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Free online tax extension 4. Free online tax extension   Qualified Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Kinds of PlansDefined Contribution Plan Defined Benefit Plan Qualification RulesEarly retirement. Free online tax extension Loan secured by benefits. Free online tax extension Waiver of survivor benefits. Free online tax extension Waiver of 30-day waiting period before annuity starting date. Free online tax extension Involuntary cash-out of benefits not more than dollar limit. Free online tax extension Exception for certain loans. Free online tax extension Exception for QDRO. Free online tax extension SIMPLE and safe harbor 401(k) plan exception. Free online tax extension Setting Up a Qualified PlanAdopting a Written Plan Investing Plan Assets Minimum Funding RequirementDue dates. Free online tax extension Installment percentage. Free online tax extension Extended period for making contributions. Free online tax extension ContributionsEmployer Contributions Employee Contributions When Contributions Are Considered Made Employer DeductionDeduction Limits Deduction Limit for Self-Employed Individuals Where To Deduct Contributions Carryover of Excess Contributions Excise Tax for Nondeductible (Excess) Contributions Elective Deferrals (401(k) Plans)Limit on Elective Deferrals Automatic Enrollment Treatment of Excess Deferrals Qualified Roth Contribution ProgramElective Deferrals Qualified Distributions Reporting Requirements DistributionsRequired Distributions Distributions From 401(k) Plans Tax Treatment of Distributions Tax on Early Distributions Tax on Excess Benefits Excise Tax on Reversion of Plan Assets Notification of Significant Benefit Accrual Reduction Prohibited TransactionsTax on Prohibited Transactions Reporting RequirementsOne-participant plan. Free online tax extension Caution: Form 5500-EZ not required. Free online tax extension Form 5500. Free online tax extension Electronic filing of Forms 5500 and 5500-SF. Free online tax extension Topics - This chapter discusses: Kinds of plans Qualification rules Setting up a qualified plan Minimum funding requirement Contributions Employer deduction Elective deferrals (401(k) plans) Qualified Roth contribution program Distributions Prohibited transactions Reporting requirements Useful Items - You may want to see: Publications 575 Pension and Annuity Income 590 Individual Retirement Arrangements (IRAs) 3066 Have you had your Check-up this year? for Retirement Plans 3998 Choosing A Retirement Solution for Your Small Business 4222 401(k) Plans for Small Businesses 4530 Designated Roth Accounts under a 401(k), 403(b), or governmental 457(b) plans 4531 401(k) Plan Checklist 4674 Automatic Enrollment 401(k) Plans for Small Businesses 4806 Profit Sharing Plans for Small Businesses Forms (and Instructions) www. Free online tax extension dol. Free online tax extension gov/ebsa/pdf/2013-5500. Free online tax extension pdf www. Free online tax extension dol. Free online tax extension gov/ebsa/pdf/2013-5500-SF. Free online tax extension pdf W-2 Wage and Tax Statement Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Free online tax extension 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Free online tax extension 1040 U. Free online tax extension S. Free online tax extension Individual Income Tax Return Schedule C (Form 1040) Profit or Loss From Business Schedule F (Form 1040) Profit or Loss From Farming 5300 Application for Determination for Employee Benefit Plan 5310 Application for Determination for Terminating Plan 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts 5330 Return of Excise Taxes Related to Employee Benefit Plans 5500 Annual Return/Report of Employee Benefit Plan. Free online tax extension For copies of this form, go to: 5500-EZ Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan. Free online tax extension For copies of this form, go to: 8717 User Fee for Employee Plan Determination Letter Request 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H. Free online tax extension R. Free online tax extension 10 plans. Free online tax extension A sole proprietor or a partnership can set up one of these plans. Free online tax extension A common-law employee or a partner cannot set up one of these plans. Free online tax extension The plans described here can also be set up and maintained by employers that are corporations. Free online tax extension All the rules discussed here apply to corporations except where specifically limited to the self-employed. Free online tax extension The plan must be for the exclusive benefit of employees or their beneficiaries. Free online tax extension These qualified plans can include coverage for a self-employed individual. Free online tax extension As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Free online tax extension The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Free online tax extension Kinds of Plans There are two basic kinds of qualified plans—defined contribution plans and defined benefit plans—and different rules apply to each. Free online tax extension You can have more than one qualified plan, but your contributions to all the plans must not total more than the overall limits discussed under Contributions and Employer Deduction, later. Free online tax extension Defined Contribution Plan A defined contribution plan provides an individual account for each participant in the plan. Free online tax extension It provides benefits to a participant largely based on the amount contributed to that participant's account. Free online tax extension Benefits are also affected by any income, expenses, gains, losses, and forfeitures of other accounts that may be allocated to an account. Free online tax extension A defined contribution plan can be either a profit-sharing plan or a money purchase pension plan. Free online tax extension Profit-sharing plan. Free online tax extension   Although it is called a “profit-sharing plan,” you do not actually have to make a business profit for the year in order to make a contribution (except for yourself if you are self-employed as discussed under Self-employed Individual, later). Free online tax extension A profit-sharing plan can be set up to allow for discretionary employer contributions, meaning the amount contributed each year to the plan is not fixed. Free online tax extension An employer may even make no contribution to the plan for a given year. Free online tax extension   The plan must provide a definite formula for allocating the contribution among the participants and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences. Free online tax extension   In general, you can be more flexible in making contributions to a profit-sharing plan than to a money purchase pension plan (discussed next) or a defined benefit plan (discussed later). Free online tax extension Money purchase pension plan. Free online tax extension   Contributions to a money purchase pension plan are fixed and are not based on your business profits. Free online tax extension For example, if the plan requires that contributions be 10% of the participants' compensation without regard to whether you have profits (or the self-employed person has earned income), the plan is a money purchase pension plan. Free online tax extension This applies even though the compensation of a self-employed individual as a participant is based on earned income derived from business profits. Free online tax extension Defined Benefit Plan A defined benefit plan is any plan that is not a defined contribution plan. Free online tax extension Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Free online tax extension Actuarial assumptions and computations are required to figure these contributions. Free online tax extension Generally, you will need continuing professional help to have a defined benefit plan. Free online tax extension Qualification Rules To qualify for the tax benefits available to qualified plans, a plan must meet certain requirements (qualification rules) of the tax law. Free online tax extension Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed. Free online tax extension The following is a brief overview of important qualification rules that generally have not yet been discussed. Free online tax extension It is not intended to be all-inclusive. Free online tax extension See Setting Up a Qualified Plan , later. Free online tax extension Generally, the following qualification rules also apply to a SIMPLE 401(k) retirement plan. Free online tax extension A SIMPLE 401(k) plan is, however, not subject to the top-heavy plan rules and nondiscrimination rules if the plan satisfies the provisions discussed in chapter 3 under SIMPLE 401(k) Plan. Free online tax extension Plan assets must not be diverted. Free online tax extension   Your plan must make it impossible for its assets to be used for, or diverted to, purposes other than the benefit of employees and their beneficiaries. Free online tax extension As a general rule, the assets cannot be diverted to the employer. Free online tax extension Minimum coverage requirement must be met. Free online tax extension   To be a qualified plan, a defined benefit plan must benefit at least the lesser of the following. Free online tax extension 50 employees, or The greater of: 40% of all employees, or Two employees. Free online tax extension If there is only one employee, the plan must benefit that employee. Free online tax extension Contributions or benefits must not discriminate. Free online tax extension   Under the plan, contributions or benefits to be provided must not discriminate in favor of highly compensated employees. Free online tax extension Contributions and benefits must not be more than certain limits. Free online tax extension   Your plan must not provide for contributions or benefits that are more than certain limits. Free online tax extension The limits apply to the annual contributions and other additions to the account of a participant in a defined contribution plan and to the annual benefit payable to a participant in a defined benefit plan. Free online tax extension These limits are discussed later in this chapter under Contributions. Free online tax extension Minimum vesting standard must be met. Free online tax extension   Your plan must satisfy certain requirements regarding when benefits vest. Free online tax extension A benefit is vested (you have a fixed right to it) when it becomes nonforfeitable. Free online tax extension A benefit is nonforfeitable if it cannot be lost upon the happening, or failure to happen, of any event. Free online tax extension Special rules apply to forfeited benefit amounts. Free online tax extension In defined contribution plans, forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way, or they can be used to reduce your contributions. Free online tax extension   Forfeitures under a defined benefit plan cannot be used to increase the benefits any employee would otherwise receive under the plan. Free online tax extension Forfeitures must be used instead to reduce employer contributions. Free online tax extension Participation. Free online tax extension   In general, an employee must be allowed to participate in your plan if he or she meets both the following requirements. Free online tax extension Has reached age 21. Free online tax extension Has at least 1 year of service (2 years if the plan is not a 401(k) plan and provides that after not more than 2 years of service the employee has a nonforfeitable right to all his or her accrued benefit). Free online tax extension A plan cannot exclude an employee because he or she has reached a specified age. Free online tax extension Leased employee. Free online tax extension   A leased employee, defined in chapter 1, who performs services for you (recipient of the services) is treated as your employee for certain plan qualification rules. Free online tax extension These rules include those in all the following areas. Free online tax extension Nondiscrimination in coverage, contributions, and benefits. Free online tax extension Minimum age and service requirements. Free online tax extension Vesting. Free online tax extension Limits on contributions and benefits. Free online tax extension Top-heavy plan requirements. Free online tax extension Contributions or benefits provided by the leasing organization for services performed for you are treated as provided by you. Free online tax extension Benefit payment must begin when required. Free online tax extension   Your plan must provide that, unless the participant chooses otherwise, the payment of benefits to the participant must begin within 60 days after the close of the latest of the following periods. Free online tax extension The plan year in which the participant reaches the earlier of age 65 or the normal retirement age specified in the plan. Free online tax extension The plan year in which the 10th anniversary of the year in which the participant began participating in the plan occurs. Free online tax extension The plan year in which the participant separates from service. Free online tax extension Early retirement. Free online tax extension   Your plan can provide for payment of retirement benefits before the normal retirement age. Free online tax extension If your plan offers an early retirement benefit, a participant who separates from service before satisfying the early retirement age requirement is entitled to that benefit if he or she meets both the following requirements. Free online tax extension Satisfies the service requirement for the early retirement benefit. Free online tax extension Separates from service with a nonforfeitable right to an accrued benefit. Free online tax extension The benefit, which may be actuarially reduced, is payable when the early retirement age requirement is met. Free online tax extension Required minimum distributions. Free online tax extension   Special rules require minimum annual distributions from qualified plans, generally beginning after age  70½. Free online tax extension See Required Distributions , under Distributions, later. Free online tax extension Survivor benefits. Free online tax extension   Defined benefit and money purchase pension plans must provide automatic survivor benefits in both the following forms. Free online tax extension A qualified joint and survivor annuity for a vested participant who does not die before the annuity starting date. Free online tax extension A qualified pre-retirement survivor annuity for a vested participant who dies before the annuity starting date and who has a surviving spouse. Free online tax extension   The automatic survivor benefit also applies to any participant under a profit-sharing plan unless all the following conditions are met. Free online tax extension The participant does not choose benefits in the form of a life annuity. Free online tax extension The plan pays the full vested account balance to the participant's surviving spouse (or other beneficiary if the surviving spouse consents or if there is no surviving spouse) if the participant dies. Free online tax extension The plan is not a direct or indirect transferee of a plan that must provide automatic survivor benefits. Free online tax extension Loan secured by benefits. Free online tax extension   If automatic survivor benefits are required for a spouse under a plan, he or she must consent to a loan that uses as security the accrued benefits in the plan. Free online tax extension Waiver of survivor benefits. Free online tax extension   Each plan participant may be permitted to waive the joint and survivor annuity or the pre-retirement survivor annuity (or both), but only if the participant has the written consent of the spouse. Free online tax extension The plan also must allow the participant to withdraw the waiver. Free online tax extension The spouse's consent must be witnessed by a plan representative or notary public. Free online tax extension Waiver of 30-day waiting period before annuity starting date. Free online tax extension    A plan may permit a participant to waive (with spousal consent) the 30-day minimum waiting period after a written explanation of the terms and conditions of a joint and survivor annuity is provided to each participant. Free online tax extension   The waiver is allowed only if the distribution begins more than 7 days after the written explanation is provided. Free online tax extension Involuntary cash-out of benefits not more than dollar limit. Free online tax extension   A plan may provide for the immediate distribution of the participant's benefit under the plan if the present value of the benefit is not greater than $5,000. Free online tax extension   However, the distribution cannot be made after the annuity starting date unless the participant and the spouse or surviving spouse of a participant who died (if automatic survivor benefits are required for a spouse under the plan) consents in writing to the distribution. Free online tax extension If the present value is greater than $5,000, the plan must have the written consent of the participant and the spouse or surviving spouse (if automatic survivor benefits are required for a spouse under the plan) for any immediate distribution of the benefit. Free online tax extension   Benefits attributable to rollover contributions and earnings on them can be ignored in determining the present value of these benefits. Free online tax extension   A plan must provide for the automatic rollover of any cash-out distribution of more than $1,000 to an individual retirement account or annuity, unless the participant chooses otherwise. Free online tax extension A section 402(f) notice must be sent prior to an involuntary cash-out of an eligible rollover distribution. Free online tax extension See Section 402(f) Notice under Distributions, later, for more details. Free online tax extension Consolidation, merger, or transfer of assets or liabilities. Free online tax extension   Your plan must provide that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant would (if the plan then terminated) receive a benefit equal to or more than the benefit he or she would have been entitled to just before the merger, etc. Free online tax extension (if the plan had then terminated). Free online tax extension Benefits must not be assigned or alienated. Free online tax extension   Your plan must provide that a participant's or beneficiary's benefits under the plan cannot be taken away by any legal or equitable proceeding except as provided below or pursuant to certain judgements or settlements against the participant for violations of plan rules. Free online tax extension Exception for certain loans. Free online tax extension   A loan from the plan (not from a third party) to a participant or beneficiary is not treated as an assignment or alienation if the loan is secured by the participant's accrued nonforfeitable benefit and is exempt from the tax on prohibited transactions under section 4975(d)(1) or would be exempt if the participant were a disqualified person. Free online tax extension A disqualified person is defined later in this chapter under Prohibited Transactions. Free online tax extension Exception for QDRO. Free online tax extension   Compliance with a QDRO (qualified domestic relations order) does not result in a prohibited assignment or alienation of benefits. Free online tax extension   Payments to an alternate payee under a QDRO before the participant attains age 59½ are not subject to the 10% additional tax that would otherwise apply under certain circumstances. Free online tax extension Benefits distributed to an alternate payee under a QDRO can be rolled over tax free to an individual retirement account or to an individual retirement annuity. Free online tax extension No benefit reduction for social security increases. Free online tax extension   Your plan must not permit a benefit reduction for a post-separation increase in the social security benefit level or wage base for any participant or beneficiary who is receiving benefits under your plan, or who is separated from service and has nonforfeitable rights to benefits. Free online tax extension This rule also applies to plans supplementing the benefits provided by other federal or state laws. Free online tax extension Elective deferrals must be limited. Free online tax extension   If your plan provides for elective deferrals, it must limit those deferrals to the amount in effect for that particular year. Free online tax extension See Limit on Elective Deferrals later in this chapter. Free online tax extension Top-heavy plan requirements. Free online tax extension   A top-heavy plan is one that mainly favors partners, sole proprietors, and other key employees. Free online tax extension   A plan is top-heavy for a plan year if, for the preceding plan year, the total value of accrued benefits or account balances of key employees is more than 60% of the total value of accrued benefits or account balances of all employees. Free online tax extension Additional requirements apply to a top-heavy plan primarily to provide minimum benefits or contributions for non-key employees covered by the plan. Free online tax extension   Most qualified plans, whether or not top-heavy, must contain provisions that meet the top-heavy requirements and will take effect in plan years in which the plans are top-heavy. Free online tax extension These qualification requirements for top-heavy plans are explained in section 416 and its regulations. Free online tax extension SIMPLE and safe harbor 401(k) plan exception. Free online tax extension   The top-heavy plan requirements do not apply to SIMPLE 401(k) plans, discussed earlier in chapter 3, or to safe harbor 401(k) plans that consist solely of safe harbor contributions, discussed later in this chapter. Free online tax extension QACAs (discussed later) also are not subject to top-heavy requirements. Free online tax extension Setting Up a Qualified Plan There are two basic steps in setting up a qualified plan. Free online tax extension First you adopt a written plan. Free online tax extension Then you invest the plan assets. Free online tax extension You, the employer, are responsible for setting up and maintaining the plan. Free online tax extension If you are self-employed, it is not necessary to have employees besides yourself to sponsor and set up a qualified plan. Free online tax extension If you have employees, see Participation, under Qualification Rules, earlier. Free online tax extension Set-up deadline. Free online tax extension   To take a deduction for contributions for a tax year, your plan must be set up (adopted) by the last day of that year (December 31 for calendar-year employers). Free online tax extension Credit for startup costs. Free online tax extension   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a qualified plan that first became effective in 2013. Free online tax extension For more information, see Credit for startup costs under Reminders, earlier. Free online tax extension Adopting a Written Plan You must adopt a written plan. Free online tax extension The plan can be an IRS-approved master or prototype plan offered by a sponsoring organization. Free online tax extension Or it can be an individually designed plan. Free online tax extension Written plan requirement. Free online tax extension   To qualify, the plan you set up must be in writing and must be communicated to your employees. Free online tax extension The plan's provisions must be stated in the plan. Free online tax extension It is not sufficient for the plan to merely refer to a requirement of the Internal Revenue Code. Free online tax extension Master or prototype plans. Free online tax extension   Most qualified plans follow a standard form of plan (a master or prototype plan) approved by the IRS. Free online tax extension Master and prototype plans are plans made available by plan providers for adoption by employers (including self-employed individuals). Free online tax extension Under a master plan, a single trust or custodial account is established, as part of the plan, for the joint use of all adopting employers. Free online tax extension Under a prototype plan, a separate trust or custodial account is established for each employer. Free online tax extension Plan providers. Free online tax extension   The following organizations generally can provide IRS-approved master or prototype plans. Free online tax extension Banks (including some savings and loan associations and federally insured credit unions). Free online tax extension Trade or professional organizations. Free online tax extension Insurance companies. Free online tax extension Mutual funds. Free online tax extension Individually designed plan. Free online tax extension   If you prefer, you can set up an individually designed plan to meet specific needs. Free online tax extension Although advance IRS approval is not required, you can apply for approval by paying a fee and requesting a determination letter. Free online tax extension You may need professional help for this. Free online tax extension See Rev. Free online tax extension Proc. Free online tax extension 2014-6, 2014-1 I. Free online tax extension R. Free online tax extension B. Free online tax extension 198, available at www. Free online tax extension irs. Free online tax extension gov/irb/2014-1_IRB/ar10. Free online tax extension html, as annually updated, that may help you decide whether to apply for approval. Free online tax extension Internal Revenue Bulletins are available on the IRS website at IRS. Free online tax extension gov They are also available at most IRS offices and at certain libraries. Free online tax extension User fee. Free online tax extension   The fee mentioned earlier for requesting a determination letter does not apply to employers who have 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year. Free online tax extension At least one of them must be a non-highly compensated employee participating in the plan. Free online tax extension The fee does not apply to requests made by the later of the following dates. Free online tax extension The end of the 5th plan year the plan is in effect. Free online tax extension The end of any remedial amendment period for the plan that begins within the first 5 plan years. Free online tax extension The request cannot be made by the sponsor of a prototype or similar plan the sponsor intends to market to participating employers. Free online tax extension   For more information about whether the user fee applies, see Rev. Free online tax extension Proc. Free online tax extension 2014-8, 2014-1 I. Free online tax extension R. Free online tax extension B. Free online tax extension 242, available at www. Free online tax extension irs. Free online tax extension gov/irb/2014-1_IRB/ar12. Free online tax extension html, as may be annually updated; Notice 2003-49, 2003-32 I. Free online tax extension R. Free online tax extension B. Free online tax extension 294, available at www. Free online tax extension irs. Free online tax extension gov/irb/2003-32_IRB/ar13. Free online tax extension html; and Notice 2011-86, 2011-45 I. Free online tax extension R. Free online tax extension B. Free online tax extension 698, available at www. Free online tax extension irs. Free online tax extension gov/irb/2011-45_IRB/ar11. Free online tax extension html. Free online tax extension Investing Plan Assets In setting up a qualified plan, you arrange how the plan's funds will be used to build its assets. Free online tax extension You can establish a trust or custodial account to invest the funds. Free online tax extension You, the trust, or the custodial account can buy an annuity contract from an insurance company. Free online tax extension Life insurance can be included only if it is incidental to the retirement benefits. Free online tax extension You set up a trust by a legal instrument (written document). Free online tax extension You may need professional help to do this. Free online tax extension You can set up a custodial account with a bank, savings and loan association, credit union, or other person who can act as the plan trustee. Free online tax extension You do not need a trust or custodial account, although you can have one, to invest the plan's funds in annuity contracts or face-amount certificates. Free online tax extension If anyone other than a trustee holds them, however, the contracts or certificates must state they are not transferable. Free online tax extension Other plan requirements. Free online tax extension   For information on other important plan requirements, see Qualification Rules , earlier in this chapter. Free online tax extension Minimum Funding Requirement In general, if your plan is a money purchase pension plan or a defined benefit plan, you must actually pay enough into the plan to satisfy the minimum funding standard for each year. Free online tax extension Determining the amount needed to satisfy the minimum funding standard for a defined benefit plan is complicated, and you should seek professional help in order to meet these contribution requirements. Free online tax extension For information on this funding requirement, see section 412 and its regulations. Free online tax extension Quarterly installments of required contributions. Free online tax extension   If your plan is a defined benefit plan subject to the minimum funding requirements, you generally must make quarterly installment payments of the required contributions. Free online tax extension If you do not pay the full installments timely, you may have to pay interest on any underpayment for the period of the underpayment. Free online tax extension Due dates. Free online tax extension   The due dates for the installments are 15 days after the end of each quarter. Free online tax extension For a calendar-year plan, the installments are due April 15, July 15, October 15, and January 15 (of the following year). Free online tax extension Installment percentage. Free online tax extension   Each quarterly installment must be 25% of the required annual payment. Free online tax extension Extended period for making contributions. Free online tax extension   Additional contributions required to satisfy the minimum funding requirement for a plan year will be considered timely if made by 8½ months after the end of that year. Free online tax extension Contributions A qualified plan is generally funded by your contributions. Free online tax extension However, employees participating in the plan may be permitted to make contributions, and you may be permitted to make contributions on your own behalf. Free online tax extension See Employee Contributions and Elective Deferrals later. Free online tax extension Contributions deadline. Free online tax extension   You can make deductible contributions for a tax year up to the due date of your return (plus extensions) for that year. Free online tax extension Self-employed individual. Free online tax extension   You can make contributions on behalf of yourself only if you have net earnings (compensation) from self-employment in the trade or business for which the plan was set up. Free online tax extension Your net earnings must be from your personal services, not from your investments. Free online tax extension If you have a net loss from self-employment, you cannot make contributions for yourself for the year, even if you can contribute for common-law employees based on their compensation. Free online tax extension Employer Contributions There are certain limits on the contributions and other annual additions you can make each year for plan participants. Free online tax extension There are also limits on the amount you can deduct. Free online tax extension See Deduction Limits , later. Free online tax extension Limits on Contributions and Benefits Your plan must provide that contributions or benefits cannot exceed certain limits. Free online tax extension The limits differ depending on whether your plan is a defined contribution plan or a defined benefit plan. Free online tax extension Defined benefit plan. Free online tax extension   For 2013, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of the following amounts. Free online tax extension 100% of the participant's average compensation for his or her highest 3 consecutive calendar years. Free online tax extension $205,000 ($210,000 for 2014). Free online tax extension Defined contribution plan. Free online tax extension   For 2013, a defined contribution plan's annual contributions and other additions (excluding earnings) to the account of a participant cannot exceed the lesser of the following amounts. Free online tax extension 100% of the participant's compensation. Free online tax extension $51,000 ($52,000 for 2014). Free online tax extension   Catch-up contributions (discussed later under Limit on Elective Deferrals) are not subject to the above limit. Free online tax extension Employee Contributions Participants may be permitted to make nondeductible contributions to a plan in addition to your contributions. Free online tax extension Even though these employee contributions are not deductible, the earnings on them are tax free until distributed in later years. Free online tax extension Also, these contributions must satisfy the actual contribution percentage (ACP) test of section 401(m)(2), a nondiscrimination test that applies to employee contributions and matching contributions. Free online tax extension See Regulations sections 1. Free online tax extension 401(k)-2 and 1. Free online tax extension 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Free online tax extension When Contributions Are Considered Made You generally apply your plan contributions to the year in which you make them. Free online tax extension But you can apply them to the previous year if all the following requirements are met. Free online tax extension You make them by the due date of your tax return for the previous year (plus extensions). Free online tax extension The plan was established by the end of the previous year. Free online tax extension The plan treats the contributions as though it had received them on the last day of the previous year. Free online tax extension You do either of the following. Free online tax extension You specify in writing to the plan administrator or trustee that the contributions apply to the previous year. Free online tax extension You deduct the contributions on your tax return for the previous year. Free online tax extension A partnership shows contributions for partners on Form 1065. Free online tax extension Employer's promissory note. Free online tax extension   Your promissory note made out to the plan is not a payment that qualifies for the deduction. Free online tax extension Also, issuing this note is a prohibited transaction subject to tax. Free online tax extension See Prohibited Transactions , later. Free online tax extension Employer Deduction You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. Free online tax extension The contributions (and earnings and gains on them) are generally tax free until distributed by the plan. Free online tax extension Deduction Limits The deduction limit for your contributions to a qualified plan depends on the kind of plan you have. Free online tax extension Defined contribution plans. Free online tax extension   The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) cannot be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. Free online tax extension If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. Free online tax extension See Deduction Limit for Self-Employed Individuals , later. Free online tax extension   When figuring the deduction limit, the following rules apply. Free online tax extension Elective deferrals (discussed later) are not subject to the limit. Free online tax extension Compensation includes elective deferrals. Free online tax extension The maximum compensation that can be taken into account for each employee in 2013 is $255,000 ($260,000 for 2014). Free online tax extension Defined benefit plans. Free online tax extension   The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Free online tax extension Consequently, an actuary must figure your deduction limit. Free online tax extension    In figuring the deduction for contributions, you cannot take into account any contributions or benefits that are more than the limits discussed earlier under Limits on Contributions and Benefits, earlier. Free online tax extension Table 4–1. Free online tax extension Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted) Year Participants' compensation Participants' share of required contribution (10% of annual profit) Deductible  limit for current year (25% of compensation) Contribution Excess contribution carryover used1 Total  deduction including carryovers Excess contribution carryover available at end of year 2010 $1,000 $100 $250 $100 $ 0 $100 $ 0 2011 400 165 100 165 0 100 65 2012 500 100 125 100 25 125 40 2013 600 100 150 100 40 140 0  1There were no carryovers from years before 2010. Free online tax extension Deduction Limit for Self-Employed Individuals If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Free online tax extension Compensation is your net earnings from self-employment, defined in chapter 1. Free online tax extension This definition takes into account both the following items. Free online tax extension The deduction for the deductible part of your self-employment tax. Free online tax extension The deduction for contributions on your behalf to the plan. Free online tax extension The deduction for your own contributions and your net earnings depend on each other. Free online tax extension For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. Free online tax extension To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Free online tax extension Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Free online tax extension Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Free online tax extension For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120, or Form 1120S. Free online tax extension Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Free online tax extension (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership. Free online tax extension ) Carryover of Excess Contributions If you contribute more to the plans than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Free online tax extension Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. Free online tax extension For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. Free online tax extension However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. Free online tax extension See Deduction Limit for Self-Employed Individuals, earlier. Free online tax extension The amount you carry over and deduct may be subject to the excise tax discussed next. Free online tax extension Table 4-1, earlier, illustrates the carryover of excess contributions to a profit-sharing plan. Free online tax extension Excise Tax for Nondeductible (Excess) Contributions If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. Free online tax extension In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs. Free online tax extension Special rule for self-employed individuals. Free online tax extension   The 10% excise tax does not apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Free online tax extension Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference is not subject to this excise tax. Free online tax extension See Minimum Funding Requirement , earlier. Free online tax extension Reporting the tax. Free online tax extension   You must report the tax on your nondeductible contributions on Form 5330. Free online tax extension Form 5330 includes a computation of the tax. Free online tax extension See the separate instructions for completing the form. Free online tax extension Elective Deferrals (401(k) Plans) Your qualified plan can include a cash or deferred arrangement under which participants can choose to have you contribute part of their before-tax compensation to the plan rather than receive the compensation in cash. Free online tax extension A plan with this type of arrangement is popularly known as a “401(k) plan. Free online tax extension ” (As a self-employed individual participating in the plan, you can contribute part of your before-tax net earnings from the business. Free online tax extension ) This contribution is called an “elective deferral” because participants choose (elect) to defer receipt of the money. Free online tax extension In general, a qualified plan can include a cash or deferred arrangement only if the qualified plan is one of the following plans. Free online tax extension A profit-sharing plan. Free online tax extension A money purchase pension plan in existence on June 27, 1974, that included a salary reduction arrangement on that date. Free online tax extension Partnership. Free online tax extension   A partnership can have a 401(k) plan. Free online tax extension Restriction on conditions of participation. Free online tax extension   The plan cannot require, as a condition of participation, that an employee complete more than 1 year of service. Free online tax extension Matching contributions. Free online tax extension   If your plan permits, you can make matching contributions for an employee who makes an elective deferral to your 401(k) plan. Free online tax extension For example, the plan might provide that you will contribute 50 cents for each dollar your participating employees choose to defer under your 401(k) plan. Free online tax extension Matching contributions are generally subject to the ACP test discussed earlier under Employee Contributions. Free online tax extension Nonelective contributions. Free online tax extension   You can also make contributions (other than matching contributions) for your participating employees without giving them the choice to take cash instead. Free online tax extension These are called nonelective contributions. Free online tax extension Employee compensation limit. Free online tax extension   No more than $255,000 of the employee's compensation can be taken into account when figuring contributions other than elective deferrals in 2013. Free online tax extension This limit is $260,000 in 2014. Free online tax extension SIMPLE 401(k) plan. Free online tax extension   If you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year, you may be able to set up a SIMPLE 401(k) plan. Free online tax extension A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy plan requirements discussed earlier under Qualification Rules. Free online tax extension For details about SIMPLE 401(k) plans, see SIMPLE 401(k) Plan in chapter 3. Free online tax extension Distributions. Free online tax extension   Certain rules apply to distributions from 401(k) plans. Free online tax extension See Distributions From 401(k) Plans , later. Free online tax extension Limit on Elective Deferrals There is a limit on the amount an employee can defer each year under these plans. Free online tax extension This limit applies without regard to community property laws. Free online tax extension Your plan must provide that your employees cannot defer more than the limit that applies for a particular year. Free online tax extension For 2013 and 2014, the basic limit on elective deferrals is $17,500. Free online tax extension This limit applies to all salary reduction contributions and elective deferrals. Free online tax extension If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income. Free online tax extension Catch-up contributions. Free online tax extension   A 401(k) plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Free online tax extension The catch-up contribution limit for 2013 and 2014 is $5,500. Free online tax extension Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the $17,500 limit, the actual deferral percentage (ADP) test limit of section 401(k)(3), or the plan limit (if any). Free online tax extension However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Free online tax extension The catch-up contribution limit. Free online tax extension The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Free online tax extension Treatment of contributions. Free online tax extension   Your contributions to your own 401(k) plan are generally deductible by you for the year they are contributed to the plan. Free online tax extension Matching or nonelective contributions made to the plan are also deductible by you in the year of contribution. Free online tax extension Your employees' elective deferrals other than designated Roth contributions are tax free until distributed from the plan. Free online tax extension Elective deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Free online tax extension Forfeiture. Free online tax extension   Employees have a nonforfeitable right at all times to their accrued benefit attributable to elective deferrals. Free online tax extension Reporting on Form W-2. Free online tax extension   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Free online tax extension You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Free online tax extension You must also include them in box 12. Free online tax extension Mark the “Retirement plan” checkbox in box 13. Free online tax extension For more information, see the Form W-2 instructions. Free online tax extension Automatic Enrollment Your 401(k) plan can have an automatic enrollment feature. Free online tax extension Under this feature, you can automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage. Free online tax extension These contributions are elective deferrals. Free online tax extension An automatic enrollment feature will encourage employees' saving for retirement and will help your plan pass nondiscrimination testing (if applicable). Free online tax extension For more information, see Publication 4674, Automatic Enrollment 401(k) Plans for Small Businesses. Free online tax extension Eligible automatic contribution arrangement. Free online tax extension   Under an eligible automatic contribution arrangement (EACA), a participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation. Free online tax extension This automatic election will remain in place until the participant specifically elects not to have such deferral percentage made (or elects a different percentage). Free online tax extension There is no required deferral percentage. Free online tax extension Withdrawals. Free online tax extension   Under an EACA, you may allow participants to withdraw their automatic contributions to the plan if certain conditions are met. Free online tax extension The participant must elect the withdrawal no later than 90 days after the date of the first elective contributions under the EACA. Free online tax extension The participant must withdraw the entire amount of EACA default contributions, including any earnings thereon. Free online tax extension   If the plan allows withdrawals under the EACA, the amount of the withdrawal other than the amount of any designated Roth contributions must be included in the employee's gross income for the tax year in which the distribution is made. Free online tax extension The additional 10% tax on early distributions will not apply to the distribution. Free online tax extension Notice requirement. Free online tax extension   Under an EACA, employees must be given written notice of the terms of the EACA within a reasonable period of time before each plan year. Free online tax extension The notice must be written in a manner calculated to be understood by the average employee and be sufficiently accurate and comprehensive in order to apprise the employee of his or her rights and obligations under the EACA. Free online tax extension The notice must include an explanation of the employee's right to elect not to have elective contributions made on his or her behalf, or to elect a different percentage, and the employee must be given a reasonable period of time after receipt of the notice before the first elective contribution is made. Free online tax extension The notice also must explain how contributions will be invested in the absence of an investment election by the employee. Free online tax extension Qualified automatic contribution arrangement. Free online tax extension    A qualified automatic contribution arrangement (QACA) is a type of safe harbor plan. Free online tax extension It contains an automatic enrollment feature, and mandatory employer contributions are required. Free online tax extension If your plan includes a QACA, it will not be subject to the ADP test (discussed later) nor the top-heavy requirements (discussed earlier). Free online tax extension Additionally, your plan will not be subject to the actual contribution percentage (ACP) test if certain additional requirements are met. Free online tax extension Under a QACA, each employee who is eligible to participate in the plan will be treated as having elected to make elective deferral contributions equal to a certain default percentage of compensation. Free online tax extension In order to not have default elective deferrals made, an employee must make an affirmative election specifying a deferral percentage (including zero, if desired). Free online tax extension If an employee does not make an affirmative election, the default deferral percentage must meet the following conditions. Free online tax extension It must be applied uniformly. Free online tax extension It must not exceed 10%. Free online tax extension It must be at least 3% in the first plan year it applies to an employee and through the end of the following year. Free online tax extension It must increase to at least 4% in the following plan year. Free online tax extension It must increase to at least 5% in the following plan year. Free online tax extension It must increase to at least 6% in subsequent plan years. Free online tax extension Matching or nonelective contributions. Free online tax extension   Under the terms of the QACA, you must make either matching or nonelective contributions according to the following terms. Free online tax extension Matching contributions. Free online tax extension You must make matching contributions on behalf of each non-highly compensated employee in the following amounts. Free online tax extension An amount equal to 100% of elective deferrals, up to 1% of compensation. Free online tax extension An amount equal to 50% of elective deferrals, from 1% up to 6% of compensation. Free online tax extension Other formulas may be used as long as they are at least as favorable to non-highly compensated employees. Free online tax extension The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Free online tax extension Nonelective contributions. Free online tax extension You must make nonelective contributions on behalf of every non-highly compensated employee eligible to participate in the plan, regardless of whether they elected to participate, in an amount equal to at least 3% of their compensation. Free online tax extension Vesting requirements. Free online tax extension   All accrued benefits attributed to matching or nonelective contributions under the QACA must be 100% vested for all employees who complete 2 years of service. Free online tax extension These contributions are subject to special withdrawal restrictions, discussed later. Free online tax extension Notice requirements. Free online tax extension   Each employee eligible to participate in the QACA must receive written notice of their rights and obligations under the QACA, within a reasonable period before each plan year. Free online tax extension The notice must be written in a manner calculated to be understood by the average employee, and it must be accurate and comprehensive. Free online tax extension The notice must explain their right to elect not to have elective contributions made on their behalf, or to have contributions made at a different percentage than the default percentage. Free online tax extension Additionally, the notice must explain how contributions will be invested in the absence of any investment election by the employee. Free online tax extension The employee must have a reasonable period of time after receiving the notice to make such contribution and investment elections prior to the first contributions under the QACA. Free online tax extension Treatment of Excess Deferrals If the total of an employee's deferrals is more than the limit for 2013, the employee can have the difference (called an excess deferral) paid out of any of the plans that permit these distributions. Free online tax extension He or she must notify the plan by April 15, 2014 (or an earlier date specified in the plan), of the amount to be paid from each plan. Free online tax extension The plan must then pay the employee that amount, plus earnings on the amount through the end of 2013, by April 15, 2014. Free online tax extension Excess withdrawn by April 15. Free online tax extension   If the employee takes out the excess deferral by April 15, 2014, it is not reported again by including it in the employee's gross income for 2014. Free online tax extension However, any income earned in 2013 on the excess deferral taken out is taxable in the tax year in which it is taken out. Free online tax extension The distribution is not subject to the additional 10% tax on early distributions. Free online tax extension   If the employee takes out part of the excess deferral and the income on it, the distribution is treated as made proportionately from the excess deferral and the income. Free online tax extension   Even if the employee takes out the excess deferral by April 15, the amount will be considered for purposes of nondiscrimination testing requirements of the plan, unless the distributed amount is for a non-highly compensated employee who participates in only one employer's 401(k) plan or plans. Free online tax extension Excess not withdrawn by April 15. Free online tax extension   If the employee does not take out the excess deferral by April 15, 2014, the excess, though taxable in 2013, is not included in the employee's cost basis in figuring the taxable amount of any eventual distributions under the plan. Free online tax extension In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Free online tax extension Also, if the employee's excess deferral is allowed to stay in the plan and the employee participates in no other employer's plan, the plan can be disqualified. Free online tax extension Reporting corrective distributions on Form 1099-R. Free online tax extension   Report corrective distributions of excess deferrals (including any earnings) on Form 1099-R. Free online tax extension For specific information about reporting corrective distributions, see the Instructions for Forms 1099-R and 5498. Free online tax extension Tax on excess contributions of highly compensated employees. Free online tax extension   The law provides tests to detect discrimination in a plan. Free online tax extension If tests, such as the actual deferral percentage test (ADP test) (see section 401(k)(3)) and the actual contribution percentage test (ACP test) (see section 401(m)(2)), show that contributions for highly compensated employees are more than the test limits for these contributions, the employer may have to pay a 10% excise tax. Free online tax extension Report the tax on Form 5330. Free online tax extension The ADP test does not apply to a safe harbor 401(k) plan (discussed next) nor to a QACA. Free online tax extension Also, the ACP test does not apply to these plans if certain additional requirements are met. Free online tax extension   The tax for the year is 10% of the excess contributions for the plan year ending in your tax year. Free online tax extension Excess contributions are elective deferrals, employee contributions, or employer matching or nonelective contributions that are more than the amount permitted under the ADP test or the ACP test. Free online tax extension   See Regulations sections 1. Free online tax extension 401(k)-2 and 1. Free online tax extension 401(m)-2 for further guidance relating to the nondiscrimination rules under sections 401(k) and 401(m). Free online tax extension    If the plan fails the ADP or ACP testing, and the failure is not corrected by the end of the next plan year, the plan can be disqualified. Free online tax extension Safe harbor 401(k) plan. Free online tax extension If you meet the requirements for a safe harbor 401(k) plan, you do not have to satisfy the ADP test, nor the ACP test, if certain additional requirements are met. Free online tax extension For your plan to be a safe harbor plan, you must meet the following conditions. Free online tax extension Matching or nonelective contributions. Free online tax extension You must make matching or nonelective contributions according to one of the following formulas. Free online tax extension Matching contributions. Free online tax extension You must make matching contributions according to the following rules. Free online tax extension You must contribute an amount equal to 100% of each non-highly compensated employee's elective deferrals, up to 3% of compensation. Free online tax extension You must contribute an amount equal to 50% of each non-highly compensated employee's elective deferrals, from 3% up to 5% of compensation. Free online tax extension The rate of matching contributions for highly compensated employees, including yourself, must not exceed the rates for non-highly compensated employees. Free online tax extension Nonelective contributions. Free online tax extension You must make nonelective contributions, without regard to whether the employee made elective deferrals, on behalf of all non-highly compensated employees eligible to participate in the plan, equal to at least 3% of the employee's compensation. Free online tax extension These mandatory matching and nonelective contributions must be immediately 100% vested and are subject to special withdrawal restrictions. Free online tax extension Notice requirement. Free online tax extension You must give eligible employees written notice of their rights and obligations with regard to contributions under the plan, within a reasonable period before the plan year. Free online tax extension The other requirements for a 401(k) plan, including withdrawal and vesting rules, must also be met for your plan to qualify as a safe harbor 401(k) plan. Free online tax extension Qualified Roth Contribution Program Under this program an eligible employee can designate all or a portion of his or her elective deferrals as after-tax Roth contributions. Free online tax extension Elective deferrals designated as Roth contributions must be maintained in a separate Roth account. Free online tax extension However, unlike other elective deferrals, designated Roth contributions are not excluded from employees' gross income, but qualified distributions from a Roth account are excluded from employees' gross income. Free online tax extension Elective Deferrals Under a qualified Roth contribution program, the amount of elective deferrals that an employee may designate as a Roth contribution is limited to the maximum amount of elective deferrals excludable from gross income for the year (for 2013 and 2014, $17,500 if under age 50 and $23,000 if age 50 or over) less the total amount of the employee's elective deferrals not designated as Roth contributions. Free online tax extension Designated Roth deferrals are treated the same as pre-tax elective deferrals for most purposes, including: The annual individual elective deferral limit (total of all designated Roth contributions and traditional, pre-tax elective deferrals) of $17,500 for 2013 and 2014, with an additional $5,500 if age 50 or over for 2013 and 2014, Determining the maximum employee and employer annual contributions of the lesser of 100% of compensation or $51,000 for 2013 ($52,000 for 2014), Nondiscrimination testing, Required distributions, and Elective deferrals not taken into account for purposes of deduction limits. Free online tax extension Qualified Distributions A qualified distribution is a distribution that is made after the employee's nonexclusion period and: On or after the employee attains age   59½, On account of the employee's being disabled, or On or after the employee's death. Free online tax extension An employee's nonexclusion period for a plan is the 5-tax-year period beginning with the earlier of the following tax years. Free online tax extension The first tax year in which the employee made a contribution to his or her Roth account in the plan, or If a rollover contribution was made to the employee's designated Roth account from a designated Roth account previously established for the employee under another plan, then the first tax year the employee made a designated Roth contribution to the previously established account. Free online tax extension Rollover. Free online tax extension   Beginning September 28, 2010, a rollover from another account can be made to a designated Roth account in the same plan. Free online tax extension For additional information on these in-plan Roth rollovers, see Notice 2010-84, 2010-51 I. Free online tax extension R. Free online tax extension B. Free online tax extension 872, available at www. Free online tax extension irs. Free online tax extension gov/irb/2010-51_IRB/ar11. Free online tax extension html, and Notice 2013-74. Free online tax extension A distribution from a designated Roth account can only be rolled over to another designated Roth account or a Roth IRA. Free online tax extension Rollover amounts do not apply toward the annual deferral limit. Free online tax extension Reporting Requirements You must report a contribution to a Roth account on Form W-2 and a distribution from a Roth account on Form 1099-R. Free online tax extension See the Form W-2 and 1099-R instructions for detailed information. Free online tax extension Distributions Amounts paid to plan participants from a qualified plan are called distributions. Free online tax extension Distributions may be nonperiodic, such as lump-sum distributions, or periodic, such as annuity payments. Free online tax extension Also, certain loans may be treated as distributions. Free online tax extension See Loans Treated as Distributions in Publication 575. Free online tax extension Required Distributions A qualified plan must provide that each participant will either: Receive his or her entire interest (benefits) in the plan by the required beginning date (defined later), or Begin receiving regular periodic distributions by the required beginning date in annual amounts calculated to distribute the participant's entire interest (benefits) over his or her life expectancy or over the joint life expectancy of the participant and the designated beneficiary (or over a shorter period). Free online tax extension These distribution rules apply individually to each qualified plan. Free online tax extension You cannot satisfy the requirement for one plan by taking a distribution from another. Free online tax extension The plan must provide that these rules override any inconsistent distribution options previously offered. Free online tax extension Minimum distribution. Free online tax extension   If the account balance of a qualified plan participant is to be distributed (other than as an annuity), the plan administrator must figure the minimum amount required to be distributed each distribution calendar year. Free online tax extension This minimum is figured by dividing the account balance by the applicable life expectancy. Free online tax extension The plan administrator can use the life expectancy tables in Appendix C of Publication 590 for this purpose. Free online tax extension For more information on figuring the minimum distribution, see Tax on Excess Accumulation in Publication 575. Free online tax extension Required beginning date. Free online tax extension   Generally, each participant must receive his or her entire benefits in the plan or begin to receive periodic distributions of benefits from the plan by the required beginning date. Free online tax extension   A participant must begin to receive distributions from his or her qualified retirement plan by April 1 of the first year after the later of the following years. Free online tax extension Calendar year in which he or she reaches age 70½. Free online tax extension Calendar year in which he or she retires from employment with the employer maintaining the plan. Free online tax extension However, the plan may require the participant to begin receiving distributions by April 1 of the year after the participant reaches age 70½ even if the participant has not retired. Free online tax extension   If the participant is a 5% owner of the employer maintaining the plan, the participant must begin receiving distributions by April 1 of the first year after the calendar year in which the participant reached age 70½. Free online tax extension For more information, see Tax on Excess Accumulation in Publication 575. Free online tax extension Distributions after the starting year. Free online tax extension   The distribution required to be made by April 1 is treated as a distribution for the starting year. Free online tax extension (The starting year is the year in which the participant meets (1) or (2) above, whichever applies. Free online tax extension ) After the starting year, the participant must receive the required distribution for each year by December 31 of that year. Free online tax extension If no distribution is made in the starting year, required distributions for 2 years must be made in the next year (one by April 1 and one by December 31). Free online tax extension Distributions after participant's death. Free online tax extension   See Publication 575 for the special rules covering distributions made after the death of a participant. Free online tax extension Distributions From 401(k) Plans Generally, distributions cannot be made until one of the following occurs. Free online tax extension The employee retires, dies, becomes disabled, or otherwise severs employment. Free online tax extension The plan ends and no other defined contribution plan is established or continued. Free online tax extension In the case of a 401(k) plan that is part of a profit-sharing plan, the employee reaches age 59½ or suffers financial hardship. Free online tax extension For the rules on hardship distributions, including the limits on them, see Regulations section 1. Free online tax extension 401(k)-1(d). Free online tax extension The employee becomes eligible for a qualified reservist distribution (defined next). Free online tax extension Certain distributions listed above may be subject to the tax on early distributions discussed later. Free online tax extension Qualified reservist distributions. Free online tax extension   A qualified reservist distribution is a distribution from an IRA or an elective deferral account made after September 11, 2001, to a military reservist or a member of the National Guard who has been called to active duty for at least 180 days or for an indefinite period. Free online tax extension All or part of a qualified reservist distribution can be recontributed to an IRA. Free online tax extension The additional 10% tax on early distributions does not apply to a qualified reservist distribution. Free online tax extension Tax Treatment of Distributions Distributions from a qualified plan minus a prorated part of any cost basis are subject to income tax in the year they are distributed. Free online tax extension Since most recipients have no cost basis, a distribution is generally fully taxable. Free online tax extension An exception is a distribution that is properly rolled over as discussed under Rollover, next. Free online tax extension The tax treatment of distributions depends on whether they are made periodically over several years or life (periodic distributions) or are nonperiodic distributions. Free online tax extension See Taxation of Periodic Payments and Taxation of Nonperiodic Payments in Publication 575 for a detailed description of how distributions are taxed, including the 10-year tax option or capital gain treatment of a lump-sum distribution. Free online tax extension Note. Free online tax extension A recipient of a distribution from a designated Roth account will have a cost basis since designated Roth contributions are made on an after-tax basis. Free online tax extension Also, a distribution from a designated Roth account is entirely tax-free if certain conditions are met. Free online tax extension See Qualified distributions under Qualified Roth Contribution Program, earlier. Free online tax extension Rollover. Free online tax extension   The recipient of an eligible rollover distribution from a qualified plan can defer the tax on it by rolling it over into a traditional IRA or another eligible retirement plan. Free online tax extension However, it may be subject to withholding as discussed under Withholding requirement, later. Free online tax extension A rollover can also be made to a Roth IRA, in which case, any previously untaxed amounts are includible in gross income unless the rollover is from a designated Roth account. Free online tax extension Eligible rollover distribution. Free online tax extension   This is a distribution of all or any part of an employee's balance in a qualified retirement plan that is not any of the following. Free online tax extension A required minimum distribution. Free online tax extension See Required Distributions , earlier. Free online tax extension Any of a series of substantially equal payments made at least once a year over any of the following periods. Free online tax extension The employee's life or life expectancy. Free online tax extension The joint lives or life expectancies of the employee and beneficiary. Free online tax extension A period of 10 years or longer. Free online tax extension A hardship distribution. Free online tax extension The portion of a distribution that represents the return of an employee's nondeductible contributions to the plan. Free online tax extension See Employee Contributions , earlier, and Rollover of nontaxable amounts, next. Free online tax extension Loans treated as distributions. Free online tax extension Dividends on employer securities. Free online tax extension The cost of any life insurance coverage provided under a qualified retirement plan. Free online tax extension Similar items designated by the IRS in published guidance. Free online tax extension See, for example, the Instructions for Forms 1099-R and 5498. Free online tax extension Rollover of nontaxable amounts. Free online tax extension   You may be able to roll over the nontaxable part of a distribution to another qualified retirement plan or a section 403(b) plan, or to an IRA. Free online tax extension If the rollover is to a qualified retirement plan or a section 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover, the transfer must be made through a direct (trustee-to-trustee) rollover. Free online tax extension If the rollover is to an IRA, the transfer can be made by any rollover method. Free online tax extension Note. Free online tax extension A distribution from a designated Roth account can be rolled over to another designated Roth account or to a Roth IRA. Free online tax extension If the rollover is to a Roth IRA, it can be rolled over by any rollover method, but if the rollover is to another designated Roth account, it must be rolled over directly (trustee-to-trustee). Free online tax extension More information. Free online tax extension   For more information about rollovers, see Rollovers in Pubs. Free online tax extension 575 and 590. Free online tax extension Withholding requirement. Free online tax extension   If, during a year, a qualified plan pays to a participant one or more eligible rollover distributions (defined earlier) that are reasonably expected to total $200 or more, the payor must withhold 20% of the taxable portion of each distribution for federal income tax. Free online tax extension Exceptions. Free online tax extension   If, instead of having the distribution paid to him or her, the participant chooses to have the plan pay it directly to an IRA or another eligible retirement plan (a direct rollover), no withholding is required. Free online tax extension   If the distribution is not an eligible rollover distribution, defined earlier, the 20% withholding requirement does not apply. Free online tax extension Other withholding rules apply to distributions that are not eligible rollover distributions, such as long-term periodic distributions and required distributions (periodic or nonperiodic). Free online tax extension However, the participant can choose not to have tax withheld from these distributions. Free online tax extension If the participant does not make this choice, the following withholding rules apply. Free online tax extension For periodic distributions, withholding is based on their treatment as wages. Free online tax extension For nonperiodic distributions, 10% of the taxable part is withheld. Free online tax extension Estimated tax payments. Free online tax extension   If no income tax is withheld or not enough tax is withheld, the recipient of a distribution may have to make estimated tax payments. Free online tax extension For more information, see Withholding Tax and Estimated Tax in Publication 575. Free online tax extension Section 402(f) Notice. Free online tax extension   If a distribution is an eligible rollover distribution, as defined earlier, you must provide a written notice to the recipient that explains the following rules regarding such distributions. Free online tax extension That the distribution may be directly transferred to an eligible retirement plan and information about which distributions are eligible for this direct transfer. Free online tax extension That tax will be withheld from the distribution if it is not directly transferred to an eligible retirement plan. Free online tax extension That the distribution will not be subject to tax if transferred to an eligible retirement plan within 60 days after the date the recipient receives the distribution. Free online tax extension Certain other rules that may be applicable. Free online tax extension   Notice 2009-68, 2009-39 I. Free online tax extension R. Free online tax extension B. Free online tax extension 423, available at www. Free online tax extension irs. Free online tax extension gov/irb/2009-39_IRB/ar14. Free online tax extension html, contains two updated safe harbor section 402(f) notices that plan administrators may provide recipients of eligible rollover distributions. Free online tax extension If the plan allows in-plan Roth rollovers, the 402(f) notice must be amended to reflect this. Free online tax extension Notice 2010-84 contains guidance on how to modify a 402(f) notice for in-plan Roth rollovers. Free online tax extension Timing of notice. Free online tax extension   The notice generally must be provided no less than 30 days and no more than 180 days before the date of a distribution. Free online tax extension Method of notice. Free online tax extension   The written notice must be provided individually to each distributee of an eligible rollover distribution. Free online tax extension Posting of the notice is not sufficient. Free online tax extension However, the written requirement may be satisfied through the use of electronic media if certain additional conditions are met. Free online tax extension See Regulations section 1. Free online tax extension 401(a)-21. Free online tax extension Tax on failure to give notice. Free online tax extension   Failure to give a 402(f) notice will result in a tax of $100 for each failure, with a total not exceeding $50,000 per calendar year. Free online tax extension The tax will not be imposed if it is shown that such failure is due to reasonable cause and not to willful neglect. Free online tax extension Tax on Early Distributions If a distribution is made to an employee under the plan before he or she reaches age 59½, the employee may have to pay a 10% additional tax on the distribution. Free online tax extension This tax applies to the amount received that the employee must include in income. Free online tax extension Exceptions. Free online tax extension   The 10% tax will not apply if distributions before age 59½ are made in any of the following circumstances. Free online tax extension Made to a beneficiary (or to the estate of the employee) on or after the death of the employee. Free online tax extension Made due to the employee having a qualifying disability. Free online tax extension Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. Free online tax extension (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period. Free online tax extension ) Made to an employee after separation from service if the separation occurred during o
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Can I Deduct My Mortgage Related Expenses?

This application will determine if you are able to deduct amounts you paid for Mortgage interest, Points, Mortgage Insurance Premiums and other Mortgage Related Expenses.

Information You Will Need:

  • Your and your spouse's filing status
  • Basic income information including amounts of your income
  • An estimated total (if applicable) of the amounts paid for mortgage interest, points and/or mortgage insurance premiums (normally reported to you on Form 1099-G)

Estimated Completion Time: 12 minutes. However: 5 minutes of inactivity will end the interview and you will be forced to start over.

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The Free Online Tax Extension

Free online tax extension 2. Free online tax extension   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Free online tax extension Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Free online tax extension S. Free online tax extension or foreign source income. Free online tax extension This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Free online tax extension S. Free online tax extension Virgin Islands (USVI). Free online tax extension Generally, the same rules that apply for determining U. Free online tax extension S. Free online tax extension source income also apply for determining possession source income. Free online tax extension However, there are some important exceptions to these rules. Free online tax extension Both the general rules and the exceptions are discussed in this chapter. Free online tax extension U. Free online tax extension S. Free online tax extension income rule. Free online tax extension   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Free online tax extension Table 2-1 shows the general rules for determining whether income is from sources within the United States. Free online tax extension Table 2-1. Free online tax extension General Rules for Determining U. Free online tax extension S. Free online tax extension Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Free online tax extension Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Free online tax extension For more information, see Regulations section 1. Free online tax extension 863-1(b). Free online tax extension Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Free online tax extension Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Free online tax extension Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Free online tax extension It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Free online tax extension Services performed wholly within a relevant possession. Free online tax extension   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Free online tax extension However, there is an exception for income earned as a member of the U. Free online tax extension S. Free online tax extension Armed Forces or a civilian spouse. Free online tax extension U. Free online tax extension S. Free online tax extension Armed Forces. Free online tax extension   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Free online tax extension However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Free online tax extension Civilian spouse of active duty member of the U. Free online tax extension S. Free online tax extension Armed Forces. Free online tax extension   If you are a bona fide resident of a U. Free online tax extension S. Free online tax extension possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Free online tax extension Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Free online tax extension S. Free online tax extension possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Free online tax extension Services performed partly inside and partly outside a relevant possession. Free online tax extension   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Free online tax extension Compensation (other than certain fringe benefits) is sourced on a time basis. Free online tax extension Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Free online tax extension   Or, you may be permitted to use an alternative basis to determine the source of compensation. Free online tax extension See Alternative basis , later. Free online tax extension   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Free online tax extension In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Free online tax extension Time basis. Free online tax extension   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Free online tax extension Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Free online tax extension The time period for which the income is made does not have to be a year. Free online tax extension Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Free online tax extension Example. Free online tax extension In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Free online tax extension Your Puerto Rico source income is $60,000, figured as follows. Free online tax extension       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Free online tax extension   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Free online tax extension Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Free online tax extension You determine the period to which the income is attributable based on the facts and circumstances of your case. Free online tax extension For more information on multi-year compensation, see Treasury Decision (T. Free online tax extension D. Free online tax extension ) 9212 and Regulations section 1. Free online tax extension 861-4, 2005-35 I. Free online tax extension R. Free online tax extension B. Free online tax extension 429, available at www. Free online tax extension irs. Free online tax extension gov/irb/2005-35_IRB/ar14. Free online tax extension html. Free online tax extension Certain fringe benefits sourced on a geographical basis. Free online tax extension   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Free online tax extension Housing. Free online tax extension Education. Free online tax extension Local transportation. Free online tax extension Tax reimbursement. Free online tax extension Hazardous or hardship duty pay. Free online tax extension Moving expense reimbursement. Free online tax extension For information on determining the source of the fringe benefits listed above, see Regulations section 1. Free online tax extension 861-4. Free online tax extension Alternative basis. Free online tax extension   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Free online tax extension If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Free online tax extension De minimis exception. Free online tax extension   There is an exception to the rule for determining the source of income earned in a possession. Free online tax extension Generally, you will not have income from a possession if during a tax year you: Are a U. Free online tax extension S. Free online tax extension citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Free online tax extension This exception began with income earned during your 2008 tax year. Free online tax extension Pensions. Free online tax extension   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Free online tax extension The contribution portion is sourced according to where services were performed that earned the pension. Free online tax extension The investment earnings portion is sourced according to the location of the pension trust. Free online tax extension Example. Free online tax extension You are a U. Free online tax extension S. Free online tax extension citizen who worked in Puerto Rico for a U. Free online tax extension S. Free online tax extension company. Free online tax extension All services were performed in Puerto Rico. Free online tax extension Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Free online tax extension S. Free online tax extension pension trust of your employer. Free online tax extension Distributions from the U. Free online tax extension S. Free online tax extension pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Free online tax extension S. Free online tax extension source income. Free online tax extension Investment Income This category includes such income as interest, dividends, rents, and royalties. Free online tax extension Interest income. Free online tax extension   The source of interest income is generally determined by the residence of the payer. Free online tax extension Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Free online tax extension   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Free online tax extension See Regulations section 1. Free online tax extension 937-2(i) for more information. Free online tax extension Dividends. Free online tax extension   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Free online tax extension There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Free online tax extension For more information, see Regulations section 1. Free online tax extension 937-2(g). Free online tax extension Rental income. Free online tax extension   Rents from property located in a relevant possession are treated as income from sources within that possession. Free online tax extension Royalties. Free online tax extension   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Free online tax extension   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Free online tax extension Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Free online tax extension The most common situations are discussed below. Free online tax extension Real property. Free online tax extension   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Free online tax extension The location of the property generally determines the source of income from the sale. Free online tax extension For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Free online tax extension If, however, the home you sold was located in the United States, the gain is U. Free online tax extension S. Free online tax extension source income. Free online tax extension Personal property. Free online tax extension   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Free online tax extension Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Free online tax extension If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Free online tax extension   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Free online tax extension The rules applying to sales of inventory are discussed below. Free online tax extension For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Free online tax extension Inventory. Free online tax extension   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Free online tax extension The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Free online tax extension Purchased. Free online tax extension   Income from the sale of inventory that you purchased is sourced where you sell the property. Free online tax extension Generally, this is where title to the property passes to the buyer. Free online tax extension Produced. Free online tax extension   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Free online tax extension For information on making the allocation, see Regulations section 1. Free online tax extension 863-3(f). Free online tax extension Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Free online tax extension S. Free online tax extension citizen or resident alien prior to becoming a bona fide resident of a possession. Free online tax extension You are subject to these special rules if you meet both of the following conditions. Free online tax extension For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Free online tax extension For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Free online tax extension If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Free online tax extension Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Free online tax extension S. Free online tax extension tax return. Free online tax extension (See chapter 3 for additional filing information. Free online tax extension ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Free online tax extension These rules apply to dispositions after April 11, 2005. Free online tax extension For details, see Regulations section 1. Free online tax extension 937-2(f)(1) and Examples 1 and 2 of section 1. Free online tax extension 937-2(k). Free online tax extension Example 1. Free online tax extension In 2007, Cheryl Jones, a U. Free online tax extension S. Free online tax extension citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Free online tax extension S. Free online tax extension corporation listed on the New York Stock Exchange. Free online tax extension On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Free online tax extension Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Free online tax extension On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Free online tax extension On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Free online tax extension Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Free online tax extension The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Free online tax extension This existing special rule applies if you are a U. Free online tax extension S. Free online tax extension citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Free online tax extension S. Free online tax extension assets during the 10-year period beginning when you became a bona fide resident. Free online tax extension The gain is U. Free online tax extension S. Free online tax extension source income that generally is subject to U. Free online tax extension S. Free online tax extension tax if the property is either (1) located in the United States; (2) stock issued by a U. Free online tax extension S. Free online tax extension corporation or a debt obligation of a U. Free online tax extension S. Free online tax extension person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Free online tax extension See chapter 3 for filing information. Free online tax extension Special election. Free online tax extension   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Free online tax extension Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Free online tax extension This election overrides both of the special rules discussed earlier. Free online tax extension   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Free online tax extension Marketable securities. Free online tax extension   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Free online tax extension Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Free online tax extension S. Free online tax extension holding periods. Free online tax extension   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Free online tax extension The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Free online tax extension This is your gain (or loss) that is treated as being from sources within the relevant possession. Free online tax extension If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Free online tax extension Example 2. Free online tax extension Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Free online tax extension S. Free online tax extension and possession holding periods. Free online tax extension Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Free online tax extension Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Free online tax extension By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Free online tax extension Other personal property. Free online tax extension   For personal property other than marketable securities, use a time-based allocation. Free online tax extension Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Free online tax extension      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Free online tax extension Example 3. Free online tax extension In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Free online tax extension On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Free online tax extension On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Free online tax extension She had owned the interest for a total of 1,720 days. Free online tax extension Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Free online tax extension The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Free online tax extension By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Free online tax extension Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Free online tax extension Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Free online tax extension These rules do not apply to amounts paid as salary or other compensation for services. Free online tax extension See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Free online tax extension Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Free online tax extension These circumstances are listed below. Free online tax extension You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Free online tax extension That office or place of business is a material factor in producing the income. Free online tax extension The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Free online tax extension An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Free online tax extension The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Free online tax extension Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Free online tax extension Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Free online tax extension Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Free online tax extension Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Free online tax extension Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Free online tax extension Example. Free online tax extension Marcy Jackson is a bona fide resident of American Samoa. Free online tax extension Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Free online tax extension A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Free online tax extension Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Free online tax extension The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Free online tax extension However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Free online tax extension Prev  Up  Next   Home   More Online Publications