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H&r free federal Publication 939 - Main Content Table of Contents General Information Taxation of Periodic PaymentsInvestment in the Contract Expected Return Computation Under the General Rule How To Use Actuarial TablesUnisex Annuity Tables Special Elections Worksheets for Determining Taxable Annuity Actuarial Tables Requesting a Ruling on Taxation of Annuity How To Get Tax HelpLow Income Taxpayer Clinics General Information Some of the terms used in this publication are defined in the following paragraphs. H&r free federal A pension is generally a series of payments made to you after you retire from work. H&r free federal Pension payments are made regularly and are for past services with an employer. H&r free federal An annuity is a series of payments under a contract. H&r free federal You can buy the contract alone or you can buy it with the help of your employer. H&r free federal Annuity payments are made regularly for more than one full year. H&r free federal Note. H&r free federal Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. H&r free federal Types of pensions and annuities. H&r free federal   Particular types of pensions and annuities include: Fixed period annuities. H&r free federal You receive definite amounts at regular intervals for a definite length of time. H&r free federal Annuities for a single life. H&r free federal You receive definite amounts at regular intervals for life. H&r free federal The payments end at death. H&r free federal Joint and survivor annuities. H&r free federal The first annuitant receives a definite amount at regular intervals for life. H&r free federal After he or she dies, a second annuitant receives a definite amount at regular intervals for life. H&r free federal The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. H&r free federal Variable annuities. H&r free federal You receive payments that may vary in amount for a definite length of time or for life. H&r free federal The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. H&r free federal Disability pensions. H&r free federal You are under minimum retirement age and receive payments because you retired on disability. H&r free federal If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524. H&r free federal If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. H&r free federal A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries. H&r free federal This plan must meet Internal Revenue Code requirements. H&r free federal It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. H&r free federal However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. H&r free federal A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. H&r free federal A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. H&r free federal   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. H&r free federal A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. H&r free federal It does not qualify for most of the tax benefits of a qualified plan. H&r free federal Annuity worksheets. H&r free federal   The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity. H&r free federal Request for a ruling. H&r free federal   If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. H&r free federal This is treated as a request for a ruling. H&r free federal See Requesting a Ruling on Taxation of Annuity near the end of this publication. H&r free federal Withholding tax and estimated tax. H&r free federal   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. H&r free federal If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments. H&r free federal Taxation of Periodic Payments This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. H&r free federal Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). H&r free federal These payments are also known as amounts received as an annuity. H&r free federal If you receive an amount from your plan that is a nonperiodic payment (amount not received as an annuity), see Taxation of Nonperiodic Payments in Publication 575. H&r free federal In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. H&r free federal The amount of each payment that is more than the part that represents your net cost is taxable. H&r free federal Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. H&r free federal These terms are explained in the following discussions. H&r free federal Investment in the Contract In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the contract. H&r free federal First, find your net cost of the contract as of the annuity starting date (defined later). H&r free federal To find this amount, you must first figure the total premiums, contributions, or other amounts paid. H&r free federal This includes the amounts your employer contributed if you were required to include these amounts in income. H&r free federal It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). H&r free federal From this total cost you subtract: Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment. H&r free federal Any additional premiums paid for double indemnity or disability benefits. H&r free federal Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). H&r free federal The annuity starting date   is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes fixed. H&r free federal Example. H&r free federal On January 1 you completed all your payments required under an annuity contract providing for monthly payments starting on August 1, for the period beginning July 1. H&r free federal The annuity starting date is July 1. H&r free federal This is the date you use in figuring your investment in the contract and your expected return (discussed later). H&r free federal Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. H&r free federal Foreign employment. H&r free federal   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. H&r free federal The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (without regard to the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to you. H&r free federal Foreign employment contributions while a nonresident alien. H&r free federal   In determining your cost, special rules apply if you are a U. H&r free federal S. H&r free federal citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. H&r free federal Your contributions and your employer's contributions are not included in your cost if the contributions: Were made based on compensation which was for services performed outside the United States which you were a nonresident alien, and Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were performed. H&r free federal Death benefit exclusion. H&r free federal   If you are the beneficiary of a deceased employee (or former employee), who died before August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. H&r free federal The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. H&r free federal How to adjust your total cost. H&r free federal   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. H&r free federal Add it to the cost or unrecovered cost of the annuity at the annuity starting date. H&r free federal See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. H&r free federal Net cost. H&r free federal   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. H&r free federal This is the unrecovered investment in the contract as of the annuity starting date. H&r free federal If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. H&r free federal Refund feature. H&r free federal   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. H&r free federal Your annuity contract has a refund feature if: The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals, The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and The payments are a refund of the amount you paid for the annuity contract. H&r free federal   If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see How To Use Actuarial Tables , later) to find the investment in the contract. H&r free federal Zero value of refund feature. H&r free federal   For a joint and survivor annuity, the value of the refund feature is zero if: Both annuitants are age 74 or younger, The payments are guaranteed for less than 2½ years, and The survivor's annuity is at least 50% of the first annuitant's annuity. H&r free federal   For a single-life annuity without survivor benefit, the value of the refund feature is zero if: The payments are guaranteed for less than 2½ years, and The annuitant is: Age 57 or younger (if using the new (unisex) annuity tables), Age 42 or younger (if male and using the old annuity tables), or Age 47 or younger (if female and using the old annuity tables). H&r free federal   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. H&r free federal Examples. H&r free federal The first example shows how to figure the value of the refund feature when there is only one beneficiary. H&r free federal Example 2 shows how to figure the value of the refund feature when the contract provides, in addition to a whole life annuity, one or more temporary life annuities for the lives of children. H&r free federal In both examples, the taxpayer elects to use Tables V through VIII. H&r free federal If you need the value of the refund feature for a joint and survivor annuity, write to the Internal Revenue Service as explained under Requesting a Ruling on Taxation of Annuity near the end of this publication. H&r free federal Example 1. H&r free federal At age 65, Barbara bought for $21,053 an annuity with a refund feature. H&r free federal She will get $100 a month for life. H&r free federal Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. H&r free federal In this case, the contract cost and the total guaranteed return are the same ($21,053). H&r free federal Barbara's investment in the contract is figured as follows: Net cost $21,053 Amount to be received annually $1,200   Number of years for which payment is guaranteed ($21,053 divided by $1,200) 17. H&r free federal 54   Rounded to nearest whole number of years 18   Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments 15%   Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 3,158 Investment in the contract, adjusted for value of refund feature $17,895       If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. H&r free federal For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). H&r free federal In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of $17,895. H&r free federal Example 2. H&r free federal John died while still employed. H&r free federal His widow, Eleanor, age 48, receives $171 a month for the rest of her life. H&r free federal John's son, Elmer, age 9, receives $50 a month until he reaches age 18. H&r free federal John's contributions to the retirement fund totaled $7,559. H&r free federal 45, with interest on those contributions of $1,602. H&r free federal 53. H&r free federal The guarantee or total refund feature of the contract is $9,161. H&r free federal 98 ($7,559. H&r free federal 45 plus $1,602. H&r free federal 53). H&r free federal The adjustment in the investment in the contract is figured as follows: A) Expected return:*       1) Widow's expected return:         Annual annuity ($171 × 12) $2,052       Multiplied by factor from Table V         (nearest age 48) 34. H&r free federal 9 $71,614. H&r free federal 80   2) Child's expected return:         Annual annuity ($50 × 12) $600       Multiplied by factor from         Table VIII (nearest age 9         for term of 9 years) 9. H&r free federal 0 5,400. H&r free federal 00   3) Total expected return   $77,014. H&r free federal 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. H&r free federal 45   2) Guaranteed amount (contributions of $7,559. H&r free federal 45 plus interest of $1,602. H&r free federal 53) $9,161. H&r free federal 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. H&r free federal 00   4) Net guaranteed amount $3,761. H&r free federal 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. H&r free federal 98 at $171 a month to nearest whole year)) 0%   6) Adjustment required for value of refund feature rounded to the nearest whole dollar  (0% × $3,761. H&r free federal 98, the smaller of B(3) or B(6)) 0 *Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. H&r free federal See the discussion of expected return, later in this publication. H&r free federal Free IRS help. H&r free federal   If you need to request assistance to figure the value of the refund feature, see Requesting a Ruling on Taxation of Annuity near the end of this publication. H&r free federal Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. H&r free federal The following discussions explain how to figure the expected return with each type of annuity. H&r free federal A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. H&r free federal Fixed period annuity. H&r free federal   If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. H&r free federal It is the total amount you will get beginning at the annuity starting date. H&r free federal You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). H&r free federal To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each period. H&r free federal Single life annuity. H&r free federal   If you are to get annuity payments for the rest of your life, find your expected return as follows. H&r free federal You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. H&r free federal These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). H&r free federal   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. H&r free federal See Adjustments to Tables I, II, V, VI, and VIA following Table I. H&r free federal Example. H&r free federal Henry bought an annuity contract that will give him an annuity of $500 a month for his life. H&r free federal If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table V, age 66 × 19. H&r free federal 2 Expected return $115,200 If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19. H&r free federal 2 multiple by +. H&r free federal 1. H&r free federal His expected return would then be $115,800 ($6,000 × 19. H&r free federal 3). H&r free federal Annuity for shorter of life or specified period. H&r free federal   With this type of annuity, you are to get annuity payments either for the rest of your life or until the end of a specified period, whichever period is shorter. H&r free federal To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. H&r free federal Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified period. H&r free federal Example. H&r free federal Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. H&r free federal She was age 65 at her birthday nearest the annuity starting date. H&r free federal She figures the expected return as follows: Annual payment ($200 × 12 months) $2,400 Multiple shown in Table VIII, age 65, 5-year term × 4. H&r free federal 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. H&r free federal See Special Elections, later. H&r free federal Joint and survivor annuities. H&r free federal   If you have an annuity that pays you a periodic income for life and after your death provides an identical lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. H&r free federal To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. H&r free federal If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. H&r free federal See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. H&r free federal Example. H&r free federal John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. H&r free federal At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. H&r free federal The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. H&r free federal 0 Expected return $132,000 Different payments to survivor. H&r free federal   If your contract provides that payments to a survivor annuitant will be different from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the survivor. H&r free federal Example 1. H&r free federal Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. H&r free federal If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows: Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI)   22. H&r free federal 0 Multiple for Gerald, age 70 (from Table V)   16. H&r free federal 0 Difference: Multiple applicable to Mary   6. H&r free federal 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. H&r free federal 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. H&r free federal 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. H&r free federal Your husband died while still employed. H&r free federal Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. H&r free federal Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. H&r free federal You were 50 years old at the annuity starting date. H&r free federal Marie was 16 and Jean was 14. H&r free federal Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows: Widow, age 50 (multiple from Table V—33. H&r free federal 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. H&r free federal 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. H&r free federal 0 × $1,800 annual payment) 7,200 Total expected return $169,680 No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting date. H&r free federal Computation Under the General Rule Note. H&r free federal Variable annuities use a different computation for determining the exclusion amounts. H&r free federal See Variable annuities later. H&r free federal Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. H&r free federal   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. H&r free federal See Death benefit exclusion , earlier. H&r free federal Step 2. H&r free federal   Figure your expected return. H&r free federal Step 3. H&r free federal   Divide Step 1 by Step 2 and round to three decimal places. H&r free federal This will give you the exclusion percentage. H&r free federal Step 4. H&r free federal   Multiply the exclusion percentage by the first regular periodic payment. H&r free federal The result is the tax-free part of each pension or annuity payment. H&r free federal   The tax-free part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. H&r free federal However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net cost. H&r free federal   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. H&r free federal Step 5. H&r free federal   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. H&r free federal This will give you the tax-free part of the total payment for the year. H&r free federal    In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. H&r free federal This fractional amount is multiplied by your exclusion percentage to get the tax-free part. H&r free federal Step 6. H&r free federal   Subtract the tax-free part from the total payment you received. H&r free federal The rest is the taxable part of your pension or annuity. H&r free federal Example 1. H&r free federal You purchased an annuity with an investment in the contract of $10,800. H&r free federal Under its terms, the annuity will pay you $100 a month for life. H&r free federal The multiple for your age (age 65) is 20. H&r free federal 0 as shown in Table V. H&r free federal Your expected return is $24,000 (20 × 12 × $100). H&r free federal Your cost of $10,800, divided by your expected return of $24,000, equals 45. H&r free federal 0%. H&r free federal This is the percentage you will not have to include in income. H&r free federal Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. H&r free federal If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). H&r free federal Example 2. H&r free federal Gerald bought a joint and survivor annuity. H&r free federal Gerald's investment in the contract is $62,712 and the expected return is $121,200. H&r free federal The exclusion percentage is 51. H&r free federal 7% ($62,712 ÷ $121,200). H&r free federal Gerald will receive $500 a month ($6,000 a year). H&r free federal Each year, until his net cost is recovered, $3,102 (51. H&r free federal 7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. H&r free federal If Gerald dies, his wife will receive $350 a month ($4,200 a year). H&r free federal If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. H&r free federal 7%). H&r free federal Each year, until the entire net cost is recovered, his wife will receive $2,171. H&r free federal 40 (51. H&r free federal 7% of her payments received of $4,200) tax free. H&r free federal She will include $2,028. H&r free federal 60 ($4,200 − $2,171. H&r free federal 40) in her income tax return. H&r free federal Example 3. H&r free federal Using the same facts as Example 2 under Different payments to survivor, you are to receive an annual annuity of $4,800 until you die or remarry. H&r free federal Your two daughters each receive annual annuities of $1,800 until they reach age 18. H&r free federal Your husband contributed $25,576 to the plan. H&r free federal You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. H&r free federal Adjusted Investment in the Contract Contributions $25,576 Plus: Death benefit exclusion 5,000 Adjusted investment in the contract $30,576 The total expected return, as previously figured (in Example 2 under Different payments to survivor), is $169,680. H&r free federal The exclusion percentage of 18. H&r free federal 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. H&r free federal Each full year $864 (18. H&r free federal 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. H&r free federal Each year, until age 18, $324 (18. H&r free federal 0% × $1,800) of each of your daughters' payments will be tax free and each must include the balance, $1,476, as income on her own income tax return. H&r free federal Part-year payments. H&r free federal   If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year. H&r free federal   If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. H&r free federal For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the year. H&r free federal   If you received a fractional payment, follow Step 5, discussed earlier. H&r free federal This gives you the tax-free part of your total payment. H&r free federal Example. H&r free federal On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. H&r free federal The applicable multiple from Table V is 23. H&r free federal 3 (age 61). H&r free federal Her expected return is $34,950 ($125 × 12 × 23. H&r free federal 3). H&r free federal Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. H&r free federal 1%. H&r free federal Each payment received will consist of 63. H&r free federal 1% return of cost and 36. H&r free federal 9% taxable income, until her net cost of the contract is fully recovered. H&r free federal During the first year, Mary received three payments of $125, or $375, of which $236. H&r free federal 63 (63. H&r free federal 1% × $375) is a return of cost. H&r free federal The remaining $138. H&r free federal 37 is included in income. H&r free federal Increase in annuity payments. H&r free federal   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. H&r free federal All increases in the installment payments are fully taxable. H&r free federal   However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1. H&r free federal 72-5(a)(5) of the regulations. H&r free federal Example. H&r free federal Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. H&r free federal In figuring the taxable part, Joe elects to use Tables V through VIII. H&r free federal The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. H&r free federal His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. H&r free federal 0 × $1,764 annual payment). H&r free federal The exclusion percentage is $7,938 ÷ $35,280, or 22. H&r free federal 5%. H&r free federal During the year he received 11 monthly payments of $147, or $1,617. H&r free federal Of this amount, 22. H&r free federal 5% × $147 × 11 ($363. H&r free federal 83) is tax free as a return of cost and the balance of $1,253. H&r free federal 17 is taxable. H&r free federal Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). H&r free federal The tax-free part is still only 22. H&r free federal 5% of the annuity payments as of the annuity starting date (22. H&r free federal 5% × $147 × 12 = $396. H&r free federal 90 for a full year). H&r free federal The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. H&r free federal Variable annuities. H&r free federal   For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the contract. H&r free federal   If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. H&r free federal If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. H&r free federal Example. H&r free federal Frank purchased a variable annuity at age 65. H&r free federal The total cost of the contract was $12,000. H&r free federal The annuity starting date is January 1 of the year of purchase. H&r free federal His annuity will be paid, starting July 1, in variable annual installments for his life. H&r free federal The tax-free amount of each payment, until he has recovered his cost of his contract, is: Investment in the contract $12,000 Number of expected annual payments (multiple for age 65 from Table V) 20 Tax-free amount of each payment ($12,000 ÷ 20) $600 If Frank's first payment is $920, he includes only $320 ($920 − $600) in his gross income. H&r free federal   If the tax-free amount for a year is more than the payments you receive in that year, you may choose, when you receive the next payment, to refigure the tax-free part. H&r free federal Divide the amount of the periodic tax-free part that is more than the payment you received by the remaining number of payments you expect. H&r free federal The result is added to the previously figured periodic tax-free part. H&r free federal The sum is the amount of each future payment that will be tax free. H&r free federal Example. H&r free federal Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. H&r free federal Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. H&r free federal Since the $500 payment is less than the $600 annual tax-free amount, he may choose to refigure his tax-free part when he receives his $1,200 (third year) payment, as follows: Amount tax free in second year $600. H&r free federal 00 Amount received in second year 500. H&r free federal 00 Difference $100. H&r free federal 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. H&r free federal 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. H&r free federal 4) $5. H&r free federal 43 Revised annual tax-free part for third and later years ($600 + $5. H&r free federal 43) $605. H&r free federal 43 Amount taxable in third year ($1,200 − $605. H&r free federal 43) $594. H&r free federal 57 If you choose to refigure your tax-free amount,   you must file a statement with your income tax return stating that you are refiguring the tax-free amount in accordance with the rules of section 1. H&r free federal 72–4(d)(3) of the Income Tax Regulations. H&r free federal The statement must also show the following information: The annuity starting date and your age on that date. H&r free federal The first day of the first period for which you received an annuity payment in the current year. H&r free federal Your investment in the contract as originally figured. H&r free federal The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year. H&r free federal Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. H&r free federal Exclusion limited to net cost. H&r free federal   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). H&r free federal This is the unrecovered investment in the contract as of the annuity starting date. H&r free federal   If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. H&r free federal This deduction is not subject to the 2%-of-adjusted-gross-income limit. H&r free federal Example 1. H&r free federal Your annuity starting date is after 1986. H&r free federal Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. H&r free federal There is no refund feature. H&r free federal Your monthly annuity payment is $833. H&r free federal 33. H&r free federal Your exclusion ratio is 12% and you exclude $100 a month. H&r free federal Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. H&r free federal Thereafter, your annuity payments are fully taxable. H&r free federal Example 2. H&r free federal The facts are the same as in Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. H&r free federal The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. H&r free federal The exclusion ratio is 10. H&r free federal 8%, and your monthly exclusion is $90. H&r free federal After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). H&r free federal An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. H&r free federal Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. H&r free federal Exclusion not limited to net cost. H&r free federal   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. H&r free federal If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. H&r free federal The total exclusion may be more than your investment in the contract. H&r free federal How To Use Actuarial Tables In figuring, under the General Rule, the taxable part of your annuity payments that you are to get for the rest of your life (rather than for a fixed number of years), you must use one or more of the actuarial tables in this publication. H&r free federal Unisex Annuity Tables Effective July 1, 1986, the Internal Revenue Service adopted new annuity Tables V through VIII, in which your sex is not considered when determining the applicable factor. H&r free federal These tables correspond to the old Tables I through IV. H&r free federal In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. H&r free federal If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. H&r free federal However, if you received an annuity payment after June 30, 1986, you may elect to use Tables V through VIII (see Annuity received after June 30, 1986, later). H&r free federal Special Elections Although you generally must use Tables V through VIII if you made contributions to the retirement plan after June 30, 1986, and Tables I through IV if you made no contributions after June 30, 1986, you can make the following special elections to select which tables to use. H&r free federal Contributions made both before July 1986 and after June 1986. H&r free federal   If you made contributions to the retirement plan both before July 1986 and after June 1986, you may elect to use Tables I through IV for the pre-July 1986 cost of the contract, and Tables V through VIII for the post-June 1986 cost. H&r free federal (See the examples below. H&r free federal )    Making the election. H&r free federal Attach this statement to your income tax return for the first year in which you receive an annuity:    “I elect to apply the provisions of paragraph (d) of section 1. H&r free federal 72–6 of the Income Tax Regulations. H&r free federal ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. H&r free federal   If your investment in the contract includes post-June 1986 contributions to the plan, and you do not make the election to use Tables I through IV and Tables V through VIII, then you can only use Tables V through VIII in figuring the taxable part of your annuity. H&r free federal You must also use Tables V through VIII if you are unable or do not wish to determine the portions of your contributions which were made before July 1, 1986, and after June 30, 1986. H&r free federal    Advantages of election. H&r free federal In general, a lesser amount of each annual annuity payment is taxable if you separately figure your exclusion ratio for pre-July 1986 and post-June 1986 contributions. H&r free federal    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. H&r free federal If the death benefit exclusion applies (see discussion, earlier), you do not have to apportion it between the pre-July 1986 and the post-June 1986 investment in the contract. H&r free federal   The following examples illustrate the separate computations required if you elect to use Tables I through IV for your pre-July 1986 investment in the contract and Tables V through VIII for your post-June 1986 investment in the contract. H&r free federal Example 1. H&r free federal Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. H&r free federal Payment of the $42,000 contribution is guaranteed under a refund feature. H&r free federal Bill is 55 years old as of the annuity starting date. H&r free federal For figuring the taxable part of Bill's annuity, he chose to make separate computations for his pre-July 1986 investment in the contract of $41,300, and for his post-June 1986 investment in the contract of $700. H&r free federal       Pre- July 1986   Post- June 1986 A. H&r free federal Adjustment for refund feature         1) Net cost $41,300   $700   2) Annual annuity—$24,000  ($41,300/$42,000 × $24,000) $23,600       ($700/$42,000 × $24,000)     $400   3) Guarantee under contract $41,300   $700   4) No. H&r free federal of years payments  guaranteed (rounded), A(3) ÷ A(2) 2   2   5) Applicable percentage from  Tables III and VII 1%   0%   6) Adjustment for value of refund  feature, A(5) × smaller of A(1)  or A(3) $413   $0 B. H&r free federal Investment in the contract         1) Net cost $41,300   $700   2) Minus: Amount in A(6) 413   0   3) Investment in the contract $40,887   $700 C. H&r free federal Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. H&r free federal 7   28. H&r free federal 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. H&r free federal Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . H&r free federal 079   . H&r free federal 001   2) Tax-free part, C(1) × D(1) $1,896   $24 The tax-free part of Bill's total annuity is $1,920 ($1,896 plus $24). H&r free federal The taxable part of his annuity is $22,080 ($24,000 minus $1,920). H&r free federal If the annuity starting date is after 1986, the exclusion over the years cannot exceed the net cost (figured without any reduction for a refund feature). H&r free federal Example 2. H&r free federal Al is age 62 at his nearest birthday to the annuity starting date. H&r free federal Al's wife is age 60 at her nearest birthday to the annuity starting date. H&r free federal The joint and survivor annuity pays $1,000 per month to Al for life, and $500 per month to Al's surviving wife after his death. H&r free federal The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. H&r free federal Al makes the election described in Example 1 . H&r free federal For purposes of this example, assume the refund feature adjustment is zero. H&r free federal If an adjustment is required, IRS will figure the amount. H&r free federal See Requesting a Ruling on Taxation of Annuity near the end of this publication. H&r free federal       Pre-  July 1986   Post-  June 1986 A. H&r free federal Adjustment for refund feature         1) Net cost $53,100   $7,000   2) Annual annuity—$12,000  ($53,100/$60,100 × $12,000) $10,602       ($7,000/$60,100 × $12,000)     $1,398   3) Guaranteed under the contract $53,100   $7,000   4) Number of years guaranteed,  rounded, A(3) ÷ A(2) 5   5   5) Applicable percentages 0%   0%   6) Refund feature adjustment, A(5) × smaller of A(1) or A(3) 0   0 B. H&r free federal Investment in the contract         1) Net cost $53,100   $7,000   2) Refund feature adjustment 0   0   3) Investment in the contract adjusted for refund feature $53,100   $7,000 C. H&r free federal Expected return         1) Multiple for both annuitants from Tables II and VI 25. H&r free federal 4   28. H&r free federal 8   2) Multiple for first annuitant from Tables I and V 16. H&r free federal 9   22. H&r free federal 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. H&r free federal 5   6. H&r free federal 3   4) Annual annuity to surviving annuitant $6,000   $6,000   5) Portion of expected return for surviving annuitant, C(4) × C(3) $51,000   $37,800   6) Annual annuity to first annuitant $12,000   $12,000   7) Plus: Portion of expected return for first annuitant, C(6) × C(2) $202,800   $270,000   8) Expected return for both annuitants, C(5) + C(7) $253,800   $307,800 D. H&r free federal Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . H&r free federal 209   . H&r free federal 023   2) Retiree's tax-free part of annuity, C(6) × D(1) $2,508   $276   3) Survivor's tax-free part of annuity, C(4) × D(1) $1,254   $138 The tax-free part of Al's total annuity is $2,784 ($2,508 + $276). H&r free federal The taxable part of his annuity is $9,216 ($12,000 − $2,784). H&r free federal The exclusion over the years cannot exceed the net cost of the contract (figured without any reduction for a refund feature) if the annuity starting date is after 1986. H&r free federal After Al's death, his widow will apply the same exclusion percentages (20. H&r free federal 9% and 2. H&r free federal 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. H&r free federal Annuity received after June 30, 1986. H&r free federal   If you receive an annuity payment after June 30, 1986, (regardless of your annuity starting date), you may elect to treat the entire cost of the contract as post-June 1986 cost (even if you made no post-June 1986 contributions to the plan) and use Tables V through VIII. H&r free federal Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. H&r free federal    Make the election by attaching the following statement to your income tax return. H&r free federal    “I elect, under section 1. H&r free federal 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. H&r free federal ”   The statement must also include your name, address, and social security number. H&r free federal   You should also indicate you are making this election if you are unable or do not wish to determine the parts of your contributions which were made before July 1, 1986, and after June 30, 1986. H&r free federal Disqualifying form of payment or settlement. H&r free federal   If your annuity starting date is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract, the entire investment in the contract is treated as post-June 1986 investment in the contract. H&r free federal See regulations section 1. H&r free federal 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. H&r free federal You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. H&r free federal Worksheets for Determining Taxable Annuity Worksheets I and II. H&r free federal   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. H&r free federal 72–6(d)(6) Election. H&r free federal Worksheet I For Determining Taxable Annuity Under Regulations Section 1. H&r free federal 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. H&r free federal   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. H&r free federal )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)   Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages* from Tables III and VII                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. H&r free federal If not, the IRS will calculate the refund feature percentage. H&r free federal             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. H&r free federal   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund feature:                   B(1) minus B(2)                             C. H&r free federal   Expected Return             1)   Annual Annuity:                   12 times monthly annuity**             2)   Expected return multiples from Tables I and V             3)     Expected return:                   C(1) times C(2)                             D. H&r free federal   Tax-Free Part of Annuity             1)     Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(3)             2)     Tax-free part of annuity:                   C(1) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. H&r free federal     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. H&r free federal 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. H&r free federal   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. H&r free federal )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)     Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages*                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. H&r free federal If not, the IRS will calculate the refund feature percentage. H&r free federal             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. H&r free federal   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund future:                   B(1) minus B(2)                             C. H&r free federal   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. H&r free federal Tables I and VI             3)   Multiple for survivor:                   C(1) minus C(2)             4)   Annual annuity to survivor:                   12 times potential monthly rate for survivor**             5)   Expected return for survivor:                   C(3) times C(4)             6)   Annual annuity to retiree:                   12 times monthly rate for retiree**             7)   Expected return for retiree:                   C(2) times C(6)             8)   Total expected return:                   C(5) plus C(7)                             D. H&r free federal   Tax-Free Part of Annuity             1)   Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(8)             2)   Retiree's tax-free part of annuity:                   C(6) times D(1)             3)   Survivor's tax-free part of annuity, if surviving after death of retiree:                   C(4) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. H&r free federal   Actuarial Tables Please click here for the text description of the image. H&r free federal Actuarial Tables Please click here for the text description of the image. H&r free federal Actuarial Tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. 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H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. 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H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Please click here for the text description of the image. H&r free federal Actuarial tables Requesting a Ruling on Taxation of Annuity If you are a retiree, or the survivor of an employee or retiree, you may ask the Internal Revenue Service to help you determine the taxation of your annuity. H&r free federal If you make this request, you are asking for a ruling. H&r free federal User fee. H&r free federal   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. H&r free federal You should call the IRS for the proper fee. H&r free federal A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. H&r free federal Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. H&r free federal O. H&r free federal Box 27063 McPherson Station Washington, DC 20038 The user fee is allowed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. H&r free federal When to make the request. H&r free federal   Please note that requests sent between February 1 and April 15 may experience some delay. H&r free federal We process requests in the order received, and we will reply to your request as soon as we can process it. H&r free federal If you do not receive your ruling by the required filing date, you may use Form 4868, Application for Automatic Extension of Time To File U. H&r free federal S. H&r free federal Individual Income Tax Return, to get an extension of time to file. H&r free federal Information you must furnish. H&r free federal   You must furnish the information listed below so the IRS can comply with your request. H&r free federal Failure to furnish the information will result in a delay in processing your request. H&r free federal Please send only copies of the following documents, as the IRS retains all material sent for its records: A letter explaining the question(s) you wish to have resolved or the information you need from the ruling. H&r free federal Copies of any documents showing distributions, annuity rates, and annuity options available to you. H&r free federal A copy of any Form 1099–R you received since your annuity began. H&r free federal A statement indicating whether you have filed your return for the year for which you are making the request. H&r free federal If you have requested an extension of time to file that return, please indicate the extension date. H&r free federal Your daytime phone number. H&r free federal Your current mailing address. H&r free federal A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. H&r free federal Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. H&r free federal A completed Tax Information Sheet (or facsimile) shown on the next page. H&r free federal Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. H&r free federal This statement must be signed by the retiree or the survivor annuitant. H&r free federal It cannot be signed by a representative. H&r free federal Tax Information Sheet Please click here for the text description of the image. H&r free federal Tax Information Sheet Please click here for the text description of the image. H&r free federal Tax Information Sheet (continued) How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. H&r free federal Free help with your tax return. H&r free federal   You can get free help preparing your return nationwide from IRS-certified volunteers. H&r free federal The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. H&r free federal The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. H&r free federal Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. H&r free federal In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. H&r free federal To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. H&r free federal gov, download the IRS2Go app, or call 1-800-906-9887. H&r free federal   As part of the TCE program, AARP offers the Tax-Aide counseling program. H&r free federal To find the nearest AARP Tax-Aide site, visit AARP's website at www. H&r free federal aarp. H&r free federal org/money/taxaide or call 1-888-227-7669. H&r free federal For more information on these programs, go to IRS. H&r free federal gov and enter “VITA” in the search box. H&r free federal Internet. H&r free federal    IRS. H&r free federal gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. H&r free federal Download the free IRS2Go app from the iTunes app store or from Google Play. H&r free federal Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. H&r free federal Check the status of your 2013 refund with the Where's My Refund? application on IRS. H&r free federal gov or download the IRS2Go app and select the Refund Status option. H&r free federal The IRS issues more than 9 out of 10 refunds in less than 21 days. H&r free federal Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. H&r free federal You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. H&r free federal The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. H&r free federal Use the Interactive Tax Assistant (ITA) to research your tax questions. H&r free federal No need to wait on the phone or stand in line. H&r free federal The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. H&r free federal When you reach the response screen, you can print the entire interview and the final response for your records. H&r free federal New subject areas are added on a regular basis. H&r free federal  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. H&r free federal gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. H&r free federal You can use the IRS Tax Map, to search publications and instructions by topic or keyword. H&r free federal The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. H&r free federal When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. H&r free federal Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. H&r free federal You can also ask the IRS to mail a return or an account transcript to you. H&r free federal Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. H&r free federal gov or by calling 1-800-908-9946. H&r free federal Tax return and tax account transcripts are generally available for the current year and the past three years. H&r free federal Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. H&r free federal Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. H&r free federal If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. H&r free federal Check the status of your amended return using Where's My Amended Return? Go to IRS. H&r free federal gov and enter Where's My Amended Return? in the search box. H&r free federal You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. H&r free federal It can take up to 3 weeks from the date you mailed it to show up in our system. H&r free federal Make a payment using one of several safe and convenient electronic payment options available on IRS. H&r free federal gov. H&r free federal Select the Payment tab on the front page of IRS. H&r free federal gov for more information. H&r free federal Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. H&r free federal Figure your income tax withholding with the IRS Withholding Calculator on IRS. H&r free federal gov. H&r free federal Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. H&r free federal Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. H&r free federal gov. H&r free federal Request an Electronic Filing PIN by going to IRS. H&r free federal gov and entering Electronic Filing PIN in the search box. H&r free federal Download forms, instructions and publications, including accessible versions for people with disabilities. H&r free federal Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. H&r free federal gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. H&r free federal An employee can answer questions about your tax account or help you set up a payment plan. H&r free federal Before you visit, check the Office Locator on IRS. H&r free federal gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. H&r free federal If you have a special need, such as a disability, you can request an appointment. H&r free federal Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. H&r free federal Apply for an Employer Identification Number (EIN). H&r free federal Go to IRS. H&r free federal gov and enter Apply for an EIN in the search box. H&r free federal Read the Internal Revenue Code, regulations, or other official guidance. H&r free federal Read Internal Revenue Bulletins. H&r free federal Sign up to receive local and national tax news and more by email. H&r free federal Just click on “subscriptions” above the search box on IRS. H&r free federal gov and choose from a variety of options. H&r free federal    Phone. H&r free federal You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. H&r free federal Download the free IRS2Go app from the iTunes app store or from Google Play. H&r free federal Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. H&r free federal gov, or download the IRS2Go app. H&r free federal Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. H&r free federal The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. H&r free federal Mos
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H&r free federal 5. H&r free federal   Soil and Water Conservation Expenses Table of Contents Introduction Topics - This chapter discusses: Business of Farming Plan Certification Conservation ExpensesWater well. H&r free federal Assessment by Conservation DistrictAssessment for Depreciable Property 25% Limit on DeductionNet operating loss. H&r free federal When to Deduct or Capitalize Sale of a Farm Introduction If you are in the business of farming, you can choose to deduct certain expenses for: Soil or water conservation, Prevention of erosion of land used in farming, or Endangered species recovery. H&r free federal Otherwise, these are capital expenses that must be added to the basis of the land. H&r free federal (See chapter 6 for information on determining basis. H&r free federal ) Conservation expenses for land in a foreign country do not qualify for this special treatment. H&r free federal The deduction for conservation expenses cannot be more than 25% of your gross income from farming. H&r free federal See 25% Limit on Deduction , later. H&r free federal Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. H&r free federal These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil. H&r free federal You must include in income most government payments for approved conservation practices. H&r free federal However, you can exclude some payments you receive under certain cost-sharing conservation programs. H&r free federal For more information, see Agricultural Program Payments in chapter 3. H&r free federal To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses. H&r free federal Topics - This chapter discusses: Business of farming Plan certification Conservation expenses Assessment by conservation district 25% limit on deduction When to deduct or capitalize Sale of a farm Business of Farming For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. H&r free federal You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. H&r free federal You are not farming if you are engaged only in forestry or the growing of timber. H&r free federal Farm defined. H&r free federal   A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. H&r free federal It also includes plantations, ranches, ranges, and orchards. H&r free federal A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. H&r free federal It does not include an area where they are merely caught or harvested. H&r free federal A plant nursery is a farm for purposes of deducting soil and water conservation expenses. H&r free federal Farm rental. H&r free federal   If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. H&r free federal If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm. H&r free federal   If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm. H&r free federal Example. H&r free federal You own a farm in Iowa and live in California. H&r free federal You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. H&r free federal You cannot deduct your soil conservation expenses for this farm. H&r free federal You must capitalize the expenses and add them to the basis of the land. H&r free federal     For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12. H&r free federal Plan Certification You can deduct soil and water conservation expenses only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. H&r free federal If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency. H&r free federal Keep a copy of the plan with your books and records to support your deductions. H&r free federal Conservation plan. H&r free federal   A conservation plan includes the farming conservation practices approved for the area where your farmland is located. H&r free federal There are three types of approved plans. H&r free federal NRCS individual site plans. H&r free federal These plans are issued individually to farmers who request assistance from NRCS to develop a conservation plan designed specifically for their farmland. H&r free federal NRCS county plans. H&r free federal These plans include a listing of farm conservation practices approved for the county where the farmland is located. H&r free federal You can deduct expenses for conservation practices not included on the NRCS county plans only if the practice is a part of an individual site plan. H&r free federal Comparable state agency plans. H&r free federal These plans are approved by state agencies and can be approved individual site plans or county plans. H&r free federal   A list of NRCS conservation programs is available at www. H&r free federal nrcs. H&r free federal usda. H&r free federal gov/programs. H&r free federal Individual site plans can be obtained from NRCS offices and the comparable state agencies. H&r free federal Conservation Expenses You can deduct conservation expenses only for land you or your tenant are using, or have used in the past, for farming. H&r free federal These expenses include, but are not limited to, the following. H&r free federal The treatment or movement of earth, such as: Leveling, Conditioning, Grading, Terracing, Contour furrowing, and Restoration of soil fertility. H&r free federal The construction, control, and protection of: Diversion channels, Drainage ditches, Irrigation ditches, Earthen dams, and Watercourses, outlets, and ponds. H&r free federal The eradication of brush. H&r free federal The planting of windbreaks. H&r free federal You cannot deduct expenses to drain or fill wetlands, or to prepare land for center pivot irrigation systems, as soil and water conservation expenses. H&r free federal These expenses are added to the basis of the land. H&r free federal If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. H&r free federal See chapter 3 for information about payments eligible for the cost-sharing exclusion. H&r free federal New farm or farmland. H&r free federal   If you acquire a new farm or new farmland from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid or incurred. H&r free federal You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. H&r free federal The new farming activity does not have to be the same as the old farming activity. H&r free federal For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, you can deduct your conservation expenses. H&r free federal Land not used for farming. H&r free federal   If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. H&r free federal For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. H&r free federal You can use another method to allocate these expenses if you can clearly show that your method is more reasonable. H&r free federal Depreciable conservation assets. H&r free federal   You generally cannot deduct your expenses for depreciable conservation assets. H&r free federal However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. H&r free federal See Assessment for Depreciable Property , later. H&r free federal   You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. H&r free federal These expenses include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. H&r free federal You recover your capital investment through annual allowances for depreciation. H&r free federal   You can deduct soil and water conservation expenses for nondepreciable earthen items. H&r free federal Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7. H&r free federal Water well. H&r free federal   You cannot deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. H&r free federal It is a capital expense. H&r free federal You recover your cost through depreciation. H&r free federal You also must capitalize your cost for drilling a test hole. H&r free federal If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. H&r free federal You can recover the total cost through depreciation deductions. H&r free federal   If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. H&r free federal Abandonment means that all economic benefits from the well are terminated. H&r free federal For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated constitutes an abandonment. H&r free federal Endangered species recovery expenses. H&r free federal   If you are in the business of farming and meet other specific requirements, you can choose to deduct the conservation expenses discussed earlier as endangered species recovery expenses. H&r free federal Otherwise, these are capital expenses that must be added to the basis of the land. H&r free federal   The expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act of 1973. H&r free federal See Internal Revenue Code section 175 for more information. H&r free federal Assessment by Conservation District In some localities, a soil or water conservation or drainage district incurs expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. H&r free federal You can deduct as a conservation expense amounts you pay or incur for the part of an assessment that: Covers expenses you could deduct if you had paid them directly, or Covers expenses for depreciable property used in the district's business. H&r free federal Assessment for Depreciable Property You generally can deduct as a conservation expense amounts you pay or incur for the part of a conservation or drainage district assessment that covers expenses for depreciable property. H&r free federal This includes items such as pumps, locks, concrete structures (including dams and weir gates), draglines, and similar equipment. H&r free federal The depreciable property must be used in the district's soil and water conservation activities. H&r free federal However, the following limits apply to these assessments. H&r free federal The total assessment limit. H&r free federal The yearly assessment limit. H&r free federal After you apply these limits, the amount you can deduct is added to your other conservation expenses for the year. H&r free federal The total for these expenses is then subject to the 25% of gross income from farming limit on the deduction, discussed later. H&r free federal See Table 5-1 for a brief summary of these limits. H&r free federal Table 5-1. H&r free federal Limits on Deducting an Assessment by a Conservation District for Depreciable Property Total Limit on Deduction for Assessment for Depreciable Property Yearly Limit on Deduction for Assessment for Depreciable Property Yearly Limit for All Conservation Expenses 10% of: $500 + 10% of: 25% of: Total assessment against all members of the district for the property. H&r free federal Your deductible share of the cost to the district for the property. H&r free federal Your gross income from farming. H&r free federal No one taxpayer can deduct more than 10% of the total assessment. H&r free federal Any amount over 10% is a capital expense and is added to the basis of your land. H&r free federal If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. H&r free federal If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. H&r free federal You can deduct the remainder in equal amounts over the next 9 tax years. H&r free federal Limit for all conservation expenses, including assessments for depreciable property. H&r free federal Amounts greater than 25% can be carried to the following year and added to that year's expenses. H&r free federal The total is then subject to the 25% of gross income from farming limit in that year. H&r free federal To ensure your deduction is within the deduction limits, keep records to show the following. H&r free federal The total assessment against all members of the district for the depreciable property. H&r free federal Your deductible share of the cost to the district for the depreciable property. H&r free federal Your gross income from farming. H&r free federal Total assessment limit. H&r free federal   You cannot deduct more than 10% of the total amount assessed to all members of the conservation or drainage district for the depreciable property. H&r free federal This applies whether you pay the assessment in one payment or in installments. H&r free federal If your assessment is more than 10% of the total amount assessed, both the following rules apply. H&r free federal The amount over 10% is a capital expense and is added to the basis of your land. H&r free federal If the assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense. H&r free federal Yearly assessment limit. H&r free federal   The maximum amount you can deduct in any one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. H&r free federal If the amount you pay or incur is equal to or less than the maximum amount, you can deduct it in the year it is paid or incurred. H&r free federal If the amount you pay or incur is more, you can deduct in that year only 10% of your deductible share of the cost. H&r free federal You can deduct the remainder in equal amounts over the next 9 tax years. H&r free federal Your total conservation expense deduction for each year is also subject to the 25% of gross income from farming limit on the deduction, discussed later. H&r free federal Example 1. H&r free federal This year, the soil conservation district levies and you pay an assessment of $2,400 against your farm. H&r free federal Of the assessment, $1,500 is for digging drainage ditches. H&r free federal You can deduct this part as a soil or conservation expense as if you had paid it directly. H&r free federal The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. H&r free federal The total amount assessed by the district against all its members for the depreciable equipment is $7,000. H&r free federal The total amount you can deduct for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. H&r free federal The $200 excess ($900 − $700) is a capital expense you must add to the basis of your farm. H&r free federal To figure the maximum amount you can deduct for the depreciable equipment this year, multiply your deductible share of the total assessment ($700) by 10%. H&r free federal Add $500 to the result for a total of $570. H&r free federal Your deductible share, $700, is greater than the maximum amount deductible in one year, so you can deduct only $70 of the amount you paid or incurred for depreciable property this year (10% of $700). H&r free federal You can deduct the balance at the rate of $70 a year over the next 9 years. H&r free federal You add $70 to the $1,500 portion of the assessment for drainage ditches. H&r free federal You can deduct $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed later. H&r free federal Example 2. H&r free federal Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. H&r free federal The total amount assessed by the district against all its members for depreciable equipment is $5,500. H&r free federal The total amount you can deduct for the depreciable equipment is limited to 10% of this amount, or $550. H&r free federal The maximum amount you can deduct this year for the depreciable equipment is $555 (10% of your deductible share of the total assessment, $55, plus $500). H&r free federal Since your deductible share is less than the maximum amount deductible in one year, you can deduct the entire $550 this year. H&r free federal You can deduct the entire assessment, $2,400, as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on the deduction, discussed below. H&r free federal Sale or other disposal of land during 9-year period. H&r free federal   If you dispose of the land during the 9-year period for deducting conservation expenses subject to the yearly limit, any amounts you have not yet deducted because of this limit are added to the basis of the property. H&r free federal Death of farmer during 9-year period. H&r free federal   If a farmer dies during the 9-year period, any remaining amounts not yet deducted are deducted in the year of death. H&r free federal 25% Limit on Deduction The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for the year. H&r free federal Gross income from farming. H&r free federal   Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. H&r free federal Gains from sales of draft, breeding, or dairy livestock are included. H&r free federal Gains from sales of assets such as farm machinery, or from the disposition of land, are not included. H&r free federal Carryover of deduction. H&r free federal   If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. H&r free federal However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well. H&r free federal Example. H&r free federal In 2012, you have gross income of $32,000 from two farms. H&r free federal During the year, you incurred $10,000 of deductible soil and water conservation expenses for one of the farms. H&r free federal However, your deduction is limited to 25% of $32,000, or $8,000. H&r free federal The $2,000 excess ($10,000 − $8,000) is carried over to 2013 and added to deductible soil and water conservation expenses made in that year. H&r free federal The total of the 2012 carryover plus 2013 expenses is deductible in 2013, subject to the limit of 25% of your gross income from farming in 2013. H&r free federal Any expenses over the limit in that year are carried to 2014 and later years. H&r free federal Net operating loss. H&r free federal   The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring a net operating loss (NOL) for the year. H&r free federal If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried. H&r free federal When to Deduct or Capitalize If you choose to deduct soil and water conservation expenses, you must deduct the total allowable amount on your tax return for the first year you pay or incur these expenses. H&r free federal If you do not choose to deduct the expenses, you must capitalize them. H&r free federal Change of method. H&r free federal   If you want to change your method for the treatment of soil and water conservation expenses, or you want to treat the expenses for a particular project or a single farm in a different manner, you must get the approval of the IRS. H&r free federal To get this approval, submit a written request by the due date of your return for the first tax year you want the new method to apply. H&r free federal You or your authorized representative must sign the request. H&r free federal   The request must include the following information. H&r free federal Your name and address. H&r free federal The first tax year the method or change of method is to apply. H&r free federal Whether the method or change of method applies to all your soil and water conservation expenses or only to those for a particular project or farm. H&r free federal If the method or change of method does not apply to all your expenses, identify the project or farm to which the expenses apply. H&r free federal The total expenses you paid or incurred in the first tax year the method or change of method is to apply. H&r free federal A statement that you will account separately in your books for the expenses to which this method or change of method relates. H&r free federal Send your request to the following  address. H&r free federal  Department of the Treasury Internal Revenue Service Center Cincinnati, OH 45999  For more information, see Change in  Accounting Method in chapter 2. H&r free federal Sale of a Farm If you sell your farm, you cannot adjust the basis of the land at the time of the sale for any unused carryover of soil and water conservation expenses (except for deductions of assessments for depreciable property, discussed earlier). H&r free federal However, if you acquire another farm and return to the business of farming, you can start taking deductions again for the unused carryovers. H&r free federal Gain on sale of farmland. H&r free federal   If you held the land 5 years or less before you sold it, gain on the sale of the land is treated as ordinary income up to the amount you previously deducted for soil and water conservation expenses. H&r free federal If you held the land less than 10 but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. H&r free federal See Section 1252 property under Other Gains in chapter 9. H&r free federal Prev  Up  Next   Home   More Online Publications