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How To File Taxes

How to file taxes 1. How to file taxes   Traditional IRAs Table of Contents What's New for 2013 What's New for 2014 Introduction Who Can Open a Traditional IRA?What Is Compensation? When Can a Traditional IRA Be Opened? How Can a Traditional IRA Be Opened?Individual Retirement Account Individual Retirement Annuity Individual Retirement Bonds Simplified Employee Pension (SEP) Employer and Employee Association Trust Accounts Required Disclosures How Much Can Be Contributed?Limit. How to file taxes When repayment contributions can be made. How to file taxes No deduction. How to file taxes Reserve component. How to file taxes Figuring your IRA deduction. How to file taxes Reporting the repayment. How to file taxes Example. How to file taxes General Limit Kay Bailey Hutchison Spousal IRA Limit Filing Status Less Than Maximum Contributions More Than Maximum Contributions When Can Contributions Be Made? How Much Can You Deduct?Kay Bailey Hutchison Spousal IRA. How to file taxes Are You Covered by an Employer Plan? Limit if Covered by Employer Plan Reporting Deductible Contributions Nondeductible Contributions Examples — Worksheet for Reduced IRA Deduction for 2013 What if You Inherit an IRA?Treating it as your own. How to file taxes Can You Move Retirement Plan Assets?Transfers to Roth IRAs from other retirement plans. How to file taxes Trustee-to-Trustee Transfer Rollovers Transfers Incident To Divorce Converting From Any Traditional IRA Into a Roth IRA Recharacterizations When Can You Withdraw or Use Assets?Contributions Returned Before Due Date of Return When Must You Withdraw Assets? (Required Minimum Distributions)IRA Owners IRA Beneficiaries Which Table Do You Use To Determine Your Required Minimum Distribution? What Age(s) Do You Use With the Table(s)? Miscellaneous Rules for Required Minimum Distributions Are Distributions Taxable?January 2013 QCDs treated as made in 2012. How to file taxes 2013 Reporting. How to file taxes Additional reporting requirements if you made the election to treat a January 2013 QCD as made in 2012. How to file taxes One-time transfer. How to file taxes Testing period rules apply. How to file taxes More information. How to file taxes Distributions Fully or Partly Taxable Figuring the Nontaxable and Taxable Amounts Recognizing Losses on Traditional IRA Investments Other Special IRA Distribution Situations Reporting and Withholding Requirements for Taxable Amounts What Acts Result in Penalties or Additional Taxes?Prohibited Transactions Investment in Collectibles Excess Contributions Early Distributions Excess Accumulations (Insufficient Distributions) Reporting Additional Taxes What's New for 2013 Traditional IRA contribution and deduction limit. How to file taxes  The contribution limit to your traditional IRA for 2013 will be increased to the smaller of the following amounts: $5,500, or Your taxable compensation for the year. How to file taxes If you were age 50 or older before 2014, the most that can be contributed to your traditional IRA for 2013 will be the smaller of the following amounts: $6,500, or Your taxable compensation for the year. How to file taxes For more information, see How Much Can Be Contributed? in this chapter. How to file taxes Modified AGI limit for traditional IRA contributions increased. How to file taxes  For 2013, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $95,000 but less than $115,000 for a married couple filing a joint return or a qualifying widow(er), More than $59,000 but less than $69,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. How to file taxes If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $178,000 but less than $188,000. How to file taxes If your modified AGI is $188,000 or more, you cannot take a deduction for contributions to a traditional IRA. How to file taxes See How Much Can You Deduct? in this chapter. How to file taxes Net Investment Income Tax. How to file taxes  For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 457(b) plans, and IRAs). How to file taxes However, these distributions are taken into account when determining the modified adjusted gross income threshold. How to file taxes Distributions from a nonqualified retirement plan are included in net investment income. How to file taxes See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information. How to file taxes What's New for 2014 Modified AGI limit for traditional IRA contributions increased. How to file taxes  For 2014, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $96,000 but less than $116,000 for a married couple filing a joint return or a qualifying widow(er), More than $60,000 but less than $70,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. How to file taxes If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $181,000 but less than $191,000. How to file taxes If your modified AGI is $191,000 or more, you cannot take a deduction for contributions to a traditional IRA. How to file taxes Introduction This chapter discusses the original IRA. How to file taxes In this publication the original IRA (sometimes called an ordinary or regular IRA) is referred to as a “traditional IRA. How to file taxes ” A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. How to file taxes The following are two advantages of a traditional IRA: You may be able to deduct some or all of your contributions to it, depending on your circumstances. How to file taxes Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed. How to file taxes Who Can Open a Traditional IRA? You can open and make contributions to a traditional IRA if: You (or, if you file a joint return, your spouse) received taxable compensation during the year, and You were not age 70½ by the end of the year. How to file taxes You can have a traditional IRA whether or not you are covered by any other retirement plan. How to file taxes However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. How to file taxes See How Much Can You Deduct , later. How to file taxes Both spouses have compensation. How to file taxes   If both you and your spouse have compensation and are under age 70½, each of you can open an IRA. How to file taxes You cannot both participate in the same IRA. How to file taxes If you file a joint return, only one of you needs to have compensation. How to file taxes What Is Compensation? Generally, compensation is what you earn from working. How to file taxes For a summary of what compensation does and does not include, see Table 1-1. How to file taxes Compensation includes all of the items discussed next (even if you have more than one type). How to file taxes Wages, salaries, etc. How to file taxes   Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. How to file taxes The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). How to file taxes Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2. How to file taxes Commissions. How to file taxes   An amount you receive that is a percentage of profits or sales price is compensation. How to file taxes Self-employment income. How to file taxes   If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of: The deduction for contributions made on your behalf to retirement plans, and The deduction allowed for the deductible part of your self-employment taxes. How to file taxes   Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. How to file taxes Self-employment loss. How to file taxes   If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation. How to file taxes Alimony and separate maintenance. How to file taxes   For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance. How to file taxes Nontaxable combat pay. How to file taxes   If you were a member of the U. How to file taxes S. How to file taxes Armed Forces, compensation includes any nontaxable combat pay you received. How to file taxes This amount should be reported in box 12 of your 2013 Form W-2 with code Q. How to file taxes Table 1-1. How to file taxes Compensation for Purposes of an IRA Includes . How to file taxes . How to file taxes . How to file taxes Does not include . How to file taxes . How to file taxes . How to file taxes   earnings and profits from property. How to file taxes wages, salaries, etc. How to file taxes     interest and dividend income. How to file taxes commissions. How to file taxes     pension or annuity income. How to file taxes self-employment income. How to file taxes     deferred compensation. How to file taxes alimony and separate maintenance. How to file taxes     income from certain  partnerships. How to file taxes nontaxable combat pay. How to file taxes     any amounts you exclude from income. How to file taxes     What Is Not Compensation? Compensation does not include any of the following items. How to file taxes Earnings and profits from property, such as rental income, interest income, and dividend income. How to file taxes Pension or annuity income. How to file taxes Deferred compensation received (compensation payments postponed from a past year). How to file taxes Income from a partnership for which you do not provide services that are a material income-producing factor. How to file taxes Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b. How to file taxes Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. How to file taxes When Can a Traditional IRA Be Opened? You can open a traditional IRA at any time. How to file taxes However, the time for making contributions for any year is limited. How to file taxes See When Can Contributions Be Made , later. How to file taxes How Can a Traditional IRA Be Opened? You can open different kinds of IRAs with a variety of organizations. How to file taxes You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. How to file taxes You can also open an IRA through your stockbroker. How to file taxes Any IRA must meet Internal Revenue Code requirements. How to file taxes The requirements for the various arrangements are discussed below. How to file taxes Kinds of traditional IRAs. How to file taxes   Your traditional IRA can be an individual retirement account or annuity. How to file taxes It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account. How to file taxes Individual Retirement Account An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. How to file taxes The account is created by a written document. How to file taxes The document must show that the account meets all of the following requirements. How to file taxes The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian. How to file taxes The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. How to file taxes However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount. How to file taxes Contributions, except for rollover contributions, must be in cash. How to file taxes See Rollovers , later. How to file taxes You must have a nonforfeitable right to the amount at all times. How to file taxes Money in your account cannot be used to buy a life insurance policy. How to file taxes Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund. How to file taxes You must start receiving distributions by April 1 of the year following the year in which you reach age 70½. How to file taxes See When Must You Withdraw Assets? (Required Minimum Distributions) , later. How to file taxes Individual Retirement Annuity You can open an individual retirement annuity by purchasing an annuity contract or an endowment contract from a life insurance company. How to file taxes An individual retirement annuity must be issued in your name as the owner, and either you or your beneficiaries who survive you are the only ones who can receive the benefits or payments. How to file taxes An individual retirement annuity must meet all the following requirements. How to file taxes Your entire interest in the contract must be nonforfeitable. How to file taxes The contract must provide that you cannot transfer any portion of it to any person other than the issuer. How to file taxes There must be flexible premiums so that if your compensation changes, your payment can also change. How to file taxes This provision applies to contracts issued after November 6, 1978. How to file taxes The contract must provide that contributions cannot be more than the deductible amount for an IRA for the year, and that you must use any refunded premiums to pay for future premiums or to buy more benefits before the end of the calendar year after the year in which you receive the refund. How to file taxes Distributions must begin by April 1 of the year following the year in which you reach age 70½. How to file taxes See When Must You Withdraw Assets? (Required Minimum Distributions) , later. How to file taxes Individual Retirement Bonds The sale of individual retirement bonds issued by the federal government was suspended after April 30, 1982. How to file taxes The bonds have the following features. How to file taxes They stop earning interest when you reach age 70½. How to file taxes If you die, interest will stop 5 years after your death, or on the date you would have reached age 70½, whichever is earlier. How to file taxes You cannot transfer the bonds. How to file taxes If you cash (redeem) the bonds before the year in which you reach age 59½, you may be subject to a 10% additional tax. How to file taxes See Age 59½ Rule under Early Distributions, later. How to file taxes You can roll over redemption proceeds into IRAs. How to file taxes Simplified Employee Pension (SEP) A simplified employee pension (SEP) is a written arrangement that allows your employer to make deductible contributions to a traditional IRA (a SEP IRA) set up for you to receive such contributions. How to file taxes Generally, distributions from SEP IRAs are subject to the withdrawal and tax rules that apply to traditional IRAs. How to file taxes See Publication 560 for more information about SEPs. How to file taxes Employer and Employee Association Trust Accounts Your employer or your labor union or other employee association can set up a trust to provide individual retirement accounts for employees or members. How to file taxes The requirements for individual retirement accounts apply to these traditional IRAs. How to file taxes Required Disclosures The trustee or issuer (sometimes called the sponsor) of your traditional IRA generally must give you a disclosure statement at least 7 days before you open your IRA. How to file taxes However, the sponsor does not have to give you the statement until the date you open (or purchase, if earlier) your IRA, provided you are given at least 7 days from that date to revoke the IRA. How to file taxes The disclosure statement must explain certain items in plain language. How to file taxes For example, the statement should explain when and how you can revoke the IRA, and include the name, address, and telephone number of the person to receive the notice of cancellation. How to file taxes This explanation must appear at the beginning of the disclosure statement. How to file taxes If you revoke your IRA within the revocation period, the sponsor must return to you the entire amount you paid. How to file taxes The sponsor must report on the appropriate IRS forms both your contribution to the IRA (unless it was made by a trustee-to-trustee transfer) and the amount returned to you. How to file taxes These requirements apply to all sponsors. How to file taxes How Much Can Be Contributed? There are limits and other rules that affect the amount that can be contributed to a traditional IRA. How to file taxes These limits and rules are explained below. How to file taxes Community property laws. How to file taxes   Except as discussed later under Kay Bailey Hutchison Spousal IRA Limit , each spouse figures his or her limit separately, using his or her own compensation. How to file taxes This is the rule even in states with community property laws. How to file taxes Brokers' commissions. How to file taxes   Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. How to file taxes For information about whether you can deduct brokers' commissions, see Brokers' commissions , later, under How Much Can You Deduct. How to file taxes Trustees' fees. How to file taxes   Trustees' administrative fees are not subject to the contribution limit. How to file taxes For information about whether you can deduct trustees' fees, see Trustees' fees , later, under How Much Can You Deduct. How to file taxes Qualified reservist repayments. How to file taxes   If you were a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions (defined later under Early Distributions) you received. How to file taxes You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. How to file taxes To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or a similar arrangement. How to file taxes Limit. How to file taxes   Your qualified reservist repayments cannot be more than your qualified reservist distributions, explained under Early Distributions , later. How to file taxes When repayment contributions can be made. How to file taxes   You cannot make these repayment contributions later than the date that is 2 years after your active duty period ends. How to file taxes No deduction. How to file taxes   You cannot deduct qualified reservist repayments. How to file taxes Reserve component. How to file taxes   The term “reserve component” means the: Army National Guard of the United States, Army Reserve, Naval Reserve, Marine Corps Reserve, Air National Guard of the United States, Air Force Reserve, Coast Guard Reserve, or Reserve Corps of the Public Health Service. How to file taxes Figuring your IRA deduction. How to file taxes   The repayment of qualified reservist distributions does not affect the amount you can deduct as an IRA contribution. How to file taxes Reporting the repayment. How to file taxes   If you repay a qualified reservist distribution, include the amount of the repayment with nondeductible contributions on line 1 of Form 8606. How to file taxes Example. How to file taxes   In 2013, your IRA contribution limit is $5,500. How to file taxes However, because of your filing status and AGI, the limit on the amount you can deduct is $3,500. How to file taxes You can make a nondeductible contribution of $2,000 ($5,500 - $3,500). How to file taxes In an earlier year you received a $3,000 qualified reservist distribution, which you would like to repay this year. How to file taxes   For 2013, you can contribute a total of $8,500 to your IRA. How to file taxes This is made up of the maximum deductible contribution of $3,500; a nondeductible contribution of $2,000; and a $3,000 qualified reservist repayment. How to file taxes You contribute the maximum allowable for the year. How to file taxes Since you are making a nondeductible contribution ($2,000) and a qualified reservist repayment ($3,000), you must file Form 8606 with your return and include $5,000 ($2,000 + $3,000) on line 1 of Form 8606. How to file taxes The qualified reservist repayment is not deductible. How to file taxes Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. How to file taxes See chapter 2 for information about Roth IRAs. How to file taxes General Limit For 2013, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation (defined earlier) for the year. How to file taxes Note. How to file taxes This limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions). How to file taxes This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. How to file taxes (See Nondeductible Contributions , later. How to file taxes ) Qualified reservist repayments do not affect this limit. How to file taxes Examples. How to file taxes George, who is 34 years old and single, earns $24,000 in 2013. How to file taxes His IRA contributions for 2013 are limited to $5,500. How to file taxes Danny, an unmarried college student working part time, earns $3,500 in 2013. How to file taxes His IRA contributions for 2013 are limited to $3,500, the amount of his compensation. How to file taxes More than one IRA. How to file taxes   If you have more than one IRA, the limit applies to the total contributions made on your behalf to all your traditional IRAs for the year. How to file taxes Annuity or endowment contracts. How to file taxes   If you invest in an annuity or endowment contract under an individual retirement annuity, no more than $5,500 ($6,500 if you are age 50 or older) can be contributed toward its cost for the tax year, including the cost of life insurance coverage. How to file taxes If more than this amount is contributed, the annuity or endowment contract is disqualified. How to file taxes Kay Bailey Hutchison Spousal IRA Limit For 2013, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts: $5,500 ($6,500 if you are age 50 or older), or The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. How to file taxes Your spouse's IRA contribution for the year to a traditional IRA. How to file taxes Any contributions for the year to a Roth IRA on behalf of your spouse. How to file taxes This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $11,000 ($12,000 if only one of you is age 50 or older or $13,000 if both of you are age 50 or older). How to file taxes Note. How to file taxes This traditional IRA limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions). How to file taxes Example. How to file taxes Kristin, a full-time student with no taxable compensation, marries Carl during the year. How to file taxes Neither of them was age 50 by the end of 2013. How to file taxes For the year, Carl has taxable compensation of $30,000. How to file taxes He plans to contribute (and deduct) $5,500 to a traditional IRA. How to file taxes If he and Kristin file a joint return, each can contribute $5,500 to a traditional IRA. How to file taxes This is because Kristin, who has no compensation, can add Carl's compensation, reduced by the amount of his IRA contribution ($30,000 − $5,500 = $24,500), to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. How to file taxes In her case, $5,500 is her contribution limit, because $5,500 is less than $24,500 (her compensation for purposes of figuring her contribution limit). How to file taxes Filing Status Generally, except as discussed earlier under Kay Bailey Hutchison Spousal IRA Limit , your filing status has no effect on the amount of allowable contributions to your traditional IRA. How to file taxes However, if during the year either you or your spouse was covered by a retirement plan at work, your deduction may be reduced or eliminated, depending on your filing status and income. How to file taxes See How Much Can You Deduct , later. How to file taxes Example. How to file taxes Tom and Darcy are married and both are 53. How to file taxes They both work and each has a traditional IRA. How to file taxes Tom earned $3,800 and Darcy earned $48,000 in 2013. How to file taxes Because of the Kay Bailey Hutchison Spousal IRA limit rule, even though Tom earned less than $6,500, they can contribute up to $6,500 to his IRA for 2013 if they file a joint return. How to file taxes They can contribute up to $6,500 to Darcy's IRA. How to file taxes If they file separate returns, the amount that can be contributed to Tom's IRA is limited by his earned income, $3,800. How to file taxes Less Than Maximum Contributions If contributions to your traditional IRA for a year were less than the limit, you cannot contribute more after the due date of your return for that year to make up the difference. How to file taxes Example. How to file taxes Rafael, who is 40, earns $30,000 in 2013. How to file taxes Although he can contribute up to $5,500 for 2013, he contributes only $3,000. How to file taxes After April 15, 2014, Rafael cannot make up the difference between his actual contributions for 2013 ($3,000) and his 2013 limit ($5,500). How to file taxes He cannot contribute $2,500 more than the limit for any later year. How to file taxes More Than Maximum Contributions If contributions to your IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. How to file taxes However, a penalty or additional tax may apply. How to file taxes See Excess Contributions , later, under What Acts Result in Penalties or Additional Taxes. How to file taxes When Can Contributions Be Made? As soon as you open your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). How to file taxes Contributions must be in the form of money (cash, check, or money order). How to file taxes Property cannot be contributed. How to file taxes Although property cannot be contributed, your IRA may invest in certain property. How to file taxes For example, your IRA may purchase shares of stock. How to file taxes For other restrictions on the use of funds in your IRA, see Prohibited Transactions , later in this chapter. How to file taxes You may be able to transfer or roll over certain property from one retirement plan to another. How to file taxes See the discussion of rollovers and other transfers later in this chapter under Can You Move Retirement Plan Assets . How to file taxes You can make a contribution to your IRA by having your income tax refund (or a portion of your refund), if any, paid directly to your traditional IRA, Roth IRA, or SEP IRA. How to file taxes For details, see the instructions for your income tax return or Form 8888, Allocation of Refund (Including Savings Bond Purchases). How to file taxes Contributions can be made to your traditional IRA for each year that you receive compensation and have not reached age 70½. How to file taxes For any year in which you do not work, contributions cannot be made to your IRA unless you receive alimony, nontaxable combat pay, military differential pay, or file a joint return with a spouse who has compensation. How to file taxes See Who Can Open a Traditional IRA , earlier. How to file taxes Even if contributions cannot be made for the current year, the amounts contributed for years in which you did qualify can remain in your IRA. How to file taxes Contributions can resume for any years that you qualify. How to file taxes Contributions must be made by due date. How to file taxes   Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. How to file taxes For most people, this means that contributions for 2013 must be made by April 15, 2014, and contributions for 2014 must be made by April 15, 2015. How to file taxes Age 70½ rule. How to file taxes   Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year. How to file taxes   You attain age 70½ on the date that is 6 calendar months after the 70th anniversary of your birth. How to file taxes If you were born on or before June 30, 1943, you cannot contribute for 2013 or any later year. How to file taxes Designating year for which contribution is made. How to file taxes   If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. How to file taxes If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). How to file taxes Filing before a contribution is made. How to file taxes    You can file your return claiming a traditional IRA contribution before the contribution is actually made. How to file taxes Generally, the contribution must be made by the due date of your return, not including extensions. How to file taxes Contributions not required. How to file taxes   You do not have to contribute to your traditional IRA for every tax year, even if you can. How to file taxes How Much Can You Deduct? Generally, you can deduct the lesser of: The contributions to your traditional IRA for the year, or The general limit (or the Kay Bailey Hutchison Spousal IRA limit, if applicable) explained earlier under How Much Can Be Contributed . How to file taxes However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. How to file taxes See Limit if Covered by Employer Plan , later. How to file taxes You may be able to claim a credit for contributions to your traditional IRA. How to file taxes For more information, see chapter 4. How to file taxes Trustees' fees. How to file taxes   Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. How to file taxes However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). How to file taxes For information about miscellaneous itemized deductions, see Publication 529, Miscellaneous Deductions. How to file taxes Brokers' commissions. How to file taxes   These commissions are part of your IRA contribution and, as such, are deductible subject to the limits. How to file taxes Full deduction. How to file taxes   If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more of your traditional IRAs of up to the lesser of: $5,500 ($6,500 if you are age 50 or older), or 100% of your compensation. How to file taxes   This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf. How to file taxes Kay Bailey Hutchison Spousal IRA. How to file taxes   In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of: $5,500 ($6,500 if the spouse with the lower compensation is age 50 or older), or The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts. How to file taxes The IRA deduction for the year of the spouse with the greater compensation. How to file taxes Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation. How to file taxes Any contributions for the year to a Roth IRA on behalf of the spouse with the greater compensation. How to file taxes   This limit is reduced by any contributions to a section 501(c)(18) plan on behalf of the spouse with the lesser compensation. How to file taxes Note. How to file taxes If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions to your spouse's IRA. How to file taxes After a divorce or legal separation, you can deduct only the contributions to your own IRA. How to file taxes Your deductions are subject to the rules for single individuals. How to file taxes Covered by an employer retirement plan. How to file taxes   If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. How to file taxes This is discussed later under Limit if Covered by Employer Plan . How to file taxes Limits on the amount you can deduct do not affect the amount that can be contributed. How to file taxes Are You Covered by an Employer Plan? The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. How to file taxes The “Retirement Plan” box should be checked if you were covered. How to file taxes Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered , later. How to file taxes If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer. How to file taxes Federal judges. How to file taxes   For purposes of the IRA deduction, federal judges are covered by an employer plan. How to file taxes For Which Year(s) Are You Covered? Special rules apply to determine the tax years for which you are covered by an employer plan. How to file taxes These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan. How to file taxes Tax year. How to file taxes   Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. How to file taxes For almost all people, the tax year is the calendar year. How to file taxes Defined contribution plan. How to file taxes   Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year. How to file taxes However, also see Situations in Which You Are Not Covered , later. How to file taxes   A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. How to file taxes In a defined contribution plan, the amount to be contributed to each participant's account is spelled out in the plan. How to file taxes The level of benefits actually provided to a participant depends on the total amount contributed to that participant's account and any earnings and losses on those contributions. How to file taxes Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. How to file taxes Example. How to file taxes Company A has a money purchase pension plan. How to file taxes Its plan year is from July 1 to June 30. How to file taxes The plan provides that contributions must be allocated as of June 30. How to file taxes Bob, an employee, leaves Company A on December 31, 2012. How to file taxes The contribution for the plan year ending on June 30, 2013, is made February 15, 2014. How to file taxes Because an amount is contributed to Bob's account for the plan year, Bob is covered by the plan for his 2013 tax year. How to file taxes   A special rule applies to certain plans in which it is not possible to determine if an amount will be contributed to your account for a given plan year. How to file taxes If, for a plan year, no amounts have been allocated to your account that are attributable to employer contributions, employee contributions, or forfeitures, by the last day of the plan year, and contributions are discretionary for the plan year, you are not covered for the tax year in which the plan year ends. How to file taxes If, after the plan year ends, the employer makes a contribution for that plan year, you are covered for the tax year in which the contribution is made. How to file taxes Example. How to file taxes Mickey was covered by a profit-sharing plan and left the company on December 31, 2012. How to file taxes The plan year runs from July 1 to June 30. How to file taxes Under the terms of the plan, employer contributions do not have to be made, but if they are made, they are contributed to the plan before the due date for filing the company's tax return. How to file taxes Such contributions are allocated as of the last day of the plan year, and allocations are made to the accounts of individuals who have any service during the plan year. How to file taxes As of June 30, 2013, no contributions were made that were allocated to the June 30, 2013, plan year, and no forfeitures had been allocated within the plan year. How to file taxes In addition, as of that date, the company was not obligated to make a contribution for such plan year and it was impossible to determine whether or not a contribution would be made for the plan year. How to file taxes On December 31, 2013, the company decided to contribute to the plan for the plan year ending June 30, 2013. How to file taxes That contribution was made on February 15, 2014. How to file taxes Mickey is an active participant in the plan for his 2014 tax year but not for his 2013 tax year. How to file taxes No vested interest. How to file taxes   If an amount is allocated to your account for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the account. How to file taxes Defined benefit plan. How to file taxes   If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. How to file taxes This rule applies even if you: Declined to participate in the plan, Did not make a required contribution, or Did not perform the minimum service required to accrue a benefit for the year. How to file taxes   A defined benefit plan is any plan that is not a defined contribution plan. How to file taxes In a defined benefit plan, the level of benefits to be provided to each participant is spelled out in the plan. How to file taxes The plan administrator figures the amount needed to provide those benefits and those amounts are contributed to the plan. How to file taxes Defined benefit plans include pension plans and annuity plans. How to file taxes Example. How to file taxes Nick, an employee of Company B, is eligible to participate in Company B's defined benefit plan, which has a July 1 to June 30 plan year. How to file taxes Nick leaves Company B on December 31, 2012. How to file taxes Because Nick is eligible to participate in the plan for its year ending June 30, 2013, he is covered by the plan for his 2013 tax year. How to file taxes No vested interest. How to file taxes   If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual. How to file taxes Situations in Which You Are Not Covered Unless you are covered by another employer plan, you are not covered by an employer plan if you are in one of the situations described below. How to file taxes Social security or railroad retirement. How to file taxes   Coverage under social security or railroad retirement is not coverage under an employer retirement plan. How to file taxes Benefits from previous employer's plan. How to file taxes   If you receive retirement benefits from a previous employer's plan, you are not covered by that plan. How to file taxes Reservists. How to file taxes   If the only reason you participate in a plan is because you are a member of a reserve unit of the Armed Forces, you may not be covered by the plan. How to file taxes You are not covered by the plan if both of the following conditions are met. How to file taxes The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. How to file taxes You did not serve more than 90 days on active duty during the year (not counting duty for training). How to file taxes Volunteer firefighters. How to file taxes   If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be covered by the plan. How to file taxes You are not covered by the plan if both of the following conditions are met. How to file taxes The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. How to file taxes Your accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement. How to file taxes Limit if Covered by Employer Plan As discussed earlier, the deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse was covered for any part of the year by an employer retirement plan. How to file taxes Your deduction is also affected by how much income you had and by your filing status. How to file taxes Your deduction may also be affected by social security benefits you received. How to file taxes Reduced or no deduction. How to file taxes   If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status. How to file taxes   Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. How to file taxes These amounts vary depending on your filing status. How to file taxes   To determine if your deduction is subject to the phaseout, you must determine your modified adjusted gross income (AGI) and your filing status, as explained later under Deduction Phaseout . How to file taxes Once you have determined your modified AGI and your filing status, you can use Table 1-2 or Table 1-3 to determine if the phaseout applies. How to file taxes Social Security Recipients Instead of using Table 1-2 or Table 1-3 and Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013, later, complete the worksheets in Appendix B of this publication if, for the year, all of the following apply. How to file taxes You received social security benefits. How to file taxes You received taxable compensation. How to file taxes Contributions were made to your traditional IRA. How to file taxes You or your spouse was covered by an employer retirement plan. How to file taxes Use the worksheets in Appendix B to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits. How to file taxes Appendix B includes an example with filled-in worksheets to assist you. How to file taxes Table 1-2. How to file taxes Effect of Modified AGI1 on Deduction if You Are Covered by a Retirement Plan at Work If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. How to file taxes IF your filing status is . How to file taxes . How to file taxes . How to file taxes AND your modified adjusted gross income (modified AGI) is . How to file taxes . How to file taxes . How to file taxes THEN you can take . How to file taxes . How to file taxes . How to file taxes single or head of household $59,000 or less a full deduction. How to file taxes more than $59,000 but less than $69,000 a partial deduction. How to file taxes $69,000 or more no deduction. How to file taxes married filing jointly or  qualifying widow(er) $95,000 or less a full deduction. How to file taxes more than $95,000 but less than $115,000 a partial deduction. How to file taxes $115,000 or more no deduction. How to file taxes married filing separately2 less than $10,000 a partial deduction. How to file taxes $10,000 or more no deduction. How to file taxes 1 Modified AGI (adjusted gross income). How to file taxes See Modified adjusted gross income (AGI) , later. How to file taxes  2 If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” filing status). How to file taxes Table 1-3. How to file taxes Effect of Modified AGI1 on Deduction if You Are NOT Covered by a Retirement Plan at Work If you are not covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. How to file taxes IF your filing status is . How to file taxes . How to file taxes . How to file taxes AND your modified adjusted gross income (modified AGI) is . How to file taxes . How to file taxes . How to file taxes THEN you can take . How to file taxes . How to file taxes . How to file taxes single, head of household, or qualifying widow(er) any amount a full deduction. How to file taxes married filing jointly or separately with a spouse who is not covered by a plan at work any amount a full deduction. How to file taxes married filing jointly with a spouse who is covered by a plan at work $178,000 or less a full deduction. How to file taxes more than $178,000 but less than $188,000 a partial deduction. How to file taxes $188,000 or more no deduction. How to file taxes married filing separately with a spouse who is covered by a plan at work2 less than $10,000 a partial deduction. How to file taxes $10,000 or more no deduction. How to file taxes 1 Modified AGI (adjusted gross income). How to file taxes See Modified adjusted gross income (AGI) , later. How to file taxes  2 You are entitled to the full deduction if you did not live with your spouse at any time during the year. How to file taxes For 2014, if you are not covered by a retirement plan at work and you are married filing jointly with a spouse who is covered by a plan at work, your deduction is phased out if your modified AGI is more than $181,000 but less than $191,000. How to file taxes If your AGI is $191,000 or more, you cannot take a deduction for a contribution to a traditional IRA. How to file taxes Deduction Phaseout The amount of any reduction in the limit on your IRA deduction (phaseout) depends on whether you or your spouse was covered by an employer retirement plan. How to file taxes Covered by a retirement plan. How to file taxes   If you are covered by an employer retirement plan and you did not receive any social security retirement benefits, your IRA deduction may be reduced or eliminated depending on your filing status and modified AGI, as shown in Table 1-2. How to file taxes For 2014, if you are covered by a retirement plan at work, your IRA deduction will not be reduced (phased out) unless your modified AGI is: More than $60,000 but less than $70,000 for a single individual (or head of household), More than $96,000 but less than $116,000 for a married couple filing a joint return (or a qualifying widow(er)), or Less than $10,000 for a married individual filing a separate return. How to file taxes If your spouse is covered. How to file taxes   If you are not covered by an employer retirement plan, but your spouse is, and you did not receive any social security benefits, your IRA deduction may be reduced or eliminated entirely depending on your filing status and modified AGI as shown in Table 1-3. How to file taxes Filing status. How to file taxes   Your filing status depends primarily on your marital status. How to file taxes For this purpose, you need to know if your filing status is single or head of household, married filing jointly or qualifying widow(er), or married filing separately. How to file taxes If you need more information on filing status, see Publication 501, Exemptions, Standard Deduction, and Filing Information. How to file taxes Lived apart from spouse. How to file taxes   If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single. How to file taxes Modified adjusted gross income (AGI). How to file taxes   You can use Worksheet 1-1 to figure your modified AGI. How to file taxes If you made contributions to your IRA for 2013 and received a distribution from your IRA in 2013, see Both contributions for 2013 and distributions in 2013 , later. How to file taxes    Do not assume that your modified AGI is the same as your compensation. How to file taxes Your modified AGI may include income in addition to your compensation (discussed earlier) such as interest, dividends, and income from IRA distributions. How to file taxes Form 1040. How to file taxes   If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. How to file taxes IRA deduction. How to file taxes Student loan interest deduction. How to file taxes Tuition and fees deduction. How to file taxes Domestic production activities deduction. How to file taxes Foreign earned income exclusion. How to file taxes Foreign housing exclusion or deduction. How to file taxes Exclusion of qualified savings bond interest shown on Form 8815. How to file taxes Exclusion of employer-provided adoption benefits shown on Form 8839. How to file taxes This is your modified AGI. How to file taxes Form 1040A. How to file taxes   If you file Form 1040A, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. How to file taxes IRA deduction. How to file taxes Student loan interest deduction. How to file taxes Tuition and fees deduction. How to file taxes Exclusion of qualified savings bond interest shown on Form 8815. How to file taxes This is your modified AGI. How to file taxes Form 1040NR. How to file taxes   If you file Form 1040NR, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. How to file taxes IRA deduction. How to file taxes Student loan interest deduction. How to file taxes Domestic production activities deduction. How to file taxes Exclusion of qualified savings bond interest shown on Form 8815. How to file taxes Exclusion of employer-provided adoption benefits shown on Form 8839. How to file taxes This is your modified AGI. How to file taxes Income from IRA distributions. How to file taxes   If you received distributions in 2013 from one or more traditional IRAs and your traditional IRAs include only deductible contributions, the distributions are fully taxable and are included in your modified AGI. How to file taxes Both contributions for 2013 and distributions in 2013. How to file taxes   If all three of the following apply, any IRA distributions you received in 2013 may be partly tax free and partly taxable. How to file taxes You received distributions in 2013 from one or more traditional IRAs, You made contributions to a traditional IRA for 2013, and Some of those contributions may be nondeductible contributions. How to file taxes (See Nondeductible Contributions and Worksheet 1-2, later. How to file taxes ) If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. How to file taxes To do this, you can use Worksheet 1-5, later. How to file taxes   If at least one of the above does not apply, figure your modified AGI using Worksheet 1-1, later. How to file taxes How To Figure Your Reduced IRA Deduction If you or your spouse is covered by an employer retirement plan and you did not receive any social security benefits, you can figure your reduced IRA deduction by using Worksheet 1-2. How to file taxes Figuring Your Reduced IRA Deduction for 2013. How to file taxes The Instructions for Form 1040, Form 1040A, and Form 1040NR include similar worksheets that you can use instead of the worksheet in this publication. How to file taxes If you or your spouse is covered by an employer retirement plan, and you received any social security benefits, see Social Security Recipients , earlier. How to file taxes Note. How to file taxes If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. How to file taxes Worksheet 1-1. How to file taxes Figuring Your Modified AGI Use this worksheet to figure your modified AGI for traditional IRA purposes. How to file taxes 1. How to file taxes Enter your adjusted gross income (AGI) from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37, figured without taking into account the amount from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32 1. How to file taxes   2. How to file taxes Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 33 2. How to file taxes   3. How to file taxes Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 3. How to file taxes   4. How to file taxes Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 34 4. How to file taxes   5. How to file taxes Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 5. How to file taxes   6. How to file taxes Enter any foreign housing deduction from Form 2555, line 50 6. How to file taxes   7. How to file taxes Enter any excludable savings bond interest from Form 8815, line 14 7. How to file taxes   8. How to file taxes Enter any excluded employer-provided adoption benefits from Form 8839, line 28 8. How to file taxes   9. How to file taxes Add lines 1 through 8. How to file taxes This is your Modified AGI for traditional IRA purposes 9. How to file taxes   Reporting Deductible Contributions If you file Form 1040, enter your IRA deduction on line 32 of that form. How to file taxes If you file Form 1040A, enter your IRA deduction on line 17 of that form. How to file taxes If you file Form 1040NR, enter your IRA deduction on line 32 of that form. How to file taxes You cannot deduct IRA contributions on Form 1040EZ or Form 1040NR-EZ. How to file taxes Self-employed. How to file taxes   If you are self-employed (a sole proprietor or partner) and have a SIMPLE IRA, enter your deduction for allowable plan contributions on Form 1040, line 28. How to file taxes If you file Form 1040NR, enter your deduction on line 28 of that form. How to file taxes Nondeductible Contributions Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA of up to the general limit or, if it applies, the Kay Bailey Hutchison Spousal IRA limit. How to file taxes The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. How to file taxes Example. How to file taxes Tony is 29 years old and single. How to file taxes In 2013, he was covered by a retirement plan at work. How to file taxes His salary is $62,000. How to file taxes His modified AGI is $70,000. How to file taxes Tony makes a $5,500 IRA contribution for 2013. How to file taxes Because he was covered by a retirement plan and his modified AGI is above $69,000, he cannot deduct his $5,500 IRA contribution. How to file taxes He must designate this contribution as a nondeductible contribution by reporting it on Form 8606. How to file taxes Repayment of reservist distributions. How to file taxes   Nondeductible contributions may include repayments of qualified reservist distributions. How to file taxes For more information, see Qualified reservist repayments under How Much Can Be Contributed, earlier. How to file taxes Form 8606. How to file taxes   To designate contributions as nondeductible, you must file Form 8606. How to file taxes (See the filled-in Forms 8606 in this chapter. How to file taxes )   You do not have to designate a contribution as nondeductible until you file your tax return. How to file taxes When you file, you can even designate otherwise deductible contributions as nondeductible contributions. How to file taxes   You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year. How to file taxes    A Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. How to file taxes In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. How to file taxes See Form 8606 under Distributions Fully or Partly Taxable, later. How to file taxes Failure to report nondeductible contributions. How to file taxes   If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated like deductible contributions when withdrawn. How to file taxes All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. How to file taxes Penalty for overstatement. How to file taxes   If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause. How to file taxes Penalty for failure to file Form 8606. How to file taxes   You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause. How to file taxes Tax on earnings on nondeductible contributions. How to file taxes   As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed. How to file taxes Cost basis. How to file taxes   You will have a cost basis in your traditional IRA if you made any nondeductible contributions. How to file taxes Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. How to file taxes    Commonly, distributions from your traditional IRAs will include both taxable and nontaxable (cost basis) amounts. How to file taxes See Are Distributions Taxable, later, for more information. How to file taxes Recordkeeping. How to file taxes There is a recordkeeping worksheet, Appendix A. How to file taxes Summary Record of Traditional IRA(s) for 2013 , that you can use to keep a record of deductible and nondeductible IRA contributions. How to file taxes Examples — Worksheet for Reduced IRA Deduction for 2013 The following examples illustrate the use of Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013. How to file taxes Example 1. How to file taxes For 2013, Tom and Betty file a joint return on Form 1040. How to file taxes They are both 39 years old. How to file taxes They are both employed and Tom is covered by his employer's retirement plan. How to file taxes Tom's salary is $59,000 and Betty's is $32,555. How to file taxes They each have a traditional IRA and their combined modified AGI, which includes $5,000 interest and dividend income, is $96,555. How to file taxes Because their modified AGI is between $95,000 and $115,000 and Tom is covered by an employer plan, Tom is subject to the deduction phaseout discussed earlier under Limit if Covered by Employer Plan . How to file taxes For 2013, Tom contributed $5,500 to his IRA and Betty contributed $5,500 to hers. How to file taxes Even though they file a joint return, they must use separate worksheets to figure the IRA deduction for each of them. How to file taxes Tom can take a deduction of only $5,080. How to file taxes He can choose to treat the $5,080 as either deductible or nondeductible contributions. How to file taxes He can either leave the $420 ($5,500 − $5,080) of nondeductible contributions in his IRA or withdraw them by April 15, 2014. How to file taxes He decides to treat the $5,080 as deductible contributions and leave the $420 of nondeductible contributions in his IRA. How to file taxes Using Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013, Tom figures his deductible and nondeductible amounts as shown on Worksheet 1-2. How to file taxes Figuring Your Reduced IRA Deduction for 2013—Example 1 Illustrated. How to file taxes Betty figures her IRA deduction as follows. How to file taxes Betty can treat all or part of her contributions as either deductible or nondeductible. How to file taxes This is because her $5,500 contribution for 2013 is not subject to the deduction phaseout discussed earlier under Limit if Covered by Employer Plan . How to file taxes She does not need to use Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013, because their modified AGI is not within the phaseout range that applies. How to file taxes Betty decides to treat her $5,500 IRA contributions as deductible. How to file taxes The IRA deductions of $5,080 and $5,500 on the joint return for Tom and Betty total $10,580. How to file taxes Example 2. How to file taxes For 2013, Ed and Sue file a joint return on Form 1040. How to file taxes They are both 39 years old. How to file taxes Ed is covered by his employer's retirement plan. How to file taxes Ed's salary is $45,000. How to file taxes Sue had no compensation for the year and did not contribute to an IRA. How to file taxes Sue is not covered by an employer plan. How to file taxes Ed contributed $5,500 to his traditional IRA and $5,500 to a traditional IRA for Sue (a Kay Bailey Hutchison Spousal IRA). How to file taxes Their combined modified AGI, which includes $2,000 interest and dividend income and a large capital gain from the sale of stock, is $180,555. How to file taxes Because the combined modified AGI is $115,000 or more, Ed cannot deduct any of the contribution to his traditional IRA. How to file taxes He can either leave the $5,500 of nondeductible contributions in his IRA or withdraw them by April 15, 2014. How to file taxes Sue figures her IRA deduction as shown on Worksheet 1-2. How to file taxes Figuring Your Reduced IRA Deduction for 2013—Example 2 Illustrated. How to file taxes Worksheet 1-2. How to file taxes Figuring Your Reduced IRA Deduction for 2013 (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status. How to file taxes ) Note. How to file taxes If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. How to file taxes IF you . How to file taxes . How to file taxes . How to file taxes AND your  filing status is . How to file taxes . How to file taxes . How to file taxes AND your modified AGI is over . How to file taxes . How to file taxes . How to file taxes THEN enter on  line 1 below . How to file taxes . How to file taxes . How to file taxes       are covered by an employer plan single or head of household $59,000 $69,000     married filing jointly or qualifying widow(er) $95,000 $115,000     married filing separately $0 $10,000     are not covered by an employer plan, but your spouse is covered married filing jointly $178,000 $188,000     married filing separately $0 $10,000     1. How to file taxes Enter applicable amount from table above 1. How to file taxes   2. How to file taxes Enter your modified AGI (that of both spouses, if married filing jointly) 2. How to file taxes     Note. How to file taxes If line 2 is equal to or more than the amount on line 1, stop here. How to file taxes  Your IRA contributions are not deductible. How to file taxes See Nondeductible Contributions , earlier. How to file taxes     3. How to file taxes Subtract line 2 from line 1. How to file taxes If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. How to file taxes You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less 3. How to file taxes   4. How to file taxes Multiply line 3 by the percentage below that applies to you. How to file taxes If the result is not a multiple of $10, round it to the next highest multiple of $10. How to file taxes (For example, $611. How to file taxes 40 is rounded to $620. How to file taxes ) However, if the result is less than $200, enter $200. How to file taxes         Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27. How to file taxes 5% (. How to file taxes 275) (by 32. How to file taxes 5% (. How to file taxes 325) if you are age 50 or older). How to file taxes All others, multiply line 3 by 55% (. How to file taxes 55) (by 65% (. How to file taxes 65) if you are age 50 or older). How to file taxes 4. How to file taxes   5. How to file taxes Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (deductible part of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). How to file taxes If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. How to file taxes If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment 5. How to file taxes   6. How to file taxes Enter contributions made, or to be made, to your IRA for 2013, but do not enter more than $5,500 ($6,500 if you are age 50 or older). How to file taxes If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions , later. How to file taxes 6. How to file taxes   7. How to file taxes IRA deduction. How to file taxes Compare lines 4, 5, and 6. How to file taxes Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. How to file taxes If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 7. How to file taxes   8. How to file taxes Nondeductible contribution. How to file taxes Subtract line 7 from line 5 or 6, whichever is smaller. How to file taxes  Enter the result here and on line 1 of your Form 8606 8. How to file taxes   Worksheet 1-2. How to file taxes Figuring Your Reduced IRA Deduction for 2013—Example 1 Illustrated (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status. How to file taxes ) Note. How to file taxes If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. How to file taxes IF you . How to file taxes . How to file taxes . How to file taxes AND your  filing status is . How to file taxes . How to file taxes . How to file taxes AND your modified AGI is over . How to file taxes . How to file taxes . How to file taxes THEN enter on  line 1 below . How to file taxes . How to file taxes . How to file taxes       are covered by an employer plan single or head of household $59,000 $69,000     married filing jointly or qualifying widow(er) $95,000 $115,000     married filing separately $0 $10,000     are not covered by an employer plan, but your spouse is covered married filing jointly $178,000 $188,000     married filing separately $0 $10,000     1. How to file taxes Enter applicable amount from table above 1. How to file taxes 115,000 2. How to file taxes Enter your modified AGI (that of both spouses, if married filing jointly) 2. How to file taxes 96,555   Note. How to file taxes If line 2 is equal to or more than the amount on line 1, stop here. How to file taxes  Your IRA contributions are not deductible. How to file taxes See Nondeductible Contributions , earlier. How to file taxes     3. How to file taxes Subtract line 2 from line 1. How to file taxes If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. How to file taxes You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less 3. How to file taxes 18,445 4. How to file taxes Multiply line 3 by the percentage below that applies to you. How to file taxes If the result is not a multiple of $10, round it to the next highest multiple of $10. How to file taxes (For example, $611. How to file taxes 40 is rounded to $620. How to file taxes ) However, if the result is less than $200, enter $200. How to file taxes         Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27. How to file taxes 5% (. How to file taxes 275) (by 32. How to file taxes 5% (. How to file taxes 325) if you are age 50 or older). How to file taxes All others, multiply line 3 by 55% (. How to file taxes 55) (by 65% (. How to file taxes 65) if you are age 50 or older). How to file taxes 4. How to file taxes 5,080 5. How to file taxes Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (deductible part of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). How to file taxes If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. How to file taxes If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment 5. How to file taxes 59,000 6. How to file taxes Enter contributions made, or to be made, to your IRA for 2013, but do not enter more than $5,500 ($6,500 if you are age 50 or older). How to file taxes If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions , later. How to file taxes 6. How to file taxes 5,500 7. How to file taxes IRA deduction. How to file taxes Compare lines 4, 5, and 6. How to file taxes Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. How to file taxes If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 7. How to file taxes 5,080 8. How to file taxes Nondeductible contribution. How to file taxes Subtract line 7 from line 5 or 6, whichever is smaller. How to file taxes  Enter the result here and on line 1 of your Form 8606 8. How to file taxes 420 Worksheet 1-2. How to file taxes Figuring Your Reduced IRA Deduction for 2013—Example 2 Illustrated (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status. How to file taxes ) Note. How to file taxes If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. How to file taxes IF you . How to file taxes . How to file taxes . How to file taxes AND your  filing status is . How to file taxes . How to file taxes . How to file taxes AND your modified AGI is over . How to file taxes . How to file taxes . How to file taxes THEN enter on  line 1 below . How to file taxes . How to file taxes . How to file taxes       are covered by an employer plan single or head of household $59,000 $69,000     married filing jointly or qualifying widow(er) $95,000 $115,000     married filing separately $0 $10,000     are not covered by an employer plan, but your spouse is covered married filing jointly $178,000 $188,000     married filing separately $0 $10,000     1. How to file taxes Enter applicable amount from table above 1. How to file taxes 188,000 2. How to file taxes Enter your modified AGI (that of both spouses, if married filing jointly) 2. How to file taxes 180,555   Note. How to file taxes If line 2 is equal to or more than the amount on line 1, stop here. How to file taxes  Your IRA contributions are not deductible. How to file taxes See Nondeductible Contributions , earlier. How to file taxes     3. How to file taxes Subtract line 2 from line 1. How to file taxes If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. How to file taxes You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less 3. How to file taxes 7,445 4. How to file taxes Multiply line 3 by the percentage below that applies to you. How to file taxes If the result is not a multiple of $10, round it to the next highest multiple of $10. How to file taxes (For example, $611. How to file taxes 40 is rounded to $620. How to file taxes ) However, if the result is less than $200, enter $200. How to file taxes         Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27. How to file taxes 5% (. How to file taxes 275) (by 32. How to file taxes 5% (. How to file taxes 325) if you are age 50 or older). How to file taxes All others, multiply line 3 by 55% (. How to file taxes 55) (by 65% (. How to file taxes 65) if you are age 50 or older). How to file taxes 4. How to file taxes 4,100 5. How to file taxes Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (deductible part of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). How to file taxes If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. How to file taxes If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment 5. How to file taxes 39,500 6. How to file taxes Enter contributions made, or to be made, to your IRA for 2013, but do not enter more than $5,500 ($6,500 if you are age 50 or older). How to file taxes If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions , later. How to file taxes 6. How to file taxes 5,500 7. How to file taxes IRA deduction. How to file taxes Compare lines 4, 5, and 6. How to file taxes Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. How to file taxes If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 7. How to file taxes 4,100 8. How to file taxes Nondeductible contribution. How to file taxes Subtract line 7 from line 5 or 6, whichever is smaller. How to file taxes  Enter the result here and on line 1 of your Form 8606 8. How to file taxes 1,400 What if You Inherit an IRA? If you inherit a traditional IRA, you are called a beneficiary. How to file taxes A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. How to file taxes Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. How to file taxes Inherited from spouse. How to file taxes   If you inherit a traditional IRA from your spouse, you generally have the following three choices. How to file taxes You can: Treat it as your own IRA by designating yourself as the account owner. How to file taxes Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a: Qualified employer plan, Qualified employee annuity plan (section 403(a) plan), Tax-sheltered annuity plan (s
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The How To File Taxes

How to file taxes Publication 583 - Main Content Table of Contents What New Business Owners Need To Know Forms of BusinessMore information. How to file taxes More information. How to file taxes Exception—Community Income. How to file taxes Exception—Qualified joint venture. How to file taxes More information. How to file taxes More information. How to file taxes Identification NumbersEmployer Identification Number (EIN) Payee's Identification Number Tax Year Accounting Method Business TaxesIncome Tax Self-Employment Tax Employment Taxes Excise Taxes Depositing Taxes Information Returns PenaltiesWaiver of penalty. How to file taxes Business ExpensesBusiness Start-Up Costs Depreciation Business Use of Your Home Car and Truck Expenses RecordkeepingWhy Keep Records? Kinds of Records To Keep How Long To Keep Records Sample Record System How to Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What New Business Owners Need To Know As a new business owner, you need to know your federal tax responsibilities. How to file taxes Table 1 can help you learn what those responsibilities are. How to file taxes Ask yourself each question listed in the table, then see the related discussion to find the answer. How to file taxes In addition to knowing about federal taxes, you need to make some basic business decisions. How to file taxes Ask yourself: What are my financial resources? What products and services will I sell? How will I market my products and services? How will I develop a strategic business plan? How will I manage my business on a day-to-day basis? How will I recruit employees? The Small Business Administration (SBA) is a federal agency that can help you answer these types of questions. How to file taxes For information on how to contact the SBA, see How to Get More Information, later. How to file taxes Forms of Business The most common forms of business are the sole proprietorship, partnership, and corporation. How to file taxes When beginning a business, you must decide which form of business to use. How to file taxes Legal and tax considerations enter into this decision. How to file taxes Only tax considerations are discussed in this publication. How to file taxes Your form of business determines which income tax return form you have to file. How to file taxes See Table 2 to find out which form you have to file. How to file taxes Sole proprietorships. How to file taxes   A sole proprietorship is an unincorporated business that is owned by one individual. How to file taxes It is the simplest form of business organization to start and maintain. How to file taxes The business has no existence apart from you, the owner. How to file taxes Its liabilities are your personal liabilities. How to file taxes You undertake the risks of the business for all assets owned, whether or not used in the business. How to file taxes You include the income and expenses of the business on your personal tax return. How to file taxes More information. How to file taxes   For more information on sole proprietorships, see Publication 334, Tax Guide for Small Business. How to file taxes If you are a farmer, see Publication 225, Farmer's Tax Guide. How to file taxes Partnerships. How to file taxes   A partnership is the relationship existing between two or more persons who join to carry on a trade or business. How to file taxes Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. How to file taxes   A partnership must file an annual information return to report the income, deductions, gains, losses, etc. How to file taxes , from its operations, but it does not pay income tax. How to file taxes Instead, it “passes through” any profits or losses to its partners. How to file taxes Each partner includes his or her share of the partnership's items on his or her tax return. How to file taxes More information. How to file taxes   For more information on partnerships, see Publication 541, Partnerships. How to file taxes Husband and wife business. How to file taxes   If you and your spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. How to file taxes Do not use Schedule C or C-EZ. How to file taxes Instead, file Form 1065, U. How to file taxes S. How to file taxes Return of Partnership Income. How to file taxes For more information, see Publication 541, Partnerships. How to file taxes Exception—Community Income. How to file taxes   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. How to file taxes S. How to file taxes possession, you can treat the business either as a sole proprietorship or a partnership. How to file taxes The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. How to file taxes A change in your reporting position will be treated as a conversion of the entity. How to file taxes Exception—Qualified joint venture. How to file taxes   If you and your spouse each materially participate as the only members of a jointly owned and operated business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. How to file taxes Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. How to file taxes For an explanation of "material participation," see the Instructions for Schedule C, line G. How to file taxes   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. How to file taxes Each of you must file a separate Schedule C or C-EZ and a separate Schedule SE. How to file taxes For more information, see Qualified Joint Venture in the Instructions for Schedule SE. How to file taxes Corporations. How to file taxes   In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. How to file taxes A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. How to file taxes A corporation can also take special deductions. How to file taxes   The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. How to file taxes However, shareholders cannot deduct any loss of the corporation. How to file taxes More information. How to file taxes   For more information on corporations, see Publication 542, Corporations. How to file taxes S corporations. How to file taxes   An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. How to file taxes Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. How to file taxes On their tax returns, the S corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. How to file taxes More information. How to file taxes   For more information on S corporations, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120S, U. How to file taxes S. How to file taxes Income Tax Return for an S Corporation. How to file taxes Limited liability company. How to file taxes   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. How to file taxes The members of an LLC are not personally liable for its debts. How to file taxes An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in regulations section 301. How to file taxes 7701-3. How to file taxes For more information, see the instructions for Form 8832, Entity Classification Election. How to file taxes Identification Numbers You must have a taxpayer identification number so the IRS can process your returns. How to file taxes The two most common kinds of taxpayer identification numbers are the social security number (SSN) and the employer identification number (EIN). How to file taxes An SSN is issued to individuals by the Social Security Administration (SSA) and is in the following format: 000–00–0000. How to file taxes An EIN is issued to individuals (sole proprietors), partnerships, corporations, and other entities by the IRS and is in the following format: 00–0000000. How to file taxes You must include your taxpayer identification number (SSN or EIN) on all returns and other documents you send to the IRS. How to file taxes You must also furnish your number to other persons who use your identification number on any returns or documents they send to the IRS. How to file taxes This includes returns or documents filed to report the following information. How to file taxes Interest, dividends, royalties, etc. How to file taxes , paid to you. How to file taxes Any amount paid to you as a dependent care provider. How to file taxes Certain other amounts paid to you that total $600 or more for the year. How to file taxes If you do not furnish your identification number as required, you may be subject to penalties. How to file taxes See Penalties, later. How to file taxes Employer Identification Number (EIN) EINs are used to identify the tax accounts of employers, certain sole proprietors, corporations, partnerships, estates, trusts, and other entities. How to file taxes If you don't already have an EIN, you need to get one if you: Have employees, Have a qualified retirement plan, Operate your business as a corporation or partnership, or File returns for: Employment taxes, or Excise taxes. How to file taxes Applying for an EIN. How to file taxes   You may apply for an EIN: Online—Click on the EIN link at www. How to file taxes irs. How to file taxes gov/businesses/small. How to file taxes The EIN is issued immediately once the application information is validated. How to file taxes By telephone at 1-800-829-4933. How to file taxes By mailing or faxing Form SS-4, Application for Employer Identification Number. How to file taxes When to apply. How to file taxes   You should apply for an EIN early enough to receive the number by the time you must file a return or statement or make a tax deposit. How to file taxes If you apply by mail, file Form SS-4 at least 4 weeks before you need an EIN. How to file taxes If you apply by telephone or through the IRS website, you can get an EIN immediately. How to file taxes If you apply by fax, you can get an EIN within 4 business days. How to file taxes   If you do not receive your EIN by the time a return is due, file your return anyway. How to file taxes Write “Applied for” and the date you applied for the number in the space for the EIN. How to file taxes Do not use your social security number as a substitute for an EIN on your tax returns. How to file taxes More than one EIN. How to file taxes   You should have only one EIN. How to file taxes If you have more than one EIN and are not sure which to use, contact the Internal Revenue Service Center where you file your return. How to file taxes Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. How to file taxes The IRS will tell you which number to use. How to file taxes More information. How to file taxes   For more information about EINs, see Publication 1635, Understanding Your EIN. How to file taxes Payee's Identification Number In the operation of a business, you will probably make certain payments you must report on information returns (discussed later under Information Returns). How to file taxes The forms used to report these payments must include the payee's identification number. How to file taxes Employee. How to file taxes   If you have employees, you must get an SSN from each of them. How to file taxes Record the name and SSN of each employee exactly as they are shown on the employee's social security card. How to file taxes If the employee's name is not correct as shown on the card, the employee should request a new card from the SSA. How to file taxes This may occur, for example, if the employee's name has changed due to marriage or divorce. How to file taxes   If your employee does not have an SSN, he or she should file Form SS-5, Application for a Social Security Card, with the SSA. How to file taxes This form is available at SSA offices or by calling 1-800-772-1213. How to file taxes It is also available from the SSA website at www. How to file taxes ssa. How to file taxes gov. How to file taxes Other payee. How to file taxes   If you make payments to someone who is not your employee and you must report the payments on an information return, get that person's SSN. How to file taxes If you make reportable payments to an organization, such as a corporation or partnership, you must get its EIN. How to file taxes   To get the payee's SSN or EIN, use Form W-9, Request for Taxpayer Identification Number and Certification. How to file taxes This form is available from IRS offices or by calling 1-800-829-3676. How to file taxes It is also available from the IRS website at IRS. How to file taxes gov. How to file taxes    If the payee does not provide you with an identification number, you may have to withhold part of the payments as backup withholding. How to file taxes For information on backup withholding, see the Form W-9 instructions and the General Instructions for Certain Information Returns. How to file taxes Tax Year You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. How to file taxes A tax year is usually 12 consecutive months. How to file taxes There are two kinds of tax years. How to file taxes Calendar tax year. How to file taxes A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. How to file taxes Fiscal tax year. How to file taxes A fiscal tax year is 12 consecutive months ending on the last day of any month except December. How to file taxes A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. How to file taxes If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. How to file taxes You must use a calendar tax year if: You keep no books. How to file taxes You have no annual accounting period. How to file taxes Your present tax year does not qualify as a fiscal year. How to file taxes You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations. How to file taxes For more information, see Publication 538, Accounting Periods and Methods. How to file taxes First-time filer. How to file taxes   If you have never filed an income tax return, you can adopt either a calendar tax year or a fiscal tax year. How to file taxes You adopt a tax year by filing your first income tax return using that tax year. How to file taxes You have not adopted a tax year if you merely did any of the following. How to file taxes Filed an application for an extension of time to file an income tax return. How to file taxes Filed an application for an employer identification number. How to file taxes Paid estimated taxes for that tax year. How to file taxes Changing your tax year. How to file taxes   Once you have adopted your tax year, you may have to get IRS approval to change it. How to file taxes To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. How to file taxes You may have to pay a fee. How to file taxes For more information, see Publication 538. How to file taxes Accounting Method An accounting method is a set of rules used to determine when and how income and expenses are reported. How to file taxes You choose an accounting method for your business when you file your first income tax return. How to file taxes There are two basic accounting methods. How to file taxes Cash method. How to file taxes Under the cash method, you report income in the tax year you receive it. How to file taxes You usually deduct or capitalize expenses in the tax year you pay them. How to file taxes Accrual method. How to file taxes Under an accrual method, you generally report income in the tax year you earn it, even though you may receive payment in a later year. How to file taxes You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year. How to file taxes For other methods, see Publication 538. How to file taxes If you need inventories to show income correctly, you must generally use an accrual method of accounting for purchases and sales. How to file taxes Inventories include goods held for sale in the normal course of business. How to file taxes They also include raw materials and supplies that will physically become a part of merchandise intended for sale. How to file taxes Inventories are explained in Publication 538. How to file taxes Certain small business taxpayers can use the cash method of accounting and can also account for inventoriable items as materials and supplies that are not incidental. How to file taxes For more information, see Publication 538. How to file taxes You must use the same accounting method to figure your taxable income and to keep your books. How to file taxes Also, you must use an accounting method that clearly shows your income. How to file taxes In general, any accounting method that consistently uses accounting principles suitable for your trade or business clearly shows income. How to file taxes An accounting method clearly shows income only if it treats all items of gross income and expense the same from year to year. How to file taxes More than one business. How to file taxes   When you own more than one business, you can use a different accounting method for each business if the method you use for each clearly shows your income. How to file taxes You must keep a complete and separate set of books and records for each business. How to file taxes Changing your method of accounting. How to file taxes   Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. How to file taxes A change in accounting method not only includes a change in your overall system of accounting, but also a change in the treatment of any material item. How to file taxes For examples of changes that require approval and information on how to get approval for the change, see Publication 538. How to file taxes Business Taxes The form of business you operate determines what taxes you must pay and how you pay them. How to file taxes The following are the four general kinds of business taxes. How to file taxes Income tax. How to file taxes Self-employment tax. How to file taxes Employment taxes. How to file taxes Excise taxes. How to file taxes See Table 2 for the forms you file to report these taxes. How to file taxes You may want to get Publication 509. How to file taxes It has tax calendars that tell you when to file returns and make tax payments. How to file taxes Income Tax All businesses except partnerships must file an annual income tax return. How to file taxes Partnerships file an information return. How to file taxes Which form you use depends on how your business is organized. How to file taxes See Table 2 to find out which return you have to file. How to file taxes The federal income tax is a pay-as-you-go tax. How to file taxes You must pay the tax as you earn or receive income during the year. How to file taxes An employee usually has income tax withheld from his or her pay. How to file taxes If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. How to file taxes If you are not required to make estimated tax payments, you may pay any tax due when you file your return. How to file taxes Table 2. How to file taxes Which Forms Must I File? IF you are a. How to file taxes . How to file taxes . How to file taxes   THEN you may be liable for. How to file taxes . How to file taxes . How to file taxes   Use Form. How to file taxes . How to file taxes . How to file taxes Sole proprietor   Income tax   1040 and Schedule C 1 or C-EZ (Schedule F 1 for farm business)     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES     Employment taxes:         • Social security and Medicare   taxes and income tax   withholding   941 or 944 (943 for farm employees)     • Federal unemployment (FUTA)   tax   940     Excise taxes   See Excise Taxes Partnership   Annual return of income   1065     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes Partner in a partnership (individual)   Income tax   1040 and Schedule E 2     Self-employment tax   1040 and Schedule SE     Estimated tax   1040-ES Corporation or S corporation   Income tax   1120 (corporation) 2  1120S (S corporation) 2     Estimated tax   1120-W (corporation only)     Employment taxes   Same as sole proprietor     Excise taxes   See Excise Taxes S corporation shareholder   Income tax   1040 and Schedule E 2     Estimated tax   1040-ES 1 File a separate schedule for each business. How to file taxes 2 Various other schedules may be needed. How to file taxes Estimated tax. How to file taxes   Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. How to file taxes Sole proprietors, partners, and S corporation shareholders. How to file taxes   You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. How to file taxes Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax. How to file taxes For more information, see Publication 505, Tax Withholding and Estimated Tax. How to file taxes Corporations. How to file taxes   You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. How to file taxes Use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. How to file taxes You must deposit the payments as explained later under Depositing Taxes. How to file taxes For more information, see Publication 542. How to file taxes Self-Employment Tax Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. How to file taxes Your payments of SE tax contribute to your coverage under the social security system. How to file taxes Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. How to file taxes You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies. How to file taxes Your net earnings from self-employment were $400 or more. How to file taxes You had church employee income of $108. How to file taxes 28 or more. How to file taxes Use Schedule SE (Form 1040) to figure your SE tax. How to file taxes For more information, see Publication 334, Tax Guide for Small Business. How to file taxes You can deduct a portion of your SE tax as an adjustment to income on your Form 1040. How to file taxes The Social Security Administration (SSA) time limit for posting self-employment income. How to file taxes   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. How to file taxes If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. How to file taxes The SSA will not change its records to increase your self-employment income. How to file taxes Employment Taxes This section briefly discusses the employment taxes you must pay, the forms you must file to report them, and other forms that must be filed when you have employees. How to file taxes Employment taxes include the following. How to file taxes Social security and Medicare taxes. How to file taxes Federal income tax withholding. How to file taxes Federal unemployment (FUTA) tax. How to file taxes If you have employees, you will need to get Publication 15, Circular E, Employer's Tax Guide. How to file taxes If you have agricultural employees, get Publication 51, Circular A, Agricultural Employer's Tax Guide. How to file taxes These publications explain your tax responsibilities as an employer. How to file taxes If you are not sure whether the people working for you are your employees, see Publication 15-A, Employer's Supplemental Tax Guide. How to file taxes That publication has information to help you determine whether an individual is an employee or an independent contractor. How to file taxes If you classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty. How to file taxes An independent contractor is someone who is self-employed. How to file taxes Generally, you do not have to withhold or pay any taxes on payments to an independent contractor. How to file taxes Federal Income, Social Security, and Medicare Taxes You generally must withhold federal income tax from your employee's wages. How to file taxes To figure how much federal income tax to withhold from each wage payment, use the employee's Form W-4 (discussed later under Hiring Employees) and the methods described in Publication 15. How to file taxes Social security and Medicare taxes pay for benefits that workers and their families receive under the Federal Insurance Contributions Act (FICA). How to file taxes Social security tax pays for benefits under the old-age, survivors, and disability insurance part of FICA. How to file taxes Medicare tax pays for benefits under the hospital insurance part of FICA. How to file taxes You withhold part of these taxes from your employee's wages and you pay a part yourself. How to file taxes To find out how much social security and Medicare tax to withhold and to pay, see Publication 15. How to file taxes Which form do I file?   Report these taxes on Form 941, Employer's QUARTERLY Federal Tax Return, or Form 944, Employer's ANNUAL Federal Tax Return. How to file taxes (Farm employers use Form 943, Employer's Annual Federal Tax Return for Agricultural Employees. How to file taxes ) Federal Unemployment (FUTA) Tax The federal unemployment tax is part of the federal and state program under the Federal Unemployment Tax Act (FUTA) that pays unemployment compensation to workers who lose their jobs. How to file taxes You report and pay FUTA tax separately from social security and Medicare taxes and withheld income tax. How to file taxes You pay FUTA tax only from your own funds. How to file taxes Employees do not pay this tax or have it withheld from their pay. How to file taxes Which form do I file?   Report federal unemployment tax on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. How to file taxes See Publication 15 to find out if you can use this form. How to file taxes Hiring Employees Have the employees you hire fill out Form I-9 and Form W-4. How to file taxes Form I-9. How to file taxes   You must verify that each new employee is legally eligible to work in the United States. How to file taxes Both you and the employee must complete the U. How to file taxes S. How to file taxes Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification. How to file taxes You can get the form from USCIS offices or from the USCIS website at www. How to file taxes uscis. How to file taxes gov. How to file taxes Call the USCIS at 1-800-375-5283 for more information about your responsibilities. How to file taxes Form W-4. How to file taxes   Each employee must fill out Form W-4, Employee's Withholding Allowance Certificate. How to file taxes You will use the filing status and withholding allowances shown on this form to figure the amount of income tax to withhold from your employee's wages. How to file taxes For more information, see Publication 15. How to file taxes Employees claiming more than 10 withholding allowances. How to file taxes   An employer of an employee who claims more than 10 withholding allowances for wages paid can use several methods of withholding. How to file taxes See section 16 of Publication 15. How to file taxes Form W-2 Wage Reporting After the calendar year is over, you must furnish copies of Form W-2, Wage and Tax Statement, to each employee to whom you paid wages during the year. How to file taxes You must also send copies to the Social Security Administration. How to file taxes See Information Returns, later, for more information on Form W-2. How to file taxes Excise Taxes This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following. How to file taxes Manufacture or sell certain products. How to file taxes Operate certain kinds of businesses. How to file taxes Use various kinds of equipment, facilities, or products. How to file taxes Receive payment for certain services. How to file taxes For more information on excise taxes, see Publication 510, Excise Taxes. How to file taxes Form 720. How to file taxes   The federal excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, consist of several broad categories of taxes, including the following. How to file taxes Environmental taxes. How to file taxes Communications and air transportation taxes. How to file taxes Fuel taxes. How to file taxes Tax on the first retail sale of heavy trucks, trailers, and tractors. How to file taxes Manufacturers taxes on the sale or use of a variety of different articles. How to file taxes Form 2290. How to file taxes   There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. How to file taxes The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. How to file taxes Report the tax on Form 2290, Heavy Highway Vehicle Use Tax Return. How to file taxes For more information, see the instructions for Form 2290. How to file taxes Form 730. How to file taxes   If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. How to file taxes Use Form 730, Monthly Tax Return for Wagers, to figure the tax on the wagers you receive. How to file taxes Form 11-C. How to file taxes   Use Form 11-C, Occupational Tax and Registration Return for Wagering, to register for any wagering activity and to pay the federal occupational tax on wagering. How to file taxes Depositing Taxes You generally have to deposit employment taxes, certain excise taxes, corporate income tax, and S corporation taxes before you file your return. How to file taxes Generally, taxpayers are required to deposit taxes through the Electronic Federal Tax Payment System (EFTPS). How to file taxes Any business that has a federal tax obligation and requests a new EIN will automatically be enrolled in EFTPS. How to file taxes Through the mail, the business will receive an EFTPS PIN package that contains instructions for activating its EFTPS enrollment. How to file taxes Information Returns If you make or receive payments in your business, you may have to report them to the IRS on information returns. How to file taxes The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. How to file taxes You must give a copy of each information return you are required to file to the recipient or payer. How to file taxes In addition to the forms described below, you may have to use other returns to report certain kinds of payments or transactions. How to file taxes For more details on information returns and when you have to file them, see the General Instructions for Certain Information Returns. How to file taxes Form 1099-MISC. How to file taxes   Use Form 1099-MISC, Miscellaneous Income, to report certain payments you make in your trade or business. How to file taxes These payments include the following items. How to file taxes Payments of $600 or more for services performed for your business by people not treated as your employees, such as subcontractors, attorneys, accountants, or directors. How to file taxes Rent payments of $600 or more, other than rents paid to real estate agents. How to file taxes Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows. How to file taxes Royalty payments of $10 or more. How to file taxes Payments to certain crew members by operators of fishing boats. How to file taxes You also use Form 1099-MISC to report your sales of $5,000 or more of consumer goods to a person for resale anywhere other than in a permanent retail establishment. How to file taxes Form W-2. How to file taxes   You must file Form W-2, Wage and Tax Statement, to report payments to your employees, such as wages, tips, and other compensation, withheld income, social security, and Medicare taxes. How to file taxes For more information on what to report on Form W-2, see the Instructions for Forms W-2 and W-3. How to file taxes Form 8300. How to file taxes   You must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, if you receive more than $10,000 in cash in one transaction or two or more related business transactions. How to file taxes Cash includes U. How to file taxes S. How to file taxes and foreign coin and currency. How to file taxes It also includes certain monetary instruments such as cashier's and traveler's checks and money orders. How to file taxes For more information, see Publication 1544, Reporting Cash Payments of Over $10,000 (Received in a Trade or Business). How to file taxes Penalties The law provides penalties for not filing returns or paying taxes as required. How to file taxes Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement. How to file taxes Failure to file tax returns. How to file taxes   If you do not file your tax return by the due date, you may have to pay a penalty. How to file taxes The penalty is based on the tax not paid by the due date. How to file taxes See your tax return instructions for more information about this penalty. How to file taxes Failure to pay tax. How to file taxes   If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid. How to file taxes For more information, see your tax return instructions. How to file taxes Failure to withhold, deposit, or pay taxes. How to file taxes   If you do not withhold income, social security, or Medicare taxes from employees, or if you withhold taxes but do not deposit them or pay them to the IRS, you may be subject to a penalty of the unpaid tax, plus interest. How to file taxes You may also be subject to penalties if you deposit the taxes late. How to file taxes For more information, see Publication 15. How to file taxes Failure to follow information reporting requirements. How to file taxes   The following penalties apply if you are required to file information returns. How to file taxes For more information, see the General Instructions for Certain Information Returns. How to file taxes Failure to file information returns. How to file taxes A penalty applies if you do not file information returns by the due date, if you do not include all required information, or if you report incorrect information. How to file taxes Failure to furnish correct payee statements. How to file taxes A penalty applies if you do not furnish a required statement to a payee by the due date, if you do not include all required information, or if you report incorrect information. How to file taxes Waiver of penalty. How to file taxes   These penalties will not apply if you can show that the failures were due to reasonable cause and not willful neglect. How to file taxes   In addition, there is no penalty for failure to include all the required information, or for including incorrect information, on a de minimis number of information returns if you correct the errors by August 1 of the year the returns are due. How to file taxes (To be considered de minimis, the number of returns cannot exceed the greater of 10 or ½ of 1% of the total number of returns you are required to file for the year. How to file taxes ) Failure to supply taxpayer identification number. How to file taxes   If you do not include your taxpayer identification number (SSN or EIN) or the taxpayer identification number of another person where required on a return, statement, or other document, you may be subject to a penalty of $50 for each failure. How to file taxes You may also be subject to the $50 penalty if you do not give your taxpayer identification number to another person when it is required on a return, statement, or other document. How to file taxes Business Expenses You can deduct business expenses on your income tax return. How to file taxes These are the current operating costs of running your business. How to file taxes To be deductible, a business expense must be both ordinary and necessary. How to file taxes An ordinary expense is one that is common and accepted in your field of business, trade, or profession. How to file taxes A necessary expense is one that is helpful and appropriate for your business, trade, or profession. How to file taxes An expense does not have to be indispensable to be considered necessary. How to file taxes The following are brief explanations of some expenses that are of interest to people starting a business. How to file taxes There are many other expenses that you may be able to deduct. How to file taxes See your form instructions and Publication 535, Business Expenses. How to file taxes Business Start-Up Costs Business start-up costs are the expenses you incur before you actually begin business operations. How to file taxes Your business start-up costs will depend on the type of business you are starting. How to file taxes They may include costs for advertising, travel, surveys, and training. How to file taxes These costs are generally capital expenses. How to file taxes You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). How to file taxes You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred after October 22, 2004. How to file taxes The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. How to file taxes Any remaining cost must be amortized. How to file taxes For more information about amortizing start-up and organizational costs, see chapter 7 in Publication 535. How to file taxes Depreciation If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. How to file taxes You must spread the cost over more than one tax year and deduct part of it each year. How to file taxes This method of deducting the cost of business property is called depreciation. How to file taxes Business property you must depreciate includes the following items. How to file taxes Office furniture. How to file taxes Buildings. How to file taxes Machinery and equipment. How to file taxes You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. How to file taxes This deduction is known as the “section 179 deduction. How to file taxes ” For more information about depreciation and the section 179 deduction, see Publication 946, How To Depreciate Property. How to file taxes Depreciation must be taken in the year it is allowable. How to file taxes Allowable depreciation not taken in a prior year cannot be taken in the current year. How to file taxes If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040X, Amended U. How to file taxes S. How to file taxes Individual Income Tax Return, or by changing your accounting method. How to file taxes For more information on how to correct depreciation deductions, see chapter 1 in Publication 946. How to file taxes Business Use of Your Home To deduct expenses related to the business use of part of your home, you must meet specific requirements. How to file taxes Even then, your deduction may be limited. How to file taxes To qualify to claim expenses for business use of your home, you must meet both the following tests. How to file taxes Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use, later), Regular, For your trade or business, AND The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) you use in connection with your trade or business. How to file taxes Exclusive use. How to file taxes   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. How to file taxes The area used for business can be a room or other separately identifiable space. How to file taxes The space does not need to be marked off by a permanent partition. How to file taxes   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. How to file taxes Exceptions to exclusive use. How to file taxes   You do not have to meet the exclusive use test if either of the following applies. How to file taxes You use part of your home for the storage of inventory or product samples. How to file taxes You use part of your home as a daycare facility. How to file taxes For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). How to file taxes Principal place of business. How to file taxes   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. How to file taxes You use it exclusively and regularly for administrative or management activities of your trade or business. How to file taxes You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. How to file taxes   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. How to file taxes The relative importance of the activities performed at each location. How to file taxes If the relative importance factor does not determine your principal place of business, the time spent at each location. How to file taxes    If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. How to file taxes However, for other ways to qualify to deduct home office expenses, see Publication 587. How to file taxes Which form do I file?   If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. How to file taxes If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587. How to file taxes More information. How to file taxes   For more information about business use of your home, see Publication 587. How to file taxes Car and Truck Expenses If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. How to file taxes You generally can deduct either your actual expenses or the standard mileage rate. How to file taxes Actual expenses. How to file taxes   If you deduct actual expenses, you can deduct the cost of the following items: Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. How to file taxes You can divide your expenses based on the miles driven for each purpose. How to file taxes Example. How to file taxes You are the sole proprietor of a flower shop. How to file taxes You drove your van 20,000 miles during the year. How to file taxes 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. How to file taxes You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. How to file taxes Standard mileage rate. How to file taxes   Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. How to file taxes You can use the standard mileage rate for a vehicle you own or lease. How to file taxes The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. How to file taxes It is announced annually by the IRS. How to file taxes To figure your deduction, multiply your business miles by the standard mileage rate for the year. How to file taxes    Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. How to file taxes However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes. How to file taxes Choosing the standard mileage rate. How to file taxes   If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. How to file taxes In later years, you can choose to use either the standard mileage rate or actual expenses. How to file taxes   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). How to file taxes Additional information. How to file taxes   For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. How to file taxes Recordkeeping This part explains why you must keep records, what kinds of records you must keep, and how to keep them. How to file taxes It also explains how long you must keep your records for federal tax purposes. How to file taxes A sample recordkeeping system is illustrated at the end of this part. How to file taxes Why Keep Records? Everyone in business must keep records. How to file taxes Good records will help you do the following. How to file taxes Monitor the progress of your business. How to file taxes   You need good records to monitor the progress of your business. How to file taxes Records can show whether your business is improving, which items are selling, or what changes you need to make. How to file taxes Good records can increase the likelihood of business success. How to file taxes Prepare your financial statements. How to file taxes   You need good records to prepare accurate financial statements. How to file taxes These include income (profit and loss) statements and balance sheets. How to file taxes These statements can help you in dealing with your bank or creditors and help you manage your business. How to file taxes An income statement shows the income and expenses of the business for a given period of time. How to file taxes A balance sheet shows the assets, liabilities, and your equity in the business on a given date. How to file taxes Identify source of receipts. How to file taxes   You will receive money or property from many sources. How to file taxes Your records can identify the source of your receipts. How to file taxes You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. How to file taxes Keep track of deductible expenses. How to file taxes   You may forget expenses when you prepare your tax return unless you record them when they occur. How to file taxes Prepare your tax returns. How to file taxes   You need good records to prepare your tax returns. How to file taxes These records must support the income, expenses, and credits you report. How to file taxes Generally, these are the same records you use to monitor your business and prepare your financial statements. How to file taxes Support items reported on tax returns. How to file taxes   You must keep your business records available at all times for inspection by the IRS. How to file taxes If the IRS examines any of your tax returns, you may be asked to explain the items reported. How to file taxes A complete set of records will speed up the examination. How to file taxes Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. How to file taxes You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. How to file taxes The business you are in affects the type of records you need to keep for federal tax purposes. How to file taxes You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. How to file taxes See Accounting Method, earlier. How to file taxes If you are in more than one business, you should keep a complete and separate set of records for each business. How to file taxes A corporation should keep minutes of board of directors' meetings. How to file taxes Your recordkeeping system should include a summary of your business transactions. How to file taxes This summary is ordinarily made in your books (for example, accounting journals and ledgers). How to file taxes Your books must show your gross income, as well as your deductions and credits. How to file taxes For most small businesses, the business checkbook (discussed later) is the main source for entries in the business books. How to file taxes In addition, you must keep supporting documents, explained later. How to file taxes Electronic records. How to file taxes   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. How to file taxes When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. How to file taxes An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. How to file taxes The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. How to file taxes All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. How to file taxes Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. How to file taxes   The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. How to file taxes You still have the responsibility of retaining any other books and records that are required to be retained. How to file taxes   The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. How to file taxes This test is not considered an examination and the results must be shared with you. How to file taxes If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. How to file taxes If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copy books and records in a manner that allows you and the IRS to determine your correct tax. How to file taxes For details on electronic storage system requirements, see Revenue Procedure 97-22, available in Internal Revenue Bulletin 1997-13. How to file taxes Supporting Documents Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. How to file taxes Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. How to file taxes These documents contain information you need to record in your books. How to file taxes It is important to keep these documents because they support the entries in your books and on your tax return. How to file taxes Keep them in an orderly fashion and in a safe place. How to file taxes For instance, organize them by year and type of income or expense. How to file taxes Gross receipts. How to file taxes   Gross receipts are the income you receive from your business. How to file taxes You should keep supporting documents that show the amounts and sources of your gross receipts. How to file taxes Documents that show gross receipts include the following. How to file taxes Cash register tapes. How to file taxes Bank deposit slips. How to file taxes Receipt books. How to file taxes Invoices. How to file taxes Credit card charge slips. How to file taxes Forms 1099-MISC. How to file taxes Purchases. How to file taxes   Purchases are the items you buy and resell to customers. How to file taxes If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. How to file taxes Your supporting documents should show the amount paid and that the amount was for purchases. How to file taxes Documents for purchases include the following. How to file taxes Canceled checks. How to file taxes Cash register tape receipts. How to file taxes Credit card sales slips. How to file taxes Invoices. How to file taxes These records will help you determine the value of your inventory at the end of the year. How to file taxes See Publication 538 for information on methods for valuing inventory. How to file taxes Expenses. How to file taxes   Expenses are the costs you incur (other than purchases) to carry on your business. How to file taxes Your supporting documents should show the amount paid and that the amount was for a business expense. How to file taxes Documents for expenses include the following. How to file taxes Canceled checks. How to file taxes Cash register tapes. How to file taxes Account statements. How to file taxes Credit card sales slips. How to file taxes Invoices. How to file taxes Petty cash slips for small cash payments. How to file taxes    A petty cash fund allows you to make small payments without having to write checks for small amounts. How to file taxes Each time you make a payment from this fund, you should make out a petty cash slip and attach it to your receipt as proof of payment. How to file taxes Travel, transportation, entertainment, and gift expenses. How to file taxes   Specific recordkeeping rules apply to these expenses. How to file taxes For more information, see Publication 463. How to file taxes Employment taxes. How to file taxes   There are specific employment tax records you must keep. How to file taxes For a list, see Publication 15. How to file taxes Assets. How to file taxes   Assets are the property, such as machinery and furniture you own and use in your business. How to file taxes You must keep records to verify certain information about your business assets. How to file taxes You need records to figure the annual depreciation and the gain or loss when you sell the assets. How to file taxes Your records should show the following information. How to file taxes When and how you acquired the asset. How to file taxes Purchase price. How to file taxes Cost of any improvements. How to file taxes Section 179 deduction taken. How to file taxes Deductions taken for depreciation. How to file taxes Deductions taken for casualty losses, such as losses resulting from fires or storms. How to file taxes How you used the asset. How to file taxes When and how you disposed of the asset. How to file taxes Selling price. How to file taxes Expenses of sale. How to file taxes   The following documents may show this information. How to file taxes Purchase and sales invoices. How to file taxes Real estate closing statements. How to file taxes Canceled checks. How to file taxes What if I don't have a canceled check?   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. How to file taxes These include account statements prepared for the financial institution by a third party. How to file taxes These account statements must be highly legible. How to file taxes The following table lists acceptable account statements. How to file taxes  IF payment is by. How to file taxes . How to file taxes . How to file taxes THEN the statement must show the. How to file taxes . How to file taxes . How to file taxes Check Check number. How to file taxes Amount. How to file taxes Payee's name. How to file taxes Date the check amount was posted to the account by the financial institution. How to file taxes Electronic funds transfer Amount transferred. How to file taxes Payee's name. How to file taxes Date the transfer was posted to the account by the financial institution. How to file taxes Credit card Amount charged. How to file taxes Payee's name. How to file taxes Transaction date. How to file taxes    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. How to file taxes You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. How to file taxes Recording Business Transactions A good recordkeeping system includes a summary of your business transactions. How to file taxes (Your business transactions are shown on the supporting documents just discussed. How to file taxes ) Business transactions are ordinarily summarized in books called journals and ledgers. How to file taxes You can buy them at your local stationery or office supply store. How to file taxes A journal is a book where you record each business transaction shown on your supporting documents. How to file taxes You may have to keep separate journals for transactions that occur frequently. How to file taxes A ledger is a book that contains the totals from all of your journals. How to file taxes It is organized into different accounts. How to file taxes Whether you keep journals and ledgers and how you keep them depends on the type of business you are in. How to file taxes For example, a recordkeeping system for a small business might include the following items. How to file taxes Business checkbook. How to file taxes Daily summary of cash receipts. How to file taxes Monthly summary of cash receipts. How to file taxes Check disbursements journal. How to file taxes Depreciation worksheet. How to file taxes Employee compensation record. How to file taxes The business checkbook is explained next. How to file taxes The other items are illustrated later under Sample Record System. How to file taxes The system you use to record business transactions will be more effective if you follow good recordkeeping practices. How to file taxes For example, record expenses when they occur, and identify the source of recorded receipts. How to file taxes Generally, it is best to record transactions on a daily basis. How to file taxes Business checkbook. How to file taxes   One of the first things you should do when you start a business is open a business checking account. How to file taxes You should keep your business account separate from your personal checking account. How to file taxes   The business checkbook is your basic source of information for recording your business expenses. How to file taxes You should deposit all daily receipts in your business checking account. How to file taxes You should check your account for errors by reconciling it. How to file taxes See Reconciling the checking account, later. How to file taxes   Consider using a checkbook that allows enough space to identify the source of deposits as business income, personal funds, or loans. How to file taxes You should also note on the deposit slip the source of the deposit and keep copies of all slips. How to file taxes   You should make all payments by check to document business expenses. How to file taxes Write checks payable to yourself only when making withdrawals from your business for personal use. How to file taxes Avoid writing checks payable to cash. How to file taxes If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. How to file taxes If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. How to file taxes    Use the business account for business purposes only. How to file taxes Indicate the source of deposits and the type of expense in the checkbook. How to file taxes Reconciling the checking account. How to file taxes   When you receive your bank statement, make sure the statement, your checkbook, and your books agree. How to file taxes The statement balance may not agree with the balance in your checkbook and books if the statement: Includes bank charges you did not enter in your books and subtract from your checkbook balance, or Does not include deposits made after the statement date or checks that did not clear your account before the statement date. How to file taxes   By reconciling your checking account, you will: Verify how much money you have in the account, Make sure that your checkbook and books reflect all bank charges and the correct balance in the checking account, and Correct any errors in your bank statement, checkbook, and books. How to file taxes    You should reconcile your checking account each month. How to file taxes     Before you reconcile your monthly bank statement, check your own figures. How to file taxes Begin with the balance shown in your checkbook at the end of the previous month. How to file taxes To this balance, add the total cash deposited during the month and subtract the total cash disbursements. How to file taxes   After checking your figures, the result should agree with your checkbook balance at the end of the month. How to file taxes If the result does not agree, you may have made an error in recording a check or deposit. How to file taxes You can find the error by doing the following. How to file taxes Adding the amounts on your check stubs and comparing that total with the total in the “amount of check” column in your check disbursements journal. How to file taxes If the totals do not agree, check the individual amounts to see if an error was made in your check stub record or in the related entry in your check disbursements journal. How to file taxes Adding the deposit amounts in your checkbook. How to file taxes Compare that total with the monthly total in your cash receipt book, if you have one. How to file taxes If the totals do not agree, check the individual amounts to find any errors. How to file taxes   If your checkbook and journal entries still disagree, then refigure the running balance in your checkbook to make sure additions and subtractions are correct. How to file taxes   When your checkbook balance agrees with the balance figured from the journal entries, you may begin reconciling your checkbook with the bank statement. How to file taxes Many banks print a reconciliation worksheet on the back of the statement. How to file taxes   To reconcile your account, follow these steps. How to file taxes Compare the deposits listed on the bank statement with the deposits shown in your checkbook. How to file taxes Note all differences in the dollar amounts. How to file taxes Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. How to file taxes Note all differences in the dollar amounts. How to file taxes Mark the check number in the checkbook as having cleared the bank. How to file taxes After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks. How to file taxes Prepare a bank reconciliation. How to file taxes One is illustrated later under Sample Record System. How to file taxes Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. How to file taxes At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. How to file taxes If you still have differences, check the previous steps to find the errors. How to file taxes   Table 3. How to file taxes Period of Limitations IF you. How to file taxes . How to file taxes . How to file taxes   THEN the period is. How to file taxes . How to file taxes . How to file taxes 1. How to file taxes Owe additional tax and situations (2), (3), and (4), below, do not apply to you   3 years 2. How to file taxes Do not report income that you should report and it is more than 25% of the gross income shown on the return   6 years 3. How to file taxes File a fraudulent return   Not limited 4. How to file taxes Do not file a return   Not limited 5. How to file taxes File a claim for credit or refund after you filed your return   Later of: 3 years or  2 years after tax   was paid 6. How to file taxes File a claim for a loss from worthless securities or a bad debt deduction   7 years Bookkeeping System You must decide whether to use a single-entry or a double-entry bookkeeping system. How to file taxes The single-entry system of bookkeeping is the simplest to maintain, but it may not be suitable for everyone. How to file taxes You may find the double-entry system better because it has built-in checks and balances to assure accuracy and control. How to file taxes Single-entry. How to file taxes   A single-entry system is based on the income statement (profit or loss statement). How to file taxes It can be a simple and practical system if you are starting a small business. How to file taxes The system records the flow of income and expenses through the use of: A daily summary of cash receipts, and Monthly summaries of cash receipts and disbursements. How to file taxes Double-entry. How to file taxes   A double-entry bookkeeping system uses journals and ledgers. How to file taxes Transactions are first entered in a journal and then posted to ledger accounts. How to file taxes These accounts show income, expenses, assets (property a business owns), liabilities (debts of a business), and net worth (excess of assets over liabilities). How to file taxes You close income and expense accounts at the end of each tax year. How to file taxes You keep asset, liability, and net worth accounts open on a permanent basis. How to file taxes   In the double-entry system, each account has a left side for debits and a right side for credits. How to file taxes It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another. How to file taxes   Under this system, the total debits must equal the total credits after you post the journal entries to the ledger accounts. How to file taxes If the amounts do not balance, you have made an error and you must find and correct it. How to file taxes   An example of a journal entry exhibiting a payment of rent in October is shown next. How to file taxes General Journal Date Description of Entry Debit  Credit Oct. How to file taxes 5 Rent expense 780. How to file taxes 00     Cash   780. How to file taxes 00                 Computerized System There are computer software packages you can use for recordkeeping. How to file taxes They can be purchased in many retail stores. How to file taxes These packages are very helpful and relatively easy to use; they require very little knowledge of bookkeeping and accounting. How to file taxes If you use a computerized system, you must be able to produce sufficient legible records to support and verify entries made on your return and determine your correct tax liability. How to file taxes To meet this qualification, the machine-sensible records must reconcile with your books and return. How to file taxes These records must provide enough detail to identify the underlying source documents. How to file taxes You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system. How to file taxes This documentation must be sufficiently detailed to show all of the following items. How to file taxes Functions being performed as the data flows through the system. How to file taxes Controls used to ensure accurate and reliable processing. How to file taxes Controls used to prevent the unauthorized addition, alteration, or deletion of retained records. How to file taxes Charts of accounts and detailed account descriptions. How to file taxes See Revenue Procedure 98-25 in Cumulative Bulletin 1998-1 for more information. How to file taxes How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. How to file taxes Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitations for that return runs out. How to file taxes The period of limitations is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. How to file taxes Table 3 contains the periods of limitations that apply to income tax returns. How to file taxes Unless otherwise stated, the years refer to the period after the return was filed. How to file taxes Returns filed before the due date are treated as filed on the due date. How to file taxes Keep copies of your filed tax returns. How to file taxes They help in preparing future tax returns and making computations if you file an amended return. How to file taxes Employment taxes. How to file taxes   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. How to file taxes For more information about recordkeeping for employment taxes, see Publication 15. How to file taxes Assets. How to file taxes   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. How to file taxes You must keep these records to figure any depreciation, amortization, or depletion deduction, and to figure your basis for computing gain or loss when you sell or otherwise dispose of the property. How to file taxes   Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. How to file taxes You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. How to file taxes Records for nontax purposes. How to file taxes   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. How to file taxes For example, your insurance company or creditors may require you to keep them longer than the IRS does. How to file taxes Sample Record System This example illustrates a single-entry system used by Henry Brown, who is the sole proprietor of a small automobile body shop. How to file taxes Henry uses part-time help, has no inventory of items held for sale, and uses the cash method of accounting. How to file taxes These sample records should not be viewed as a recommendation of how to keep your records. How to file taxes They are intended only to show how one business keeps its records. How to file taxes 1. How to file taxes Daily Summary of Cash Receipts This summary is a record of cash sales for the day. How to file taxes It accounts for cash at the end of the day over the amount in the Change and Petty Cash Fund at the beginning of the day. How to file taxes Henry takes the cash sales entry from his cash register tape. How to file taxes If he had no cash register, he would simply total his cash sale slips and any other cash received that day. How to file taxes He carries the total receipts shown in this summary for January 3 ($267. How to file taxes 80), including cash sales ($263. How to file taxes 60) and sales tax ($4. How to file taxes 20), to the Monthly Summary of Cash Receipts. How to file taxes Petty cash fund. How to file taxes   Henry uses a petty cash fund to make small payments without having to write checks for small amounts. How to file taxes Each time he makes a payment from this fund, he makes out a petty cash slip and attaches it to his receipt as proof of payment. How to file taxes He sets up a fixed amount ($50) in his petty cash fund. How to file taxes The total of the unspent petty cash and the amounts on the petty cash slips should equal the fixed amount of the fund. How to file taxes When the totals on the petty cash slips approach the fixed amount, he brings the cash in the fund back to the fixed amount by writing a check to “Petty Cash” for the total of the outstanding slips. How to file taxes (See the Check Disbursements Journal entry for check number 92. How to file taxes ) This restores the fund to its fixed amount of $50. How to file taxes He then summarizes the slips and enters them in the proper columns in the monthly check disbursements journal. How to file taxes 2. How to file taxes Monthly Summary of Cash Receipts This shows the income activity for the month. How to file taxes Henry carries the total monthly net sales shown in this summary for January ($4,865. How to file taxes 05) to his Annual Summary. How to file taxes To figure total monthly net sales, Henry reduces the total monthly receipts by the sales tax imposed on his customers and turned over to the state. How to file taxes He cannot take a deduction for sales tax turned over to the state because he only collected the tax. How to file taxes He does not include the tax in his income. How to file taxes 3. How to file taxes Check Disbursements Journal Henry enters checks drawn on the business checking account in the Check Disbursements Journal each day. How to file taxes All checks are prenumbered and each check number is listed and accounted for in the column provided in the journal. How to file taxes Frequent expenses have their own headings across the sheet. How to file taxes He enters in a separate column expenses that require comparatively numerous or large payments each month, such as materials, gross payroll, and rent. How to file taxes Under the General Accounts column, he enters small expenses that normally have only one or two monthly payments, such as licenses and postage. How to file taxes Henry does not pay personal or nonbusiness expenses by checks drawn on the business account. How to file taxes If he did, he would record them in the journal, even though he could not deduct them as business expenses. How to file taxes Henry carries the January total of expenses for materials ($1,083. How to file taxes 50) to the Annual Summary. How to file taxes Similarly, he enters the monthly total of expenses for telephone, truck/auto, etc. How to file taxes , in the appropriate columns of that summary. How to file taxes 4. How to file taxes Employee Compensation Record This record shows the following information. How to file taxes The number of hours Henry's employee worked in a pay period. How to file taxes The employee's total pay for the period. How to file taxes The deductions Henry withheld in figuring the employee's net pay. How to file taxes The monthly gross payroll. How to file taxes Henry carries the January gross payroll ($520) to the Annual Summary. How to file taxes 5. How to file taxes Annual Summary This annual summary of monthly cash receipts and expense totals provides the final amounts to enter on Henry's tax return. How to file taxes He figures the cash receipts total from the total of monthly cash receipts shown in the Monthly Summary of Cash Receipts. How to file taxes He figures the expense totals from the totals of monthly expense items shown in the Check Disbursements Journal. How to file taxes As in the journal, he keeps each major expense in a separate column. How to file taxes Henry carries the cash receipts total shown in the annual summary ($47,440. How to file taxes 9