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taxmap/pubs/p525-004.htm#en_us_publink1000229342

Miscellaneous Income(p19)


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This section discusses various types of income. You may have taxable income from certain transactions even if no money changes hands. For example, you may have taxable income if you lend money at a below-market interest rate or have a debt you owe canceled.
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Bartering(p19)


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Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise.
Generally, you report this income on Schedule C or Schedule C-EZ (Form 1040). However, if the barter involves an exchange of something other than services, such as in Example 4 below, you may have to use another form or schedule instead.
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Example 1.(p19)

You are a self-employed attorney who performs legal services for a client, a small corporation. The corporation gives you shares of its stock as payment for your services. You must include the fair market value of the shares in your income on Schedule C or Schedule C-EZ (Form 1040) in the year you receive them.
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Example 2.(p19)

You are a self-employed accountant. You and a house painter are members of a barter club. Members get in touch with each other directly and bargain for the value of the services to be performed. In return for accounting services you provided, the house painter painted your home. You must report as your income on Schedule C or Schedule C-EZ (Form 1040) the fair market value of the house painting services you received. The house painter must include in income the fair market value of the accounting services you provided.
taxmap/pubs/p525-004.htm#en_us_publink1000229346

Example 3.(p19)

You are self-employed and a member of a barter club. The club uses credit units as a means of exchange. It adds credit units to your account for goods or services you provide to members, which you can use to purchase goods or services offered by other members of the barter club. The club subtracts credit units from your account when you receive goods or services from other members. You must include in your income the value of the credit units that are added to your account, even though you may not actually receive goods or services from other members until a later tax year.
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Example 4.(p19)

You own a small apartment building. In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created. You must report as rental income on Schedule E (Form 1040) the fair market value of the artwork, and the artist must report as income on Schedule C or Schedule C-EZ (Form 1040) the fair rental value of the apartment.
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Form 1099-B from barter exchange.(p19)


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If you exchanged property or services through a barter exchange, Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, or a similar statement from the barter exchange should be sent to you by February 16, 2010. It should show the value of cash, property, services, credits, or scrip you received from exchanges during 2009. The IRS also will receive a copy of Form 1099-B.
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Backup withholding.(p19)


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The income you receive from bartering generally is not subject to regular income tax withholding. However, backup withholding will apply in certain circumstances to ensure that income tax is collected on this income.
Under backup withholding, the barter exchange must withhold, as income tax, 28% of the income if: If you join a barter exchange, you must certify under penalties of perjury that your taxpayer identification number is correct and that you are not subject to backup withholding. If you do not make this certification, backup withholding may begin immediately. The barter exchange will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or a similar form, for you to make this certification. The barter exchange will withhold tax only up to the amount of any cash paid to you or deposited in your account and any scrip or credit issued to you (and converted to cash).
Deposit
If tax is withheld from your barter income, the barter exchange will report the amount of tax withheld on Form 1099-B, or similar statement.
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Canceled Debts(p19)


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Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it is intended as a gift to you. A debt includes any indebtedness for which you are liable or which attaches to property you hold.
If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. If it is a business debt, report the amount on Schedule C or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if the debt is farm debt and you are a farmer).
If the debt is a business debt, you may be able to elect to recognize the canceled debt in income over a 5 tax year period. For information on this election, see Revenue Procedure 2009-37 available at www.irs.gov/irb/2009-36_irb/ar01.html.
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Form 1099-C.(p20)


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If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. The amount of the canceled debt is shown in box 2.
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Interest included in canceled debt.(p20)
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If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest also will be shown in box 3. Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible if you paid it. See Deductible debt under Exceptions, later.
If the interest would not be deductible (such as interest on a personal loan), include in your income the amount from Form 1099-C, box 2. If the interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3).
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Discounted mortgage loan.(p20)


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If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. You must include the canceled amount in your income.
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Mortgage relief upon sale or other disposition.(p20)


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If you are personally liable for a mortgage (recourse debt), and you are relieved of the mortgage when you dispose of the property, you may realize gain or loss up to the fair market value of the property. To the extent the mortgage discharge exceeds the fair market value of the property, it is income from discharge of indebtedness unless it qualifies for exclusion under Excluded debt, later. Report any income from discharge of indebtedness on nonbusiness debt that does not qualify for exclusion as other income on Form 1040, line 21.
Deposit
You may be able to exclude part of the mortgage relief on your principal residence. See Excluded debt, later.
If you are not personally liable for a mortgage (nonrecourse debt), and you are relieved of the mortgage when you dispose of the property (such as through foreclosure or repossession), that relief is included in the amount you realize. You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. Report any gain on nonbusiness property as a capital gain.
See Publication 4681 for more information.
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Stockholder debt.(p20)


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If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution that is generally dividend income to you. For more information, see Publication 542, Corporations.
If you are a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally do not realize income. This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.
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Repayment of canceled debt.(p20)


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If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund for the year the amount was included in income. You can file a claim on Form 1040X if the statute of limitations for filing a claim is still open. The statute of limitations generally does not end until 3 years after the due date of your original return.
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Exceptions(p20)


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There are several exceptions to the inclusion of canceled debt in income. These are explained next.
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Debt canceled as a result of a Midwestern disaster.(p20)


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If you qualify, you can exclude from income the amount of a canceled nonbusiness debt. The debt must have been canceled by an applicable entity after the applicable disaster date and before January 1, 2010.
You may qualify for this relief if your main home on the applicable disaster date was located in a Midwestern disaster area. This exclusion does not apply to a canceled debt to the extent that real property, which was security for the debt, is located outside a Midwestern disaster area. For more information, see Publication 4492-B.
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Student loans.(p20)


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Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers.
You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required. To qualify, the loan must have been made by:
  1. The Federal Government, a state or local government, or an instrumentality, agency, or subdivision thereof,
  2. A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are considered public employees under state law, or
  3. An educational institution:
    1. Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or
    2. As part of a program of the institution designed to encourage students to serve in occupations or areas with unmet needs and under which the services provided are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization (defined later).
A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a tax-exempt section 501(a) organization under its program designed as described in (3)(b) earlier.
An educational institution is an organization with a regular faculty and curriculum and a regularly enrolled body of students in attendance at the place where the educational activities are carried on.
A section 501(c)(3) organization is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.
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Exception.(p20)
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You do have income if your student loan was made by an educational institution and is canceled because of services you performed for the institution or other organization that provided the funds.
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Education loan repayment assistance.(p20)
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Education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment Program) or a state education loan repayment program eligible for funds under the Public Health Service Act are not taxable if you agree to provide primary health services in health professional shortage areas.
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Deductible debt.(p20)


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You do not have income from the cancellation of a debt if your payment of the debt would be deductible. This exception applies only if you use the cash method of accounting. For more information, see chapter 5 of Publication 334.
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Price reduced after purchase.(p20)


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Generally, if the seller reduces the amount of debt you owe for property you purchased, you do not have income from the reduction. The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property.
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Excluded debt.(p20)


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Do not include a canceled debt in your gross income in the following situations.
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Qualified principal residence indebtedness (QPRI).(p21)
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This is a mortgage secured by your principal residence that you took out to buy, build, or substantially improve your principal residence. QPRI cannot be more than the cost of your principal residence plus improvements.
You must reduce the basis of your principal residence by the amount excluded from gross income. To claim the exclusion, you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with your tax return.
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Principal residence.(p21)
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Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.
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Amount eligible for exclusion.(p21)
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The maximum amount you can treat as QPRI is $2 million ($1 million if married filing separately). You cannot exclude debt canceled because of services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.
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Limitation.(p21)
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If only part of a loan is QPRI, the exclusion applies only to the extent the canceled amount is more than the amount of the loan immediately before the cancellation that is not QPRI.
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Example.(p21)

Your principal residence is secured by a debt of $1 million, of which $800,000 is QPRI. Your residence is sold for $700,000 and $300,000 of debt is canceled. Only $100,000 of the canceled debt may be excluded from income (the $300,000 that was discharged minus the $200,000 of nonqualified debt).
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Host or Hostess(p21)


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If you host a party or event at which sales are made, any gift or gratuity you receive for giving the event is a payment for helping a direct seller make sales. You must report this item as income at its fair market value.
Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. These expenses are deductible as miscellaneous itemized deductions subject to the 2%-of-AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive for giving the party.
For more information about the 50% limit for meal and entertainment expenses, see 50% Limit in Publication 463.
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Life Insurance Proceeds(p21)


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Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.
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Proceeds not received in installments.(p21)


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If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the benefits that are more than the amount payable to you at the time of the insured person's death. If the benefit payable at death is not specified, you include in your income the benefit payments that are more than the present value of the payments at the time of death.
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Proceeds received in installments.(p21)


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If you receive life insurance proceeds in installments, you can exclude part of each installment from your income.
To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in your income as interest.
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Example.(p21)

The face amount of the policy is $75,000 and, as beneficiary, you choose to receive 120 monthly installments of $1,000 each. The excluded part of each installment is $625 ($75,000 ÷ 120), or $7,500 for an entire year. The rest of each payment, $375 a month (or $4,500 for an entire year), is interest income to you.
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Installments for life.(p21)
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If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee.
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Surviving spouse.(p21)
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If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude up to $1,000 a year of the interest included in the installments. If you remarry, you can continue to take the exclusion.
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Employer-owned life insurance contract.(p21)


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If you are the policyholder of an employer-owned life insurance contract, you must include in income any life insurance proceeds received that are more than the premiums and any other amounts you paid on the policy. You are subject to this rule if you have a trade or business, you own a life insurance contract on the life of your employee, and you (or a related person) are a beneficiary under the contract.
However, you may exclude the full amount of the life insurance proceeds if the following apply.
  1. Before the policy is issued, you provide written notice about the insurance to the employee and the employee provides written consent to be insured.
  2. Either:
    1. The employee was your employee within the 12-month period before death, or, at the time the contract was issued, was a director or highly compensated employee, or
    2. The amount is paid to the family or designated beneficiary of the employee.
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Interest option on insurance.(p21)


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If an insurance company pays you interest only on proceeds from life insurance left on deposit, the interest you are paid is taxable.
If your spouse died before October 23, 1986, and you chose to receive only the interest from your insurance proceeds, the $1,000 interest exclusion for a surviving spouse does not apply. If you later decide to receive the proceeds from the policy in installments, you can take the interest exclusion from the time you begin to receive the installments.
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Surrender of policy for cash.(p21)


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If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income.
You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.
Deposit
For information on when the proceeds are excluded from income, see Accelerated Death Benefits, later.
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Split-dollar life insurance.(p21)


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Generally, a split-dollar life insurance arrangement is an arrangement between an owner and a non-owner of a life insurance contract under which either party to the arrangement pays all or part of the premiums, and one of the parties paying the premiums is entitled to recover all or part of those premiums from the proceeds of the contract. There are two mutually exclusive regimes to tax split-dollar life insurance arrangements.
  1. Under the economic benefit regime, the owner of the life insurance contract is treated as providing current life insurance protection and other taxable economic benefits to the non-owner of the contract.
  2. Under the loan regime, the non-owner of the life insurance contract is treated as loaning premium payments to the owner of the contract.
Only one of these regimes applies to any one policy. For more information, see sections 1.61-22 and 1.7872-15 of the regulations.
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Endowment Contract Proceeds(p21)


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An endowment contract is a policy under which you are paid a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. Endowment proceeds paid in a lump-sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. To determine your cost, subtract any amount that you previously received under the contract and excluded from your income from the total premiums (or other consideration) paid for the contract. Include the part of the lump-sum payment that is more than your cost in your income.
Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy are taxed as an annuity. This is explained in Publication 575. For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. This election must be made within 60 days after the lump-sum payment first becomes payable to you.
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Accelerated Death Benefits(p22)


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Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are excluded from income if the insured is terminally or chronically ill.
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Viatical settlement.(p22)


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This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill and who meets the requirements of section 101(g)(2)(B) of the Internal Revenue Code.
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Exclusion for terminal illness.(p22)


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Accelerated death benefits are fully excludable if the insured is a terminally ill individual. This is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification.
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Exclusion for chronic illness.(p22)


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If the insured is a chronically ill individual who is not terminally ill, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Accelerated death benefits paid on a per diem or other periodic basis are excludable up to a limit. This limit applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. For information on the limit and the definitions of chronically ill individual, qualified long-term care services, and long-term care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury Benefits, earlier.
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Exception.(p22)


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The exclusion does not apply to any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured because the insured:
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Form 8853.(p22)


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To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853 with your return. You do not have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred.
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Recoveries(p22)


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A recovery is a return of an amount you deducted or took a credit for in an earlier year. The most common recoveries are refunds, reimbursements, and rebates of itemized deductions. You also may have recoveries of non-itemized deductions (such as payments on previously deducted bad debts) and recoveries of items for which you previously claimed a tax credit.
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Tax benefit rule.(p22)


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You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year.
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Federal income tax refund.(p22)


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Refunds of federal income taxes are not included in your income because they are never allowed as a deduction from income.
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State tax refund.(p22)


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If you received a state or local income tax refund (or credit or offset) in 2009, you generally must include it in income if you deducted the tax in an earlier year. The payer should send Form 1099-G, Certain Government Payments, to you by February 1, 2010. The IRS also will receive a copy of the Form 1099-G. If you file Form 1040, use the worksheet in the 2009 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income. See Itemized Deduction Recoveries, later, for when you must use Worksheet 2 on page 25 of this publication.
If you could choose to deduct for a tax year either: the maximum refund that you may have to include in income is limited to the excess of the tax you chose to deduct for that year over the tax you did not choose to deduct for that year.
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Example 1.(p22)
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For 2008 you can choose an $11,000 state income tax deduction or a $10,000 state general sales tax deduction. You choose to deduct the state income tax. In 2009 you receive a $2,500 state income tax refund. The maximum refund that you may have to include in income is $1,000, since you could have deducted $10,000 in state general sales tax.
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Example 2.(p22)
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For 2008 you can choose an $11,500 state general sales tax deduction based on actual expenses or an $11,200 state income tax deduction. You choose to deduct the general sales tax deduction. In 2009 you return an item you had purchased and receive a $500 sales tax refund. In 2009 you also receive a $1,500 state income tax refund. The maximum refund that you may have to include in income is $500, since it is less than the excess of the tax deducted ($11,500) over the tax you did not choose to deduct ($11,200 − $1,500 = $9,700). Since you did not choose to deduct the state income tax, you do not include the state income tax refund in income.
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Real property tax.(p22)


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For 2008, you could claim your real property tax as part of your itemized deductions or your standard deduction. If you claimed them as part of your itemized deductions, they are subject to the rules for Itemized Deduction Recoveries, discussed later.
If you claimed them as part of your standard deduction, the deduction is limited to the lesser of:
If you claimed $500 ($1,000 if married filing jointly) as part of your standard deduction and you receive a real property tax refund in 2009, you would include in income only that part of the refund that reduced your real property tax below $500 ($1,000 if married filing jointly).
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Example.(p22)
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You are single and claim the standard deduction for 2008. You paid real property taxes of $800 in 2008. As part of your standard deduction, you claimed $500 for your real property taxes. In 2009, you receive a $400 refund of real property tax. The maximum refund that you may have to include in income is $100.
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Net disaster loss.(p22)


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For 2008, you could claim a net disaster loss as part of your itemized deductions or your standard deduction. If you claimed the loss as part of your itemized deductions, the recovery of the loss is subject to the rules for Itemized Deduction Recoveries, discussed later.
If you claimed them as part of your standard deduction, any recovery of the net disaster loss is included in income. For information on net disaster losses, see Disaster Area Losses in Publication 547, Casualties, Disasters, and Thefts.
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Mortgage interest refund.(p22)


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If you received a refund or credit in 2009 of mortgage interest paid in an earlier year, the amount should be shown in box 3 of your Form 1098, Mortgage Interest Statement. Do not subtract the refund amount from the interest you paid in 2009. You may have to include it in your income under the rules explained in the following discussions.
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Interest on recovery.(p22)


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Interest on any of the amounts you recover must be reported as interest income in the year received. For example, report any interest you received on state or local income tax refunds on Form 1040, line 8a or Form 1040NR, line 9a.
taxmap/pubs/p525-004.htm#en_us_publink1000229399

Recovery and expense in same year.(p22)


rule
spacer

If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit and is not reported as income.
taxmap/pubs/p525-004.htm#en_us_publink1000229400

Recovery for 2 or more years.(p22)


rule
spacer

If you receive a refund or other recovery that is for amounts you paid in 2 or more separate years, you must allocate, on a pro rata basis, the recovered amount between the years in which you paid it. This allocation is necessary to determine the amount of recovery from any earlier years and to determine the amount, if any, of your allowable deduction for this item for the current year.
taxmap/pubs/p525-004.htm#en_us_publink1000229401

Example.(p22)

You paid 2008 estimated state income tax of $4,000 in four equal payments. You made your fourth payment in January 2009. You had no state income tax withheld during 2008. In 2009, you received a $400 tax refund based on your 2008 state income tax return. You claimed itemized deductions each year on Schedule A (Form 1040).
You must allocate the $400 refund between 2008 and 2009, the years in which you paid the tax on which the refund is based. You paid 75% ($3,000 ÷ $4,000) of the estimated tax in 2008, so 75% of the $400 refund, or $300, is for amounts you paid in 2008 and is a recovery item. If all of the $300 is a taxable recovery item, you will include $300 on Form 1040, line 10, for 2009, and attach a copy of your computation showing why that amount is less than the amount shown on the Form 1099-G you received from the state.
The balance ($100) of the $400 refund is for your January 2009 estimated tax payment. When you figure your deduction for state and local income taxes paid during 2009, you will reduce the $1,000 paid in January by $100. Your deduction for state and local income taxes paid during 2009 will include the January net amount of $900 ($1,000 − $100), plus any estimated state income taxes paid in 2009 for 2009, and any state income tax withheld during 2009.
taxmap/pubs/p525-004.htm#en_us_publink1000229402

Deductions not itemized.(p23)


rule
spacer

If you did not itemize deductions for the year for which you received the recovery of an expense that was deductible only if you itemized, do not include any of the recovery amount in your income.
taxmap/pubs/p525-004.htm#en_us_publink1000229403

Example.(p23)

You claimed the standard deduction on your 2008 federal income tax return. In 2009 you received a refund of your 2008 state income tax. Do not report any of the refund as income because you did not itemize deductions for 2008.
taxmap/pubs/p525-004.htm#en_us_publink1000229405

Itemized Deduction Recoveries(p23)


rule
spacer

previous topic occurrence Itemized Deduction Recoveries next topic occurrence

The following discussion explains how to determine the amount to include in your income from a recovery of an amount deducted in an earlier year as an itemized deduction. However, you generally do not need to use this discussion if you file Form 1040 and the recovery is for state or local income taxes paid in 2008. Instead, use the worksheet in the 2009 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income.
You cannot use the Form 1040 worksheet and must use this discussion if you are a nonresident alien (discussed later) or any of the following statements are true.
  1. The recovery is for a tax year other than 2008.
  2. The recovery is for a deducted item other than state or local income taxes, such as a general sales tax or real property tax refund.
  3. On your 2008 Form 1040, line 42 was more than line 41.
  4. You received a refund of state and local income taxes in 2009 that was more than the excess of your 2008 state and local income tax deduction over the amount you could have deducted for your 2008 state and local general sales tax.
  5. You made your last payment of 2008 state or local estimated tax in 2009.
  6. You owed alternative minimum tax for 2008.
  7. You could not deduct all your tax credits for 2008 because their total was more than the amount of tax shown on your 2008 Form 1040, line 46.
  8. You could be claimed as a dependent by someone else in 2008.
  9. You had to use the Itemized Deductions Worksheet in the 2008 Schedule A instructions because your 2008 adjusted gross income was over $159,950 ($79,975 if married filing separately) and both of the following apply.
    1. You could not deduct all of the amount on the 2008 Itemized Deductions Worksheet, line 1.
    2. The amount on line 8 of that 2008 worksheet would be more than the amount on line 4 of that worksheet if the amount on line 4 were reduced by 80% of the refund you received in 2009.
EIC
If you also recovered an amount deducted as a non-itemized deduction, figure the amount of that recovery to include in your income and add it to your adjusted gross income before applying the rules explained here. See Non-Itemized Deduction Recoveries, later.
taxmap/pubs/p525-004.htm#en_us_publink1000229407

Nonresident aliens.(p23)


rule
spacer

If you are a nonresident alien and file Form 1040NR or 1040NR-EZ, you cannot claim the standard deduction. If you recover an itemized deduction that you claimed in an earlier year, you generally must include the full amount of the recovery in your income in the year you receive it. However, if you had no taxable income in that earlier year (see Negative taxable income, later), you should complete Worksheet 2 to determine the amount you must include in income. If any other statement under Total recovery included in income is not true, see the discussion referenced in the statement to determine the amount to include in income.
taxmap/pubs/p525-004.htm#en_us_publink1000229408

Total recovery included in income.(p23)


rule
spacer

If you recover any itemized deduction that you claimed in an earlier year, you generally must include the full amount of the recovery in your income in the year you receive it. This rule applies if, for the earlier year, all of the following statements are true.
  1. Your itemized deductions exceeded the standard deduction by at least the amount of the recovery. (If your itemized deductions did not exceed the standard deduction by at least the amount of the recovery, see Standard deduction limit, later.)
  2. You had taxable income. (If you had no taxable income, see Negative taxable income, later.)
  3. Your deduction for the item recovered equals or exceeds the amount recovered. (If your deduction was less than the amount recovered, see Recovery limited to deduction, later.)
  4. Your itemized deductions were not subject to the limit on itemized deductions. (If your deductions were limited, see Itemized deductions limited, later.)
  5. You had no unused tax credits. (If you had unused tax credits, see Unused tax credits, later.)
  6. You were not subject to alternative minimum tax. (If you were subject to alternative minimum tax, see Subject to alternative minimum tax, later.)
If any of the earlier statements is not true, see Total recovery not included in income, later.
taxmap/pubs/p525-004.htm#en_us_publink1000229409

State tax refund.(p23)
spacer

In addition to the previous six items, you must include in your income the full amount of a refund of state or local income tax or general sales tax if the excess of the tax you deducted over the tax you did not deduct is more than the refund of the tax deducted.
If the refund is more than the excess, see Total recovery not included in income, later.
taxmap/pubs/p525-004.htm#en_us_publink1000229410

Where to report.(p23)
spacer

Enter your state or local income tax refund on Form 1040, line 10, and the total of all other recoveries as other income on Form 1040, line 21. You cannot use Form 1040A or Form 1040EZ.
If you file Form 1040NR, enter your state or local income tax refund on line 11 and the total of all other recoveries on line 21. If you file Form 1040NR-EZ, enter your state or local income tax refund on line 4.
taxmap/pubs/p525-004.htm#en_us_publink1000229411

Example.(p23)

For 2008, you filed a joint return on Form 1040. Your taxable income was $60,000 and you were not entitled to any tax credits. Your standard deduction was $11,400, and you had itemized deductions of $13,000. In 2009, you received the following recoveries for amounts deducted on your 2008 return:
Medical expenses$200
State and local income tax refund400
Refund of mortgage interest 325
Total recoveries $925
None of the recoveries were more than the deductions taken for 2008. The difference between the state and local income tax you deducted and your local general sales tax was more than $400.
Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($13,000 − $11,400 = $1,600), so you must include your total recoveries in your income for 2009. Report the state and local income tax refund of $400 on Form 1040, line 10, and the balance of your recoveries, $525, on Form 1040, line 21.
taxmap/pubs/p525-004.htm#en_us_publink1000229413

Total recovery not included in income.(p23)


rule
spacer

If one or more of the six statements listed in the preceding discussion is not true, you may be able to exclude at least part of the recovery from your income. See the discussion referenced to in the statement. You may be able to use Worksheet 2 on page 25 to determine the part of your recovery to include in your income. You also can use Worksheet 2 to determine the part of a state tax refund (discussed earlier) to include in income.
taxmap/pubs/p525-004.htm#en_us_publink1000229414

Allocating the included part.(p23)
spacer

If you are not required to include all of your recoveries in your income, and you have both a state income tax refund and other itemized deduction recoveries, you must allocate the taxable recoveries between the state income tax refund you report on Form 1040, line 10 (Form 1040NR, line 11), and the amount you report as other income on Form 1040, line 21 (Form 1040NR, line 21). If you do not use Worksheet 2, make the allocation as follows.
  1. Divide your state income tax refund by the total of all your itemized deduction recoveries.
  2. Multiply the amount of taxable recoveries by the percentage in (1). This is the amount you report as a state income tax refund.
  3. Subtract the result in (2) above from the amount of taxable recoveries. This is the amount you report as other income.
taxmap/pubs/p525-004.htm#en_us_publink1000229415

Example.(p24)

In 2009 you recovered $2,500 of your 2008 itemized deductions claimed on Schedule A (Form 1040), but the recoveries you must include in your 2009 income are only $1,500. Of the $2,500 you recovered, $500 was due to your state income tax refund. Your state income tax was more than your state general sales tax by $600. The amount you report as a state tax refund on Form 1040, line 10, is $300 [($500 ÷ $2,500) × $1,500]. The balance of the taxable recoveries, $1,200, is reported as other income on Form 1040, line 21.
taxmap/pubs/p525-004.htm#en_us_publink1000229416

Standard deduction limit.(p24)


rule
spacer

You generally are allowed to claim the standard deduction if you do not itemize your deductions. Only your itemized deductions that are more than your standard deduction are subject to the recovery rule (unless you are required to itemize your deductions). If your total deductions on the earlier year return were not more than your income for that year, include in your income this year the lesser of:
taxmap/pubs/p525-004.htm#en_us_publink1000240395

Standard deduction for earlier years.(p24)
spacer

To determine if amounts recovered in 2009 must be included in your income, you must know the standard deduction for your filing status for the year the deduction was claimed. If you filed Form 1040, the standard deduction tables for 2008, 2007, and 2006 are shown in Tables 2, 3, and 4. If you need the standard deduction amounts for years before 2006, see the copy of your return for that year. If you filed Form 1040NR or 1040NR-EZ, you could not claim the standard deduction.
taxmap/pubs/p525-004.htm#en_us_publink1000240396

Example.(p24)

You filed a joint return on Form 1040 for 2008 with taxable income of $45,000. Your itemized deductions were $11,550. The standard deduction that you could have claimed was $10,900. In 2009, you recovered $2,100 of your 2008 itemized deductions. None of the recoveries were more than the actual deductions for 2008. Include $650 of the recoveries in your 2009 income. This is the smaller of your recoveries ($2,100) or the amount by which your itemized deductions were more than the standard deduction ($11,550 − $10,900 = $650).
taxmap/pubs/p525-004.htm#en_us_publink1000240397

Negative taxable income.(p24)


rule
spacer

If your taxable income for the prior year (Worksheet 2, line 10) was a negative amount, the recovery you must include in income is reduced by that amount. You have a negative taxable income for 2008 if your:
taxmap/pubs/p525-004.htm#en_us_publink1000240398

Example.(p24)

The facts are the same as in the previous example except line 42 was $200 more than line 41 on your 2008 Form 1040 giving you a negative taxable income of $200. You must include $450 in your 2009 income, rather than $650.
taxmap/pubs/p525-004.htm#en_us_publink1000240399

Recovery limited to deduction.(p24)


rule
spacer

You do not include in your income any amount of your recovery that is more than the amount you deducted in the earlier year. The amount you include in your income is limited to the smaller of:
taxmap/pubs/p525-004.htm#en_us_publink1000240400

Example.(p24)

During 2008, you paid $1,700 for medical expenses. From this amount you subtracted $1,500, which was 7.5% of your adjusted gross income. Your actual medical expense deduction was $200. In 2009, you received a $500 reimbursement from your medical insurance for your 2008 expenses. The only amount of the $500 reimbursement that must be included in your income for 2009 is $200—the amount actually deducted.
taxmap/pubs/p525-004.htm#en_us_publink1000240401

Itemized deductions limited.(p24)


rule
spacer

You were subject to the limit on itemized deductions in the earlier year if your adjusted gross income (AGI) was more than a base amount. This amount was: If the limit applied, your itemized deductions were reduced by the smaller of the following amounts. In 2006 and 2007, your itemized deductions were reduced by only 2/3 of the smaller amount. In 2008 and 2009, your itemized deductions were reduced by only 1/3 of the smaller amount.
If the amount you recovered was deducted in a year in which your itemized deductions were limited, you must include it in income up to the difference between the amount of itemized deductions actually allowed that year and the amount you would have been allowed (the greater of your itemized deductions or your standard deduction) if you had figured your deductions using only the net amount of the recovery item.
To determine the part of the recovery you must include in income, follow the two steps below.
  1. Figure the greater of:
    1. The standard deduction for the earlier year, or
    2. The amount of itemized deductions you would have been allowed for the earlier year (after taking into account the limit on itemized deductions) if you had figured them using only the net amount of the recovery item. The net amount is the amount you actually paid reduced by the recovery amount.
    Note. If you were required to itemize your deductions in the earlier year, use step 1(b) and not step 1(a).
  2. Subtract the amount in step 1 from the amount of itemized deductions actually allowed in the earlier year after applying the limit on itemized deductions.
The result of step 2 is the amount of the recovery to include in your income for the year you receive the recovery. If your taxable income for the earlier year was a negative amount, reduce your recovery by the negative amount.
If you had unused tax credits in the earlier year, see Unused tax credits, later.
For more information on this computation, see Revenue Ruling 93-75. This ruling is in Cumulative Bulletin 1993-2.
taxmap/pubs/p525-004.htm#en_us_publink1000240392
Pencil

Worksheet 2. Recoveries of Itemized Deductions

To determine whether you should complete this worksheet to figure the part of a recovery amount to include in income on your 2009 tax return, see Itemized Deduction Recoveries. If you recovered amounts from more than one year, such as a state income tax refund from 2008 and a casualty loss reimbursement from 2007, complete a separate worksheet for each year. Use information from your tax return for the year the expense was deducted.

A recovery is included in income only to the extent of the deduction amount that reduced your tax in the prior year (year of the deduction). If you were subject to the alternative minimum tax or your tax credits reduced your tax to zero, see Unused tax credits and Subject to alternative minimum tax under Itemized Deduction Recoveries. If your recovery was for an itemized deduction that was limited, you should read Itemized deductions limited under Itemized Deduction Recoveries.
1.State/local income tax refund or credit1 1.             
2.Enter the total of all other Schedule A refunds or reimbursements
(excluding the amount you entered on line 1)2
2.             
3.Add lines 1 and 23.             
4.Itemized deductions for the prior year. For 2008,
Form 1040, Schedule A, line 29
Form 1040NR, Schedule A, line 17
Form 1040NR-EZ, line 11
4.                
5.Enter any amount previously refunded to you
(do not enter an amount from line 1 or line 2)
5.                
6.Subtract line 5 from line 46.                
7.Standard deduction for the prior year. (If you filed Form 1040, the standard deduction amounts for 2008, 2007, and 2006 are shown in Tables 2, 3, and 4. If you filed Form 1040NR or 1040NR-EZ, enter -0-.)7.                
8.Subtract line 7 from line 6. If the result is zero or less, stop here.
The amounts on lines 1 and 2 are not taxable
8.             
9.Enter the smaller of line 3 or line 89.             
10.Taxable income for prior year3 (2008 Form 1040, line 43; 2008 Form 1040NR, line 40; 2008 Form 1040NR-EZ, line 14)10.                
11. Amount to include in income for 2009:
  • If line 10 is zero or more, enter the amount from line 9.
  • If line 10 is a negative amount, add lines 9 and 10 and enter the result
    (but not less than zero).4
11.             
  If line 11 equals line 3—
   Enter the amount from line 1 on Form 1040, line 10; Form 1040NR, line 11; Form 1040NR-EZ, line 4.
   Enter the amount from line 2 on Form 1040, line 21; Form 1040NR, line 21.
  If line 11 is less than line 3 and either line 1 or line 2 is zero—
   If there is an amount on line 1, enter the amount from line 11 on Form 1040, line 10; Form 1040NR, line 11;
   Form 1040NR-EZ, line 4.
   If there is an amount on line 2, enter the amount from line 11 on Form 1040, line 21; Form 1040NR, line 21.
  If line 11 is less than line 3, and there are amounts on both lines 1 and 2, complete the following worksheet.
 A.Divide the amount on line 1 by the amount on line 3. Enter the percentageA.                
 B.Multiply the amount on line 11 by the percentage on line A.
Enter the result here and on Form 1040, line 10; Form 1040NR, line 11
B.             
 C.Subtract the amount on line B from the amount on line 11.
Enter the result here and on Form 1040, line 21; Form 1040NR, line 21
C.             
1 Do not enter more than the amount deducted for the prior year. Do not enter more than the excess of your state and local income tax deduction over your state and local general sales taxes you could have deducted.
2 Do not enter more than the amount deducted for the prior year. If you deducted state and local general sales taxes and received a refund of those taxes, include the amount on line 2, but do not enter more than the excess of your sales tax deduction over your state and local income tax you could have deducted.
3 If taxable income is a negative amount, enter that amount in brackets. Do not enter zero unless your taxable income is exactly zero. See Negative taxable income. Taxable income will have to be adjusted for any net operating loss carryover. For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
4 For example, $700 + ($400) = $300.

Table 2. 2008 Standard Deduction Tables

Caution: If you are married filing a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you cannot take the standard deduction even if you were born before January 2, 1944, or you are blind.

Table I. Standard Deduction Chart for Most People*

IF your filing status is . . . THEN your standard
deduction is . . .
Single or Married filing separately$5,450
Married filing joint return or Qualifying widow(er) with dependent child10,900
Head of household 8,000
* DO NOT use this chart if you were born before January 2, 1944, or you are blind, OR if someone else can claim an exemption for you (or your spouse if married filing jointly). Use Table II or III instead.

Table II. Standard Deduction Chart for People Who Were Born Before January 2, 1944, or Were Blind*

Check the correct number of boxes below. Then go to the chart.
   
YouBorn before
January 2, 1944  □

Blind  □
Your spouse, if claiming
spouse's exemption
Born before
January 2, 1944  □

Blind  □
   
Total number of boxes you checked   ____
IF your
filing status is . . .
AND the number on the line above is . . .THEN your
standard deduction is . . .
Single1
2
$  6,800
  8,150
Married filing joint return or Qualifying widow(er) with dependent child1
2
3
4
 11,950
 13,000
 14,050
 15,100
Married filing separate return1
2
3
4
  6,500
  7,550
  8,600
  9,650
Head of household1
2
  9,350
 10,700
*If someone else can claim an exemption for you (or your spouse if married filing jointly), use Table III instead.

Table III. Standard Deduction Worksheet for Dependents*

If you were born before January 2, 1944, or you were blind, check the correct number of boxes below. Then go to the worksheet.
       
YouBorn before
January 2, 1944  □
 
Blind  □
Your spouse, if claiming spouse's exemptionBorn before
January 2, 1944  □
 
Blind  □
       
   Total number of boxes you checked   ____
1.  Enter your earned income (defined below). If none, enter -0-1.             
2.   Additional amount2. $300
3.   Add lines 1 and 23.             
4.  Minimum standard deduction4. $900
5.  Enter the larger of line 3 or line 45.             
6.  Enter the amount shown below for your filing status.
  • Single or Married filing separately—$5,450
  • Married filing jointly —$10,900
  • Head of household—$8,000
6.             
7. Standard deduction.   
  a. Enter the smaller of line 5 or line 6. If born after January 1, 1944, and not blind, stop here. This is your standard deduction. Otherwise, go on to line 7b.7a.             
  b. If born before January 2, 1944, or blind, multiply $1,350 ($1,050 if married) by the number in the box above.7b.             
  c. Add lines 7a and 7b. This is your standard deduction for 2008.7c.             
Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any amount received as a scholarship that you must include in your income.
*Use this worksheet ONLY if someone else can claim an exemption for you (or your spouse if married filing jointly).
taxtip For 2008 you can increase your standard deduction, figured using these tables, by your real property tax (limited to $500 ($1,000 if married filing jointly)) and net disaster loss that you could claim as part of your standard deduction.
  

Table 3. 2007 Standard Deduction Tables

Caution: If you are married filing a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you cannot take the standard deduction even if you were born before January 2, 1943, or you are blind.

Table I. Standard Deduction Chart for Most People*

IF your filing status is . . . THEN your standard
deduction is . . .
Single or Married filing separately$5,350
Married filing joint return or Qualifying widow(er) with dependent child10,700
Head of household 7,850
* DO NOT use this chart if you were born before January 2, 1943, or you are blind, OR if someone else can claim an exemption for you (or your spouse if married filing jointly). Use Table II or III instead.

Table II. Standard Deduction Chart for People Who Were Born Before January 2, 1943, or Were Blind*

Check the correct number of boxes below. Then go to the chart.
   
YouBorn before
January 2, 1943  □

Blind  □
Your spouse, if claiming
spouse's exemption
Born before
January 2, 1943  □

Blind  □
   
Total number of boxes you checked   ____
IF your
filing status is . . .
AND the number on the line above is . . .THEN your
standard deduction is . . .
Single1
2
$ 6,650
  7,950
Married filing joint return or Qualifying widow(er) with dependent child1
2
3
4
 11,750
 12,800
 13,850
 14,900
Married filing separate return1
2
3
4
  6,400
  7,450
  8,500
  9,550
Head of household1
2
  9,150
 10,450
*If someone else can claim an exemption for you (or your spouse if married filing jointly), use Table III instead.

Table III. Standard Deduction Worksheet for Dependents*

If you were born before January 2, 1943, or you were blind, check the correct number of boxes below. Then go to the worksheet.
       
YouBorn before
January 2, 1943  □
 
Blind  □
Your spouse, if claiming spouse's exemptionBorn before
January 2, 1943  □
 
Blind  □
       
   Total number of boxes you checked   ____
1.  Enter your earned income (defined below). If none, enter -0-1.             
2.   Additional amount2. $300
3.   Add lines 1 and 23.             
4.  Minimum standard deduction4. $850
5.  Enter the larger of line 3 or line 45.             
6.  Enter the amount shown below for your filing status.
  • Single or Married filing separately—$5,350
  • Married filing jointly—$10,700
  • Head of household—$7,850
6.             
7. Standard deduction.   
  a. Enter the smaller of line 5 or line 6. If born after January 1, 1943, and not blind, stop here. This is your standard deduction. Otherwise, go on to line 7b.7a.             
  b. If born before January 2, 1943, or blind, multiply $1,300 ($1,050 if married) by the number in the box above.7b.             
  c. Add lines 7a and 7b. This is your standard deduction for 2007.7c.             
Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any amount received as a scholarship that you must include in your income.
*Use this worksheet ONLY if someone else can claim an exemption for you (or your spouse if married filing jointly).

Table 4. 2006 Standard Deduction Tables

Caution: If you are married filing a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you cannot take the standard deduction even if you were born before January 2, 1942, or you are blind.

Table I. Standard Deduction Chart for Most People*

IF your filing status is . . . THEN your standard
deduction is . . .
Single or Married filing separately$5,150
Married filing joint return or Qualifying widow(er) with dependent child10,300
Head of household 7,550
* DO NOT use this chart if you were born before January 2, 1942, or you are blind, OR if someone else can claim an exemption for you (or your spouse if married filing jointly). Use Table II or III instead.

Table II. Standard Deduction Chart for People Who Were Born Before January 2, 1942, or Were Blind*

Check the correct number of boxes below. Then go to the chart.
   
YouBorn before
January 2, 1942 □

Blind  □
Your spouse, if claiming
spouse's exemption
Born before
January 2, 1942 □

Blind  □
   
Total number of boxes you checked   _____
IF your
filing status is . . .
AND the number on the line above is . . .THEN your
standard deduction is . . .
Single1
2
$ 6,400
  7,650
Married filing joint return or Qualifying widow(er) with dependent child1
2
3
4
 11,300
 12,300
 13,300
 14,300
Married filing separate return1
2
3
4
  6,150
  7,150
  8,150
  9,150
Head of household1
2
  8,800
 10,050
*If someone else can claim an exemption for you (or your spouse if married filing jointly), use Table III instead.

Table III. Standard Deduction Worksheet for Dependents*

If you were born before January 2, 1942, or you were blind, check the correct number of boxes below. Then go to the worksheet.
       
YouBorn before
January 2, 1942 □
 
Blind  □
Your spouse, if claiming spouse's exemptionBorn before
January 2, 1942  □
 
Blind  □
       
   Total number of boxes you checked   ____
1.  Enter your earned income (defined below). If none, enter -0-1.             
2.   Additional amount2. $300
3.   Add lines 1 and 23.             
4.  Minimum standard deduction4. $850
5.  Enter the larger of line 3 or line 45.             
6.  Enter the amount shown below for your filing status.
  • Single or Married filing separately—$5,150
  • Married filing jointly—$10,300
  • Head of household—$7,550
6.             
7. Standard deduction.   
  a. Enter the smaller of line 5 or line 6. If born after January 1, 1942, and not blind, stop here. This is your standard deduction. Otherwise, go on to line 7b.7a.             
  b. If born before January 2, 1942, or blind, multiply $1,250 ($1,000 if married) by the number in the box above.7b.             
  c. Add lines 7a and 7b. This is your standard deduction for 2006.7c.             
Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any amount received as a scholarship that you must include in your income.
*Use this worksheet ONLY if someone else can claim an exemption for you (or your spouse if married filing jointly).
taxmap/pubs/p525-004.htm#en_us_publink1000229448

Example.(p28)

Eileen Martin is single. She had an AGI of $1,159,950 and itemized her deductions on Schedule A (Form 1040) for 2008. She was not subject to alternative minimum tax and was not entitled to any credit against income tax. Her only allowable deduction was $40,000 of state income taxes. Her state general sales tax was $20,000. Eileen deducted only $30,000 of her state income taxes in 2008 because her otherwise allowable deductions of $40,000 were reduced by $10,000. In 2009, she received a $5,000 refund of her state income taxes for 2008.
The following shows how Eileen figured the $10,000 reduction and other amounts from the Itemized Deduction Worksheet in the 2008 Schedule A (Form 1040) instructions. These amounts are needed to figure the part of the $5,000 refund that Eileen must include in her income for 2009.
AGI for 2008 $1,159,950 
State income taxes paid in 2008$40,000 
3% reduction (amount on
 2008 Itemized Deduction
 Worksheet, line 8)
  [($1,159,950 − $159,950) × 3%]
$30,000 
80% reduction (amount on
 2008 Itemized Deduction
 Worksheet, line 4)
 ($40,000 × 80%)
$32,000 
Lesser of 3% reduction or
 80% reduction
 $30,000  
Reduction limit (1/3)$10,000 
2008 deduction (amount on
 2008 Itemized Deduction
 Worksheet, line 12)
 ($40,000 − $10,000)
$30,000 
Refund received in 2009 of 2008
 state income tax
$ 5,000 
Net amount of 2008 state income
 tax ($40,000 − $5,000)
$35,000 
If Eileen had used the $35,000 net amount of state income tax to figure her itemized deductions for 2008, the deduction allowed would have been $25,667 which is her otherwise allowable deduction of $35,000 reduced by $9,333. This is her 80% reduction ($35,000 × 80% = $28,000) subject to the reduction limit ($28,000 × 1/3 = $9,333). By deducting $30,000 in 2008, she derived a tax benefit of $4,333 ($30,000 − $25,667). Therefore, only $4,333 of the $5,000 refund is included in her income for 2009.
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Unused tax credits.(p28)


rule
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If you recover an item deducted in an earlier year in which you had unused tax credits, you must refigure the earlier year's tax to determine if you must include the recovery in your income. To do this, add the amount of the recovery to your earlier year's taxable income and refigure the tax and the credits on the recomputed amount. If the recomputed tax, after application of the credits, is more than the actual tax in the earlier year, include the recovery in your income up to the amount of the deduction that reduced the tax in the earlier year. For this purpose, any increase to a credit carried over to the current year that resulted from deducting the recovered amount in the earlier year is considered to have reduced your tax in the earlier year. If the recovery is for an itemized deduction claimed in a year in which the deductions were limited, see Itemized deductions limited, earlier.
If your tax, after application of the credits, does not change, you did not have a tax benefit from the deduction. Do not include the recovery in your income.
taxmap/pubs/p525-004.htm#en_us_publink1000229451

Example.(p29)

In 2008, Jean Black filed as head of household and itemized her deductions on Schedule A (Form 1040). Her taxable income was $5,260 and her tax was $528. She claimed a child care credit of $1,200. The credit reduced her tax to zero and she had an unused tax credit of $672 ($1,200 − $528). In 2009, Jean recovered $1,000 of her itemized deductions. She reduces her 2008 itemized deductions by $1,000 and recomputes that year's tax on taxable income of $6,260. However, the child care credit exceeds the recomputed tax of $628. Jean's tax liability for 2008 is not changed by reducing her deductions by the recovery. She did not have a tax benefit from the recovered deduction and does not include any of the recovery in her income for 2009.
taxmap/pubs/p525-004.htm#en_us_publink1000229452

Subject to alternative minimum tax.(p29)


rule
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If you were subject to the alternative minimum tax in the year of the deduction, you will have to recompute your tax for the earlier year to determine if the recovery must be included in your income. This will require a recomputation of your regular tax, as shown in the preceding example, and a recomputation of your alternative minimum tax. If inclusion of the recovery does not change your total tax, you do not include the recovery in your income. However, if your total tax increases by any amount, you received a tax benefit from the deduction and you must include the recovery in your income up to the amount of the deduction that reduced your tax in the earlier year.
taxmap/pubs/p525-004.htm#en_us_publink1000229453

Non-Itemized Deduction Recoveries(p29)


rule
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previous topic occurrence Recovery next topic occurrence

This section discusses recovery of deductions other than itemized deductions.
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Total recovery included in income.(p29)


rule
spacer

If you recover an amount that you deducted in an earlier year in figuring your adjusted gross income, you generally must include the full amount of the recovery in your income in the year received.
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Total recovery not included in income.(p29)


rule
spacer

If any part of the deduction you took for the recovered amount did not reduce your tax, you may be able to exclude at least part of the recovery from your income. You must include the recovery in your income only up to the amount of the deduction that reduced your tax in the year of the deduction. (See Tax benefit rule, earlier.)
taxmap/pubs/p525-004.htm#en_us_publink1000229456

Negative taxable income.(p29)


rule
spacer

If your taxable income for the prior year was a negative amount, the recovery you must include in income is reduced by that amount. You have a negative taxable income for 2008 if your:
taxmap/pubs/p525-004.htm#en_us_publink1000229457

Unused tax credits.(p29)


rule
spacer

If you recover an item deducted in an earlier year in which you had unused tax credits, you must refigure the earlier year's tax to determine if you must include the recovery in your income. To do this, add the amount of the recovery to your earlier year's taxable income and refigure the tax and the credits on the recomputed amount. If the recomputed tax, after application of the credits, is more than the actual tax in the earlier year, include the recovery in your income up to the amount of the deduction that reduced the tax in the earlier year. For this purpose, any increase to a credit carried over to the current year that resulted from deducting the recovered amount in the earlier year is considered to have reduced your tax in the earlier year.
If your tax, after application of the credits, does not change, you did not have a tax benefit from the deduction. Do not include the recovery in your income.
taxmap/pubs/p525-004.htm#en_us_publink1000229458

Amounts Recovered for Credits(p29)


rule
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previous topic occurrence Recovery next topic occurrence

If you received a recovery in 2009 for an item for which you claimed a tax credit in an earlier year, you must increase your 2009 tax by the amount of the recovery, up to the amount by which the credit reduced your tax in the earlier year. You had a recovery if there was a downward price adjustment or similar adjustment on the item for which you claimed a credit.
This rule does not apply to the investment credit or the foreign tax credit. Recoveries of these credits are covered by other provisions of the law. See Publication 514, Foreign Tax Credit for Individuals, or Form 4255, Recapture of Investment Credit, for details.
taxmap/pubs/p525-004.htm#en_us_publink1000229459

Survivor Benefits(p29)


rule
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previous topic occurrence Survivor Benefits next topic occurrence

Generally, payments made by or for an employer because of an employee's death must be included in income. The following discussions explain the tax treatment of certain payments made to survivors. For additional information, see Publication 559.
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Lump-sum payments.(p29)


rule
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Lump-sum payments you receive from a decedent's employer as the surviving spouse or beneficiary may be accrued salary payments; distributions from employee profit-sharing, pension, annuity, or stock bonus plans; or other items that should be treated separately for tax purposes. The tax treatment of these lump-sum payments depends on the type of payment.
taxmap/pubs/p525-004.htm#en_us_publink1000229461

Salary or wages.(p29)
spacer

Salary or wages received after the death of the employee are usually ordinary income to you.
taxmap/pubs/p525-004.htm#en_us_publink1000229462

Qualified employee retirement plans.(p29)
spacer

Lump-sum distributions from qualified employee retirement plans are subject to special tax treatment. For information on these distributions, see Publication 575 (or Publication 721, if you are the survivor of a federal employee or retiree).
taxmap/pubs/p525-004.htm#en_us_publink1000229463

Public safety officer killed in the line of duty.(p29)


rule
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If you are a survivor of a public safety officer who was killed in the line of duty, you may be able to exclude from income certain amounts you receive. For this purpose, the term public safety officer includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance crew members. For more information, see Publication 559.
taxmap/pubs/p525-004.htm#en_us_publink1000229464

Unemployment Benefits(p29)


rule
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previous topic occurrence Unemployment Compensation next topic occurrence

The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.
taxmap/pubs/p525-004.htm#en_us_publink1000229465

Unemployment compensation.(p29)


rule
spacer

For 2009, you must include in income all unemployment compensation you received that is more than $2,400. You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2009. You must subtract $2,400 from that amount to figure how much of your unemployment compensation is taxable and must be reported on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. Do not enter less than zero. If married filing jointly, include any unemployment compensation received by your spouse that is more than $2,400.
taxmap/pubs/p525-004.htm#en_us_publink1000229466

Types of unemployment compensation.(p29)
spacer

Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. It includes the following benefits.
taxmap/pubs/p525-004.htm#en_us_publink1000229467

Governmental program.(p29)
spacer

If you contribute to a governmental unemployment compensation program and your contributions are not deductible, amounts you receive under the program are not included as unemployment compensation until you recover your contributions. If you deducted all of your contributions to the program, the entire amount you receive under the program is included in your income.
taxmap/pubs/p525-004.htm#en_us_publink1000229468

Repayment of unemployment compensation.(p29)
spacer

If you repaid in 2009 unemployment compensation you received in 2009, subtract the amount you repaid from the total amount you received and enter the difference on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. On the dotted line next to your entry, enter "Repaid" and the amount you repaid. If you repaid unemployment compensation in 2009 that you included in your income in an earlier year, you can deduct the amount repaid on Schedule A (Form 1040), line 23, if you itemize deductions. If the amount is more than $3,000, see Repayments, later.
taxmap/pubs/p525-004.htm#en_us_publink1000229469

Tax withholding.(p30)
spacer

You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 10% of your payment.
EIC
If you do not choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. For more information, see Publication 505, Tax Withholding and Estimated Tax.
taxmap/pubs/p525-004.htm#en_us_publink1000229471

Supplemental unemployment benefits.(p30)


rule
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Benefits received from an employer-financed fund (to which the employees did not contribute) are not unemployment compensation. They are taxable as wages and are subject to withholding for income tax. They may be subject to social security and Medicare taxes. For more information, see Supplemental Unemployment Benefits in Publication 15-A, section 5, Employer's Supplemental Tax Guide. Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.
taxmap/pubs/p525-004.htm#en_us_publink1000229472

Repayment of benefits.(p30)
spacer

You may have to repay some of your supplemental unemployment benefits to qualify for trade readjustment allowances under the Trade Act of 1974. If you repay supplemental unemployment benefits in the same year you receive them, reduce the total benefits by the amount you repay. If you repay the benefits in a later year, you must include the full amount of the benefits in your income for the year you received them.
Deduct the repayment in the later year as an adjustment to gross income on Form 1040. (You cannot use Form 1040A or Form 1040EZ.) Include the repayment on Form 1040, line 36, and enter "Sub-Pay TRA" and the amount on the dotted line next to line 36. If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year instead of deducting the amount repaid. For information on this, see Repayments, later.
taxmap/pubs/p525-004.htm#en_us_publink1000229473

Private unemployment fund.(p30)


rule
spacer

Unemployment benefit payments from a private (nonunion) fund to which you voluntarily contribute are taxable only if the amounts you receive are more than your total payments into the fund. Report the taxable amount on Form 1040, line 21.
taxmap/pubs/p525-004.htm#en_us_publink1000229474

Payments by a union.(p30)


rule
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Benefits paid to you as an unemployed member of a union from regular union dues are included in your income on Form 1040, line 21. However, if you contribute to a special union fund and your payments to the fund are not deductible, the unemployment benefits you receive from the fund are includible in your income only to the extent they are more than your contributions.
taxmap/pubs/p525-004.htm#en_us_publink1000229475

Guaranteed annual wage.(p30)


rule
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Payments you receive from your employer during periods of unemployment, under a union agreement that guarantees you full pay during the year, are taxable as wages. Include them on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.
taxmap/pubs/p525-004.htm#en_us_publink1000229476

State employees.(p30)


rule
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Payments similar to a state's unemployment compensation may be made by the state to its employees who are not covered by the state's unemployment compensation law. Although the payments are fully taxable, do not report them as unemployment compensation. Report these payments on Form 1040, line 21.
taxmap/pubs/p525-004.htm#en_us_publink1000229477

Welfare and Other  
Public Assistance Benefits(p30)


rule
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previous topic occurrence Welfare and Other Public Assistance Benefits next topic occurrence

Do not include in your income governmental benefit payments from a public welfare fund based upon need, such as payments due to blindness. Payments from a state fund for the victims of crime should not be included in the victims' incomes if they are in the nature of welfare payments. Do not deduct medical expenses that are reimbursed by such a fund. You must include in your income any welfare payments that are compensation for services or that are obtained fraudulently.
taxmap/pubs/p525-004.htm#en_us_publink1000229478

Work-training program.(p30)


rule
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Payments you receive from a state welfare agency for taking part in a work-training program are not included in your income, as long as the payments (exclusive of extra allowances for transportation or other costs) do not total more than the public welfare benefits you would have received otherwise. If the payments are more than the welfare benefits you would have received, the entire amount must be included in your income as wages.
taxmap/pubs/p525-004.htm#en_us_publink1000229479

Alternative trade adjustment assistance (ATAA) payments.(p30)
spacer

Payments you receive from a state agency under the Demonstration Project for Alternative Trade Adjustment Assistance for Older Workers (ATAA) must be included in your income. The state must send you Form 1099-G to advise you of the amount you should include in income. The amount should be reported on Form 1040, line 21.
taxmap/pubs/p525-004.htm#en_us_publink1000229480

Persons with disabilities.(p30)


rule
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If you have a disability, you must include in income compensation you receive for services you perform unless the compensation is otherwise excluded. However, you do not include in income the value of goods, services, and cash that you receive, not in return for your services, but for your training and rehabilitation because you have a disability. Excludable amounts include payments for transportation and attendant care, such as interpreter services for the deaf, reader services for the blind, and services to help mentally retarded persons do their work.
taxmap/pubs/p525-004.htm#en_us_publink1000229481

Disaster relief grants.(p30)


rule
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Do not include post-disaster grants received under the Disaster Relief and Emergency Assistance Act in your income if the grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property, transportation, or funeral expenses. Do not deduct casualty losses or medical expenses that are specifically reimbursed by these disaster relief grants. If you have deducted a casualty loss for the loss of your personal residence and you later receive a disaster relief grant for the loss of the same residence, you may have to include part or all of the grant in your taxable income. See Recoveries, earlier. Unemployment assistance payments under the Act are taxable unemployment compensation. See Unemployment compensation under Unemployment Benefits, earlier.
taxmap/pubs/p525-004.htm#en_us_publink1000229482

Disaster relief payments.(p30)


rule
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You can exclude from income any amount you receive that is a qualified disaster relief payment. A qualified disaster relief payment is an amount paid to you:
  1. To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster;
  2. To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its contents to the extent it is due to a qualified disaster;
  3. By a person engaged in the furnishing or sale of transportation as a common carrier because of the death or personal physical injuries incurred as a result of a qualified disaster; or
  4. By a federal, state, or local government, or agency or instrumentality in connection with a qualified disaster in order to promote the general welfare.
You can exclude this amount only to the extent any expense it pays for is not paid for by insurance or otherwise. The exclusion does not apply if you were a participant or conspirator in a terrorist action or his or her representative.
A qualified disaster is:
For amounts paid under item (4), a disaster is qualified if it is determined by an applicable federal, state, or local authority to warrant assistance from the federal, state, or local government, agency, or instrumentality.
taxmap/pubs/p525-004.htm#en_us_publink1000229483

Disaster mitigation payments.(p30)
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You also can exclude from income any amount you receive that is a qualified disaster mitigation payment. Like qualified disaster relief payments, qualified disaster mitigation payments are also most commonly paid to you in the period immediately following damage to property as a result of a natural disaster. However, disaster mitigation payments are grants you use to mitigate (reduce the severity of) potential damage from future natural disasters. They are paid to you through state and local governments based on the provisions of the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act.
You cannot increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation payments.
taxmap/pubs/p525-004.htm#en_us_publink1000173495

Home Affordable Modification Program (HAMP).(p30)


rule
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If you benefit from Pay-for-Performance Success Payments under HAMP, the payments are not taxable.
taxmap/pubs/p525-004.htm#en_us_publink1000229484

Mortgage assistance payments.(p31)


rule
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Payments made under section 235 of the National Housing Act for mortgage assistance are not included in the homeowner's income. Interest paid for the homeowner under the mortgage assistance program cannot be deducted.
taxmap/pubs/p525-004.htm#en_us_publink1000229485

Replacement housing payments.(p31)


rule
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Replacement housing payments made under the Uniform Relocation Assistance and Real Property Acquisition Policies Act for Federal and Federally Assisted Programs are not includible in gross income, but are includible in the basis of the newly acquired property.
taxmap/pubs/p525-004.htm#en_us_publink1000229486

Relocation payments and home rehabilitation grants.(p31)


rule
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A relocation payment under section 105(a)(11) of the Housing and Community Development Act made by a local jurisdiction to a displaced individual moving from a flood-damaged residence to another residence is not includible in gross income. Home rehabilitation grants received by low-income homeowners in a defined area under the same act are also not includible in gross income.
taxmap/pubs/p525-004.htm#en_us_publink1000229487

Indian financing grants.(p31)


rule
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Nonreimbursable grants under title IV of the Indian Financing Act of 1974 to Indians to expand profit-making Indian-owned economic enterprises on or near reservations are not includible in gross income.
taxmap/pubs/p525-004.htm#en_us_publink1000229488

Medicare.(p31)


rule
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Medicare benefits received under title XVIII of the Social Security Act are not includible in the gross income of the individuals for whom they are paid. This includes basic (part A (Hospital Insurance Benefits for the Aged)) and supplementary (part B (Supplementary Medical Insurance Benefits for the Aged)).
taxmap/pubs/p525-004.htm#en_us_publink1000229489

Old-age, survivors, and disability insurance benefits (OASDI).(p31)


rule
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OASDI payments under section 202 of title II of the Social Security Act are not includible in the gross income of the individuals to whom they are paid. This applies to old-age insurance benefits, and insurance benefits for wives, husbands, children, widows, widowers, mothers and fathers, and parents, as well as the lump-sum death payment.
taxmap/pubs/p525-004.htm#en_us_publink1000229490

Nutrition Program for the Elderly.(p31)


rule
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Food benefits you receive under the Nutrition Program for the Elderly are not taxable. If you prepare and serve free meals for the program, include in your income as wages the cash pay you receive, even if you are also eligible for food benefits.
taxmap/pubs/p525-004.htm#en_us_publink1000229491

Payments to reduce cost of winter energy.(p31)


rule
spacer

Payments made by a state to qualified people to reduce their cost of winter energy use are not taxable.
taxmap/pubs/p525-004.htm#en_us_publink1000229492

Other Income(p31)


rule
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previous topic occurrence Income next topic occurrence

The following brief discussions are arranged in alphabetical order. Income items that are discussed in greater detail in another publication include a reference to that publication.
taxmap/pubs/p525-004.htm#en_us_publink1000229493

Activity not for profit.(p31)


rule
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You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. Enter this income on Form 1040, line 21. Deductions for expenses related to the activity are limited. They cannot total more than the income you report and can be taken only if you itemize deductions on Schedule A (Form 1040). See Not-for-Profit Activities in chapter 1 of Publication 535 for information on whether an activity is considered carried on for a profit.
taxmap/pubs/p525-004.htm#en_us_publink1000229494

Alaska Permanent Fund dividend.(p31)


rule
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If you received a payment from Alaska's mineral income fund (Alaska Permanent Fund dividend), report it as income on line 21 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. The state of Alaska sends each recipient a document that shows the amount of the payment with the check. The amount also is reported to the IRS.
taxmap/pubs/p525-004.htm#en_us_publink1000229495

Alimony.(p31)


rule
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Include in your income on Form 1040, line 11, any alimony payments you receive. Amounts you receive for child support are not income to you. For complete information, see Publication 504, Divorced or Separated Individuals.
taxmap/pubs/p525-004.htm#en_us_publink1000229496

Below-market loans.(p31)


rule
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A below-market loan is a loan on which no interest is charged or on which the interest is charged at a rate below the applicable federal rate. If you make a below-market gift or demand loan, you must include the forgone interest (at the federal rate) as interest income on your return. These loans are considered a transaction in which you, the lender, are treated as having made: Depending on the transaction, the additional payment to the borrower is treated as a: The borrower may have to report this payment as income, depending on its classification.
For more information on below-market loans, see chapter 1 of Publication 550.
taxmap/pubs/p525-004.htm#en_us_publink1000229497

Bribes.(p31)


rule
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If you receive a bribe, include it in your income.
taxmap/pubs/p525-004.htm#en_us_publink1000229498

Campaign contributions.(p31)


rule
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These contributions are not income to a candidate unless they are diverted to his or her personal use. To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. However, interest earned on bank deposits, dividends received on contributed securities, and net gains realized on sales of contributed securities are taxable and must be reported on Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations. Excess campaign funds transferred to an office account must be included in the officeholder's income on Form 1040, line 21, in the year transferred.
taxmap/pubs/p525-004.htm#en_us_publink1000229499

Canceled sales contract.(p31)


rule
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If you sell property (such as land or a residence) under a contract, but the contract is canceled and you return the buyer's money in the same tax year as the original sale, you have no income from the sale. If the contract is canceled and you return the buyer's money in a later tax year, you must include your gain in your income for the year of the sale. When you return the money and take back the property in the later year, you treat the transaction as a purchase that gives you a new basis in the property equal to the funds you return to the buyer.
Special rules apply to the reacquisition of real property where a secured indebtedness (mortgage) to the original seller is involved. For further information, see Repossession in Publication 537, Installment Sales.
taxmap/pubs/p525-004.htm#en_us_publink1000229500

Car pools.(p31)


rule
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Do not include in your income amounts you receive from the passengers for driving a car in a car pool to and from work. These amounts are considered reimbursement for your expenses. However, this rule does not apply if you have developed car pool arrangements into a profit-making business of transporting workers for hire.
taxmap/pubs/p525-004.htm#en_us_publink1000229501

Cash for clunkers.(p31)


rule
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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 considered income. However, your basis in the new vehicle must be reduced by the amount of the voucher.
taxmap/pubs/p525-004.htm#en_us_publink1000229502

Cash rebates.(p31)


rule
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A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate.
taxmap/pubs/p525-004.htm#en_us_publink1000229503

Example.(p31)

You buy a new car for $24,000 cash and receive a $2,000 rebate check from the manufacturer. The $2,000 is not income to you. Your basis in the car is $22,000. This is the basis on which you figure gain or loss if you sell the car and depreciation if you use it for business.
taxmap/pubs/p525-004.htm#en_us_publink1000229504

Casualty insurance and other reimbursements.(p31)


rule
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You generally should not report these reimbursements on your return unless you are figuring gain or loss from the casualty or theft. See Publication 547.
taxmap/pubs/p525-004.htm#en_us_publink1000229505

Charitable gift annuities.(p31)


rule
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If you are the beneficiary of a charitable gift annuity, you must include the yearly annuity or fixed percentage payment in your income.
The payer will report the types of income you received on Form 1099-R. Report the gross distribution from box 1 on Form 1040, line 16a, or on Form 1040A, line 12a, and the part taxed as ordinary income (box 2a minus box 3) on Form 1040, line 16b, or on Form 1040A, line 12b. Report the portion taxed as capital gain (box 3) on Schedule D, line 8.
taxmap/pubs/p525-004.htm#en_us_publink1000229506

Child support payments.(p31)


rule
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You should not report these payments on your return. See Publication 504 for more information.
taxmap/pubs/p525-004.htm#en_us_publink1000229507

Court awards and damages.(p31)


rule
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To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income.
  1. Interest on any award.
  2. Compensation for lost wages or lost profits in most cases.
  3. Punitive damages, in most cases. It does not matter if they relate to a physical injury or physical sickness.
  4. Amounts received in settlement of pension rights (if you did not contribute to the plan).
  5. Damages for:
    1. Patent or copyright infringement,
    2. Breach of contract, or
    3. Interference with business operations.
  6. Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
  7. Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.
Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).
taxmap/pubs/p525-004.htm#en_us_publink1000229508

Emotional distress.(p32)
spacer

Emotional distress itself is not a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Do not include them in your income.
If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, unlawful discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.
taxmap/pubs/p525-004.htm#en_us_publink1000229509

Deduction for costs involved in unlawful discrimination suits.(p32)
spacer

You may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination under various provisions of federal, state, and local law listed in Internal Revenue Code section 62(e), a claim against the United States government, or a claim under section 1862(b)(3)(A) of the Social Security Act. You can claim this deduction as an adjustment to income on Form 1040, line 36. The following rules apply.
taxmap/pubs/p525-004.htm#en_us_publink1000229510

Pre-existing agreement.(p32)
spacer

If you receive damages under a written binding agreement, court decree, or mediation award that was in effect (or issued on or before) September 13, 1995, do not include in income any of those damages received on account of personal injuries or sickness.
taxmap/pubs/p525-004.htm#en_us_publink1000229511

Credit card insurance.(p32)


rule
spacer

Generally, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. These plans make the minimum monthly payment on your credit card account if you cannot make the payment due to injury, illness, disability, or unemployment. Report on Form 1040, line 21, the amount of benefits you received during the year that is more than the amount of the premiums you paid during the year.
taxmap/pubs/p525-004.htm#en_us_publink1000229512

Down payment assistance.(p32)


rule
spacer

If you purchase a home and receive assistance from a nonprofit corporation to make the down payment, that assistance is not included in your income. If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift and is included in your basis of the house. If the corporation does not qualify, the assistance is treated as a rebate or reduction of the purchase price and is not included in your basis.
taxmap/pubs/p525-004.htm#en_us_publink1000229513

Economic recovery payment.(p32)


rule
spacer

If you received an economic recovery payment, such as the payments of $250 made to certain recipients of social security, SSI, railroad retirement, or certain veterans' benefits, it is not taxable for federal income tax purposes, but it reduces any making work pay credit or government retiree credit.
taxmap/pubs/p525-004.htm#en_us_publink1000229514

Employment agency fees.(p32)


rule
spacer

If you get a job through an employment agency, and the fee is paid by your employer, the fee is not includible in your income if you are not liable for it. However, if you pay it and your employer reimburses you for it, it is includible in your income.
taxmap/pubs/p525-004.htm#en_us_publink1000229515

Energy conservation subsidies.(p32)


rule
spacer

You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit.
taxmap/pubs/p525-004.htm#en_us_publink1000229516

Energy conservation measure.(p32)
spacer

This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand.
taxmap/pubs/p525-004.htm#en_us_publink1000229517

Dwelling unit.(p32)
spacer

This includes a house, apartment, condominium, mobile home, boat, or similar property. If a building or structure contains both dwelling and other units, any subsidy must be properly allocated.
taxmap/pubs/p525-004.htm#en_us_publink1000229518

Estate and trust income.(p32)


rule
spacer

An estate or trust, unlike a partnership, may have to pay federal income tax. If you are a beneficiary of an estate or trust, you may be taxed on your share of its income distributed or required to be distributed to you. However, there is never a double tax. Estates and trusts file their returns on Form 1041, U.S. Income Tax Return for Estates and Trusts, and your share of the income is reported to you on Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc.
taxmap/pubs/p525-004.htm#en_us_publink1000229519

Current income required to be distributed.(p32)
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If you are the beneficiary of an estate or trust that must distribute all of its current income, you must report your share of the distributable net income, whether or not you actually received it.
taxmap/pubs/p525-004.htm#en_us_publink1000229520

Current income not required to be distributed.(p32)
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If you are the beneficiary of an estate or trust and the fiduciary has the choice of whether to distribute all or part of the current income, you must report: up to the amount of your share of distributable net income.
taxmap/pubs/p525-004.htm#en_us_publink1000229521

How to report.(p32)
spacer

Treat each item of income the same way that the estate or trust would treat it. For example, if a trust's dividend income is distributed to you, you report the distribution as dividend income on your return. The same rule applies to distributions of tax-exempt interest and capital gains.
The fiduciary of the estate or trust must tell you the type of items making up your share of the estate or trust income and any credits you are allowed on your individual income tax return.
taxmap/pubs/p525-004.htm#en_us_publink1000229522

Losses.(p32)
spacer

Losses of estates and trusts generally are not deductible by the beneficiaries.
taxmap/pubs/p525-004.htm#en_us_publink1000229523

Grantor trust.(p32)
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Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. (The grantor is the one who transferred property to the trust.) This rule applies if the property (or income from the property) put into the trust will or may revert (be returned) to the grantor or the grantor's spouse.
Generally, a trust is a grantor trust if the grantor has a reversionary interest valued (at the date of transfer) at more than 5% of the value of the transferred property.
taxmap/pubs/p525-004.htm#en_us_publink1000229524

Expenses paid by another.(p32)


rule
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If your personal expenses are paid for by another person, such as a corporation, the payment may be taxable to you depending upon your relationship with that person and the nature of the payment. But if the payment makes up for a loss caused by that person, and only restores you to the position you were in before the loss, the payment is not includible in your income.
taxmap/pubs/p525-004.htm#en_us_publink1000229525

Exxon Valdez settlement income.(p32)


rule
spacer

Include in your income on Form 1040, line 21, or Form 1040NR, line 21, any qualified settlement income you receive as a qualified taxpayer. See Statement, later. Qualified settlement income is any interest and punitive damage awards that are:
You are a qualified taxpayer if you were a plaintiff in the civil action mentioned earlier or you were a beneficiary of the estate of your spouse or a close relative who was such a plaintiff and from whom you acquired the right to receive qualified settlement income.
The income can be received as a lump sum or as periodic payments. You will receive a Form 1099-MISC showing the gross amount of the settlement income paid to you in the tax year.
taxmap/pubs/p525-004.htm#en_us_publink1000229526

Contributions to eligible retirement plan.(p33)
spacer

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 Statement, later. For more information on these contributions, see Publications 560, 575, and 590.
taxmap/pubs/p525-004.htm#en_us_publink1000229527

Legal expenses.(p33)
spacer

You may be able to deduct attorney fees and court costs paid in connection with the civil action. Depending on the facts and circumstances, these expenses are either claimed on Schedule A (Form 1040) or Form 1040NR (Schedule A), or deducted in figuring the income you report on Form 1040, line 21, or Form 1040NR, line 21. If the qualified settlement income was received in connection with your trade or business (other than as an employee), you can reduce the taxable amount of qualified settlement income by these expenses. In all other situations, you can only claim these expenses as a miscellaneous itemized deduction subject to the 2%-of-adjusted- 
gross-income limit on Schedule A (Form 1040), line 23, or Form 1040NR (Schedule A), line 11. For example, an employee or the surviving spouse or beneficiary of a deceased plaintiff would claim the expenses as a miscellaneous itemized deduction subject to the 2% limit. See Statement, next.
taxmap/pubs/p525-004.htm#en_us_publink1000229528

Statement.(p33)
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If you report on Form 1040, line 21, or Form 1040NR, line 21, qualified settlement income that is less than the gross amount shown on the Form 1099-MISC, you must attach a statement to your tax return. The statement must identify and show the gross amount of the qualified settlement income, the reductions for the amount contributed to an eligible retirement plan or allowable as legal expenses not reported as a miscellaneous itemized deduction, and the net amount.
taxmap/pubs/p525-004.htm#en_us_publink1000229529

Income averaging.(p33)
spacer

For purposes of the income averaging rules that apply to an individual engaged in a farming or fishing business, qualified settlement income is treated as attributable to a fishing business for the tax year in which it is received. See Schedule J (Form 1040) and its instructions for more information.
taxmap/pubs/p525-004.htm#en_us_publink1000229530

Fees for services.(p33)


rule
spacer

Include all fees for your services in your income. Examples of these fees are amounts you receive for services you perform as:
Deposit
If you are not an employee and the fees for your services from the same payor total $600 or more for the year, you may receive a Form 1099-MISC.
taxmap/pubs/p525-004.htm#en_us_publink1000229532

Corporate director.(p33)
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Corporate director fees are self-employment income. Report these payments on Schedule C or Schedule C-EZ (Form 1040).
taxmap/pubs/p525-004.htm#en_us_publink1000229533

Personal representatives.(p33)
spacer

All personal representatives must include in their gross income fees paid to them from an estate. If you are not in the trade or business of being an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on Form 1040, line 21. If you are in the trade or business of being an executor, report these fees as self-employment income on Schedule C or Schedule C-EZ (Form 1040). The fee is not includible in income if it is waived.
taxmap/pubs/p525-004.htm#en_us_publink1000229534

Manager of trade or business for bankruptcy estate.(p33)
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Include in your income all payments received from your bankruptcy estate for managing or operating a trade or business that you operated before you filed for bankruptcy. Report this income on Form 1040, line 21.
taxmap/pubs/p525-004.htm#en_us_publink1000229535

Notary public.(p33)
spacer

Report payments for these services on Schedule C or Schedule C-EZ (Form 1040). These payments are not subject to self-employment tax. (See the separate instructions for Schedule SE (Form 1040) for details.)
taxmap/pubs/p525-004.htm#en_us_publink1000229536

Election precinct official.(p33)
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You should receive a Form W-2 showing payments for services performed as an election official or election worker. Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.
taxmap/pubs/p525-004.htm#en_us_publink1000229537

Food program payments to daycare providers.(p33)


rule
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If you operate a daycare service and receive payments under the Child and Adult Care Food Program administered by the Department of Agriculture that are not for your services, the payments generally are not included in your income. However, you must include in your income any part of the payments you do not use to provide food to individuals eligible for help under the program.
taxmap/pubs/p525-004.htm#en_us_publink1000229538

Foreign currency transactions.(p33)


rule
spacer

If you have a gain on a personal foreign currency transaction because of changes in exchange rates, you do not have to include that gain in your income unless it is more than $200. If the gain is more than $200, report it as a capital gain.
taxmap/pubs/p525-004.htm#en_us_publink1000229539

Foster care providers.(p33)


rule
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Payments you receive from a state, political subdivision, or a qualified foster care placement agency for providing care to qualified foster individuals in your home generally are not included in your income. However, you must include in your income payments received for the care of more than 5 individuals age 19 or older and certain difficulty-of-care payments.
A qualified foster individual is a person who:
  1. Is living in a foster family home, and
  2. Was placed there by:
    1. An agency of a state or one of its political subdivisions, or
    2. A qualified foster care placement agency.
taxmap/pubs/p525-004.htm#en_us_publink1000229540

Difficulty-of-care payments.(p33)
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These are additional payments that are designated by the payer as compensation for providing the additional care that is required for physically, mentally, or emotionally handicapped qualified foster individuals. A state must determine that the additional compensation is needed, and the care for which the payments are made must be provided in your home.
You must include in your income difficulty-of-care payments received for more than:
taxmap/pubs/p525-004.htm#en_us_publink1000229541

Maintaining space in home.(p33)
spacer

If you are paid to maintain space in your home for emergency foster care, you must include the payment in your income.
taxmap/pubs/p525-004.htm#en_us_publink1000229542

Reporting taxable payments.(p33)
spacer

If you receive payments that you must include in your income, you are in business as a foster-care provider and you are self-employed. Report the payments on Schedule C or Schedule C-EZ (Form 1040). See Publication 587, Business Use of Your Home (Including Use by Daycare Providers), to help you determine the amount you can deduct for the use of your home.
taxmap/pubs/p525-004.htm#en_us_publink1000229543

Found property.(p33)


rule
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If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is taxable to you at its fair market value in the first year it is your undisputed possession.
taxmap/pubs/p525-004.htm#en_us_publink1000229544

Free tour.(p33)


rule
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If you received a free tour from a travel agency for organizing a group of tourists, you must include its value in your income. Report the fair market value of the tour on Form 1040, line 21, if you are not in the trade or business of organizing tours. You cannot deduct your expenses in serving as the voluntary leader of the group at the group's request. If you organize tours as a trade or business, report the tour's value on Schedule C or Schedule C-EZ (Form 1040).
taxmap/pubs/p525-004.htm#en_us_publink1000229545

Gambling winnings.(p33)


rule
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You must include your gambling winnings in your income on Form 1040, line 21. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings.
taxmap/pubs/p525-004.htm#en_us_publink1000229546

Lotteries and raffles.(p33)
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Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses, and other noncash prizes. However, the difference between the fair market value and the cost of an oil and gas lease obtained from the government through a lottery is not includible in income.
taxmap/pubs/p525-004.htm#en_us_publink1000229547

Installment payments.(p34)
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Generally, if you win a state lottery prize payable in installments, you must include in your gross income the annual payments and any amounts you receive designated as interest on the unpaid installments. If you sell future lottery payments for a lump sum, you must report the amount you receive from the sale as ordinary income (Form 1040, line 21) in the year you receive it.
taxmap/pubs/p525-004.htm#en_us_publink1000229548

Form W-2G.(p34)
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You may have received a Form W-2G, Certain Gambling Winnings, showing the amount of your gambling winnings and any tax taken out of them. Include the amount from box 1 on Form 1040, line 21. Include the amount shown in box 2 on Form 1040, line 61, as federal income tax withheld.
taxmap/pubs/p525-004.htm#en_us_publink1000229549

Gifts and inheritances.(p34)


rule
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Generally, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.
taxmap/pubs/p525-004.htm#en_us_publink1000229550

Inherited pension or IRA.(p34)
spacer

If you inherited a pension or an individual retirement arrangement (IRA), you may have to include part of the inherited amount in your income. See Survivors and Beneficiaries in Publication 575, if you inherited a pension. See What If You Inherit an IRA? in Publication 590, if you inherited an IRA.
taxmap/pubs/p525-004.htm#en_us_publink1000229551

Expected inheritance.(p34)
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If you sell an interest in an expected inheritance from a living person, include the entire amount you receive in gross income on Form 1040, line 21.
taxmap/pubs/p525-004.htm#en_us_publink1000229552

Bequest for services.(p34)
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If you receive cash or other property as a bequest for services you performed while the decedent was alive, the value is taxable compensation.
taxmap/pubs/p525-004.htm#en_us_publink1000229553

Historic preservation grants.(p34)


rule
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Do not include in your income any payment you receive under the National Historic Preservation Act to preserve a historically significant property.
taxmap/pubs/p525-004.htm#en_us_publink1000229554

Hobby losses.(p34)


rule
spacer

Losses from a hobby are not deductible from other income. A hobby is an activity from which you do not expect to make a profit. See Activity not for profit, earlier, under Other Income.
EIC
If you collect stamps, coins, or other items as a hobby for recreation and pleasure, and you sell any of the items, your gain is taxable as a capital gain. However, if you sell items from your collection at a loss, you cannot deduct the loss.
taxmap/pubs/p525-004.htm#en_us_publink1000229556

Holocaust victims restitution.(p34)


rule
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Restitution payments you receive as a Holocaust victim (or the heir of a Holocaust victim) and interest earned on the payments are not taxable. Excludable interest is earned by escrow accounts or settlement funds established for holding funds prior to the settlement. You also do not include the restitution payments and interest the funds earned prior to disbursement in any computations in which you ordinarily would add excludable income to your adjusted gross income, such as the computation to determine the taxable part of social security benefits. If the payments are made in property, your basis in the property is its fair market value when you receive it.
Excludable restitution payments are payments or distributions made by any country or any other entity because of persecution of an individual on the basis of race, religion, physical or mental disability, or sexual orientation by Nazi Germany, any other Axis regime, or any other Nazi-controlled or Nazi-allied country, whether the payments are made under a law or as a result of a legal action. They include compensation or reparation for property losses resulting from Nazi persecution, including proceeds under insurance policies issued before and during World War II by European insurance companies.
taxmap/pubs/p525-004.htm#en_us_publink1000229557

Illegal activities.(p34)


rule
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Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.
taxmap/pubs/p525-004.htm#en_us_publink1000229558

Indian fishing rights.(p34)


rule
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If you are a member of a qualified Indian tribe that has fishing rights secured by treaty, executive order, or an Act of Congress as of March 17, 1988, do not include in your income amounts you receive from activities related to those fishing rights. The income is not subject to income tax, self-employment tax, or employment taxes.
taxmap/pubs/p525-004.htm#en_us_publink1000229559

Interest on frozen deposits.(p34)


rule
spacer

In general, you exclude from your income the amount of interest earned on a frozen deposit. A deposit is frozen if, at the end of the calendar year, you cannot withdraw any part of the deposit because:
taxmap/pubs/p525-004.htm#en_us_publink1000229560

Excludable amount.(p34)
spacer

The amount of interest you exclude from income for the year is the interest that was credited on the frozen deposit for that tax year minus the sum of:
  1. The net amount withdrawn from the deposit during that year, and
  2. The amount that could have been withdrawn at the end of that tax year (not reduced by any penalty for premature withdrawals of a time deposit).
The excluded part of the interest is included in your income in the tax year it becomes withdrawable.
taxmap/pubs/p525-004.htm#en_us_publink1000229561

Interest on qualified savings bonds.(p34)


rule
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You may be able to exclude from income the interest from qualified U.S. savings bonds you redeem if you pay qualified higher educational expenses in the same year. Qualified higher educational expenses are those you pay for tuition and required fees at an eligible educational institution for you, your spouse, or your dependent. A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must have been issued to you when you were 24 years of age or older. For more information on this exclusion, see Education Savings Bond Program in chapter 1 of Publication 550.
taxmap/pubs/p525-004.htm#en_us_publink1000229562

Interest on state and local government obligations.(p34)


rule
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This interest is usually exempt from federal tax. However, you must show the amount of any tax-exempt interest on your federal income tax return. For more information, see State or Local Government Obligations in chapter 1 of Publication 550.
taxmap/pubs/p525-004.htm#en_us_publink1000229563

Job interview expenses.(p34)


rule
spacer

If a prospective employer asks you to appear for an interview and either pays you an allowance or reimburses you for your transportation and other travel expenses, the amount you receive generally is not taxable. You include in income only the amount you receive that is more than your actual expenses.
taxmap/pubs/p525-004.htm#en_us_publink1000229564

Jury duty.(p34)


rule
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Jury duty pay you receive must be included in your income on Form 1040, line 21. If you must give the pay to your employer because your employer continues to pay your salary while you serve on the jury, you can deduct the amount turned over to your employer as an adjustment to income. Enter the amount you repay your employer on Form 1040, line 36. Enter "Jury Pay" and the amount on the dotted line next to line 36.
taxmap/pubs/p525-004.htm#en_us_publink1000229565

Kickbacks.(p34)


rule
spacer

You must include kickbacks, side commissions, push money, or similar payments you receive in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.
taxmap/pubs/p525-004.htm#en_us_publink1000229566

Example.(p34)

You sell cars and help arrange car insurance for buyers. Insurance brokers pay back part of their commissions to you for referring customers to them. You must include the kickbacks in your income.
taxmap/pubs/p525-004.htm#en_us_publink1000229567

Manufacturer incentive payments.(p34)


rule
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You must include as other income on Form 1040, line 21 (or Schedule C or Schedule C-EZ (Form 1040) if you are self-employed) incentive payments from a manufacturer that you receive as a salesperson. This is true whether you receive the payment directly from the manufacturer or through your employer.
taxmap/pubs/p525-004.htm#en_us_publink1000229568

Example.(p34)

You sell cars for an automobile dealership and receive incentive payments from the automobile manufacturer every time you sell a particular model of car. You report the incentive payments on Form 1040, line 21.
taxmap/pubs/p525-004.htm#en_us_publink1000229569

Medical savings accounts (Archer MSAs and Medicare Advantage MSAs).(p34)


rule
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You generally do not include in income amounts you withdraw from your Archer MSA or Medicare Advantage MSA if you use the money to pay for qualified medical expenses. Generally, qualified medical expenses are those you can deduct on Schedule A (Form 1040). For more information about Archer MSAs or Medicare Advantage MSAs, see Publication 969.
taxmap/pubs/p525-004.htm#en_us_publink1000229570

Moving expense reimbursements.(p34)


rule
spacer

You generally should not report these benefits on your return. See Publication 521 for more information.
taxmap/pubs/p525-004.htm#en_us_publink1000229572

Prizes and awards.(p34)


rule
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If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income. For example, if you win a $50 prize in a photography contest, you must report this income on Form 1040, line 21. If you refuse to accept a prize, do not include its value in your income.
Prizes and awards in goods or services must be included in your income at their fair market value.
taxmap/pubs/p525-004.htm#en_us_publink1000229573

Employee awards or bonuses.(p35)
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Cash awards or bonuses given to you by your employer for good work or suggestions generally must be included in your income as wages. However, certain noncash employee achievement awards can be excluded from income. See Bonuses and awards under Miscellaneous Compensation, earlier.
taxmap/pubs/p525-004.htm#en_us_publink1000229574

Prize points.(p35)
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If you are a salesperson and receive prize points redeemable for merchandise, that are awarded by a distributor or manufacturer to employees of dealers, you must include their fair market value in your income. The prize points are taxable in the year they are paid or made available to you, rather than in the year you redeem them for merchandise.
taxmap/pubs/p525-004.htm#en_us_publink1000229575

Pulitzer, Nobel, and similar prizes.(p35)
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If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic fields, you generally must include the value of the prize in your income. However, you do not include this prize in your income if you meet all of the following requirements.
  1. You were selected without any action on your part to enter the contest or proceeding.
  2. You are not required to perform substantial future services as a condition for receiving the prize or award.
  3. The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated by you. The following conditions apply to the transfer.
    1. You cannot use the prize or award before it is transferred.
    2. You should provide the designation before the prize or award is presented to prevent a disqualifying use. The designation should contain:
      1. The purpose of the designation by making a reference to section 74(b)(3) of the Internal Revenue Code,
      2. A description of the prize or award,
      3. The name and address of the organization to receive the prize or award,
      4. Your name, address, and taxpayer identification number, and
      5. Your signature and the date signed.
    3. In the case of an unexpected presentation, you must return the prize or award before using it (or spending, depositing, investing it, etc., in the case of money) and then prepare the statement as described in (b).
    4. After the transfer, you should receive from the payer a written response stating when and to whom the designated amounts were transferred.
These rules do not apply to scholarship or fellowship awards. See Scholarships and fellowships, later.
taxmap/pubs/p525-004.htm#en_us_publink1000229576

Qualified tuition program (QTP).(p35)


rule
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A qualified tuition program (also known as a 529 program) is a program set up to allow you to either prepay or contribute to an account established for paying a student's qualified higher education expenses at an eligible educational institution. A program can be established and maintained by a state, an agency or instrumentality of a state, or an eligible educational institution.
The part of a distribution representing the amount paid or contributed to a QTP is not included in income. This is a return of the investment in the program.
The beneficiary generally does not include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified higher education expenses. See Publication 970 for more information.
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Railroad retirement annuities.(p35)


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The following types of payments are treated as pension or annuity income and are taxable under the rules explained in Publication 575.
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Rewards.(p35)


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If you receive a reward for providing information, include it in your income.
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Sale of home.(p35)


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You may be able to exclude from income all or part of any gain from the sale or exchange of a personal residence. See Publication 523.
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Sale of personal items.(p35)


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If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain. Report it on Schedule D (Form 1040). You cannot deduct a loss.
However, if you sold an item you held for investment, such as gold or silver bullion, coins, or gems, any gain is taxable as a capital gain and any loss is deductible as a capital loss.
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Example.(p35)
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You sold a painting on an online auction website for $100. You bought the painting for $20 at a garage sale years ago. Report your $80 gain as a capital gain on Schedule D (Form 1040).
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Scholarships and fellowships.(p35)


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A candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship or fellowship is any amount you receive that is for: Amounts used for room and board do not qualify for the exclusion. See Publication 970 for more information on qualified scholarships and fellowship grants.
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Payment for services.(p35)
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Generally, you must include in income the part of any scholarship or fellowship that represents payment for past, present, or future teaching, research, or other services. This applies even if all candidates for a degree must perform the services to receive the degree.
Do not include in income the part of any scholarship or fellowship representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program.
For information about the rules that apply to a tax-free qualified tuition reduction provided to employees and their families by an educational institution, see Publication 970.
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VA payments.(p35)
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Allowances paid by the Department of Veterans Affairs are not included in your income. These allowances are not considered scholarship or fellowship grants.
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Prizes.(p35)
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Scholarship prizes won in a contest are not scholarships or fellowships if you do not have to use the prizes for educational purposes. You must include these amounts in your income on Form 1040, line 21, whether or not you use the amounts for educational purposes.
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Smallpox vaccine injuries.(p35)


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If you are an eligible individual who receives benefits under the Smallpox Emergency Personnel Protection Act of 2003 for a covered injury resulting from a covered countermeasure, you can exclude the payment from your income (to the extent it is not allowed as a medical and dental expense deduction on Schedule A (Form 1040)). Eligible individuals include health care workers, emergency personnel, and first responders in a smallpox emergency, who have received a smallpox vaccination.
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Social security and equivalent railroad retirement benefits.(p35)


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Social security or equivalent railroad retirement benefits, if taxable, must be included in the income of the person who has the legal right to receive the benefits. Whether any of your benefits are taxable, and the amount that is taxable, depends on the amount of the benefits and your other income.
Social security benefits include any monthly benefit under Title II of the Social Security Act and any part of a tier I railroad retirement benefit treated as a social security benefit. Social security benefits do not include any supplemental security income (SSI) payments.
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Form SSA-1099.(p35)
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If you received social security benefits during the year, you will receive Form SSA-1099, Social Security Benefit Statement. An IRS Notice 703 will be enclosed with your Form SSA-1099. This notice includes a worksheet you can use to figure whether any of your benefits are taxable.
For an explanation of the information found on your Form SSA-1099, see Publication 915.
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Form RRB-1099.(p36)
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If you received equivalent railroad retirement or special guaranty benefits during the year, you will receive Form RRB-1099, Payments by the Railroad Retirement Board.
For an explanation of the information found on your Form RRB-1099, see Publication 915.
If you received other railroad retirement benefits, see Railroad retirement annuities, earlier.
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Joint return.(p36)
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If you are married and file a joint return, you and your spouse must combine your incomes and your social security and equivalent railroad retirement benefits when figuring whether any of your combined benefits are taxable. Even if your spouse did not receive any benefits, you must add your spouse's income to yours when figuring if any of your benefits are taxable.
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Taxable amount.(p36)
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Use the worksheet in the Form 1040 or Form 1040A instruction package to determine the amount of your benefits to include in your income. Publication 915 also has worksheets you can use. However, you must use the worksheets in Publication 915 if any of the following situations apply.
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Benefits may affect your IRA deduction.(p36)
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You must use the special worksheets in appendix B of Publication 590 to figure your taxable benefits and your IRA deduction if all of the following conditions apply.
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How to report.(p36)
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If any of your benefits are taxable, you must use either Form 1040 or Form 1040A to report the taxable part. You cannot use Form 1040EZ. Report your net benefits (the amount in box 5 of your Forms SSA-1099 and RRB-1099) on line 20a of Form 1040 or line 14a of Form 1040A. Report the taxable part (from the last line of the worksheet) on line 20b of Form 1040 or on line 14b of Form 1040A.
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Stolen property.(p36)


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If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner.
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Transporting school children.(p36)


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Do not include in your income a school board mileage allowance for taking children to and from school if you are not in the business of taking children to school. You cannot deduct expenses for providing this transportation.
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Union benefits and dues.(p36)


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Amounts deducted from your pay for union dues, assessments, contributions, or other payments to a union cannot be excluded from your income.
You may be able to deduct some of these payments as a miscellaneous deduction subject to the 2%-of-AGI limit if they are related to your job and if you itemize deductions on Schedule A (Form 1040). For more information, get Publication 529, Miscellaneous Deductions.
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Strike and lockout benefits.(p36)
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Benefits paid to you by a union as strike or lockout benefits, including both cash and the fair market value of other property, usually are included in your income as compensation. You can exclude these benefits from your income only when the facts clearly show that the union intended them as gifts to you.
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Reimbursed union convention expenses.(p36)
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If you are a delegate of your local union chapter and you attend the annual convention of the international union, do not include in your income amounts you receive from the international union to reimburse you for expenses of traveling away from home to attend the convention. You cannot deduct the reimbursed expenses, even if you are reimbursed in a later year. If you are reimbursed for lost salary, you must include that reimbursement in your income.
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Utility rebates.(p36)


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If you are a customer of an electric utility company and you participate in the utility's energy conservation program, you may receive on your monthly electric bill either: The amount of the rate reduction or nonrefundable credit is not included in your income.
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Whistleblower's award.(p36)


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If you receive a whistleblower's award from the Internal Revenue Service, you must include it in your income. Any deduction allowed for attorney fees and court costs paid by you, or on your behalf, in connection with the award are deducted as an adjustment to income, but cannot be more than the amount included in income for the tax year.