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Free Income Tax Filing

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Free Income Tax Filing

Free income tax filing 8. Free income tax filing   Dividends and Other Distributions Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationDividends not reported on Form 1099-DIV. Free income tax filing Reporting tax withheld. Free income tax filing Nominees. Free income tax filing Ordinary DividendsQualified Dividends Dividends Used to Buy More Stock Money Market Funds Capital Gain DistributionsBasis adjustment. Free income tax filing Nondividend DistributionsLiquidating Distributions Distributions of Stock and Stock Rights Other DistributionsInformation reporting requirement. Free income tax filing Alternative minimum tax treatment. Free income tax filing How To Report Dividend IncomeInvestment interest deducted. Free income tax filing Reminder Foreign-source income. Free income tax filing  If you are a U. Free income tax filing S. Free income tax filing citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U. Free income tax filing S. Free income tax filing law. Free income tax filing This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. Free income tax filing Introduction This chapter discusses the tax treatment of: Ordinary dividends, Capital gain distributions, Nondividend distributions, and Other distributions you may receive from a corporation or a mutual fund. Free income tax filing This chapter also explains how to report dividend income on your tax return. Free income tax filing Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. Free income tax filing You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Free income tax filing However, some amounts you receive that are called dividends are actually interest income. Free income tax filing (See Dividends that are actually interest under Taxable Interest in chapter 7. Free income tax filing ) Most distributions are paid in cash (or check). Free income tax filing However, distributions can consist of more stock, stock rights, other property, or services. Free income tax filing Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 550 Investment Income and Expenses Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends General Information This section discusses general rules for dividend income. Free income tax filing Tax on unearned income of certain children. Free income tax filing   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Free income tax filing If it is, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. Free income tax filing If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Free income tax filing    Some parents can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Free income tax filing Use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. Free income tax filing   For more information about the tax on unearned income of children and the parents' election, see chapter 31. Free income tax filing Beneficiary of an estate or trust. Free income tax filing    Dividends and other distributions you receive as a beneficiary of an estate or trust are generally taxable income. Free income tax filing You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Free income tax filing , from the fiduciary. Free income tax filing Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Free income tax filing Social security number (SSN) or individual taxpayer identification number (ITIN). Free income tax filing    You must give your SSN or ITIN to any person required by federal tax law to make a return, statement, or other document that relates to you. Free income tax filing This includes payers of dividends. Free income tax filing If you do not give your SSN or ITIN to the payer of dividends, you may have to pay a penalty. Free income tax filing For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Free income tax filing Backup withholding. Free income tax filing   Your dividend income is generally not subject to regular withholding. Free income tax filing However, it may be subject to backup withholding to ensure that income tax is collected on the income. Free income tax filing Under backup withholding, the payer of dividends must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Free income tax filing   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. Free income tax filing For more information, see Backup Withholding in chapter 4. Free income tax filing Stock certificate in two or more names. Free income tax filing   If two or more persons hold stock as joint tenants, tenants by the entirety, or tenants in common, each person's share of any dividends from the stock is determined by local law. Free income tax filing Form 1099-DIV. Free income tax filing   Most corporations and mutual funds use Form 1099-DIV, Dividends and Distributions, to show you the distributions you received from them during the year. Free income tax filing Keep this form with your records. Free income tax filing You do not have to attach it to your tax return. Free income tax filing Dividends not reported on Form 1099-DIV. Free income tax filing   Even if you do not receive Form 1099-DIV, you must still report all your taxable dividend income. Free income tax filing For example, you may receive distributive shares of dividends from partnerships or S corporations. Free income tax filing These dividends are reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Free income tax filing , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Free income tax filing Reporting tax withheld. Free income tax filing   If tax is withheld from your dividend income, the payer must give you a Form 1099-DIV that indicates the amount withheld. Free income tax filing Nominees. Free income tax filing   If someone receives distributions as a nominee for you, that person should give you a Form 1099-DIV, which will show distributions received on your behalf. Free income tax filing Form 1099-MISC. Free income tax filing   Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. Free income tax filing See Reporting Substitute Payments under Short Sales in chapter 4 of Publication 550 for more information about reporting these payments. Free income tax filing Incorrect amount shown on a Form 1099. Free income tax filing   If you receive a Form 1099 that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Free income tax filing The new Form 1099 you receive will be marked “Corrected. Free income tax filing ” Dividends on stock sold. Free income tax filing   If stock is sold, exchanged, or otherwise disposed of after a dividend is declared but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income. Free income tax filing Dividends received in January. Free income tax filing   If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. Free income tax filing You report the dividend in the year it was declared. Free income tax filing Ordinary Dividends Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. Free income tax filing They are paid out of earnings and profits and are ordinary income to you. Free income tax filing This means they are not capital gains. Free income tax filing You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Free income tax filing Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive. Free income tax filing Qualified Dividends Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. Free income tax filing They should be shown in box 1b of the Form 1099-DIV you receive. Free income tax filing The maximum rate of tax on qualified dividends is: 0% on any amount that otherwise would be taxed at a 10% or 15% rate. Free income tax filing 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39. Free income tax filing 6%. Free income tax filing 20% on any amount that otherwise would be taxed at a 39. Free income tax filing 6% rate. Free income tax filing To qualify for the maximum rate, all of the following requirements must be met. Free income tax filing The dividends must have been paid by a U. Free income tax filing S. Free income tax filing corporation or a qualified foreign corporation. Free income tax filing (See Qualified foreign corporation , later. Free income tax filing ) The dividends are not of the type listed later under Dividends that are not qualified dividends . Free income tax filing You meet the holding period (discussed next). Free income tax filing Holding period. Free income tax filing   You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Free income tax filing The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. Free income tax filing Instead, the seller will get the dividend. Free income tax filing   When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. Free income tax filing See the examples later. Free income tax filing Exception for preferred stock. Free income tax filing   In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. Free income tax filing If the preferred dividends are due to periods totaling less than 367 days, the holding period in the previous paragraph applies. Free income tax filing Example 1. Free income tax filing You bought 5,000 shares of XYZ Corp. Free income tax filing common stock on July 9, 2013. Free income tax filing XYZ Corp. Free income tax filing paid a cash dividend of 10 cents per share. Free income tax filing The ex-dividend date was July 16, 2013. Free income tax filing Your Form 1099-DIV from XYZ Corp. Free income tax filing shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). Free income tax filing However, you sold the 5,000 shares on August 12, 2013. Free income tax filing You held your shares of XYZ Corp. Free income tax filing for only 34 days of the 121-day period (from July 10, 2013, through August 12, 2013). Free income tax filing The 121-day period began on May 17, 2013 (60 days before the ex-dividend date), and ended on September 14, 2013. Free income tax filing You have no qualified dividends from XYZ Corp. Free income tax filing because you held the XYZ stock for less than 61 days. Free income tax filing Example 2. Free income tax filing Assume the same facts as in Example 1 except that you bought the stock on July 15, 2013 (the day before the ex-dividend date), and you sold the stock on September 16, 2013. Free income tax filing You held the stock for 63 days (from July 16, 2013, through September 16, 2013). Free income tax filing The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 16, 2013, through September 14, 2013). Free income tax filing Example 3. Free income tax filing You bought 10,000 shares of ABC Mutual Fund common stock on July 9, 2013. Free income tax filing ABC Mutual Fund paid a cash dividend of 10 cents a share. Free income tax filing The ex-dividend date was July 16, 2013. Free income tax filing The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Free income tax filing Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. Free income tax filing However, you sold the 10,000 shares on August 12, 2013. Free income tax filing You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days. Free income tax filing Holding period reduced where risk of loss is diminished. Free income tax filing   When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions. Free income tax filing You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities. Free income tax filing You were grantor (writer) of an option to buy substantially identical stock or securities. Free income tax filing Your risk of loss is diminished by holding one or more other positions in substantially similar or related property. Free income tax filing   For information about how to apply condition (3), see Regulations section 1. Free income tax filing 246-5. Free income tax filing Qualified foreign corporation. Free income tax filing   A foreign corporation is a qualified foreign corporation if it meets any of the following conditions. Free income tax filing The corporation is incorporated in a U. Free income tax filing S. Free income tax filing possession. Free income tax filing The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. Free income tax filing For a list of those treaties, see Table 8-1. Free income tax filing The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. Free income tax filing See Readily tradable stock , later. Free income tax filing Exception. Free income tax filing   A corporation is not a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year. Free income tax filing Readily tradable stock. Free income tax filing   Any stock (such as common, ordinary, or preferred) or an American depositary receipt in respect of that stock is considered to satisfy requirement (3) under Qualified foreign corporation , if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. Free income tax filing For a list of the exchanges that meet these requirements, see www. Free income tax filing sec. Free income tax filing gov/divisions/marketreg/mrexchanges. Free income tax filing shtml. Free income tax filing Dividends that are not qualified dividends. Free income tax filing   The following dividends are not qualified dividends. Free income tax filing They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV. Free income tax filing Capital gain distributions. Free income tax filing Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U. Free income tax filing S. Free income tax filing building and loan associations, U. Free income tax filing S. Free income tax filing savings and loan associations, federal savings and loan associations, and similar financial institutions. Free income tax filing (Report these amounts as interest income. Free income tax filing ) Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year. Free income tax filing Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation. Free income tax filing Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. Free income tax filing Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. Free income tax filing Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. Free income tax filing Table 8-1. Free income tax filing Income Tax Treaties Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation. Free income tax filing Australia Indonesia Romania Austria Ireland Russian Bangladesh Israel Federation Barbados Italy Slovak Belgium Jamaica Republic Bulgaria Japan Slovenia Canada Kazakhstan South Africa China Korea Spain Cyprus Latvia Sri Lanka Czech Lithuania Sweden Republic Luxembourg Switzerland Denmark Malta Thailand Egypt Mexico Trinidad and Estonia Morocco Tobago Finland Netherlands Tunisia France New Zealand Turkey Germany Norway Ukraine Greece Pakistan United Hungary Philippines Kingdom Iceland Poland Venezuela India Portugal     Dividends Used to Buy More Stock The corporation in which you own stock may have a dividend reinvestment plan. Free income tax filing This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Free income tax filing Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. Free income tax filing If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income. Free income tax filing If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date. Free income tax filing You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. Free income tax filing But you may be able to deduct the service charge. Free income tax filing See chapter 28 for more information about deducting expenses of producing income. Free income tax filing In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. Free income tax filing If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. Free income tax filing When figuring this amount, use the fair market value of the stock on the dividend payment date. Free income tax filing Money Market Funds Report amounts you receive from money market funds as dividend income. Free income tax filing Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest. Free income tax filing Capital Gain Distributions Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). Free income tax filing They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT. Free income tax filing Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT. Free income tax filing Undistributed capital gains of mutual funds and REITs. Free income tax filing    Some mutual funds and REITs keep their long-term capital gains and pay tax on them. Free income tax filing You must treat your share of these gains as distributions, even though you did not actually receive them. Free income tax filing However, they are not included on Form 1099-DIV. Free income tax filing Instead, they are reported to you in box 1a of Form 2439. Free income tax filing   Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), column (h), line 11. Free income tax filing   The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. Free income tax filing You take credit for this tax by including it on Form 1040, line 71, and checking box a on that line. Free income tax filing Attach Copy B of Form 2439 to your return, and keep Copy C for your records. Free income tax filing Basis adjustment. Free income tax filing   Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid. Free income tax filing Additional information. Free income tax filing   For more information on the treatment of distributions from mutual funds, see Publication 550. Free income tax filing Nondividend Distributions A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. Free income tax filing You should receive a Form 1099-DIV or other statement showing the nondividend distribution. Free income tax filing On Form 1099-DIV, a nondividend distribution will be shown in box 3. Free income tax filing If you do not receive such a statement, you report the distribution as an ordinary dividend. Free income tax filing Basis adjustment. Free income tax filing   A nondividend distribution reduces the basis of your stock. Free income tax filing It is not taxed until your basis in the stock is fully recovered. Free income tax filing This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. Free income tax filing If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first. Free income tax filing   When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Free income tax filing Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. Free income tax filing See Holding Period in chapter 14. Free income tax filing Example. Free income tax filing You bought stock in 2000 for $100. Free income tax filing In 2003, you received a nondividend distribution of $80. Free income tax filing You did not include this amount in your income, but you reduced the basis of your stock to $20. Free income tax filing You received a nondividend distribution of $30 in 2013. Free income tax filing The first $20 of this amount reduced your basis to zero. Free income tax filing You report the other $10 as a long-term capital gain for 2013. Free income tax filing You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years. Free income tax filing Liquidating Distributions Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. Free income tax filing These distributions are, at least in part, one form of a return of capital. Free income tax filing They may be paid in one or more installments. Free income tax filing You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9. Free income tax filing For more information on liquidating distributions, see chapter 1 of Publication 550. Free income tax filing Distributions of Stock and Stock Rights Distributions by a corporation of its own stock are commonly known as stock dividends. Free income tax filing Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation's stock. Free income tax filing Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return. Free income tax filing Taxable stock dividends and stock rights. Free income tax filing   Distributions of stock dividends and stock rights are taxable to you if any of the following apply. Free income tax filing You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights. Free income tax filing The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders. Free income tax filing The distribution is in convertible preferred stock and has the same result as in (2). Free income tax filing The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders. Free income tax filing The distribution is on preferred stock. Free income tax filing (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right. Free income tax filing )   The term “stock” includes rights to acquire stock, and the term “shareholder” includes a holder of rights or of convertible securities. Free income tax filing If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income. Free income tax filing Preferred stock redeemable at a premium. Free income tax filing   If you hold preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. Free income tax filing For more information, see chapter 1 of Publication 550. Free income tax filing Basis. Free income tax filing   Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. Free income tax filing If you receive stock or stock rights that are not taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550 for information on how to figure their basis. Free income tax filing Fractional shares. Free income tax filing    You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. Free income tax filing However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares are not issued but instead are sold, and the cash proceeds are given to the shareholders. Free income tax filing Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. Free income tax filing Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. Free income tax filing Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate. Free income tax filing    Report these transactions on Form 8949 with the correct box checked. Free income tax filing   For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Publication 550. Free income tax filing Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Free income tax filing Example. Free income tax filing You own one share of common stock that you bought on January 3, 2004, for $100. Free income tax filing The corporation declared a common stock dividend of 5% on June 29, 2013. Free income tax filing The fair market value of the stock at the time the stock dividend was declared was $200. Free income tax filing You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. Free income tax filing You figure your gain or loss as follows: Fair market value of old stock $200. Free income tax filing 00 Fair market value of stock dividend (cash received) +10. Free income tax filing 00 Fair market value of old stock and stock dividend $210. Free income tax filing 00 Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) $95. Free income tax filing 24 Basis (cost) of stock dividend (($10 ÷ $210) × $100) + 4. Free income tax filing 76 Total $100. Free income tax filing 00 Cash received $10. Free income tax filing 00 Basis (cost) of stock dividend − 4. Free income tax filing 76 Gain $5. Free income tax filing 24 Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain. Free income tax filing Scrip dividends. Free income tax filing   A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. Free income tax filing The certificate is generally nontaxable when you receive it. Free income tax filing If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation's stock allocated to the certificate. Free income tax filing   However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. Free income tax filing You must include its fair market value in income on the date you receive it. Free income tax filing Other Distributions You may receive any of the following distributions during the year. Free income tax filing Exempt-interest dividends. Free income tax filing   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Free income tax filing Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Free income tax filing Information reporting requirement. Free income tax filing   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file a return. Free income tax filing This is an information reporting requirement and does not change the exempt-interest dividends to taxable income. Free income tax filing Alternative minimum tax treatment. Free income tax filing   Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Free income tax filing See Alternative Minimum Tax (AMT) in chapter 30 for more information. Free income tax filing Dividends on insurance policies. Free income tax filing    Insurance policy dividends the insurer keeps and uses to pay your premiums are not taxable. Free income tax filing However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company. Free income tax filing    If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. Free income tax filing Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. Free income tax filing Report any taxable distributions on insurance policies on Form 1040, line 21. Free income tax filing Dividends on veterans' insurance. Free income tax filing   Dividends you receive on veterans' insurance policies are not taxable. Free income tax filing In addition, interest on dividends left with the Department of Veterans Affairs is not taxable. Free income tax filing Patronage dividends. Free income tax filing   Generally, patronage dividends you receive in money from a cooperative organization are included in your income. Free income tax filing   Do not include in your income patronage dividends you receive on: Property bought for your personal use, or Capital assets or depreciable property bought for use in your business. Free income tax filing But you must reduce the basis (cost) of the items bought. Free income tax filing If the dividend is more than the adjusted basis of the assets, you must report the excess as income. Free income tax filing   These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative. Free income tax filing Alaska Permanent Fund dividends. Free income tax filing    Do not report these amounts as dividends. Free income tax filing Instead, report these amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ, line 3. Free income tax filing How To Report Dividend Income Generally, you can use either Form 1040 or Form 1040A to report your dividend income. Free income tax filing Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. Free income tax filing Report qualified dividends on line 9b of Form 1040 or Form 1040A. Free income tax filing If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. Free income tax filing See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. Free income tax filing If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. Free income tax filing You cannot use Form 1040EZ if you receive any dividend income. Free income tax filing Form 1099-DIV. Free income tax filing   If you owned stock on which you received $10 or more in dividends and other distributions, you should receive a Form 1099-DIV. Free income tax filing Even if you do not receive Form 1099-DIV, you must report all your dividend income. Free income tax filing   See Form 1099-DIV for more information on how to report dividend income. Free income tax filing Form 1040A or 1040. Free income tax filing    You must complete Schedule B (Form 1040A or 1040), Part II, and attach it to your Form 1040A or 1040, if: Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or You received, as a nominee, dividends that actually belong to someone else. Free income tax filing If your ordinary dividends are more than $1,500, you must also complete Schedule B (Form 1040A or 1040), Part III. Free income tax filing   List on Schedule B (Form 1040A or 1040), Part II, line 5, each payer's name and the ordinary dividends you received. Free income tax filing If your securities are held by a brokerage firm (in “street name”), list the name of the brokerage firm shown on Form 1099-DIV as the payer. Free income tax filing If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited. Free income tax filing   Enter on line 6 the total of the amounts listed on line 5. Free income tax filing Also enter this total on line 9a of Form 1040A or 1040. Free income tax filing Qualified dividends. Free income tax filing   Report qualified dividends (Form 1099-DIV, box 1b) on line 9b of Form 1040 or Form 1040A. Free income tax filing The amount in box 1b is already included in box 1a. Free income tax filing Do not add the amount in box 1b to, or substract it from, the amount in box 1a. Free income tax filing   Do not include any of the following on line 9b. Free income tax filing Qualified dividends you received as a nominee. Free income tax filing See Nominees under How to Report Dividend Income in chapter 1 of Publication 550. Free income tax filing Dividends on stock for which you did not meet the holding period. Free income tax filing See Holding period , earlier under Qualified Dividends. Free income tax filing Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. Free income tax filing Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. Free income tax filing Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. Free income tax filing   If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions, whichever applies. Free income tax filing Enter qualified dividends on line 2 of the worksheet. Free income tax filing Investment interest deducted. Free income tax filing   If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. Free income tax filing Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. Free income tax filing This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. Free income tax filing For more information about the limit on investment interest, see Investment expenses in chapter 23. Free income tax filing Expenses related to dividend income. Free income tax filing   You may be able to deduct expenses related to dividend income if you itemize your deductions on Schedule A (Form 1040). Free income tax filing See chapter 28 for general information about deducting expenses of producing income. Free income tax filing More information. Free income tax filing    For more information about how to report dividend income, see chapter 1 of Publication 550 or the instructions for the form you must file. Free income tax filing Prev  Up  Next   Home   More Online Publications
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The Free Income Tax Filing

Free income tax filing 2. Free income tax filing   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Free income tax filing How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Free income tax filing Deferral percentage. Free income tax filing Employee compensation. Free income tax filing Compensation of self-employed individuals. Free income tax filing Choice not to treat deferrals as compensation. Free income tax filing Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Free income tax filing Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Free income tax filing S. Free income tax filing Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Free income tax filing Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Free income tax filing A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Free income tax filing SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Free income tax filing A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Free income tax filing Eligible employee. Free income tax filing   An eligible employee is an individual who meets all the following requirements. Free income tax filing Has reached age 21. Free income tax filing Has worked for you in at least 3 of the last 5 years. Free income tax filing Has received at least $550 in compensation from you in 2013. Free income tax filing This amount remains the same in 2014. Free income tax filing    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Free income tax filing Excludable employees. Free income tax filing   The following employees can be excluded from coverage under a SEP. Free income tax filing Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Free income tax filing Nonresident alien employees who have received no U. Free income tax filing S. Free income tax filing source wages, salaries, or other personal services compensation from you. Free income tax filing For more information about nonresident aliens, see Publication 519, U. Free income tax filing S. Free income tax filing Tax Guide for Aliens. Free income tax filing Setting Up a SEP There are three basic steps in setting up a SEP. Free income tax filing You must execute a formal written agreement to provide benefits to all eligible employees. Free income tax filing You must give each eligible employee certain information about the SEP. Free income tax filing A SEP-IRA must be set up by or for each eligible employee. Free income tax filing Many financial institutions will help you set up a SEP. Free income tax filing Formal written agreement. Free income tax filing   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Free income tax filing You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Free income tax filing However, see When not to use Form 5305-SEP, below. Free income tax filing   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Free income tax filing Keep the original form. Free income tax filing Do not file it with the IRS. Free income tax filing Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Free income tax filing See the Form 5305-SEP instructions for details. Free income tax filing If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Free income tax filing When not to use Form 5305-SEP. Free income tax filing   You cannot use Form 5305-SEP if any of the following apply. Free income tax filing You currently maintain any other qualified retirement plan other than another SEP. Free income tax filing You have any eligible employees for whom IRAs have not been set up. Free income tax filing You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Free income tax filing You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Free income tax filing An affiliated service group described in section 414(m). Free income tax filing A controlled group of corporations described in section 414(b). Free income tax filing Trades or businesses under common control described in section 414(c). Free income tax filing You do not pay the cost of the SEP contributions. Free income tax filing Information you must give to employees. Free income tax filing   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Free income tax filing An IRS model SEP is not considered adopted until you give each employee this information. Free income tax filing Setting up the employee's SEP-IRA. Free income tax filing   A SEP-IRA must be set up by or for each eligible employee. Free income tax filing SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Free income tax filing You send SEP contributions to the financial institution where the SEP-IRA is maintained. Free income tax filing Deadline for setting up a SEP. Free income tax filing   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Free income tax filing Credit for startup costs. Free income tax filing   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Free income tax filing For more information, see Credit for startup costs under Reminders, earlier. Free income tax filing How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Free income tax filing If you are self-employed, you can contribute to your own SEP-IRA. Free income tax filing Contributions must be in the form of money (cash, check, or money order). Free income tax filing You cannot contribute property. Free income tax filing However, participants may be able to transfer or roll over certain property from one retirement plan to another. Free income tax filing See Publication 590 for more information about rollovers. Free income tax filing You do not have to make contributions every year. Free income tax filing But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Free income tax filing When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Free income tax filing Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Free income tax filing A SEP-IRA cannot be a Roth IRA. Free income tax filing Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Free income tax filing Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Free income tax filing If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Free income tax filing Participants age 70½ or over must take required minimum distributions. Free income tax filing Time limit for making contributions. Free income tax filing   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Free income tax filing Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Free income tax filing Compensation generally does not include your contributions to the SEP. Free income tax filing The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Free income tax filing Example. Free income tax filing Your employee, Mary Plant, earned $21,000 for 2013. Free income tax filing The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Free income tax filing Contributions for yourself. Free income tax filing   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Free income tax filing However, special rules apply when figuring your maximum deductible contribution. Free income tax filing See Deduction Limit for Self-Employed Individuals , later. Free income tax filing Annual compensation limit. Free income tax filing   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Free income tax filing However, $51,000 is the maximum contribution for an eligible employee. Free income tax filing These limits are $260,000 and $52,000, respectively, in 2014. Free income tax filing Example. Free income tax filing Your employee, Susan Green, earned $210,000 for 2013. Free income tax filing Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Free income tax filing More than one plan. Free income tax filing   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Free income tax filing When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Free income tax filing Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Free income tax filing Tax treatment of excess contributions. Free income tax filing   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Free income tax filing 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Free income tax filing $51,000. Free income tax filing Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Free income tax filing For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Free income tax filing Reporting on Form W-2. Free income tax filing   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Free income tax filing Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Free income tax filing If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Free income tax filing Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Free income tax filing Your contributions (including any excess contributions carryover). Free income tax filing 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Free income tax filing In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Free income tax filing Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Free income tax filing When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Free income tax filing The deduction for the deductible part of your self-employment tax. Free income tax filing The deduction for contributions to your own SEP-IRA. Free income tax filing The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Free income tax filing For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Free income tax filing To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Free income tax filing Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Free income tax filing Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Free income tax filing However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Free income tax filing If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Free income tax filing Excise tax. Free income tax filing   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Free income tax filing For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Free income tax filing When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Free income tax filing If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. Free income tax filing If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year. Free income tax filing Example. Free income tax filing You are a fiscal year taxpayer whose tax year ends June 30. Free income tax filing You maintain a SEP on a calendar year basis. Free income tax filing You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Free income tax filing Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Free income tax filing For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Free income tax filing S. Free income tax filing Return of Partnership Income; and corporations deduct them on Form 1120, U. Free income tax filing S. Free income tax filing Corporation Income Tax Return, or Form 1120S, U. Free income tax filing S. Free income tax filing Income Tax Return for an S Corporation. Free income tax filing Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Free income tax filing (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Free income tax filing , you receive from the partnership. Free income tax filing ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Free income tax filing Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Free income tax filing (See the Caution, next. Free income tax filing ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Free income tax filing This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Free income tax filing You are not allowed to set up a SARSEP after 1996. Free income tax filing However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Free income tax filing If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Free income tax filing Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Free income tax filing At least 50% of your employees eligible to participate choose to make elective deferrals. Free income tax filing You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Free income tax filing The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Free income tax filing SARSEP ADP test. Free income tax filing   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Free income tax filing A highly compensated employee is defined in chapter 1. Free income tax filing Deferral percentage. Free income tax filing   The deferral percentage for an employee for a year is figured as follows. Free income tax filing   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Free income tax filing Employee compensation. Free income tax filing   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Free income tax filing Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Free income tax filing See Compensation in chapter 1. Free income tax filing Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Free income tax filing Compensation of self-employed individuals. Free income tax filing   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Free income tax filing   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Free income tax filing Choice not to treat deferrals as compensation. Free income tax filing   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Free income tax filing Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Free income tax filing 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Free income tax filing $17,500. Free income tax filing The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Free income tax filing Cash or deferred arrangement (section 401(k) plan). Free income tax filing Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Free income tax filing SIMPLE IRA plan. Free income tax filing In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Free income tax filing Catch-up contributions. Free income tax filing   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Free income tax filing The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Free income tax filing Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Free income tax filing However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Free income tax filing The catch-up contribution limit. Free income tax filing The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Free income tax filing   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Free income tax filing Overall limit on SEP contributions. Free income tax filing   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Free income tax filing The same rule applies to contributions you make to your own SEP-IRA. Free income tax filing See Contribution Limits , earlier. Free income tax filing Figuring the elective deferral. Free income tax filing   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Free income tax filing Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Free income tax filing However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Free income tax filing Excess deferrals. Free income tax filing   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Free income tax filing For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Free income tax filing The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Free income tax filing See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Free income tax filing Excess SEP contributions. Free income tax filing   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Free income tax filing You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Free income tax filing If you do not notify them within this time period, you must pay a 10% tax on the excess. Free income tax filing For an explanation of the notification requirements, see Rev. Free income tax filing Proc. Free income tax filing 91-44, 1991-2 C. Free income tax filing B. Free income tax filing 733. Free income tax filing If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Free income tax filing Reporting on Form W-2. Free income tax filing   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Free income tax filing You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Free income tax filing You must also include them in box 12. Free income tax filing Mark the “Retirement plan” checkbox in box 13. Free income tax filing For more information, see the Form W-2 instructions. Free income tax filing Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Free income tax filing Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Free income tax filing Distributions are subject to IRA rules. Free income tax filing Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Free income tax filing For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Free income tax filing Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Free income tax filing Making excess contributions. Free income tax filing Making early withdrawals. Free income tax filing Not making required withdrawals. Free income tax filing For information about these taxes, see chapter 1 in Publication 590. Free income tax filing Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Free income tax filing Prohibited transaction. Free income tax filing   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Free income tax filing In that case, the SEP-IRA will no longer qualify as an IRA. Free income tax filing For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Free income tax filing Effects on employee. Free income tax filing   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Free income tax filing The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Free income tax filing Also, the employee may have to pay the additional tax for making early withdrawals. Free income tax filing Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Free income tax filing See Setting Up a SEP , earlier. Free income tax filing Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Free income tax filing You must also give them notice of any excess contributions. Free income tax filing For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Free income tax filing Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Free income tax filing For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Free income tax filing Prev  Up  Next   Home   More Online Publications