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2011 1040x

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2011 1040x

2011 1040x Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. 2011 1040x Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. 2011 1040x For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. 2011 1040x Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. 2011 1040x See Passive Activity Deductions, later. 2011 1040x Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. 2011 1040x However, there is a special allowance under which some or all of your passive activity loss may be allowed. 2011 1040x See Special $25,000 allowance , later. 2011 1040x Definition of passive activity loss. 2011 1040x    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. 2011 1040x See Passive Activity Income and Deductions , later. 2011 1040x   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. 2011 1040x For details on net active income, see the Instructions for Form 8810. 2011 1040x For the definition of passive activity gross income, see Passive Activity Income , later. 2011 1040x For the definition of passive activity deductions, see Passive Activity Deductions , later. 2011 1040x Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. 2011 1040x Allocation of disallowed passive activity loss among activities. 2011 1040x   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. 2011 1040x The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. 2011 1040x Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. 2011 1040x Loss from an activity. 2011 1040x   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. 2011 1040x   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. 2011 1040x See Significant Participation Passive Activities , later. 2011 1040x Example. 2011 1040x John Pine holds interests in three passive activities, A, B, and C. 2011 1040x The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. 2011 1040x Therefore, a ratable portion of the losses from activities A and B is disallowed. 2011 1040x He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. 2011 1040x   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. 2011 1040x The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. 2011 1040x Excluded deductions. 2011 1040x    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. 2011 1040x See Recharacterization of Passive Income , later. 2011 1040x Separately identified deductions. 2011 1040x   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. 2011 1040x   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. 2011 1040x   Deductions that must be accounted for separately include (but are not limited to) the following deductions. 2011 1040x Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. 2011 1040x See Active participation , later. 2011 1040x Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. 2011 1040x See Active participation , later. 2011 1040x Losses from sales or exchanges of capital assets. 2011 1040x Section 1231 losses. 2011 1040x See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. 2011 1040x Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. 2011 1040x The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. 2011 1040x For more information, see Regulations section 1. 2011 1040x 469-1(f)(4). 2011 1040x Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. 2011 1040x The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. 2011 1040x Credits that are included in figuring the general business credit are subject to the passive activity rules. 2011 1040x See the Instructions for Form 8582-CR for more information. 2011 1040x Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). 2011 1040x You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. 2011 1040x You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. 2011 1040x Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. 2011 1040x This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. 2011 1040x For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. 2011 1040x Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. 2011 1040x These rules do not apply to C corporations. 2011 1040x For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. 2011 1040x Passive Activities There are two kinds of passive activities. 2011 1040x Trade or business activities in which you do not materially participate during the year. 2011 1040x Rental activities, even if you do materially participate in them, unless you are a real estate professional. 2011 1040x Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . 2011 1040x Treatment of former passive activities. 2011 1040x   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. 2011 1040x You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. 2011 1040x Treat any remaining prior year unallowed loss like you treat any other passive loss. 2011 1040x   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. 2011 1040x The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. 2011 1040x You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). 2011 1040x Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). 2011 1040x A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. 2011 1040x You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. 2011 1040x Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. 2011 1040x See Real Estate Professional under Activities That Are Not Passive Activities, later. 2011 1040x An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. 2011 1040x It does not matter whether the use is under a lease, a service contract, or some other arrangement. 2011 1040x Exceptions. 2011 1040x   Your activity is not a rental activity if any of the following apply. 2011 1040x The average period of customer use of the property is 7 days or less. 2011 1040x You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. 2011 1040x If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. 2011 1040x The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. 2011 1040x The activity's average period of customer use will equal the sum of the amounts for each class. 2011 1040x The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. 2011 1040x Significant personal services include only services performed by individuals. 2011 1040x To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. 2011 1040x Significant personal services do not include the following. 2011 1040x Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. 2011 1040x You provide extraordinary personal services in making the rental property available for customer use. 2011 1040x Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. 2011 1040x The rental is incidental to a nonrental activity. 2011 1040x The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. 2011 1040x The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. 2011 1040x The rental of property is incidental to a trade or business activity if all of the following apply. 2011 1040x You own an interest in the trade or business activity during the year. 2011 1040x The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. 2011 1040x Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. 2011 1040x Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. 2011 1040x You customarily make the rental property available during defined business hours for nonexclusive use by various customers. 2011 1040x You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. 2011 1040x    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. 2011 1040x Special $25,000 allowance. 2011 1040x   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. 2011 1040x This special allowance is an exception to the general rule disallowing the passive activity loss. 2011 1040x Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. 2011 1040x   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. 2011 1040x If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. 2011 1040x   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. 2011 1040x See Phaseout rule , later. 2011 1040x Example. 2011 1040x Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. 2011 1040x She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. 2011 1040x She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). 2011 1040x Commercial revitalization deduction (CRD). 2011 1040x   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. 2011 1040x Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. 2011 1040x You cannot claim a CRD for a building placed in service after December 31, 2009. 2011 1040x Active participation. 2011 1040x   Active participation is not the same as material participation (defined later). 2011 1040x Active participation is a less stringent standard than material participation. 2011 1040x For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. 2011 1040x Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. 2011 1040x   Only individuals can actively participate in rental real estate activities. 2011 1040x However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. 2011 1040x   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. 2011 1040x The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. 2011 1040x   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). 2011 1040x   Limited partners are not treated as actively participating in a partnership's rental real estate activities. 2011 1040x   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. 2011 1040x   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. 2011 1040x Example. 2011 1040x Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. 2011 1040x He advertised and rented the house to the current tenant himself. 2011 1040x He also collected the rents and did the repairs or hired someone to do them. 2011 1040x Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. 2011 1040x Phaseout rule. 2011 1040x   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). 2011 1040x If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. 2011 1040x    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. 2011 1040x Taxable social security and tier 1 railroad retirement benefits. 2011 1040x Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. 2011 1040x The exclusion from income of interest from qualified U. 2011 1040x S. 2011 1040x savings bonds used to pay qualified higher education expenses. 2011 1040x The exclusion from income of amounts received from an employer's adoption assistance program. 2011 1040x Passive activity income or loss included on Form 8582. 2011 1040x Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). 2011 1040x Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). 2011 1040x The deduction for the employer-equivalent portion of self-employment tax. 2011 1040x The deduction for domestic production activities. 2011 1040x The deduction allowed for interest on student loans. 2011 1040x The deduction for qualified tuition and related expenses. 2011 1040x Example. 2011 1040x During 2013, John was unmarried and was not a real estate professional. 2011 1040x For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. 2011 1040x His modified adjusted gross income is $120,000. 2011 1040x When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. 2011 1040x He must carry over the remaining $16,000 passive activity loss to 2014. 2011 1040x He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. 2011 1040x   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. 2011 1040x For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). 2011 1040x   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. 2011 1040x Ordering rules. 2011 1040x   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. 2011 1040x The portion of passive activity losses not attributable to the CRD. 2011 1040x The portion of passive activity losses attributable to the CRD. 2011 1040x The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. 2011 1040x The portion of passive activity credits attributable to the rehabilitation credit. 2011 1040x The portion of passive activity credits attributable to the low-income housing credit. 2011 1040x Activities That Are Not Passive Activities The following are not passive activities. 2011 1040x Trade or business activities in which you materially participated for the tax year. 2011 1040x A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). 2011 1040x It does not matter whether you materially participated in the activity for the tax year. 2011 1040x However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. 2011 1040x  See Temporary Regulations section 1. 2011 1040x 469-1T(e)(4)(ii). 2011 1040x The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. 2011 1040x An activity of trading personal property for the account of those who own interests in the activity. 2011 1040x See Temporary Regulations section 1. 2011 1040x 469-1T(e)(6). 2011 1040x Rental real estate activities in which you materially participated as a real estate professional. 2011 1040x See Real Estate Professional , later. 2011 1040x You should not enter income and losses from these activities on Form 8582. 2011 1040x Instead, enter them on the forms or schedules you would normally use. 2011 1040x Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. 2011 1040x Material participation tests. 2011 1040x    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. 2011 1040x You participated in the activity for more than 500 hours. 2011 1040x Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. 2011 1040x You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. 2011 1040x The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. 2011 1040x A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. 2011 1040x See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. 2011 1040x You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. 2011 1040x The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. 2011 1040x An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. 2011 1040x Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. 2011 1040x   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. 2011 1040x Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). 2011 1040x Participation. 2011 1040x   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. 2011 1040x Work not usually performed by owners. 2011 1040x   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. 2011 1040x The work is not work that is customarily done by the owner of that type of activity. 2011 1040x One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. 2011 1040x Participation as an investor. 2011 1040x   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. 2011 1040x Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. 2011 1040x Spouse's participation. 2011 1040x   Your participation in an activity includes your spouse's participation. 2011 1040x This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. 2011 1040x Proof of participation. 2011 1040x You can use any reasonable method to prove your participation in an activity for the year. 2011 1040x You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. 2011 1040x For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. 2011 1040x Limited partners. 2011 1040x   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. 2011 1040x However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. 2011 1040x   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). 2011 1040x Retired or disabled farmer and surviving spouse of a farmer. 2011 1040x   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. 2011 1040x Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. 2011 1040x Corporations. 2011 1040x   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. 2011 1040x   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. 2011 1040x See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. 2011 1040x Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. 2011 1040x However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. 2011 1040x For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. 2011 1040x See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. 2011 1040x If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). 2011 1040x If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. 2011 1040x Qualifications. 2011 1040x   You qualified as a real estate professional for the year if you met both of the following requirements. 2011 1040x More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. 2011 1040x You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. 2011 1040x   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. 2011 1040x You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. 2011 1040x   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. 2011 1040x However, you can count your spouse's participation in an activity in determining if you materially participated. 2011 1040x Real property trades or businesses. 2011 1040x   A real property trade or business is a trade or business that does any of the following with real property. 2011 1040x Develops or redevelops it. 2011 1040x Constructs or reconstructs it. 2011 1040x Acquires it. 2011 1040x Converts it. 2011 1040x Rents or leases it. 2011 1040x Operates or manages it. 2011 1040x Brokers it. 2011 1040x Closely held corporations. 2011 1040x   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. 2011 1040x Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. 2011 1040x Self-charged interest. 2011 1040x   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. 2011 1040x   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. 2011 1040x This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. 2011 1040x   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. 2011 1040x    Exception. 2011 1040x The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. 2011 1040x 469-7(g) to avoid the application of these rules. 2011 1040x For more details on the self-charged interest rules, see Regulations section 1. 2011 1040x 469-7. 2011 1040x Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. 2011 1040x Passive activity income does not include the following items. 2011 1040x Income from an activity that is not a passive activity. 2011 1040x These activities are discussed under Activities That Are Not Passive Activities , earlier. 2011 1040x Portfolio income. 2011 1040x This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. 2011 1040x It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. 2011 1040x The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. 2011 1040x For more information on self-charged interest, see Self-charged interest , earlier. 2011 1040x Personal service income. 2011 1040x This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. 2011 1040x Income from positive section 481 adjustments allocated to activities other than passive activities. 2011 1040x (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. 2011 1040x ) Income or gain from investments of working capital. 2011 1040x Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. 2011 1040x This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. 2011 1040x Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. 2011 1040x Any other income that must be treated as nonpassive income. 2011 1040x See Recharacterization of Passive Income , later. 2011 1040x Overall gain from any interest in a publicly traded partnership. 2011 1040x See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. 2011 1040x State, local, and foreign income tax refunds. 2011 1040x Income from a covenant not to compete. 2011 1040x Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. 2011 1040x Alaska Permanent Fund dividends. 2011 1040x Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. 2011 1040x See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. 2011 1040x Disposition of property interests. 2011 1040x   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. 2011 1040x The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. 2011 1040x An exception to this general rule may apply if you previously used the property in a different activity. 2011 1040x Exception for more than one use in the preceding 12 months. 2011 1040x   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. 2011 1040x Any gain allocated to a passive activity is passive activity income. 2011 1040x   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. 2011 1040x Exception for substantially appreciated property. 2011 1040x   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. 2011 1040x You used the property in a passive activity for 20% of the time you held your interest in the property. 2011 1040x You used the property in a passive activity for the entire 24-month period before its disposition. 2011 1040x If neither condition applies, the gain is not passive activity income. 2011 1040x However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. 2011 1040x   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. 2011 1040x Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. 2011 1040x   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. 2011 1040x Disposition of property converted to inventory. 2011 1040x   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. 2011 1040x Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. 2011 1040x This rule applies only if you meet all of the following conditions. 2011 1040x At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). 2011 1040x Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. 2011 1040x You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. 2011 1040x Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. 2011 1040x For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. 2011 1040x See Coordination with other limitations on deductions that apply before the passive activity rules , later. 2011 1040x Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. 2011 1040x Exceptions. 2011 1040x   Passive activity deductions do not include the following items. 2011 1040x Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. 2011 1040x Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. 2011 1040x For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. 2011 1040x Losses from dispositions of property that produce portfolio income or property held for investment. 2011 1040x State, local, and foreign income taxes. 2011 1040x Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. 2011 1040x Charitable contribution deductions. 2011 1040x Net operating loss deductions. 2011 1040x Percentage depletion carryovers for oil and gas wells. 2011 1040x Capital loss carrybacks and carryovers. 2011 1040x Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. 2011 1040x See Coordination with other limitations on deductions that apply before the passive activity rules , later. 2011 1040x Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. 2011 1040x Net negative section 481 adjustments allocated to activities other than passive activities. 2011 1040x (Section 481 adjustments are adjustments required due to changes in accounting methods. 2011 1040x ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. 2011 1040x The deduction for the employer-equivalent portion of self-employment tax. 2011 1040x Coordination with other limitations on deductions that apply before the passive activity rules. 2011 1040x   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. 2011 1040x The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. 2011 1040x Proration of deductions disallowed under basis limitations. 2011 1040x   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. 2011 1040x For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. 2011 1040x   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. 2011 1040x For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. 2011 1040x Proration of deductions disallowed under at-risk limitation. 2011 1040x   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. 2011 1040x For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. 2011 1040x Coordination of basis and at-risk limitations. 2011 1040x   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. 2011 1040x Separately identified items of deduction and loss. 2011 1040x   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. 2011 1040x   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. 2011 1040x See Grouping Your Activities , later. 2011 1040x Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). 2011 1040x See Section 1231 Gains and Losses in Publication 544 for more information. 2011 1040x Are attributable to pre-enactment interests in activities. 2011 1040x See Regulations section 1. 2011 1040x 469-11T(c). 2011 1040x Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. 2011 1040x Grouping is important for a number of reasons. 2011 1040x If you group two activities into one larger activity, you need only show material participation in the activity as a whole. 2011 1040x But if the two activities are separate, you must show material participation in each one. 2011 1040x On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. 2011 1040x But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. 2011 1040x Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. 2011 1040x Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. 2011 1040x You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. 2011 1040x The following factors have the greatest weight in determining whether activities form an appropriate economic unit. 2011 1040x All of the factors do not have to apply to treat more than one activity as a single activity. 2011 1040x The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. 2011 1040x Example 1. 2011 1040x John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. 2011 1040x Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. 2011 1040x For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. 2011 1040x Example 2. 2011 1040x Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. 2011 1040x Betty is also a partner in DEF (a trucking business). 2011 1040x ABC and DEF are under common control. 2011 1040x The main part of DEF's business is transporting goods for ABC. 2011 1040x DEF is the only trucking business in which Betty is involved. 2011 1040x Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. 2011 1040x Consistency and disclosure requirement. 2011 1040x   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. 2011 1040x You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. 2011 1040x   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. 2011 1040x   See Disclosure Requirement , later. 2011 1040x Regrouping by the IRS. 2011 1040x   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. 2011 1040x Rental activities. 2011 1040x   In general, you cannot group a rental activity with a trade or business activity. 2011 1040x However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. 2011 1040x Example. 2011 1040x Herbert and Wilma are married and file a joint return. 2011 1040x Healthy Food, an S corporation, is a grocery store business. 2011 1040x Herbert is Healthy Food's only shareholder. 2011 1040x Plum Tower, an S corporation, owns and rents out the building. 2011 1040x Wilma is Plum Tower's only shareholder. 2011 1040x Plum Tower rents part of its building to Healthy Food. 2011 1040x Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. 2011 1040x Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. 2011 1040x The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). 2011 1040x If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. 2011 1040x Grouping of real and personal property rentals. 2011 1040x   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. 2011 1040x However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. 2011 1040x Certain activities may not be grouped. 2011 1040x   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. 2011 1040x Holding, producing, or distributing motion picture films or video tapes. 2011 1040x Farming. 2011 1040x Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). 2011 1040x For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. 2011 1040x Exploring for, or exploiting, oil and gas resources. 2011 1040x Exploring for, or exploiting, geothermal deposits. 2011 1040x   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. 2011 1040x Limited entrepreneur. 2011 1040x   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. 2011 1040x Activities conducted through another entity. 2011 1040x   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. 2011 1040x Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. 2011 1040x    You may not treat activities grouped together by the entity as separate activities. 2011 1040x Personal service and closely held corporations. 2011 1040x   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. 2011 1040x See Material Participation , earlier, and Significant Participation Passive Activities , later. 2011 1040x Publicly traded partnership (PTP). 2011 1040x   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. 2011 1040x Partial dispositions. 2011 1040x   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. 2011 1040x However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. 2011 1040x Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. 2011 1040x You are required to report certain changes to your groupings that occur during the tax year to the IRS. 2011 1040x If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. 2011 1040x You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. 2011 1040x If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. 2011 1040x New grouping. 2011 1040x   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. 2011 1040x The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. 2011 1040x In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. 2011 1040x Addition to an existing grouping. 2011 1040x   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. 2011 1040x The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. 2011 1040x In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. 2011 1040x Regrouping. 2011 1040x   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. 2011 1040x The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. 2011 1040x If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. 2011 1040x In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. 2011 1040x Groupings by partnerships and S corporations. 2011 1040x   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. 2011 1040x Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. 2011 1040x S. 2011 1040x Return of Partnership Income, or Form 1120S, U. 2011 1040x S. 2011 1040x Income Tax Return for an S Corporation, whichever is applicable. 2011 1040x   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. 2011 1040x   A partner or shareholder may not treat activities grouped together by the entity as separate activities. 2011 1040x Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. 2011 1040x Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. 2011 1040x If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. 2011 1040x If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). 2011 1040x If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. 2011 1040x Instead, enter income or losses on the form and schedules you normally use. 2011 1040x However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. 2011 1040x Limit on recharacterized passive income. 2011 1040x   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. 2011 1040x Investment income and investment expense. 2011 1040x   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. 2011 1040x Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. 2011 1040x If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. 2011 1040x Corporations. 2011 1040x   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. 2011 1040x The corporation is not treated as materially participating in the activity for the year. 2011 1040x One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. 2011 1040x Worksheet A. 2011 1040x   Complete Worksheet A. 2011 1040x Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. 2011 1040x Begin by entering the name of each activity in the left column. 2011 1040x Column (a). 2011 1040x   Enter the number of hours you participated in each activity and total the column. 2011 1040x   If the total is more than 500, do not complete Worksheet A or B. 2011 1040x None of the activities are passive activities because you satisfy test 4 for material participation. 2011 1040x (See Material participation tests , earlier. 2011 1040x ) Report all the income and losses from these activities on the forms and schedules you normally use. 2011 1040x Do not include the income and losses on Form 8582. 2011 1040x Column (b). 2011 1040x   Enter the net loss, if any, from the activity. 2011 1040x Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). 2011 1040x Enter -0- here if the prior year unallowed loss is the same as the current year net income. 2011 1040x Column (c). 2011 1040x   Enter net income (if any) from the activity. 2011 1040x Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. 2011 1040x Column (d). 2011 1040x   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). 2011 1040x If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. 2011 1040x Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88
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The 2011 1040x

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