Publication 525 - Taxable and Nontaxable Income

Publication 525

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

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Bartering

Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead of time on the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise.

Generally, you report this income on Schedule C or Schedule C-EZ (Form 1040). However, if the barter involves an exchange of something other than services, such as in Example 4 below, you may have to use another form or schedule instead.

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Example 1.(p19)

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

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Example 2.(p19)

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

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Example 3.(p19)

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

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Example 4.(p19)

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

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If you exchanged property or services through a barter exchange, Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, or a similar statement from the barter exchange should be sent to you by February 15, 2011. It should show the value of cash, property, services, credits, or scrip you received from exchanges during 2010. The IRS also will receive a copy of Form 1099-B.

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The income you receive from bartering generally is not subject to regular income tax withholding. However, backup withholding will apply in certain circumstances to ensure that income tax is collected on this income.

Under backup withholding, the barter exchange must withhold, as income tax, 28% of the income if:

You do not give the barter exchange your taxpayer identification number (generally a social security number or an employer identification number), or
The IRS notifies the barter exchange that you gave it an incorrect identification number.

If you join a barter exchange, you must certify under penalties of perjury that your taxpayer identification number is correct and that you are not subject to backup withholding. If you do not make this certification, backup withholding may begin immediately. The barter exchange will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or a similar form, for you to make this certification. The barter exchange will withhold tax only up to the amount of any cash paid to you or deposited in your account and any scrip or credit issued to you (and converted to cash).

If tax is withheld from your barter income, the barter exchange will report the amount of tax withheld on Form 1099-B, or similar statement.

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Debt Cancellation

Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it is intended as a gift to you. A debt includes any indebtedness for which you are liable or which attaches to property you hold.

If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. If it is a business debt, report the amount on Schedule C or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if the debt is farm debt and you are a farmer).

You may be able to elect to recognize a canceled business debt in income over a 5-tax-year period if the income is realized in a reacquisition in 2009 or 2010. For information on this election, see Revenue Procedure 2009-37 available at www.irs.gov/irb/2009-36_IRB/ar01.html.

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If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. The amount of the canceled debt is shown in box 2.

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If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest also will be shown in box 3. Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible if you paid it. See Deductible debt under Exceptions, later.

If the interest would not be deductible (such as interest on a personal loan), include in your income the amount from Form 1099-C, box 2. If the interest would be deductible (such as on a business loan), include in your income the net amount of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3).

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If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. You must include the canceled amount in your income.

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If you are personally liable for a mortgage (recourse debt), and you are relieved of the mortgage when you dispose of the property, you may realize gain or loss up to the fair market value of the property. To the extent the mortgage discharge exceeds the fair market value of the property, it is income from discharge of indebtedness unless it qualifies for exclusion under Excluded debt, later. Report any income from discharge of indebtedness on nonbusiness debt that does not qualify for exclusion as other income on Form 1040, line 21.

You may be able to exclude part of the mortgage relief on your principal residence. See Excluded debt, later.

If you are not personally liable for a mortgage (nonrecourse debt), and you are relieved of the mortgage when you dispose of the property (such as through foreclosure or repossession), that relief is included in the amount you realize. You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. Report any gain on nonbusiness property as a capital gain.

See Publication 4681 for more information.

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If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution that is generally dividend income to you. For more information, see Publication 542, Corporations.

If you are a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally do not realize income. This is because the canceled debt is considered as a contribution to the capital of the corporation equal to the amount of debt principal that you canceled.

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

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There are several exceptions to the inclusion of canceled debt in income. These are explained next.

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Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers.

You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required. To qualify, the loan must have been made by:

The Federal Government, a state or local government, or an instrumentality, agency, or subdivision thereof,
A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees are considered public employees under state law, or
An educational institution:
1. Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or
2. As part of a program of the institution designed to encourage students to serve in occupations or areas with unmet needs and under which the services provided are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization (defined later).

A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a tax-exempt section 501(a) organization under its program designed as described in (3)(b) earlier.

An educational institution is an organization with a regular faculty and curriculum and a regularly enrolled body of students in attendance at the place where the educational activities are carried on.

A section 501(c)(3) organization is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.

Charitable.
Educational.
Fostering national or international amateur sports competition (but only if none of the organization's activities involve providing athletic facilities or equipment).
Literary.
Preventing cruelty to children or animals.
Religious.
Scientific.
Testing for public safety.

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You do have income if your student loan was made by an educational institution and is canceled because of services you performed for the institution or other organization that provided the funds.

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Education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment Program), a state education loan repayment program eligible for funds under the Public Health Service Act, or any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas are not taxable.

The provision relating to the "other state loan repayment or loan forgiveness program" was added to this exclusion for amounts received in tax years beginning after December 31, 2008. If you included these amounts in income in 2009, you should file an amended tax return to exclude this income. See Form 1040X, Amended U.S. Individual Income Tax Return, and its instructions for details on filing.

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

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

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Do not include a canceled debt in your gross income in the following situations.

The debt is canceled in a bankruptcy case under Title 11 of the U.S. Code. See Publication 908, Bankruptcy Tax Guide.
The debt is canceled when you are insolvent. However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent. See Publication 908.
The debt is qualified farm debt and is canceled by a qualified person. See chapter 3 of Publication 225, Farmer's Tax Guide.
The debt is qualified real property business debt. See chapter 5 of Publication 334.
The cancellation is intended as a gift.
The debt is qualified principal residence indebtedness, discussed next.

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This is a mortgage secured by your principal residence that you took out to buy, build, or substantially improve your principal residence. QPRI cannot be more than the cost of your principal residence plus improvements.

You must reduce the basis of your principal residence by the amount excluded from gross income. To claim the exclusion, you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with your tax return.

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Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.

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The maximum amount you can treat as QPRI is $2 million ($1 million if married filing separately). You cannot exclude debt canceled because of services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.

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If only part of a loan is QPRI, the exclusion applies only to the extent the canceled amount is more than the amount of the loan immediately before the cancellation that is not QPRI.

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Example.(p21)

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

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If you host a party or event at which sales are made, any gift or gratuity you receive for giving the event is a payment for helping a direct seller make sales. You must report this item as income at its fair market value.

Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. These expenses are deductible as miscellaneous itemized deductions subject to the 2%-of-AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive for giving the party.

For more information about the 50% limit for meal and entertainment expenses, see 50% Limit in Publication 463.

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Life Insurance Proceeds

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

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

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If you receive life insurance proceeds in installments, you can exclude part of each installment from your income.

To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in your income as interest.

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Example.(p21)

The face amount of the policy is $75,000 and, as beneficiary, you choose to receive 120 monthly installments of $1,000 each. The excluded part of each installment is $625 ($75,000 ÷ 120), or $7,500 for an entire year. The rest of each payment, $375 a month (or $4,500 for an entire year), is interest income to you.

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If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing the amount held by the insurance company by your life expectancy. If there is a refund or period-certain guarantee, the amount held by the insurance company for this purpose is reduced by the actuarial value of the guarantee.

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If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse are received in installments, you can exclude up to $1,000 a year of the interest included in the installments. If you remarry, you can continue to take the exclusion.

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If you are the policyholder of an employer-owned life insurance contract, you must include in income any life insurance proceeds received that are more than the premiums and any other amounts you paid on the policy. You are subject to this rule if you have a trade or business, you own a life insurance contract on the life of your employee, and you (or a related person) are a beneficiary under the contract.

However, you may exclude the full amount of the life insurance proceeds if the following apply.

Before the policy is issued, you provide written notice about the insurance to the employee and the employee provides written consent to be insured.
Either:
1. The employee was your employee within the 12-month period before death, or, at the time the contract was issued, was a director or highly compensated employee, or
2. The amount is paid to the family or designated beneficiary of the employee.

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If an insurance company pays you interest only on proceeds from life insurance left on deposit, the interest you are paid is taxable.

If your spouse died before October 23, 1986, and you chose to receive only the interest from your insurance proceeds, the $1,000 interest exclusion for a surviving spouse does not apply. If you later decide to receive the proceeds from the policy in installments, you can take the interest exclusion from the time you begin to receive the installments.

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If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income.

You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.

For information on when the proceeds are excluded from income, see Accelerated Death Benefits, later.

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Generally, a split-dollar life insurance arrangement is an arrangement between an owner and a non-owner of a life insurance contract under which either party to the arrangement pays all or part of the premiums, and one of the parties paying the premiums is entitled to recover all or part of those premiums from the proceeds of the contract. There are two mutually exclusive regimes to tax split-dollar life insurance arrangements.

Under the economic benefit regime, the owner of the life insurance contract is treated as providing current life insurance protection and other taxable economic benefits to the non-owner of the contract.
Under the loan regime, the non-owner of the life insurance contract is treated as loaning premium payments to the owner of the contract.

Only one of these regimes applies to any one policy. For more information, see sections 1.61-22 and 1.7872-15 of the regulations.

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Endowment Contract Proceeds

An endowment contract is a policy under which you are paid a specified amount of money on a certain date unless you die before that date, in which case, the money is paid to your designated beneficiary. Endowment proceeds paid in a lump-sum to you at maturity are taxable only if the proceeds are more than the cost of the policy. To determine your cost, subtract any amount that you previously received under the contract and excluded from your income from the total premiums (or other consideration) paid for the contract. Include the part of the lump-sum payment that is more than your cost in your income.

Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy are taxed as an annuity. This is explained in Publication 575. For this treatment to apply, you must choose to receive the proceeds in installments before receiving any part of the lump sum. This election must be made within 60 days after the lump-sum payment first becomes payable to you.

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Accelerated Death Benefits

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

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

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

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

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

Is a director, officer, or employee of the person, or
Has a financial interest in the person's business.

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

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Recovery

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

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

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Refunds of federal income taxes are not included in your income because they are never allowed as a deduction from income.

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If you received a state or local income tax refund (or credit or offset) in 2010, you generally must include it in income if you deducted the tax in an earlier year. The payer should send Form 1099-G, Certain Government Payments, to you by January 31, 2011. The IRS also will receive a copy of the Form 1099-G. If you file Form 1040, use the worksheet in the 2010 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income. See Itemized Deduction Recoveries, later, for when you must use Worksheet 2 on page 25 of this publication.

If you could choose to deduct for a tax year either:

State and local income taxes, or
State and local general sales taxes, then

the maximum refund that you may have to include in income is limited to the excess of the tax you chose to deduct for that year over the tax you did not choose to deduct for that year.

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For 2009 you can choose an $11,000 state income tax deduction or a $10,000 state general sales tax deduction. You choose to deduct the state income tax. In 2010 you receive a $2,500 state income tax refund. The maximum refund that you may have to include in income is $1,000, since you could have deducted $10,000 in state general sales tax.

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For 2009 you can choose an $11,500 state general sales tax deduction based on actual expenses or an $11,200 state income tax deduction. You choose to deduct the general sales tax deduction. In 2010 you return an item you had purchased and receive a $500 sales tax refund. In 2010 you also receive a $1,500 state income tax refund. The maximum refund that you may have to include in income is $500, since it is less than the excess of the tax deducted ($11,500) over the tax you did not choose to deduct ($11,200 − $1,500 = $9,700). Since you did not choose to deduct the state income tax, you do not include the state income tax refund in income.

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For 2008 and 2009, you could claim your real property tax as part of your itemized deductions or your standard deduction. If you claimed them as part of your itemized deductions, they are subject to the rules for Itemized Deduction Recoveries, discussed later.

If you claimed them as part of your standard deduction, the deduction was limited to the lesser of:

The amount allowable as a deduction if you itemized your deductions, or
$500 ($1,000 if married filing jointly).

If you claimed $500 ($1,000 if married filing jointly) as part of your standard deduction and you receive a real property tax refund in 2010, you would include in income only that part of the refund that reduced your real property tax below $500 ($1,000 if married filing jointly).

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You are single and claim the standard deduction for 2009. You paid real property taxes of $800 in 2009. As part of your standard deduction, you claimed $500 for your real property taxes. In 2010, you receive a $400 refund of real property tax. The maximum refund that you may have to include in income is $100.

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For 2008 and 2009, you could claim a net disaster loss as part of your itemized deductions or your standard deduction. If you claimed the loss as part of your itemized deductions, the recovery of the loss is subject to the rules for Itemized Deduction Recoveries, discussed later.

If you claimed them as part of your standard deduction, any recovery of the net disaster loss is included in income. For information on net disaster losses, see Disaster Area Losses in Publication 547, Casualties, Disasters, and Thefts.

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You may have been able to deduct as part of your itemized deductions or your standard deduction, state or local sales or excise taxes for certain new motor vehicles purchased after February 16, 2009, and before January 1, 2010. If you claimed them as part of your itemized deductions, they are subject to the rules for Itemized Deduction Recoveries, discussed later.

If you claimed them as part of your standard deduction and receive a refund in 2010 for motor vehicle taxes you deducted in 2009, they are subject to the rules for Non-Itemized Deduction Recoveries discussed later.

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If you received a refund or credit in 2010 of mortgage interest paid in an earlier year, the amount should be shown in box 3 of your Form 1098, Mortgage Interest Statement. Do not subtract the refund amount from the interest you paid in 2010. You may have to include it in your income under the rules explained in the following discussions.

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Interest on any of the amounts you recover must be reported as interest income in the year received. For example, report any interest you received on state or local income tax refunds on Form 1040, line 8a or Form 1040NR, line 9a.

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If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit and is not reported as income.

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

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Example.(p22)

You paid 2009 estimated state income tax of $4,000 in four equal payments. You made your fourth payment in January 2010. You had no state income tax withheld during 2009. In 2010, you received a $400 tax refund based on your 2009 state income tax return. You claimed itemized deductions each year on Schedule A (Form 1040).

You must allocate the $400 refund between 2009 and 2010, the years in which you paid the tax on which the refund is based. You paid 75% ($3,000 ÷ $4,000) of the estimated tax in 2009, so 75% of the $400 refund, or $300, is for amounts you paid in 2009 and is a recovery item. If all of the $300 is a taxable recovery item, you will include $300 on Form 1040, line 10, for 2010, and attach a copy of your computation showing why that amount is less than the amount shown on the Form 1099-G you received from the state.

The balance ($100) of the $400 refund is for your January 2010 estimated tax payment. When you figure your deduction for state and local income taxes paid during 2010, you will reduce the $1,000 paid in January by $100. Your deduction for state and local income taxes paid during 2010 will include the January net amount of $900 ($1,000 − $100), plus any estimated state income taxes paid in 2010 for 2010, and any state income tax withheld during 2010.

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If you filed a joint state or local income tax return in an earlier year and you are not filing a joint Form 1040 with the same person for 2010, any refund of a deduction claimed on that state or local income tax return must be allocated to the person that paid the expense. If both persons paid a portion of the expense, allocate the refund based on your individual portion. For example, if you paid 25% of the expense, then you would use 25% of the refund to figure if you must include any portion of the refund in your income.

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A registered domestic partner in Nevada, Washington, or California (or a person in California who is married to a person of the same sex) generally must report half the combined community income earned by the individual and his or her domestic partner (or same-sex spouse). If the expense was paid out of community income, then half of the refund would be used by each person to figure if any amount is included in that person's income. See Publication 555.

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If you did not itemize deductions for the year for which you received the recovery of an expense that was deductible only if you itemized, do not include any of the recovery amount in your income.

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Example.(p23)

You claimed the standard deduction on your 2009 federal income tax return. In 2010 you received a refund of your 2009 state income tax. Do not report any of the refund as income because you did not itemize deductions for 2009.

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Itemized Deduction Recoveries

The following discussion explains how to determine the amount to include in your income from a recovery of an amount deducted in an earlier year as an itemized deduction. However, you generally do not need to use this discussion if you file Form 1040 and the recovery is for state or local income taxes paid in 2009. Instead, use the worksheet in the 2010 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income.

You cannot use the Form 1040 worksheet and must use this discussion if you are a nonresident alien (discussed later) or any of the following statements are true.

You received a refund in 2010 that is for a tax year other than 2009.
You received a refund other than an income tax refund, such as a general sales tax or real property tax refund, in 2010 of an amount deducted or credit claimed in an earlier year.
The amount on your 2009 Form 1040, line 42 was more than the amount on your 2009 Form 1040, line 41.
You had taxable income on your 2009 Form 1040, line 43, but no tax on your Form 1040, line 44, because of the 0% tax rate on net capital gain and qualified dividends in certain situations. See Capital gains, later.
Your 2009 state and local income tax refund is more than your 2009 state and local income tax deduction minus the amount you could have deducted as your 2009 state and local general sales taxes.
You made your last payment of 2009 estimated state or local income tax in 2010.
You owed alternative minimum tax in 2009.
You could not use the full amount of credits you were entitled to in 2009 because the total credits were more than the amount shown on your 2009 Form 1040, line 46.
You could be claimed as a dependent by someone else in 2009.
You had to use the itemized deductions worksheet in the 2009 Instructions for Schedule A (Form 1040) because your 2009 adjusted gross income was over $166,800 ($83,400 if married filing separately) and both of the following apply.
1. You could not deduct all of the amount on the 2009 Itemized Deductions Worksheet, line 1.
2. The amount on line 8 of that 2009 worksheet would be more than the amount on line 4 of that worksheet if the amount on line 4 were reduced by 80% of the refund you received in 2010.
You received a refund because of a jointly-filed state or local income tax return, but you are not filing a joint 2010 Form 1040 with the same person.

If you also recovered an amount deducted as a non-itemized deduction, figure the amount of that recovery to include in your income and add it to your adjusted gross income before applying the rules explained here. See Non-Itemized Deduction Recoveries, later.

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

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If you determined your tax in the earlier year by using the Schedule D Tax Worksheet, or the Qualified Dividends and Capital Gain Tax Worksheet, and you receive a refund in 2010 of a deduction claimed in that year, you will have to recompute your tax for the earlier year to determine if the recovery must be included in your income. If inclusion of the recovery does not change your total tax, you do not include the recovery in income. However, if your total tax increases by any amount, you must include the recovery in your income up to the amount of the deduction that reduced your tax in the earlier year.

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If you recover any itemized deduction that you claimed in an earlier year, you generally must include the full amount of the recovery in your income in the year you receive it. This rule applies if, for the earlier year, all of the following statements are true.

Your itemized deductions exceeded the standard deduction by at least the amount of the recovery. (If your itemized deductions did not exceed the standard deduction by at least the amount of the recovery, see Standard deduction limit, later.)
You had taxable income. (If you had no taxable income, see Negative taxable income, later.)
Your deduction for the item recovered equals or exceeds the amount recovered. (If your deduction was less than the amount recovered, see Recovery limited to deduction, later.)
Your itemized deductions were not subject to the limit on itemized deductions. (If your deductions were limited, see Itemized deductions limited, later.)
You had no unused tax credits. (If you had unused tax credits, see Unused tax credits, later.)
You were not subject to alternative minimum tax. (If you were subject to alternative minimum tax, see Subject to alternative minimum tax, later.)

If any of the earlier statements is not true, see Total recovery not included in income, later.

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In addition to the previous six items, you must include in your income the full amount of a refund of state or local income tax or general sales tax if the excess of the tax you deducted over the tax you did not deduct is more than the refund of the tax deducted.

If the refund is more than the excess, see Total recovery not included in income, later.

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Enter your state or local income tax refund on Form 1040, line 10, and the total of all other recoveries as other income on Form 1040, line 21. You cannot use Form 1040A or Form 1040EZ.

If you file Form 1040NR, enter your state or local income tax refund on line 11 and the total of all other recoveries on line 21. If you file Form 1040NR-EZ, enter your state or local income tax refund on line 4.

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Example.(p23)

For 2009, you filed a joint return on Form 1040. Your taxable income was $60,000 and you were not entitled to any tax credits. Your standard deduction was $11,400, and you had itemized deductions of $13,000. In 2010, you received the following recoveries for amounts deducted on your 2009 return:

Medical expenses	$200
State and local income tax refund	400
Refund of mortgage interest	325
Total recoveries	$925

None of the recoveries were more than the deductions taken for 2009. The difference between the state and local income tax you deducted and your local general sales tax was more than $400.

Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($13,000 − $11,400 = $1,600), so you must include your total recoveries in your income for 2010. Report the state and local income tax refund of $400 on Form 1040, line 10, and the balance of your recoveries, $525, on Form 1040, line 21.

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

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If you are not required to include all of your recoveries in your income, and you have both a state income tax refund and other itemized deduction recoveries, you must allocate the taxable recoveries between the state income tax refund you report on Form 1040, line 10 (Form 1040NR, line 11), and the amount you report as other income on Form 1040, line 21 (Form 1040NR, line 21). If you do not use Worksheet 2, make the allocation as follows.

Divide your state income tax refund by the total of all your itemized deduction recoveries.
Multiply the amount of taxable recoveries by the percentage in (1). This is the amount you report as a state income tax refund.
Subtract the result in (2) above from the amount of taxable recoveries. This is the amount you report as other income.

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Example.(p24)

In 2010 you recovered $2,500 of your 2009 itemized deductions claimed on Schedule A (Form 1040), but the recoveries you must include in your 2010 income are only $1,500. Of the $2,500 you recovered, $500 was due to your state income tax refund. Your state income tax was more than your state general sales tax by $600. The amount you report as a state tax refund on Form 1040, line 10, is $300 [($500 ÷ $2,500) × $1,500]. The balance of the taxable recoveries, $1,200, is reported as other income on Form 1040, line 21.

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

Your recoveries, or
The amount by which your itemized deductions exceeded the standard deduction.

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To determine if amounts recovered in 2010 must be included in your income, you must know the standard deduction for your filing status for the year the deduction was claimed. If you filed Form 1040, the standard deduction tables for 2009, 2008, and 2007 are shown in Tables 2, 3, and 4. If you need the standard deduction amounts for years before 2007, see the copy of your return for that year. If you filed Form 1040NR or 1040NR-EZ, you could not claim the standard deduction.

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Example.(p24)

You filed a joint return on Form 1040 for 2009 with taxable income of $45,000. Your itemized deductions were $12,050. The standard deduction that you could have claimed was $11,400. In 2010, you recovered $2,100 of your 2009 itemized deductions. None of the recoveries were more than the actual deductions for 2009. Include $650 of the recoveries in your 2010 income. This is the smaller of your recoveries ($2,100) or the amount by which your itemized deductions were more than the standard deduction ($12,050 − $11,400 = $650).

If you could claim an additional standard deduction for certain taxes or a net disaster loss, increase your standard deduction for that year.

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If your taxable income for the prior year (Worksheet 2, line 10) was a negative amount, the recovery you must include in income is reduced by that amount. You have a negative taxable income for 2009 if your:

Form 1040, line 42 was more than line 41,
Form 1040NR, line 39 was more than line 38, or
Form 1040NR-EZ, line 13 was more than line 12.

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Example.(p24)

The facts are the same as in the previous example except line 42 was $200 more than line 41 on your 2009 Form 1040 giving you a negative taxable income of $200. You must include $450 in your 2010 income, rather than $650.

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You do not include in your income any amount of your recovery that is more than the amount you deducted in the earlier year. The amount you include in your income is limited to the smaller of:

The amount deducted, or
The amount recovered.

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Example.(p24)

During 2009, you paid $1,700 for medical expenses. From this amount you subtracted $1,500, which was 7.5% of your adjusted gross income. Your actual medical expense deduction was $200. In 2010, you received a $500 reimbursement from your medical insurance for your 2009 expenses. The only amount of the $500 reimbursement that must be included in your income for 2010 is $200—the amount actually deducted.

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You were subject to the limit on itemized deductions in the earlier year if your adjusted gross income (AGI) was more than a base amount. This amount was:

For 2009, $166,800 ($83,400 if married filing separately),
For 2008, $159,950 ($79,975 if married filing separately), and
For 2007, $156,400 ($78,200 if married filing separately).

If the limit applied, your itemized deductions were reduced by the smaller of the following amounts.

3% of the amount by which your AGI exceeded the base amount.
80% of your otherwise allowable deductions other than medical and dental expenses, investment interest expense, nonbusiness casualty and theft losses, and gambling losses.

In 2007, your itemized deductions were reduced by only 2/3 of the smaller amount. In 2008 and 2009, your itemized deductions were reduced by only 1/3 of the smaller amount.

If the amount you recovered was deducted in a year in which your itemized deductions were limited, you must include it in income up to the difference between the amount of itemized deductions actually allowed that year and the amount you would have been allowed (the greater of your itemized deductions or your standard deduction) if you had figured your deductions using only the net amount of the recovery item.

To determine the part of the recovery you must include in income, follow the two steps below.

Figure the greater of:
1. The standard deduction for the earlier year, or
2. The amount of itemized deductions you would have been allowed for the earlier year (after taking into account the limit on itemized deductions) if you had figured them using only the net amount of the recovery item. The net amount is the amount you actually paid reduced by the recovery amount.
Note. If you were required to itemize your deductions in the earlier year, use step 1(b) and not step 1(a).
Subtract the amount in step 1 from the amount of itemized deductions actually allowed in the earlier year after applying the limit on itemized deductions.

The result of step 2 is the amount of the recovery to include in your income for the year you receive the recovery. If your taxable income for the earlier year was a negative amount, reduce your recovery by the negative amount.

If you had unused tax credits in the earlier year, see Unused tax credits, later.

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Worksheet 2. Recoveries of Itemized Deductions

To determine whether you should complete this worksheet to figure the part of a recovery amount to include in income on your 2010 tax return, see Itemized Deduction Recoveries. If you recovered amounts from more than one year, such as a state income tax refund from 2009 and a casualty loss reimbursement from 2008, complete a separate worksheet for each year. Use information from your tax return for the year the expense was deducted. A recovery is included in income only to the extent of the deduction amount that reduced your tax in the prior year (year of the deduction). If you were subject to the alternative minimum tax or your tax credits reduced your tax to zero, see Unused tax credits and Subject to alternative minimum tax under Itemized Deduction Recoveries. If your recovery was for an itemized deduction that was limited, you should read Itemized deductions limited under Itemized Deduction Recoveries.
1.	State/local income tax refund or credit¹			1.
2.	Enter the total of all other Schedule A refunds or reimbursements (excluding the amount you entered on line 1)²			2.
3.	Add lines 1 and 2			3.
4.	Itemized deductions for the prior year. For 2009, Form 1040, Schedule A, line 29 Form 1040NR, Schedule A, line 17 Form 1040NR-EZ, line 11		4.
5.	Enter any amount previously refunded to you (do not enter an amount from line 1 or line 2)		5.
6.	Subtract line 5 from line 4		6.
7.	Standard deduction for the prior year. (If you filed Form 1040, the standard deduction amounts for 2009, 2008, and 2007 are shown in Tables 2, 3, and 4. If you filed Form 1040NR or 1040NR-EZ, enter -0-.)		7.
8.	Subtract line 7 from line 6. If the result is zero or less, stop here. The amounts on lines 1 and 2 are not taxable			8.
9.	Enter the smaller of line 3 or line 8			9.
10.	Taxable income for prior year³ (2009 Form 1040, line 43; 2009 Form 1040NR, line 40; 2009 Form 1040NR-EZ, line 14)		10.
11.	Amount to include in income for 2010: If line 10 is zero or more, enter the amount from line 9. If line 10 is a negative amount, add lines 9 and 10 and enter the result (but not less than zero).⁴			11.
	If line 11 equals line 3— Enter the amount from line 1 on Form 1040, line 10; Form 1040NR, line 11; Form 1040NR-EZ, line 4. Enter the amount from line 2 on Form 1040, line 21; Form 1040NR, line 21.
	If line 11 is less than line 3 and either line 1 or line 2 is zero— If there is an amount on line 1, enter the amount from line 11 on Form 1040, line 10; Form 1040NR, line 11; Form 1040NR-EZ, line 4. If there is an amount on line 2, enter the amount from line 11 on Form 1040, line 21; Form 1040NR, line 21.
	If line 11 is less than line 3, and there are amounts on both lines 1 and 2, complete the following worksheet.
	A.	Divide the amount on line 1 by the amount on line 3. Enter the percentage	A.
	B.	Multiply the amount on line 11 by the percentage on line A. Enter the result here and on Form 1040, line 10; Form 1040NR, line 11		B.
	C.	Subtract the amount on line B from the amount on line 11. Enter the result here and on Form 1040, line 21; Form 1040NR, line 21		C.

¹ Do not enter more than the amount deducted for the prior year. Do not enter more than the excess of your state and local income tax deduction over your state and local general sales taxes you could have deducted.
² Do not enter more than the amount deducted for the prior year. If you deducted state and local general sales taxes and received a refund of those taxes, include the amount on line 2, but do not enter more than the excess of your sales tax deduction over your state and local income tax you could have deducted.
³ If taxable income is a negative amount, enter that amount in brackets. Do not enter zero unless your taxable income is exactly zero. See Negative taxable income. Taxable income will have to be adjusted for any net operating loss carryover. For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.
⁴ For example, $700 + ($400) = $300.

Table 2. 2009 Standard Deduction Tables

Caution: If you are married filing a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you cannot take the standard deduction even if you were born before January 2, 1945, or you are blind.

Table I. Standard Deduction Chart for Most People*

IF your filing status is . . .	THEN your standard deduction is . . .
Single or Married filing separately	$5,700
Married filing joint return or Qualifying widow(er) with dependent child	11,400
Head of household	8,350

* DO NOT use this chart if you were born before January 2, 1945, or you are blind, OR if someone else can claim an exemption for you (or your spouse if married filing jointly). Use Table II or III instead.

Table II. Standard Deduction Chart for People Who Were Born Before January 2, 1945, or Were Blind*

Check the correct number of boxes below. Then go to the chart.

You	Born before January 2, 1945 □	Blind □
Your spouse, if claiming spouse's exemption	Born before January 2, 1945 □	Blind □

Total number of boxes you checked ____
IF your filing status is . . .	AND the number on the line above is . . .	THEN your standard deduction is . . .
Single	1 2	$ 7,100 8,500
Married filing joint return or Qualifying widow(er) with dependent child	1 2 3 4	12,500 13,600 14,700 15,800
Married filing separate return	1 2 3 4	6,800 7,900 9,000 10,100
Head of household	1 2	9,750 11,150

*If someone else can claim an exemption for you (or your spouse if married filing jointly), use Table III instead.

Table III. Standard Deduction Worksheet for Dependents*

If you were born before January 2, 1945, or you were blind, check the correct number of boxes below. Then go to the worksheet.

You			Born before January 2, 1945 □		Blind □
Your spouse, if claiming spouse's exemption			Born before January 2, 1945 □		Blind □

		Total number of boxes you checked ____
1.		Enter your earned income (defined below). If none, enter -0-		1.
2.		Additional amount		2.	$300
3.		Add lines 1 and 2		3.
4.		Minimum standard deduction		4.	$950
5.		Enter the larger of line 3 or line 4		5.
6.		Enter the amount shown below for your filing status. Single or Married filing separately—$5,700 Married filing jointly —$11,400 Head of household—$8,350		6.
7.	Standard deduction.
	a.	Enter the smaller of line 5 or line 6. If born after January 1, 1945, and not blind, stop here. This is your standard deduction. Otherwise, go on to line 7b.		7a.
	b.	If born before January 2, 1945, or blind, multiply $1,400 ($1,100 if married) by the number in the box above.		7b.
	c.	Add lines 7a and 7b. This is your standard deduction for 2009.		7c.
Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any amount received as a scholarship that you must include in your income.

*Use this worksheet ONLY if someone else can claim an exemption for you (or your spouse if married filing jointly).

	For 2009 you can increase your standard deduction, figured using these tables, by your real property tax (limited to $500 ($1,000 if married filing jointly)), state or local sales or excise tax paid on the purchase of a motor vehicle in 2009 after February 16, and net disaster loss that you could claim as part of your standard deduction.

Table 3. 2008 Standard Deduction Tables

Table I. Standard Deduction Chart for Most People*

IF your filing status is . . .	THEN your standard deduction is . . .
Single or Married filing separately	$5,450
Married filing joint return or Qualifying widow(er) with dependent child	10,900
Head of household	8,000

* DO NOT use this chart if you were born before January 2, 1944, or you are blind, OR if someone else can claim an exemption for you (or your spouse if married filing jointly). Use Table II or III instead.

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

Check the correct number of boxes below. Then go to the chart.

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

Total number of boxes you checked ____
IF your filing status is . . .	AND the number on the line above is . . .	THEN your standard deduction is . . .
Single	1 2	$ 6,800 8,150
Married filing joint return or Qualifying widow(er) with dependent child	1 2 3 4	11,950 13,000 14,050 15,100
Married filing separate return	1 2 3 4	6,500 7,550 8,600 9,650
Head of household	1 2	9,350 10,700

*If someone else can claim an exemption for you (or your spouse if married filing jointly), use Table III instead.

Table III. Standard Deduction Worksheet for Dependents*

If you were born before January 2, 1944, or you were blind, check the correct number of boxes below. Then go to the worksheet.

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

		Total number of boxes you checked ____
1.		Enter your earned income (defined below). If none, enter -0-		1.
2.		Additional amount		2.	$300
3.		Add lines 1 and 2		3.
4.		Minimum standard deduction		4.	$900
5.		Enter the larger of line 3 or line 4		5.
6.		Enter the amount shown below for your filing status. Single or Married filing separately—$5,450 Married filing jointly—$10,900 Head of household—$8,000		6.
7.	Standard deduction.
	a.	Enter the smaller of line 5 or line 6. If born after January 1, 1944, and not blind, stop here. This is your standard deduction. Otherwise, go on to line 7b.		7a.
	b.	If born before January 2, 1944, or blind, multiply $1,350 ($1,050 if married) by the number in the box above.		7b.
	c.	Add lines 7a and 7b. This is your standard deduction for 2008.		7c.
Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any amount received as a scholarship that you must include in your income.

*Use this worksheet ONLY if someone else can claim an exemption for you (or your spouse if married filing jointly).

	For 2008 you can increase your standard deduction, figured using these tables, by your real property tax (limited to $500 ($1,000 if married filing jointly)) and net disaster loss that you could claim as part of your standard deduction.

Table 4. 2007 Standard Deduction Tables

Table I. Standard Deduction Chart for Most People*

IF your filing status is . . .	THEN your standard deduction is . . .
Single or Married filing separately	$5,350
Married filing joint return or Qualifying widow(er) with dependent child	10,700
Head of household	7,850

* DO NOT use this chart if you were born before January 2, 1943, or you are blind, OR if someone else can claim an exemption for you (or your spouse if married filing jointly). Use Table II or III instead.

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

Check the correct number of boxes below. Then go to the chart.

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

Total number of boxes you checked _____
IF your filing status is . . .	AND the number on the line above is . . .	THEN your standard deduction is . . .
Single	1 2	$ 6,650 7,950
Married filing joint return or Qualifying widow(er) with dependent child	1 2 3 4	11,750 12,800 13,850 14,900
Married filing separate return	1 2 3 4	6,400 7,450 8,500 9,550
Head of household	1 2	9,150 10,450

*If someone else can claim an exemption for you (or your spouse if married filing jointly), use Table III instead.

Table III. Standard Deduction Worksheet for Dependents*

If you were born before January 2, 1943, or you were blind, check the correct number of boxes below. Then go to the worksheet.

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

		Total number of boxes you checked ____
1.		Enter your earned income (defined below). If none, enter -0-		1.
2.		Additional amount		2.	$300
3.		Add lines 1 and 2		3.
4.		Minimum standard deduction		4.	$850
5.		Enter the larger of line 3 or line 4		5.
6.		Enter the amount shown below for your filing status. Single or Married filing separately—$5,350 Married filing jointly—$10,700 Head of household—$7,850		6.
7.	Standard deduction.
	a.	Enter the smaller of line 5 or line 6. If born after January 1, 1943, and not blind, stop here. This is your standard deduction. Otherwise, go on to line 7b.		7a.
	b.	If born before January 2, 1943, or blind, multiply $1,300 ($1,050 if married) by the number in the box above.		7b.
	c.	Add lines 7a and 7b. This is your standard deduction for 2007.		7c.
Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any amount received as a scholarship that you must include in your income.

*Use this worksheet ONLY if someone else can claim an exemption for you (or your spouse if married filing jointly).

For more information on this computation, see Revenue Ruling 93-75. This ruling is in Cumulative Bulletin 1993-2.

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Example.(p28)

Eileen Martin is single. She had an AGI of $1,166,800 and itemized her deductions on Schedule A (Form 1040) for 2009. She was not subject to alternative minimum tax and was not entitled to any credit against income tax. Her only allowable deduction was $40,000 of state income taxes. Her state general sales tax was $20,000. Eileen deducted only $30,000 of her state income taxes in 2009 because her otherwise allowable deductions of $40,000 were reduced by $10,000. In 2010, she received a $5,000 refund of her state income taxes for 2009.

The following shows how Eileen figured the $10,000 reduction and other amounts from the Itemized Deduction Worksheet in the 2009 Schedule A (Form 1040) instructions. These amounts are needed to figure the part of the $5,000 refund that Eileen must include in her income for 2010.

AGI for 2009		$1,166,800
State income taxes paid in 2009		$40,000
3% reduction (amount on 2009 Itemized Deduction Worksheet, line 8) [($1,166,800 − $166,800) × 3%]		$30,000
80% reduction (amount on 2009 Itemized Deduction Worksheet, line 4) ($40,000 × 80%)		$32,000
Lesser of 3% reduction or 80% reduction	$30,000
Reduction limit (1/3)		$10,000
2009 deduction (amount on 2009 Itemized Deduction Worksheet, line 12) ($40,000 − $10,000)		$30,000
Refund received in 2010 of 2009 state income tax		$ 5,000
Net amount of 2009 state income tax ($40,000 − $5,000)		$35,000

If Eileen had used the $35,000 net amount of state income tax to figure her itemized deductions for 2009, the deduction allowed would have been $25,667 which is her otherwise allowable deduction of $35,000 reduced by $9,333. This is her 80% reduction ($35,000 × 80% = $28,000) subject to the reduction limit ($28,000 × 1/3 = $9,333). By deducting $30,000 in 2009, she derived a tax benefit of $4,333 ($30,000 − $25,667). Therefore, only $4,333 of the $5,000 refund is included in her income for 2010.

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If you recover an item deducted in an earlier year in which you had unused tax credits, you must refigure the earlier year's tax to determine if you must include the recovery in your income. To do this, add the amount of the recovery to your earlier year's taxable income and refigure the tax and the credits on the recomputed amount. If the recomputed tax, after application of the credits, is more than the actual tax in the earlier year, include the recovery in your income up to the amount of the deduction that reduced the tax in the earlier year. For this purpose, any increase to a credit carried over to the current year that resulted from deducting the recovered amount in the earlier year is considered to have reduced your tax in the earlier year. If the recovery is for an itemized deduction claimed in a year in which the deductions were limited, see Itemized deductions limited, earlier.

If your tax, after application of the credits, does not change, you did not have a tax benefit from the deduction. Do not include the recovery in your income.

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Example.(p29)

In 2009, Jean Black filed as head of household and itemized her deductions on Schedule A (Form 1040). Her taxable income was $5,260 and her tax was $528. She claimed a child care credit of $1,200. The credit reduced her tax to zero and she had an unused tax credit of $672 ($1,200 − $528). In 2010, Jean recovered $1,000 of her itemized deductions. She reduces her 2009 itemized deductions by $1,000 and recomputes that year's tax on taxable income of $6,260. However, the child care credit exceeds the recomputed tax of $628. Jean's tax liability for 2009 is not changed by reducing her deductions by the recovery. She did not have a tax benefit from the recovered deduction and does not include any of the recovery in her income for 2010.

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

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Recovery

This section discusses recovery of deductions other than itemized deductions.

taxmap/pubs/p525-004.htm#en_us_publink1000229454

If you recover an amount that you deducted in an earlier year in figuring your adjusted gross income, you generally must include the full amount of the recovery in your income in the year received.

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

taxmap/pubs/p525-004.htm#en_us_publink1000229456

If your taxable income for the prior year was a negative amount, the recovery you must include in income is reduced by that amount. You have a negative taxable income for 2009 if your:

Form 1040, line 42 was more than line 41,
Form 1040NR, line 39 was more than line 38, or
Form 1040NR-EZ, line 13 was more than line 12.

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If your tax, after application of the credits, does not change, you did not have a tax benefit from the deduction. Do not include the recovery in your income.

taxmap/pubs/p525-004.htm#en_us_publink1000252461

taxmap/pubs/p525-004.htm#en_us_publink1000229458

Recovery

If you received a recovery in 2010 for an item for which you claimed a tax credit in an earlier year, you must increase your 2010 tax by the amount of the recovery, up to the amount by which the credit reduced your tax in the earlier year. You had a recovery if there was a downward price adjustment or similar adjustment on the item for which you claimed a credit.

This rule does not apply to the investment credit or the foreign tax credit. Recoveries of these credits are covered by other provisions of the law. See Publication 514, Foreign Tax Credit for Individuals, or Form 4255, Recapture of Investment Credit, for details.

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Survivor Benefits

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

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

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Salary or wages received after the death of the employee are usually ordinary income to you.

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

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

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Unemployment Compensation

The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.

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You must include in income all unemployment compensation you receive. You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you. Generally, you enter unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.

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Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. It includes the following benefits.

Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund.
State unemployment insurance benefits.
Railroad unemployment compensation benefits.
Disability payments from a government program paid as a substitute for unemployment compensation. (Amounts received as workers' compensation for injuries or illness are not unemployment compensation. See Workers' Compensation under Sickness and Injury Benefits, earlier.)
Trade readjustment allowances under the Trade Act of 1974.
Unemployment assistance under the Disaster Relief and Emergency Assistance Act of 1974.

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If you contribute to a governmental unemployment compensation program and your contributions are not deductible, amounts you receive under the program are not included as unemployment compensation until you recover your contributions. If you deducted all of your contributions to the program, the entire amount you receive under the program is included in your income.

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If you repaid in 2010 unemployment compensation you received in 2010, subtract the amount you repaid from the total amount you received and enter the difference on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. On the dotted line next to your entry, enter "Repaid" and the amount you repaid. If you repaid unemployment compensation in 2010 that you included in your income in an earlier year, you can deduct the amount repaid on Schedule A (Form 1040), line 23, if you itemize deductions. If the amount is more than $3,000, see Repayments, later.

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You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 10% of your payment.

If you do not choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. For more information, see Publication 505, Tax Withholding and Estimated Tax.

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

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You may have to repay some of your supplemental unemployment benefits to qualify for trade readjustment allowances under the Trade Act of 1974. If you repay supplemental unemployment benefits in the same year you receive them, reduce the total benefits by the amount you repay. If you repay the benefits in a later year, you must include the full amount of the benefits in your income for the year you received them.

Deduct the repayment in the later year as an adjustment to gross income on Form 1040. (You cannot use Form 1040A or Form 1040EZ.) Include the repayment on Form 1040, line 36, and enter "Sub-Pay TRA" and the amount on the dotted line next to line 36. If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year instead of deducting the amount repaid. For information on this, see Repayments, later.

taxmap/pubs/p525-004.htm#en_us_publink1000229473

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

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

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Payments you receive from your employer during periods of unemployment, under a union agreement that guarantees you full pay during the year, are taxable as wages. Include them on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.

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Payments similar to a state's unemployment compensation may be made by the state to its employees who are not covered by the state's unemployment compensation law. Although the payments are fully taxable, do not report them as unemployment compensation. Report these payments on Form 1040, line 21.

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Welfare and Other Public Assistance Benefits

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

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

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

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

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

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You can exclude from income any amount you receive that is a qualified disaster relief payment. A qualified disaster relief payment is an amount paid to you:

To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster;
To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or replacement of its contents to the extent it is due to a qualified disaster;
By a person engaged in the furnishing or sale of transportation as a common carrier because of the death or personal physical injuries incurred as a result of a qualified disaster; or
By a federal, state, or local government, or agency or instrumentality in connection with a qualified disaster in order to promote the general welfare.

You can exclude this amount only to the extent any expense it pays for is not paid for by insurance or otherwise. The exclusion does not apply if you were a participant or conspirator in a terrorist action or his or her representative.

A qualified disaster is:

A disaster which results from a terrorist or military action;
A federally declared disaster; or
A disaster which results from an accident involving a common carrier, or from any other event, which is determined to be catastrophic by the Secretary of the Treasury or his or her delegate.

For amounts paid under item (4), a disaster is qualified if it is determined by an applicable federal, state, or local authority to warrant assistance from the federal, state, or local government, agency, or instrumentality.

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You also can exclude from income any amount you receive that is a qualified disaster mitigation payment. Like qualified disaster relief payments, qualified disaster mitigation payments are also most commonly paid to you in the period immediately following damage to property as a result of a natural disaster. However, disaster mitigation payments are grants you use to mitigate (reduce the severity of) potential damage from future natural disasters. They are paid to you through state and local governments based on the provisions of the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act.

You cannot increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation payments.

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

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Payments made under section 235 of the National Housing Act for mortgage assistance are not included in the homeowner's income. Interest paid for the homeowner under the mortgage assistance program cannot be deducted.

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Replacement housing payments made under the Uniform Relocation Assistance and Real Property Acquisition Policies Act for Federal and Federally Assisted Programs are not includible in gross income, but are includible in the basis of the newly acquired property.

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

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Nonreimbursable grants under title IV of the Indian Financing Act of 1974 to Indians to expand profit-making Indian-owned economic enterprises on or near reservations are not includible in gross income.

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Medicare benefits received under title XVIII of the Social Security Act are not includible in the gross income of the individuals for whom they are paid. This includes basic (part A (Hospital Insurance Benefits for the Aged)) and supplementary (part B (Supplementary Medical Insurance Benefits for the Aged)).

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

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Food benefits you receive under the Nutrition Program for the Elderly are not taxable. If you prepare and serve free meals for the program, include in your income as wages the cash pay you receive, even if you are also eligible for food benefits.

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Payments made by a state to qualified people to reduce their cost of winter energy use are not taxable.

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Income

The following brief discussions are arranged in alphabetical order. Income items that are discussed in greater detail in another publication include a reference to that publication.

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

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

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Include in your income on Form 1040, line 11, any alimony payments you receive. Amounts you receive for child support are not income to you. For complete information, see Publication 504, Divorced or Separated Individuals.

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A below-market loan is a loan on which no interest is charged or on which the interest is charged at a rate below the applicable federal rate. If you make a below-market gift or demand loan, you must include the forgone interest (at the federal rate) as interest income on your return. These loans are considered a transaction in which you, the lender, are treated as having made:

A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and
An additional payment to the borrower, which the borrower transfers back to you as interest.

Depending on the transaction, the additional payment to the borrower is treated as a:

Gift,
Dividend,
Contribution to capital,
Payment of compensation, or
Another type of payment.

The borrower may have to report this payment as income, depending on its classification.

For more information on below-market loans, see chapter 1 of Publication 550.

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If you receive a bribe, include it in your income.

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

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If you sell property (such as land or a residence) under a contract, but the contract is canceled and you return the buyer's money in the same tax year as the original sale, you have no income from the sale. If the contract is canceled and you return the buyer's money in a later tax year, you must include your gain in your income for the year of the sale. When you return the money and take back the property in the later year, you treat the transaction as a purchase that gives you a new basis in the property equal to the funds you return to the buyer.

Special rules apply to the reacquisition of real property where a secured indebtedness (mortgage) to the original seller is involved. For further information, see Repossession in Publication 537, Installment Sales.

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

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A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate.

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Example.(p31)

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

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You generally should not report these reimbursements on your return unless you are figuring gain or loss from the casualty or theft. See Publication 547.

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If you are the beneficiary of a charitable gift annuity, you must include the yearly annuity or fixed percentage payment in your income.

The payer will report the types of income you received on Form 1099-R. Report the gross distribution from box 1 on Form 1040, line 16a, or on Form 1040A, line 12a, and the part taxed as ordinary income (box 2a minus box 3) on Form 1040, line 16b, or on Form 1040A, line 12b. Report the portion taxed as capital gain (box 3) on Schedule D, line 8.

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You should not report these payments on your return. See Publication 504 for more information.

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To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must consider the item that the settlement replaces. The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. Include the following as ordinary income.

Interest on any award.
Compensation for lost wages or lost profits in most cases.
Punitive damages, in most cases. It does not matter if they relate to a physical injury or physical sickness.
Amounts received in settlement of pension rights (if you did not contribute to the plan).
Damages for:
1. Patent or copyright infringement,
2. Breach of contract, or
3. Interference with business operations.
Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.
Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.

Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments).

taxmap/pubs/p525-004.htm#en_us_publink1000229508

Emotional distress itself is not a physical injury or physical sickness, but damages you receive for emotional distress due to a physical injury or sickness are treated as received for the physical injury or sickness. Do not include them in your income.

If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, unlawful discrimination or injury to reputation), you must include the damages in your income, except for any damages you receive for medical care due to that emotional distress. Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders.

taxmap/pubs/p525-004.htm#en_us_publink1000229509

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

The attorney fees and court costs may be paid by you or on your behalf in connection with the claim for unlawful discrimination, the claim against the United States government, or the claim under section 1862(b)(3)(A) of the Social Security Act.
The deduction you are claiming cannot be more than the amount of the judgment or settlement you are including in income for the tax year.
The judgment or settlement to which your attorney fees and court costs apply must occur after October 22, 2004.

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

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

taxmap/pubs/p525-004.htm#en_us_publink1000229512

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

taxmap/pubs/p525-004.htm#en_us_publink1000229513

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

taxmap/pubs/p525-004.htm#en_us_publink1000229514

If you get a job through an employment agency, and the fee is paid by your employer, the fee is not includible in your income if you are not liable for it. However, if you pay it and your employer reimburses you for it, it is includible in your income.

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You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit.

taxmap/pubs/p525-004.htm#en_us_publink1000229516

This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand.

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This includes a house, apartment, condominium, mobile home, boat, or similar property. If a building or structure contains both dwelling and other units, any subsidy must be properly allocated.

taxmap/pubs/p525-004.htm#en_us_publink1000229518

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

taxmap/pubs/p525-004.htm#en_us_publink1000229519

If you are the beneficiary of an estate or trust that must distribute all of its current income, you must report your share of the distributable net income, whether or not you actually received it.

taxmap/pubs/p525-004.htm#en_us_publink1000229520

If you are the beneficiary of an estate or trust and the fiduciary has the choice of whether to distribute all or part of the current income, you must report:

All income that is required to be distributed to you, whether or not it is actually distributed, plus
All other amounts actually paid or credited to you,

up to the amount of your share of distributable net income.

taxmap/pubs/p525-004.htm#en_us_publink1000229521

Treat each item of income the same way that the estate or trust would treat it. For example, if a trust's dividend income is distributed to you, you report the distribution as dividend income on your return. The same rule applies to distributions of tax-exempt interest and capital gains.

The fiduciary of the estate or trust must tell you the type of items making up your share of the estate or trust income and any credits you are allowed on your individual income tax return.

taxmap/pubs/p525-004.htm#en_us_publink1000229522

Losses of estates and trusts generally are not deductible by the beneficiaries.

taxmap/pubs/p525-004.htm#en_us_publink1000229523

Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. (The grantor is the one who transferred property to the trust.) This rule applies if the property (or income from the property) put into the trust will or may revert (be returned) to the grantor or the grantor's spouse.

Generally, a trust is a grantor trust if the grantor has a reversionary interest valued (at the date of transfer) at more than 5% of the value of the transferred property.

taxmap/pubs/p525-004.htm#en_us_publink1000229524

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

taxmap/pubs/p525-004.htm#en_us_publink1000229525

Include in your income on Form 1040, line 21, or Form 1040NR, line 21, any qualified settlement income you receive as a qualified taxpayer. See Statement, later. Qualified settlement income is any interest and punitive damage awards that are:

Otherwise includible in taxable income, and
Received in connection with the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D. Alaska).

You are a qualified taxpayer if you were a plaintiff in the civil action mentioned earlier or you were a beneficiary of the estate of your spouse or a close relative who was such a plaintiff and from whom you acquired the right to receive qualified settlement income.

The income can be received as a lump sum or as periodic payments. You will receive a Form 1099-MISC showing the gross amount of the settlement income paid to you in the tax year.

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If you are a qualified taxpayer, you can contribute all or part of your qualified settlement income, up to $100,000, to an eligible retirement plan, including an IRA. Contributions to eligible retirement plans, other than a Roth IRA or a designated Roth contribution, reduce the qualified settlement income that you must include in income. See Statement, later. For more information on these contributions, see Publications 560, 575, and 590.

taxmap/pubs/p525-004.htm#en_us_publink1000229527

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

taxmap/pubs/p525-004.htm#en_us_publink1000229528

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

taxmap/pubs/p525-004.htm#en_us_publink1000229529

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

taxmap/pubs/p525-004.htm#en_us_publink1000229530

Include all fees for your services in your income. Examples of these fees are amounts you receive for services you perform as:

A corporate director,
An executor, administrator, or personal representative of an estate,
A manager of a trade or business you operated before declaring Chapter 11 bankruptcy,
A notary public, or
An election precinct official.

If you are not an employee and the fees for your services from the same payor total $600 or more for the year, you may receive a Form 1099-MISC.

taxmap/pubs/p525-004.htm#en_us_publink1000229532

Corporate director fees are self-employment income. Report these payments on Schedule C or Schedule C-EZ (Form 1040).

taxmap/pubs/p525-004.htm#en_us_publink1000229533

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

taxmap/pubs/p525-004.htm#en_us_publink1000229534

Include in your income all payments received from your bankruptcy estate for managing or operating a trade or business that you operated before you filed for bankruptcy. Report this income on Form 1040, line 21.

taxmap/pubs/p525-004.htm#en_us_publink1000229535

Report payments for these services on Schedule C or Schedule C-EZ (Form 1040). These payments are not subject to self-employment tax. (See the separate instructions for Schedule SE (Form 1040) for details.)

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You should receive a Form W-2 showing payments for services performed as an election official or election worker. Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.

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

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

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Payments you receive from a state, political subdivision, or a qualified foster care placement agency for providing care to qualified foster individuals in your home generally are not included in your income. However, you must include in your income payments received for the care of more than 5 individuals age 19 or older and certain difficulty-of-care payments.

A qualified foster individual is a person who:

Is living in a foster family home, and
Was placed there by:
1. An agency of a state or one of its political subdivisions, or
2. A qualified foster care placement agency.

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These are additional payments that are designated by the payer as compensation for providing the additional care that is required for physically, mentally, or emotionally handicapped qualified foster individuals. A state must determine that the additional compensation is needed, and the care for which the payments are made must be provided in your home.

You must include in your income difficulty-of-care payments received for more than:

10 qualified foster individuals under age 19, or
5 qualified foster individuals age 19 or older.

taxmap/pubs/p525-004.htm#en_us_publink1000229541

If you are paid to maintain space in your home for emergency foster care, you must include the payment in your income.

taxmap/pubs/p525-004.htm#en_us_publink1000229542

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

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

taxmap/pubs/p525-004.htm#en_us_publink1000229544

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

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You must include your gambling winnings in your income on Form 1040, line 21. If you itemize your deductions on Schedule A (Form 1040), you can deduct gambling losses you had during the year, but only up to the amount of your winnings.

taxmap/pubs/p525-004.htm#en_us_publink1000229546

Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses, and other noncash prizes. However, the difference between the fair market value and the cost of an oil and gas lease obtained from the government through a lottery is not includible in income.

taxmap/pubs/p525-004.htm#en_us_publink1000229547

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

taxmap/pubs/p525-004.htm#en_us_publink1000229548

You may have received a Form W-2G, Certain Gambling Winnings, showing the amount of your gambling winnings and any tax taken out of them. Include the amount from box 1 on Form 1040, line 21. Include the amount shown in box 2 on Form 1040, line 61, as federal income tax withheld.

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

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

taxmap/pubs/p525-004.htm#en_us_publink1000229551

If you sell an interest in an expected inheritance from a living person, include the entire amount you receive in gross income on Form 1040, line 21.

taxmap/pubs/p525-004.htm#en_us_publink1000229552

If you receive cash or other property as a bequest for services you performed while the decedent was alive, the value is taxable compensation.

taxmap/pubs/p525-004.htm#en_us_publink1000252463

If you received payments for lost wages or income, property damage, or physical injury due to the gulf oil spill, the payment may be taxable.

taxmap/pubs/p525-004.htm#en_us_publink1000252468

Payments you received for lost wages, lost business income, or lost profits are taxable.

taxmap/pubs/p525-004.htm#en_us_publink1000252469

Payments you received for property damage are not taxable if the payments are not more than your adjusted basis in the property. If the payments are more than your adjusted basis, you will realize a gain. If the damage was due to an involuntary conversion, you may defer the tax on the gain if you purchase qualified replacement property. See Publication 544.

If the payments (including insurance proceeds) you received, or expect to receive, are less than your adjusted basis, you may be able to claim a casualty deduction. See Publication 547.

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Payments you received for personal physical injuries or physical sickness are not taxable. This includes payments for emotional distress that is attributable to personal physical injuries or physical sickness. Payments for emotional distress that is not attributable to personal physical injuries or physical sickness are taxable.

taxmap/pubs/p525-004.htm#en_us_publink1000252471

For the most recent guidance, go to IRS.gov and enter Gulf Oil Spill in the search box.

taxmap/pubs/p525-004.htm#en_us_publink1000229553

Do not include in your income any payment you receive under the National Historic Preservation Act to preserve a historically significant property.

taxmap/pubs/p525-004.htm#en_us_publink1000229554

Losses from a hobby are not deductible from other income. A hobby is an activity from which you do not expect to make a profit. See Activity not for profit, earlier, under Other Income.

If you collect stamps, coins, or other items as a hobby for recreation and pleasure, and you sell any of the items, your gain is taxable as a capital gain. However, if you sell items from your collection at a loss, you cannot deduct the loss.

taxmap/pubs/p525-004.htm#en_us_publink1000229556

Restitution payments you receive as a Holocaust victim (or the heir of a Holocaust victim) and interest earned on the payments are not taxable. Excludable interest is earned by escrow accounts or settlement funds established for holding funds prior to the settlement. You also do not include the restitution payments and interest the funds earned prior to disbursement in any computations in which you ordinarily would add excludable income to your adjusted gross income, such as the computation to determine the taxable part of social security benefits. If the payments are made in property, your basis in the property is its fair market value when you receive it.

Excludable restitution payments are payments or distributions made by any country or any other entity because of persecution of an individual on the basis of race, religion, physical or mental disability, or sexual orientation by Nazi Germany, any other Axis regime, or any other Nazi-controlled or Nazi-allied country, whether the payments are made under a law or as a result of a legal action. They include compensation or reparation for property losses resulting from Nazi persecution, including proceeds under insurance policies issued before and during World War II by European insurance companies.

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Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.

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

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Amounts received by an individual Indian as a lump sum or periodic payment pursuant to the Class Action Settlement Agreement dated December 7, 2009, are not included in gross income. This amount will not be used to figure adjusted gross income (AGI) or modified AGI in applying any Internal Revenue Code provision that takes into account excludable income.

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In general, you exclude from your income the amount of interest earned on a frozen deposit. A deposit is frozen if, at the end of the calendar year, you cannot withdraw any part of the deposit because:

The financial institution is bankrupt or insolvent, or
The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent.

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The amount of interest you exclude from income for the year is the interest that was credited on the frozen deposit for that tax year minus the sum of:

The net amount withdrawn from the deposit during that year, and
The amount that could have been withdrawn at the end of that tax year (not reduced by any penalty for premature withdrawals of a time deposit).

The excluded part of the interest is included in your income in the tax year it becomes withdrawable.

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

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

taxmap/pubs/p525-004.htm#en_us_publink1000229563

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

taxmap/pubs/p525-004.htm#en_us_publink1000229564

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

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

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Example.(p35)

You sell cars and help arrange car insurance for buyers. Insurance brokers pay back part of their commissions to you for referring customers to them. You must include the kickbacks in your income.

taxmap/pubs/p525-004.htm#en_us_publink1000229567

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

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Example.(p35)

You sell cars for an automobile dealership and receive incentive payments from the automobile manufacturer every time you sell a particular model of car. You report the incentive payments on Form 1040, line 21.

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

taxmap/pubs/p525-004.htm#en_us_publink1000229570

You generally should not report these benefits on your return. See Publication 521 for more information.

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If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income. For example, if you win a $50 prize in a photography contest, you must report this income on Form 1040, line 21. If you refuse to accept a prize, do not include its value in your income.

Prizes and awards in goods or services must be included in your income at their fair market value.

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Cash awards or bonuses given to you by your employer for good work or suggestions generally must be included in your income as wages. However, certain noncash employee achievement awards can be excluded from income. See Bonuses and awards under Miscellaneous Compensation, earlier.

taxmap/pubs/p525-004.htm#en_us_publink1000229574

If you are a salesperson and receive prize points redeemable for merchandise, that are awarded by a distributor or manufacturer to employees of dealers, you must include their fair market value in your income. The prize points are taxable in the year they are paid or made available to you, rather than in the year you redeem them for merchandise.

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If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic fields, you generally must include the value of the prize in your income. However, you do not include this prize in your income if you meet all of the following requirements.

You were selected without any action on your part to enter the contest or proceeding.
You are not required to perform substantial future services as a condition for receiving the prize or award.
The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated by you. The following conditions apply to the transfer.
1. You cannot use the prize or award before it is transferred.
2. You should provide the designation before the prize or award is presented to prevent a disqualifying use. The designation should contain:
  1. The purpose of the designation by making a reference to section 74(b)(3) of the Internal Revenue Code,
  2. A description of the prize or award,
  3. The name and address of the organization to receive the prize or award,
  4. Your name, address, and taxpayer identification number, and
  5. Your signature and the date signed.
3. In the case of an unexpected presentation, you must return the prize or award before using it (or spending, depositing, investing it, etc., in the case of money) and then prepare the statement as described in (b).
4. After the transfer, you should receive from the payer a written response stating when and to whom the designated amounts were transferred.

These rules do not apply to scholarship or fellowship awards. See Scholarships and fellowships, later.

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A qualified tuition program (also known as a 529 program) is a program set up to allow you to either prepay or contribute to an account established for paying a student's qualified higher education expenses at an eligible educational institution. A program can be established and maintained by a state, an agency or instrumentality of a state, or an eligible educational institution.

The part of a distribution representing the amount paid or contributed to a QTP is not included in income. This is a return of the investment in the program.

The beneficiary generally does not include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified higher education expenses. See Publication 970 for more information.

taxmap/pubs/p525-004.htm#en_us_publink1000229577

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

Tier 1 railroad retirement benefits that are more than the social security equivalent benefit.
Tier 2 benefits.
Vested dual benefits.

taxmap/pubs/p525-004.htm#en_us_publink1000229578

If you receive a reward for providing information, include it in your income.

taxmap/pubs/p525-004.htm#en_us_publink1000229579

You may be able to exclude from income all or part of any gain from the sale or exchange of your main home. See Publication 523.

taxmap/pubs/p525-004.htm#en_us_publink1000229580

If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain. Report it on Schedule D (Form 1040). You cannot deduct a loss.

However, if you sold an item you held for investment, such as gold or silver bullion, coins, or gems, any gain is taxable as a capital gain and any loss is deductible as a capital loss.

taxmap/pubs/p525-004.htm#en_us_publink1000229581

You sold a painting on an online auction website for $100. You bought the painting for $20 at a garage sale years ago. Report your $80 gain as a capital gain on Schedule D (Form 1040).

taxmap/pubs/p525-004.htm#en_us_publink1000229582

A candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship or fellowship is any amount you receive that is for:

Tuition and fees to enroll at or attend an educational institution, or
Fees, books, supplies, and equipment required for courses at the educational institution.

Amounts used for room and board do not qualify for the exclusion. See Publication 970 for more information on qualified scholarships and fellowship grants.

taxmap/pubs/p525-004.htm#en_us_publink1000229583

Generally, you must include in income the part of any scholarship or fellowship that represents payment for past, present, or future teaching, research, or other services. This applies even if all candidates for a degree must perform the services to receive the degree.

Do not include in income the part of any scholarship or fellowship representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program.

For information about the rules that apply to a tax-free qualified tuition reduction provided to employees and their families by an educational institution, see Publication 970.

taxmap/pubs/p525-004.htm#en_us_publink1000229584

Allowances paid by the Department of Veterans Affairs are not included in your income. These allowances are not considered scholarship or fellowship grants.

taxmap/pubs/p525-004.htm#en_us_publink1000229585

Scholarship prizes won in a contest are not scholarships or fellowships if you do not have to use the prizes for educational purposes. You must include these amounts in your income on Form 1040, line 21, whether or not you use the amounts for educational purposes.

taxmap/pubs/p525-004.htm#en_us_publink1000229586

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

taxmap/pubs/p525-004.htm#en_us_publink1000229587

Social security or equivalent railroad retirement benefits, if taxable, must be included in the income of the person who has the legal right to receive the benefits. Whether any of your benefits are taxable, and the amount that is taxable, depends on the amount of the benefits and your other income.

Social security benefits include any monthly benefit under Title II of the Social Security Act and any part of a tier I railroad retirement benefit treated as a social security benefit. Social security benefits do not include any supplemental security income (SSI) payments.

taxmap/pubs/p525-004.htm#en_us_publink1000229588

If you received social security benefits during the year, you will receive Form SSA-1099, Social Security Benefit Statement. An IRS Notice 703 will be enclosed with your Form SSA-1099. This notice includes a worksheet you can use to figure whether any of your benefits are taxable.

For an explanation of the information found on your Form SSA-1099, see Publication 915.

taxmap/pubs/p525-004.htm#en_us_publink1000229589

If you received equivalent railroad retirement or special guaranty benefits during the year, you will receive Form RRB-1099, Payments by the Railroad Retirement Board.

For an explanation of the information found on your Form RRB-1099, see Publication 915.

If you received other railroad retirement benefits, see Railroad retirement annuities, earlier.

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If you are married and file a joint return, you and your spouse must combine your incomes and your social security and equivalent railroad retirement benefits when figuring whether any of your combined benefits are taxable. Even if your spouse did not receive any benefits, you must add your spouse's income to yours when figuring if any of your benefits are taxable.

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Use the worksheet in the Form 1040 or Form 1040A instruction package to determine the amount of your benefits to include in your income. Publication 915 also has worksheets you can use. However, you must use the worksheets in Publication 915 if any of the following situations apply.

You received a lump-sum benefit payment during the year that is for one or more earlier years.
You exclude employer-provided adoption benefits or interest from qualified U.S. savings bonds.
You take the foreign earned income exclusion, the foreign housing exclusion or deduction, the exclusion of income from American Samoa, or the exclusion of income from Puerto Rico by bona fide residents of Puerto Rico.

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You must use the special worksheets in appendix B of Publication 590 to figure your taxable benefits and your IRA deduction if all of the following conditions apply.

You receive social security or equivalent railroad retirement benefits.
You have taxable compensation.
You contribute to your IRA.
You or your spouse is covered by a retirement plan at work.

taxmap/pubs/p525-004.htm#en_us_publink1000229593

If any of your benefits are taxable, you must use either Form 1040 or Form 1040A to report the taxable part. You cannot use Form 1040EZ. Report your net benefits (the amount in box 5 of your Forms SSA-1099 and RRB-1099) on line 20a of Form 1040 or line 14a of Form 1040A. Report the taxable part (from the last line of the worksheet) on line 20b of Form 1040 or on line 14b of Form 1040A.

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

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

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Amounts deducted from your pay for union dues, assessments, contributions, or other payments to a union cannot be excluded from your income.

You may be able to deduct some of these payments as a miscellaneous deduction subject to the 2%-of-AGI limit if they are related to your job and if you itemize deductions on Schedule A (Form 1040). For more information, get Publication 529, Miscellaneous Deductions.

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Benefits paid to you by a union as strike or lockout benefits, including both cash and the fair market value of other property, usually are included in your income as compensation. You can exclude these benefits from your income only when the facts clearly show that the union intended them as gifts to you.

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If you are a delegate of your local union chapter and you attend the annual convention of the international union, do not include in your income amounts you receive from the international union to reimburse you for expenses of traveling away from home to attend the convention. You cannot deduct the reimbursed expenses, even if you are reimbursed in a later year. If you are reimbursed for lost salary, you must include that reimbursement in your income.

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If you are a customer of an electric utility company and you participate in the utility's energy conservation program, you may receive on your monthly electric bill either:

A reduction in the purchase price of electricity furnished to you (rate reduction), or
A nonrefundable credit against the purchase price of the electricity.

The amount of the rate reduction or nonrefundable credit is not included in your income.

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

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Miscellaneous Income(p19)

Bartering(p19)

Example 1.(p19)

Example 2.(p19)

Example 3.(p19)

Example 4.(p19)

Form 1099-B from barter exchange.(p19)

Backup withholding.(p19)

Canceled Debts(p19)

Form 1099-C.(p19)

Discounted mortgage loan.(p20)

Mortgage relief upon sale or other disposition.(p20)

Stockholder debt.(p20)

Repayment of canceled debt.(p20)

Exceptions(p20)

Student loans.(p20)

Deductible debt.(p20)

Price reduced after purchase.(p20)

Excluded debt.(p20)

Example.(p21)

Host or Hostess(p21)

Life Insurance Proceeds(p21)

Proceeds not received in installments.(p21)

Proceeds received in installments.(p21)

Example.(p21)

Employer-owned life insurance contract.(p21)

Interest option on insurance.(p21)

Surrender of policy for cash.(p21)

Split-dollar life insurance.(p21)

Endowment Contract Proceeds(p21)

Accelerated Death Benefits(p21)

Viatical settlement.(p21)

Exclusion for terminal illness.(p22)

Exclusion for chronic illness.(p22)

Exception.(p22)

Form 8853.(p22)

Recoveries(p22)

Tax benefit rule.(p22)

Federal income tax refund.(p22)

State tax refund.(p22)

Real property tax.(p22)

Net disaster loss.(p22)

Motor vehicle tax.(p22)

Mortgage interest refund.(p22)

Interest on recovery.(p22)

Recovery and expense in same year.(p22)

Recovery for 2 or more years.(p22)

Example.(p22)

Joint state or local income tax return.(p23)

Deductions not itemized.(p23)

Example.(p23)

Itemized Deduction Recoveries(p23)

Nonresident aliens.(p23)

Capital gains.(p23)

Total recovery included in income.(p23)

Example.(p23)

Total recovery not included in income.(p24)

Example.(p24)

Standard deduction limit.(p24)

Example.(p24)

Negative taxable income.(p24)

Example.(p24)

Recovery limited to deduction.(p24)

Example.(p24)

Itemized deductions limited.(p24)

Worksheet 2. Recoveries of Itemized Deductions

Table 2. 2009 Standard Deduction Tables

Table I. Standard Deduction Chart for Most People*

Table II. Standard Deduction Chart for People Who Were Born Before January 2, 1945, or Were Blind*

Table III. Standard Deduction Worksheet for Dependents*

Table 3. 2008 Standard Deduction Tables

Table I. Standard Deduction Chart for Most People*

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

Table III. Standard Deduction Worksheet for Dependents*

Table 4. 2007 Standard Deduction Tables

Table I. Standard Deduction Chart for Most People*

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

Table III. Standard Deduction Worksheet for Dependents*

Example.(p28)

Unused tax credits.(p28)

Welfare and Other
Public Assistance Benefits(p30)