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H&r block free federal Publication 525 - Main Content Table of Contents Employee CompensationBabysitting. H&r block free federal Miscellaneous Compensation Fringe Benefits Retirement Plan Contributions Stock Options Restricted Property Special Rules for Certain EmployeesClergy Members of Religious Orders Foreign Employer Military Volunteers Business and Investment IncomeRents From Personal Property Royalties Partnership Income S Corporation Income Sickness and Injury BenefitsDisability Pensions Long-Term Care Insurance Contracts Workers' Compensation Other Sickness and Injury Benefits Miscellaneous IncomeBartering Canceled Debts Host or Hostess Life Insurance Proceeds Recoveries Survivor Benefits Unemployment Benefits Welfare and Other Public Assistance Benefits Other Income RepaymentsMethod 1. H&r block free federal Method 2. H&r block free federal How To Get Tax HelpLow Income Taxpayer Clinics Employee Compensation In most cases, you must include in gross income everything you receive in payment for personal services. H&r block free federal In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. H&r block free federal You should receive a Form W-2 from your employer or former employer showing the pay you received for your services. H&r block free federal Include all your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive Form W-2, or you receive a Form W-2 that does not include all pay that should be included on the Form W-2. H&r block free federal If you performed services, other than as an independent contractor, and your employer did not withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. H&r block free federal These wages must be included on line 7 of Form 1040. H&r block free federal See Form 8919 for more information. H&r block free federal Childcare providers. H&r block free federal   If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. H&r block free federal If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. H&r block free federal You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. H&r block free federal Babysitting. H&r block free federal   If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you. H&r block free federal Bankruptcy. H&r block free federal   If you filed for bankruptcy under Chapter 11 of the Bankruptcy Code, you must allocate your wages and withheld income tax. H&r block free federal Your W-2 will show your total wages and withheld income tax for the year. H&r block free federal On your tax return, you report the wages and withheld income tax for the period before you filed for bankruptcy. H&r block free federal Your bankruptcy estate reports the wages and withheld income tax for the period after you filed for bankruptcy. H&r block free federal If you receive other information returns (such as Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income) that report gross income to you, rather than to the bankruptcy estate, you must allocate that income. H&r block free federal   The only exception is for purposes of figuring your self-employment tax, if you are self-employed. H&r block free federal For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. H&r block free federal   You must file a statement with your income tax return stating you filed a Chapter 11 bankruptcy case. H&r block free federal The statement must show the allocation and describe the method used to make the allocation. H&r block free federal For a sample of this statement and other information, see Notice 2006-83, 2006-40 I. H&r block free federal R. H&r block free federal B. H&r block free federal 596, available at www. H&r block free federal irs. H&r block free federal gov/irb/2006-40_IRB/ar12. H&r block free federal html. H&r block free federal Miscellaneous Compensation This section discusses many types of employee compensation. H&r block free federal The subjects are arranged in alphabetical order. H&r block free federal Advance commissions and other earnings. H&r block free federal   If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them. H&r block free federal    If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. H&r block free federal If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), Itemized Deductions, or you may be able to take a credit for that year. H&r block free federal See Repayments , later. H&r block free federal Allowances and reimbursements. H&r block free federal    If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. H&r block free federal If you are reimbursed for moving expenses, see Publication 521, Moving Expenses. H&r block free federal Back pay awards. H&r block free federal   Include in income amounts you are awarded in a settlement or judgment for back pay. H&r block free federal These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. H&r block free federal They should be reported to you by your employer on Form W-2. H&r block free federal Bonuses and awards. H&r block free federal    Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. H&r block free federal These include prizes such as vacation trips for meeting sales goals. H&r block free federal If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. H&r block free federal However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you. H&r block free federal Employee achievement award. H&r block free federal   If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. H&r block free federal However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. H&r block free federal Your employer can tell you whether your award is a qualified plan award. H&r block free federal Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay. H&r block free federal   However, the exclusion does not apply to the following awards. H&r block free federal A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years. H&r block free federal A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year. H&r block free federal Example. H&r block free federal Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. H&r block free federal Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. H&r block free federal However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 − $1,600) in his income. H&r block free federal Differential wage payments. H&r block free federal   This is any payment made by an employer to an individual for any period during which the individual is, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages the individual would have received from the employer for that period. H&r block free federal These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. H&r block free federal The payments are reported as wages on Form W-2. H&r block free federal Government cost-of-living allowances. H&r block free federal   Most payments received by U. H&r block free federal S. H&r block free federal Government civilian employees for working abroad are taxable. H&r block free federal However, certain cost-of-living allowances are tax free. H&r block free federal Publication 516, U. H&r block free federal S. H&r block free federal Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. H&r block free federal Nonqualified deferred compensation plans. H&r block free federal   Your employer will report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan. H&r block free federal This amount is shown on Form W-2, box 12, using code Y. H&r block free federal This amount is not included in your income. H&r block free federal   However, if at any time during the tax year, the plan fails to meet certain requirements, or is not operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years are included in your income for the current year. H&r block free federal This amount is included in your wages shown on Form W-2, box 1. H&r block free federal It is also shown on Form W-2, box 12, using code Z. H&r block free federal Nonqualified deferred compensation plans of nonqualified entities. H&r block free federal   In most cases, any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is included in gross income when there is no substantial risk of forfeiture of the rights to such compensation. H&r block free federal For this purpose, a nonqualified entity is: A foreign corporation unless substantially all of its income is: Effectively connected with the conduct of a trade or business in the United States, or Subject to a comprehensive foreign income tax. H&r block free federal A partnership unless substantially all of its income is allocated to persons other than: Foreign persons for whom the income is not subject to a comprehensive foreign income tax, and Tax-exempt organizations. H&r block free federal Note received for services. H&r block free federal   If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. H&r block free federal When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. H&r block free federal Do not include that part again in your income. H&r block free federal Include the rest of the payment in your income in the year of payment. H&r block free federal   If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them. H&r block free federal Severance pay. H&r block free federal   You must include in income amounts you receive as severance pay and any payment for the cancellation of your employment contract. H&r block free federal Accrued leave payment. H&r block free federal   If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2. H&r block free federal   If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. H&r block free federal You can reduce gross wages by the amount you repaid in the same tax year in which you received it. H&r block free federal Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2. H&r block free federal Outplacement services. H&r block free federal   If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income. H&r block free federal    However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040). H&r block free federal Sick pay. H&r block free federal   Pay you receive from your employer while you are sick or injured is part of your salary or wages. H&r block free federal In addition, you must include in your income sick pay benefits received from any of the following payers. H&r block free federal A welfare fund. H&r block free federal A state sickness or disability fund. H&r block free federal An association of employers or employees. H&r block free federal An insurance company, if your employer paid for the plan. H&r block free federal However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. H&r block free federal For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later. H&r block free federal Social security and Medicare taxes paid by employer. H&r block free federal   If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. H&r block free federal The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. H&r block free federal However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker. H&r block free federal Stock appreciation rights. H&r block free federal   Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. H&r block free federal When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. H&r block free federal You include the cash payment in income in the year you use the right. H&r block free federal Fringe Benefits Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. H&r block free federal Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules. H&r block free federal See Valuation of Fringe Benefits , later in this discussion, for information on how to determine the amount to include in income. H&r block free federal Recipient of fringe benefit. H&r block free federal   You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. H&r block free federal You are considered to be the recipient even if it is given to another person, such as a member of your family. H&r block free federal An example is a car your employer gives to your spouse for services you perform. H&r block free federal The car is considered to have been provided to you and not to your spouse. H&r block free federal   You do not have to be an employee of the provider to be a recipient of a fringe benefit. H&r block free federal If you are a partner, director, or independent contractor, you also can be the recipient of a fringe benefit. H&r block free federal Provider of benefit. H&r block free federal   Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. H&r block free federal The provider can be a client or customer of an independent contractor. H&r block free federal Accounting period. H&r block free federal   You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. H&r block free federal Your employer has the option to report taxable noncash fringe benefits by using either of the following rules. H&r block free federal The general rule: benefits are reported for a full calendar year (January 1–December 31). H&r block free federal The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. H&r block free federal For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year. H&r block free federal Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit. H&r block free federal   You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example). H&r block free federal Form W-2. H&r block free federal   Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. H&r block free federal Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). H&r block free federal However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement). H&r block free federal Accident or Health Plan In most cases, the value of accident or health plan coverage provided to you by your employer is not included in your income. H&r block free federal Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits . H&r block free federal For information on the items covered in this section, other than Long-term care coverage , see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. H&r block free federal Long-term care coverage. H&r block free federal   Contributions by your employer to provide coverage for long-term care services generally are not included in your income. H&r block free federal However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. H&r block free federal This amount will be reported as wages in box 1 of your Form W-2. H&r block free federal Archer MSA contributions. H&r block free federal    Contributions by your employer to your Archer MSA generally are not included in your income. H&r block free federal Their total will be reported in box 12 of Form W-2, with code R. H&r block free federal You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. H&r block free federal File the form with your return. H&r block free federal Health flexible spending arrangement (health FSA). H&r block free federal   If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, are not included in your income. H&r block free federal   Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. H&r block free federal The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. H&r block free federal For more information, see Notice 2012-40, 2012-26 I. H&r block free federal R. H&r block free federal B. H&r block free federal 1046, available at www. H&r block free federal irs. H&r block free federal gov/irb/2012-26 IRB/ar09. H&r block free federal html. H&r block free federal Health reimbursement arrangement (HRA). H&r block free federal   If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally are not included in your income. H&r block free federal Health savings accounts (HSA). H&r block free federal   If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. H&r block free federal Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. H&r block free federal Contributions made by your employer are not included in your income. H&r block free federal Distributions from your HSA that are used to pay qualified medical expenses are not included in your income. H&r block free federal Distributions not used for qualified medical expenses are included in your income. H&r block free federal See Publication 969 for the requirements of an HSA. H&r block free federal   Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. H&r block free federal The contributions are treated as a distribution of money and are not included in the partner's gross income. H&r block free federal Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. H&r block free federal In both situations, the partner can deduct the contribution made to the partner's HSA. H&r block free federal   Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. H&r block free federal The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA. H&r block free federal Qualified HSA funding distribution. H&r block free federal   You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally will not include any of the distribution in your income. H&r block free federal See Publication 590, Individual Retirement Arrangements (IRAs), for the requirements for these qualified HSA funding distributions. H&r block free federal Failure to maintain eligibility. H&r block free federal   If your HSA received qualified HSA distributions from a health FSA or HRA (discussed earlier) or a qualified HSA funding distribution, you must be an eligible individual for HSA purposes for the period beginning with the month in which the qualified distribution was made and ending on the last day of the 12th month following that month. H&r block free federal If you fail to be an eligible individual during this period, other than because of death or disability, you must include the distribution in your income for the tax year in which you become ineligible. H&r block free federal This income is also subject to an additional 10% tax. H&r block free federal Adoption Assistance You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. H&r block free federal See Instructions for Form 8839, Qualified Adoption Expenses, for more information. H&r block free federal Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. H&r block free federal They also are included as social security and Medicare wages in boxes 3 and 5. H&r block free federal However, they are not included as wages in box 1. H&r block free federal To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. H&r block free federal File the form with your return. H&r block free federal Athletic Facilities If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. H&r block free federal The gym must be used primarily by employees, their spouses, and their dependent children. H&r block free federal If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation. H&r block free federal De Minimis (Minimal) Benefits If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. H&r block free federal In most cases, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. H&r block free federal Also see Employee Discounts , later. H&r block free federal Holiday gifts. H&r block free federal   If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. H&r block free federal However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved. H&r block free federal Dependent Care Benefits If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. H&r block free federal Dependent care benefits include: Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and The fair market value of care in a daycare facility provided or sponsored by your employer. H&r block free federal The amount you can exclude is limited to the lesser of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). H&r block free federal Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. H&r block free federal Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2. H&r block free federal To claim the exclusion, you must complete Part III of Form 2441, Child and Dependent Care Expenses. H&r block free federal See the Instructions for Form 2441 for more information. H&r block free federal Educational Assistance You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. H&r block free federal For more information, see Publication 970. H&r block free federal Employee Discounts If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. H&r block free federal The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. H&r block free federal However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds). H&r block free federal The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage. H&r block free federal For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. H&r block free federal (Ask your employer for this percentage. H&r block free federal ) For a discount on services, 20%. H&r block free federal Financial Counseling Fees Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. H&r block free federal If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2%-of-AGI limit). H&r block free federal Qualified retirement planning services paid for you by your employer may be excluded from your income. H&r block free federal For more information, see Retirement Planning Services , later. H&r block free federal Group-Term Life Insurance In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. H&r block free federal However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance. H&r block free federal For exceptions to this rule, see Entire cost excluded , and Entire cost taxed , later. H&r block free federal If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. H&r block free federal Also, it is shown separately in box 12 with code C. H&r block free federal Group-term life insurance. H&r block free federal   This insurance is term life insurance protection (insurance for a fixed period of time) that: Provides a general death benefit, Is provided to a group of employees, Is provided under a policy carried by the employer, and Provides an amount of insurance to each employee based on a formula that prevents individual selection. H&r block free federal Permanent benefits. H&r block free federal   If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. H&r block free federal Your employer should be able to tell you the amount to include in your income. H&r block free federal Accidental death benefits. H&r block free federal   Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance. H&r block free federal Former employer. H&r block free federal   If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. H&r block free federal Also, it is shown separately in box 12 with code C. H&r block free federal Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. H&r block free federal You must pay these taxes with your income tax return. H&r block free federal Include them on line 60, Form 1040, and follow the instructions forline 60. H&r block free federal For more information, see the Instructions for Form 1040. H&r block free federal Two or more employers. H&r block free federal   Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. H&r block free federal If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. H&r block free federal You must figure how much to include in your income. H&r block free federal Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return. H&r block free federal Figuring the taxable cost. H&r block free federal    Use the following worksheet to figure the amount to include in your income. H&r block free federal   If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you otherwise would include in your income. H&r block free federal However, you cannot reduce the amount to include in your income by: Payments for coverage in a different tax year, Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded . H&r block free federal Worksheet 1. H&r block free federal Figuring the Cost of Group-Term Life Insurance To Include in Income 1. H&r block free federal Enter the total amount of your insurance coverage from your employer(s) 1. H&r block free federal   2. H&r block free federal Limit on exclusion for employer-provided group-term life insurance coverage 2. H&r block free federal 50,000 3. H&r block free federal Subtract line 2 from line 1 3. H&r block free federal   4. H&r block free federal Divide line 3 by $1,000. H&r block free federal Figure to the nearest tenth 4. H&r block free federal   5. H&r block free federal Go to Table 1. H&r block free federal Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. H&r block free federal   6. H&r block free federal Multiply line 4 by line 5 6. H&r block free federal     7. H&r block free federal Enter the number of full months of coverage at this cost 7. H&r block free federal   8. H&r block free federal Multiply line 6 by line 7 8. H&r block free federal   9. H&r block free federal Enter the premiums you paid per month 9. H&r block free federal       10. H&r block free federal Enter the number of months you paid the  premiums 10. H&r block free federal       11. H&r block free federal Multiply line 9 by line 10. H&r block free federal 11. H&r block free federal   12. H&r block free federal Subtract line 11 from line 8. H&r block free federal Include this amount in your income as wages 12. H&r block free federal   Table 1. H&r block free federal Cost of $1,000 of Group-Term Life Insurance for One Month   Age Cost     Under 25 $ . H&r block free federal 05     25 through 29 . H&r block free federal 06     30 through 34 . H&r block free federal 08     35 through 39 . H&r block free federal 09     40 through 44 . H&r block free federal 10     45 through 49 . H&r block free federal 15     50 through 54 . H&r block free federal 23     55 through 59 . H&r block free federal 43     60 through 64 . H&r block free federal 66     65 through 69 1. H&r block free federal 27     70 and older 2. H&r block free federal 06   Example. H&r block free federal You are 51 years old and work for employers A and B. H&r block free federal Both employers provide group-term life insurance coverage for you for the entire year. H&r block free federal Your coverage is $35,000 with employer A and $45,000 with employer B. H&r block free federal You pay premiums of $4. H&r block free federal 15 a month under the employer B group plan. H&r block free federal You figure the amount to include in your income as follows. H&r block free federal   Worksheet 1. H&r block free federal Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. H&r block free federal Enter the total amount of your insurance coverage from your employer(s) 1. H&r block free federal 80,000 2. H&r block free federal Limit on exclusion for employer-provided group-term life insurance coverage 2. H&r block free federal 50,000 3. H&r block free federal Subtract line 2 from line 1 3. H&r block free federal 30,000 4. H&r block free federal Divide line 3 by $1,000. H&r block free federal Figure to the nearest tenth 4. H&r block free federal 30. H&r block free federal 0 5. H&r block free federal Go to Table 1. H&r block free federal Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. H&r block free federal . H&r block free federal 23 6. H&r block free federal Multiply line 4 by line 5 6. H&r block free federal 6. H&r block free federal 90 7. H&r block free federal Enter the number of full months of coverage at this cost. H&r block free federal 7. H&r block free federal 12 8. H&r block free federal Multiply line 6 by line 7 8. H&r block free federal 82. H&r block free federal 80 9. H&r block free federal Enter the premiums you paid per month 9. H&r block free federal 4. H&r block free federal 15     10. H&r block free federal Enter the number of months you paid the premiums 10. H&r block free federal 12     11. H&r block free federal Multiply line 9 by line 10. H&r block free federal 11. H&r block free federal 49. H&r block free federal 80 12. H&r block free federal Subtract line 11 from line 8. H&r block free federal Include this amount in your income as wages 12. H&r block free federal 33. H&r block free federal 00 The total amount to include in income for the cost of excess group-term life insurance is $33. H&r block free federal Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. H&r block free federal You must add it to the wages shown on your Forms W-2 and include the total on your return. H&r block free federal Entire cost excluded. H&r block free federal   You are not taxed on the cost of group-term life insurance if any of the following circumstances apply. H&r block free federal You are permanently and totally disabled and have ended your employment. H&r block free federal Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year. H&r block free federal A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. H&r block free federal (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy. H&r block free federal ) The plan existed on January 1, 1984, and: You retired before January 2, 1984, and were covered by the plan when you retired, or You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983. H&r block free federal Entire cost taxed. H&r block free federal   You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply. H&r block free federal The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan. H&r block free federal You are a key employee and your employer's plan discriminates in favor of key employees. H&r block free federal Meals and Lodging You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met. H&r block free federal The meals are: Furnished on the business premises of your employer, and Furnished for the convenience of your employer. H&r block free federal The lodging is: Furnished on the business premises of your employer, Furnished for the convenience of your employer, and A condition of your employment. H&r block free federal (You must accept it in order to be able to properly perform your duties. H&r block free federal ) You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. H&r block free federal See De Minimis (Minimal) Benefits , earlier. H&r block free federal Faculty lodging. H&r block free federal   If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions given earlier, you still may not have to include the value of the lodging in income. H&r block free federal However, the lodging must be qualified campus lodging, and you must pay an adequate rent. H&r block free federal Academic health center. H&r block free federal   This is an organization that meets the following conditions. H&r block free federal Its principal purpose or function is to provide medical or hospital care or medical education or research. H&r block free federal It receives payments for graduate medical education under the Social Security Act. H&r block free federal One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty. H&r block free federal Qualified campus lodging. H&r block free federal   Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. H&r block free federal The lodging must be located on or near a campus of the educational institution or academic health center. H&r block free federal Adequate rent. H&r block free federal   The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of: 5% of the appraised value of the lodging, or The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution. H&r block free federal If the amount you pay is less than the lesser of these amounts, you must include the difference in your income. H&r block free federal   The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis. H&r block free federal Example. H&r block free federal Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. H&r block free federal The house is appraised at $200,000. H&r block free federal The average rent paid for comparable university lodging by persons other than employees or students is $14,000 a year. H&r block free federal Carl pays an annual rent of $11,000. H&r block free federal Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $200,000 = $10,000). H&r block free federal If Carl paid annual rent of only $8,000, he would have to include $2,000 in his income ($10,000 − $8,000). H&r block free federal Moving Expense Reimbursements In most cases, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. H&r block free federal See Publication 521 for more information. H&r block free federal No-Additional-Cost Services The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer: Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service). H&r block free federal In most cases, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services. H&r block free federal Example. H&r block free federal You are employed as a flight attendant for a company that owns both an airline and a hotel chain. H&r block free federal Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. H&r block free federal The value of the personal flight is not included in your income. H&r block free federal However, the value of the hotel room is included in your income because you do not work in the hotel business. H&r block free federal Retirement Planning Services If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. H&r block free federal Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. H&r block free federal You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. H&r block free federal Also, see Financial Counseling Fees , earlier. H&r block free federal Transportation If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. H&r block free federal A qualified transportation fringe benefit is: Transportation in a commuter highway vehicle (such as a van) between your home and work place, A transit pass, Qualified parking, or Qualified bicycle commuting reimbursement. H&r block free federal Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. H&r block free federal However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you. H&r block free federal Exclusion limit. H&r block free federal   The exclusion for commuter vehicle transportation and transit pass fringe benefits cannot be more than $245 a month. H&r block free federal   The exclusion for the qualified parking fringe benefit cannot be more than $245 a month. H&r block free federal   The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. H&r block free federal   If the benefits have a value that is more than these limits, the excess must be included in your income. H&r block free federal You are not entitled to these exclusions if the reimbursements are made under a compensation reduction agreement. H&r block free federal Commuter highway vehicle. H&r block free federal   This is a highway vehicle that seats at least six adults (not including the driver). H&r block free federal At least 80% of the vehicle's mileage must reasonably be expected to be: For transporting employees between their homes and work place, and On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver). H&r block free federal Transit pass. H&r block free federal   This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation. H&r block free federal Qualified parking. H&r block free federal   This is parking provided to an employee at or near the employer's place of business. H&r block free federal It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. H&r block free federal It does not include parking at or near the employee's home. H&r block free federal Qualified bicycle commuting. H&r block free federal   This is reimbursement based on the number of qualified bicycle commuting months for the year. H&r block free federal A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you do not receive any of the other qualified transportation fringe benefits. H&r block free federal The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage. H&r block free federal Tuition Reduction You can exclude a qualified tuition reduction from your income. H&r block free federal This is the amount of a reduction in tuition: For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children. H&r block free federal For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution. H&r block free federal Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance program. H&r block free federal For more information, see Publication 970. H&r block free federal Working Condition Benefits If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income. H&r block free federal Example. H&r block free federal You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. H&r block free federal The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself. H&r block free federal Valuation of Fringe Benefits If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. H&r block free federal For an exception, see Group-Term Life Insurance , earlier. H&r block free federal General valuation rule. H&r block free federal   You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of: The amount, if any, you paid for the benefit, plus The amount, if any, specifically excluded from your income by law. H&r block free federal If you pay fair market value for a fringe benefit, no amount is included in your income. H&r block free federal Fair market value. H&r block free federal   The fair market value of a fringe benefit is determined by all the facts and circumstances. H&r block free federal It is the amount you would have to pay a third party to buy or lease the benefit. H&r block free federal This is determined without regard to: Your perceived value of the benefit, or The amount your employer paid for the benefit. H&r block free federal Employer-provided vehicles. H&r block free federal   If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit. H&r block free federal   Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. H&r block free federal An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. H&r block free federal The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis. H&r block free federal Flights on employer-provided aircraft. H&r block free federal   Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party. H&r block free federal   If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. H&r block free federal The division must be based on all the facts, including which employee or employees control the use of the aircraft. H&r block free federal Special valuation rules. H&r block free federal   You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. H&r block free federal If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. H&r block free federal You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule. H&r block free federal   If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of: Any amount you repaid your employer, plus Any amount specifically excluded from income by law. H&r block free federal The special valuation rules are the following. H&r block free federal The automobile lease rule. H&r block free federal The vehicle cents-per-mile rule. H&r block free federal The commuting rule. H&r block free federal The unsafe conditions commuting rule. H&r block free federal The employer-operated eating-facility rule. H&r block free federal   For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. H&r block free federal    For information on the non-commercial flight and commercial flight valuation rules, see sections 1. H&r block free federal 61-21(g) and 1. H&r block free federal 61-21(h) of the regulations. H&r block free federal Retirement Plan Contributions Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. H&r block free federal (Your employer can tell you whether your retirement plan is qualified. H&r block free federal ) However, the cost of life insurance coverage included in the plan may have to be included. H&r block free federal See Group-Term Life Insurance , earlier, under Fringe Benefits. H&r block free federal If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. H&r block free federal However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture. H&r block free federal For information on distributions from retirement plans, see Publication 575 (or Publication 721, Tax Guide to U. H&r block free federal S. H&r block free federal Civil Service Retirement Benefits, if you are a federal employee or retiree). H&r block free federal Elective Deferrals If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. H&r block free federal The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. H&r block free federal An elective deferral, other than a designated Roth contribution (discussed later), is not included in wages subject to income tax at the time contributed. H&r block free federal However, it is included in wages subject to social security and Medicare taxes. H&r block free federal Elective deferrals include elective contributions to the following retirement plans. H&r block free federal Cash or deferred arrangements (section 401(k) plans). H&r block free federal The Thrift Savings Plan for federal employees. H&r block free federal Salary reduction simplified employee pension plans (SARSEP). H&r block free federal Savings incentive match plans for employees (SIMPLE plans). H&r block free federal Tax-sheltered annuity plans (403(b) plans). H&r block free federal Section 501(c)(18)(D) plans. H&r block free federal (But see Reporting by employer , later. H&r block free federal ) Section 457 plans. H&r block free federal Qualified automatic contribution arrangements. H&r block free federal   Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. H&r block free federal You are to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. H&r block free federal The notice must explain: Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and How contributions made will be invested in the absence of any investment decision by you. H&r block free federal   You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions. H&r block free federal Overall limit on deferrals. H&r block free federal   For 2013, in most cases, you should not have deferred more than a total of $17,500 of contributions to the plans listed in (1) through (3), earlier. H&r block free federal The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. H&r block free federal Amounts deferred under specific plan limits are part of the overall limit on deferrals. H&r block free federal   Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. H&r block free federal However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit. H&r block free federal Catch-up contributions. H&r block free federal   You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. H&r block free federal For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans. H&r block free federal   For more information about additional elective deferrals to: SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in chapter 2 of Publication 560, Retirement Plans for Small Business. H&r block free federal SIMPLE plans, see How Much Can Be Contributed on Your Behalf? in chapter 3 of Publication 590. H&r block free federal Section 457 plans, see Limit for deferrals under section 457 plans , later. H&r block free federal Limit for deferrals under SIMPLE plans. H&r block free federal   If you are a participant in a SIMPLE plan, you generally should not have deferred more than $12,000 in 2013. H&r block free federal Amounts you defer under a SIMPLE plan count toward the overall limit ($17,500 for 2013) and may affect the amount you can defer under other elective deferral plans. H&r block free federal Limit for tax-sheltered annuities. H&r block free federal   If you are a participant in a tax-sheltered annuity plan (403(b) plan), the limit on elective deferrals for 2013 generally is $17,500. H&r block free federal However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts. H&r block free federal $3,000, $15,000, reduced by the sum of: The additional pre-tax elective deferrals made in earlier years because of this rule, plus The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule, or $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. H&r block free federal   If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $20,500 for 2013. H&r block free federal   For more information, see Publication 571. H&r block free federal Limit for deferral under section 501(c)(18) plans. H&r block free federal   If you are a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. H&r block free federal Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($17,500 in 2013) and may affect the amount you can defer under other elective deferral plans. H&r block free federal Limit for deferrals under section 457 plans. H&r block free federal   If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $17,500 in 2013. H&r block free federal However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. H&r block free federal See Increased limit , later. H&r block free federal Includible compensation. H&r block free federal   This is the pay you received for the year from the employer who maintained the section 457 plan. H&r block free federal In most cases, it includes all the following payments. H&r block free federal Wages and salaries. H&r block free federal Fees for professional services. H&r block free federal The value of any employer-provided qualified transportation fringe benefit (defined under Transportation , earlier) that is not included in your income. H&r block free federal Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items. H&r block free federal Commissions and tips. H&r block free federal Fringe benefits. H&r block free federal Bonuses. H&r block free federal Employer contributions (elective deferrals) to: The section 457 plan. H&r block free federal Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income. H&r block free federal A salary reduction simplified employee pension (SARSEP). H&r block free federal A tax-sheltered annuity (section 403(b) plan). H&r block free federal A savings incentive match plan for employees (SIMPLE plan). H&r block free federal A section 125 cafeteria plan. H&r block free federal   Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts. H&r block free federal Your wages as defined for income tax withholding purposes. H&r block free federal Your wages as reported in box 1 of Form W-2. H&r block free federal Your wages that are subject to social security withholding (including elective deferrals). H&r block free federal Increased limit. H&r block free federal   During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of: Twice the annual limit ($35,000 for 2013), or The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions). H&r block free federal Catch-up contributions. H&r block free federal   You generally can have additional elective deferrals made to your governmental section 457 plan if: You reached age 50 by the end of the year, and No other elective deferrals can be made for you to the plan for the year because of limits or restrictions. H&r block free federal If you qualify, your limit can be the lesser of your includible compensation or $17,500, plus $5,500. H&r block free federal However, if you are within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher. H&r block free federal Designated Roth contributions. H&r block free federal   Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. H&r block free federal Designated Roth contributions are treated as elective deferrals, except that they are included in income. H&r block free federal Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. H&r block free federal   Qualified distributions from a Roth plan are not included in income. H&r block free federal In most cases, a distribution made before the end of the 5-tax-year period beginning with the first tax year for which you made a designated Roth contribution to the plan is not a qualified distribution. H&r block free federal Reporting by employer. H&r block free federal   Your employer generally should not include elective deferrals in your wages in box 1 of Form W-2. H&r block free federal Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred in box 12. H&r block free federal Section 501(c)(18)(D) contributions. H&r block free federal   Wages shown in box 1 of your Form W-2 should not have been reduced for contributions you made to a section 501(c)(18)(D) retirement plan. H&r block free federal The amount you contributed should be identified with code “H” in box 12. H&r block free federal You may deduct the amount deferred subject to the limits that apply. H&r block free federal Include your deduction in the total on Form 1040, line 36. H&r block free federal Enter the amount and “501(c)(18)(D)” on the dotted line next to line 36. H&r block free federal Designated Roth contributions. H&r block free federal    These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. H&r block free federal Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. H&r block free federal Excess deferrals. H&r block free federal   If your deferrals exceed the limit, you must notify your plan by the date required by the plan. H&r block free federal If the plan permits, the excess amount will be distributed to you. H&r block free federal If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. H&r block free federal You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. H&r block free federal The plan then must pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. H&r block free federal   You must include the excess deferral in your income for the year of the deferral unless you have an excess deferral of a designated Roth contribution. H&r block free federal File Form 1040 to add the excess deferral amount to your wages on line 7. H&r block free federal Do not use Form 1040A or Form 1040EZ to report excess deferral amounts. H&r block free federal Excess not distributed. H&r block free federal   If you do not take out the excess amount, you cannot include it in the cost of the contract even though you included it in your income. H&r block free federal Therefore, you are taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution. H&r block free federal Excess distributed to you. H&r block free federal   If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. H&r block free federal If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. H&r block free federal Any income on the excess deferral taken out is taxable in the tax year in which you take it out. H&r block free federal If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income. H&r block free federal    You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. H&r block free federal Use the following rules to report a corrective distribution shown on Form 1099-R for 2013. H&r block free federal If the distribution was for a 2013 excess deferral, your Form 1099-R should have the code “8” in box 7. H&r block free federal Add the excess deferral amount to your wages on your 2013 tax return. H&r block free federal If the distribution was for a 2013 excess deferral to a designated Roth account, your Form 1099-R should have code “B” in box 7. H&r block free federal Do not add this amount to your wages on your 2013 return. H&r block free federal If the distribution was for a 2012 excess deferral, your Form 1099-R should have the code “P” in box 7. H&r block free federal If you did not add the excess deferral amount to your wages on your 2012 tax return, you must file an amended return on Form 1040X, Amended U. H&r block free federal S. H&r block free federal Individual Income Tax Return. H&r block free federal If you did not receive the distribution by April 15, 2013, you also must add it to your wages on your 2013 tax return. H&r block free federal If the distribution was for the income earned on an excess deferral, your Form 1099-R should have the code “8” in box 7. H&r block free federal Add the income amount to your wages on your 2013 income tax return, regardless of when the excess deferral was made. H&r block free federal Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. H&r block free federal Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution. H&r block free federal ”    Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. H&r block free federal It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. H&r block free federal Excess Contributions If you are a highly compensated employee, the total of your elective deferrals and other contributions made for you for any year under a section 401(k) plan or SARSEP can be, as a percentage of pay, no more than 125% of the average deferral percentage (ADP) of all eligible non-highly compensated employees. H&r block free federal If the total contributed to the plan is more than the amount allowed under the ADP test, the excess contributions must be either distributed to you or recharacterized as after-tax employee contributions by treating them as distributed to you and then contributed by you to the plan. H&r block free federal You must include the excess contributions in your income as wages on Form 1040, line 7. H&r block free federal You cannot use Form 1040A or Form 1040EZ to report excess contribution amounts. H&r block free federal If you receive a corrective distribution of excess contributions (and allocable income), it is included in your income in the year of the distribution. H&r block free federal The allocable income is the amount of gain or loss through the end of the plan year for which the contribution was made that is allocable to the excess contributions. H&r block free federal You should receive a Form 1099-R for the year the excess contributions are distributed to you. H&r block free federal Add the distribution to your wages for that year. H&r block free federal Even though a corrective distribution of excess contributions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. H&r block free federal It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. H&r block free federal Excess Annual Additions The amount contributed in 2013 to a defined contribution plan is generally limited to the lesser of 100% of your compensation or $51,000. H&r block free federal Under certain circumstances, contributions that exceed these limits (excess annual additions) may be corrected by a distribution of your elective deferrals or a return of your after-tax contributions and earnings from these contributions. H&r block free federal A corrective payment of excess annual additions consisting of elective deferrals or earnings from your after-tax contributions is fully taxable in the year paid. H&r block free federal A corrective payment consisting of your after-tax contributions is not taxable. H&r block free federal If you received a corrective payment of excess annual additions, you should receive a separate Form 1099-R for the year of the payment with the code “E” in box 7. H&r block free federal Report the total payment shown in box 1 of Form 1099-R on line 16a of Form 1040 or line 12a of Form 1040A. H&r block free federal Report the taxable amount shown in box 2a of Form 1099-R on line 16b of Form 1040 or line 12b of Form 1040A. H&r block free federal Even though a corrective distribution of excess annual additions is reported on Form 1099-R, it is not otherwise treated as a distribution from the plan. H&r block free federal It cannot be rolled over into another plan, and it is not subject to the additional tax on early distributions. H&r block free federal Stock Options If you receive an option to buy or sell stock or other property as payment for your services, you may have income when you receive the option (the grant), when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option or property acquired through exercise of the option. H&r block free federal The timing, type, and amount of income inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. H&r block free federal Your employer can tell you which kind of option you hold. H&r block free federal Nonstatutory Stock Options Grant of option. H&r block free federal   If you are granted a nonstatutory stock option, you may have income when you receive the option. H&r block free federal The amount of income to include and the time to include it depend on whether the fair market value of the option can be readily determined. H&r block free federal The fair market value of an option can be readily determined if it is actively traded on an established market. H&r block free federal    The fair market value of an option that is not traded on an established market can be readily determined only if all of the following conditions exist. H&r block free federal You can transfer the option. H&r block free federal You can exercise the option immediately in full. H&r block free federal The option or the property subject to the option is not subject to any condition or restriction (other than a condition to secure payment of the purchase price) that has a significant effect on the fair market value of the option. H&r block free federal The fair market value of the option privilege can be readily determined. H&r block free federal The option privilege for an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option without risking any capital. H&r block free federal For example, if during the exercise period the fair market value of stock subject to an option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the stock at its higher value. H&r block free federal The option privilege for an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of the property subject to the option. H&r block free federal If you or a member of your family is an officer, director, or more-than-10% owner of an expatriated corporation, you may owe an excise tax on the value of nonstatutory options and other stock-based compensation from that corporation. H&r block free federal For more information on the excise tax, see Internal Revenue Code section 4985. H&r block free federal Option with readily determinable value. H&r block free federal   If you receive a nonstatutory stock option that has a readily determinable fair market value at the time it is granted to you, the option is treated like other property received as compensation. H&r block free federal See Restricted Property , later, for rules on how much income to include and when to include it. H&r block free federal However, the rule described in that discussion for choosing to include the value of property in your income for the year of the transfer does not apply to a nonstatutory option. H&r block free federal Option without readily determinable value. H&r block free federal   If the fair market value of the option is not readily determinable at the time it is granted to you (even if it is determined later), you do not have income until you exercise or transfer the option. H&r block free federal    Exercise or transfer of option. H&r block free federal   When you exercise a nonstatutory stock option, the amount to include in your income depends on whether the option had a readily determinable value. H&r block free federal Option with readily determinable value. H&r block free federal   When you exercise a nonstatutory stock option that had a readily determinable value at the time the option was granted, you do not have to include any amount in income. H&r block free federal Option without readily determinable value. H&r block free federal   When you exercise a nonstatutory stock option that did not have a readily determinable value at the time the option was granted, the restricted prope