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Income Tax 1040ez

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Income Tax 1040ez

Income tax 1040ez 1. Income tax 1040ez   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Income tax 1040ez At-risk limits. Income tax 1040ez Passive activities. Income tax 1040ez Net operating loss. Income tax 1040ez When Can I Deduct an Expense?Economic performance. Income tax 1040ez Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Income tax 1040ez  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Income tax 1040ez See Optional safe harbor method under Business use of your home , later. Income tax 1040ez Introduction This chapter covers the general rules for deducting business expenses. Income tax 1040ez Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Income tax 1040ez Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Income tax 1040ez What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Income tax 1040ez An ordinary expense is one that is common and accepted in your industry. Income tax 1040ez A necessary expense is one that is helpful and appropriate for your trade or business. Income tax 1040ez An expense does not have to be indispensable to be considered necessary. Income tax 1040ez Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Income tax 1040ez In some cases you may not be allowed to deduct the expense at all. Income tax 1040ez Therefore, it is important to distinguish usual business expenses from expenses that include the following. Income tax 1040ez The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Income tax 1040ez Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Income tax 1040ez Some of your business expenses may be included in figuring cost of goods sold. Income tax 1040ez Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Income tax 1040ez If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Income tax 1040ez The following are types of expenses that go into figuring cost of goods sold. Income tax 1040ez The cost of products or raw materials, including freight. Income tax 1040ez Storage. Income tax 1040ez Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Income tax 1040ez Factory overhead. Income tax 1040ez Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Income tax 1040ez Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Income tax 1040ez This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Income tax 1040ez For more information, see the following sources. Income tax 1040ez Cost of goods sold—chapter 6 of Publication 334. Income tax 1040ez Inventories—Publication 538. Income tax 1040ez Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Income tax 1040ez Capital Expenses You must capitalize, rather than deduct, some costs. Income tax 1040ez These costs are a part of your investment in your business and are called “capital expenses. Income tax 1040ez ” Capital expenses are considered assets in your business. Income tax 1040ez In general, you capitalize three types of costs. Income tax 1040ez Business start-up costs (See Tip below). Income tax 1040ez Business assets. Income tax 1040ez Improvements. Income tax 1040ez You can elect to deduct or amortize certain business start-up costs. Income tax 1040ez See chapters 7 and 8. Income tax 1040ez Cost recovery. Income tax 1040ez   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Income tax 1040ez These recovery methods allow you to deduct part of your cost each year. Income tax 1040ez In this way, you are able to recover your capital expense. Income tax 1040ez See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Income tax 1040ez A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Income tax 1040ez A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Income tax 1040ez See Publication 946 for details. Income tax 1040ez Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Income tax 1040ez These costs may include expenses for advertising, travel, or wages for training employees. Income tax 1040ez If you go into business. Income tax 1040ez   When you go into business, treat all costs you had to get your business started as capital expenses. Income tax 1040ez   Usually you recover costs for a particular asset through depreciation. Income tax 1040ez Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Income tax 1040ez However, you can choose to amortize certain costs for setting up your business. Income tax 1040ez See Starting a Business in chapter 8 for more information on business start-up costs. Income tax 1040ez If your attempt to go into business is unsuccessful. Income tax 1040ez   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Income tax 1040ez The costs you had before making a decision to acquire or begin a specific business. Income tax 1040ez These costs are personal and nondeductible. Income tax 1040ez They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Income tax 1040ez The costs you had in your attempt to acquire or begin a specific business. Income tax 1040ez These costs are capital expenses and you can deduct them as a capital loss. Income tax 1040ez   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Income tax 1040ez   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Income tax 1040ez You cannot take a deduction for these costs. Income tax 1040ez You will recover the costs of these assets when you dispose of them. Income tax 1040ez Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Income tax 1040ez You must fully capitalize the cost of these assets, including freight and installation charges. Income tax 1040ez Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Income tax 1040ez See Regulations section 1. Income tax 1040ez 263A-2 for information on these rules. Income tax 1040ez Improvements Improvements are generally major expenditures. Income tax 1040ez Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Income tax 1040ez The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Income tax 1040ez Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Income tax 1040ez Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Income tax 1040ez However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Income tax 1040ez Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Income tax 1040ez Restoration plan. Income tax 1040ez   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Income tax 1040ez This applies even if some of the work would by itself be classified as repairs. Income tax 1040ez Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Income tax 1040ez Motor vehicles. Income tax 1040ez   You usually capitalize the cost of a motor vehicle you use in your business. Income tax 1040ez You can recover its cost through annual deductions for depreciation. Income tax 1040ez   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Income tax 1040ez See Publication 463. Income tax 1040ez   Generally, repairs you make to your business vehicle are currently deductible. Income tax 1040ez However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Income tax 1040ez Roads and driveways. Income tax 1040ez    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Income tax 1040ez The cost of maintaining a private road on your business property is a deductible expense. Income tax 1040ez Tools. Income tax 1040ez   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Income tax 1040ez Machinery parts. Income tax 1040ez   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Income tax 1040ez Heating equipment. Income tax 1040ez   The cost of changing from one heating system to another is a capital expense. Income tax 1040ez Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Income tax 1040ez However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Income tax 1040ez You can deduct the business part. Income tax 1040ez For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Income tax 1040ez The remaining 30% is personal interest and generally is not deductible. Income tax 1040ez See chapter 4 for information on deducting interest and the allocation rules. Income tax 1040ez Business use of your home. Income tax 1040ez   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Income tax 1040ez These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Income tax 1040ez   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Income tax 1040ez The business part of your home must be used exclusively and regularly for your trade or business. Income tax 1040ez The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Income tax 1040ez   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Income tax 1040ez   Your home office qualifies as your principal place of business if you meet the following requirements. Income tax 1040ez You use the office exclusively and regularly for administrative or management activities of your trade or business. Income tax 1040ez You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Income tax 1040ez   If you have more than one business location, determine your principal place of business based on the following factors. Income tax 1040ez The relative importance of the activities performed at each location. Income tax 1040ez If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Income tax 1040ez Optional safe harbor method. Income tax 1040ez   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Income tax 1040ez This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Income tax 1040ez   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Income tax 1040ez Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Income tax 1040ez You are not required to allocate these deductions between personal and business use, as is required under the regular method. Income tax 1040ez If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Income tax 1040ez   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Income tax 1040ez All of the requirements discussed earlier under Business use of your home still apply. Income tax 1040ez   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Income tax 1040ez    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Income tax 1040ez Business use of your car. Income tax 1040ez   If you use your car exclusively in your business, you can deduct car expenses. Income tax 1040ez If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Income tax 1040ez Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Income tax 1040ez   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Income tax 1040ez Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Income tax 1040ez Beginning in 2013, the standard mileage rate is 56. Income tax 1040ez 5 cents per mile. Income tax 1040ez   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Income tax 1040ez   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Income tax 1040ez How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Income tax 1040ez Recovery of amount deducted (tax benefit rule). Income tax 1040ez   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Income tax 1040ez If you have a recovery in a later year, include the recovered amount in income in that year. Income tax 1040ez However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Income tax 1040ez   For more information on recoveries and the tax benefit rule, see Publication 525. Income tax 1040ez Payments in kind. Income tax 1040ez   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Income tax 1040ez You cannot deduct the cost of your own labor. Income tax 1040ez   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Income tax 1040ez If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Income tax 1040ez Limits on losses. Income tax 1040ez   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Income tax 1040ez There may be limits on how much of the loss you can deduct. Income tax 1040ez Not-for-profit limits. Income tax 1040ez   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Income tax 1040ez See Not-for-Profit Activities , later. Income tax 1040ez At-risk limits. Income tax 1040ez   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Income tax 1040ez You are at risk in any activity for the following. Income tax 1040ez The money and adjusted basis of property you contribute to the activity. Income tax 1040ez Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Income tax 1040ez For more information, see Publication 925. Income tax 1040ez Passive activities. Income tax 1040ez   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Income tax 1040ez In general, deductions for losses from passive activities only offset income from passive activities. Income tax 1040ez You cannot use any excess deductions to offset other income. Income tax 1040ez In addition, passive activity credits can only offset the tax on net passive income. Income tax 1040ez Any excess loss or credits are carried over to later years. Income tax 1040ez Suspended passive losses are fully deductible in the year you completely dispose of the activity. Income tax 1040ez For more information, see Publication 925. Income tax 1040ez Net operating loss. Income tax 1040ez   If your deductions are more than your income for the year, you may have a “net operating loss. Income tax 1040ez ” You can use a net operating loss to lower your taxes in other years. Income tax 1040ez See Publication 536 for more information. Income tax 1040ez   See Publication 542 for information about net operating losses of corporations. Income tax 1040ez When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Income tax 1040ez An accounting method is a set of rules used to determine when and how income and expenses are reported. Income tax 1040ez The two basic methods are the cash method and the accrual method. Income tax 1040ez Whichever method you choose must clearly reflect income. Income tax 1040ez For more information on accounting methods, see Publication 538. Income tax 1040ez Cash method. Income tax 1040ez   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Income tax 1040ez Accrual method. Income tax 1040ez   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Income tax 1040ez The all-events test has been met. Income tax 1040ez The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Income tax 1040ez Economic performance has occurred. Income tax 1040ez Economic performance. Income tax 1040ez   You generally cannot deduct or capitalize a business expense until economic performance occurs. Income tax 1040ez If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. Income tax 1040ez If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Income tax 1040ez Example. Income tax 1040ez Your tax year is the calendar year. Income tax 1040ez In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Income tax 1040ez You paid it by check in January 2014. Income tax 1040ez If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Income tax 1040ez If you use the cash method of accounting, deduct the expense on your 2014 return. Income tax 1040ez Prepayment. Income tax 1040ez   You generally cannot deduct expenses in advance, even if you pay them in advance. Income tax 1040ez This rule applies to both the cash and accrual methods. Income tax 1040ez It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Income tax 1040ez Example. Income tax 1040ez In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Income tax 1040ez Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Income tax 1040ez You can deduct the rent for 2014 and 2015 on your tax returns for those years. Income tax 1040ez Contested liability. Income tax 1040ez   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Income tax 1040ez Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Income tax 1040ez S. Income tax 1040ez possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Income tax 1040ez However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Income tax 1040ez See Regulations section 1. Income tax 1040ez 461-2. Income tax 1040ez Related person. Income tax 1040ez   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Income tax 1040ez However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Income tax 1040ez Your deduction is allowed when the amount is includible in income by the related cash method payee. Income tax 1040ez See Related Persons in Publication 538. Income tax 1040ez Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Income tax 1040ez Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Income tax 1040ez The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Income tax 1040ez It does not apply to corporations other than S corporations. Income tax 1040ez In determining whether you are carrying on an activity for profit, several factors are taken into account. Income tax 1040ez No one factor alone is decisive. Income tax 1040ez Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Income tax 1040ez Presumption of profit. Income tax 1040ez   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Income tax 1040ez Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Income tax 1040ez The activity must be substantially the same for each year within this period. Income tax 1040ez You have a profit when the gross income from an activity exceeds the deductions. Income tax 1040ez   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Income tax 1040ez   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Income tax 1040ez This means the limits discussed here will not apply. Income tax 1040ez You can take all your business deductions from the activity, even for the years that you have a loss. Income tax 1040ez You can rely on this presumption unless the IRS later shows it to be invalid. Income tax 1040ez Using the presumption later. Income tax 1040ez   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Income tax 1040ez   You can elect to do this by filing Form 5213. Income tax 1040ez Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Income tax 1040ez   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Income tax 1040ez Accordingly, it will not restrict your deductions. Income tax 1040ez Rather, you will gain time to earn a profit in the required number of years. Income tax 1040ez If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Income tax 1040ez If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Income tax 1040ez   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Income tax 1040ez The period is extended only for deductions of the activity and any related deductions that might be affected. Income tax 1040ez    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Income tax 1040ez Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Income tax 1040ez Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Income tax 1040ez You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Income tax 1040ez However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Income tax 1040ez Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Income tax 1040ez If you are an individual, these deductions may be taken only if you itemize. Income tax 1040ez These deductions may be taken on Schedule A (Form 1040). Income tax 1040ez Category 1. Income tax 1040ez   Deductions you can take for personal as well as for business activities are allowed in full. Income tax 1040ez For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Income tax 1040ez Deduct them on the appropriate lines of Schedule A (Form 1040). Income tax 1040ez For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Income tax 1040ez The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Income tax 1040ez The reduction amount returns to $100 for tax years beginning after December 31, 2009. Income tax 1040ez See Publication 547 for more information on casualty losses. Income tax 1040ez For the limits that apply to home mortgage interest, see Publication 936. Income tax 1040ez Category 2. Income tax 1040ez   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Income tax 1040ez Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Income tax 1040ez Category 3. Income tax 1040ez   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Income tax 1040ez Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Income tax 1040ez Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Income tax 1040ez    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Income tax 1040ez They are subject to the 2%-of-adjusted-gross-income limit. Income tax 1040ez See Publication 529 for information on this limit. Income tax 1040ez Example. Income tax 1040ez Adriana is engaged in a not-for-profit activity. Income tax 1040ez The income and expenses of the activity are as follows. Income tax 1040ez Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Income tax 1040ez The limit is reached in category (3), as follows. Income tax 1040ez Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Income tax 1040ez $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Income tax 1040ez Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Income tax 1040ez The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Income tax 1040ez Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Income tax 1040ez Partnerships and S corporations. Income tax 1040ez   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Income tax 1040ez They are reflected in the individual shareholder's or partner's distributive shares. Income tax 1040ez More than one activity. Income tax 1040ez   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Income tax 1040ez The following are the most significant facts and circumstances in making this determination. Income tax 1040ez The degree of organizational and economic interrelationship of various undertakings. Income tax 1040ez The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Income tax 1040ez The similarity of the undertakings. Income tax 1040ez   The IRS will generally accept your characterization if it is supported by facts and circumstances. Income tax 1040ez    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Income tax 1040ez Figure separately whether each is a not-for-profit activity. Income tax 1040ez Then figure the limit on deductions and losses separately for each activity that is not for profit. Income tax 1040ez Prev  Up  Next   Home   More Online Publications
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Help for Victims of Hurricane Sandy

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The IRS is providing help to the victims of Hurricane Sandy. Special tax relief and assistance is available to taxpayers in the Presidential Disaster Areas. 

So far, the IRS filing and payment relief applies to the following localities identified by FEMA for Individual Assistance due to Hurricane Sandy:

  • In Connecticut: Fairfield, Middlesex, New Haven, and New London Counties and the Mashantucket Pequot Tribal Nation and Mohegan Tribal Nation located within New London County;

  • In Maryland: Somerset County
  • In New Jersey: Atlantic, Bergen, Burlington, Camden, Cape May, Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union and Warren;
  • In New York: Bronx, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Sullivan, Suffolk, Ulster and Westchester;
  • In Rhode Island: Newport and Washington counties.

The IRS also announced additional tax relief to certain affected individuals and businesses, further extending tax deadlines of that relief until April 1 for the following localities:

  • In New Jersey: Monmouth and Ocean counties.
  • In New York: Nassau, Queens, Richmond and Suffolk counties.

We are monitoring the situation closely to resolve potential tax administration issues as they are identified. The IRS often updates its information on disaster relief efforts related to Hurricane Sandy. For the latest news, check this page frequently.

News Releases

  • IR-2013-16, IRS Extends Tax Relief to Some New Jersey and New York Victims of Hurricane Sandy; Return Filing and Tax Payment Deadline Extended to April 1, 2013
  • IR-2012-96, IRS Gives Additional Time to Small, Automatically Revoked Tax-Exempt Organizations Affected by Hurricane Sandy
  • IR-2012-94, IRS Extends Hurricane Sandy Diesel Fuel Penalty Waiver to Dec. 7 for New Jersey and Parts of New York
  • IR-2012-93, Retirement Plans Can Make Loans, Hardship Distributions to Sandy Victims
  • IR-2012-91, IRS Warns Consumers of Possible Scams Relating to Hurricane Sandy Relief
  • IR-2012-91SP, IRS Advierte a Consumidores de Posibles Estafas Relacionadas a las Ayudas por el Huracán Sandy
  • IR-2012-88, Treasury, IRS Announce Special Relief to Encourage Leave-Donation Programs for Victims of Hurricane Sandy
  • IR-2012-88SP, Tesoro y IRS Anuncian Alivio Especial para Estimular Programas Que Permitan la Donación de Días de Paga a Víctimas del Huracán Sandy
  • IR-2012-87, IRS Expedites Charity Applications, Urges Use of Existing Charities
  • IR-2012-87SP, El IRS Acelera Las Solicitudes de Organizaciones Benéficas, Recomienda el Uso de Caridades Existentes
  • IR-2012-86, Treasury and IRS Expand Availability of Housing for Hurricane Sandy Victims
  • IR-2012-85, IRS Waives Diesel Fuel Penalty Due to Hurricane Sandy
  • IR-2012-84, IRS Announces Qualified Disaster Treatment of Payments to Victims of Hurricane Sandy
  • IR-2012-84SP, El IRS Anuncia el Trato de Pagos Por un Desastre Calificado para las Víctimas del Huracán Sandy
  • IR-2012-83, IRS Provides Tax Relief to Victims of Hurricane Sandy; Return Filing and Tax Payment Deadline Extended to Feb. 1, 2013
  • IR-2012-83SP, IRS Ofrece Alivio a Víctimas del Huracán Sandy; Extiende Plazo de Presentación de Declaraciones de Impuestos y Pagos al 1 de Febrero de 2013
  • IR-2012-82, IRS Gives Additional Time to Taxpayers and Preparers Affected by Hurricane Sandy; File and Pay by Nov. 7

Legal Guidance

  • Notice 2013-21, Postponement of Deadline for Making an Election to Deduct for the Preceding Taxable Year Losses Attributable to Hurricane Sandy
  • Notice 2012-71, Postponement of Deadline for Transitional Relief under Notice 2011-43 for Certain Small Organizations Affected by Hurricane Sandy
  • Notice 2012-69, Treatment of Certain Amounts Paid to Section 170(c) Organizations under Certain Employer Leave-Based Donation Programs to Aid Victims of Hurricane Sandy
  • Notice 2012-68, Low-Income Housing Credit Disaster Relief for Hurricane Sandy

Other Resources

For additional information provided by the federal government on disaster recovery, visit DisasterAssistance.gov and the Hurricane Sandy Recovery page on USA.gov. The latest Federal Emergency Management Agency disaster declarations are also available.

Related Item: Hurricane Sandy News Releases and Legal Guidance

 

Page Last Reviewed or Updated: 05-Nov-2013

The Income Tax 1040ez

Income tax 1040ez 3. Income tax 1040ez   Limit on Annual Additions Table of Contents Ministers and church employees. Income tax 1040ez Includible Compensation for Your Most Recent Year of ServiceMost Recent Year of Service Includible Compensation The first component of MAC is the limit on annual additions. Income tax 1040ez This is a limit on the total contributions (elective deferrals, nonelective contributions, and after-tax contributions) that can be made to your 403(b) account. Income tax 1040ez The limit on annual additions generally is the lesser of: $51,000 for 2013 and $52,000 for 2014, or 100% of your includible compensation for your most recent year of service. Income tax 1040ez More than one 403(b) account. Income tax 1040ez If you contributed to more than one 403(b) account, you must combine the contributions made to all 403(b) accounts on your behalf by your employer. Income tax 1040ez Ministers and church employees. Income tax 1040ez   If you are a minister or a church employee, you may be able to increase your limit on annual additions or use different rules when figuring your limit on annual additions. Income tax 1040ez For more information, see chapter 5. Income tax 1040ez Participation in a qualified plan. Income tax 1040ez If you participated in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pensions of all corporations, partnerships, and sole proprietorships in which you have more than 50% control. Income tax 1040ez You can use Part I of Worksheet 1 in chapter 9 to figure your limit on annual additions. Income tax 1040ez Includible Compensation for Your Most Recent Year of Service Definition. Income tax 1040ez   Generally, includible compensation for your most recent year of service is the amount of taxable wages and benefits you received from the employer that maintained a 403(b) account for your benefit during your most recent year of service. Income tax 1040ez When figuring your includible compensation for your most recent year of service, keep in mind that your most recent year of service may not be the same as your employer's most recent annual work period. Income tax 1040ez This can happen if your tax year is not the same as your employer's annual work period. Income tax 1040ez When figuring includible compensation for your most recent year of service, do not mix compensation or service of one employer with compensation or service of another employer. Income tax 1040ez Most Recent Year of Service Your most recent year of service is your last full year of service, ending on the last day of your tax year that you worked for the employer that maintained a 403(b) account on your behalf. Income tax 1040ez Tax year different from employer's annual work period. Income tax 1040ez   If your tax year is not the same as your employer's annual work period, your most recent year of service is made up of parts of at least two of your employer's annual work periods. Income tax 1040ez Example. Income tax 1040ez A professor who reports her income on a calendar-year basis is employed on a full-time basis by a university that operates on an academic year (October through May). Income tax 1040ez To figure her includible compensation for 2013, the professor's most recent year of service is her service from January through May 2013 and from October through December 2013. Income tax 1040ez Figuring Your Most Recent Year of Service To figure your most recent year of service, begin by determining what is a full year of service for your position. Income tax 1040ez A full year of service is equal to full-time employment for your employer's annual work period. Income tax 1040ez After identifying a full year of service, begin counting the service you have provided for your employer starting with the service provided in the current year. Income tax 1040ez Part-time or employed only part of the year. Income tax 1040ez   If you are a part-time or a full-time employee who is employed for only part of the year, your most recent year of service is your service this year and your service for as many previous years as is necessary to total 1 full year of service. Income tax 1040ez To determine your most recent year of service, add the following periods of service: Your service during the year for which you are figuring the limit on annual additions, and Your service during your preceding tax years until the total service equals 1 year of service or you have figured all of your service with the employer. Income tax 1040ez Example. Income tax 1040ez You were employed on a full-time basis from July through December 2011 (1/2 year of service), July through December 2012 (1/2 year of service), and October through December 2013 (1/4 year of service). Income tax 1040ez Your most recent year of service for computing your limit on annual additions for 2013 is the total of your service during 2013 (1/4 year of service), your service during 2012 (1/2 year of service), and your service during the months October through December 2011 (1/4 year of service). Income tax 1040ez Not yet employed for 1 year. Income tax 1040ez   If, at the close of the year, you have not yet worked for your employer for 1 year (including time you worked for the same employer in all earlier years), use the period of time you have worked for the employer as your most recent year of service. Income tax 1040ez Includible Compensation After identifying your most recent year of service, the next step is to identify the includible compensation associated with that full year of service. Income tax 1040ez Includible compensation is not the same as income included on your tax return. Income tax 1040ez Compensation is a combination of income and benefits received in exchange for services provided to your employer. Income tax 1040ez Generally, includible compensation is the amount of income and benefits: Received from the employer who maintains your 403(b) account, and Must be included in your income. Income tax 1040ez Includible compensation includes the following amounts. Income tax 1040ez Elective deferrals (employer's contributions made on your behalf under a salary reduction agreement). Income tax 1040ez Amounts contributed or deferred by your employer under a section 125 cafeteria plan. Income tax 1040ez Amounts contributed or deferred, at the election of the employee, under an eligible section 457 nonqualified deferred compensation plan (state or local government or tax-exempt organization plan). Income tax 1040ez  Note. Income tax 1040ez For information about treating elective deferrals under section 457 plans as Roth contributions, see Publication 575. Income tax 1040ez Wages, salaries, and fees for personal services earned with the employer maintaining your 403(b) account. Income tax 1040ez Income otherwise excluded under the foreign earned income exclusion. Income tax 1040ez Pre-tax contributions (employer's contributions made on your behalf according to your election) to a qualified transportation fringe benefit plan. Income tax 1040ez Includible compensation does not include the following items. Income tax 1040ez Your employer's contributions to your 403(b) account. Income tax 1040ez Compensation earned while your employer was not an eligible employer. Income tax 1040ez Your employer's contributions to a qualified plan that: Are on your behalf, and Are excludable from income. Income tax 1040ez The cost of incidental life insurance. Income tax 1040ez See Cost of Incidental Life Insurance, later. Income tax 1040ez If you are a church employee or a foreign missionary, figure includible compensation using the rules explained in chapter 5. Income tax 1040ez Contributions after retirement. Income tax 1040ez   Nonelective contributions may be made for an employee for up to 5 years after retirement. Income tax 1040ez These contributions would be based on includible compensation for the last year of service before retirement. Income tax 1040ez Cost of Incidental Life Insurance Includible compensation does not include the cost of incidental life insurance. Income tax 1040ez If all of your 403(b) accounts invest only in mutual funds, then you have no incidental life insurance. Income tax 1040ez If you have an annuity contract, a portion of the cost of that contract may be for incidental life insurance. Income tax 1040ez If so, the cost of the insurance is taxable to you in the year contributed and is considered part of your basis when distributed. Income tax 1040ez Your employer will include the cost of your insurance as taxable wages in box 1 of Form W-2. Income tax 1040ez Not all annuity contracts include life insurance. Income tax 1040ez Contact your plan administrator to determine if your contract includes incidental life insurance. Income tax 1040ez If it does, you will need to figure the cost of life insurance each year the policy is in effect. Income tax 1040ez Figuring the cost of incidental life insurance. Income tax 1040ez If you have determined that part of the cost of your annuity contract is for an incidental life insurance premium, you will need to determine the amount of the premium and subtract it from your includible compensation. Income tax 1040ez To determine the amount of the life insurance premiums, you will need to know the following information. Income tax 1040ez The value of your life insurance contract, which is the amount payable upon your death. Income tax 1040ez The cash value of your life insurance contract at the end of the tax year. Income tax 1040ez Your age on your birthday nearest the beginning of the policy year. Income tax 1040ez Your current life insurance protection under an ordinary retirement income life insurance policy, which is the amount payable upon your death minus the cash value of the contract at the end of the year. Income tax 1040ez You can use Worksheet A, in chapter 9, to determine the cost of your incidental life insurance. Income tax 1040ez Example. Income tax 1040ez Your new contract provides that your beneficiary will receive $10,000 if you should die before retirement. Income tax 1040ez Your cash value in the contract at the end of the first year is zero. Income tax 1040ez Your current life insurance protection for the first year is $10,000 ($10,000 − 0). Income tax 1040ez The cash value in the contract at the end of year two is $1,000, and the current life insurance protection for the second year is $9,000 ($10,000 – $1,000). Income tax 1040ez The 1-year cost of the protection can be calculated by using Figure 3-1, Table of One-Year Term Premiums for $1,000 Life Insurance Protection . Income tax 1040ez The premium rate is determined based on your age on your birthday nearest the beginning of the policy year. Income tax 1040ez Figure 3-1. Income tax 1040ez Table of One-Year Term Premiums for $1,000 Life Insurance Protection Age Cost   Age Cost   Age Cost 0 $0. Income tax 1040ez 70   35 $0. Income tax 1040ez 99   70 $20. Income tax 1040ez 62 1 0. Income tax 1040ez 41   36 1. Income tax 1040ez 01   71 22. Income tax 1040ez 72 2 0. Income tax 1040ez 27   37 1. Income tax 1040ez 04   72 25. Income tax 1040ez 07 3 0. Income tax 1040ez 19   38 1. Income tax 1040ez 06   73 27. Income tax 1040ez 57 4 0. Income tax 1040ez 13   39 1. Income tax 1040ez 07   74 30. Income tax 1040ez 18 5 0. Income tax 1040ez 13   40 1. Income tax 1040ez 10   75 33. Income tax 1040ez 05 6 0. Income tax 1040ez 14   41 1. Income tax 1040ez 13   76 36. Income tax 1040ez 33 7 0. Income tax 1040ez 15   42 1. Income tax 1040ez 20   77 40. Income tax 1040ez 17 8 0. Income tax 1040ez 16   43 1. Income tax 1040ez 29   78 44. Income tax 1040ez 33 9 0. Income tax 1040ez 16   44 1. Income tax 1040ez 40   79 49. Income tax 1040ez 23 10 0. Income tax 1040ez 16   45 1. Income tax 1040ez 53   80 54. Income tax 1040ez 56 11 0. Income tax 1040ez 19   46 1. Income tax 1040ez 67   81 60. Income tax 1040ez 51 12 0. Income tax 1040ez 24   47 1. Income tax 1040ez 83   82 66. Income tax 1040ez 74 13 0. Income tax 1040ez 28   48 1. Income tax 1040ez 98   83 73. Income tax 1040ez 07 14 0. Income tax 1040ez 33   49 2. Income tax 1040ez 13   84 80. Income tax 1040ez 35 15 0. Income tax 1040ez 38   50 2. Income tax 1040ez 30   85 88. Income tax 1040ez 76 16 0. Income tax 1040ez 52   51 2. Income tax 1040ez 52   86 99. Income tax 1040ez 16 17 0. Income tax 1040ez 57   52 2. Income tax 1040ez 81   87 110. Income tax 1040ez 40 18 0. Income tax 1040ez 59   53 3. Income tax 1040ez 20   88 121. Income tax 1040ez 85 19 0. Income tax 1040ez 61   54 3. Income tax 1040ez 65   89 133. Income tax 1040ez 40 20 0. Income tax 1040ez 62   55 4. Income tax 1040ez 15   90 144. Income tax 1040ez 30 21 0. Income tax 1040ez 62   56 4. Income tax 1040ez 68   91 155. Income tax 1040ez 80 22 0. Income tax 1040ez 64   57 5. Income tax 1040ez 20   92 168. Income tax 1040ez 75 23 0. Income tax 1040ez 66   58 5. Income tax 1040ez 66   93 186. Income tax 1040ez 44 24 0. Income tax 1040ez 68   59 6. Income tax 1040ez 06   94 206. Income tax 1040ez 70 25 0. Income tax 1040ez 71   60 6. Income tax 1040ez 51   95 228. Income tax 1040ez 35 26 0. Income tax 1040ez 73   61 7. Income tax 1040ez 11   96 250. Income tax 1040ez 01 27 0. Income tax 1040ez 76   62 7. Income tax 1040ez 96   97 265. Income tax 1040ez 09 28 0. Income tax 1040ez 80   63 9. Income tax 1040ez 08   98 270. Income tax 1040ez 11 29 0. Income tax 1040ez 83   64 10. Income tax 1040ez 41   99 281. Income tax 1040ez 05 30 0. Income tax 1040ez 87   65 11. Income tax 1040ez 90       31 0. Income tax 1040ez 90   66 13. Income tax 1040ez 51       32 0. Income tax 1040ez 93   67 15. Income tax 1040ez 20       33 0. Income tax 1040ez 96   68 16. Income tax 1040ez 92       34 0. Income tax 1040ez 98   69 18. Income tax 1040ez 70                       If the current published premium rates per $1,000 of insurance protection charged by an insurer for individual 1-year term life insurance premiums available to all standard risks are lower than those in the preceding table, you can use the lower rates for figuring the cost of insurance in connection with individual policies issued by the same insurer. Income tax 1040ez Example 1. Income tax 1040ez Lynne Green, age 44, and her employer enter into a 403(b) plan that will provide her with a $500 a month annuity upon retirement at age 65. Income tax 1040ez The agreement also provides that if she should die before retirement, her beneficiary will receive the greater of $20,000 or the cash surrender value in the life insurance contract. Income tax 1040ez Using the facts presented we can determine the cost of Lynne's life insurance protection as shown in Table 3-1. Income tax 1040ez Lynne's employer has included $28 for the cost of the life insurance protection in her current year's income. Income tax 1040ez When figuring her includible compensation for this year, Lynne will subtract $28. Income tax 1040ez Table 3-1. Income tax 1040ez Worksheet A. Income tax 1040ez Cost of Incidental Life Insurance Note. Income tax 1040ez Use this worksheet to figure the cost of incidental life insurance included in your annuity contract. Income tax 1040ez This amount will be used to figure includible compensation for your most recent year of service. Income tax 1040ez 1. Income tax 1040ez Enter the value of the contract (amount payable upon your death) 1. Income tax 1040ez $20,000. Income tax 1040ez 00 2. Income tax 1040ez Enter the cash value in the contract at the end of the year 2. Income tax 1040ez 0. Income tax 1040ez 00 3. Income tax 1040ez Subtract line 2 from line 1. Income tax 1040ez This is the value of your current life insurance protection 3. Income tax 1040ez $20,000. Income tax 1040ez 00 4. Income tax 1040ez Enter your age on your birthday nearest the beginning of the policy year 4. Income tax 1040ez 44 5. Income tax 1040ez Enter the 1-year term premium for $1,000 of life insurance based on your age. Income tax 1040ez (From Figure 3-1) 5. Income tax 1040ez $1. Income tax 1040ez 40 6. Income tax 1040ez Divide line 3 by $1,000 6. Income tax 1040ez 20 7. Income tax 1040ez Multiply line 6 by line 5. Income tax 1040ez This is the cost of your incidental life insurance 7. Income tax 1040ez $28. Income tax 1040ez 00 Example 2. Income tax 1040ez Lynne's cash value in the contract at the end of the second year is $1,000. Income tax 1040ez In year two, the cost of Lynne's life insurance is calculated as shown in Table 3-2. Income tax 1040ez In year two, Lynne's employer will include $29. Income tax 1040ez 07 in her current year's income. Income tax 1040ez Lynne will subtract this amount when figuring her includible compensation. Income tax 1040ez Table 3-2. Income tax 1040ez Worksheet A. Income tax 1040ez Cost of Incidental Life Insurance Note. Income tax 1040ez Use this worksheet to figure the cost of incidental life insurance included in your annuity contract. Income tax 1040ez This amount will be used to figure includible compensation for your most recent year of service. Income tax 1040ez 1. Income tax 1040ez Enter the value of the contract (amount payable upon your death) 1. Income tax 1040ez $20,000. Income tax 1040ez 00 2. Income tax 1040ez Enter the cash value in the contract at the end of the year 2. Income tax 1040ez $1,000. Income tax 1040ez 00 3. Income tax 1040ez Subtract line 2 from line 1. Income tax 1040ez This is the value of your current life insurance protection 3. Income tax 1040ez $19,000. Income tax 1040ez 00 4. Income tax 1040ez Enter your age on your birthday nearest the beginning of the policy year 4. Income tax 1040ez 45 5. Income tax 1040ez Enter the 1-year term premium for $1,000 of life insurance based on your age. Income tax 1040ez (From Figure 3-1) 5. Income tax 1040ez $1. Income tax 1040ez 53 6. Income tax 1040ez Divide line 3 by $1,000 6. Income tax 1040ez 19 7. Income tax 1040ez Multiply line 6 by line 5. Income tax 1040ez This is the cost of your incidental life insurance 7. Income tax 1040ez $29. Income tax 1040ez 07 Figuring Includible Compensation for Your Most Recent Year of Service You can use Worksheet B in chapter 9 to determine your includible compensation for your most recent year of service. Income tax 1040ez Example. Income tax 1040ez Floyd has been periodically working full-time for a local hospital since September 2011. Income tax 1040ez He needs to figure his limit on annual additions for 2014. Income tax 1040ez The hospital's normal annual work period for employees in Floyd's general type of work runs from January to December. Income tax 1040ez During the periods that Floyd was employed with the hospital, the hospital has always been eligible to provide a 403(b) plan to employees. Income tax 1040ez Additionally, the hospital has never provided the employees with a 457 deferred compensation plan, a transportation fringe benefit plan, or a cafeteria plan. Income tax 1040ez Floyd has never worked abroad and there is no life insurance provided under the plan. Income tax 1040ez Table 3-3 shows the service Floyd provided to his employer, his compensation for the periods worked, his elective deferrals, and his taxable wages. Income tax 1040ez Table 3-3. Income tax 1040ez Floyd's Compensation Note. Income tax 1040ez This table shows information Floyd will use to figure includible compensation for his most recent year of service. Income tax 1040ez   Year Years of Service Taxable Wages Elective Deferrals 2014 6/12 of  a year $42,000 $2,000 2013 4/12 of  a year $16,000 $1,650 2012 4/12 of  a year $16,000 $1,650 Before Floyd can figure his limit on annual additions, he must figure includible compensation for his most recent year of service. Income tax 1040ez Because Floyd is not planning to work the entire 2014 year, his most recent year of service will include the time he is planning to work in 2014 plus time he worked in the preceding 3 years until the time he worked for the hospital totals 1 year. Income tax 1040ez If the total time he worked is less than 1 year, Floyd will treat it as if it were 1 year. Income tax 1040ez He figures his most recent year of service shown in the following list. Income tax 1040ez Time he will work in 2014 is 6/12 of a year. Income tax 1040ez Time worked in 2013 is 4/12 of a year. Income tax 1040ez All of this time will be used to determine Floyd's most recent year of service. Income tax 1040ez Time worked in 2012 is 4/12 of a year. Income tax 1040ez Floyd only needs 2 months of the 4 months he worked in 2012 to have enough time to total 1 full year. Income tax 1040ez Because he needs only one-half of the actual time he worked, Floyd will use only one-half of his income earned during that period to calculate wages that will be used in figuring his includible compensation. Income tax 1040ez Using the information provided in Table 3-3, wages for Floyd's most recent year of service are $66,000 ($42,000 + $16,000 + $8,000). Income tax 1040ez His includible compensation for his most recent year of service is figured as shown in Table 3-4. Income tax 1040ez After figuring his includible compensation, Floyd determines his limit on annual additions for 2014 to be $52,000, the lesser of his includible compensation, $70,475 (Table 3-4), and the maximum amount of $52,000. Income tax 1040ez Table 3-4. Income tax 1040ez Worksheet B. Income tax 1040ez Includible Compensation for Your Most Recent Year of Service1 Note. Income tax 1040ez Use this worksheet to figure includible compensation for your most recent year of service. Income tax 1040ez 1. Income tax 1040ez Enter your includible wages from the employer maintaining your 403(b) account for your most recent year of service 1. Income tax 1040ez $66,000 2. Income tax 1040ez Enter elective deferrals excluded from your gross income for your most recent year of service2 2. Income tax 1040ez 4,4753 3. Income tax 1040ez Enter amounts contributed or deferred by your employer under a cafeteria plan for your most recent year of service 3. Income tax 1040ez -0- 4. Income tax 1040ez Enter amounts contributed or deferred by your employer according to your election to your 457 account (a nonqualified plan of a state or local government, or of a tax-exempt organization) for your most recent year of service 4. Income tax 1040ez -0- 5. Income tax 1040ez Enter pre-tax contributions (employer's contributions made on your behalf according to your election) to a qualified transportation fringe benefit plan for your most recent year of service 5. Income tax 1040ez -0- 6. Income tax 1040ez Enter your foreign earned income exclusion for your most recent year of service 6. Income tax 1040ez -0- 7. Income tax 1040ez Add lines 1, 2, 3, 4, 5, and 6 7. Income tax 1040ez 70,475 8. Income tax 1040ez Enter the cost of incidental life insurance that is part of your annuity contract for your most recent year of service 8. Income tax 1040ez -0- 9. Income tax 1040ez Enter compensation that was both: Earned during your most recent year of service, and Earned while your employer was not qualified to maintain a 403(b) plan 9. Income tax 1040ez -0- 10. Income tax 1040ez Add lines 8 and 9 10. Income tax 1040ez -0- 11. Income tax 1040ez Subtract line 10 from line 7. Income tax 1040ez This is your includible compensation for your most recent year of service 11. Income tax 1040ez 70,475 1Use estimated amounts if figuring includible compensation before the end of the year. Income tax 1040ez 2Elective deferrals made to a designated Roth account are not excluded from your gross income and should not be included on this line. Income tax 1040ez  3$4,475 ($2,000 + $1,650 + $825). Income tax 1040ez Prev  Up  Next   Home   More Online Publications