taxmap/pubs/p525-000.htm#en_us_publink1000229057taxmap/pubs/p525-000.htm#en_us_publink1000173448Roth IRAs.(p1)
Half of any income that results from a rollover or conversion
to a Roth IRA from another retirement plan in 2010 is included in income in
2011, and the other half in 2012, unless you elect to include all of it in 2010.
taxmap/pubs/p525-000.htm#en_us_publink1000173449Exclusions from income.(p1)
The exclusion of up to $2,400 of unemployment compensation expired
and is not available for 2010.
taxmap/pubs/p525-000.htm#en_us_publink1000252455Gulf oil spill.(p1)
You are required to include in your gross income payments you
received for lost wages, lost business income, or lost profits. See
Gulf oil spill under
Other Income.
taxmap/pubs/p525-000.htm#en_us_publink1000229070Terrorist attacks.(p2)
You can exclude from income certain disaster assistance, disability,
and death payments received as a result of a terrorist or military action. For
more information, see Publication 3920, Tax Relief for Victims of Terrorist
Attacks.
taxmap/pubs/p525-000.htm#en_us_publink1000229071Astronauts.(p2)
You also can exclude death payments for astronauts dying in the
line of duty after 2002.
taxmap/pubs/p525-000.htm#en_us_publink1000229072Qualified settlement income.(p2)
If you are a qualified taxpayer, you can contribute all or part
of your qualified settlement income, up to $100,000, to an eligible retirement
plan, including an IRA. Contributions to eligible retirement plans, other than a
Roth IRA or a designated Roth contribution, reduce the qualified settlement
income that you must include in income. See
Exxon Valdez settlement income under
Other Income.
taxmap/pubs/p525-000.htm#en_us_publink1000229073Foreign income.(p2)
If you are a U.S. citizen or resident alien, you must report
income from sources outside the United States (foreign income) on your tax
return unless it is exempt by U.S. law. This is true whether you reside inside
or outside the United States and whether or not you receive a Form W-2, Wage and
Tax Statement, or Form 1099 from the foreign payer. This applies to earned
income (such as wages and tips) as well as unearned income (such as interest,
dividends, capital gains, pensions, rents, and royalties).
If you reside outside the United States, you may be able to exclude part or all
of your foreign source earned income. For details, see Publication 54, Tax Guide
for U.S. Citizens and Resident Aliens Abroad.
taxmap/pubs/p525-000.htm#en_us_publink1000229074Disaster mitigation payments.(p2)
You can exclude from income grants you use to mitigate (reduce
the severity of) potential damage from future natural disasters that are paid to
you through state and local governments. For more information, see
Disaster mitigation payments
under
Welfare and Other Public Assistance Benefits.
taxmap/pubs/p525-000.htm#en_us_publink1000229075Nonqualified deferred compensation plans.(p2)
Generally, all amounts deferred under a nonqualified deferred
compensation plan for all tax years are included in gross income for the current
year, unless certain requirements are met. See
Nonqualified deferred compensation plans under
Employee Compensation.
taxmap/pubs/p525-000.htm#en_us_publink1000229076Health Savings Account (HSA).(p2)
You can fund your HSA with a one-time direct transfer from your
individual retirement plan, health reimbursement account, or health flexible
spending account and exclude the amount of the transfer from income. However,
you must include the amount transferred in your income, as well as pay a 10%
additional tax, if you do not remain an eligible individual for at least 12
months after the month of the transfer. See
Accident or Health Plan under
Fringe Benefits.
taxmap/pubs/p525-000.htm#en_us_publink1000229077Qualified joint venture.(p2)
A qualified joint venture conducted by you and your spouse may
not be treated as a partnership if you file a joint return for the tax year. See
Partnership Income.
taxmap/pubs/p525-000.htm#en_us_publink1000229078Photographs of missing children.(p2)
The Internal Revenue Service is a proud partner with the National
Center for Missing and Exploited Children. Photographs of missing children
selected by the Center may appear in this publication on pages that otherwise
would be blank. You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a
child.
You can receive income in the form of money, property, or services.
This publication discusses many kinds of income and explains whether they are
taxable or nontaxable. It includes discussions on employee wages and fringe
benefits, and income from bartering, partnerships, S corporations, and
royalties. It also includes information on disability pensions, life insurance
proceeds, and welfare and other public assistance benefits. Check the index for
the location of a specific subject.
Generally, an amount included in your income is taxable unless it is
specifically exempted by law. Income that is taxable must be reported on your
return and is subject to tax. Income that is nontaxable may have to be shown on
your tax return but is not taxable.
taxmap/pubs/p525-000.htm#en_us_publink1000229079You are generally taxed on income that is available to you, regardless
of whether it is actually in your possession.
A valid check that you received or that was made available to you before the end
of the tax year is considered income constructively received in that year, even
if you do not cash the check or deposit it to your account until the next year.
For example, if the postal service tries to deliver a check to you on the last
day of the tax year but you are not at home to receive it, you must include the
amount in your income for that tax year. If the check was mailed so that it
could not possibly reach you until after the end of the tax year, and you
otherwise could not get the funds before the end of the year, you include the
amount in your income for the next tax year.
taxmap/pubs/p525-000.htm#en_us_publink1000229080Income received by an agent for you is income you constructively
received in the year the agent received it. If you agree by contract that a
third party is to receive income for you, you must include the amount in your
income when the third party receives it.
taxmap/pubs/p525-000.htm#en_us_publink1000229081You and your employer agree that part of your salary is to be
paid directly to your former spouse. You must include that amount in your income
when your former spouse receives it.
taxmap/pubs/p525-000.htm#en_us_publink1000229082Prepaid income, such as compensation for future services, generally
is included in your income in the year you receive it. However, if you use an
accrual method of accounting, you can defer prepaid income you receive for
services to be performed before the end of the next tax year. In this case, you
include the payment in your income as you earn it by performing the services.
taxmap/pubs/p525-000.htm#en_us_publink1000229083We welcome your comments about this publication and your suggestions
for future editions.
You can write to us at the following address:
Internal Revenue Service
Individual Forms and Publications Branch
SE:W:CAR:MP:T:I
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224
We respond to many letters by telephone. Therefore, it would
be helpful if you would include your daytime phone number, including the area
code, in your correspondence.
You can email us at
*taxforms@irs.gov. (The asterisk must be included in the address.) Please put
"Publications Comment" on the subject line. Although we cannot respond
individually to each email, we do appreciate your feedback and will consider
your comments as we revise our tax products.
Visit
www.irs.gov/formspubs
to download forms and publications, call 1-800-829-3676, or write to the address
below and receive a response within 10 days after your request is received.
Internal Revenue Service
1201 N. Mitsubishi Motorway
Bloomington, IL 61705-6613If you have a tax question, check the information available on
IRS.gov or call 1-800-829-1040. We cannot answer tax questions sent to either of
the above addresses.
taxmap/pubs/p525-000.htm#TXMP644bda68Useful items
You may want to see:
Publication 334 Tax Guide for Small Business (For Individuals Who Use Schedule
C or C-EZ) 523 Selling Your Home 527 Residential Rental Property (Including Rental of Vacation Homes) 541 Partnerships 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses (Including Capital Gains and
Losses) 559 Survivors, Executors, and Administrators 564 Mutual Fund Distributions 575 Pension and Annuity Income 915 Social Security and Equivalent Railroad Retirement Benefits 970 Tax Benefits for Education 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments See
How To Get Tax Help,
near the end of this publication, for information about getting
these publications.
taxmap/pubs/p525-000.htm#en_us_publink1000229086Generally, you must include in gross income everything you receive
in payment for personal services. In addition to wages, salaries, commissions,
fees, and tips, this includes other forms of compensation such as fringe
benefits and stock options.
You should receive a Form W-2, Wage and Tax Statement, from your employer
showing the pay you received for your services. Include your pay on line 7 of
Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive
a Form W-2.
If you performed services, other than as an independent contractor,
and your employer did not withhold social security and Medicare taxes from your
pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on
Wages, with your Form 1040. These wages must be included on line 7 of Form 1040.
See Form 8919 for more information.
taxmap/pubs/p525-000.htm#en_us_publink1000229087If you provide childcare, either in the child's home or in your
home or other place of business, the pay you receive must be included in your
income. If you are not an employee, you are probably self-employed and must
include payments for your services on Schedule C (Form 1040), Profit or Loss
From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You
generally are not an employee unless you are subject to the will and control of
the person who employs you as to what you are to do and how you are to do it.
taxmap/pubs/p525-000.htm#en_us_publink1000229088If you babysit for relatives or neighborhood children, whether
on a regular basis or only periodically, the rules for childcare providers apply
to you.
taxmap/pubs/p525-000.htm#en_us_publink1000229089If you filed for bankruptcy under Chapter 11 of the Bankruptcy
Code, you must allocate your wages and withheld income tax. Your W-2 will show
your total wages and withheld income tax for the year. On your tax return, you
report the wages and withheld income tax for the period before you filed for
bankruptcy. Your bankruptcy estate reports the wages and withheld income tax for
the period after you filed for bankruptcy. If you receive other information
returns (such as Form 1099-DIV or 1099-INT) that report gross income to you,
rather than to the bankruptcy estate, you must allocate that income.
The only exception is for purposes of figuring your self-employment
tax, if you are self-employed. For that purpose, you must take into account all
your self-employment income for the year from services performed both before and
after the beginning of the case.
You must file a statement with your income tax return stating
that you filed a Chapter 11 bankruptcy case. The statement must show the
allocation and describe the method used to make the allocation. For a sample of
this statement and other information, see Notice 2006-83, 2006-40 I.R.B. 596,
available at
www.irs.gov/irb/2006-40_IRB/ar12.html.
This section discusses many types of employee compensation. The
subjects are arranged in alphabetical order.
taxmap/pubs/p525-000.htm#en_us_publink1000229091If you receive advance commissions or other amounts for services
to be performed in the future and you are a cash-method taxpayer, you must
include these amounts in your income in the year you receive them.
If you repay unearned commissions or other amounts in the same year you receive
them, reduce the amount included in your income by the repayment. If you repay
them in a later tax year, you can deduct the repayment as an itemized deduction
on your Schedule A (Form 1040), or you may be able to take a credit for that
year. See
Repayments,
later.
taxmap/pubs/p525-000.htm#en_us_publink1000229092
If you receive travel, transportation, or other business expense allowances or
reimbursements from your employer, see Publication 463, Travel, Entertainment,
Gift, and Car Expenses. If you are reimbursed for moving expenses, see
Publication 521, Moving Expenses.
taxmap/pubs/p525-000.htm#en_us_publink1000229093Include in income amounts you are awarded in a settlement or
judgment for back pay. These include payments made to you for damages, unpaid
life insurance premiums, and unpaid health insurance premiums. They should be
reported to you by your employer on Form W-2.
taxmap/pubs/p525-000.htm#en_us_publink1000229094
Bonuses or awards you receive for outstanding work are included in your income
and should be shown on your Form W-2. These include prizes such as vacation
trips for meeting sales goals. If the prize or award you receive is goods or
services, you must include the fair market value of the goods or services in
your income. However, if your employer merely promises to pay you a bonus or
award at some future time, it is not taxable until you receive it or it is made
available to you.
taxmap/pubs/p525-000.htm#en_us_publink1000229095If you receive tangible personal property (other than cash, a
gift certificate, or an equivalent item) as an award for length of service or
safety achievement, you generally can exclude its value from your income.
However, the amount you can exclude is limited to your employer's cost and
cannot be more than $1,600 ($400 for awards that are not qualified plan awards)
for all such awards you receive during the year. Your employer can tell you
whether your award is a qualified plan award. Your employer must make the award
as part of a meaningful presentation, under conditions and circumstances that do
not create a significant likelihood of it being disguised pay.
However, the exclusion does not apply to the following awards.
- A length-of-service award if you received it for less than
5 years of service or if you received another length-of-service award during the
year or the previous 4 years.
- A safety achievement award if you are a manager, administrator,
clerical employee, or other professional employee or if more than 10% of
eligible employees previously received safety achievement awards during the
year.
Ben Green received three employee achievement awards during the
year: a nonqualified plan award of a watch valued at $250, and two qualified
plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500.
Assuming that the requirements for qualified plan awards are otherwise
satisfied, each award by itself would be excluded from income. However, because
the $1,750 total value of the awards is more than $1,600, Ben must include $150
($1,750 − $1,600) in his income.
taxmap/pubs/p525-000.htm#en_us_publink1000229097This is any payment made by an employer to an individual for
any period during which the individual is, for a period of more than 30 days, an
active duty member of the uniformed services and represents all or a portion of
the wages the individual would have received from the employer for that period.
These payments are treated as wages and are subject to income tax withholding,
but not FICA or FUTA taxes. The payments are reported as wages on Form W-2.
taxmap/pubs/p525-000.htm#en_us_publink1000173689Cost-of-living allowances generally are included in your income.
However, cost-of-living allowances are not included in your income if you were a
federal civilian employee or a federal court employee who was stationed in
Alaska, Hawaii, or outside the United States. Beginning January 1, 2010, these
federal employees are being transitioned from a nontaxable cost-of-living
adjustment to a taxable locality-based comparability payment.
Allowances and differentials that increase your basic pay as
an incentive for taking a less desirable post of duty are part of your
compensation and must be included in income. For example, your compensation
includes Foreign Post, Foreign Service, and Overseas Tropical differentials. For
more information, see Publication 516, U.S. Government Civilian Employees
Stationed Abroad.
taxmap/pubs/p525-000.htm#en_us_publink1000229098Your employer will report to you the total amount of deferrals
for the year under a nonqualified deferred compensation plan. This amount is
shown on Form W-2, box 12, using code Y. This amount is not included in your
income.
However, if at any time during the tax year, the plan fails to
meet certain requirements, or is not operated under those requirements, all
amounts deferred under the plan for the tax year and all preceding tax years are
included in your income for the current year. This amount is included in your
wages shown on Form W-2, box 1. It is also shown on Form W-2, box 12, using code
Z.
taxmap/pubs/p525-000.htm#en_us_publink1000246786Generally, any compensation deferred under a nonqualified deferred
compensation plan of a nonqualified entity is included in gross income when
there is no substantial risk of forfeiture of the rights to such compensation.
For this purpose, a nonqualified entity is:
- A foreign corporation unless substantially all of its income
is:
- Effectively connected with the conduct of a trade or business
in the United States, or
- Subject to a comprehensive foreign income tax.
- A partnership unless substantially all of its income is allocated
to persons other than:
- Foreign persons for whom the income is not subject to a
comprehensive foreign income tax, and
- Tax-exempt organizations.
If your employer gives you a secured note as payment for your
services, you must include the fair market value (usually the discount value) of
the note in your income for the year you receive it. When you later receive
payments on the note, a proportionate part of each payment is the recovery of
the fair market value that you previously included in your income. Do not
include that part again in your income. Include the rest of the payment in your
income in the year of payment.
If your employer gives you a nonnegotiable unsecured note as
payment for your services, payments on the note that are credited toward the
principal amount of the note are compensation income when you receive them.
taxmap/pubs/p525-000.htm#en_us_publink1000229101You must include in income amounts you receive as severance pay
and any payment for the cancellation of your employment contract.
taxmap/pubs/p525-000.htm#en_us_publink1000229102If you are a federal employee and receive a lump-sum payment
for accrued annual leave when you retire or resign, this amount will be included
as wages on your Form W-2.
If you resign from one agency and are reemployed by another agency,
you may have to repay part of your lump-sum annual leave payment to the second
agency. You can reduce gross wages by the amount you repaid in the same tax year
in which you received it. Attach to your tax return a copy of the receipt or
statement given to you by the agency you repaid to explain the difference
between the wages on your return and the wages on your Forms W-2.
taxmap/pubs/p525-000.htm#en_us_publink1000229103If you choose to accept a reduced amount of severance pay so
that you can receive outplacement services (such as training in résumé
writing and interview techniques), you must include the unreduced amount of the
severance pay in income.
However, you can deduct the value of these outplacement services (up to the
difference between the severance pay included in income and the amount actually
received) as a miscellaneous deduction (subject to the
2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040).
taxmap/pubs/p525-000.htm#en_us_publink1000229104Pay you receive from your employer while you are sick or injured
is part of your salary or wages. In addition, you must include in your income
sick pay benefits received from any of the following payers.
- A welfare fund.
- A state sickness or disability fund.
- An association of employers or employees.
- An insurance company, if your employer paid for the plan.
However, if you paid the premiums on an accident or health insurance
policy, the benefits you receive under the policy are not taxable. For more
information, see
Other Sickness and Injury Benefits
under
Sickness and Injury Benefits,
later.
If you and your employer have an agreement that your employer
pays your social security and Medicare taxes without deducting them from your
gross wages, you must report the amount of tax paid for you as taxable wages on
your tax return. The payment is also treated as wages for figuring your social
security and Medicare taxes and your social security and Medicare benefits.
However, these payments are not treated as social security and Medicare wages if
you are a household worker or a farm worker.
taxmap/pubs/p525-000.htm#en_us_publink1000229106Do not include a stock appreciation right granted by your employer
in income until you exercise (use) the right. When you use the right, you are
entitled to a cash payment equal to the fair market value of the corporation's
stock on the date of use minus the fair market value on the date the right was
granted. You include the cash payment in income in the year you use the right.
taxmap/pubs/p525-000.htm#en_us_publink1000229107Fringe benefits received in connection with the performance of
your services are included in your income as compensation unless you pay fair
market value for them or they are specifically excluded by law. Abstaining from
the performance of services (for example, under a covenant not to compete) is
treated as the performance of services for purposes of these rules.
See
Valuation of Fringe Benefits,
later in this discussion, for information on how to determine
the amount to include in income.
taxmap/pubs/p525-000.htm#en_us_publink1000229108You are the recipient of a fringe benefit if you perform the
services for which the fringe benefit is provided. You are considered to be the
recipient even if it is given to another person, such as a member of your
family. An example is a car your employer gives to your spouse for services you
perform. The car is considered to have been provided to you and not to your
spouse.
You do not have to be an employee of the provider to be a recipient
of a fringe benefit. If you are a partner, director, or independent contractor,
you also can be the recipient of a fringe benefit.
taxmap/pubs/p525-000.htm#en_us_publink1000229109Your employer or another person for whom you perform services
is the provider of a fringe benefit regardless of whether that person actually
provides the fringe benefit to you. The provider can be a client or customer of
an independent contractor.
taxmap/pubs/p525-000.htm#en_us_publink1000229110You must use the same accounting period your employer uses to
report your taxable noncash fringe benefits. Your employer has the option to
report taxable noncash fringe benefits by using either of the following rules.
- The general rule: benefits are reported for a full calendar
year (January 1–December 31).
- The special accounting period rule: benefits provided during
the last 2 months of the calendar year (or any shorter period) are treated as
paid during the following calendar year. For example, each year your employer
reports the value of benefits provided during the last 2 months of the prior
year and the first 10 months of the current year.
Your employer does not have to use the same accounting period
for each fringe benefit, but must use the same period for all employees who
receive a particular benefit.
You must use the same accounting period that you use to report
the benefit to claim an employee business deduction (for use of a car, for
example).
taxmap/pubs/p525-000.htm#en_us_publink1000229111Your employer reports your taxable fringe benefits in box 1 (Wages,
tips, other compensation) of Form W-2. The total value of your fringe benefits
also may be noted in box 14. The value of your fringe benefits may be added to
your other compensation on one Form W-2, or you may receive a separate Form W-2
showing just the value of your fringe benefits in box 1 with a notation in box
14.
taxmap/pubs/p525-000.htm#en_us_publink1000229112Generally, the value of accident or health plan coverage provided
to you by your employer is not included in your income. Benefits you receive
from the plan may be taxable, as explained, later, under
Sickness and Injury Benefits.
For information on the items covered in this section, other than
Long-term care coverage,
see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
taxmap/pubs/p525-000.htm#en_us_publink1000229113Contributions by your employer to provide coverage for long-term
care services generally are not included in your income. However, contributions
made through a flexible spending or similar arrangement (such as a cafeteria
plan) must be included in your income. This amount will be reported as wages in
box 1 of your Form W-2.
taxmap/pubs/p525-000.htm#en_us_publink1000229114
Contributions by your employer to your Archer MSA generally are not included in
your income. Their total will be reported in box 12 of Form W-2, with code R.
You must report this amount on Form 8853, Archer MSAs and Long-Term Care
Insurance Contracts. File the form with your return.
taxmap/pubs/p525-000.htm#en_us_publink1000229115If your employer provides a health FSA that qualifies as an accident
or health plan, the amount of your salary reduction, and reimbursements of your
medical care expenses, generally are not included in your income.
taxmap/pubs/p525-000.htm#en_us_publink1000229116A health FSA can make a qualified HSA distribution. This distribution
is a direct transfer to your HSA trustee by your employer. Generally, the
distribution is not included in your income and is not deductible. See
Publication 969 for the requirements for these qualified HSA distributions.
taxmap/pubs/p525-000.htm#en_us_publink1000229117If your employer provides an HRA that qualifies as an accident
or health plan, coverage and reimbursements of your medical care expenses
generally are not included in your income.
taxmap/pubs/p525-000.htm#en_us_publink1000229118An HRA can make a qualified HSA distribution. This distribution
is a direct transfer to your HSA trustee by your employer. Generally, the
distribution is not included in your income and is not deductible. See
Publication 969 for the requirements for these qualified HSA distributions.
taxmap/pubs/p525-000.htm#en_us_publink1000229119If you are an eligible individual, you and any other person,
including your employer or a family member, can make contributions to your HSA.
Contributions, other than employer contributions, are deductible on your return
whether or not you itemize deductions. Contributions made by your employer are
not included in your income. Distributions from your HSA that are used to pay
qualified medical expenses are not included in your income. Distributions not
used for qualified medical expenses are included in your income. See Publication
969 for the requirements of an HSA.
Contributions by a partnership to a
bona fide
partner's HSA are not contributions by an employer. The contributions are
treated as a distribution of money and are not included in the partner's gross
income. Contributions by a partnership to a partner's HSA for services rendered
are treated as guaranteed payments that are includible in the partner's gross
income. In both situations, the partner can deduct the contribution made to the
partner's HSA.
Contributions by an S corporation to a 2% shareholder-employee's
HSA for services rendered are treated as guaranteed payments and are includible
in the shareholder-employee's gross income. The shareholder-employee can deduct
the contribution made to the shareholder-employee's HSA.
taxmap/pubs/p525-000.htm#en_us_publink1000229120You can make a one-time distribution from your individual retirement
account (IRA) to an HSA and you generally will not include any of the
distribution in your income. See Publication 590, Individual Retirement
Arrangements (IRAs), for the requirements for these qualified HSA funding
distributions.
taxmap/pubs/p525-000.htm#en_us_publink1000229121If your HSA received qualified HSA distributions from a health
FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must
be an eligible individual for HSA purposes for the period beginning with the
month in which the qualified distribution was made and ending on the last day of
the 12th month following that month. If you fail to be an eligible individual
during this period, other than because of death or disability, you must include
the distribution in your income for the tax year in which you become ineligible.
This income is also subject to an additional 10% tax.
taxmap/pubs/p525-000.htm#en_us_publink1000229122You may be able to exclude from your income amounts paid or expenses
incurred by your employer for qualified adoption expenses in connection with
your adoption of an eligible child. See Instructions for Form 8839, Qualified
Adoption Expenses, for more information.
Adoption benefits are reported by your employer in box 12 of Form W-2 with code
T. They also are included as social security and Medicare wages in boxes 3 and
5. However, they are not included as wages in box 1. To determine the taxable
and nontaxable amounts, you must complete Part III of Form 8839. File the form
with your return.
taxmap/pubs/p525-000.htm#en_us_publink1000229123If your employer provides you with the free or low-cost use of
an employer-operated gym or other athletic club on your employer's premises, the
value is not included in your compensation. The gym must be used primarily by
employees, their spouses, and their dependent children.
If your employer pays for a fitness program provided to you at
an off-site resort hotel or athletic club, the value of the program is included
in your compensation.
taxmap/pubs/p525-000.htm#en_us_publink1000229124If your employer provides you with a product or service and the
cost of it is so small that it would be unreasonable for the employer to account
for it, the value is not included in your income. Generally, the value of
benefits such as discounts at company cafeterias, cab fares home when working
overtime, and company picnics are not included in your income. Also see
Employee Discounts, later.
taxmap/pubs/p525-000.htm#en_us_publink1000229125If your employer gives you a turkey, ham, or other item of nominal
value at Christmas or other holidays, do not include the value of the gift in
your income. However, if your employer gives you cash, a gift certificate, or a
similar item that you easily can exchange for cash, you include the value of
that gift as extra salary or wages regardless of the amount involved.
taxmap/pubs/p525-000.htm#en_us_publink1000229126If your employer provides dependent care benefits under a qualified
plan, you may be able to exclude these benefits from your income. Dependent care
benefits include:
- Amounts your employer pays directly to either you or your
care provider for the care of your qualifying person while you work, and
- The fair market value of care in a daycare facility provided
or sponsored by your employer.
The amount you can exclude is limited to the lesser of:
- The total amount of dependent care benefits you received during
the year,
- The total amount of qualified expenses you incurred during
the year,
- Your earned income,
- Your spouse's earned income, or
- $5,000 ($2,500 if married filing separately).
Your employer must show the total amount of dependent care benefits
provided to you during the year under a qualified plan in box 10 of your Form
W-2. Your employer also will include any dependent care benefits over $5,000 in
your wages shown in box 1 of your Form W-2.
To claim the exclusion, you must complete Part III of Form 2441, Child and
Dependent Care Expenses. See the instructions for Form 2441 for more
information.
taxmap/pubs/p525-000.htm#en_us_publink1000229127You can exclude from your income up to $5,250 of qualified employer-provided
educational assistance. For more information, see Publication 970.
taxmap/pubs/p525-000.htm#en_us_publink1000229128If your employer sells you property or services at a discount,
you may be able to exclude the amount of the discount from your income. The
exclusion applies to discounts on property or services offered to customers in
the ordinary course of the line of business in which you work. However, it does
not apply to discounts on real property or property commonly held for investment
(such as stocks or bonds).
The exclusion is limited to the price charged nonemployee customers
multiplied by the following percentage.
- For a discount on property, your employer's gross profit percentage
(gross profit divided by gross sales) on all property sold during the employer's
previous tax year. (Ask your employer for this percentage.)
- For a discount on services, 20%.
Financial counseling fees paid for you by your employer are included in your
income and must be reported as part of wages. If the fees are for tax or
investment counseling, they can be deducted on Schedule A (Form 1040) as a
miscellaneous deduction (subject to the 2%-of-AGI limit).
Qualified retirement planning services paid for you by your employer may be
excluded from your income. For more information, see
Retirement Planning Services, later.
taxmap/pubs/p525-000.htm#en_us_publink1000229130Generally, the cost of up to $50,000 of group-term life insurance
coverage provided to you by your employer (or former employer) is not included
in your income. However, you must include in income the cost of
employer-provided insurance that is more than the cost of $50,000 of coverage
reduced by any amount you pay toward the purchase of the insurance.
For exceptions to this rule, see
Entire cost excluded,
and
Entire cost taxed,
later.
If your employer provided more than $50,000 of coverage, the
amount included in your income is reported as part of your wages in box 1 of
your Form W-2. Also, it is shown separately in box 12 with code C.
taxmap/pubs/p525-000.htm#en_us_publink1000229131This insurance is term life insurance protection (insurance for
a fixed period of time) that:
- Provides a general death benefit,
- Is provided to a group of employees,
- Is provided under a policy carried by the employer, and
- Provides an amount of insurance to each employee based on
a formula that prevents individual selection.
If your group-term life insurance policy includes permanent benefits,
such as a paid-up or cash surrender value, you must include in your income, as
wages, the cost of the permanent benefits minus the amount you pay for them.
Your employer should be able to tell you the amount to include in your income.
taxmap/pubs/p525-000.htm#en_us_publink1000229133Insurance that provides accidental or other death benefits but
does not provide general death benefits (travel insurance, for example) is not
group-term life insurance.
taxmap/pubs/p525-000.htm#en_us_publink1000229134If your former employer provided more than $50,000 of group-term
life insurance coverage during the year, the amount included in your income is
reported as wages in box 1 of Form W-2. Also, it is shown separately in box 12
with code C. Box 12 also will show the amount of uncollected social security and
Medicare taxes on the excess coverage, with codes M and N. You must pay these
taxes with your income tax return. Include them in your total tax on line 60,
Form 1040, and enter "UT" and the amount of the taxes on the dotted line next to
line 60.
taxmap/pubs/p525-000.htm#en_us_publink1000229135Your exclusion for employer-provided group-term life insurance
coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is
provided by a single employer or multiple employers. If two or more employers
provide insurance coverage that totals more than $50,000, the amounts reported
as wages on your Forms W-2 will not be correct. You must figure how much to
include in your income. Reduce the amount you figure by any amount reported with
code C in box 12 of your Forms W-2, add the result to the wages reported in box
1, and report the total on your return.
taxmap/pubs/p525-000.htm#en_us_publink1000229136
Use the following worksheet to figure the amount to include in your income.
If you pay any part of the cost of the insurance, your entire
payment reduces, dollar for dollar, the amount you otherwise would include in
your income. However, you cannot reduce the amount to include in your income by:
- Payments for coverage in a different tax year,
- Payments for coverage through a cafeteria plan, unless the
payments are after-tax contributions, or
- Payments for coverage not taxed to you because of the exceptions
discussed later under
Entire cost excluded.
taxmap/pubs/p525-000.htm#en_us_publink1000229137 | Worksheet 1. Figuring the Cost of Group-Term Life Insurance
To Include in Income | 1. | Enter the total amount of your insurance coverage from
your employer(s) | 1. | | | 2. | Limit on exclusion for employer-provided group-term life
insurance coverage | 2. | 50,000 | | 3. | Subtract line 2 from line 1 | 3. | | | 4. | Divide line 3 by $1,000. Figure to the nearest tenth | 4. | | | 5. | Go to Table 1. Using your age on the last day of the
tax year, find your age group in the left column, and enter the cost from the
column on the right for your age group
| 5. | | | 6. | Multiply line 4 by line 5 | 6.
| | | 7. | Enter the number of full months of coverage at this cost | 7. | | | 8. | Multiply line 6 by line 7 | 8. | | | 9. | Enter the premiums you paid per month | 9. | | | | | 10. | Enter the number of months you paid the premiums | 10. | | | | | 11. | Multiply line 9 by line 10. | 11. | | | 12. | Subtract line 11 from line 8.
Include this amount in your income as wages | 12. | |
|
Table 1. Cost of $1,000 of Group-Term Life Insurance for One
Month
| | Age | Cost | |
| | Under 25 | $ .05 | |
| | 25 through 29 | .06 | |
| | 30 through 34 | .08 | |
| | 35 through 39 | .09 | |
| | 40 through 44 | .10 | |
| | 45 through 49 | .15 | |
| | 50 through 54 | .23 | |
| | 55 through 59 | .43 | |
| | 60 through 64 | .66 | |
| | 65 through 69 | 1.27 | |
| | 70 and older | 2.06 | |
taxmap/pubs/p525-000.htm#en_us_publink1000229140You are 51 years old and work for employers A and B. Both employers
provide group-term life insurance coverage for you for the entire year. Your
coverage is $35,000 with employer A and $45,000 with employer B. You pay
premiums of $4.15 a month under the employer B group plan. You figure the amount
to include in your income as follows.
taxmap/pubs/p525-000.htm#en_us_publink1000229141 | Worksheet 1. Figuring the Cost of Group-Term Life Insurance
To Include in Income—Illustrated | 1. | Enter the total amount of your insurance coverage from
your employer(s) | 1. | 80,000 | | 2. | Limit on exclusion for employer-provided group-term life
insurance coverage | 2. | 50,000 | | 3. | Subtract line 2 from line 1 | 3. | 30,000 | | 4. | Divide line 3 by $1,000. Figure to the nearest tenth | 4. | 30.0 | | 5. | Go to Table 1. Using your age on the last day of the
tax year, find your age group in the left column, and enter the cost from the
column on the right for your age group
| 5. | .23 | | 6. | Multiply line 4 by line 5 | 6. | 6.90 | | 7. | Enter the number of full months of coverage at this cost. | 7. | 12 | | 8. | Multiply line 6 by line 7 | 8. | 82.80 | | 9. | Enter the premiums you paid per month | 9. | 4.15 | | | | 10. | Enter the number of months you paid the premiums | 10. | 12 | | | | 11. | Multiply line 9 by line 10. | 11. | 49.80 | | 12. | Subtract line 11 from line 8.
Include this amount in your income as wages | 12. | 33.00 |
|
The total amount to include in income for the cost of excess
group-term life insurance is $33. Neither employer provided over $50,000
insurance coverage, so the wages shown on your Forms W-2 do not include any part
of that $33. You must add it to the wages shown on your Forms W-2 and include
the total on your return.
taxmap/pubs/p525-000.htm#en_us_publink1000229143You are not taxed on the cost of group-term life insurance if
any of the following circumstances apply.
- You are permanently and totally disabled and have ended your
employment.
- Your employer is the beneficiary of the policy for the entire
period the insurance is in force during the tax year.
- A charitable organization to which contributions are deductible
is the only beneficiary of the policy for the entire period the insurance is in
force during the tax year. (You are not entitled to a deduction for a charitable
contribution for naming a charitable organization as the beneficiary of your
policy.)
- The plan existed on January 1, 1984, and:
- You retired before January 2, 1984, and were covered by
the plan when you retired, or
- You reached age 55 before January 2, 1984, and were employed
by the employer or its predecessor in 1983.
You are taxed on the entire cost of group-term life insurance
if either of the following circumstances apply.
- The insurance is provided by your employer through a qualified
employees' trust, such as a pension trust or a qualified annuity plan.
- You are a key employee and your employer's plan discriminates
in favor of key employees.
You do not include in your income the value of meals and lodging
provided to you and your family by your employer at no charge if the following
conditions are met.
- The meals are:
- Furnished on the business premises of your employer, and
- Furnished for the convenience of your employer.
- The lodging is:
- Furnished on the business premises of your employer,
- Furnished for the convenience of your employer, and
- A condition of your employment. (You must accept it in order
to be able to properly perform your duties.)
You also do not include in your income the value of meals or meal money that
qualifies as a
de minimis fringe benefit. See
De Minimis (Minimal) Benefits, earlier.
taxmap/pubs/p525-000.htm#en_us_publink1000229147If you are an employee of an educational institution or an academic
health center and you are provided with lodging that does not meet the three
conditions given earlier, you still may not have to include the value of the
lodging in income. However, the lodging must be qualified campus lodging, and
you must pay an adequate rent.
taxmap/pubs/p525-000.htm#en_us_publink1000229148This is an organization that meets the following conditions.
- Its principal purpose or function is to provide medical or
hospital care or medical education or research.
- It receives payments for graduate medical education under
the Social Security Act.
- One of its principal purposes or functions is to provide and
teach basic and clinical medical science and research using its own faculty.
Qualified campus lodging is lodging furnished to you, your spouse,
or one of your dependents by, or on behalf of, the institution or center for use
as a home. The lodging must be located on or near a campus of the educational
institution or academic health center.
taxmap/pubs/p525-000.htm#en_us_publink1000229150The amount of rent you pay for the year for qualified campus
lodging is considered adequate if it is at least equal to the lesser of:
- 5% of the appraised value of the lodging, or
- The average of rentals paid by individuals (other than employees
or students) for comparable lodging held for rent by the educational
institution.
If the amount you pay is less than the lesser of these amounts,
you must include the difference in your income.
The lodging must be appraised by an independent appraiser and
the appraisal must be reviewed on an annual basis.
taxmap/pubs/p525-000.htm#en_us_publink1000229151Carl Johnson, a sociology professor for State University, rents
a home from the university that is qualified campus lodging. The house is
appraised at $200,000. The average rent paid for comparable university lodging
by persons other than employees or students is $14,000 a year. Carl pays an
annual rent of $11,000. Carl does not include in his income any rental value
because the rent he pays equals at least 5% of the appraised value of the house
(5% × $200,000 = $10,000). If Carl paid annual rent of only $8,000, he
would have to include $2,000 in his income ($10,000 − $8,000).
taxmap/pubs/p525-000.htm#en_us_publink1000229152Generally, if your employer pays for your moving expenses (either
directly or indirectly) and the expenses would have been deductible if you paid
them yourself, the value is not included in your income. See Publication 521,
for more information.
taxmap/pubs/p525-000.htm#en_us_publink1000229153The value of services you receive from your employer for free,
at cost, or for a reduced price is not included in your income if your employer:
- Offers the same service for sale to customers in the ordinary
course of the line of business in which you work, and
- Does not have a substantial additional cost (including any
sales income given up) to provide you with the service (regardless of what you
paid for the service).
Generally, no-additional-cost services are excess capacity services,
such as airline, bus, or train tickets, hotel rooms, and telephone services.
taxmap/pubs/p525-000.htm#en_us_publink1000229154You are employed as a flight attendant for a company that owns
both an airline and a hotel chain. Your employer allows you to take personal
flights (if there is an unoccupied seat) and stay in any one of their hotels (if
there is an unoccupied room) at no cost to you. The value of the personal flight
is not included in your income. However, the value of the hotel room is included
in your income because you do not work in the hotel business.
taxmap/pubs/p525-000.htm#en_us_publink1000229155If your employer has a qualified retirement plan, qualified retirement
planning services provided to you (and your spouse) by your employer are not
included in your income. Qualified services include retirement planning advice,
information about your employer's retirement plan, and information about how the
plan may fit into your overall individual retirement income plan. You cannot
exclude the value of any tax preparation, accounting, legal, or brokerage
services provided by your employer. Also, see
Financial Counseling Fees, earlier.
taxmap/pubs/p525-000.htm#en_us_publink1000229156If your employer provides you with a qualified transportation
fringe benefit, it can be excluded from your income, up to certain limits. A
qualified transportation fringe benefit is:
- Transportation in a commuter highway vehicle (such as a van)
between your home and work place,
- A transit pass,
- Qualified parking, or
- Qualified bicycle commuting reimbursement.
Cash reimbursement by your employer for these expenses under
a
bona fide
reimbursement arrangement is also excludable. However, cash reimbursement for a
transit pass is excludable only if a voucher or similar item that can be
exchanged only for a transit pass is not readily available for direct
distribution to you.
The exclusion for commuter vehicle transportation and transit
pass fringe benefits cannot be more than $230 a month.
The exclusion for the qualified parking fringe benefit cannot
be more than $230 a month.
The exclusion for qualified bicycle commuting in a calendar year
is $20 multiplied by the number of qualified bicycle commuting months that year.
If the benefits have a value that is more than these limits,
the excess must be included in your income. You are not entitled to these
exclusions if the reimbursements are made under a compensation reduction
agreement.
taxmap/pubs/p525-000.htm#en_us_publink1000229158This is a highway vehicle that seats at least six adults (not
including the driver). At least 80% of the vehicle's mileage must reasonably be
expected to be:
- For transporting employees between their homes and work place,
and
- On trips during which employees occupy at least half of the
vehicle's adult seating capacity (not including the driver).
This is any pass, token, farecard, voucher, or similar item entitling
a person to ride mass transit (whether public or private) free or at a reduced
rate or to ride in a commuter highway vehicle operated by a person in the
business of transporting persons for compensation.
taxmap/pubs/p525-000.htm#en_us_publink1000229161This is parking provided to an employee at or near the employer's
place of business. It also includes parking provided on or near a location from
which the employee commutes to work by mass transit, in a commuter highway
vehicle, or by carpool. It does not include parking at or near the employee's
home.
taxmap/pubs/p525-000.htm#en_us_publink1000173483This is reimbursement based on the number of qualified bicycle
commuting months for the year. A qualified bicycle commuting month is any month
you use the bicycle regularly for a substantial portion of the travel between
your home and place of employment and you do not receive any of the other
qualified transportation fringe benefits. The reimbursement can be for expenses
you incurred during the year for the purchase of a bicycle and bicycle
improvements, repair, and storage.
taxmap/pubs/p525-000.htm#en_us_publink1000229162You can exclude a qualified tuition reduction from your income.
This is the amount of a reduction in tuition:
- For education (below graduate level) furnished by an educational
institution to an employee, former employee who retired or became disabled, or
his or her spouse and dependent children.
- For education furnished to a graduate student at an educational
institution if the graduate student is engaged in teaching or research
activities for that institution.
- 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 more information, see Publication 970.
If your employer provides you with a product or service and the
cost of it would have been allowable as a business or depreciation deduction if
you paid for it yourself, the cost is not included in your income.
taxmap/pubs/p525-000.htm#en_us_publink1000229164You work as an engineer and your employer provides you with a
subscription to an engineering trade magazine. The cost of the subscription is
not included in your income because the cost would have been allowable to you as
a business deduction if you had paid for the subscription yourself.
taxmap/pubs/p525-000.htm#en_us_publink1000229165If a fringe benefit is included in your income, the amount included
is generally its value determined under the general valuation rule or under the
special valuation rules. For an exception, see
Group-Term Life Insurance,
earlier.
taxmap/pubs/p525-000.htm#en_us_publink1000229166You must include in your income the amount by which the fair
market value of the fringe benefit is more than the sum of:
- The amount, if any, you paid for the benefit, plus
- The amount, if any, specifically excluded from your income
by law.
If you pay fair market value for a fringe benefit, no amount
is included in your income.
The fair market value of a fringe benefit is determined by all
the facts and circumstances. It is the amount you would have to pay a third
party to buy or lease the benefit. This is determined without regard to:
- Your perceived value of the benefit, or
- The amount your employer paid for the benefit.
If your employer provides a car (or other highway motor vehicle)
to you, your personal use of the car is usually a taxable noncash fringe
benefit.
Under the general valuation rules, the value of an employer-provided
vehicle is the amount you would have to pay a third party to lease the same or a
similar vehicle on the same or comparable terms in the same geographic area
where you use the vehicle. An example of a comparable lease term is the amount
of time the vehicle is available for your use, such as a 1-year period. The
value cannot be determined by multiplying a cents-per-mile rate times the number
of miles driven unless you prove the vehicle could have been leased on a
cents-per-mile basis.
taxmap/pubs/p525-000.htm#en_us_publink1000229169Under the general valuation rules, if your flight on an employer-provided
piloted aircraft is primarily personal and you control the use of the aircraft
for the flight, the value is the amount it would cost to charter the flight from
a third party.
If there is more than one employee on the flight, the cost to
charter the aircraft must be divided among those employees. The division must be
based on all the facts, including which employee or employees control the use of
the aircraft.
taxmap/pubs/p525-000.htm#en_us_publink1000229170You generally can use a special valuation rule for a fringe benefit
only if your employer uses the rule. If your employer uses a special valuation
rule, you cannot use a different special rule to value that benefit. You always
can use the general valuation rule discussed earlier, based on facts and
circumstances, even if your employer uses a special rule.
If you and your employer use a special valuation rule, you must
include in your income the amount your employer determines under the special
rule minus the sum of:
- Any amount you repaid your employer, plus
- Any amount specifically excluded from income by law.
The special valuation rules are the following.
- The automobile lease rule.
- The vehicle cents-per-mile rule.
- The commuting rule.
- The unsafe conditions commuting rule.
- The employer-operated eating-facility rule.
For more information on these rules, see Publication 15-B, Employer's
Tax Guide to Fringe Benefits.
For information on the non-commercial flight and commercial flight valuation
rules, see sections 1.61-21(g) and 1.61-21(h) of the regulations.
taxmap/pubs/p525-000.htm#en_us_publink1000229171Your employer's contributions to a qualified retirement plan
for you are not included in income at the time contributed. (Your employer can
tell you whether your retirement plan is qualified.) However, the cost of life
insurance coverage included in the plan may have to be included. See
Group-Term Life Insurance, earlier, under
Fringe Benefits.
If your employer pays into a nonqualified plan for you, you generally
must include the contributions in your income as wages for the tax year in which
the contributions are made. However, if your interest in the plan is not
transferable or is subject to a substantial risk of forfeiture (you have a good
chance of losing it) at the time of the contribution, you do not have to include
the value of your interest in your income until it is transferable or is no
longer subject to a substantial risk of forfeiture.
 | For information on distributions from retirement plans, see
Publication 575 (or Publication 721, Tax Guide to U.S. Civil Service Retirement
Benefits, if you are a federal employee or retiree). |
taxmap/pubs/p525-000.htm#en_us_publink1000229173If you are covered by certain kinds of retirement plans, you
can choose to have part of your compensation contributed by your employer to a
retirement fund, rather than have it paid to you. The amount you set aside
(called an elective deferral) is treated as an employer contribution to a
qualified plan. An elective deferral, other than a designated Roth contribution
(discussed later), is not included in wages subject to income tax at the time
contributed. However, it is included in wages subject to social security and
Medicare taxes.
Elective deferrals include elective contributions to the following
retirement plans.
- Cash or deferred arrangements (section 401(k) plans).
- The Thrift Savings Plan for federal employees.
- Salary reduction simplified employee pension plans (SARSEP).
- Savings incentive match plans for employees (SIMPLE plans).
- Tax-sheltered annuity plans (403(b) plans).
- Section 501(c)(18)(D) plans. (But see
Reporting by employer, later.)
- Section 457 plans.
Under a qualified automatic contribution arrangement, your employer
can treat you as having elected to have a part of your compensation contributed
to a section 401(k) plan. You are to receive written notice of your rights and
obligations under the qualified automatic contribution arrangement. The notice
must explain:
- Your rights to elect not to have elective contributions made,
or to have contributions made at a different percentage, and
- How contributions made will be invested in the absence of
any investment decision by you.
You must be given a reasonable period of time after receipt of
the notice and before the first elective contribution is made to make an
election with respect to the contributions.
taxmap/pubs/p525-000.htm#en_us_publink1000229175For 2010, you generally should not have deferred more than a
total of $16,500 of contributions to the plans listed in (1) through (3) above.
The specific plan limits for the plans listed in (4) through (7) above are
discussed later.
Your employer or plan administrator should apply the proper annual
limit when figuring your plan contributions. However, you are responsible for
monitoring the total you defer to ensure that the deferrals are not more than
the overall limit.
taxmap/pubs/p525-000.htm#en_us_publink1000229176You may be allowed catch-up contributions (additional elective
deferrals) if you are age 50 or older by the end of your tax year. For more
information about catch-up contributions to 403(b) plans, see chapter 6 of
Publication 571, Tax Sheltered Annuity Plans (403(b) Plans).
For more information about additional elective deferrals to:
- SEPs (SARSEPs), see
Salary Reduction Simplified Employee Pension in Publication 560, Retirement Plans for Small Business.
- SIMPLE plans, see
How Much Can Be Contributed on Your Behalf? in chapter 3 of Publication 590.
- Section 457 plans, see
Limit for deferrals under section 457 plans, later.
If you are a participant in a SIMPLE plan, you generally should
not have deferred more than $11,500 in 2010. Amounts you defer under a SIMPLE
plan count toward the overall limit ($16,500 for 2010) and may affect the amount
you can defer under other elective deferral plans.
taxmap/pubs/p525-000.htm#en_us_publink1000229178If you are a participant in a tax-sheltered annuity plan (403(b)
plan), the limit on elective deferrals for 2010 generally is $16,500. However,
if you have at least 15 years of service with a public school system, a
hospital, a home health service agency, a health and welfare service agency, a
church, or a convention or association of churches (or associated organization),
the limit on elective deferrals is increased by the least of the following
amounts.
- $3,000,
- $15,000, reduced by the sum of:
- The additional pre-tax elective deferrals made in earlier
years because of this rule, plus
- The aggregate amount of designated Roth contributions permitted
for prior tax years because of this rule, or
- $5,000 times the number of your years of service for the organization,
minus the total elective deferrals made by your employer on your behalf for
earlier years.
If you qualify for the 15-year rule, your elective deferrals
under this limit can be as high as $19,500 for 2010.
For more information, see Publication 571.
taxmap/pubs/p525-000.htm#en_us_publink1000229179If you are a participant in a section 501(c)(18) plan (a trust
created before June 25, 1959, funded only by employee contributions), you should
have deferred no more than the lesser of $7,000 or 25% of your compensation.
taxmap/pubs/p525-000.htm#en_us_publink1000229180If you are a participant in a section 457 plan (a deferred compensation
plan for employees of state or local governments or tax-exempt organizations),
you should have deferred no more than the lesser of your includible compensation
or $16,500. However, if you are within 3 years of normal retirement age, you may
be allowed an increased limit if the plan allows it. See
Increased limit, later.
taxmap/pubs/p525-000.htm#en_us_publink1000229181This is the pay you received for the year from the employer who
maintained the section 457 plan. It generally includes all the following
payments.
- Wages and salaries.
- Fees for professional services.
- The value of any employer-provided qualified transportation
fringe benefit (defined under
Transportation, earlier) that is not included in your income.
- Other amounts received (cash or noncash) for personal services
you performed, including, but not limited to, the following items.
- Commissions and tips.
- Fringe benefits.
- Bonuses.
- Employer contributions (elective deferrals) to:
- The section 457 plan.
- Qualified cash or deferred arrangements (section 401(k)
plans) that are not included in your income.
- A salary reduction simplified employee pension (SARSEP).
- A tax-sheltered annuity (section 403(b) plan).
- A savings incentive match plan for employees (SIMPLE plan).
- A section 125 cafeteria plan.
Instead of using the amounts listed earlier to determine your
includible compensation, your employer can use any of the following amounts.
- Your wages as defined for income tax withholding purposes.
- Your wages as reported in box 1 of Form W-2, Wage and Tax
Statement.
- Your wages that are subject to social security withholding
(including elective deferrals).
During any, or all, of the last 3 years ending before you reach
normal retirement age under the plan, your plan may provide that your limit is
the lesser of:
- Twice the annual limit ($33,000 for 2010), or
- The basic annual limit plus the amount of the basic limit
not used in prior years (only allowed if not using age 50 or over catch-up
contributions).
You generally can have additional elective deferrals made to
your governmental section 457 plan if:
- You reached age 50 by the end of the year, and
- No other elective deferrals can be made for you to the plan
for the year because of limits or restrictions.
If you qualify, your limit can be the lesser of your includible
compensation or $16,500, plus $5,500. However, if you are within 3 years of
retirement age and your plan provides the increased limit, discussed earlier,
that limit may be higher.
Employers with section 401(k) and section 403(b) plans can create
qualified Roth contribution programs so that you may elect to have part or all
of your elective deferrals to the plan designated as after-tax Roth
contributions. Designated Roth contributions are treated as elective deferrals,
except that they are included in income. Your retirement plan must maintain
separate accounts and recordkeeping for the designated Roth contributions.
Qualified distributions from a Roth plan are not included in
income. Generally, a distribution made before the end of the 5-tax-year period
beginning with the first tax year for which you made a designated Roth
contribution to the plan is not a qualified distribution.
taxmap/pubs/p525-000.htm#en_us_publink1000229185Your employer generally should not include elective deferrals
in your wages in box 1 of Form W-2. Instead, your employer should mark the
Retirement plan checkbox in box 13 and show the total amount deferred in box 12.
taxmap/pubs/p525-000.htm#en_us_publink1000229186Wages shown in box 1 of your Form W-2 should not have been reduced
for contributions you made to a section 501(c)(18)(D) retirement plan. The
amount you contributed should be identified with code "H" in box 12. You may
deduct the amount deferred subject to the limits that apply. Include your
deduction in the total on Form 1040, line 36. Enter the amount and
"501(c)(18)(D)" on the dotted line next to line 36.
taxmap/pubs/p525-000.htm#en_us_publink1000229187
These contributions are elective deferrals but are included in your wages in box
1 of Form W-2. Designated Roth contributions to a section 401(k) plan are
reported using code AA in box 12, or, for section 403(b) plans, code BB in box
12.
taxmap/pubs/p525-000.htm#en_us_publink1000229188If your deferrals exceed the limit, you must notify your plan
by the date required by the plan. If the plan permits, the excess amount will be
distributed to you. If you participate in more than one plan, you can have the
excess paid out of any of the plans that permit these distributions. You must
notify each plan by the date required by that plan of the amount to be paid from
that particular plan. The plan then must pay you the amount of the excess, along
with any income earned on that amount, by April 15 of the following year.
You must include the excess deferral in your income for the year
of the deferral unless you have an excess deferral of a designated Roth
contribution. File Form 1040 to add the excess deferral amount to your wages on
line 7. Do not use Form 1040A or Form 1040EZ to report excess deferral amounts.
taxmap/pubs/p525-000.htm#en_us_publink1000229189If you do not take out the excess amount, you cannot include
it in the cost of the contract even though you included it in your income.
Therefore, you are taxed twice on the excess deferral left in the
plan—once when you contribute it, and again when you receive it as a
distribution.
taxmap/pubs/p525-000.htm#en_us_publink1000229190If you take out the excess after the year of the deferral and
you receive the corrective distribution by April 15 of the following year, do
not include it in income again in the year you receive it. If you receive it
later, you must include it in income in both the year of the deferral and the
year you receive it. Any income on the excess deferral taken out is taxable in
the tax year in which you take it out. If you take out part of the excess
deferral and the income on it, allocate the distribution proportionately between
the excess deferral and the income.
You should receive a Form 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the
year in which the excess deferral is distributed to you. Use the following rules
to report a corrective distribution shown on Form 1099-R for 2010.
- If the distribution was for a 2010 excess deferral, your Form
1099-R should have the code "8" in box 7. Add the excess deferral amount to your
wages on your 2010 tax return.
- If the distribution was for a 2010 excess deferral to a designated
Roth account, your Form 1099-R should have code "B" in box 7. Do not add this
amount to your wages on your 2010 return.
- If the distribution was for a 2009 excess deferral, your Form
1099-R should have the code "P" in box 7. If you did not add the excess deferral
amount to your wages on your 2009 tax return, you must file an amended return on
Form 1040X, Amended U.S. Individual Income Tax Return. If you did not receive
the distribution by April 15, 2010, you also must add it to your wages on your
2010 tax return.
- If the distribution was for a 2008 excess deferral, your Form
1099-R should have the code "D" in box 7. If you did not add the excess deferral
amount to your wages on your 2008 tax return, you must file an amended return on
Form 1040X. You also must add it to your wages on your 2010 income tax return.
- If the distribution was for the income earned on an excess
deferral, your Form 1099-R should have the code "8" in box 7. Add the income
amount to your wages on your 2010 income tax return, regardless of when the
excess deferral was made.
Report a loss on a corrective distribution of an excess deferral
in the year the excess amount (reduced by the loss) is distributed to you.
Include the loss as a negative amount on Form 1040, line 21 and identify it as
"Loss on Excess Deferral Distribution."
| Even though a corrective distribution of excess deferrals
is reported on Form 1099-R, it is not otherwise treated as a distribution from
the plan. It cannot be rolled over into another plan, and it is not subject to
the additional tax on early distributions.
|
taxmap/pubs/p525-000.htm#en_us_publink1000229192If you are a highly compensated employee, the total of your elective
deferrals and other contributions made for you for any year under a section
401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the
average deferral percentage (ADP) of all eligible non-highly compensated
employees.
If the total contributed to the plan is more than the amount allowed under the
ADP test, the excess contributions must be either distributed to you or
recharacterized as after-tax employee contributions by treating them as
distributed to you and then contributed by you to the plan. You must include the
excess contributions in your income as wages on Form 1040, line 7. You cannot
use Form 1040A or Form 1040EZ to report excess contribution amounts.
If you receive a corrective distribution of excess contributions
(and allocable income), it is included in your income in the year of the
distribution. The allocable income is the amount of gain or loss through the end
of the plan year for which the contribution was made that is allocable to the
excess contributions. You should receive a Form 1099-R for the year the excess
contributions are distributed to you. Add the distribution to your wages for
that year.
| Even though a corrective distribution of excess contributions
is reported on Form 1099-R, it is not otherwise treated as a distribution from
the plan. It cannot be rolled over into another plan, and it is not subject to
the additional tax on early distributions.
|
taxmap/pubs/p525-000.htm#en_us_publink1000229196The amount contributed in 2010 to a defined contribution plan
is generally limited to the lesser of 100% of your compensation or $49,000.
Under certain circumstances, contributions that exceed these limits (excess
annual additions) may be corrected by a distribution of your elective deferrals
or a return of your after-tax contributions and earnings from these
contributions.
A corrective payment of excess annual additions consisting of
elective deferrals or earnings from your after-tax contributions is fully
taxable in the year paid. A corrective payment consisting of your after-tax
contributions is not taxable.
If you received a corrective payment of excess annual additions, you should
receive a separate Form 1099-R for the year of the payment with the code "E" in
box 7. Report the total payment shown in box 1 of Form 1099-R on line 16a of
Form 1040 or line 12a of Form 1040A. Report the taxable amount shown in box 2a
of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A.
|
Even though a corrective distribution of excess annual additions is reported on
Form 1099-R, it is not otherwise treated as a distribution from the plan. It
cannot be rolled over into another plan, and it is not subject to the additional
tax on early distributions.
|
taxmap/pubs/p525-000.htm#en_us_publink1000229198If you receive an option to buy or sell stock or other property
as payment for your services, you may have income when you receive the option
(the grant), when you exercise the option (use it to buy or sell the stock or
other property), or when you sell or otherwise dispose of the option or property
acquired through exercise of the option. The timing, type, and amount of income
inclusion depend on whether you receive a nonstatutory stock option or a
statutory stock option. Your employer can tell you which kind of option you
hold.
taxmap/pubs/p525-000.htm#en_us_publink1000229199taxmap/pubs/p525-000.htm#en_us_publink1000229200If you are granted a nonstatutory stock option, you may have
income when you receive the option. The amount of income to include and the time
to include it depend on whether the fair market value of the option can be
readily determined. The fair market value of an option can be readily determined
if it is actively traded on an established market.
The fair market value of an option that is not traded on an established market
can be readily determined only if all of the following conditions exist.
- You can transfer the option.
- You can exercise the option immediately in full.
- The option or the property subject to the option is not subject
to any condition or restriction (other than a condition to secure payment of the
purchase price) that has a significant effect on the fair market value of the
option.
- The fair market value of the option privilege can be readily
determined.
The option privilege for an option to buy is the opportunity
to benefit during the option's exercise period from any increase in the value of
property subject to the option without risking any capital. For example, if
during the exercise period the fair market value of stock subject to an option
is greater than the option's exercise price, a profit may be realized by
exercising the option and immediately selling the stock at its higher value. The
option privilege for an option to sell is the opportunity to benefit during the
exercise period from a decrease in the value of the property subject to the
option.
 | If you or a member of your family is an officer, director,
or more-than-10% owner of an expatriated corporation, you may owe an excise tax
on the value of nonstatutory options and other stock-based compensation from
that corporation. For more information on the excise tax, see Internal Revenue
Code section 4985. |
taxmap/pubs/p525-000.htm#en_us_publink1000229202If you receive a nonstatutory stock option that has a readily
determinable fair market value at the time it is granted to you, the option is
treated like other property received as compensation. See
Restricted Property,
later, for rules on how much income to include and when to include
it. However, the rule described in that discussion for choosing to include the
value of property in your income for the year of the transfer does not apply to
a nonstatutory option.
taxmap/pubs/p525-000.htm#en_us_publink1000229203If the fair market value of the option is not readily determinable
at the time it is granted to you (even if it is determined later), you do not
have income until you exercise or transfer the option.
taxmap/pubs/p525-000.htm#en_us_publink1000229204When you exercise a nonstatutory stock option, the amount to
include in your income depends on whether the option had a readily determinable
value.
taxmap/pubs/p525-000.htm#en_us_publink1000229205When you exercise a nonstatutory stock option that had a readily
determinable value at the time the option was granted, you do not have to
include any amount in income.
taxmap/pubs/p525-000.htm#en_us_publink1000229206When you exercise a nonstatutory stock option that did not have
a readily determinable value at the time the option was granted, the restricted
property rules apply to the property received. The amount to include in your
income is the difference between the amount you pay for the property and its
fair market value when it becomes substantially vested. If it is not
substantially vested at the time you exercise this nonstatutory stock option (so
that you may have to give the stock back), you do not have to include any amount
in income. You include the difference in income when the option becomes
substantially vested. For more information on restricted property, see
Restricted Property,
later.
taxmap/pubs/p525-000.htm#en_us_publink1000229207If you transfer a nonstatutory stock option without a readily
determinable value in an arm's-length transaction to an unrelated person, you
must include in your income the money or other property you received for the
transfer, as if you had exercised the option.
taxmap/pubs/p525-000.htm#en_us_publink1000229208
If you transfer a nonstatutory stock option without a readily determinable value
in a non-arm's-length transaction (for example, a gift), the option is not
treated as exercised or closed at that time. You must include in your income, as
compensation, any money or property received. When the transferee exercises the
option, you must include in your income, as compensation, the excess of the fair
market value of the stock acquired by the transferee over the sum of the
exercise price paid and any amount you included in income at the time you
transferred the option. At the time of the exercise, the transferee recognizes
no income and has a basis in the stock acquired equal to the fair market value
of the stock.
Any transfer of this kind of option to a related person is treated
as a non-arm's-length transaction. See Regulations section 1.83-7 for the
definition of a related person.
taxmap/pubs/p525-000.htm#en_us_publink1000229209If you are an employee, and you issue a recourse note to your
employer in satisfaction of the exercise price of an option to acquire your
employer's stock, and your employer and you subsequently agree to reduce the
stated principal amount of the note, you generally recognize compensation income
at the time and in the amount of the reduction.
taxmap/pubs/p525-000.htm#en_us_publink1000229210If you receive compensation from employer-provided nonstatutory
stock options, it is reported in box 1 of Form W-2. It also is reported in box
12 using code "V."
If you are a nonemployee spouse and you exercise nonstatutory stock options you
received incident to a divorce, the income is reported to you on Form 1099-MISC,
Miscellaneous Income, in box 3.
taxmap/pubs/p525-000.htm#en_us_publink1000229211There are no special income rules for the sale of stock acquired
through the exercise of a nonstatutory stock option. Report the sale on Schedule
D (Form 1040), Capital Gains and Losses, for the year of the sale. You may
receive a Form 1099-B, Proceeds from Broker and Barter Sale Transactions,
reporting the sales proceeds.
Your basis in the property you acquire under the option is the
amount you pay for it plus any amount you included in income upon grant or
exercise of the option.
Your holding period begins as of the date you acquired the option,
if it had a readily determinable value, or as of the date you exercised or
transferred the option, if it had no readily determinable value.
taxmap/pubs/p525-000.htm#en_us_publink1000229212There are two kinds of statutory stock options.
- Incentive stock options (ISOs), and
- Options granted under employee stock purchase plans.
For either kind of option, you must be an employee of the company
granting the option, or a related company, at all times during the period
beginning on the date the option is granted and ending 3 months before the date
you exercise the option (for an incentive stock option, 1 year before if you are
disabled). Also, the option must be nontransferable except at death.
If you do not meet the employment requirements, or you receive a transferable
option, your option is a nonstatutory stock option.
taxmap/pubs/p525-000.htm#en_us_publink1000229213If you receive a statutory stock option, do not include any amount
in your income when the option is granted.
taxmap/pubs/p525-000.htm#en_us_publink1000229214If you exercise a statutory stock option, do not include any
amount in income when you exercise the option.
taxmap/pubs/p525-000.htm#en_us_publink1000229215
For the AMT, you must treat stock acquired through the exercise of an ISO as if
no special treatment applied. This means that, when your rights in the stock are
transferable or no longer subject to a substantial risk of forfeiture, you must
include as an adjustment in figuring alternative minimum taxable income the
amount by which the fair market value of the stock exceeds the option price.
Enter this adjustment on line 14 of Form 6251, Alternative Minimum
Tax—Individuals. Increase your AMT basis in any stock you acquire by
exercising the ISO by the amount of the adjustment. However, no adjustment is
required if you dispose of the stock in the same year you exercise the option.
See
Restricted Property,
later, for more information.
 | Your AMT basis in stock acquired through an ISO is likely
to differ from your regular tax basis. Therefore, keep adequate records for both
the AMT and regular tax so that you can figure your adjusted gain or loss.
|
taxmap/pubs/p525-000.htm#en_us_publink1000229217Your employer, M Company, granted you an incentive stock option
on April 7, 2008, to buy 100 shares of M Company at $9 a share, its fair market
value at the time. You exercised the option on January 9, 2009, when the stock
was selling on the open market for $14 a share. On January 26, 2010, when the
stock was selling on the open market for $16 a share, your rights to the stock
first became transferable. You include $700 ($1,600 value when your rights first
became transferable minus $900 option price) as an adjustment on Form 6251, line
14.
|
If you exercise an ISO during 2010, you should receive Form 3921, Exercise of an
Incentive Stock Option Under Section 422(b), or a statement, from the
corporation for each transfer made during 2010. The corporation must send or
provide you with the form by January 31, 2011. Keep this information for your
records.
|
taxmap/pubs/p525-000.htm#en_us_publink1000229218You have taxable income or a deductible loss when you sell the
stock that you bought by exercising the option. Your income or loss is the
difference between the amount you paid for the stock (the option price) and the
amount you receive when you sell it. You generally treat this amount as capital
gain or loss and report it on Schedule D (Form 1040) for the year of the sale.
However, you may have ordinary income for the year that you sell
or otherwise dispose of the stock in either of the following situations.
- You do not satisfy the holding period requirement.
- You satisfy the conditions described under
Option granted at a discount, under
Employee stock purchase plan, later.
Report your ordinary income as wages on Form 1040, line 7, for
the year of the sale.
You satisfy the holding period requirement if you do not sell
the stock until the end of the later of the 1-year period after the stock was
transferred to you or the 2-year period after the option was granted. However,
you are considered to satisfy the holding period requirement if you sold the
stock to comply with conflict-of-interest requirements.
taxmap/pubs/p525-000.htm#en_us_publink1000229220
If you sell stock acquired by exercising an ISO, you need to determine if you
satisfied the holding period requirement.
taxmap/pubs/p525-000.htm#en_us_publink1000229221If you sell stock acquired by exercising an ISO and satisfy the
holding period requirement, your gain or loss from the sale is capital gain or
loss. Report the sale on Schedule D (Form 1040). The basis of your stock is the
amount you paid for the stock.
taxmap/pubs/p525-000.htm#en_us_publink1000229222If you sell stock acquired by exercising an ISO, do not satisfy
the holding period requirement, and have a gain from the sale, the gain is
ordinary income up to the amount by which the stock's fair market value when you
exercised the option exceeded the option price. Any excess gain is capital gain.
If you have a loss from the sale, it is a capital loss and you do not have any
ordinary income.
Report the ordinary income as wages on line 7, Form 1040. Report
the capital gain or loss on Schedule D (Form 1040). In determining capital gain
or loss, your basis is the amount you paid when you exercised the option plus
the amount reported as wages.
taxmap/pubs/p525-000.htm#en_us_publink1000229223Your employer, X Corporation, granted you an ISO on March 12,
2008, to buy 100 shares of X Corporation stock at $10 a share, its fair market
value at the time. You exercised the option on January 5, 2009, when the stock
was selling on the open market for $12 a share. On January 26, 2010, you sold
the stock for $15 a share. Although you held the stock for more than a year,
less than 2 years had passed from the time you were granted the option. In 2010,
you must report the difference between the option price ($10) and the value of
the stock when you exercised the option ($12) as wages. The rest of your gain is
capital gain, figured as follows:
| Selling price ($15 × 100 shares) | $ 1,500 |
| Purchase price ($10 × 100 shares) | −1,000 |
| Gain | $ 500 |
Amount reported as wages
[($12 × 100 shares) − $1,000]
| − 200 |
| Amount reported as capital gain | $ 300 |
If you sold stock acquired by exercising an option granted under
an employee stock purchase plan, you need to determine if you satisfied the
holding period requirement.
taxmap/pubs/p525-000.htm#en_us_publink1000229226If you sold stock acquired by exercising an option granted under
an employee stock purchase plan, and you satisfy the holding period requirement,
determine your ordinary income as follows.
Your basis is equal to the option price at the time you exercised
your option and acquired the stock. The timing and amount of pay period
deductions do not affect your basis.
Your holding period for the property you acquire when you exercise
an option begins on the day after you exercise the option.
taxmap/pubs/p525-000.htm#en_us_publink1000229227XYZ Company has an employee stock purchase plan. The option price
is the lower of the stock price at the time the option is granted or at the time
the option is exercised. The value of the stock when the option was granted was
$25. XYZ deducts $5 from A's pay every week for 48 weeks (total = $240 ($5
× 48)). The value of the stock when the option is exercised is $20. A
receives 12 shares of XYZ stock ($240 ÷ $20). A's holding period for all 12
shares begins the day after the option is exercised, even though the money used
to purchase the shares was deducted from A's pay on 48 separate days. A's basis
in each share is $20.
taxmap/pubs/p525-000.htm#en_us_publink1000229228If, at the time the option was granted, the option price per
share was less than 100% (but not less than 85%) of the fair market value of the
share, and you dispose of the share after meeting the holding period
requirement, or you die while owning the share, you must include in your income
as compensation, the lesser of:
- The excess of the fair market value of the share at the time
the option was granted over the option price, or
- The excess of the fair market value of the share at the time
of the disposition or death over the amount paid for the share under the option.
For this purpose, if the option price was not fixed or determinable
at the time the option was granted, the option price is figured as if the option
had been exercised at the time it was granted.
Any excess gain is capital gain. If you have a loss from the sale, it is a
capital loss, and you do not have any ordinary income.
taxmap/pubs/p525-000.htm#en_us_publink1000229229Your employer, Y Corporation, granted you an option under its
employee stock purchase plan to buy 100 shares of stock of Y Corporation for $20
a share at a time when the stock had a value of $22 a share. Eighteen months
later, when the value of the stock was $23 a share, you exercised the option,
and 14 months after that you sold your stock for $30 a share. In the year of
sale, you must report as wages the difference between the option price ($20) and
the value at the time the option was granted ($22). The rest of your gain ($8
per share) is capital gain, figured as follows:
| Selling price ($30 × 100 shares) | $ 3,000 |
Purchase price (option price)
($20 × 100 shares)
| −2,000 |
| Gain | $ 1,000 |
Amount reported as wages
[($22 × 100 shares) − $2,000]
| − 200 |
| Amount reported as capital gain | $ 800 |
If you do not satisfy the holding period requirement, your ordinary
income is the amount by which the stock's fair market value when you exercised
the option exceeded the option price. This ordinary income is not limited to
your gain from the sale of the stock. Increase your basis in the stock by the
amount of this ordinary income. The difference between your increased basis and
the selling price of the stock is a capital gain or loss.
taxmap/pubs/p525-000.htm#en_us_publink1000229232
The facts are the same as in the previous example, except that you sold the
stock only 6 months after you exercised the option. You did not satisfy the
holding period requirement, so you must report $300 as wages and $700 as capital
gain, figured as follows:
| Selling price ($30 × 100 shares) | $3,000 |
Purchase price (option price)
($20 × 100 shares)
| −2,000 |
| Gain | $1,000 |
Amount reported as wages
[($23 × 100 shares) − $2,000]
| − 300 |
Amount reported as capital gain
[$3,000 – ($2,000 + $300)]
| $700 |
| If you sold stock in 2010 that you acquired by exercising
an option granted at a discount under an employee stock purchase plan, you
should receive Form 3922, Transfer of Stock Acquired Through an Employee Stock
Purchase Plan Under Section 423(c), from the corporation. The corporation must
send or provide you with the form by January 31, 2011. Keep this information for
your records.
|
taxmap/pubs/p525-000.htm#en_us_publink1000229234Generally, if you receive property for your services, you must
include its fair market value in your income in the year you receive the
property. However, if you receive stock or other property that has certain
restrictions that affect its value, you do not include the value of the property
in your income until it has been substantially vested. (You can choose to
include the value of the property in your income in the year it is transferred
to you, as discussed later, rather than the year it is substantially vested.)
Until the property becomes substantially vested, it is owned
by the person who makes the transfer to you, usually your employer. However, any
income from the property, or the right to use the property, is included in your
income as additional compensation in the year you receive the income or have the
right to use the property.
When the property becomes substantially vested, you must include
its fair market value, minus any amount you paid for it, in your income for that
year. Your holding period for this property begins when the property becomes
substantially vested.
taxmap/pubs/p525-000.htm#en_us_publink1000229235Your employer, the RST Corporation, sells you 100 shares of its
stock at $10 a share. At the time of the sale the fair market value of the stock
is $100 a share. Under the terms of the sale, the stock is under a substantial
risk of forfeiture (you have a good chance of losing it) for a 5-year period.
Your stock is not substantially vested when it is transferred, so you do not
include any amount in your income in the year you buy it. At the end of the
5-year period, the fair market value of the stock is $200 a share. You must
include $19,000 in your income [100 shares × ($200 fair market value
− $10 you paid)]. Dividends paid by the RST Corporation on your 100 shares
of stock are taxable to you as additional compensation during the period the
stock can be forfeited.
taxmap/pubs/p525-000.htm#en_us_publink1000229236Property is substantially vested when:
- It is transferable, or
- It is not subject to a substantial risk of forfeiture. (You
do not have a good chance of losing it.)
Property is transferable if you can sell, assign, or pledge your
interest in the property to any person (other than the transferor), and if the
person receiving your interest in the property is not required to give up the
property, or its value, if the substantial risk of forfeiture occurs.
taxmap/pubs/p525-000.htm#en_us_publink1000229238A substantial risk of forfeiture exists if the rights in the
property transferred depend on performing (or not performing) substantial
services, or on a condition related to the transfer, and the possibility of
forfeiture is substantial if the condition is not satisfied.
taxmap/pubs/p525-000.htm#en_us_publink1000229239The Spin Corporation transfers to you as compensation for services
100 shares of its corporate stock for $100 a share. Under the terms of the
transfer, you must resell the stock to the corporation at $100 a share if you
leave your job for any reason within 3 years from the date of transfer. You must
perform substantial services over a period of time and you must resell the stock
to the corporation at $100 a share (regardless of its value) if you do not
perform the services, so your rights to the stock are subject to a substantial
risk of forfeiture.
taxmap/pubs/p525-000.htm#en_us_publink1000229240You can choose to include the value of restricted property at
the time of transfer (minus any amount you paid for the property) in your income
for the year it is transferred. If you make this choice, the substantial vesting
rules do not apply and, generally, any later appreciation in value is not
included in your compensation when the property becomes substantially vested.
Your basis for figuring gain or loss when you sell the property is the amount
you paid for it plus the amount you included in income as compensation.
| If you make this choice, you cannot revoke it without the
consent of the Internal Revenue Service. Consent will be given only if you were
under a mistake of fact as to the underlying transaction.
|
If you forfeit the property after you have included its value
in income, your loss is the amount you paid for the property minus any amount
you realized on the forfeiture.
| You cannot make this choice for a nonstatutory stock option. |
taxmap/pubs/p525-000.htm#en_us_publink1000229243You make the choice by filing a written statement with the Internal
Revenue Service Center where you file your return. You must file this statement
no later than 30 days after the date the property was transferred. A copy of the
statement must be attached to your tax return for the year the property was
transferred. You also must give a copy of this statement to the person for whom
you performed the services and, if someone other than you received the property,
to that person.
You must sign the statement and indicate on it that you are making the choice
under section 83(b) of the Internal Revenue Code. The statement must contain all
of the following information.
- Your name, address, and taxpayer identification number.
- A description of each property for which you are making the
choice.
- The date or dates on which the property was transferred and
the tax year for which you are making the choice.
- The nature of any restrictions on the property.
- The fair market value at the time of transfer (ignoring restrictions
except those that will never lapse) of each property for which you are making
the choice.
- Any amount that you paid for the property.
- A statement that you have provided copies to the appropriate
persons.
Dividends you receive on restricted stock are treated as compensation
and not as dividend income. Your employer should include these payments on your
Form W-2. If they also are reported on a Form 1099-DIV, Dividends and
Distributions, you should list them on Schedule B (Form 1040A or 1040) with a
statement that you have included them as wages. Do not include them in the total
dividends received.
taxmap/pubs/p525-000.htm#en_us_publink1000229245Dividends you receive on restricted stock you chose to include
in your income in the year transferred are treated the same as any other
dividends. You should receive a Form 1099-DIV showing these dividends. Do not
include the dividends in your wages on your return. Report them as dividends.
taxmap/pubs/p525-000.htm#en_us_publink1000229246These rules apply to the sale or other disposition of property
that you did not choose to include in your income in the year transferred and
that is not substantially vested.
If you sell or otherwise dispose of the property in an arm's-length
transaction, include in your income as compensation for the year of sale the
amount realized minus the amount you paid for the property. If you exchange the
property in an arm's-length transaction for other property that is not
substantially vested, treat the new property as if it were substituted for the
exchanged property.
The sale or other disposition of a nonstatutory stock option
to a related person is not considered an arm's-length transaction. See
Regulations section 1.83-7 for the definition of a related person.
If you sell the property in a transaction that is not at arm's
length, include in your income as compensation for the year of sale the total of
any money you received and the fair market value of any substantially vested
property you received on the sale. In addition, you will have to report income
when the original property becomes substantially vested, as if you still held
it. Report as compensation its fair market value minus the total of the amount
you paid for the property and the amount included in your income from the
earlier sale.
taxmap/pubs/p525-000.htm#en_us_publink1000229247In 2007, you paid your employer $50 for a share of stock that
had a fair market value of $100 and was subject to forfeiture until 2010. In
2009, you sold the stock to your spouse for $10 in a transaction not at arm's
length. You had compensation of $10 from this transaction. In 2010, when the
stock had a fair market value of $120, it became substantially vested. For 2010,
you must report additional compensation of $60, figured as follows:
| Fair market value of stock at time of substantial vesting | | $120 |
| Minus: Amount paid for stock | $50 | |
| Minus: Compensation previously included in income from sale
to spouse | 10 | −60 |
| Additional income
| | $60 |
If you inherit property not substantially vested at the time of the decedent's
death, any income you receive from the property is considered income in respect
of a decedent and is taxed according to the rules for restricted property
received for services. For information about income in respect of a decedent,
see Publication 559.
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