File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

Hrblock Com

Il 1040x2011 Tax FormsHow To File Taxes Online2013 Ohio 1040ez InstructionsTurbotax Military MembersAmended Tax FormState Tax Return FreeFill 1040x Form OnlineIrs Tax Forms 1040xIrs Forms For 20121040 Tax Form 2012Free Federal And State Efile 2013Easy Tax FormHow To Fill Out 1040ezTurbotax Free State Efile Coupon2012 Irs Tax FormsEfile 7004 Tax ExtensionFiling State Tax ReturnsH 7 R Block Free File2013 Form 1040ez InstructionsAmend Your Tax ReturnForm 1040 2010Www 1040ezAmend 10402011 Ez Tax FormHow To File A 2012 Tax ReturnInstructions For 1040ez FormTax Cut Hr BlockFile Free 2012 Tax Return2011 1040aFile Irs Extension1040 Estimated Tax FormHow To File 2010 Taxes Online For FreeBack Tax DebtFile My Taxes OnlineHow To Refile A Tax ReturnHow To File An Amended Tax Return For 2012File 1040x Online FreeEz 1040 Tax FormState Income Tax Free Filing

Hrblock Com

Hrblock com Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. Hrblock com General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. Hrblock com Several assets. Hrblock com Special situations. Hrblock com Schedule D (Form 1040). Hrblock com Form 4797. Hrblock com How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Hrblock com The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. Hrblock com The installment sales method cannot be used for the following. Hrblock com Sale of inventory. Hrblock com   The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. Hrblock com See Sale of a Business under Other Rules, later. Hrblock com Dealer sales. Hrblock com   Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. Hrblock com This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. Hrblock com However, the rule does not apply to an installment sale of property used or produced in farming. Hrblock com Special rule. Hrblock com   Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. Hrblock com For more information, see section 453(l). Hrblock com Stock or securities. Hrblock com   You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. Hrblock com You must report the entire gain on the sale in the year in which the trade date falls. Hrblock com Installment obligation. Hrblock com   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Hrblock com General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Hrblock com See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. Hrblock com Sale at a loss. Hrblock com   If your sale results in a loss, you cannot use the installment method. Hrblock com If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. Hrblock com Unstated interest. Hrblock com   If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. Hrblock com See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Hrblock com Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. Hrblock com Each payment on an installment sale usually consists of the following three parts. Hrblock com Interest income. Hrblock com Return of your adjusted basis in the property. Hrblock com Gain on the sale. Hrblock com In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Hrblock com You do not include in income the part that is the return of your basis in the property. Hrblock com Basis is the amount of your investment in the property for installment sale purposes. Hrblock com Interest Income You must report interest as ordinary income. Hrblock com Interest is generally not included in a down payment. Hrblock com However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Hrblock com Interest provided in the agreement is called stated interest. Hrblock com If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Hrblock com See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. Hrblock com Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Hrblock com A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). Hrblock com Figuring adjusted basis for installment sale purposes. Hrblock com   You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. Hrblock com When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Hrblock com Worksheet A. Hrblock com Figuring Adjusted Basis and Gross Profit Percentage 1. Hrblock com Enter the selling price for the property   2. Hrblock com Enter your adjusted basis for the property     3. Hrblock com Enter your selling expenses     4. Hrblock com Enter any depreciation recapture     5. Hrblock com Add lines 2, 3, and 4. Hrblock com  This is your adjusted basis for installment sale purposes   6. Hrblock com Subtract line 5 from line 1. Hrblock com If zero or less, enter -0-. Hrblock com  This is your gross profit     If the amount entered on line 6 is zero, stop here. Hrblock com You cannot use the installment method. Hrblock com   7. Hrblock com Enter the contract price for the property   8. Hrblock com Divide line 6 by line 7. Hrblock com This is your gross profit percentage   Selling price. Hrblock com   The selling price is the total cost of the property to the buyer and includes any of the following. Hrblock com Any money you are to receive. Hrblock com The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). Hrblock com Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Hrblock com Any of your selling expenses the buyer pays. Hrblock com   Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Hrblock com Adjusted basis for installment sale purposes. Hrblock com   Your adjusted basis is the total of the following three items. Hrblock com Adjusted basis. Hrblock com Selling expenses. Hrblock com Depreciation recapture. Hrblock com Adjusted basis. Hrblock com   Basis is your investment in the property for installment sale purposes. Hrblock com The way you figure basis depends on how you acquire the property. Hrblock com The basis of property you buy is generally its cost. Hrblock com The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Hrblock com   While you own property, various events may change your original basis. Hrblock com Some events, such as adding rooms or making permanent improvements, increase basis. Hrblock com Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Hrblock com The result is adjusted basis. Hrblock com   For more information on how to figure basis and adjusted basis, see Publication 551. Hrblock com For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. Hrblock com Selling expenses. Hrblock com   Selling expenses relate to the sale of the property. Hrblock com They include commissions, attorney fees, and any other expenses paid on the sale. Hrblock com Selling expenses are added to the basis of the sold property. Hrblock com Depreciation recapture. Hrblock com   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Hrblock com See Depreciation Recapture Income under Other Rules, later. Hrblock com Gross profit. Hrblock com   Gross profit is the total gain you report on the installment method. Hrblock com   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Hrblock com If the property you sold was your home, subtract from the gross profit any gain you can exclude. Hrblock com See Sale of Your Home , later, under Reporting Installment Sale Income. Hrblock com Contract price. Hrblock com   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Hrblock com Gross profit percentage. Hrblock com   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Hrblock com This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Hrblock com   The gross profit percentage generally remains the same for each payment you receive. Hrblock com However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. Hrblock com Example. Hrblock com You sell property at a contract price of $6,000 and your gross profit is $1,500. Hrblock com Your gross profit percentage is 25% ($1,500 ÷ $6,000). Hrblock com After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Hrblock com The remainder (balance) of each payment is the tax-free return of your adjusted basis. Hrblock com Amount to report as installment sale income. Hrblock com   Multiply the payments you receive each year (less interest) by the gross profit percentage. Hrblock com The result is your installment sale income for the tax year. Hrblock com In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Hrblock com A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Hrblock com For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. Hrblock com Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. Hrblock com You then must refigure the gross profit percentage for the remaining payments. Hrblock com Refigure your gross profit using Worksheet B. Hrblock com You will spread any remaining gain over future installments. Hrblock com Worksheet B. Hrblock com New Gross Profit Percentage — Selling Price Reduced 1. Hrblock com Enter the reduced selling  price for the property   2. Hrblock com Enter your adjusted  basis for the  property     3. Hrblock com Enter your selling  expenses     4. Hrblock com Enter any depreciation  recapture     5. Hrblock com Add lines 2, 3, and 4. Hrblock com   6. Hrblock com Subtract line 5 from line 1. Hrblock com  This is your adjusted  gross profit   7. Hrblock com Enter any installment sale  income reported in  prior year(s)   8. Hrblock com Subtract line 7 from line 6   9. Hrblock com Future installments   10. Hrblock com Divide line 8 by line 9. Hrblock com  This is your new gross profit percentage*   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Hrblock com Example. Hrblock com In 2011, you sold land with a basis of $40,000 for $100,000. Hrblock com Your gross profit was $60,000. Hrblock com You received a $20,000 down payment and the buyer's note for $80,000. Hrblock com The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. Hrblock com Your gross profit percentage is 60%. Hrblock com You reported a gain of $12,000 on each payment received in 2011 and 2012. Hrblock com In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. Hrblock com The new gross profit percentage, 46. Hrblock com 67%, is figured on Example—Worksheet B. Hrblock com You will report a gain of $7,000 (46. Hrblock com 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. Hrblock com Example — Worksheet B. Hrblock com New Gross Profit Percentage — Selling Price Reduced 1. Hrblock com Enter the reduced selling  price for the property 85,000 2. Hrblock com Enter your adjusted  basis for the  property 40,000   3. Hrblock com Enter your selling  expenses -0-   4. Hrblock com Enter any depreciation  recapture -0-   5. Hrblock com Add lines 2, 3, and 4. Hrblock com 40,000 6. Hrblock com Subtract line 5 from line 1. Hrblock com  This is your adjusted  gross profit 45,000 7. Hrblock com Enter any installment sale  income reported in  prior year(s) 24,000 8. Hrblock com Subtract line 7 from line 6 21,000 9. Hrblock com Future installments 45,000 10. Hrblock com Divide line 8 by line 9. Hrblock com  This is your new gross profit percentage* 46. Hrblock com 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Hrblock com Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. Hrblock com You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. Hrblock com See Schedule D (Form 1040) and Form 4797 , later. Hrblock com If the property was your main home, you may be able to exclude part or all of the gain. Hrblock com See Sale of Your Home , later. Hrblock com Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Hrblock com Attach it to your tax return for each year. Hrblock com Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. Hrblock com Which parts to complete. Hrblock com   Which part to complete depends on whether you are filing the form for the year of sale or a later year. Hrblock com Year of sale. Hrblock com   Complete lines 1 through 4, Part I, and Part II. Hrblock com If you sold property to a related party during the year, also complete Part III. Hrblock com Later years. Hrblock com   Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. Hrblock com   If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. Hrblock com (After December 31, 1986, the installment method is not available for the sale of marketable securities. Hrblock com ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. Hrblock com Complete Part III unless you received the final payment during the tax year. Hrblock com   If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. Hrblock com Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. Hrblock com Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. Hrblock com Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). Hrblock com If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. Hrblock com Your gain is long-term if you owned the property for more than 1 year when you sold it. Hrblock com Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. Hrblock com All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. Hrblock com For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. Hrblock com If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. Hrblock com ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. Hrblock com See Publication 523 for information about excluding the gain. Hrblock com If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. Hrblock com Seller-financed mortgage. Hrblock com   If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. Hrblock com   When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Hrblock com   When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. Hrblock com   If either person fails to include the other person's SSN, a $50 penalty will be assessed. Hrblock com Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. Hrblock com The following topics are discussed. Hrblock com Electing out of the installment method. Hrblock com Payments received or considered received. Hrblock com Escrow account. Hrblock com Depreciation recapture income. Hrblock com Sale to a related person. Hrblock com Like-kind exchange. Hrblock com Contingent payment sale. Hrblock com Single sale of several assets. Hrblock com Sale of a business. Hrblock com Unstated interest and original issue discount. Hrblock com Disposition of an installment obligation. Hrblock com Repossession. Hrblock com Interest on deferred tax. Hrblock com Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Hrblock com To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. Hrblock com Notes, mortgages, and land contracts are examples of obligations that are included at FMV. Hrblock com You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. Hrblock com If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). Hrblock com Example. Hrblock com You sold a parcel of land for $50,000. Hrblock com You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. Hrblock com The buyer gave you a note for $40,000. Hrblock com The note had an FMV of $40,000. Hrblock com You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. Hrblock com The land cost $25,000, and you owned it for more than one year. Hrblock com You decide to elect out of the installment method and report the entire gain in the year of sale. Hrblock com Gain realized:     Selling price $50,000 Minus: Property's adj. Hrblock com basis $25,000     Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale:   Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. Hrblock com basis $25,000     Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. Hrblock com You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. Hrblock com The interest on the note is ordinary income and is reported as interest income each year. Hrblock com How to elect out. Hrblock com   To make this election, do not report your sale on Form 6252. Hrblock com Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. Hrblock com When to elect out. Hrblock com   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Hrblock com Automatic six-month extension. Hrblock com   If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Hrblock com Write “Filed pursuant to section 301. Hrblock com 9100-2” at the top of the amended return and file it where the original return was filed. Hrblock com Revoking the election. Hrblock com   Once made, the election can be revoked only with IRS approval. Hrblock com A revocation is retroactive. Hrblock com You will not be allowed to revoke the election if either of the following applies. Hrblock com One of the purposes is to avoid federal income tax. Hrblock com The tax year in which any payment was received has closed. Hrblock com Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Hrblock com In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Hrblock com These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Hrblock com However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. Hrblock com Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Hrblock com Include these expenses in the selling and contract prices when figuring the gross profit percentage. Hrblock com Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Hrblock com Mortgage not more than basis. Hrblock com   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Hrblock com It is considered a recovery of your basis. Hrblock com The contract price is the selling price minus the mortgage. Hrblock com Example. Hrblock com You sell property with an adjusted basis of $19,000. Hrblock com You have selling expenses of $1,000. Hrblock com The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). Hrblock com The selling price is $25,000 ($15,000 + $10,000). Hrblock com Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Hrblock com The contract price is $10,000 ($25,000 − $15,000 mortgage). Hrblock com Your gross profit percentage is 50% ($5,000 ÷ $10,000). Hrblock com You report half of each $2,000 payment received as gain from the sale. Hrblock com You also report all interest you receive as ordinary income. Hrblock com Mortgage more than basis. Hrblock com   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Hrblock com The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Hrblock com   To figure the contract price, subtract the mortgage from the selling price. Hrblock com This is the total amount (other than interest) you will receive directly from the buyer. Hrblock com Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Hrblock com The contract price is then the same as your gross profit from the sale. Hrblock com    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Hrblock com Example. Hrblock com The selling price for your property is $9,000. Hrblock com The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Hrblock com Your adjusted basis in the property is $4,400. Hrblock com You have selling expenses of $600, for a total installment sale basis of $5,000. Hrblock com The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Hrblock com This amount is included in the contract price and treated as a payment received in the year of sale. Hrblock com The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000       Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. Hrblock com Report 100% of each payment (less interest) as gain from the sale. Hrblock com Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Hrblock com Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. Hrblock com You are considered to receive a payment equal to the outstanding canceled debt. Hrblock com Example. Hrblock com Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. Hrblock com On April 4, 2013, she bought the land for $70,000. Hrblock com At that time, $30,000 of her loan to you was outstanding. Hrblock com She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. Hrblock com She did not assume an existing mortgage. Hrblock com She canceled the $30,000 debt you owed her. Hrblock com You are considered to have received a $30,000 payment at the time of the sale. Hrblock com Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Hrblock com If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Hrblock com Compare the debt to your installment sale basis in the property being sold. Hrblock com If the debt is less than your installment sale basis, none of it is treated as a payment. Hrblock com If it is more, only the difference is treated as a payment. Hrblock com If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Hrblock com These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . Hrblock com However, they apply only to the following types of debt the buyer assumes. Hrblock com Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Hrblock com Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Hrblock com If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Hrblock com The value of the assumed debt is then considered a payment to you in the year of sale. Hrblock com Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. Hrblock com However, see Like-Kind Exchange , later. Hrblock com Generally, the amount of the payment is the property's FMV on the date you receive it. Hrblock com Exception. Hrblock com   If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Hrblock com See Unstated Interest and Original Issue Discount (OID) , later. Hrblock com Debt not payable on demand. Hrblock com   Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. Hrblock com This is true even if the debt is guaranteed by a third party, including a government agency. Hrblock com Fair market value (FMV). Hrblock com   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Hrblock com Third-party note. Hrblock com   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Hrblock com Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Hrblock com The excess of the note's face value over its FMV is interest. Hrblock com Exclude this interest in determining the selling price of the property. Hrblock com However, see Exception under Property Used As a Payment, earlier. Hrblock com Example. Hrblock com You sold real estate in an installment sale. Hrblock com As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. Hrblock com The FMV of the third-party note at the time of the sale was $30,000. Hrblock com This amount, not $50,000, is a payment to you in the year of sale. Hrblock com The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Hrblock com The remaining 40% is interest taxed as ordinary income. Hrblock com Bond. Hrblock com   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Hrblock com For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. Hrblock com    If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Hrblock com However, see Exception under Property Used As a Payment, earlier. Hrblock com Buyer's note. Hrblock com   The buyer's note (unless payable on demand) is not considered payment on the sale. Hrblock com However, its full face value is included when figuring the selling price and the contract price. Hrblock com Payments you receive on the note are used to figure your gain in the year received. Hrblock com Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. Hrblock com This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. Hrblock com It does not apply to the following dispositions. Hrblock com Sales of property used or produced in farming. Hrblock com Sales of personal-use property. Hrblock com Qualifying sales of time-shares and residential lots. Hrblock com The net debt proceeds are the gross debt minus the direct expenses of getting the debt. Hrblock com The amount treated as a payment is considered received on the later of the following dates. Hrblock com The date the debt becomes secured. Hrblock com The date you receive the debt proceeds. Hrblock com A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. Hrblock com For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. Hrblock com Limit. Hrblock com   The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. Hrblock com The total contract price on the installment sale. Hrblock com Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. Hrblock com Installment payments. Hrblock com   The pledge rule accelerates the reporting of the installment obligation payments. Hrblock com Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. Hrblock com Exception. Hrblock com   The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. Hrblock com The debt was outstanding on December 17, 1987. Hrblock com The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. Hrblock com   A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. Hrblock com   This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. Hrblock com Any excess is treated as a payment on the installment obligation. Hrblock com Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. Hrblock com These sales cannot be reported on the installment method. Hrblock com The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. Hrblock com When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. Hrblock com Example. Hrblock com You sell property for $100,000. Hrblock com The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. Hrblock com You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. Hrblock com You report the entire gain in the year of sale. Hrblock com Escrow established in a later year. Hrblock com   If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. Hrblock com Substantial restriction. Hrblock com   If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. Hrblock com For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. Hrblock com Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. Hrblock com Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Hrblock com Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. Hrblock com The recapture income is also included in Part I of Form 6252. Hrblock com However, the gain equal to the recapture income is reported in full in the year of the sale. Hrblock com Only the gain greater than the recapture income is reported on the installment method. Hrblock com For more information on depreciation recapture, see chapter 3 in Publication 544. Hrblock com The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. Hrblock com Determining gross profit is discussed under General Rules , earlier. Hrblock com Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Hrblock com If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. Hrblock com These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. Hrblock com Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. Hrblock com Instead, all payments to be received are considered received in the year of sale. Hrblock com However, see Exception , below. Hrblock com Depreciable property for this rule is any property the purchaser can depreciate. Hrblock com Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. Hrblock com In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. Hrblock com The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. Hrblock com Exception. Hrblock com   You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. Hrblock com You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. Hrblock com Related person. Hrblock com   Related persons include the following. Hrblock com A person and all controlled entities with respect to that person. Hrblock com A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. Hrblock com Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. Hrblock com Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. Hrblock com   For information about which entities are controlled entities, see section 1239(c). Hrblock com Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. Hrblock com The related person makes the second disposition before making all payments on the first disposition. Hrblock com The related person disposes of the property within 2 years of the first disposition. Hrblock com This rule does not apply if the property involved is marketable securities. Hrblock com Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. Hrblock com See Exception , later. Hrblock com Related person. Hrblock com   Related persons include the following. Hrblock com Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. Hrblock com A partnership or estate and a partner or beneficiary. Hrblock com A trust (other than a section 401(a) employees trust) and a beneficiary. Hrblock com A trust and an owner of the trust. Hrblock com Two corporations that are members of the same controlled group as defined in section 267(f). Hrblock com The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. Hrblock com A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. Hrblock com An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. Hrblock com A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. Hrblock com The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Hrblock com Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. Hrblock com An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. Hrblock com A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. Hrblock com An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. Hrblock com Example 1. Hrblock com In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. Hrblock com His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. Hrblock com His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). Hrblock com He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. Hrblock com 50). Hrblock com Bob made no improvements to the property and sold it to Alfalfa Inc. Hrblock com , in 2013 for $600,000 after making the payment for that year. Hrblock com The amount realized from the second disposition is $600,000. Hrblock com Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . Hrblock com 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). Hrblock com Example 2. Hrblock com Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. Hrblock com The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . Hrblock com 50 Installment sale income for 2013 $150,000     Harvey receives a $100,000 payment in 2014 and another in 2015. Hrblock com They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. Hrblock com In 2016, he receives the final $100,000 payment. Hrblock com He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of:     Payment from 2012 $100,000   Payment from 2013 100,000   Amount treated as received in 2013 200,000   Total on which gain was previously recognized  − 400,000 Payment on which gain is recognized for 2016  $100,000 Multiply by gross profit % × . Hrblock com 50 Installment sale income for 2016 $ 50,000 Exception. Hrblock com   This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. Hrblock com Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. Hrblock com   The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. Hrblock com However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. Hrblock com   In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. Hrblock com An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. Hrblock com A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. Hrblock com Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Hrblock com These trades are known as like-kind exchanges. Hrblock com The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. Hrblock com You do not have to report any part of your gain if you receive only like-kind property. Hrblock com However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. Hrblock com For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. Hrblock com Installment payments. Hrblock com   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. Hrblock com The contract price is reduced by the FMV of the like-kind property received in the trade. Hrblock com The gross profit is reduced by any gain on the trade that can be postponed. Hrblock com Like-kind property received in the trade is not considered payment on the installment obligation. Hrblock com Example. Hrblock com In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. Hrblock com He also receives an installment note for $800,000 in the trade. Hrblock com Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. Hrblock com George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). Hrblock com His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). Hrblock com The contract price is $800,000 ($1,000,000 − $200,000). Hrblock com The gross profit percentage is 75% ($600,000 ÷ $800,000). Hrblock com He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. Hrblock com He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). Hrblock com Deferred exchanges. Hrblock com   A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. Hrblock com Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. Hrblock com If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. Hrblock com See Regulations section 1. Hrblock com 1031(k)-1(j)(2) for these rules. Hrblock com Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. Hrblock com This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. Hrblock com If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. Hrblock com For rules on using the installment method for a contingent payment sale, see Regulations section 15a. Hrblock com 453-1(c). Hrblock com Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. Hrblock com You also have to allocate part of the selling price to each asset. Hrblock com If you sell assets that constitute a trade or business, see Sale of a Business , later. Hrblock com Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. Hrblock com If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. Hrblock com This becomes the net FMV. Hrblock com A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. Hrblock com However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. Hrblock com It must be reported separately. Hrblock com The remaining assets sold at a gain are reported together. Hrblock com Example. Hrblock com You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. Hrblock com The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. Hrblock com Your installment sale basis for each parcel was $15,000. Hrblock com Your net gain was $85,000 ($130,000 − $45,000). Hrblock com You report the gain on the installment method. Hrblock com The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. Hrblock com The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. Hrblock com The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. Hrblock com You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. Hrblock com Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. Hrblock com You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. Hrblock com The allocation is figured as follows:   Parcels   A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV:     Percentage of total 90% 10% Payments in year of sale:     $20,000 × 90% $18,000   $20,000 × 10%   $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments  received (or considered  received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. Hrblock com You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. Hrblock com However, if parcel C was held for personal use, the loss is not deductible. Hrblock com You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). Hrblock com Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. Hrblock com Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. Hrblock com Assets sold at a loss. Hrblock com Real and personal property eligible for the installment method. Hrblock com Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. Hrblock com Inventory. Hrblock com   The sale of inventories of personal property cannot be reported on the installment method. Hrblock com All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Hrblock com   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Hrblock com If you do not, each payment must be allocated between the inventory and the other assets sold. Hrblock com   Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. Hrblock com Use your basis in the inventory to figure the cost of goods sold. Hrblock com Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. Hrblock com Residual method. Hrblock com   Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. Hrblock com This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. Hrblock com   The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. Hrblock com This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). Hrblock com   A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. Hrblock com   The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). Hrblock com The consideration remaining after this reduction must be allocated among the various business assets in a certain order. Hrblock com   For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. Hrblock com Certificates of deposit, U. Hrblock com S. Hrblock com Government securities, foreign currency, and actively traded personal property, including stock and securities. Hrblock com Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. Hrblock com However, see Regulations section 1. Hrblock com 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. Hrblock com Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. Hrblock com All other assets except section 197 intangibles. Hrblock com Section 197 intangibles except goodwill and going concern value. Hrblock com Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Hrblock com   If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. Hrblock com For example, if an asset is described in both (4) and (6), include it in (4). Hrblock com Agreement. Hrblock com   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. Hrblock com This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Hrblock com Reporting requirement. Hrblock com   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Hrblock com Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. Hrblock com The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Hrblock com Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. Hrblock com The sale of a partnership interest is treated as the sale of a single capital asset. Hrblock com The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. Hrblock com (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. Hrblock com ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. Hrblock com The gain allocated to the other assets can be reported under the installment method. Hrblock com For more information on the treatment of unrealized receivables and inventory, see Publication 541. Hrblock com Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. Hrblock com You received a $100,000 down payment and the buyer's note for $120,000. Hrblock com The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. Hrblock com The total selling price is $220,000. Hrblock com Your selling expenses are $11,000. Hrblock com The selling expenses are divided among all the assets sold, including inventory. Hrblock com Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). Hrblock com The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows:     Depre- ciation Adj. Hrblock com Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376   $201,500 $67,784 $150,216         Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). Hrblock com The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. Hrblock com The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. Hrblock com   Sale  Price Sale   Exp. Hrblock com Adj. Hrblock com   Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. Hrblock com A 71,000 3,550 63,800 3,650 Mch. Hrblock com B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575   $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. Hrblock com There is no depreciation recapture income because the building was depreciated using the straight line method. Hrblock com All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. Hrblock com Figure depreciation recapture in Part III of Form 4797. Hrblock com The total depreciation recapture income reported in Part II of Form 4797 is $5,209. Hrblock com This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). Hrblock com These gains are reported in full in the year of sale and are not included in the installment sale computation. Hrblock com Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. Hrblock com The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. Hrblock com The selling price equals the contract price for the installment sale ($108,500). Hrblock com The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. Hrblock com   Selling  Price Install- ment  Sale  Basis Gross  Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075         The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). Hrblock com The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. Hrblock com 95 Building— $9,600 ÷ $108,500 8. Hrblock com 85 Goodwill— $17,575 ÷ $108,500 16. Hrblock com 20 Total 48. Hrblock com 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. Hrblock com The selling price for the installment sale is $108,500. Hrblock com This is 49. Hrblock com 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). Hrblock com The selling price of assets not reported on the installment method is $111,500. Hrblock com This is 50. Hrblock com 7% ($111,500 ÷ $220,000) of the total selling price. Hrblock com Multiply principal payments by 49. Hrblock com 3% to determine the part of the payment for the installment sale. Hrblock com The balance, 50. Hrblock com 7%, is for the part reported in the year of the sale. Hrblock com The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. Hrblock com When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. Hrblock com Only the part for the installment sale (49. Hrblock com 3%) is used in the installment sale computation. Hrblock com The only payment received in 2013 is the down payment of $100,000. Hrblock com The part of the payment for the installment sale is $49,300 ($100,000 × 49. Hrblock com 3%). Hrblock com This amount is used in the installment sale computation. Hrblock com Installment income for 2013. Hrblock com   Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. Hrblock com Income Land—22. Hrblock com 95% of $49,300 $11,314 Building—8. Hrblock com 85% of $49,300 4,363 Goodwill—16. Hrblock com 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. Hrblock com   You figure installment income for years after 2013 by applying the same gross profit percentages to 49. Hrblock com 3% of the total payments you receive on the buyer's note during the year. Hrblock com Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Hrblock com Interest provided in the contract is called stated interest. Hrblock com If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Hrblock com If section 483 applies to the contract, this interest is called unstated interest. Hrblock com If section 1274 applies to the contract, this interest is called original issue discount (OID). Hrblock com An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). Hrblock com Treatment of unstated interest and OID. Hrblock com   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Hrblock com As a result, the buyer cannot deduct the unstated interest. Hrblock com The seller must report the unstated interest as income. Hrblock com   Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Hrblock com   If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Hrblock com Rules for the seller. Hrblock com   If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. Hrblock com If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. Hrblock com   Include the unstated interest in income based on your regular method of accounting. Hrblock com Include OID in income over the term of the contract. Hrblock com   The OID includible in income each year is based on the constant yield method described in section 1272. Hrblock com (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. Hrblock com )   If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. Hrblock com Reduce the selling price by any stated principal treated as interest to determine the gain. Hrblock com   Report unstated interest or OID on your tax return, in addition to stated interest. Hrblock com Rules for the buyer. Hrblock com   Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. Hrblock com These rules do not apply to personal-use property (for example, property not used in a trade or business). Hrblock com Adequate stated interest. Hrblock com   An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. Hrblock com The present value of a payment is determined based on the test rate of interest, defined next. Hrblock com (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. Hrblock com ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. Hrblock com Test rate of interest. Hrblock com   The test rate of interest for a contract is the 3-month rate. Hrblock com The 3-month rate is the lower of the following applicable federal rates (AFRs). Hrblock com The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. Hrblock com The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. Hrblock com Applicable federal rate (AFR). Hrblock com   The AFR depends on the month the binding
Español

Bureau of the Public Debt

This agency borrows moneys to make sure that the federal government continues to operate. You can contact them to purchase bonds or to check on the maturity of bonds you have already purchased.

Contact the Agency or Department

Website: Bureau of the Public Debt Buy and Redeem U.S. Government Securities

Address: P.O. Box 7015
Parkersburg, WV 26106-7015

Toll-free: (800) 722-2678

The Hrblock Com

Hrblock com 10. Hrblock com   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. Hrblock com Individual retirement arrangements (IRAs). Hrblock com Civil service retirement benefits. Hrblock com Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. Hrblock com How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. Hrblock com Exclusion not limited to cost. Hrblock com Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. Hrblock com Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New 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), 408, 408A, or 457(b) plans). Hrblock com However, these distributions are taken into account when determining the modified adjusted gross income threshold. Hrblock com Distributions from a nonqualified retirement plan are included in net investment income. Hrblock com See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Hrblock com Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Hrblock com For more information, see Designated Roth accounts discussed later. Hrblock com Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. Hrblock com What is not covered in this chapter. Hrblock com   The following topics are not discussed in this chapter. Hrblock com The General Rule. Hrblock com   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Hrblock com For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Hrblock com For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. Hrblock com Individual retirement arrangements (IRAs). Hrblock com   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. Hrblock com Civil service retirement benefits. Hrblock com    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. Hrblock com S. Hrblock com Civil Service Retirement Benefits. Hrblock com Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. Hrblock com Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. Hrblock com S. Hrblock com Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Hrblock com 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. Hrblock com   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Hrblock com Elective deferrals that are designated as Roth contributions are included in your income. Hrblock com However, qualified distributions are not included in your income. Hrblock com See Publication 575 for more information. Hrblock com In-plan rollovers to designated Roth accounts. Hrblock com   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Hrblock com The rollover of any untaxed amounts must be included in income. Hrblock com See Publication 575 for more information. Hrblock com More than one program. Hrblock com   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. Hrblock com Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. Hrblock com Section 457 deferred compensation plans. Hrblock com    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Hrblock com If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. Hrblock com You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Hrblock com You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Hrblock com   Your 457(b) plan may have a designated Roth account option. Hrblock com If so, you may be able to roll over amounts to the designated Roth account or make contributions. Hrblock com Elective deferrals to a designated Roth account are included in your income. Hrblock com Qualified distributions from a designated Roth account are not subject to tax. Hrblock com   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Hrblock com For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. Hrblock com   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. Hrblock com Disability pensions. Hrblock com   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Hrblock com You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Hrblock com Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Hrblock com    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Hrblock com For information on the credit for the elderly or the disabled, see chapter 33. Hrblock com   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Hrblock com Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. Hrblock com    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. Hrblock com For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Hrblock com   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. Hrblock com Retired public safety officers. Hrblock com   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. Hrblock com See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. Hrblock com Railroad retirement benefits. Hrblock com   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. Hrblock com For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Hrblock com For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. Hrblock com Withholding and estimated tax. Hrblock com   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. Hrblock com You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. Hrblock com If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. Hrblock com   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. Hrblock com Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. Hrblock com See Direct rollover option under Rollovers, later. Hrblock com   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Hrblock com Qualified plans for self-employed individuals. Hrblock com   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. Hrblock com R. Hrblock com 10 plans. Hrblock com Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. Hrblock com They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. Hrblock com    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. Hrblock com If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. Hrblock com For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. Hrblock com Purchased annuities. Hrblock com   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. Hrblock com For more information about the General Rule, get Publication 939. Hrblock com Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. Hrblock com Loans. Hrblock com   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. Hrblock com This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. Hrblock com This means that you must include in income all or part of the amount borrowed. Hrblock com Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. Hrblock com For details, see Loans Treated as Distributions in Publication 575. Hrblock com For information on the deductibility of interest, see chapter 23. Hrblock com Tax-free exchange. Hrblock com   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. Hrblock com However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. Hrblock com See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. Hrblock com How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. Hrblock com If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. Hrblock com If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. Hrblock com If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. Hrblock com More than one annuity. Hrblock com   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Hrblock com If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. Hrblock com Joint return. Hrblock com   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Hrblock com Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. Hrblock com Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. Hrblock com This includes the amounts your employer contributed that were taxable to you when paid. Hrblock com Cost does not include any amounts you deducted or were excluded from your income. Hrblock com From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. Hrblock com Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. Hrblock com Designated Roth accounts. Hrblock com   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Hrblock com Your cost will also include any in-plan Roth rollovers you included in income. Hrblock com Foreign employment contributions. Hrblock com   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. Hrblock com See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. Hrblock com Taxation of Periodic Payments Fully taxable payments. Hrblock com   Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. Hrblock com You must report them on your income tax return. Hrblock com Partly taxable payments. Hrblock com   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. Hrblock com The rest of the amount you receive is generally taxable. Hrblock com You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Hrblock com Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. Hrblock com   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Hrblock com Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. Hrblock com   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Hrblock com   If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. Hrblock com Exclusion limit. Hrblock com   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Hrblock com Once your annuity starting date is determined, it does not change. Hrblock com If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. Hrblock com That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Hrblock com Exclusion limited to cost. Hrblock com   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Hrblock com Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Hrblock com This deduction is not subject to the 2%-of-adjusted-gross-income limit. Hrblock com Exclusion not limited to cost. Hrblock com   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Hrblock com If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Hrblock com The total exclusion may be more than your cost. Hrblock com Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Hrblock com For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Hrblock com For any other annuity, this number is the number of monthly annuity payments under the contract. Hrblock com Who must use the Simplified Method. Hrblock com   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. Hrblock com Guaranteed payments. Hrblock com   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Hrblock com If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Hrblock com How to use the Simplified Method. Hrblock com    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. Hrblock com Single-life annuity. Hrblock com    If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Hrblock com Enter on line 3 the number shown for your age at the annuity starting date. Hrblock com Multiple-lives annuity. Hrblock com   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Hrblock com Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. Hrblock com   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Hrblock com Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Hrblock com    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. Hrblock com Example. Hrblock com Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Hrblock com Bill's annuity starting date is January 1, 2013. Hrblock com The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Hrblock com Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Hrblock com Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Hrblock com Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Hrblock com Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. Hrblock com His completed worksheet is shown in Worksheet 10-A. Hrblock com Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Hrblock com Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Hrblock com The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Hrblock com If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Hrblock com This deduction is not subject to the 2%-of-adjusted- gross-income limit. Hrblock com Worksheet 10-A. Hrblock com Simplified Method Worksheet for Bill Smith 1. Hrblock com Enter the total pension or annuity payments received this year. Hrblock com Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. Hrblock com 14,400 2. Hrblock com Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. Hrblock com See Cost (Investment in the Contract) , earlier 2. Hrblock com 31,000       Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Hrblock com Otherwise, go to line 3. Hrblock com         3. Hrblock com Enter the appropriate number from Table 1 below. Hrblock com But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Hrblock com 310     4. Hrblock com Divide line 2 by the number on line 3 4. Hrblock com 100     5. Hrblock com Multiply line 4 by the number of months for which this year's payments were made. Hrblock com If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Hrblock com Otherwise, go to line 6 5. Hrblock com 1,200     6. Hrblock com Enter any amounts previously recovered tax free in years after 1986. Hrblock com This is the amount shown on line 10 of your worksheet for last year 6. Hrblock com -0-     7. Hrblock com Subtract line 6 from line 2 7. Hrblock com 31,000     8. Hrblock com Enter the smaller of line 5 or line 7 8. Hrblock com 1,200 9. Hrblock com Taxable amount for year. Hrblock com Subtract line 8 from line 1. Hrblock com Enter the result, but not less than zero. Hrblock com Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. Hrblock com 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Hrblock com If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. Hrblock com     10. Hrblock com Was your annuity starting date before 1987? □ Yes. Hrblock com STOP. Hrblock com Do not complete the rest of this worksheet. Hrblock com  ☑ No. Hrblock com Add lines 6 and 8. Hrblock com This is the amount you have recovered tax free through 2013. Hrblock com You will need this number if you need to fill out this worksheet next year 10. Hrblock com 1,200 11. Hrblock com Balance of cost to be recovered. Hrblock com Subtract line 10 from line 2. Hrblock com If zero, you will not have to complete this worksheet next year. Hrblock com The payments you receive next year will generally be fully taxable 11. Hrblock com 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. Hrblock com . Hrblock com . Hrblock com before November 19, 1996, enter on line 3. Hrblock com . Hrblock com . Hrblock com after November 18, 1996, enter on line 3. Hrblock com . Hrblock com . Hrblock com 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. Hrblock com . Hrblock com . Hrblock com   THEN enter on line 3. Hrblock com . Hrblock com . Hrblock com 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Hrblock com Who must use the General Rule. Hrblock com   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. Hrblock com Annuity starting before November 19, 1996. Hrblock com   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. Hrblock com You also had to use it for any fixed-period annuity. Hrblock com If you did not have to use the General Rule, you could have chosen to use it. Hrblock com If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. Hrblock com   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Hrblock com Who cannot use the General Rule. Hrblock com   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. Hrblock com See Who must use the Simplified Method , earlier. Hrblock com More information. Hrblock com   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Hrblock com Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. Hrblock com They include all payments other than periodic payments and corrective distributions. Hrblock com Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. Hrblock com Corrective distributions of excess plan contributions. Hrblock com   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Hrblock com To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Hrblock com For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. Hrblock com Figuring the taxable amount of nonperiodic payments. Hrblock com   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Hrblock com If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. Hrblock com If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. Hrblock com Annuity starting date. Hrblock com   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. Hrblock com Distribution on or after annuity starting date. Hrblock com   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. Hrblock com Distribution before annuity starting date. Hrblock com   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. Hrblock com You exclude from your gross income the part that you allocate to the cost. Hrblock com You include the remainder in your gross income. Hrblock com   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). Hrblock com This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. Hrblock com    Distributions from nonqualified plans are subject to the net investment income tax. Hrblock com See the Instructions for Form 8960. Hrblock com   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. Hrblock com Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. Hrblock com If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. Hrblock com A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Hrblock com A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. Hrblock com The participant's entire balance from a plan does not include certain forfeited amounts. Hrblock com It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. Hrblock com For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. Hrblock com If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. Hrblock com The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Hrblock com The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Hrblock com You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. Hrblock com Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. Hrblock com The tax figured on Form 4972 is added to the regular tax figured on your other income. Hrblock com This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. Hrblock com How to treat the distribution. Hrblock com   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. Hrblock com Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. Hrblock com Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). Hrblock com Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). Hrblock com Roll over all or part of the distribution. Hrblock com See Rollovers , later. Hrblock com No tax is currently due on the part rolled over. Hrblock com Report any part not rolled over as ordinary income. Hrblock com Report the entire taxable part of the distribution as ordinary income on your tax return. Hrblock com   The first three options are explained in the following discussions. Hrblock com Electing optional lump-sum treatment. Hrblock com   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. Hrblock com If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. Hrblock com Taxable and tax-free parts of the distribution. Hrblock com    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. Hrblock com You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. Hrblock com Cost. Hrblock com   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. Hrblock com You must reduce this cost by amounts previously distributed tax free. Hrblock com Net unrealized appreciation (NUA). Hrblock com   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. Hrblock com (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. Hrblock com ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. Hrblock com The amount treated as capital gain is taxed at a 20% rate. Hrblock com You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Hrblock com Complete Part II of Form 4972 to choose the 20% capital gain election. Hrblock com For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. Hrblock com 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. Hrblock com You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. Hrblock com You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Hrblock com The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. Hrblock com You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. Hrblock com Complete Part III of Form 4972 to choose the 10-year tax option. Hrblock com You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Hrblock com Publication 575 illustrates how to complete Form 4972 to figure the separate tax. Hrblock com Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. Hrblock com For this purpose, the following plans are qualified retirement plans. Hrblock com A qualified employee plan. Hrblock com A qualified employee annuity. Hrblock com A tax-sheltered annuity plan (403(b) plan). Hrblock com An eligible state or local government section 457 deferred compensation plan. Hrblock com Eligible rollover distributions. Hrblock com   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. Hrblock com For information about exceptions to eligible rollover distributions, see Publication 575. Hrblock com Rollover of nontaxable amounts. Hrblock com   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. Hrblock com The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. Hrblock com   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. Hrblock com   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Hrblock com To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Hrblock com For more information, see the Form 8606 instructions. Hrblock com Direct rollover option. Hrblock com   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. Hrblock com If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. Hrblock com Payment to you option. Hrblock com   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. Hrblock com However, the full amount is treated as distributed to you even though you actually receive only 80%. Hrblock com You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. Hrblock com (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Hrblock com )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. Hrblock com Time for making rollover. Hrblock com   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. Hrblock com (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. Hrblock com )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Hrblock com   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. Hrblock com Qualified domestic relations order (QDRO). Hrblock com   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. Hrblock com If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. Hrblock com You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. Hrblock com See Rollovers in Publication 575 for more information on benefits received under a QDRO. Hrblock com Rollover by surviving spouse. Hrblock com   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. Hrblock com The rollover rules apply to you as if you were the employee. Hrblock com You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. Hrblock com For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. Hrblock com    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. Hrblock com However, see Rollovers by nonspouse beneficiary next. Hrblock com Rollovers by nonspouse beneficiary. Hrblock com   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. Hrblock com The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. Hrblock com The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. Hrblock com For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). Hrblock com Retirement bonds. Hrblock com   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. Hrblock com Designated Roth accounts. Hrblock com   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. Hrblock com If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. Hrblock com For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. Hrblock com In-plan rollovers to designated Roth accounts. Hrblock com   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Hrblock com The rollover of any untaxed amounts must be included in income. Hrblock com See Designated Roth accounts under Rollovers in Publication 575 for more information. Hrblock com Rollovers to Roth IRAs. Hrblock com   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. Hrblock com   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. Hrblock com You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. Hrblock com In addition, the 10% tax on early distributions does not apply. Hrblock com More information. Hrblock com   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. Hrblock com Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Hrblock com Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. Hrblock com These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). Hrblock com These taxes are discussed in the following sections. Hrblock com If you must pay either of these taxes, report them on Form 5329. Hrblock com However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Hrblock com Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. Hrblock com Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. Hrblock com This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. Hrblock com Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. Hrblock com This tax applies to the part of the distribution that you must include in gross income. Hrblock com For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity plan, or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). Hrblock com 5% rate on certain early distributions from deferred annuity contracts. Hrblock com   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. Hrblock com A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. Hrblock com On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Hrblock com Attach an explanation to your return. Hrblock com Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. Hrblock com   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. Hrblock com You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. Hrblock com The additional tax is figured on Form 5329. Hrblock com For more information, see Form 5329 and its instructions. Hrblock com For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. Hrblock com Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. Hrblock com   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. Hrblock com You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. Hrblock com The additional tax is figured on Form 5329. Hrblock com For more information, see Form 5329 and its instructions. Hrblock com For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. Hrblock com Exceptions to tax. Hrblock com    Certain early distributions are excepted from the early distribution tax. Hrblock com If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. Hrblock com If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Hrblock com Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. Hrblock com On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. Hrblock com    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Hrblock com Enter exception number “12” on line 2. Hrblock com General exceptions. Hrblock com   The tax does not apply to distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Hrblock com Additional exceptions for qualified retirement plans. Hrblock com   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. Hrblock com 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. Hrblock com See Pub. Hrblock com 721 for more information on the phased retirement program. Hrblock com Qualified public safety employees. Hrblock com   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. Hrblock com You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. Hrblock com Qualified reservist distributions. Hrblock com   A qualified reservist distribution is not subject to the additional tax on early distributions. Hrblock com A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. Hrblock com You must have been ordered or called to active duty after September 11, 2001. Hrblock com For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. Hrblock com Additional exceptions for nonqualified annuity contracts. Hrblock com   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). Hrblock com Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). Hrblock com The payments each year cannot be less than the required minimum distribution. Hrblock com Required distributions not made. Hrblock com   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. Hrblock com The tax equals 50% of the part of the required minimum distribution that was not distributed. Hrblock com   For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986). Hrblock com Waiver. Hrblock com   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. Hrblock com See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. Hrblock com State insurer delinquency proceedings. Hrblock com   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. Hrblock com If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Hrblock com Under certain conditions, you will not have to pay the 50% excise tax. Hrblock com Required beginning date. Hrblock com   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. Hrblock com However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. Hrblock com   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. Hrblock com Your required distribution then must be made for 2014 by December 31, 2014. Hrblock com 5% owners. Hrblock com   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. Hrblock com   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. Hrblock com Age 70½. Hrblock com   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. Hrblock com   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. Hrblock com If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. Hrblock com Required distributions. Hrblock com   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). Hrblock com Additional information. Hrblock com   For more information on this rule, see Tax on Excess Accumulation in Publication 575. Hrblock com Form 5329. Hrblock com   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. Hrblock com Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. Hrblock com However, some special rules apply. Hrblock com See Publication 575 for more information. Hrblock com Survivors of employees. Hrblock com   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. Hrblock com You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. Hrblock com Survivors of retirees. Hrblock com   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. Hrblock com If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. Hrblock com    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. Hrblock com The resulting tax-free amount will then remain fixed. Hrblock com Any increases in the survivor annuity are fully taxable. Hrblock com    If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. Hrblock com This amount remains fixed even if the annuity payments are increased or decreased. Hrblock com See Simplified Method , earlier. Hrblock com   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. Hrblock com Estate tax deduction. Hrblock com   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. Hrblock com You can deduct the part of the total estate tax that was based on the annuity. Hrblock com The deceased annuitant must have died after the annuity starting date. Hrblock com (For details, see section 1. Hrblock com 691(d)-1 of the regulations. Hrblock com ) Deduct it in equal amounts over your remaining life expectancy. Hrblock com   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. Hrblock com   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. Hrblock com This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Hrblock com See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. Hrblock com Prev  Up  Next   Home   More Online Publications