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1040ez. 1040ez.com com 3. 1040ez.com   Section 501(c)(3) Organizations Table of Contents IntroductionChild care organizations. 1040ez.com Topics - This chapter discusses: Useful Items - You may want to see: Contributions to 501(c)(3) OrganizationsCertain annuity contracts. 1040ez.com Certain contracts held by a charitable remainder trust. 1040ez.com Excise Taxes. 1040ez.com Indoor tanning services. 1040ez.com Application for Recognition of ExemptionPolitical activity. 1040ez.com Private delivery service. 1040ez.com Amendments to organizing documents required. 1040ez.com How to show reasonable action and good faith. 1040ez.com Not acting reasonably and in good faith. 1040ez.com Prejudicing the interest of the Government. 1040ez.com Procedure for requesting extension. 1040ez.com More information. 1040ez.com Organizations Not Required To File Form 1023 Articles of OrganizationOrganizational Test Dedication and Distribution of Assets Educational Organizations and Private SchoolsEducational Organizations Private Schools Organizations Providing InsuranceCharitable Risk Pools Other Section 501(c)(3) OrganizationsCharitable Organizations Religious Organizations Scientific Organizations Literary Organizations Amateur Athletic Organizations Prevention of Cruelty to Children or Animals Private Foundations and Public CharitiesPrivate Foundations Public Charities Private Operating Foundations Lobbying ExpendituresLobbying expenditures. 1040ez.com Grass roots expenditures. 1040ez.com Lobbying nontaxable amount. 1040ez.com Grass roots nontaxable amount. 1040ez.com Organization that no longer qualifies. 1040ez.com Tax on organization. 1040ez.com Tax on managers. 1040ez.com Taxes on organizations. 1040ez.com Taxes on managers. 1040ez.com Political expenditures. 1040ez.com Correction of expenditure. 1040ez.com Introduction An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes. 1040ez.com Religious. 1040ez.com Charitable. 1040ez.com Scientific. 1040ez.com Testing for public safety. 1040ez.com Literary. 1040ez.com Educational. 1040ez.com Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment; however, see Amateur Athletic Organizations , later in this chapter). 1040ez.com The prevention of cruelty to children or animals. 1040ez.com To qualify, the organization must be a corporation, community chest, fund, articles of association, or foundation. 1040ez.com A trust is a fund or foundation and will qualify. 1040ez.com However, an individual or a partnership will not qualify. 1040ez.com Examples. 1040ez.com   Qualifying organizations include: Nonprofit old-age homes, Parent-teacher associations, Charitable hospitals or other charitable organizations, Alumni associations, Schools, Chapters of the Red Cross, Boys' or Girls' Clubs, and Churches. 1040ez.com Child care organizations. 1040ez.com   The term educational purposes includes providing for care of children away from their homes if substantially all the care provided is to enable individuals (the parents) to be gainfully employed and the services are available to the general public. 1040ez.com Instrumentalities. 1040ez.com   A state or municipal instrumentality may qualify under section 501(c)(3) if it is organized as a separate entity from the governmental unit that created it and if it otherwise meets the organizational and operational tests of section 501(c)(3). 1040ez.com Examples of a qualifying instrumentality might include state schools, universities, or hospitals. 1040ez.com However, if an organization is an integral part of the local government or possesses governmental powers, it does not qualify for exemption. 1040ez.com A state or municipality itself does not qualify for exemption. 1040ez.com Topics - This chapter discusses: Contributions to 501(c)(3) organizations, Applications for recognition of exemption, Articles of Organization, Educational organizations and private schools, Organizations providing insurance, Other section 501(c)(3) organizations, Private foundations and public charities, and Lobbying expenditures. 1040ez.com Useful Items - You may want to see: Forms (and Instructions) 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code See chapter 6 for information about getting publications and forms. 1040ez.com Contributions to 501(c)(3) Organizations Contributions to domestic organizations described in this chapter, except organizations testing for public safety, are deductible as charitable contributions on the donor's federal income tax return. 1040ez.com Fundraising events. 1040ez.com   If the donor receives something of value in return for the contribution, a common occurrence with fundraising efforts, part or all of the contribution may not be deductible. 1040ez.com This may apply to fundraising activities such as charity balls, bazaars, banquets, auctions, concerts, athletic events, and solicitations for membership or contributions when merchandise or benefits are given in return for payment of a specified minimum contribution. 1040ez.com   If the donor receives or expects to receive goods or services in return for a contribution to your organization, the donor cannot deduct any part of the contribution unless the donor intends to, and does, make a payment greater than the fair market value of the goods or services. 1040ez.com If a deduction is allowed, the donor can deduct only the part of the contribution, if any, that is more than the fair market value of the goods or services received. 1040ez.com You should determine in advance the fair market value of any goods or services to be given to contributors and tell them, when you publicize the fundraising event or solicit their contributions, how much is deductible and how much is for the goods or services. 1040ez.com See Disclosure of Quid Pro Quo Contributions in chapter 2. 1040ez.com Exemption application not filed. 1040ez.com   Donors cannot deduct any charitable contribution to an organization that is required to apply for recognition of exemption but has not done so. 1040ez.com Separate fund—contributions that are deductible. 1040ez.com   An organization that is exempt from federal income tax other than as an organization described in section 501(c)(3) can, if it desires, establish a fund, separate and apart from its other funds, exclusively for religious, charitable, scientific, literary, or educational purposes, fostering national or international amateur sports competition, or for the prevention of cruelty to children or animals. 1040ez.com   If the fund is organized and operated exclusively for these purposes, it may qualify for exemption as an organization described in section 501(c)(3), and contributions made to it will be deductible as provided by section 170. 1040ez.com A fund with these characteristics must be organized in such a manner as to prohibit the use of its funds upon dissolution, or otherwise, for the general purposes of the organization creating it. 1040ez.com Personal benefit contracts. 1040ez.com   Generally, charitable deductions will not be allowed for a transfer to, or for the use of, a section 501(c)(3) or (c)(4) organization if in connection with the transfer: The organization directly or indirectly pays, or previously paid, a premium on a personal benefit contract for the transferor, or There is an understanding or expectation that anyone will directly or indirectly pay a premium on a personal benefit contract for the transferor. 1040ez.com   A personal benefit contract with respect to the transferor is any life insurance, annuity, or endowment contract, if any direct or indirect beneficiary under the contract is the transferor, any member of the transferor's family, or any other person designated by the transferor. 1040ez.com Certain annuity contracts. 1040ez.com   If an organization incurs an obligation to pay a charitable gift annuity, and the organization purchases an annuity contract to fund the obligation, individuals receiving payments under the charitable gift annuity will not be treated as indirect beneficiaries if the organization owns all of the incidents of ownership under the contract, is entitled to all payments under the contract, and the timing and amount of the payments are substantially the same as the timing and amount of payments to each person under the obligation (as such obligation is in effect at the time of the transfer). 1040ez.com Certain contracts held by a charitable remainder trust. 1040ez.com   An individual will not be considered an indirect beneficiary under a life insurance, annuity, or endowment contract held by a charitable remainder annuity trust or a charitable remainder unitrust solely by reason of being entitled to the payment if the trust owns all of the incidents of ownership under the contract, and the trust is entitled to all payments under the contract. 1040ez.com Excise tax. 1040ez.com   If the premiums are paid in connection with a transfer for which a deduction is not allowable under the deduction denial rule, without regard to when the transfer to the charitable organization was made, an excise tax will be applied that is equal to the amount of the premiums paid by the organization on any life insurance, annuity, or endowment contract. 1040ez.com The excise tax does not apply if all of the direct and indirect beneficiaries under the contract are organizations. 1040ez.com Excise Taxes. 1040ez.com   A charitable organization liable for excise taxes must file Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. 1040ez.com Generally, the due date for filing Form 4720 occurs on the fifteenth day of the fifth month following the close of the organization's tax year. 1040ez.com Indoor tanning services. 1040ez.com   If your organization provides an indoor tanning bed service, the ACA imposed a 10% excise tax on services provided after June 30, 2010. 1040ez.com For more information, go to IRS. 1040ez.com gov and select Affordable Care Act Tax Provisions. 1040ez.com Application for Recognition of Exemption This discussion describes certain information to be provided upon application for recognition of exemption by all organizations created for any of the purposes described earlier in this chapter. 1040ez.com For example, the application must include a conformed copy of the organization's articles of incorporation, as discussed under Articles of Organization , later in this chapter. 1040ez.com See the organization headings that follow for specific information your organization may need to provide. 1040ez.com Form 1023. 1040ez.com   Your organization must file its application for recognition of exemption on Form 1023. 1040ez.com See chapter 1 and the instructions accompanying Form 1023 for the procedures to follow in applying. 1040ez.com Some organizations are not required to file Form 1023. 1040ez.com See Organizations Not Required To File Form 1023, later. 1040ez.com    Additional information to help you complete your application can be found online. 1040ez.com Go to Exemption Requirement – Section 501(c)(3) Organizations and select the link at the bottom of the Web page for step by step help with the application process. 1040ez.com See Exemption Requirements - Section 501(c)(3) Organizations. 1040ez.com   Form 1023 and accompanying statements must show that all of the following are true. 1040ez.com The organization is organized exclusively for, and will be operated exclusively for, one or more of the purposes (religious, charitable, etc. 1040ez.com ) specified in the introduction to this chapter. 1040ez.com No part of the organization's net earnings will inure to the benefit of private shareholders or individuals. 1040ez.com You must establish that your organization will not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. 1040ez.com The organization will not, as a substantial part of its activities, attempt to influence legislation (unless it elects to come under the provisions allowing certain lobbying expenditures) or participate to any extent in a political campaign for or against any candidate for public office. 1040ez.com See Political activity, next, and Lobbying Expenditures , near the end of this chapter. 1040ez.com Political activity. 1040ez.com   If any of the activities (whether or not substantial) of your organization consist of participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office, your organization will not qualify for tax-exempt status under section 501(c)(3). 1040ez.com Such participation or intervention includes the publishing or distributing of statements. 1040ez.com   Whether your organization is participating or intervening, directly or indirectly, in any political campaign on behalf of (or in opposition to) any candidate for public office depends upon all of the facts and circumstances of each case. 1040ez.com Certain voter education activities or public forums conducted in a nonpartisan manner may not be prohibited political activity under section 501(c)(3), while other so-called voter education activities may be prohibited. 1040ez.com Effective date of exemption. 1040ez.com   Most organizations described in this chapter that were organized after October 9, 1969, will not be treated as tax exempt unless they apply for recognition of exemption by filing Form 1023. 1040ez.com These organizations will not be treated as tax exempt for any period before they file Form 1023, unless they file the form within 27 months from the end of the month in which they were organized. 1040ez.com If the organization files the application within this 27-month period, the organization's exemption will be recognized retroactively to the date it was organized. 1040ez.com Otherwise, exemption will be recognized only from the date of receipt. 1040ez.com The date of receipt is the date of the U. 1040ez.com S. 1040ez.com postmark on the cover in which an exemption application is mailed or, if no postmark appears on the cover, the date the application is stamped as received by the IRS. 1040ez.com Private delivery service. 1040ez.com   If a private delivery service designated by the IRS, rather than the U. 1040ez.com S. 1040ez.com Postal Service, is used to deliver the application, the date of receipt is the date recorded or marked by the private delivery service. 1040ez.com The following private delivery services have been designated by the IRS. 1040ez.com DHL Express (DHL): DHL “Same Day” Service. 1040ez.com Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First. 1040ez.com United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A. 1040ez.com M. 1040ez.com , UPS Worldwide Express Plus, and UPS Worldwide Express. 1040ez.com Amendments to organizing documents required. 1040ez.com   If an organization is required to alter its activities or to make substantive amendments to its organizing document, the ruling or determination letter recognizing its exempt status will be effective as of the date the changes are made. 1040ez.com If only a nonsubstantive amendment is made, exempt status will be effective as of the date it was organized, if the application was filed within the 15-month period, or the date the application was filed. 1040ez.com Extensions of time for filing. 1040ez.com   There are two ways organizations seeking exemption can receive an extension of time for filing Form 1023. 1040ez.com Automatic 12-month extension. 1040ez.com Organizations will receive an automatic 12-month extension if they file an application for recognition of exemption with the IRS within 12 months of the original deadline. 1040ez.com To get this extension, an organization must add the following statement at the top of its application: “Filed Pursuant to Section 301. 1040ez.com 9100-2. 1040ez.com ” Discretionary extensions. 1040ez.com An organization that fails to file a Form 1023 within the extended 12-month period will be granted an extension to file if it submits evidence (including affidavits) to establish that: It acted reasonably and in good faith, and Granting a discretionary extension will not prejudice the interests of the government. 1040ez.com How to show reasonable action and good faith. 1040ez.com   An organization acted reasonably and showed good faith if at least one of the following is true. 1040ez.com The organization requests relief before its failure to file is discovered by the IRS. 1040ez.com The organization failed to file because of intervening events beyond its control. 1040ez.com The organization exercised reasonable diligence (taking into account the complexity of the return or issue and the organization's experience in these matters) but was not aware of the filing requirement. 1040ez.com The organization reasonably relied upon the written advice of the IRS. 1040ez.com The organization reasonably relied upon the advice of a qualified tax professional who failed to file or advise the organization to file Form 1023. 1040ez.com An organization cannot rely on the advice of a tax professional if it knows or should know that he or she is not competent to render advice on filing exemption applications or is not aware of all the relevant facts. 1040ez.com Not acting reasonably and in good faith. 1040ez.com   An organization has not acted reasonably and in good faith under the following circumstances. 1040ez.com It seeks to change a return position for which an accuracy-related penalty has been or could be imposed at the time the relief is requested. 1040ez.com It was informed of the requirement to file and related tax consequences, but chose not to file. 1040ez.com It uses hindsight in requesting relief. 1040ez.com The IRS will not ordinarily grant an extension if specific facts have changed since the due date that makes filing an application advantageous to an organization. 1040ez.com Prejudicing the interest of the Government. 1040ez.com   Prejudice to the interest of the Government results if granting an extension of time to file to an organization results in a lower total tax liability for the years to which the filing applies than would have been the case if the organization had filed on time. 1040ez.com Before granting an extension, the IRS can require the organization requesting it to submit a statement from an independent auditor certifying that no prejudice will result if the extension is granted. 1040ez.com The interests of the Government are ordinarily prejudiced if the tax year in which the application should have been filed (or any tax year that would have been affected had the filing been timely) are closed by the statute of limitations before relief is granted. 1040ez.com The IRS can condition a grant of relief on the organization providing the IRS with a statement from an independent auditor certifying that the interests of the Government are not prejudiced. 1040ez.com Procedure for requesting extension. 1040ez.com   To request a discretionary extension, an organization must submit (to the IRS address shown on Form 1023 and Notice 1382) the following. 1040ez.com A statement showing the date Form 1023 was required to have been filed and the date it was actually filed. 1040ez.com Any documents relevant to the application. 1040ez.com An affidavit describing in detail the events that led to the failure to apply and to the discovery of that failure. 1040ez.com If the organization relied on a tax professional's advice, the affidavit must describe the engagement and responsibilities of the professional and the extent to which the organization relied on him or her. 1040ez.com This affidavit must be accompanied by a dated declaration, signed by an individual who has personal knowledge of the facts and circumstances, who is authorized to act for the organization, which states, “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. 1040ez.com ” Detailed affidavits from individuals having knowledge or information about the events that led to the failure to make the application and to the discovery of that failure. 1040ez.com This includes the organization's return preparer, and any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer on the application. 1040ez.com The affidavits must describe the engagement and responsibilities of the individual and the advice that he or she provided. 1040ez.com These affidavits must include the name, current address, and taxpayer identification number of the individual, and be accompanied by a dated declaration, signed by the individual, which states: “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. 1040ez.com ” The organization must state whether the returns for the tax year in which the application should have been filed or any tax years that would have been affected by the application had it been timely made are being examined by the IRS, an appeals office, or a federal court. 1040ez.com The organization must notify the IRS office considering the request for relief if the IRS starts an examination of any such return while the organization's request for relief is pending. 1040ez.com The organization, if requested, has to submit copies of its tax returns, and copies of the returns of other affected taxpayers. 1040ez.com   A request for this relief in connection with an application for exemption does not require payment of an additional user fee. 1040ez.com Also, a request for relief under the automatic 12-month extension does not require payment of a user fee. 1040ez.com More information. 1040ez.com   For more information about these procedures, see Regulations sections 301. 1040ez.com 9100-1, 301. 1040ez.com 9100-2, 301. 1040ez.com 9100-3, Revenue Procedure 2013-4, section 6. 1040ez.com 04, 2013-1 I. 1040ez.com R. 1040ez.com B. 1040ez.com 126, and Revenue Procedure 2013-8, 2013-1 I. 1040ez.com R. 1040ez.com B. 1040ez.com 237. 1040ez.com See Revenue Procedure 2013-4 and Revenue Procedure 2013-8. 1040ez.com Notification from the IRS. 1040ez.com   Organizations filing Form 1023 and satisfying all requirements of section 501(c)(3) will be notified of their exempt status in writing. 1040ez.com Organizations Not Required To File Form 1023 Some organizations are not required to file Form 1023. 1040ez.com These include: Churches, interchurch organizations of local units of a church, conventions or associations of churches, or integrated auxiliaries of a church, such as a men's or women's organization, religious school, mission society, or youth group. 1040ez.com Any organization (other than a private foundation) normally having annual gross receipts of not more than $5,000 (see Gross receipts test, later). 1040ez.com These organizations are exempt automatically if they meet the requirements of section 501(c)(3). 1040ez.com Filing Form 1023 to establish exemption. 1040ez.com   If the organization wants to establish its exemption with the IRS and receive a ruling or determination letter recognizing its exempt status, it should file Form 1023. 1040ez.com By establishing its exemption, potential contributors are assured by the IRS that contributions will be deductible. 1040ez.com A subordinate organization (other than a private foundation) covered by a group exemption letter does not have to submit a Form 1023 for itself. 1040ez.com Private foundations. 1040ez.com   See Private Foundations and Public Charities, later in this chapter, for more information about the additional notice required from an organization in order for it not to be presumed to be a private foundation and for the additional information required from a private foundation claiming to be an operating foundation. 1040ez.com Gross receipts test. 1040ez.com   For purposes of the gross receipts test, an organization normally does not have more than $5,000 annually in gross receipts if: During its first tax year the organization received gross receipts of $7,500 or less, During its first 2 years the organization had a total of $12,000 or less in gross receipts, and In the case of an organization that has been in existence for at least 3 years, the total gross receipts received by the organization during the immediately preceding 2 years, plus the current year, are $15,000 or less. 1040ez.com   An organization with gross receipts more than the amounts in the gross receipts test, unless otherwise exempt from filing Form 1023, must file a Form 1023 within 90 days after the end of the period in which the amounts are exceeded. 1040ez.com For example, an organization's gross receipts for its first tax year were less than $7,500, but at the end of its second tax year its gross receipts for the 2-year period were more than $12,000. 1040ez.com The organization must file Form 1023 within 90 days after the end of its second tax year. 1040ez.com   If the organization had existed for at least 3 tax years and had met the gross receipts test for all prior tax years but fails to meet the requirement for the current tax year, its tax-exempt status for the prior years will not be lost even if Form 1023 is not filed within 90 days after the close of the current tax year. 1040ez.com However, the organization will not be treated as a section 501(c)(3) organization for the period beginning with the current tax year and ending with the filing of Form 1023. 1040ez.com Example. 1040ez.com   An organization is organized and operated exclusively for charitable purposes and is not a private foundation. 1040ez.com It was incorporated on January 1, 2009, and files returns on a calendar-year basis. 1040ez.com It did not file a Form 1023. 1040ez.com The organization's gross receipts during the years 2009 through 2012 were as follows: 2009 $3,600 2010 2,900 2011 400 2012 12,600   The organization's total gross receipts for 2009, 2010, and 2011 were $6,900. 1040ez.com Therefore, it did not have to file Form 1023 and is exempt for those years. 1040ez.com However, for 2010, 2011, and 2012 the total gross receipts were $15,900. 1040ez.com Therefore, the organization must file Form 1023 within 90 days after the end of its 2012 tax year. 1040ez.com If it does not file within this time period, it will not be exempt under section 501(c)(3) for the period beginning with tax year 2012 ending when the Form 1023 is received by the IRS. 1040ez.com The organization, however, will not lose its exempt status for the tax years ending before January 1, 2012. 1040ez.com   The IRS will consider applying the Commissioner's discretionary authority to extend the time for filing Form 1023. 1040ez.com See the procedures for this extension discussed earlier. 1040ez.com Articles of Organization Your organization must include a conformed copy of its articles of organization with the application for recognition of exemption. 1040ez.com This may be its trust instrument, corporate charter, articles of association, or any other written instrument by which it is created. 1040ez.com Organizational Test The articles of organization must limit the organization's purposes to one or more of those described at the beginning of this chapter and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further one or more of those purposes. 1040ez.com These conditions for exemption are referred to as the organizational test. 1040ez.com Section 501(c)(3) is the provision of law that grants exemption to the organizations described in this chapter. 1040ez.com Therefore, the organizational test may be met if the purposes stated in the articles of organization are limited in some way by reference to section 501(c)(3). 1040ez.com The requirement that your organization's purposes and powers must be limited by the articles of organization is not satisfied if the limit is contained only in the bylaws or other rules or regulations. 1040ez.com Moreover, the organizational test is not satisfied by statements of your organization's officers that you intend to operate only for exempt purposes. 1040ez.com Also, the test is not satisfied by the fact that your actual operations are for exempt purposes. 1040ez.com In interpreting an organization's articles, the law of the state where the organization was created is controlling. 1040ez.com If an organization contends that the terms of its articles have a different meaning under state law than their generally accepted meaning, such meaning must be established by a clear and convincing reference to relevant court decisions, opinions of the state attorney general, or other appropriate state authorities. 1040ez.com The following are examples illustrating the organizational test. 1040ez.com Example 1. 1040ez.com Articles of organization state that an organization is formed exclusively for literary and scientific purposes within the meaning of section 501(c)(3). 1040ez.com These articles appropriately limit the organization's purposes. 1040ez.com The organization meets the organizational test. 1040ez.com Example 2. 1040ez.com An organization, by the terms of its articles, is formed to engage in research without any further description or limitation. 1040ez.com The organization will not be properly limited as to its purposes since all research is not scientific. 1040ez.com The organization does not meet the organizational test. 1040ez.com Example 3. 1040ez.com An organization's articles state that its purpose is to receive contributions and pay them over to organizations that are described in section 501(c)(3) and exempt from taxation under section 501(a). 1040ez.com The organization meets the organizational test. 1040ez.com Example 4. 1040ez.com If a stated purpose in the articles is the conduct of a school of adult education and its manner of operation is described in detail, such a purpose will be satisfactorily limited. 1040ez.com Example 5. 1040ez.com If the articles state the organization is formed for charitable purposes, without any further description, such language ordinarily will be sufficient since the term charitable has a generally accepted legal meaning. 1040ez.com On the other hand, if the purposes are stated to be charitable, philanthropic, and benevolent, the organizational requirement will not be met since the terms philanthropic and benevolent have no generally accepted legal meaning and, therefore, the stated purposes may, under the laws of the state, permit activities that are broader than those intended by the exemption law. 1040ez.com Example 6. 1040ez.com If the articles state an organization is formed to promote American ideals, or to foster the best interests of the people, or to further the common welfare and well-being of the community, without any limitation or provision restricting such purposes to accomplishment only in a charitable manner, the purposes will not be sufficiently limited. 1040ez.com Such purposes are vague and may be accomplished other than in an exempt manner. 1040ez.com Example 7. 1040ez.com A stated purpose to operate a hospital does not meet the organizational test since it is not necessarily charitable. 1040ez.com A hospital may or may not be exempt depending on the manner in which it is operated. 1040ez.com Example 8. 1040ez.com An organization that is expressly empowered by its articles to carry on social activities will not be sufficiently limited as to its power, even if its articles state that it is organized and will be operated exclusively for charitable purposes. 1040ez.com Dedication and Distribution of Assets Assets of an organization must be permanently dedicated to an exempt purpose. 1040ez.com This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the Federal Government or to a state or local government for a public purpose. 1040ez.com If the assets could be distributed to members or private individuals or for any other purpose, the organizational test is not met. 1040ez.com Dedication. 1040ez.com   To establish that your organization's assets will be permanently dedicated to an exempt purpose, the articles of organization should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. 1040ez.com Although reliance can be placed upon state law to establish permanent dedication of assets for exempt purposes, your organization's application probably can be processed much more rapidly if its articles of organization include a provision ensuring permanent dedication of assets for exempt purposes. 1040ez.com Distribution. 1040ez.com   Revenue Procedure 82-2, 1982-1 C. 1040ez.com B. 1040ez.com 367, identifies the states and circumstances in which the IRS will not require an express provision for the distribution of assets upon dissolution in the articles of organization. 1040ez.com The procedure also provides a sample of an acceptable dissolution provision for organizations required to have one. 1040ez.com   If a named beneficiary is to be the distributee, it must be one that would qualify and would be exempt within the meaning of section 501(c)(3) at the time the dissolution takes place. 1040ez.com Since the named beneficiary at the time of dissolution may not be qualified, may not be in existence, or may be unwilling or unable to accept the assets of the dissolving organization, a provision should be made for distribution of the assets for one or more of the purposes specified in this chapter in the event of any such contingency. 1040ez.com Sample articles of organization. 1040ez.com   See sample articles of organization in the Appendix in the back of this publication. 1040ez.com Educational Organizations and Private Schools If your organization wants to obtain recognition of exemption as an educational organization, you must submit complete information as to how your organization carries on or plans to carry on its educational activities, such as by conducting a school, by panels, discussions, lectures, forums, radio and television programs, or through various cultural media such as museums, symphony orchestras, or art exhibits. 1040ez.com In each instance, you must explain by whom and where these activities are or will be conducted and the amount of admission fees, if any. 1040ez.com You must submit a copy of the pertinent contracts, agreements, publications, programs, etc. 1040ez.com If you are organized to conduct a school, you must submit full information regarding your tuition charges, number of faculty members, number of full-time and part-time students enrolled, courses of study and degrees conferred, together with a copy of your school catalog. 1040ez.com See also Private Schools , discussed later. 1040ez.com Educational Organizations The term educational relates to: The instruction or training of individuals for the purpose of improving or developing their capabilities, or The instruction of the public on subjects useful to individuals and beneficial to the community. 1040ez.com Advocacy of a position. 1040ez.com   Advocacy of a particular position or viewpoint may be educational if there is a sufficiently full and fair exposition of pertinent facts to permit an individual or the public to form an independent opinion or conclusion. 1040ez.com The mere presentation of unsupported opinion is not educational. 1040ez.com Method not educational. 1040ez.com   The method used by an organization to develop and present its views is a factor in determining if an organization qualifies as educational within the meaning of section 501(c)(3). 1040ez.com The following factors may indicate that the method is not educational. 1040ez.com The presentation of viewpoints unsupported by facts is a significant part of the organization's communications. 1040ez.com The facts that purport to support the viewpoint are distorted. 1040ez.com The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of emotion than of objective evaluations. 1040ez.com The approach used is not aimed at developing an understanding on the part of the audience because it does not consider their background or training. 1040ez.com   Exceptional circumstances, however, may exist where an organization's advocacy may be educational even if one or more of the factors listed above are present. 1040ez.com Qualifying organizations. 1040ez.com   The following types of organizations may qualify as educational: An organization, such as a primary or secondary school, a college, or a professional or trade school, that has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled student body in attendance at a place where the educational activities are regularly carried on, An organization whose activities consist of conducting public discussion groups, forums, panels, lectures, or other similar programs, An organization that presents a course of instruction by correspondence or through the use of television or radio, A museum, zoo, planetarium, symphony orchestra, or other similar organization, A nonprofit children's day-care center, and A credit counseling organization. 1040ez.com College book stores, cafeterias, restaurants, etc. 1040ez.com   These and other on-campus organizations should submit information to show that they are controlled by and operated for the convenience of the faculty and student body or by whom they are controlled and whom they serve. 1040ez.com Alumni association. 1040ez.com   An alumni association should establish that it is organized to promote the welfare of the university with which it is affiliated, is subject to the control of the university as to its policies and destination of funds, and is operated as an integral part of the university or is otherwise organized to promote the welfare of the college or university. 1040ez.com If your association does not have these characteristics, it may still be exempt as a social club if it meets the requirements described in chapter 4, under 501(c)(7) - Social and Recreation Clubs . 1040ez.com Athletic organization. 1040ez.com   This type of organization must submit evidence that it is engaged in activities such as directing and controlling interscholastic athletic competitions, conducting tournaments, and prescribing eligibility rules for contestants. 1040ez.com If it is not so engaged, your organization may be exempt as a social club described in chapter 4. 1040ez.com Raising funds to be used for travel and other activities to interview and persuade prospective students with outstanding athletic ability to attend a particular university does not show an exempt purpose. 1040ez.com If your organization is not exempt as an educational organization, see Amateur Athletic Organizations , later in this chapter. 1040ez.com Private Schools Every private school filing an application for recognition of tax-exempt status must supply the IRS (on Schedule B, Form 1023) with the following information. 1040ez.com The racial composition of the student body, and of the faculty and administrative staff, as of the current academic year. 1040ez.com (This information also must be projected, so far as may be feasible, for the next academic year. 1040ez.com ) The amount of scholarship and loan funds, if any, awarded to students enrolled and the racial composition of students who have received the awards. 1040ez.com A list of the school's incorporators, founders, board members, and donors of land or buildings, whether individuals or organizations. 1040ez.com A statement indicating whether any of the organizations described in item (3) above have an objective of maintaining segregated public or private school education at the time the application is filed and, if so, whether any of the individuals described in item (3) are officers or active members of those organizations at the time the application is filed. 1040ez.com The public school district and county in which the school is located. 1040ez.com How to determine racial composition. 1040ez.com   The racial composition of the student body, faculty, and administrative staff can be an estimate based on the best information readily available to the school, without requiring student applicants, students, faculty, or administrative staff to submit to the school information that the school otherwise does not require. 1040ez.com Nevertheless, a statement of the method by which the racial composition was determined must be supplied. 1040ez.com The identity of individual students or members of the faculty and administrative staff should not be included with this information. 1040ez.com   A school that is a state or municipal instrumentality (see Instrumentalities , near the beginning of this chapter), whether or not it qualifies for exemption under section 501(c)(3), is not considered to be a private school for purposes of the following discussion. 1040ez.com Racially Nondiscriminatory Policy To qualify as an organization exempt from federal income tax, a private school must include a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that it has a racially nondiscriminatory policy as to students and that it does not discriminate against applicants and students on the basis of race, color, or national or ethnic origin. 1040ez.com Also, the school must circulate information that clearly states the school's admission policies. 1040ez.com A racially nondiscriminatory policy toward students means that the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that the school does not discriminate on the basis of race in administering its educational policies, admission policies, scholarship and loan programs, and athletic and other school-administered programs. 1040ez.com The IRS considers discrimination on the basis of race to include discrimination on the basis of color or national or ethnic origin. 1040ez.com The existence of a racially discriminatory policy with respect to the employment of faculty and administrative staff is indicative of a racially discriminatory policy as to students. 1040ez.com Conversely, the absence of racial discrimination in the employment of faculty and administrative staff is indicative of a racially nondiscriminatory policy as to students. 1040ez.com A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance is not discrimination on the basis of race when the purpose and effect of this policy is to promote establishing and maintaining the school's nondiscriminatory policy. 1040ez.com A school that selects students on the basis of membership in a religious denomination or unit is not discriminating if membership in the denomination or unit is open to all on a racially nondiscriminatory basis. 1040ez.com Policy statement. 1040ez.com   The school must include a statement of its racially nondiscriminatory policy in all its brochures and catalogs dealing with student admissions, programs, and scholarships. 1040ez.com Also, the school must include a reference to its racially nondiscriminatory policy in other written advertising that it uses to inform prospective students of its programs. 1040ez.com Publicity requirement. 1040ez.com   The school must make its racially nondiscriminatory policy known to all segments of the general community served by the school. 1040ez.com Selective communication of a racially nondiscriminatory policy that a school provides solely to leaders of racial groups will not be considered an effective means of communication to make the policy known to all segments of the community. 1040ez.com To satisfy this requirement, the school must use one of the following two methods. 1040ez.com Method one. 1040ez.com   The school can publish a notice of its racially nondiscriminatory policy in a newspaper of general circulation that serves all racial segments of the community. 1040ez.com Such publication must be repeated at least once annually during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. 1040ez.com When more than one community is served by a school, the school can publish the notice in those newspapers that are reasonably likely to be read by all racial segments in the communities that the school serves. 1040ez.com If this method is used, the notice must meet the following printing requirements. 1040ez.com It must appear in a section of the newspaper likely to be read by prospective students and their families. 1040ez.com It must occupy at least 3 column inches. 1040ez.com It must have its title printed in at least 12 point bold face type. 1040ez.com It must have the remaining text printed in at least 8 point type. 1040ez.com The following is an acceptable example of the notice:   NOTICE OF NONDISCRIMINATORY POLICY AS TO STUDENTS     The M School admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. 1040ez.com It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. 1040ez.com   Method two. 1040ez.com   The school can use the broadcast media to publicize its racially nondiscriminatory policy if this use makes the policy known to all segments of the general community the school serves. 1040ez.com If the school uses this method, it must provide documentation showing that the means by which this policy was communicated to all segments of the general community was reasonably expected to be effective. 1040ez.com In this case, appropriate documentation would include copies of the tapes or scripts used and records showing that there was an adequate number of announcements. 1040ez.com The documentation also would include proof that these announcements were made during hours when they were likely to be communicated to all segments of the general community, that they were long enough to convey the message clearly, and that they were broadcast on radio or television stations likely to be listened to by substantial numbers of members of all racial segments of the general community. 1040ez.com Announcements must be made during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. 1040ez.com Exceptions. 1040ez.com   The publicity requirements will not apply in the following situations. 1040ez.com First, if for the preceding 3 years the enrollment of a parochial or other church-related school consists of students at least 75% of whom are members of the sponsoring religious denomination or unit, the school can make known its racially nondiscriminatory policy in whatever newspapers or circulars the religious denomination or unit uses in the communities from which the students are drawn. 1040ez.com These newspapers and circulars can be distributed by a particular religious denomination or unit or by an association that represents a number of religious organizations of the same denomination. 1040ez.com If, however, the school advertises in newspapers of general circulation in the community or communities from which its students are drawn and the second exception (discussed next) does not apply to the school, then it must comply with either of the publicity requirements explained earlier. 1040ez.com Second, if a school customarily draws a substantial percentage of its students nationwide, worldwide, from a large geographic section or sections of the United States, or from local communities, and if the school follows a racially nondiscriminatory policy as to its students, the school may satisfy the publicity requirement by complying with the instructions explained earlier under Policy statement . 1040ez.com   The school can demonstrate that it follows a racially nondiscriminatory policy either by showing that it currently enrolls students of racial minority groups in meaningful numbers or, except for local community schools, when minority students are not enrolled in meaningful numbers, that its promotional activities and recruiting efforts in each geographic area were reasonably designed to inform students of all racial segments in the general communities within the area of the availability of the school. 1040ez.com The question as to whether a school demonstrates such a policy satisfactorily will be determined on the basis of the facts and circumstances of each case. 1040ez.com   The IRS recognizes that the failure by a school drawing its students from local communities to enroll racial minority group students may not necessarily indicate the absence of a racially nondiscriminatory policy when there are relatively few or no such students in these communities. 1040ez.com Actual enrollment is, however, a meaningful indication of a racially nondiscriminatory policy in a community in which a public school or schools became subject to a desegregation order of a federal court or are otherwise expressly obligated to implement a desegregation plan under the terms of any written contract or other commitment to which any federal agency was a party. 1040ez.com   The IRS encourages schools to satisfy the publicity requirement by using either of the methods described earlier, even though a school considers itself to be within one of the Exceptions. 1040ez.com The IRS believes that these publicity requirements are the most effective methods to make known a school's racially nondiscriminatory policy. 1040ez.com In this regard, it is each school's responsibility to determine whether either of the exceptions applies. 1040ez.com Such responsibility will prepare the school, if it is audited by the IRS, to demonstrate that the failure to publish its racially nondiscriminatory policy in accordance with either one of the publicity requirements was justified by one of the exceptions. 1040ez.com Also, a school must be prepared to demonstrate that it has publicly disavowed or repudiated any statements purported to have been made on its behalf (after November 6, 1975) that are contrary to its publicity of a racially nondiscriminatory policy as to students, to the extent that the school or its principal official was aware of these statements. 1040ez.com Facilities and programs. 1040ez.com   A school must be able to show that all of its programs and facilities are operated in a racially nondiscriminatory manner. 1040ez.com Scholarship and loan programs. 1040ez.com   As a general rule, all scholarship or other comparable benefits obtainable at the school must be offered on a racially nondiscriminatory basis. 1040ez.com This must be known throughout the general community being served by the school and should be referred to in its publicity. 1040ez.com Financial assistance programs, as well as scholarships and loans made under financial assistance programs, that favor members of one or more racial minority groups and that do not significantly detract from or are designed to promote a school's racially nondiscriminatory policy will not adversely affect the school's exempt status. 1040ez.com Certification. 1040ez.com   An individual authorized to take official action on behalf of a school that claims to be racially nondiscriminatory as to students must certify annually, under penalties of perjury, on Schedule E (Form 990 or 990-EZ) or Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax, whichever applies, that to the best of his or her knowledge and belief the school has satisfied all requirements that apply, as previously explained. 1040ez.com   Failure to comply with the guidelines ordinarily will result in the proposed revocation of the exempt status of a school. 1040ez.com Recordkeeping requirements. 1040ez.com With certain exceptions, given later, each exempt private school must maintain the following records for a minimum period of 3 years, beginning with the year after the year of compilation or acquisition. 1040ez.com Records indicating the racial composition of the student body, faculty, and administrative staff for each academic year. 1040ez.com Records sufficient to document that scholarship and other financial assistance is awarded on a racially nondiscriminatory basis. 1040ez.com Copies of all materials used by or on behalf of the school to solicit contributions. 1040ez.com Copies of all brochures, catalogs, and advertising dealing with student admissions, programs, and scholarships. 1040ez.com (Schools advertising nationally or in a large geographic segment or segments of the United States need only maintain a record sufficient to indicate when and in what publications their advertisements were placed. 1040ez.com ) The racial composition of the student body, faculty, and administrative staff can be determined in the same manner as that described at the beginning of this section. 1040ez.com However, a school cannot discontinue maintaining a system of records that reflect the racial composition of its students, faculty, and administrative staff used on November 6, 1975, unless it substitutes a different system that compiles substantially the same information, without advance approval of the IRS. 1040ez.com The IRS does not require that a school release any personally identifiable records or personal information except in accordance with the requirements of the Family Educational Rights and Privacy Act of 1974. 1040ez.com Similarly, the IRS does not require a school to keep records prohibited under state or federal law. 1040ez.com Exceptions. 1040ez.com   The school does not have to independently maintain these records for IRS use if both of the following are true. 1040ez.com Substantially the same information has been included in a report or reports filed with an agency or agencies of federal, state, or local governments, and this information is current within 1 year. 1040ez.com The school maintains copies of these reports from which this information is readily obtainable. 1040ez.com If these reports do not include all of the information required, as discussed earlier, records providing such remaining information must be maintained by the school for IRS use. 1040ez.com Failure to maintain records. 1040ez.com   Failure to maintain or to produce the required records and information, upon proper request, will create a presumption that the organization has failed to comply with these guidelines. 1040ez.com Organizations Providing Insurance An organization described in sections 501(c)(3) or 501(c)(4) may be exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance. 1040ez.com However, this rule does not apply to state-sponsored organizations described in sections 501(c)(26) or 501(c)(27), which are discussed in chapter 4, or to charitable risk pools, discussed next. 1040ez.com Charitable Risk Pools A charitable risk pool is treated as organized and operated exclusively for charitable purposes if it: Is organized and operated only to pool insurable risks of its members (not including risks related to medical malpractice) and to provide information to its members about loss control and risk management, Consists only of members that are section 501(c)(3) organizations exempt from tax under section 501(a), Is organized under state law authorizing this type of risk pooling, Is exempt from state income tax (or will be after qualifying as a section 501(c)(3) organization), Has obtained at least $1,000,000 in startup capital from nonmember charitable organizations, Is controlled by a board of directors elected by its members, and Is organized under documents requiring that: Each member be a section 501(c)(3) organization exempt from tax under section 501(a), Each member that receives a final determination that it no longer qualifies under section 501(c)(3) notify the pool immediately, and Each insurance policy issued by the pool provide that it will not cover events occurring after a final determination described in (b). 1040ez.com Other Section 501(c)(3) Organizations In addition to the information required for all organizations, as described earlier, you should include any other information described in this section. 1040ez.com Charitable Organizations If your organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. 1040ez.com Some examples of this type of organization are those organized for: Relief of the poor, the distressed, or the underprivileged, Advancement of religion, Advancement of education or science, Erection or maintenance of public buildings, monuments, or works, Lessening the burdens of government, Lessening of neighborhood tensions, Elimination of prejudice and discrimination, Defense of human and civil rights secured by law, and Combating community deterioration and juvenile delinquency. 1040ez.com The rest of this section contains a description of the information to be provided by certain specific organizations. 1040ez.com This information is in addition to the required inclusions described in chapter 1, and other statements requested on Form 1023. 1040ez.com Each of the following organizations must submit the information described. 1040ez.com Charitable organization supporting education. 1040ez.com   Submit information showing how your organization supports education — for example, contributes to an existing educational institution, endows a professorial chair, contributes toward paying teachers' salaries, or contributes to an educational institution to enable it to carry on research. 1040ez.com Scholarships. 1040ez.com   If the organization awards or plans to award scholarships, complete Schedule H of Form 1023. 1040ez.com Also, submit the following: Criteria used for selecting recipients, including the rules of eligibility. 1040ez.com How and by whom the recipients are or will be selected. 1040ez.com If awards are or will be made directly to individuals, whether information is required assuring that the student remains in school. 1040ez.com If awards are or will be made to recipients of a particular class, for example, children of employees of a particular employer— Whether any preference is or will be accorded an applicant by reason of the parent's position, length of employment, or salary, Whether as a condition of the award the recipient must upon graduation accept employment with the company, and Whether the award will be continued even if the parent's employment ends. 1040ez.com A copy of the scholarship application form and any brochures or literature describing the scholarship program. 1040ez.com Hospital. 1040ez.com   If you are organized to operate a charitable hospital, complete and attach Section I of Schedule C, Form 1023. 1040ez.com   If your hospital was transferred to you from proprietary ownership, complete and attach Schedule G of Form 1023. 1040ez.com You must attach a list showing: The names of the active and courtesy staff members of the proprietary hospital, as well as the names of your medical staff members after the transfer to nonprofit ownership, and The names of any doctors who continued to lease office space in the hospital after its transfer to nonprofit ownership and the amount of rent paid. 1040ez.com Submit also an appraisal showing the fair rental value of the rented space. 1040ez.com Clinic. 1040ez.com   If you are organized to operate a clinic, attach a statement including: A description of the facilities and services, To whom the services are offered, such as the public at large or a specific group, How charges are determined, such as on a profit basis, to recover costs, or at less than cost, By whom administered and controlled, Whether any of the professional staff (that is, those who perform or will perform the clinical services) also serve or will serve in an administrative capacity, and How compensation paid the professional staff is or will be determined. 1040ez.com Home for the aged. 1040ez.com   If you are organized to operate a home for the aged, complete and attach Schedule F of Form 1023 and required attachments. 1040ez.com Community nursing bureau. 1040ez.com   If you provide a nursing register or community nursing bureau, provide information showing that your organization will be operated as a community project and will receive its primary support from public contributions to maintain a nonprofit register of qualified nursing personnel, including graduate nurses, unregistered nursing school graduates, licensed attendants and practical nurses for the benefit of hospitals, health agencies, doctors, and individuals. 1040ez.com Organization providing loans. 1040ez.com   If you make, or will make, loans for charitable and educational purposes, submit the following information. 1040ez.com An explanation of the circumstances under which such loans are, or will be, made. 1040ez.com Criteria for selection, including the rules of eligibility. 1040ez.com How and by whom the recipients are or will be selected. 1040ez.com Manner of repayment of the loan. 1040ez.com Security required, if any. 1040ez.com Interest charged, if any, and when payable. 1040ez.com Copies in duplicate of the loan application and any brochures or literature describing the loan program. 1040ez.com Public-interest law firms. 1040ez.com   If your organization was formed to litigate in the public interest (as opposed to providing legal services to the poor), such as in the area of protection of the environment, you should submit the following information. 1040ez.com How the litigation can reasonably be said to be representative of a broad public interest rather than a private one. 1040ez.com Whether the organization will accept fees for its services. 1040ez.com A description of the cases litigated or to be litigated and how they benefit the public generally. 1040ez.com Whether the policies and program of the organization are the responsibility of a board or committee representative of the public interest, which is neither controlled by employees or persons who litigate on behalf of the organization nor by any organization that is not itself an organization described in this chapter. 1040ez.com Whether the organization is operated, through sharing of office space or otherwise, in a way to create identification or confusion with a particular private law firm. 1040ez.com Whether there is an arrangement to provide, directly or indirectly, a deduction for the cost of litigation that is for the private benefit of the donor. 1040ez.com Acceptance of attorneys' fees. 1040ez.com   A nonprofit public-interest law firm can accept attorneys' fees in public-interest cases if the fees are paid directly by its clients and the fees are not more than the actual costs incurred in the case. 1040ez.com Upon undertaking a representation, the organization cannot withdraw from the case because the litigant is unable to pay the fee. 1040ez.com   Firms can accept fees awarded or approved by a court or an administrative agency and paid by an opposing party if the firms do not use the likelihood or probability of fee awards as a consideration in the selection of cases. 1040ez.com All fee awards must be paid to the organization and not to its individual staff attorneys. 1040ez.com Instead, a public-interest law firm can reasonably compensate its staff attorneys, but only on a straight salary basis. 1040ez.com Private attorneys, whose services are retained by the firm to assist it in particular cases, can be compensated by the firm, but only on a fixed fee or salary basis. 1040ez.com   The total amount of all attorneys' fees (court awarded and those received from clients) must not be more than 50% of the total cost of operations of the organization's legal functions, calculated over a 5-year period. 1040ez.com   If, in order to carry out its program, an organization violates applicable canons of ethics, disrupts the judicial system, or engages in any illegal action, the organization will jeopardize its exemption. 1040ez.com Religious Organizations To determine whether an organization meets the religious purposes test of section 501(c)(3), the IRS maintains two basic guidelines. 1040ez.com That the particular religious beliefs of the organization are truly and sincerely held. 1040ez.com That the practices and rituals associated with the organization's religious belief or creed are not illegal or contrary to clearly defined public policy. 1040ez.com Therefore, your group (or organization) may not qualify for treatment as an exempt religious organization for tax purposes if its actions, as contrasted with its beliefs, are contrary to well established and clearly defined public policy. 1040ez.com If there is a clear showing that the beliefs (or doctrines) are sincerely held by those professing them, the IRS will not question the religious nature of those beliefs. 1040ez.com Churches. 1040ez.com   Although a church, its integrated auxiliaries, or a convention or association of churches is not required to file Form 1023 to be exempt from federal income tax or to receive tax deductible contributions, the organization may find it advantageous to obtain recognition of exemption. 1040ez.com In this event, you should submit information showing that your organization is a church, synagogue, association or convention of churches, religious order, or religious organization that is an integral part of a church, and that it is engaged in carrying out the function of a church. 1040ez.com   In determining whether an admittedly religious organization is also a church, the IRS does not accept every assertion that the organization is a church. 1040ez.com Because beliefs and practices vary so widely, there is no single definition of the word church for tax purposes. 1040ez.com The IRS considers the facts and circumstances of each organization applying for church status. 1040ez.com Convention or association of churches. 1040ez.com   Any organization that is otherwise a convention or association of churches will not fail to qualify as a church merely because the membership of the organization includes individuals as well as churches or because the individuals have voting rights in the organization. 1040ez.com Integrated auxiliaries. 1040ez.com   An organization is an integrated auxiliary of a church if all the following are true. 1040ez.com The organization is described both in sections 501(c)(3) and 509(a)(1), 509(a)(2), or 509(a)(3). 1040ez.com It is affiliated with a church or a convention or association of churches. 1040ez.com It is internally supported. 1040ez.com An organization is internally supported unless both of the following are true. 1040ez.com It offers admissions, goods, services, or facilities for sale, other than on an incidental basis, to the general public (except goods, services, or facilities sold at a nominal charge or for a small part of the cost). 1040ez.com It normally gets more than 50% of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses. 1040ez.com Special rule. 1040ez.com   Men's and women's organizations, seminaries, mission societies, and youth groups that satisfy (1) and (2) shown earlier are integrated auxiliaries of a church even if they are not internally supported. 1040ez.com   In order for an organization (including a church and religious organization) to qualify for tax exemption, no part of its net earnings can inure to any individual. 1040ez.com   Although an individual is entitled to a charitable deduction for contributions to a church, the assignment or similar transfer of compensation for personal services to a church generally does not relieve a taxpayer of federal income tax liability on the compensation, regardless of the motivation behind the transfer. 1040ez.com Scientific Organizations You must show that your organization's research will be carried on in the public interest. 1040ez.com Scientific research will be considered to be in the public interest if the results of the research (including any patents, copyrights, processes, or formulas) are made available to the public on a nondiscriminatory basis; if the research is performed for the United States or a state, county, or municipal government; or if the research is carried on for one of the following purposes. 1040ez.com Aiding in the scientific education of college or university students. 1040ez.com Obtaining scientific information that is published in a treatise, thesis, trade publication, or in any other form th
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The 1040ez.com

1040ez. 1040ez.com com 12. 1040ez.com   Other Income Table of Contents Introduction Useful Items - You may want to see: Bartering Canceled DebtsInterest included in canceled debt. 1040ez.com Exceptions Host or Hostess Life Insurance ProceedsSurviving spouse. 1040ez.com Endowment Contract Proceeds Accelerated Death Benefits Public Safety Officer Killed in the Line of Duty Partnership Income S Corporation Income RecoveriesItemized Deduction Recoveries Rents from Personal Property RepaymentsMethod 1. 1040ez.com Method 2. 1040ez.com RoyaltiesDepletion. 1040ez.com Coal and iron ore. 1040ez.com Sale of property interest. 1040ez.com Part of future production sold. 1040ez.com Unemployment BenefitsTypes of unemployment compensation. 1040ez.com Governmental program. 1040ez.com Repayment of unemployment compensation. 1040ez.com Tax withholding. 1040ez.com Repayment of benefits. 1040ez.com Welfare and Other Public Assistance Benefits Other IncomeEmotional distress. 1040ez.com Deduction for costs involved in unlawful discrimination suits. 1040ez.com Energy conservation measure. 1040ez.com Dwelling unit. 1040ez.com Current income required to be distributed. 1040ez.com Current income not required to be distributed. 1040ez.com How to report. 1040ez.com Losses. 1040ez.com Grantor trust. 1040ez.com Nonemployee compensation. 1040ez.com Corporate director. 1040ez.com Personal representatives. 1040ez.com Manager of trade or business for bankruptcy estate. 1040ez.com Notary public. 1040ez.com Election precinct official. 1040ez.com Difficulty-of-care payments. 1040ez.com Maintaining space in home. 1040ez.com Reporting taxable payments. 1040ez.com Lotteries and raffles. 1040ez.com Form W-2G. 1040ez.com Reporting winnings and recordkeeping. 1040ez.com Inherited pension or IRA. 1040ez.com Employee awards or bonuses. 1040ez.com Pulitzer, Nobel, and similar prizes. 1040ez.com Payment for services. 1040ez.com VA payments. 1040ez.com Prizes. 1040ez.com Strike and lockout benefits. 1040ez.com Introduction You must include on your return all items of income you receive in the form of money, property, and services unless the tax law states that you do not include them. 1040ez.com Some items, however, are only partly excluded from income. 1040ez.com This chapter discusses many kinds of income and explains whether they are taxable or nontaxable. 1040ez.com Income that is taxable must be reported on your tax return and is subject to tax. 1040ez.com Income that is nontaxable may have to be shown on your tax return but is not taxable. 1040ez.com This chapter begins with discussions of the following income items. 1040ez.com Bartering. 1040ez.com Canceled debts. 1040ez.com Sales parties at which you are the host or hostess. 1040ez.com Life insurance proceeds. 1040ez.com Partnership income. 1040ez.com S Corporation income. 1040ez.com Recoveries (including state income tax refunds). 1040ez.com Rents from personal property. 1040ez.com Repayments. 1040ez.com Royalties. 1040ez.com Unemployment benefits. 1040ez.com Welfare and other public assistance benefits. 1040ez.com These discussions are followed by brief discussions of other income items. 1040ez.com Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 544 Sales and Other Dispositions of Assets 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Bartering Bartering is an exchange of property or services. 1040ez.com You must include in your income, at the time received, the fair market value of property or services you receive in bartering. 1040ez.com 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. 1040ez.com Generally, you report this income on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. 1040ez.com However, if the barter involves an exchange of something other than services, such as in Example 3 below, you may have to use another form or schedule instead. 1040ez.com Example 1. 1040ez.com You are a self-employed attorney who performs legal services for a client, a small corporation. 1040ez.com The corporation gives you shares of its stock as payment for your services. 1040ez.com You must include the fair market value of the shares in your income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) in the year you receive them. 1040ez.com Example 2. 1040ez.com You are self-employed and a member of a barter club. 1040ez.com The club uses “credit units” as a means of exchange. 1040ez.com 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. 1040ez.com The club subtracts credit units from your account when you receive goods or services from other members. 1040ez.com 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. 1040ez.com Example 3. 1040ez.com You own a small apartment building. 1040ez.com In return for 6 months rent-free use of an apartment, an artist gives you a work of art she created. 1040ez.com You must report as rental income on Schedule E (Form 1040), Supplemental Income and Loss, the fair market value of the artwork, and the artist must report as income on Schedule C (Form 1040) or Schedule C-EZ (Form 1040) the fair rental value of the apartment. 1040ez.com Form 1099-B from barter exchange. 1040ez.com   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 18, 2014. 1040ez.com It should show the value of cash, property, services, credits, or scrip you received from exchanges during 2013. 1040ez.com The IRS also will receive a copy of Form 1099-B. 1040ez.com Canceled Debts In most cases, 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. 1040ez.com You have no income from the canceled debt if it is intended as a gift to you. 1040ez.com A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040ez.com If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. 1040ez.com If it is a business debt, report the amount on Schedule C (Form 1040) 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). 1040ez.com Form 1099-C. 1040ez.com   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. 1040ez.com The amount of the canceled debt is shown in box 2. 1040ez.com Interest included in canceled debt. 1040ez.com   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. 1040ez.com Whether or not you must include the interest portion of the canceled debt in your income depends on whether the interest would be deductible when you paid it. 1040ez.com See Deductible debt under Exceptions, later. 1040ez.com   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. 1040ez.com 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). 1040ez.com Discounted mortgage loan. 1040ez.com   If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount is canceled debt. 1040ez.com You must include the canceled amount in your income. 1040ez.com Mortgage relief upon sale or other disposition. 1040ez.com   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. 1040ez.com 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. 1040ez.com Report any income from discharge of indebtedness on nonbusiness debt that does not qualify for exclusion as other income on Form 1040, line 21. 1040ez.com    You may be able to exclude part of the mortgage relief on your principal residence. 1040ez.com See Excluded debt, later. 1040ez.com   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), that relief is included in the amount you realize. 1040ez.com You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. 1040ez.com Report any gain on nonbusiness property as a capital gain. 1040ez.com   See Publication 4681 for more information. 1040ez.com Stockholder debt. 1040ez.com   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. 1040ez.com For more information, see Publication 542, Corporations. 1040ez.com   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. 1040ez.com 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. 1040ez.com Repayment of canceled debt. 1040ez.com   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. 1040ez.com You can file a claim on Form 1040X if the statute of limitations for filing a claim is still open. 1040ez.com The statute of limitations generally does not end until 3 years after the due date of your original return. 1040ez.com Exceptions There are several exceptions to the inclusion of canceled debt in income. 1040ez.com These are explained next. 1040ez.com Student loans. 1040ez.com   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. 1040ez.com   You do not have income if your student loan is canceled after you agreed to this provision and then performed the services required. 1040ez.com 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: Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or As part of a program of the institution designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt organization described in section 501(c)(3). 1040ez.com   A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a qualified tax-exempt organization under its program designed as described in (3)(b) above. 1040ez.com Education loan repayment assistance. 1040ez.com   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. 1040ez.com    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. 1040ez.com If you included these amounts in income in 2010, 2011, or 2012, you should file an amended tax return to exclude this income. 1040ez.com See Form 1040X and its instructions for details on filing. 1040ez.com Deductible debt. 1040ez.com   You do not have income from the cancellation of a debt if your payment of the debt would be deductible. 1040ez.com This exception applies only if you use the cash method of accounting. 1040ez.com For more information, see chapter 5 of Publication 334, Tax Guide for Small Business. 1040ez.com Price reduced after purchase. 1040ez.com   In most cases, if the seller reduces the amount of debt you owe for property you purchased, you do not have income from the reduction. 1040ez.com The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property. 1040ez.com Excluded debt. 1040ez.com   Do not include a canceled debt in your gross income in the following situations. 1040ez.com The debt is canceled in a bankruptcy case under title 11 of the U. 1040ez.com S. 1040ez.com Code. 1040ez.com See Publication 908, Bankruptcy Tax Guide. 1040ez.com The debt is canceled when you are insolvent. 1040ez.com However, you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent. 1040ez.com See Publication 908. 1040ez.com The debt is qualified farm debt and is canceled by a qualified person. 1040ez.com See chapter 3 of Publication 225, Farmer's Tax Guide. 1040ez.com The debt is qualified real property business debt. 1040ez.com See chapter 5 of Publication 334. 1040ez.com The cancellation is intended as a gift. 1040ez.com The debt is qualified principal residence indebtedness. 1040ez.com See Publication 525 for additional information. 1040ez.com Host or Hostess 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. 1040ez.com You must report this item as income at its fair market value. 1040ez.com Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. 1040ez.com 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. 1040ez.com For more information about the 50% limit for meal and entertainment expenses, see chapter 26. 1040ez.com 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. 1040ez.com This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. 1040ez.com However, interest income received as a result of life insurance proceeds may be taxable. 1040ez.com Proceeds not received in installments. 1040ez.com   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. 1040ez.com 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. 1040ez.com Proceeds received in installments. 1040ez.com   If you receive life insurance proceeds in installments, you can exclude part of each installment from your income. 1040ez.com   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. 1040ez.com Include anything over this excluded part in your income as interest. 1040ez.com Surviving spouse. 1040ez.com   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. 1040ez.com If you remarry, you can continue to take the exclusion. 1040ez.com Surrender of policy for cash. 1040ez.com   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. 1040ez.com In most cases, 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. 1040ez.com    You should receive a Form 1099-R showing the total proceeds and the taxable part. 1040ez.com Report these amounts on lines 16a and 16b of Form 1040 or lines 12a and 12b of Form 1040A. 1040ez.com More information. 1040ez.com   For more information, see Life Insurance Proceeds in Publication 525. 1040ez.com 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. 1040ez.com 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. 1040ez.com 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. 1040ez.com Include the part of the lump sum payment that is more than your cost in your income. 1040ez.com 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. 1040ez.com Viatical settlement. 1040ez.com   This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. 1040ez.com 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. 1040ez.com Exclusion for terminal illness. 1040ez.com    Accelerated death benefits are fully excludable if the insured is a terminally ill individual. 1040ez.com 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. 1040ez.com Exclusion for chronic illness. 1040ez.com    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. 1040ez.com Accelerated death benefits paid on a per diem or other periodic basis are excludable up to a limit. 1040ez.com This limit applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. 1040ez.com 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 in Publication 525. 1040ez.com Exception. 1040ez.com   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. 1040ez.com Form 8853. 1040ez.com   To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your return. 1040ez.com You do not have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred. 1040ez.com Public Safety Officer Killed in the Line of Duty 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. 1040ez.com For this purpose, the term public safety officer includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance crew members. 1040ez.com For more information, see Publication 559, Survivors, Executors, and Administrators. 1040ez.com Partnership Income A partnership generally is not a taxable entity. 1040ez.com The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner's distributive share of these items. 1040ez.com Schedule K-1 (Form 1065). 1040ez.com    Although a partnership generally pays no tax, it must file an information return on Form 1065, U. 1040ez.com S. 1040ez.com Return of Partnership Income, and send Schedule K-1 (Form 1065) to each partner. 1040ez.com In addition, the partnership will send each partner a copy of the Partner's Instructions for Schedule K-1 (Form 1065) to help each partner report his or her share of the partnership's income, deductions, credits, and tax preference items. 1040ez.com Keep Schedule K-1 (Form 1065) for your records. 1040ez.com Do not attach it to your Form 1040, unless you are specifically required to do so. 1040ez.com For more information on partnerships, see Publication 541, Partnerships. 1040ez.com Qualified joint venture. 1040ez.com   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. 1040ez.com To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. 1040ez.com For further information on how to make the election and which schedule(s) to file, see the instructions for your individual tax return. 1040ez.com S Corporation Income In most cases, an S corporation does not pay tax on its income. 1040ez.com Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder's pro rata share. 1040ez.com Schedule K-1 (Form 1120S). 1040ez.com   An S corporation must file a return on Form 1120S, U. 1040ez.com S. 1040ez.com Income Tax Return for an S Corporation, and send Schedule K-1 (Form 1120S) to each shareholder. 1040ez.com In addition, the S corporation will send each shareholder a copy of the Shareholder's Instructions for Schedule K-1 (Form 1120S) to help each shareholder report his or her share of the S corporation's income, losses, credits, and deductions. 1040ez.com Keep Schedule K-1 (Form 1120S) for your records. 1040ez.com Do not attach it to your Form 1040, unless you are specifically required to do so. 1040ez.com For more information on S corporations and their shareholders, see the Instructions for Form 1120S. 1040ez.com Recoveries A recovery is a return of an amount you deducted or took a credit for in an earlier year. 1040ez.com The most common recoveries are refunds, reimbursements, and rebates of deductions itemized on Schedule A (Form 1040). 1040ez.com 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. 1040ez.com Tax benefit rule. 1040ez.com   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. 1040ez.com 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. 1040ez.com For more information, see Publication 525. 1040ez.com Federal income tax refund. 1040ez.com   Refunds of federal income taxes are not included in your income because they are never allowed as a deduction from income. 1040ez.com State tax refund. 1040ez.com   If you received a state or local income tax refund (or credit or offset) in 2013, you generally must include it in income if you deducted the tax in an earlier year. 1040ez.com The payer should send Form 1099-G, Certain Government Payments, to you by January 31, 2014. 1040ez.com The IRS also will receive a copy of the Form 1099-G. 1040ez.com If you file Form 1040, use the State and Local Income Tax Refund Worksheet in the 2013 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income. 1040ez.com See Publication 525 for when you must use another worksheet. 1040ez.com   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. 1040ez.com For examples, see Publication 525. 1040ez.com Mortgage interest refund. 1040ez.com    If you received a refund or credit in 2013 of mortgage interest paid in an earlier year, the amount should be shown in box 3 of your Form 1098, Mortgage Interest Statement. 1040ez.com Do not subtract the refund amount from the interest you paid in 2013. 1040ez.com You may have to include it in your income under the rules explained in the following discussions. 1040ez.com Interest on recovery. 1040ez.com   Interest on any of the amounts you recover must be reported as interest income in the year received. 1040ez.com For example, report any interest you received on state or local income tax refunds on Form 1040, line 8a. 1040ez.com Recovery and expense in same year. 1040ez.com   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. 1040ez.com Recovery for 2 or more years. 1040ez.com   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. 1040ez.com 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. 1040ez.com For information on how to compute the allocation, see Recoveries in Publication 525. 1040ez.com Itemized Deduction Recoveries If you recover any amount that you deducted in an earlier year on Schedule A (Form 1040), you generally must include the full amount of the recovery in your income in the year you receive it. 1040ez.com Where to report. 1040ez.com   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. 1040ez.com You cannot use Form 1040A or Form 1040EZ. 1040ez.com Standard deduction limit. 1040ez.com   You generally are allowed to claim the standard deduction if you do not itemize your deductions. 1040ez.com 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). 1040ez.com 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. 1040ez.com Example. 1040ez.com For 2012, you filed a joint return. 1040ez.com Your taxable income was $60,000 and you were not entitled to any tax credits. 1040ez.com Your standard deduction was $11,900, and you had itemized deductions of $14,000. 1040ez.com In 2013, you received the following recoveries for amounts deducted on your 2012 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 2012. 1040ez.com The difference between the state and local income tax you deducted and your local general sales tax was more than $400. 1040ez.com Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($14,000 − 11,900 = $2,100), so you must include your total recoveries in your income for 2013. 1040ez.com 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. 1040ez.com Standard deduction for earlier years. 1040ez.com   To determine if amounts recovered in 2013 must be included in your income, you must know the standard deduction for your filing status for the year the deduction was claimed. 1040ez.com Look in the instructions for your tax return from prior years to locate the standard deduction for the filing status for that prior year. 1040ez.com Example. 1040ez.com You filed a joint return on Form 1040 for 2012 with taxable income of $45,000. 1040ez.com Your itemized deductions were $12,350. 1040ez.com The standard deduction that you could have claimed was $11,900. 1040ez.com In 2013, you recovered $2,100 of your 2012 itemized deductions. 1040ez.com None of the recoveries were more than the actual deductions for 2012. 1040ez.com Include $450 of the recoveries in your 2013 income. 1040ez.com This is the smaller of your recoveries ($2,100) or the amount by which your itemized deductions were more than the standard deduction ($12,350 − $11,900 = $450). 1040ez.com Recovery limited to deduction. 1040ez.com   You do not include in your income any amount of your recovery that is more than the amount you deducted in the earlier year. 1040ez.com The amount you include in your income is limited to the smaller of: The amount deducted on Schedule A (Form 1040), or The amount recovered. 1040ez.com Example. 1040ez.com During 2012 you paid $1,700 for medical expenses. 1040ez.com From this amount you subtracted $1,500, which was 7. 1040ez.com 5% of your adjusted gross income. 1040ez.com Your actual medical expense deduction was $200. 1040ez.com In 2013, you received a $500 reimbursement from your medical insurance for your 2012 expenses. 1040ez.com The only amount of the $500 reimbursement that must be included in your income for 2013 is $200—the amount actually deducted. 1040ez.com Other recoveries. 1040ez.com   See Recoveries in Publication 525 if: You have recoveries of items other than itemized deductions, or You received a recovery for an item for which you claimed a tax credit (other than investment credit or foreign tax credit) in a prior year. 1040ez.com Rents from Personal Property If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is in most cases determined by: Whether or not the rental activity is a business, and Whether or not the rental activity is conducted for profit. 1040ez.com In most cases, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity, your rental activity is a business. 1040ez.com See Publication 535, Business Expenses, for details on deducting expenses for both business and not-for-profit activities. 1040ez.com Reporting business income and expenses. 1040ez.com    If you are in the business of renting personal property, report your income and expenses on Schedule C or Schedule C-EZ (Form 1040). 1040ez.com The form instructions have information on how to complete them. 1040ez.com Reporting nonbusiness income. 1040ez.com   If you are not in the business of renting personal property, report your rental income on Form 1040, line 21. 1040ez.com List the type and amount of the income on the dotted line next to line 21. 1040ez.com Reporting nonbusiness expenses. 1040ez.com   If you rent personal property for profit, include your rental expenses in the total amount you enter on Form 1040, line 36. 1040ez.com Also enter the amount and “PPR” on the dotted line next to line 36. 1040ez.com   If you do not rent personal property for profit, your deductions are limited and you cannot report a loss to offset other income. 1040ez.com See Activity not for profit , under Other Income, later. 1040ez.com Repayments If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid from your income for the year in which you repaid it. 1040ez.com Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. 1040ez.com Generally, you can claim a deduction or credit only if the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction. 1040ez.com Type of deduction. 1040ez.com   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. 1040ez.com You generally deduct the repayment on the same form or schedule on which you previously reported it as income. 1040ez.com For example, if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). 1040ez.com If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). 1040ez.com If you reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction on Schedule A (Form 1040). 1040ez.com Repaid social security benefits. 1040ez.com   If you repaid social security benefits or equivalent railroad retirement benefits, see Repayment of benefits in chapter 11. 1040ez.com Repayment of $3,000 or less. 1040ez.com   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. 1040ez.com If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 23. 1040ez.com Repayment over $3,000. 1040ez.com   If the amount you repaid was more than $3,000, you can deduct the repayment (as explained under Type of deduction , earlier). 1040ez.com However, you can choose instead to take a tax credit for the year of repayment if you included the income under a claim of right. 1040ez.com This means that at the time you included the income, it appeared that you had an unrestricted right to it. 1040ez.com If you qualify for this choice, figure your tax under both methods and compare the results. 1040ez.com Use the method (deduction or credit) that results in less tax. 1040ez.com When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the return. 1040ez.com Each instance of repayment is not considered separately. 1040ez.com Method 1. 1040ez.com   Figure your tax for 2013 claiming a deduction for the repaid amount. 1040ez.com If you must deduct it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 28. 1040ez.com Method 2. 1040ez.com   Figure your tax for 2013 claiming a credit for the repaid amount. 1040ez.com Follow these steps. 1040ez.com Figure your tax for 2013 without deducting the repaid amount. 1040ez.com Refigure your tax from the earlier year without including in income the amount you repaid in 2013. 1040ez.com Subtract the tax in (2) from the tax shown on your return for the earlier year. 1040ez.com This is the credit. 1040ez.com Subtract the answer in (3) from the tax for 2013 figured without the deduction (Step 1). 1040ez.com   If method 1 results in less tax, deduct the amount repaid. 1040ez.com If method 2 results in less tax, claim the credit figured in (3) above on Form 1040, line 71, by adding the amount of the credit to any other credits on this line, and entering “I. 1040ez.com R. 1040ez.com C. 1040ez.com 1341” in the column to the right of line 71. 1040ez.com   An example of this computation can be found in Publication 525. 1040ez.com Repaid wages subject to social security and Medicare taxes. 1040ez.com   If you had to repay an amount that you included in your wages or compensation in an earlier year on which social security, Medicare, or tier 1 RRTA taxes were paid, ask your employer to refund the excess amount to you. 1040ez.com If the employer refuses to refund the taxes, ask for a statement indicating the amount of the overcollection to support your claim. 1040ez.com File a claim for refund using Form 843, Claim for Refund and Request for Abatement. 1040ez.com Repaid wages subject to Additional Medicare Tax. 1040ez.com   Employers cannot make an adjustment or file a claim for refund for Additional Medicare Tax withholding when there is a repayment of wages received by an employee in a prior year because the employee determines liability for Additional Medicare Tax on the employee's income tax return for the prior year. 1040ez.com If you had to repay an amount that you included in your wages or compensation in an earlier year, and on which Additional Medicare Tax was paid, you may be able to recover the Additional Medicare Tax paid on the amount. 1040ez.com To recover Additional Medicare Tax on the repaid wages or compensation, you must file Form 1040X, Amended U. 1040ez.com S. 1040ez.com Individual Income Tax Return, for the prior year in which the wages or compensation were originally received. 1040ez.com See the Instructions for Form 1040X. 1040ez.com Royalties Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income. 1040ez.com In most cases you report royalties in Part I of Schedule E (Form 1040). 1040ez.com However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc. 1040ez.com , report your income and expenses on Schedule C or Schedule C-EZ (Form 1040). 1040ez.com Copyrights and patents. 1040ez.com   Royalties from copyrights on literary, musical, or artistic works, and similar property, or from patents on inventions, are amounts paid to you for the right to use your work over a specified period of time. 1040ez.com Royalties generally are based on the number of units sold, such as the number of books, tickets to a performance, or machines sold. 1040ez.com Oil, gas, and minerals. 1040ez.com   Royalty income from oil, gas, and mineral properties is the amount you receive when natural resources are extracted from your property. 1040ez.com The royalties are based on units, such as barrels, tons, etc. 1040ez.com , and are paid to you by a person or company who leases the property from you. 1040ez.com Depletion. 1040ez.com   If you are the owner of an economic interest in mineral deposits or oil and gas wells, you can recover your investment through the depletion allowance. 1040ez.com For information on this subject, see chapter 9 of Publication 535. 1040ez.com Coal and iron ore. 1040ez.com   Under certain circumstances, you can treat amounts you receive from the disposal of coal and iron ore as payments from the sale of a capital asset, rather than as royalty income. 1040ez.com For information about gain or loss from the sale of coal and iron ore, see Publication 544. 1040ez.com Sale of property interest. 1040ez.com   If you sell your complete interest in oil, gas, or mineral rights, the amount you receive is considered payment for the sale of property used in a trade or business under section 1231, not royalty income. 1040ez.com Under certain circumstances, the sale is subject to capital gain or loss treatment as explained in the Instructions for Schedule D (Form 1040). 1040ez.com For more information on selling section 1231 property, see chapter 3 of Publication 544. 1040ez.com   If you retain a royalty, an overriding royalty, or a net profit interest in a mineral property for the life of the property, you have made a lease or a sublease, and any cash you receive for the assignment of other interests in the property is ordinary income subject to a depletion allowance. 1040ez.com Part of future production sold. 1040ez.com   If you own mineral property but sell part of the future production, in most cases you treat the money you receive from the buyer at the time of the sale as a loan from the buyer. 1040ez.com Do not include it in your income or take depletion based on it. 1040ez.com   When production begins, you include all the proceeds in your income, deduct all the production expenses, and deduct depletion from that amount to arrive at your taxable income from the property. 1040ez.com Unemployment Benefits The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits. 1040ez.com Unemployment compensation. 1040ez.com   You must include in income all unemployment compensation you receive. 1040ez.com You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you. 1040ez.com In most cases, you enter unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. 1040ez.com Types of unemployment compensation. 1040ez.com   Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. 1040ez.com It includes the following benefits. 1040ez.com Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund. 1040ez.com State unemployment insurance benefits. 1040ez.com Railroad unemployment compensation benefits. 1040ez.com Disability payments from a government program paid as a substitute for unemployment compensation. 1040ez.com (Amounts received as workers' compensation for injuries or illness are not unemployment compensation. 1040ez.com See chapter 5 for more information. 1040ez.com ) Trade readjustment allowances under the Trade Act of 1974. 1040ez.com Unemployment assistance under the Disaster Relief and Emergency Assistance Act. 1040ez.com Unemployment assistance under the Airline Deregulation Act of 1974 Program. 1040ez.com Governmental program. 1040ez.com   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. 1040ez.com If you deducted all of your contributions to the program, the entire amount you receive under the program is included in your income. 1040ez.com Repayment of unemployment compensation. 1040ez.com   If you repaid in 2013 unemployment compensation you received in 2013, 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. 1040ez.com On the dotted line next to your entry enter “Repaid” and the amount you repaid. 1040ez.com If you repaid unemployment compensation in 2013 that you included in income in an earlier year, you can deduct the amount repaid on Schedule A (Form 1040), line 23, if you itemize deductions. 1040ez.com If the amount is more than $3,000, see Repayments , earlier. 1040ez.com Tax withholding. 1040ez.com   You can choose to have federal income tax withheld from your unemployment compensation. 1040ez.com To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. 1040ez.com Tax will be withheld at 10% of your payment. 1040ez.com    If you do not choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. 1040ez.com 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. 1040ez.com For more information on estimated tax, see chapter 4. 1040ez.com Supplemental unemployment benefits. 1040ez.com   Benefits received from an employer-financed fund (to which the employees did not contribute) are not unemployment compensation. 1040ez.com They are taxable as wages and are subject to withholding for income tax. 1040ez.com They may be subject to social security and Medicare taxes. 1040ez.com For more information, see Supplemental Unemployment Benefits in section 5 of Publication 15-A, Employer's Supplemental Tax Guide. 1040ez.com Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. 1040ez.com Repayment of benefits. 1040ez.com   You may have to repay some of your supplemental unemployment benefits to qualify for trade readjustment allowances under the Trade Act of 1974. 1040ez.com If you repay supplemental unemployment benefits in the same year you receive them, reduce the total benefits by the amount you repay. 1040ez.com If you repay the benefits in a later year, you must include the full amount of the benefits received in your income for the year you received them. 1040ez.com   Deduct the repayment in the later year as an adjustment to gross income on Form 1040. 1040ez.com (You cannot use Form 1040A or Form 1040EZ. 1040ez.com ) Include the repayment on Form 1040, line 36, and enter “Sub-Pay TRA” and the amount on the dotted line next to line 36. 1040ez.com 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. 1040ez.com For more information on this, see Repayments , earlier. 1040ez.com Private unemployment fund. 1040ez.com   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. 1040ez.com Report the taxable amount on Form 1040, line 21. 1040ez.com Payments by a union. 1040ez.com   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. 1040ez.com 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. 1040ez.com Guaranteed annual wage. 1040ez.com   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. 1040ez.com Include them on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. 1040ez.com State employees. 1040ez.com   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. 1040ez.com Although the payments are fully taxable, do not report them as unemployment compensation. 1040ez.com Report these payments on Form 1040, line 21. 1040ez.com 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 to blind individuals under a state public assistance law. 1040ez.com 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. 1040ez.com Do not deduct medical expenses that are reimbursed by such a fund. 1040ez.com You must include in your income any welfare payments that are compensation for services or that are obtained fraudulently. 1040ez.com Reemployment Trade Adjustment Assistance (RTAA) payments. 1040ez.com   RTAA payments received from a state must be included in your income. 1040ez.com The state must send you Form 1099-G to advise you of the amount you should include in income. 1040ez.com The amount should be reported on Form 1040, line 21. 1040ez.com Persons with disabilities. 1040ez.com   If you have a disability, you must include in income compensation you receive for services you perform unless the compensation is otherwise excluded. 1040ez.com 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. 1040ez.com 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 individuals with an intellectual disability do their work. 1040ez.com Disaster relief grants. 1040ez.com    Do not include post-disaster grants received under the Robert T. 1040ez.com Stafford 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, child care, or funeral expenses. 1040ez.com Do not deduct casualty losses or medical expenses that are specifically reimbursed by these disaster relief grants. 1040ez.com 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. 1040ez.com See Recoveries , earlier. 1040ez.com Unemployment assistance payments under the Act are taxable unemployment compensation. 1040ez.com See Unemployment compensation under Unemployment Benefits, earlier. 1040ez.com Disaster relief payments. 1040ez.com   You can exclude from income any amount you receive that is a qualified disaster relief payment. 1040ez.com 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. 1040ez.com You can exclude this amount only to the extent any expense it pays for is not paid for by insurance or otherwise. 1040ez.com The exclusion does not apply if you were a participant or conspirator in a terrorist action or a representative of one. 1040ez.com   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. 1040ez.com   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. 1040ez.com Disaster mitigation payments. 1040ez.com   You also can exclude from income any amount you receive that is a qualified disaster mitigation payment. 1040ez.com 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. 1040ez.com However, disaster mitigation payments are used to mitigate (reduce the severity of) potential damage from future natural disasters. 1040ez.com They are paid to you through state and local governments based on the provisions of the Robert T. 1040ez.com Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act. 1040ez.com   You cannot increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation payments. 1040ez.com Home Affordable Modification Program (HAMP). 1040ez.com   If you benefit from Pay-for-Performance Success Payments under HAMP, the payments are not taxable. 1040ez.com Mortgage assistance payments under section 235 of the National Housing Act. 1040ez.com   Payments made under section 235 of the National Housing Act for mortgage assistance are not included in the homeowner's income. 1040ez.com Interest paid for the homeowner under the mortgage assistance program cannot be deducted. 1040ez.com Medicare. 1040ez.com   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. 1040ez.com This includes basic (part A (Hospital Insurance Benefits for the Aged)) and supplementary (part B (Supplementary Medical Insurance Benefits for the Aged)). 1040ez.com Old-age, survivors, and disability insurance benefits (OASDI). 1040ez.com   Generally, 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. 1040ez.com 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. 1040ez.com Nutrition Program for the Elderly. 1040ez.com    Food benefits you receive under the Nutrition Program for the Elderly are not taxable. 1040ez.com 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. 1040ez.com Payments to reduce cost of winter energy. 1040ez.com   Payments made by a state to qualified people to reduce their cost of winter energy use are not taxable. 1040ez.com Other Income The following brief discussions are arranged in alphabetical order. 1040ez.com Other income items briefly discussed below are referenced to publications which provide more topical information. 1040ez.com Activity not for profit. 1040ez.com   You must include on your return income from an activity from which you do not expect to make a profit. 1040ez.com An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. 1040ez.com Enter this income on Form 1040, line 21. 1040ez.com Deductions for expenses related to the activity are limited. 1040ez.com They cannot total more than the income you report and can be taken only if you itemize deductions on Schedule A (Form 1040). 1040ez.com See Not-for-Profit Activities in chapter 1 of Publication 535 for information on whether an activity is considered carried on for a profit. 1040ez.com Alaska Permanent Fund dividend. 1040ez.com   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. 1040ez.com The state of Alaska sends each recipient a document that shows the amount of the payment with the check. 1040ez.com The amount also is reported to IRS. 1040ez.com Alimony. 1040ez.com   Include in your income on Form 1040, line 11, any alimony payments you receive. 1040ez.com Amounts you receive for child support are not income to you. 1040ez.com Alimony and child support payments are discussed in chapter 18. 1040ez.com Bribes. 1040ez.com   If you receive a bribe, include it in your income. 1040ez.com Campaign contributions. 1040ez.com   These contributions are not income to a candidate unless they are diverted to his or her personal use. 1040ez.com To be exempt from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. 1040ez.com 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. 1040ez.com S. 1040ez.com Income Tax Return for Certain Political Organizations. 1040ez.com 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. 1040ez.com Car pools. 1040ez.com   Do not include in your income amounts you receive from the passengers for driving a car in a car pool to and from work. 1040ez.com These amounts are considered reimbursement for your expenses. 1040ez.com However, this rule does not apply if you have developed car pool arrangements into a profit-making business of transporting workers for hire. 1040ez.com Cash rebates. 1040ez.com   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. 1040ez.com Example. 1040ez.com You buy a new car for $24,000 cash and receive a $2,000 rebate check from the manufacturer. 1040ez.com The $2,000 is not income to you. 1040ez.com Your basis in the car is $22,000. 1040ez.com This is the basis on which you figure gain or loss if you sell the car and depreciation if you use it for business. 1040ez.com Casualty insurance and other reimbursements. 1040ez.com   You generally should not report these reimbursements on your return unless you are figuring gain or loss from the casualty or theft. 1040ez.com See chapter 25 for more information. 1040ez.com Child support payments. 1040ez.com   You should not report these payments on your return. 1040ez.com See chapter 18 for more information. 1040ez.com Court awards and damages. 1040ez.com   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. 1040ez.com The character of the income as ordinary income or capital gain depends on the nature of the underlying claim. 1040ez.com Include the following as ordinary income. 1040ez.com Interest on any award. 1040ez.com Compensation for lost wages or lost profits in most cases. 1040ez.com Punitive damages, in most cases. 1040ez.com It does not matter if they relate to a physical injury or physical sickness. 1040ez.com Amounts received in settlement of pension rights (if you did not contribute to the plan). 1040ez.com Damages for: Patent or copyright infringement, Breach of contract, or Interference with business operations. 1040ez.com Back pay and damages for emotional distress received to satisfy a claim under title VII of the Civil Rights Act of 1964. 1040ez.com Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income. 1040ez.com   Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum or installments). 1040ez.com Emotional distress. 1040ez.com   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. 1040ez.com Do not include them in your income. 1040ez.com   If the emotional distress is due to a personal injury that is not due to a physical injury or sickness (for example, employment 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. 1040ez.com Emotional distress includes physical symptoms that result from emotional distress, such as headaches, insomnia, and stomach disorders. 1040ez.com Deduction for costs involved in unlawful discrimination suits. 1040ez.com   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. 1040ez.com For more information, see Publication 525. 1040ez.com Credit card insurance. 1040ez.com   In most cases, if you receive benefits under a credit card disability or unemployment insurance plan, the benefits are taxable to you. 1040ez.com 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. 1040ez.com 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. 1040ez.com Down payment assistance. 1040ez.com   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. 1040ez.com 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. 1040ez.com 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. 1040ez.com Employment agency fees. 1040ez.com   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. 1040ez.com However, if you pay it and your employer reimburses you for it, it is includible in your income. 1040ez.com Energy conservation subsidies. 1040ez.com   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. 1040ez.com Energy conservation measure. 1040ez.com   This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand. 1040ez.com Dwelling unit. 1040ez.com   This includes a house, apartment, condominium, mobile home, boat, or similar property. 1040ez.com If a building or structure contains both dwelling and other units, any subsidy must be properly allocated. 1040ez.com Estate and trust income. 1040ez.com    An estate or trust, unlike a partnership, may have to pay federal income tax. 1040ez.com 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. 1040ez.com However, there is never a double tax. 1040ez.com Estates and trusts file their returns on Form 1041, U. 1040ez.com S. 1040ez.com Income Tax Return for Estates and Trusts, and your share of the income is reported to you on Schedule K-1 (Form 1041). 1040ez.com Current income required to be distributed. 1040ez.com   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. 1040ez.com Current income not required to be distributed. 1040ez.com    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. 1040ez.com How to report. 1040ez.com   Treat each item of income the same way that the estate or trust would treat it. 1040ez.com For example, if a trust's dividend income is distributed to you, you report the distribution as dividend income on your return. 1040ez.com The same rule applies to distributions of tax-exempt interest and capital gains. 1040ez.com   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. 1040ez.com Losses. 1040ez.com   Losses of estates and trusts generally are not deductible by the beneficiaries. 1040ez.com Grantor trust. 1040ez.com   Income earned by a grantor trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over the trust. 1040ez.com (The grantor is the one who transferred property to the trust. 1040ez.com ) 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. 1040ez.com   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. 1040ez.com Expenses paid by another. 1040ez.com   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. 1040ez.com 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. 1040ez.com Fees for services. 1040ez.com   Include all fees for your services in your income. 1040ez.com 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. 1040ez.com Nonemployee compensation. 1040ez.com   If you are not an employee and the fees for your services from the same payer total $600 or more for the year, you may receive a Form 1099-MISC. 1040ez.com You may need to report your fees as self-employment income. 1040ez.com See Self-Employed Persons , in chapter 1, for a discussion of when you are considered self-employed. 1040ez.com Corporate director. 1040ez.com   Corporate director fees are self-employment income. 1040ez.com Report these payments on Schedule C or Schedule C-EZ (Form 1040). 1040ez.com Personal representatives. 1040ez.com   All personal representatives must include in their gross income fees paid to them from an estate. 1040ez.com 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. 1040ez.com 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). 1040ez.com The fee is not includible in income if it is waived. 1040ez.com Manager of trade or business for bankruptcy estate. 1040ez.com   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. 1040ez.com Report this income on Form 1040, line 21. 1040ez.com Notary public. 1040ez.com    Report payments for these services on Schedule C or Schedule C-EZ (Form 1040). 1040ez.com These payments are not subject to self-employment tax. 1040ez.com See the separate instructions for Schedule SE (Form 1040) for details. 1040ez.com Election precinct official. 1040ez.com    You should receive a Form W-2 showing payments for services performed as an election official or election worker. 1040ez.com Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. 1040ez.com Foster care providers. 1040ez.com   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. 1040ez.com 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. 1040ez.com   A qualified foster individual is a person who: Is living in a foster family home, and Was placed there by: An agency of a state or one of its political subdivisions, or A qualified foster care placement agency. 1040ez.com Difficulty-of-care payments. 1040ez.com   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. 1040ez.com 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. 1040ez.com   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. 1040ez.com Maintaining space in home. 1040ez.com   If you are paid to maintain space in your home for emergency foster care, you must include the payment in your income. 1040ez.com Reporting taxable payments. 1040ez.com    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. 1040ez.com Report the payments on Schedule C or Schedule C-EZ (Form 1040). 1040ez.com See Publication 587, Business Use of Your Home, to help you determine the amount you can deduct for the use of your home. 1040ez.com Found property. 1040ez.com   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. 1040ez.com Free tour. 1040ez.com   If you received a free tour from a travel agency for organizing a group of tourists, you must include its value in your income. 1040ez.com 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. 1040ez.com You cannot deduct your expenses in serving as the voluntary leader of the group at the group's request. 1040ez.com If you organize tours as a trade or business, report the tour's value on Schedule C or Schedule C-EZ (Form 1040). 1040ez.com Gambling winnings. 1040ez.com   You must include your gambling winnings in income on Form 1040, line 21. 1040ez.com 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. 1040ez.com Lotteries and raffles. 1040ez.com   Winnings from lotteries and raffles are gambling winnings. 1040ez.com In addition to cash winnings, you must include in your income the fair market value of bonds, cars, houses, and other noncash prizes. 1040ez.com    If you win a state lottery prize payable in installments, see Publication 525 for more information. 1040ez.com Form W-2G. 1040ez.com   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. 1040ez.com Include the amount from box 1 on Form 1040, line 21. 1040ez.com Include the amount shown in box 4 on Form 1040, line 62, as federal income tax withheld. 1040ez.com Reporting winnings and recordkeeping. 1040ez.com   For more information on reporting gam