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Irs Free File

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Irs Free File

Irs free file Publication 15-B - Main Content Table of Contents 1. Irs free file Fringe Benefit OverviewAre Fringe Benefits Taxable? Cafeteria Plans Simple Cafeteria Plans 2. Irs free file Fringe Benefit Exclusion RulesAccident and Health Benefits Achievement Awards Adoption Assistance Athletic Facilities De Minimis (Minimal) Benefits Dependent Care Assistance Educational Assistance Employee Discounts Employee Stock Options Employer-Provided Cell Phones Group-Term Life Insurance Coverage Health Savings Accounts Lodging on Your Business Premises Meals Moving Expense Reimbursements No-Additional-Cost Services Retirement Planning Services Transportation (Commuting) Benefits Tuition Reduction Working Condition Benefits 3. Irs free file Fringe Benefit Valuation RulesGeneral Valuation Rule Cents-Per-Mile Rule Commuting Rule Lease Value Rule Unsafe Conditions Commuting Rule 4. Irs free file Rules for Withholding, Depositing, and ReportingTransfer of property. Irs free file Amount of deposit. Irs free file Limitation. Irs free file Conformity rules. Irs free file Election not to withhold income tax. Irs free file How To Get Tax Help 1. Irs free file Fringe Benefit Overview A fringe benefit is a form of pay for the performance of services. Irs free file For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work. Irs free file Performance of services. Irs free file   A person who performs services for you does not have to be your employee. Irs free file A person may perform services for you as an independent contractor, partner, or director. Irs free file Also, for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services. Irs free file Provider of benefit. Irs free file   You are the provider of a fringe benefit if it is provided for services performed for you. Irs free file You are considered the provider of a fringe benefit even if a third party, such as your client or customer, provides the benefit to your employee for services the employee performs for you. Irs free file For example, if, in exchange for goods or services, your customer provides day care services as a fringe benefit to your employees for services they provide for you as their employer, then you are the provider of this fringe benefit even though the customer is actually providing the day care. Irs free file Recipient of benefit. Irs free file   The person who performs services for you is considered the recipient of a fringe benefit provided for those services. Irs free file That person may be considered the recipient even if the benefit is provided to someone who did not perform services for you. Irs free file For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family. Irs free file Are Fringe Benefits Taxable? Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Irs free file Section 2 discusses the exclusions that apply to certain fringe benefits. Irs free file Any benefit not excluded under the rules discussed in section 2 is taxable. Irs free file Including taxable benefits in pay. Irs free file   You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts. Irs free file Any amount the law excludes from pay. Irs free file Any amount the recipient paid for the benefit. Irs free file The rules used to determine the value of a fringe benefit are discussed in section 3. Irs free file   If the recipient of a taxable fringe benefit is your employee, the benefit is subject to employment taxes and must be reported on Form W-2, Wage and Tax Statement. Irs free file However, you can use special rules to withhold, deposit, and report the employment taxes. Irs free file These rules are discussed in section 4. Irs free file   If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes. Irs free file However, you may have to report the benefit on one of the following information returns. Irs free file If the recipient receives the benefit as: Use: An independent contractor Form 1099-MISC, Miscellaneous Income A partner Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Irs free file For more information, see the instructions for the forms listed above. Irs free file Cafeteria Plans A cafeteria plan, including a flexible spending arrangement, is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. Irs free file If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable. Irs free file Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. Irs free file However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Irs free file Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay. Irs free file Qualified benefits. Irs free file   A cafeteria plan can include the following benefits discussed in section 2. Irs free file Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance). Irs free file Adoption assistance. Irs free file Dependent care assistance. Irs free file Group-term life insurance coverage (including costs that cannot be excluded from wages). Irs free file Health savings accounts (HSAs). Irs free file Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services. Irs free file Benefits not allowed. Irs free file   A cafeteria plan cannot include the following benefits discussed in section 2. Irs free file Archer MSAs. Irs free file See Accident and Health Benefits in section 2. Irs free file Athletic facilities. Irs free file De minimis (minimal) benefits. Irs free file Educational assistance. Irs free file Employee discounts. Irs free file Employer-provided cell phones. Irs free file Lodging on your business premises. Irs free file Meals. Irs free file Moving expense reimbursements. Irs free file No-additional-cost services. Irs free file Transportation (commuting) benefits. Irs free file Tuition reduction. Irs free file Working condition benefits. Irs free file It also cannot include scholarships or fellowships (discussed in Publication 970, Tax Benefits for Education). Irs free file $2,500 limit on a health flexible spending arrangement (FSA). Irs free file   For plan years beginning after December 31, 2012, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,500. Irs free file For plan years beginning after December 31, 2013, the limit is unchanged at $2,500. Irs free file   A cafeteria plan offering a health FSA must be amended to specify the $2,500 limit (or any lower limit set by the employer). Irs free file While cafeteria plans generally must be amended on a prospective basis, an amendment that is adopted on or before December 31, 2014, may be made effective retroactively, provided that in operation the cafeteria plan meets the limit for plan years beginning after December 31, 2012. Irs free file A cafeteria plan that does not limit health FSA contributions to the dollar limit is not a cafeteria plan and all benefits offered under the plan are includible in the employee's gross income. Irs free file   For more information, see Notice 2012-40, 2012-26 I. Irs free file R. Irs free file B. Irs free file 1046, available at www. Irs free file irs. Irs free file gov/irb/2012-26_IRB/ar09. Irs free file html. Irs free file Employee. Irs free file   For these plans, treat the following individuals as employees. Irs free file A current common-law employee. Irs free file See section 2 in Publication 15 (Circular E) for more information. Irs free file A full-time life insurance agent who is a current statutory employee. Irs free file A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Irs free file Exception for S corporation shareholders. Irs free file   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Irs free file A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Irs free file Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Irs free file Plans that favor highly compensated employees. Irs free file   If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. Irs free file A plan you maintain under a collective bargaining agreement does not favor highly compensated employees. Irs free file   A highly compensated employee for this purpose is any of the following employees. Irs free file An officer. Irs free file A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock. Irs free file An employee who is highly compensated based on the facts and circumstances. Irs free file A spouse or dependent of a person described in (1), (2), or (3). Irs free file Plans that favor key employees. Irs free file   If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. Irs free file A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. Irs free file However, a plan you maintain under a collective bargaining agreement does not favor key employees. Irs free file   A key employee during 2014 is generally an employee who is either of the following. Irs free file An officer having annual pay of more than $170,000. Irs free file An employee who for 2014 is either of the following. Irs free file A 5% owner of your business. Irs free file A 1% owner of your business whose annual pay was more than $150,000. Irs free file Simple Cafeteria Plans Eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. Irs free file Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan. Irs free file Eligible employer. Irs free file   You are an eligible employer if you employ an average of 100 or fewer employees during either of the 2 preceding years. Irs free file If your business was not in existence throughout the preceding year, you are eligible if you reasonably expect to employ an average of 100 or fewer employees in the current year. Irs free file If you establish a simple cafeteria plan in a year that you employ an average of 100 or fewer employees, you are considered an eligible employer for any subsequent year as long as you do not employ an average of 200 or more employees in a subsequent year. Irs free file Eligibility and participation requirements. Irs free file   These requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and each employee eligible to participate in the plan may elect any benefit available under the plan. Irs free file You may elect to exclude from the plan employees who: Are under age 21 before the close of the plan year, Have less than 1 year of service with you as of any day during the plan year, Are covered under a collective bargaining agreement, or Are nonresident aliens working outside the United States whose income did not come from a U. Irs free file S. Irs free file source. Irs free file Contribution requirements. Irs free file   You must make a contribution to provide qualified benefits on behalf of each qualified employee in an amount equal to: A uniform percentage (not less than 2%) of the employee’s compensation for the plan year, or An amount which is at least 6% of the employee’s compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee, whichever is less. Irs free file If the contribution requirements are met using option (2), the rate of contribution to any salary reduction contribution of a highly compensated or key employee can not be greater than the rate of contribution to any other employee. Irs free file More information. Irs free file   For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations. Irs free file 2. Irs free file Fringe Benefit Exclusion Rules This section discusses the exclusion rules that apply to fringe benefits. Irs free file These rules exclude all or part of the value of certain benefits from the recipient's pay. Irs free file The excluded benefits are not subject to federal income tax withholding. Irs free file Also, in most cases, they are not subject to social security, Medicare, or federal unemployment (FUTA) tax and are not reported on Form W-2. Irs free file This section discusses the exclusion rules for the following fringe benefits. Irs free file Accident and health benefits. Irs free file Achievement awards. Irs free file Adoption assistance. Irs free file Athletic facilities. Irs free file De minimis (minimal) benefits. Irs free file Dependent care assistance. Irs free file Educational assistance. Irs free file Employee discounts. Irs free file Employee stock options. Irs free file Employer-provided cell phones. Irs free file Group-term life insurance coverage. Irs free file Health savings accounts (HSAs). Irs free file Lodging on your business premises. Irs free file Meals. Irs free file Moving expense reimbursements. Irs free file No-additional-cost services. Irs free file Retirement planning services. Irs free file Transportation (commuting) benefits. Irs free file Tuition reduction. Irs free file Working condition benefits. Irs free file See Table 2-1, later, for an overview of the employment tax treatment of these benefits. Irs free file Table 2-1. Irs free file Special Rules for Various Types of Fringe Benefits (For more information, see the full discussion in this section. Irs free file ) Treatment Under Employment Taxes Type of Fringe Benefit Income Tax Withholding Social Security and Medicare (including Additional Medicare Tax when wages are paid in excess of $200,000) Federal Unemployment (FUTA) Accident and health benefits Exempt1,2, except for long-term care benefits provided through a flexible spending or similar arrangement. Irs free file Exempt, except for certain payments to S corporation employees who are 2% shareholders. Irs free file Exempt Achievement awards Exempt1 up to $1,600 for qualified plan awards ($400 for nonqualified awards). Irs free file Adoption assistance Exempt1,3 Taxable Taxable Athletic facilities Exempt if substantially all use during the calendar year is by employees, their spouses, and their dependent children and the facility is operated by the employer on premises owned or leased by the employer. Irs free file De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). Irs free file Educational assistance Exempt up to $5,250 of benefits each year. Irs free file (See Educational Assistance , later in this section. Irs free file ) Employee discounts Exempt3 up to certain limits. Irs free file (See Employee Discounts , later in this section. Irs free file ) Employee stock options See Employee Stock Options , later in this section. Irs free file Employer-provided cell phones Exempt if provided primarily for noncompensatory business purposes. Irs free file Group-term life insurance coverage Exempt Exempt1,4, 7 up to cost of $50,000 of coverage. Irs free file (Special rules apply to former employees. Irs free file ) Exempt Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. Irs free file (See Health Savings Accounts , later in this section. Irs free file ) Lodging on your business premises Exempt1 if furnished for your convenience as a condition of employment. Irs free file Meals Exempt if furnished on your business premises for your convenience. Irs free file Exempt if de minimis. Irs free file Moving expense reimbursements Exempt1 if expenses would be deductible if the employee had paid them. Irs free file No-additional-cost services Exempt3 Exempt3 Exempt3 Retirement planning services Exempt5 Exempt5 Exempt5 Transportation (commuting) benefits Exempt1 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($130), qualified parking ($250), or qualified bicycle commuting reimbursement6 ($20). Irs free file (See Transportation (Commuting) Benefits , later in this section. Irs free file ) Exempt if de minimis. Irs free file Tuition reduction Exempt3 if for undergraduate education (or graduate education if the employee performs teaching or research activities). Irs free file Working condition benefits Exempt Exempt Exempt 1 Exemption does not apply to S corporation employees who are 2% shareholders. Irs free file 2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees. Irs free file 3 Exemption does not apply to certain highly compensated employees under a program that favors those employees. Irs free file 4 Exemption does not apply to certain key employees under a plan that favors those employees. Irs free file 5 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services. Irs free file 6 If the employee receives a qualified bicycle commuting reimbursement in a qualified bicycle commuting month, the employee cannot receive commuter highway vehicle, transit pass, or qualified parking benefits in that same month. Irs free file 7 You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. Irs free file Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Irs free file Also, show it in box 12 with code “C. Irs free file ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. Irs free file Accident and Health Benefits This exclusion applies to contributions you make to an accident or health plan for an employee, including the following. Irs free file Contributions to the cost of accident or health insurance including qualified long-term care insurance. Irs free file Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits. Irs free file Contributions to Archer MSAs or health savings accounts (discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans). Irs free file This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following. Irs free file Payments or reimbursements of medical expenses. Irs free file Payments for specific injuries or illnesses (such as the loss of the use of an arm or leg). Irs free file The payments must be figured without regard to any period of absence from work. Irs free file Accident or health plan. Irs free file   This is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children (under age 27) in the event of personal injury or sickness. Irs free file The plan may be insured or noninsured and does not need to be in writing. Irs free file Employee. Irs free file   For this exclusion, treat the following individuals as employees. Irs free file A current common-law employee. Irs free file A full-time life insurance agent who is a current statutory employee. Irs free file A retired employee. Irs free file A former employee you maintain coverage for based on the employment relationship. Irs free file A widow or widower of an individual who died while an employee. Irs free file A widow or widower of a retired employee. Irs free file For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Irs free file Special rule for certain government plans. Irs free file   For certain government accident and health plans, payments to a deceased plan participant's beneficiary may qualify for the exclusion from gross income if the other requirements for exclusion are met. Irs free file See section 105(j) for details. Irs free file Exception for S corporation shareholders. Irs free file   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Irs free file A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Irs free file Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Irs free file Exclusion from wages. Irs free file   You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages. Irs free file Exception for certain long-term care benefits. Irs free file   You cannot exclude contributions to the cost of long-term care insurance from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement. Irs free file This is a benefit program that reimburses specified expenses up to a maximum amount that is reasonably available to the employee and is less than five times the total cost of the insurance. Irs free file However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. Irs free file S corporation shareholders. Irs free file   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee's wages subject to federal income tax withholding. Irs free file However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. Irs free file Exception for highly compensated employees. Irs free file   If your plan is a self-insured medical reimbursement plan that favors highly compensated employees, you must include all or part of the amounts you pay to these employees in their wages subject to federal income tax withholding. Irs free file However, you can exclude these amounts (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. Irs free file   A self-insured plan is a plan that reimburses your employees for medical expenses not covered by an accident or health insurance policy. Irs free file   A highly compensated employee for this exception is any of the following individuals. Irs free file One of the five highest paid officers. Irs free file An employee who owns (directly or indirectly) more than 10% in value of the employer's stock. Irs free file An employee who is among the highest paid 25% of all employees (other than those who can be excluded from the plan). Irs free file   For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations. Irs free file COBRA premiums. Irs free file   The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a current or former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). Irs free file The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary. Irs free file Achievement Awards This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. Irs free file The exclusion does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. Irs free file The award must meet the requirements for employee achievement awards discussed in chapter 2 of Publication 535, Business Expenses. Irs free file Employee. Irs free file   For this exclusion, treat the following individuals as employees. Irs free file A current employee. Irs free file A former common-law employee you maintain coverage for in consideration of or based on an agreement relating to prior service as an employee. Irs free file A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Irs free file Exception for S corporation shareholders. Irs free file   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Irs free file A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Irs free file Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Irs free file Exclusion from wages. Irs free file   You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not more than the amount you can deduct as a business expense for the year. Irs free file The excludable annual amount is $1,600 ($400 for awards that are not “qualified plan awards”). Irs free file See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards. Irs free file    To determine for 2014 whether an achievement award is a “qualified plan award” under the deduction rules described in Publication 535, treat any employee who received more than $115,000 in pay for 2013 as a highly compensated employee. Irs free file   If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages the larger of the following amounts. Irs free file The part of the cost that is more than your allowable deduction (up to the value of the awards). Irs free file The amount by which the value of the awards exceeds your allowable deduction. Irs free file Exclude the remaining value of the awards from the employee's wages. Irs free file Adoption Assistance An adoption assistance program is a separate written plan of an employer that meets all of the following requirements. Irs free file It benefits employees who qualify under rules set up by you, which do not favor highly compensated employees or their dependents. Irs free file To determine whether your plan meets this test, do not consider employees excluded from your plan who are covered by a collective bargaining agreement, if there is evidence that adoption assistance was a subject of good-faith bargaining. Irs free file It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). Irs free file A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. Irs free file You give reasonable notice of the plan to eligible employees. Irs free file Employees provide reasonable substantiation that payments or reimbursements are for qualifying expenses. Irs free file For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Irs free file The employee was a 5% owner at any time during the year or the preceding year. Irs free file The employee received more than $115,000 in pay for the preceding year. Irs free file You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Irs free file You must exclude all payments or reimbursements you make under an adoption assistance program for an employee's qualified adoption expenses from the employee's wages subject to federal income tax withholding. Irs free file However, you cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. Irs free file For more information, see the Instructions for Form 8839, Qualified Adoption Expenses. Irs free file You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance program for each employee for the year in box 12 of the employee's Form W-2. Irs free file Use code “T” to identify this amount. Irs free file Exception for S corporation shareholders. Irs free file   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. Irs free file A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Irs free file Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, including using the benefit as a reduction in distributions to the 2% shareholder. Irs free file Athletic Facilities You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. Irs free file For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, has not attained the age of 25. Irs free file On-premises facility. Irs free file   The athletic facility must be located on premises you own or lease. Irs free file It does not have to be located on your business premises. Irs free file However, the exclusion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort. Irs free file Employee. Irs free file   For this exclusion, treat the following individuals as employees. Irs free file A current employee. Irs free file A former employee who retired or left on disability. Irs free file A widow or widower of an individual who died while an employee. Irs free file A widow or widower of a former employee who retired or left on disability. Irs free file A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Irs free file A partner who performs services for a partnership. Irs free file De Minimis (Minimal) Benefits You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. Irs free file A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administratively impracticable. Irs free file Cash and cash equivalent fringe benefits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare. Irs free file Examples of de minimis benefits include the following. Irs free file Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes. Irs free file See Employer-Provided Cell Phones , later in this section, for details. Irs free file Occasional personal use of a company copying machine if you sufficiently control its use so that at least 85% of its use is for business purposes. Irs free file Holiday gifts, other than cash, with a low fair market value. Irs free file Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount is not more than $2,000. Irs free file Meals. Irs free file See Meals , later in this section, for details. Irs free file Occasional parties or picnics for employees and their guests. Irs free file Occasional tickets for theater or sporting events. Irs free file Transportation fare. Irs free file See Transportation (Commuting) Benefits , later in this section, for details. Irs free file Employee. Irs free file   For this exclusion, treat any recipient of a de minimis benefit as an employee. Irs free file Dependent Care Assistance This exclusion applies to household and dependent care services you directly or indirectly pay for or provide to an employee under a dependent care assistance program that covers only your employees. Irs free file The services must be for a qualifying person's care and must be provided to allow the employee to work. Irs free file These requirements are basically the same as the tests the employee would have to meet to claim the dependent care credit if the employee paid for the services. Irs free file For more information, see Qualifying Person Test and Work-Related Expense Test in Publication 503, Child and Dependent Care Expenses. Irs free file Employee. Irs free file   For this exclusion, treat the following individuals as employees. Irs free file A current employee. Irs free file A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Irs free file Yourself (if you are a sole proprietor). Irs free file A partner who performs services for a partnership. Irs free file Exclusion from wages. Irs free file   You can exclude the value of benefits you provide to an employee under a dependent care assistance program from the employee's wages if you reasonably believe that the employee can exclude the benefits from gross income. Irs free file   An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. Irs free file This limit is reduced to $2,500 for married employees filing separate returns. Irs free file   However, the exclusion cannot be more than the smaller of the earned income of either the employee or employee's spouse. Irs free file Special rules apply to determine the earned income of a spouse who is either a student or not able to care for himself or herself. Irs free file For more information on the earned income limit, see Publication 503. Irs free file Exception for highly compensated employees. Irs free file   You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided under the program do not favor highly compensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue Code. Irs free file   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Irs free file The employee was a 5% owner at any time during the year or the preceding year. Irs free file The employee received more than $115,000 in pay for the preceding year. Irs free file You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Irs free file Form W-2. Irs free file   Report the value of all dependent care assistance you provide to an employee under a dependent care assistance program in box 10 of the employee's Form W-2. Irs free file Include any amounts you cannot exclude from the employee's wages in boxes 1, 3, and 5. Irs free file Report both the nontaxable portion of assistance (up to $5,000) and any assistance above the amount that is non-taxable to the employee. Irs free file Example. Irs free file   Company A provides a dependent care assistance flexible spending arrangement to its employees through a cafeteria plan. Irs free file In addition, it provides occasional on-site dependent care to its employees at no cost. Irs free file Emily, an employee of company A, had $4,500 deducted from her pay for the dependent care flexible spending arrangement. Irs free file In addition, Emily used the on-site dependent care several times. Irs free file The fair market value of the on-site care was $700. Irs free file Emily's Form W-2 should report $5,200 of dependent care assistance in box 10 ($4,500 flexible spending arrangement plus $700 on-site dependent care). Irs free file Boxes 1, 3, and 5 should include $200 (the amount in excess of the nontaxable assistance), and applicable taxes should be withheld on that amount. Irs free file Educational Assistance This exclusion applies to educational assistance you provide to employees under an educational assistance program. Irs free file The exclusion also applies to graduate level courses. Irs free file Educational assistance means amounts you pay or incur for your employees' education expenses. Irs free file These expenses generally include the cost of books, equipment, fees, supplies, and tuition. Irs free file However, these expenses do not include the cost of a course or other education involving sports, games, or hobbies, unless the education: Has a reasonable relationship to your business, or Is required as part of a degree program. Irs free file Education expenses do not include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. Irs free file Nor do they include the cost of lodging, meals, or transportation. Irs free file Educational assistance program. Irs free file   An educational assistance program is a separate written plan that provides educational assistance only to your employees. Irs free file The program qualifies only if all of the following tests are met. Irs free file The program benefits employees who qualify under rules set up by you that do not favor highly compensated employees. Irs free file To determine whether your program meets this test, do not consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining. Irs free file The program does not provide more than 5% of its benefits during the year for shareholders or owners. Irs free file A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. Irs free file The program does not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance. Irs free file You give reasonable notice of the program to eligible employees. Irs free file Your program can cover former employees if their employment is the reason for the coverage. Irs free file   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Irs free file The employee was a 5% owner at any time during the year or the preceding year. Irs free file The employee received more than $115,000 in pay for the preceding year. Irs free file You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Irs free file Employee. Irs free file   For this exclusion, treat the following individuals as employees. Irs free file A current employee. Irs free file A former employee who retired, left on disability, or was laid off. Irs free file A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Irs free file Yourself (if you are a sole proprietor). Irs free file A partner who performs services for a partnership. Irs free file Exclusion from wages. Irs free file   You can exclude up to $5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year. Irs free file Assistance over $5,250. Irs free file   If you do not have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. Irs free file Working condition benefits may be excluded from wages. Irs free file Property or a service provided is a working condition benefit to the extent that if the employee paid for it, the amount paid would have been deductible as a business or depreciation expense. Irs free file See Working Condition Benefits , later, in this section. Irs free file Employee Discounts This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. Irs free file However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds). Irs free file Employee. Irs free file   For this exclusion, treat the following individuals as employees. Irs free file A current employee. Irs free file A former employee who retired or left on disability. Irs free file A widow or widower of an individual who died while an employee. Irs free file A widow or widower of an employee who retired or left on disability. Irs free file A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Irs free file A partner who performs services for a partnership. Irs free file Exclusion from wages. Irs free file   You can generally exclude the value of an employee discount you provide an employee from the employee's wages, up to the following limits. Irs free file For a discount on services, 20% of the price you charge nonemployee customers for the service. Irs free file For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers for the property. Irs free file   Determine your gross profit percentage in the line of business based on all property you offer to customers (including employee customers) and your experience during the tax year immediately before the tax year in which the discount is available. Irs free file To figure your gross profit percentage, subtract the total cost of the property from the total sales price of the property and divide the result by the total sales price of the property. Irs free file Exception for highly compensated employees. Irs free file   You cannot exclude from the wages of a highly compensated employee any part of the value of a discount that is not available on the same terms to one of the following groups. Irs free file All of your employees. Irs free file A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees. Irs free file   For this exclusion, a highly compensated employee for 2014 is an employee who meets either of the following tests. Irs free file The employee was a 5% owner at any time during the year or the preceding year. Irs free file The employee received more than $115,000 in pay for the preceding year. Irs free file You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Irs free file Employee Stock Options There are three kinds of stock options—incentive stock options, employee stock purchase plan options, and nonstatutory (nonqualified) stock options. Irs free file Wages for social security, Medicare, and federal unemployment (FUTA) taxes do not include remuneration resulting from the exercise, after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or from any disposition of stock acquired by exercising such an option. Irs free file The IRS will not apply these taxes to an exercise before October 23, 2004, of an incentive stock option or an employee stock purchase plan option or to a disposition of stock acquired by such exercise. Irs free file Additionally, federal income tax withholding is not required on the income resulting from a disqualifying disposition of stock acquired by the exercise after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or on income equal to the discount portion of stock acquired by the exercise, after October 22, 2004, of an employee stock purchase plan option resulting from any disposition of the stock. Irs free file The IRS will not apply federal income tax withholding upon the disposition of stock acquired by the exercise, before October 23, 2004, of an incentive stock option or an employee stock purchase plan option. Irs free file However, the employer must report as income in box 1 of Form W-2, (a) the discount portion of stock acquired by the exercise of an employee stock purchase plan option upon disposition of the stock, and (b) the spread (between the exercise price and the fair market value of the stock at the time of exercise) upon a disqualifying disposition of stock acquired by the exercise of an incentive stock option or an employee stock purchase plan option. Irs free file An employer must report the excess of the fair market value of stock received upon exercise of a nonstatutory stock option over the amount paid for the stock option on Form W-2 in boxes 1, 3 (up to the social security wage base), 5, and in box 12 using the code “V. Irs free file ” See Regulations section 1. Irs free file 83-7. Irs free file An employee who transfers his or her interest in nonstatutory stock options to the employee's former spouse incident to a divorce is not required to include an amount in gross income upon the transfer. Irs free file The former spouse, rather than the employee, is required to include an amount in gross income when the former spouse exercises the stock options. Irs free file See Revenue Ruling 2002-22 and Revenue Ruling 2004-60 for details. Irs free file You can find Revenue Ruling 2002-22 on page 849 of Internal Revenue Bulletin 2002-19 at www. Irs free file irs. Irs free file gov/pub/irs-irbs/irb02-19. Irs free file pdf. Irs free file See Revenue Ruling 2004-60, 2004-24 I. Irs free file R. Irs free file B. Irs free file 1051, available at www. Irs free file irs. Irs free file gov/irb/2004-24_IRB/ar13. Irs free file html. Irs free file For more information about employee stock options, see sections 421, 422, and 423 of the Internal Revenue Code and their related regulations. Irs free file Employer-Provided Cell Phones The value of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a working condition fringe benefit. Irs free file Personal use of an employer-provided cell phone, provided primarily for noncompensatory business reasons, is excludable from an employee's income as a de minimis fringe benefit. Irs free file For the rules relating to these types of benefits, see De Minimis (Minimal) Benefits , earlier in this section, and Working Condition Benefits , later in this section. Irs free file Noncompensatory business purposes. Irs free file   You provide a cell phone primarily for noncompensatory business purposes if there are substantial business reasons for providing the cell phone. Irs free file Examples of substantial business reasons include the employer's: Need to contact the employee at all times for work-related emergencies, Requirement that the employee be available to speak with clients at times when the employee is away from the office, and Need to speak with clients located in other time zones at times outside the employee's normal workday. Irs free file Cell phones provided to promote goodwill, boost morale, or attract prospective employees. Irs free file   You cannot exclude from an employee's wages the value of a cell phone provided to promote goodwill of an employee, to attract a prospective employee, or as a means of providing additional compensation to an employee. Irs free file Additional information. Irs free file   For additional information on the tax treatment of employer-provided cell phones, see Notice 2011-72, 2011-38 I. Irs free file R. Irs free file B. Irs free file 407, available at  www. Irs free file irs. Irs free file gov/irb/2011-38_IRB/ar07. Irs free file html. Irs free file Group-Term Life Insurance Coverage This exclusion applies to life insurance coverage that meets all the following conditions. Irs free file It provides a general death benefit that is not included in income. Irs free file You provide it to a group of employees. Irs free file See The 10-employee rule , later. Irs free file It provides an amount of insurance to each employee based on a formula that prevents individual selection. Irs free file This formula must use factors such as the employee's age, years of service, pay, or position. Irs free file You provide it under a policy you directly or indirectly carry. Irs free file Even if you do not pay any of the policy's cost, you are considered to carry it if you arrange for payment of its cost by your employees and charge at least one employee less than, and at least one other employee more than, the cost of his or her insurance. Irs free file Determine the cost of the insurance, for this purpose, as explained under Coverage over the limit , later. Irs free file Group-term life insurance does not include the following insurance. Irs free file Insurance that does not provide general death benefits, such as travel insurance or a policy providing only accidental death benefits. Irs free file Life insurance on the life of your employee's spouse or dependent. Irs free file However, you may be able to exclude the cost of this insurance from the employee's wages as a de minimis benefit. Irs free file See De Minimis (Minimal) Benefits , earlier in this section. Irs free file Insurance provided under a policy that provides a permanent benefit (an economic value that extends beyond 1 policy year, such as paid-up or cash surrender value), unless certain requirements are met. Irs free file See Regulations section 1. Irs free file 79-1 for details. Irs free file Employee. Irs free file   For this exclusion, treat the following individuals as employees. Irs free file A current common-law employee. Irs free file A full-time life insurance agent who is a current statutory employee. Irs free file An individual who was formerly your employee under (1) or (2). Irs free file A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction and control. Irs free file Exception for S corporation shareholders. Irs free file   Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. Irs free file A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Irs free file Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Irs free file The 10-employee rule. Irs free file   Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees at some time during the year. Irs free file   For this rule, count employees who choose not to receive the insurance unless, to receive it, they must contribute to the cost of benefits other than the group-term life insurance. Irs free file For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. Irs free file However, do not count an employee who must pay part or all of the cost of permanent benefits to get insurance, unless that employee chooses to receive it. Irs free file A permanent benefit is an economic value extending beyond one policy year (for example, a paid-up or cash-surrender value) that is provided under a life insurance policy. Irs free file Exceptions. Irs free file   Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance. Irs free file   Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met. Irs free file If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee) that does not require a physical. Irs free file You provide the insurance to all your full-time employees or, if the insurer requires the evidence mentioned in (1), to all full-time employees who provide evidence the insurer accepts. Irs free file You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets that meet certain requirements. Irs free file See Regulations section 1. Irs free file 79-1 for details. Irs free file   Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met. Irs free file You provide the insurance under a common plan covering your employees and the employees of at least one other employer who is not related to you. Irs free file The insurance is restricted to, but mandatory for, all your employees who belong to, or are represented by, an organization (such as a union) that carries on substantial activities besides obtaining insurance. Irs free file Evidence of whether an employee is insurable does not affect an employee's eligibility for insurance or the amount of insurance that employee gets. Irs free file   To apply either exception, do not consider employees who were denied insurance for any of the following reasons. Irs free file They were 65 or older. Irs free file They customarily work 20 hours or less a week or 5 months or less in a calendar year. Irs free file They have not been employed for the waiting period given in the policy. Irs free file This waiting period cannot be more than 6 months. Irs free file Exclusion from wages. Irs free file   You can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee. Irs free file You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. Irs free file In addition, you do not have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee. Irs free file Coverage over the limit. Irs free file   You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. Irs free file Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Irs free file Also, show it in box 12 with code “C. Irs free file ” The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax. Irs free file   Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of all insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in Table 2-2. Irs free file For all coverage provided within the calendar year, use the employee's age on the last day of the employee's tax year. Irs free file You must prorate the cost from the table if less than a full month of coverage is involved. Irs free file Table 2-2. Irs free file Cost Per $1,000 of Protection For 1 Month Age Cost Under 25 $ . Irs free file 05 25 through 29 . Irs free file 06 30 through 34 . Irs free file 08 35 through 39 . Irs free file 09 40 through 44 . Irs free file 10 45 through 49 . Irs free file 15 50 through 54 . Irs free file 23 55 through 59 . Irs free file 43 60 through 64 . Irs free file 66 65 through 69 1. Irs free file 27 70 and older 2. Irs free file 06 You figure the total cost to include in the employee's wages by multiplying the monthly cost by the number of full months' coverage at that cost. Irs free file Example. Irs free file Tom's employer provides him with group-term life insurance coverage of $200,000. Irs free file Tom is 45 years old, is not a key employee, and pays $100 per year toward the cost of the insurance. Irs free file Tom's employer must include $170 in his wages. Irs free file The $200,000 of insurance coverage is reduced by $50,000. Irs free file The yearly cost of $150,000 of coverage is $270 ($. Irs free file 15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. Irs free file The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. Irs free file The employer also enters $170 in box 12 with code “C. Irs free file ” Coverage for dependents. Irs free file   Group-term life insurance coverage paid by the employer for the spouse or dependents of an employee may be excludable from income as a de minimis fringe benefit if the face amount is not more than $2,000. Irs free file If the face amount is greater than $2,000, the entire cost of the dependent coverage must be included in income unless the amount over $2,000 is purchased with employee contributions on an after-tax basis. Irs free file The cost of the insurance is determined by using Table 2-2. Irs free file Former employees. Irs free file   When group-term life insurance over $50,000 is provided to an employee (including retirees) after his or her termination, the employee share of social security and Medicare taxes on that period of coverage is paid by the former employee with his or her tax return and is not collected by the employer. Irs free file You are not required to collect those taxes. Irs free file Use the table above to determine the amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service. Irs free file Report those uncollected amounts separately in box 12 of Form W-2 using codes “M” and “N. Irs free file ” See the General Instructions for Forms W-2 and W-3 and the Instructions for Form 941. Irs free file Exception for key employees. Irs free file   Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. Irs free file This exception generally does not apply to church plans. Irs free file When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. Irs free file Include the cost in boxes 1, 3, and 5 of Form W-2. Irs free file However, you do not have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee. Irs free file   For this purpose, the cost of the insurance is the greater of the following amounts. Irs free file The premiums you pay for the employee's insurance. Irs free file See Regulations section 1. Irs free file 79-4T(Q&A 6) for more information. Irs free file The cost you figure using Table 2-2. Irs free file   For this exclusion, a key employee during 2014 is an employee or former employee who is one of the following individuals. Irs free file See section 416(i) of the Internal Revenue Code for more information. Irs free file An officer having annual pay of more than $170,000. Irs free file An individual who for 2014 was either of the following. Irs free file A 5% owner of your business. Irs free file A 1% owner of your business whose annual pay was more than $150,000. Irs free file   A former employee who was a key employee upon retirement or separation from service is also a key employee. Irs free file   Your plan does not favor key employees as to participation if at least one of the following is true. Irs free file It benefits at least 70% of your employees. Irs free file At least 85% of the participating employees are not key employees. Irs free file It benefits employees who qualify under a set of rules you set up that do not favor key employees. Irs free file   Your plan meets this participation test if it is part of a cafeteria plan (discussed in section 1) and it meets the participation test for those plans. Irs free file   When applying this test, do not consider employees who: Have not completed 3 years of service, Are part-time or seasonal, Are nonresident aliens who receive no U. Irs free file S. Irs free file source earned income from you, or Are not included in the plan but are in a unit of employees covered by a collective bargaining agreement, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives. Irs free file   Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Irs free file Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay. Irs free file S corporation shareholders. Irs free file   Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. Irs free file When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. Irs free file Include the cost in boxes 1, 3, and 5 of Form W-2. Irs free file However, you do not have to withhold federal income tax or pay federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder. Irs free file Health Savings Accounts A Health Savings Account (HSA) is an account owned by a qualified individual who is generally your employee or former employee. Irs free file Any contributions that you make to an HSA become the employee's property and cannot be withdrawn by you. Irs free file Contributions to the account are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Irs free file The medical expenses must not be reimbursable by insurance or other sources and their payment from HSA funds (distribution) will not give rise to a medical expense deduction on the individual's federal income tax return. Irs free file For more information about HSAs, visit the Department of Treasury's website at www. Irs free file treasury. Irs free file gov and enter “HSA” in the search box. Irs free file Eligibility. Irs free file   A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance except for permitted insurance listed under section 223(c)(3) or insurance for accidents, disability, dental care, vision care, or long-term care. Irs free file For calendar year 2014, a qualifying HDHP must have a deductible of at least $1,250 for self-only coverage or $2,500 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $6,350 for self-only coverage and $12,700 for family coverage. Irs free file   There are no income limits that restrict an individual's eligibility to contribute to an HSA nor is there a requirement that the account owner have earned income to make a contribution. Irs free file Exceptions. Irs free file   An individual is not a qualified individual if he or she can be claimed as a dependent on another person's tax return. Irs free file Also, an employee's participation in a health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA) generally disqualifies the individual (and employer) from making contributions to his or her HSA. Irs free file However, an individual may qualify to participate in an HSA if he or she is participating in only a limited-purpose FSA or HRA or a post-deductible FSA. Irs free file For more information, see Other employee health plans in Publication 969. Irs free file Employer contributions. Irs free file   Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. Irs free file For 2014, you can contribute up to $3,300 for self-only coverage or $6,550 for family coverage to a qualified individual's HSA. Irs free file   The contribution amounts listed above are increased by $1,000 for a qualified individual who is age 55 or older at any time during the year. Irs free file For two qualified individuals who are married to each other and who each are age 55 or older at any time during the year, each spouse's contribution limit is increased by $1,000 provided each spouse has a separate HSA. Irs free file No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part B. Irs free file Nondiscrimination rules. Irs free file    Your contribution amount to an employee's HSA must be comparable for all employees who have comparable coverage during the same period. Irs free file Otherwise, there will be an excise tax equal to 35% of the amount you contributed to all employees' HSAs. Irs free file   For guidance on employer comparable contributions to HSAs under section 4980G in instances where an employee has not established an HSA by December 31 and in instances where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses, see Regulations section 54. Irs free file 4980G-4. Irs free file Exception. Irs free file   The Tax Relief and Health Care Act of 2006 allows employers to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee. Irs free file A highly compensated employee for 2014 is an employee who meets either of the following tests. Irs free file The employee was a 5% owner at any time during the year or the preceding year. Irs free file The employee received more than $115,000 in pay for the preceding year. Irs free file You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Irs free file Partnerships and S corporations. Irs free file   Partners and 2% shareholders of an S corporation are not eligible for salary reduction (pre-tax) contributions to an HSA. Irs free file Employer contributions to the HSA of a bona fide partner or 2% shareholder are treated as distributions or guaranteed payments as determined by the facts and circumstances. Irs free file Cafeteria plans. Irs free file   You may contribute to an employee's HSA using a cafeteria plan and your contributions are not subject to the statutory comparability rules. Irs free file However, cafeteria plan nondiscrimination rules still apply. Irs free file For example, contributions under a cafeteria plan to employee HSAs cannot be greater for higher-paid employees than they are for lower-paid employees. Irs free file Contributions that favor lower-paid employees are not prohibited. Irs free file Reporting requirements. Irs free file   You must report your contributions to an employee's HSA in box 12 of Form W-2 using code “W. Irs free file ” The trustee or custodian of the HSA, generally a bank or insurance company, reports distributions from the HSA using Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. Irs free file Lodging on Your Business Premises You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests. Irs free file It is furnished on your business premises. Irs free file It is furnished for your convenience. Irs free file The employee must accept it as a condition of employment. Irs free file Different tests may apply to lodging furnished by educational institutions. Irs free file See section 119(d) of the Internal Revenue Code for details. Irs free file The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging. Irs free file On your business premises. Irs free file   For this exclusion, your business premises is generally your employee's place of work. Irs free file For special rules that apply to lodging furnished in a camp located in a foreign country, see section 119(c) of the Internal Revenue Code and its regulations. Irs free file For your convenience. Irs free file   Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances. Irs free file You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. Irs free file This is true even if a law or an employment contract provides that the lodging is furnished as pay. Irs free file However, a written statement that the lodging is furnished for your convenience is not sufficient. Irs free file Condition of employment. Irs free file   Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. Irs free file Examples include employees who must be available at all times and employees who could not perform their required duties without being furnished the lodging. Irs free file   It does not matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment. Irs free file Example. Irs free file A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. Irs free file If Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment. Irs free file S corporation shareholders. Irs free file   For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. Irs free file A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Irs free file Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Irs free file Meals This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises. Irs free file De Minimis Meals You can exclude any occasional meal or meal money you provide to an employee if it has so little value (taking into account how frequently you provide meals to your employees) that accounting for it would be unreasonable or administratively impracticable. Irs free file The exclusion applies, for example, to the following items. Irs free file Coffee, doughnuts, or soft drinks. Irs free file Occasional meals or meal money provided to enable an employee to work overtime. Irs free file However, the exclusion does not apply to meal money figured on the basis of hours worked. Irs free file Occasional parties or picnics for employees and their guests. Irs free file This exclusion also applies to meals you provide at an employer-operated eating facility for employees if the annual revenue from the facility equals or exceeds the direct costs of the facility. Irs free file For this purpose, your revenue from providing a meal is considered equal to the facility's direct operating costs to provide that meal if its value can be excluded from an employee's wages as explained under Meals on Your Business Premises , later. Irs free file If food or beverages you furnish to employees qualify as a de minimis benefit, you can deduct their full cost. Irs free file The 50% limit on deductions for the cost of meals does not apply. Irs free file The deduction limit on meals is discussed in chapter 2 of Publication 535. Irs free file Employee. Irs free file   For this exclusion, treat any recipient of a de minimis meal as
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The Irs Free File

Irs free file Publication 523 - Main Content Table of Contents Main HomeVacant land. Irs free file Factors used to determine main home. Irs free file Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining BasisCost As Basis Basis Other Than Cost Adjusted Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Nonqualified Use Business Use or Rental of HomeUnrecaptured section 1250 gain. Irs free file Property Used Partly for Business or Rental Reporting the SaleSeller-financed mortgage. Irs free file Individual taxpayer identification number (ITIN). Irs free file More information. Irs free file Comprehensive Examples Special SituationsException for sales to related persons. Irs free file Deducting Taxes in the Year of SaleForm 1099-S. Irs free file More information. Irs free file Recapturing (Paying Back) a Federal Mortgage Subsidy Recapture of First-Time Homebuyer CreditExample. Irs free file Worksheets How To Get Tax HelpLow Income Taxpayer Clinics Main Home This section explains the term “main home. Irs free file ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Irs free file To exclude gain under the rules in this publication, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Irs free file Land. Irs free file   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. Irs free file Example. Irs free file You buy a piece of land and move your main home to it. Irs free file Then, you sell the land on which your main home was located. Irs free file This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Irs free file Vacant land. Irs free file   The sale of vacant land is not a sale of your main home unless: The vacant land is adjacent to land containing your home, You owned and used the vacant land as part of your main home, The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land. Irs free file If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain. Irs free file See Excluding the Gain , later. Irs free file The destruction of your home is treated as a sale of your home. Irs free file As a result, you may be able to meet these requirements if you sell vacant land used as a part of your main home within 2 years from the date of the destruction of your main home. Irs free file For information, see Publication 547. Irs free file More than one home. Irs free file   If you have more than one home, you can exclude gain only from the sale of your main home. Irs free file You must include in income the gain from the sale of any other home. Irs free file If you have two homes and live in each of them, your main home is ordinarily the one you live in most of the time during the year. Irs free file Example 1. Irs free file You own two homes, one in New York and one in Florida. Irs free file From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. Irs free file In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Irs free file You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Irs free file Example 2. Irs free file You own a house, but you live in another house that you rent. Irs free file The rented house is your main home. Irs free file Example 3. Irs free file You own two homes, one in Virginia and one in New Hampshire. Irs free file In 2009 and 2010, you lived in the Virginia home. Irs free file In 2011 and 2012, you lived in the New Hampshire home. Irs free file In 2013, you lived again in the Virginia home. Irs free file Your main home in 2009, 2010, and 2013 is the Virginia home. Irs free file Your main home in 2011 and 2012 is the New Hampshire home. Irs free file You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Irs free file Factors used to determine main home. Irs free file   In addition to the amount of time you live in each home, other factors are relevant in determining which home is your main home. Irs free file Those factors include the following. Irs free file Your place of employment. Irs free file The location of your family members' main home. Irs free file Your mailing address for bills and correspondence. Irs free file The address listed on your: Federal and state tax returns, Driver's license, Car registration, and Voter registration card. Irs free file The location of the banks you use. Irs free file The location of recreational clubs and religious organizations of which you are a member. Irs free file Property used partly as your main home. Irs free file   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. Irs free file For details, see Business Use or Rental of Home , later. Irs free file Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Irs free file Subtract the adjusted basis from the amount realized to get your gain or loss. Irs free file     Selling price     − Selling expenses       Amount realized     − Adjusted basis       Gain or loss   Gain. Irs free file   Gain is the excess of the amount realized over the adjusted basis of the property. Irs free file Loss. Irs free file   Loss is the excess of the adjusted basis over the amount realized for the property. Irs free file Selling Price The selling price is the total amount you receive for your home. Irs free file It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. Irs free file Personal property. Irs free file   The selling price of your home does not include amounts you received for personal property sold with your home. Irs free file Personal property is property that is not a permanent part of the home. Irs free file Examples are furniture, draperies, rugs, a washer and dryer, and lawn equipment. Irs free file Separately stated amounts you received for these items should not be shown on Form 1099-S (discussed later). Irs free file Any gains from sales of personal property must be included in your income, but not as part of the sale of your home. Irs free file Payment by employer. Irs free file   You may have to sell your home because of a job transfer. Irs free file If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Irs free file Your employer will include it as wages in box 1 of your Form W-2 and you will include it in your income on Form 1040, line 7, or on Form 1040NR, line 8. Irs free file Option to buy. Irs free file   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. Irs free file If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Irs free file Report this amount on Form 1040, line 21, or on Form 1040NR, line 21. Irs free file Form 1099-S. Irs free file   If you received Form 1099-S, box 2 (gross proceeds) should show the total amount you received for your home. Irs free file   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Irs free file Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Irs free file Amount Realized The amount realized is the selling price minus selling expenses. Irs free file Selling expenses. Irs free file   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Irs free file ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Irs free file This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Irs free file For information on how to figure your home's adjusted basis, see Determining Basis , later. Irs free file Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Irs free file Gain on sale. Irs free file   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, generally is taxable. Irs free file Loss on sale. Irs free file   If the amount realized is less than the adjusted basis, the difference is a loss. Irs free file Generally, a loss on the sale of your main home cannot be deducted. Irs free file Jointly owned home. Irs free file   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Irs free file Separate returns. Irs free file   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Irs free file Your ownership interest is generally determined by state law. Irs free file Joint owners not married. Irs free file   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Irs free file Each of you applies the rules discussed in this publication on an individual basis. Irs free file Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Irs free file Foreclosure or repossession. Irs free file   If your home was foreclosed on or repossessed, you have a disposition. Irs free file See Publication 4681 to determine if you have ordinary income, gain, or loss. Irs free file More information. Irs free file   If part of a home is used for business or rental purposes, see Foreclosures and Repossessions in chapter 1 of Publication 544 for more information. Irs free file Publication 544 has examples of how to figure gain or loss on a foreclosure or repossession. Irs free file Abandonment. Irs free file   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Irs free file Trading (exchanging) homes. Irs free file   If you trade your home for another home, treat the trade as a sale and a purchase. Irs free file Example. Irs free file You owned and lived in a home with an adjusted basis of $41,000. Irs free file A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. Irs free file This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 − $41,000). Irs free file If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Irs free file Transfer to spouse. Irs free file   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss (unless the Exception, discussed next, applies). Irs free file This is true even if you receive cash or other consideration for the home. Irs free file As a result, the rules explained in this publication do not apply. Irs free file   If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. Irs free file You have no gain or loss. Irs free file Exception. Irs free file   These transfer rules do not apply if your spouse or former spouse is a nonresident alien. Irs free file In that case, you generally will have a gain or loss. Irs free file More information. Irs free file    See Property Settlements in Publication 504, Divorced or Separated Individuals, for more information. Irs free file Involuntary conversion. Irs free file   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. Irs free file This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations (see Home destroyed or condemned ). Irs free file Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Irs free file Your basis in your home is determined by how you got the home. Irs free file Generally, your basis is its cost if you bought it or built it. Irs free file If you got it in some other way (inheritance, gift, etc. Irs free file ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Irs free file While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Irs free file The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. Irs free file To figure your adjusted basis, you can use Worksheet 1, near the end of this publication. Irs free file Filled-in examples of that worksheet are included in the Comprehensive Examples , later. Irs free file Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Irs free file Purchase. Irs free file   If you bought your home, your basis is its cost to you. Irs free file This includes the purchase price and certain settlement or closing costs. Irs free file In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. Irs free file If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed later. Irs free file Seller-paid points. Irs free file   If the person who sold you your home paid points on your loan, you may have to reduce your home's basis by the amount of the points, as shown in the following chart. Irs free file    IF you bought your home. Irs free file . Irs free file . Irs free file THEN reduce your home's basis by the seller-paid points. Irs free file . Irs free file . Irs free file after 1990 but before April 4, 1994 only if you deducted them as home mortgage interest in the year paid. Irs free file after April 3, 1994 even if you did not deduct them. Irs free file Settlement fees or closing costs. Irs free file   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Irs free file You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. Irs free file A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). Irs free file   Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Irs free file   Some of the settlement fees or closing costs that you can include in your basis are: Abstract fees (abstract of title fees), Charges for installing utility services, Legal fees (including fees for the title search and preparing the sales contract and deed), Recording fees, Survey fees, Transfer or stamp taxes, Owner's title insurance, and Any amounts the seller owes that you agree to pay, such as: Certain real estate taxes (discussed later), Back interest, Recording or mortgage fees, Charges for improvements or repairs, and Sales commissions. Irs free file   Some settlement fees and closing costs you cannot include in your basis are: Fire insurance premiums, Rent for occupancy of the house before closing, Charges for utilities or other services related to occupancy of the house before closing, Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), Charges connected with getting a mortgage loan, such as: Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs), Loan assumption fees, Cost of a credit report, Fee for an appraisal required by a lender, and Fees for refinancing a mortgage. Irs free file Real estate taxes. Irs free file   Real estate taxes for the year you bought your home may affect your basis, as shown in the following chart. Irs free file    IF. Irs free file . Irs free file . Irs free file AND. Irs free file . Irs free file . Irs free file THEN the taxes. Irs free file . Irs free file . Irs free file you pay taxes that the seller owed on the home up to the date of sale the seller does not reimburse you are added to the basis of your home. Irs free file the seller reimburses you do not affect the basis of your home. Irs free file the seller pays taxes for you (taxes owed beginning on the date of sale) you do not reimburse the seller are subtracted from the basis of your home. Irs free file you reimburse the seller do not affect the basis of your home. Irs free file Construction. Irs free file   If you contracted to have your house built on land you own, your basis is: The cost of the land, plus The amount it cost you to complete the house, including: The cost of labor and materials, Any amounts paid to a contractor, Any architect's fees, Building permit charges, Utility meter and connection charges, and Legal fees directly connected with building the house. Irs free file   Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. Irs free file It also includes certain settlement or closing costs. Irs free file You may have to reduce your basis by points the seller paid for you. Irs free file For more information, see Seller-paid points and Settlement fees or closing costs , earlier. Irs free file Built by you. Irs free file   If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Irs free file Do not include in the cost of the house: The value of your own labor, or The value of any other labor you did not pay for. Irs free file Temporary housing. Irs free file   If a builder gave you temporary housing while your home was being finished, you must reduce your basis by the part of the contract price that was for the temporary housing. Irs free file To figure the amount of the reduction, multiply the contract price by a fraction. Irs free file The numerator is the value of the temporary housing, and the denominator is the sum of the value of the temporary housing plus the value of the new home. Irs free file Cooperative apartment. Irs free file   If you are a tenant-stockholder in a cooperative housing corporation, your basis in the cooperative apartment used as your home is usually the cost of your stock in the corporation. Irs free file This may include your share of a mortgage on the apartment building. Irs free file Condominium. Irs free file   To determine your basis in a condominium apartment used as your home, use the same rules as for any other home. Irs free file Basis Other Than Cost You must use a basis other than cost, such as adjusted basis or fair market value, if you received your home as a gift, inheritance, a trade, or from your spouse. Irs free file These situations are discussed in the following pages. Irs free file Also, the instructions for Worksheet 1 (near the end of the publication) address each of these issues. Irs free file Other special rules may apply in certain situations. Irs free file If you converted the property, or some part of it, to business or rental use, see Property Changed to Business or Rental Use, in Publication 551. Irs free file Home received as gift. Irs free file   Use the following chart to find the basis of a home you received as a gift. Irs free file IF the donor's adjusted basis at the time of the gift was. Irs free file . Irs free file . Irs free file THEN your basis is. Irs free file . Irs free file . Irs free file more than the fair market value of the home at that time the same as the donor's adjusted basis at the time of the gift. Irs free file   Exception: If using the donor's adjusted basis results in a loss when you sell the home, you must use the fair market value of the home at the time of the gift as your basis. Irs free file If using the fair market value results in a gain, you have neither gain nor loss. Irs free file equal to or less than the fair market value at that time, and you received the gift before 1977 the smaller of the: • donor's adjusted basis, plus  any federal gift tax paid on  the gift, or • the home's fair market value  at the time of the gift. Irs free file equal to or less than the fair market value at that time, and you received the gift after 1976 the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home (explained next). Irs free file Fair market value. Irs free file   The fair market value of property at the time of the gift is the value of the property as appraised for purposes of the federal gift tax. Irs free file If the gift was not subject to the federal gift tax, the fair market value is the value as appraised for the purposes of a state gift tax. Irs free file Part of federal gift tax due to net increase in value. Irs free file   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Irs free file The numerator of the fraction is the net increase in the value of the home, and the denominator is the value of the home for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Irs free file The net increase in the value of the home is its fair market value minus the donor's adjusted basis immediately before the gift. Irs free file Home acquired from a decedent who died before or after 2010. Irs free file   If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). Irs free file If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. Irs free file If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes. Irs free file Surviving spouse. Irs free file   If you are a surviving spouse and you owned your home jointly, your basis in the home will change. Irs free file The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). Irs free file The basis in your interest will remain the same. Irs free file Your new basis in the home is the total of these two amounts. Irs free file   If you and your spouse owned the home either as tenants by the entirety or as joint tenants with right of survivorship, you will each be considered to have owned one-half of the home. Irs free file Example. Irs free file Your jointly owned home (owned as joint tenants with right of survivorship) had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Irs free file Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value). Irs free file Community property. Irs free file   In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. Irs free file When either spouse dies, the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse. Irs free file For this to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return. Irs free file   For more information about community property, see Publication 555, Community Property. Irs free file    If you are selling a home in which you acquired an interest from a decedent who died in 2010, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to determine your basis. Irs free file Home received as trade. Irs free file   If you acquired your home as a trade for other property, in most cases, the basis of your home is the fair market value (at the time of the trade) of the property you gave up. Irs free file If you traded one home for another, you have made a sale and purchase. Irs free file In that case, you may have a gain. Irs free file See Trading (exchanging) homes under Dispositions Other Than Sales, earlier, for an example of figuring the gain. Irs free file Home received from spouse. Irs free file   If you received your home from your spouse or from your former spouse incident to your divorce, your basis in the home depends on the date of the transfer. Irs free file Transfers after July 18, 1984. Irs free file   If you received the home after July 18, 1984, there was no gain or loss on the transfer. Irs free file In most cases, your basis in this home is the same as your spouse's (or former spouse's) adjusted basis just before you received it. Irs free file This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations. Irs free file   If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, in most cases, your basis in the half interest received from your spouse is the same as your spouse's adjusted basis just before the transfer. Irs free file This also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Irs free file Your basis in the half interest you already owned does not change. Irs free file Your new basis in the home is the total of these two amounts. Irs free file Transfers before July 19, 1984. Irs free file   If you received your home before July 19, 1984, in exchange for your release of marital rights, in most cases, your basis in the home is generally its fair market value at the time you received it. Irs free file More information. Irs free file   For more information on property received from a spouse or former spouse, see Property Settlements in Publication 504. Irs free file Involuntary conversion. Irs free file   If your home is destroyed or condemned, you may receive insurance proceeds or a condemnation award. Irs free file If you acquired a replacement home with these proceeds, the basis is its cost decreased by any gain not recognized on the conversion under the rules explained in: Publication 547, in the case of a home that was destroyed, or Chapter 1 of Publication 544, in the case of a home that was condemned. Irs free file Example. Irs free file A fire destroyed your home that you owned and used for only 6 months. Irs free file The home had an adjusted basis of $80,000 and the insurance company paid you $130,000 for the loss. Irs free file Your gain is $50,000 ($130,000 − $80,000). Irs free file You bought a replacement home for $100,000. Irs free file The part of your gain that is taxable is $30,000 ($130,000 − $100,000), the unspent part of the payment from the insurance company. Irs free file The rest of the gain ($20,000) is not taxable, so that amount reduces your basis in the new home. Irs free file The basis of the new home is figured as follows. Irs free file Cost of replacement home $100,000 Minus: Gain not recognized 20,000 Basis of the replacement home $80,000 More information. Irs free file   For more information about basis, see Publication 551. Irs free file Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Irs free file To figure your adjusted basis, you can use Worksheet 1, found toward the end of this publication. Irs free file Filled-in examples of that worksheet are included in Comprehensive Examples , later. Irs free file Recordkeeping. Irs free file You should keep records to prove your home's adjusted basis. Irs free file Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. Irs free file But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Irs free file Keep records proving the basis of both homes as long as they are needed for tax purposes. Irs free file The records you should keep include: Proof of the home's purchase price and purchase expenses; Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis; Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain; Any Form 982 you filed to exclude any discharge of qualified principal residence indebtedness; Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997; and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. Irs free file Increases to Basis These include the following. Irs free file Additions and other improvements that have a useful life of more than 1 year. Irs free file Special assessments for local improvements. Irs free file Amounts you spent after a casualty to restore damaged property. Irs free file Improvements. Irs free file   These add to the value of your home, prolong its useful life, or adapt it to new uses. Irs free file You add the cost of additions and other improvements to the basis of your property. Irs free file   The following chart lists some other examples of improvements. Irs free file Examples of Improvements That Increase Basis Additions Bedroom Bathroom Deck Garage Porch Patio Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Lawn & Grounds Landscaping Driveway Walkway Fence  Retaining wall Sprinkler system Swimming pool  Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system  Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances  Kitchen modernization  Flooring Wall-to-wall carpeting  Insulation Attic Walls Floors Pipes and duct work Improvements no longer part of home. Irs free file   Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Irs free file Example. Irs free file You put wall-to-wall carpeting in your home 15 years ago. Irs free file Later, you replaced that carpeting with new wall-to-wall carpeting. Irs free file The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Irs free file Repairs. Irs free file   These maintain your home in good condition but do not add to its value or prolong its life. Irs free file You do not add their cost to the basis of your property. Irs free file Examples. Irs free file Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs. Irs free file Exception. Irs free file   The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. Irs free file For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. Irs free file Decreases to Basis These include the following. Irs free file Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero). Irs free file For details, see Publication 4681. Irs free file Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Irs free file For details, see Publication 4681. Irs free file Gain you postponed from the sale of a previous home before May 7, 1997. Irs free file Deductible casualty losses. Irs free file Insurance payments you received or expect to receive for casualty losses. Irs free file Payments you received for granting an easement or right-of-way. Irs free file Depreciation allowed or allowable if you used your home for business or rental purposes. Irs free file Energy-related credits allowed for expenditures made on the residence. Irs free file (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Irs free file ) Adoption credit you claimed for improvements added to the basis of your home. Irs free file Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Irs free file Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. Irs free file An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. Irs free file District of Columbia first-time homebuyer credit allowed on the purchase of a principal residence in the District of Columbia. Irs free file General sales taxes claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. Irs free file Discharges of qualified principal residence indebtedness. Irs free file   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Irs free file This exclusion applies to discharges made after 2006 and before 2014. Irs free file If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income. Irs free file   File Form 982 with your tax return. Irs free file See the form's instructions for detailed information. Irs free file    A decrease in basis due to a discharge of qualified principal residence indebtedness that is excluded from income occurs only if you retain ownership of the principal residence after a discharge. Irs free file In most cases, this would occur in a refinancing or a restructuring of the mortgage. Irs free file Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Irs free file This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. Irs free file To qualify, you must meet the ownership and use tests described later. Irs free file You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Irs free file This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale. Irs free file You can use Worksheet 2 (near the end of this publication) to figure the amount of your exclusion and your taxable gain, if any. Irs free file If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Irs free file See Publication 505, Tax Withholding and Estimated Tax. Irs free file Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Irs free file You meet the ownership test. Irs free file You meet the use test. Irs free file During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Irs free file For details on gain allocated to periods of nonqualified use, see Nonqualified Use , later. Irs free file If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed. Irs free file You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Irs free file Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Irs free file This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Irs free file Exception. Irs free file   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. Irs free file However, the maximum amount you may be able to exclude will be reduced. Irs free file See Reduced Maximum Exclusion , later. Irs free file Example 1—home owned and occupied for at least 2 years. Irs free file Mya bought and moved into her main home in September 2011. Irs free file She sold the home at a gain in October 2013. Irs free file During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. Irs free file She meets the ownership and use tests. Irs free file Example 2—ownership test met but use test not met. Irs free file Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Irs free file He later sold the home for a gain in June 2013. Irs free file He owned the home during the entire 5-year period ending on the date of sale. Irs free file He meets the ownership test but not the use test. Irs free file He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Irs free file Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. Irs free file You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. Irs free file Example. Irs free file Naomi bought and moved into a house in July 2009. Irs free file She lived there for 13 months and then moved in with a friend. Irs free file She later moved back into her house and lived there for 12 months until she sold it in August 2013. Irs free file Naomi meets the ownership and use tests because, during the 5-year period ending on the date of sale, she owned the house for more than 2 years and lived in it for a total of 25 (13 + 12) months. Irs free file Temporary absence. Irs free file   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. Irs free file The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Irs free file Example 1. Irs free file David Johnson, who is single, bought and moved into his home on February 1, 2011. Irs free file Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Irs free file David sold the house on March 1, 2013. Irs free file Although the total time David lived in his home is less than 2 years (21 months), he meets the use requirement and may exclude gain. Irs free file The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. Irs free file Example 2. Irs free file Professor Paul Beard, who is single, bought and moved into a house in December 2010, went abroad for a 1-year sabbatical leave in January 2012, returned to the house in January 2013, and sold it at a gain in February 2013. Irs free file Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Irs free file He cannot exclude any part of his gain because he did not use the residence for the required 2 years. Irs free file Ownership and use tests met at different times. Irs free file   You can meet the ownership and use tests during different 2-year periods. Irs free file However, you must meet both tests during the 5-year period ending on the date of the sale. Irs free file Example. Irs free file Beginning in 2002, Helen Jones lived in a rented apartment. Irs free file The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Irs free file In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Irs free file On July 12, 2013, while still living in her daughter's home, she sold her condominium. Irs free file Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. Irs free file She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Irs free file She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Irs free file The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. Irs free file Cooperative apartment. Irs free file   If you sold stock as a tenant-shareholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitled you to occupy as your main home for at least 2 years. Irs free file Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Irs free file Exception for individuals with a disability. Irs free file   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. Irs free file Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. Irs free file   If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Irs free file Previous home destroyed or condemned. Irs free file   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. Irs free file This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home (see Involuntary Conversions in Publication 551). Irs free file Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. Irs free file Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Irs free file   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Irs free file You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on qualified official extended duty (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. Irs free file This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. Irs free file   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. Irs free file Example. Irs free file John bought and moved into a home in 2005. Irs free file He lived in it as his main home for 2½ years. Irs free file For the next 6 years, he did not live in it because he was on qualified official extended duty with the Army. Irs free file He then sold the home at a gain in 2013. Irs free file To meet the use test, John chooses to suspend the 5-year test period for the 6 years he was on qualified official extended duty. Irs free file This means he can disregard those 6 years. Irs free file Therefore, John's 5-year test period consists of the 5 years before he went on qualified official extended duty. Irs free file He meets the ownership and use tests because he owned and lived in the home for 2½ years during this test period. Irs free file Period of suspension. Irs free file   The period of suspension cannot last more than 10 years. Irs free file Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. Irs free file You cannot suspend the 5-year period for more than one property at a time. Irs free file You can revoke your choice to suspend the 5-year period at any time. Irs free file Example. Irs free file Mary bought a home on April 1, 1997. Irs free file She used it as her main home until August 31, 2000. Irs free file On September 1, 2000, she went on qualified official extended duty with the Navy. Irs free file She did not live in the house again before selling it on July 31, 2013. Irs free file Mary chooses to use the entire 10-year suspension period. Irs free file Therefore, the suspension period would extend back from July 31, 2013, to August 1, 2003, and the 5-year test period would extend back to August 1, 1998. Irs free file During that period, Mary owned the house all 5 years and lived in it as her main home from August 1, 1998, until August 31, 2000, a period of more than 24 months. Irs free file She meets the ownership and use tests because she owned and lived in the home for at least 2 years during this test period. Irs free file Uniformed services. Irs free file   The uniformed services are: The Armed Forces (the Army, Navy, Air Force, Marine Corps, and Coast Guard), The commissioned corps of the National Oceanic and Atmospheric Administration, and The commissioned corps of the Public Health Service. Irs free file Foreign Service member. Irs free file   For purposes of the choice to suspend the 5-year test period for ownership and use, you are a member of the Foreign Service if you are any of the following. Irs free file A Chief of mission. Irs free file An Ambassador at large. Irs free file A member of the Senior Foreign Service. Irs free file A Foreign Service officer. Irs free file Part of the Foreign Service personnel. Irs free file Employee of the intelligence community. Irs free file   For purposes of the choice to suspend the 5-year test period for ownership and use, you are an employee of the intelligence community if you are an employee of any of the following. Irs free file The Office of the Director of National Intelligence. Irs free file The Central Intelligence Agency. Irs free file The National Security Agency. Irs free file The Defense Intelligence Agency. Irs free file The National Geospatial-Intelligence Agency. Irs free file The National Reconnaissance Office and any other office within the Department of Defense for the collection of specialized national intelligence through reconnaissance programs. Irs free file Any of the intelligence elements of the Army, the Navy, the Air Force, the Marine Corps, the Federal Bureau of Investigation, the Department of Treasury, the Department of Energy, and the Coast Guard. Irs free file The Bureau of Intelligence and Research of the Department of State. Irs free file Any of the elements of the Department of Homeland Security concerned with the analyses of foreign intelligence information. Irs free file Qualified official extended duty. Irs free file   You are on qualified official extended duty if you are on extended duty while: Serving at a duty station at least 50 miles from your main home, or Living in Government quarters under Government orders. Irs free file   You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period. Irs free file Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. Irs free file (But see Special rules for joint returns, next. Irs free file ) Special rules for joint returns. Irs free file   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Irs free file You are married and file a joint return for the year. Irs free file Either you or your spouse meets the ownership test. Irs free file Both you and your spouse meet the use test. Irs free file During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. Irs free file If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. Irs free file For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Irs free file Example 1—one spouse sells a home. Irs free file Emily sells her home in June 2013 for a gain of $300,000. Irs free file She marries Jamie later in the year. Irs free file She meets the ownership and use tests, but Jamie does not. Irs free file Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Irs free file The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Irs free file Example 2—each spouse sells a home. Irs free file The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. Irs free file He meets the ownership and use tests on his home, but Emily does not. Irs free file Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Irs free file However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Irs free file Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Irs free file The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. Irs free file Sale of main home by surviving spouse. Irs free file   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Irs free file   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Irs free file The sale or exchange took place after 2008. Irs free file The sale or exchange took place no more than 2 years after the date of death of your spouse. Irs free file You have not remarried. Irs free file You and your spouse met the use test at the time of your spouse's death. Irs free file You or your spouse met the ownership test at the time of your spouse's death. Irs free file Neither you nor your spouse excluded gain from the sale of another home during the last 2 years before the date of death. Irs free file The ownership and use tests were described earlier. Irs free file Example. Irs free file Harry owned and used a house as his main home since 2009. Irs free file Harry and Wilma married on July 1, 2013, and from that date they used Harry's house as their main home. Irs free file Harry died on August 15, 2013, and Wilma inherited the property. Irs free file Wilma sold the property on September 1, 2013, at which time she had not remarried. Irs free file Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. Irs free file Home transferred from spouse. Irs free file   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Irs free file Use of home after divorce. Irs free file   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Irs free file Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. Irs free file This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. Irs free file In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Irs free file A change in place of employment. Irs free file Health. Irs free file Unforeseen circumstances. Irs free file Qualified individual. Irs free file   For purposes of the reduced maximum exclusion, a qualified individual is any of the following. Irs free file You. Irs free file Your spouse. Irs free file A co-owner of the home. Irs free file A person whose main home is the same as yours. Irs free file Primary reason for sale. Irs free file   One of the three reasons above will be considered to be the primary reason you sold your home if either (1) or (2) is true. Irs free file You qualify under a “safe harbor. Irs free file ” This is a specific set of facts and circumstances that, if applicable, qualifies you to claim a reduced maximum exclusion. Irs free file Safe harbors corresponding to the reasons listed above are described later. Irs free file A safe harbor does not apply, but you can establish, based on facts and circumstances, that the primary reason for the sale is a change in place of employment, health, or unforeseen circumstances. Irs free file  Factors that may be relevant in determining your primary reason for sale include whether: Your sale and the circumstances causing it were close in time, The circumstances causing your sale occurred during the time you owned and used the property as your main home, The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home, Your financial ability to maintain the property became materially impaired, The suitability of the property as your main home materially changed, and During the time you owned the property, you used it as your home. Irs free file Change in Place of Employment You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual. Irs free file Employment. Irs free file   For this purpose, employment includes the start of work with a new employer or continuation of work with the same employer. Irs free file It also includes the start or continuation of self-employment. Irs free file Distance safe harbor. Irs free file   A change in place of employment is considered to be the reason you sold your home if: The change occurred during the period you owned and used the property as your main home, and The new place of employment is at least 50 miles farther from the home you sold than was the former place of employment (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles). Irs free file Example. Irs free file Justin was unemployed and living in a townhouse in Florida he had owned and used as his main home since 2012. Irs free file He got a job in North Carolina and sold his townhouse in 2013. Irs free file Because the distance between Justin's new place of employment and the home he sold is at least 50 miles, the sale satisfies the conditions of the distance safe harbor. Irs free file Justin's sale of his home is considered to be because of a change in place of employment, and he is entitled to claim a reduced maximum exclusion of gain from the sale. Irs free file Health The sale of your main home is because of health if your primary reason for the sale is: To obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or To obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury. Irs free file The sale of your home is not because of health if the sale merely benefits a qualified individual's general health or well-being. Irs free file For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier under Qualified individual , any of the following family members of these individuals. Irs free file Parent, grandparent, stepmother, stepfather. Irs free file Child, grandchild, stepchild, adopted child, eligible foster child. Irs free file Brother, sister, stepbrother, stepsister, half-brother, half-sister. Irs free file Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law. Irs free file Uncle, aunt, nephew, niece, or cousin. Irs free file Example. Irs free file In 2012, Chase and Lauren, spouses, bought a house that they used as their main home. Irs free file Lauren's father has a chronic disease and is unable to care for himself. Irs free file In 2013, Chase and Lauren sold their home in order to move into Lauren's father's house to provide care for him. Irs free file Because the primary reason for the sale of their home was to provide care for Lauren's father, Chase and Lauren are entitled to a reduced maximum exclusion. Irs free file Doctor's recommendation safe harbor. Irs free file   Health is considered to be the reason you sold your home if, for one or more of the reasons listed at the beginning of this discussion, a doctor recommends a change of residence. Irs free file Unforeseen Circumstances The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying that home. Irs free file You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved. Irs free file Specific event safe harbors. Irs free file   Unforeseen circumstances are considered to be the reason for selling your home if any of the following events occurred while you owned and used the property as your main home. Irs free file An involuntary conversion of your home, such as when your home is destroyed or condemned. Irs free file Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible. Irs free file In the case of qualified individuals (listed earlier under Qualified individual ): Death, Unemployment (if the individual is eligible for unemployment compensation), A change in employment or self-employment status that results in the individual's inability to pay reasonable basic living expenses (listed under Reasonable basic living expenses , later) for his or her household, Divorce or legal separation under a decree of divorce or separate maintenance, or Multiple births resulting from the same pregnancy. Irs free file An event the IRS determined to be an unforeseen circumstance in published guidance of general applicability. Irs free file For example, the IRS determined the September 11, 2001, terrorist attacks to be an unforeseen circumstance. Irs free file Reasonable basic living expenses. Irs free file   Reasonable basic living expenses for your household include the following. Irs free file Amounts spent for food. Irs free file Amounts spent for clothing. Irs free file Housing and related expenses. Irs free file Medical expenses. Irs free file Transportation expenses. Irs free file Tax payments. Irs free file Court-ordered payments. Irs free file Expenses reasonably necessary to produce income. Irs free file   Any of these amounts spent to maintain an affluent or luxurious standard of living are not reasonable basic living expenses. Irs free file Nonqualified Use Gain from the sale or exchange of the main home is not excludable from income if it is allocable to periods of nonqualified use. Irs free file Nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home, with certain exceptions (see next). Irs free file Exceptions. Irs free file   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. Irs free file Calculation. Irs free file   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain (net of any depreciation allowed or allowable on the property for periods after May 6, 1997) by the following fraction:   Total nonqualified use during the period of ownership after 2008     Total period of ownership     This calculation can be found in Worksheet 2, line 10, later in this publication. Irs free file   For examples of this calculation, see Business Use or Rental of Home , next. Irs free file Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income if you meet the ownership and use tests. Irs free file Example 1. Irs free file On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Irs free file She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. Irs free file The house was rented from June 1, 2009, to March 31, 2011. Irs free file Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Irs free file Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. Irs free file During the 5-year period ending on the date of the sale (January 31, 2008–January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. Irs free file Five-Year Period Used as Home Used as Rental 1/31/08 – 5/31/09 16 months   6/01/09 – 3/31/11   22 months 4/01/11 – 1/31/13 22 months     38 months 22 months       During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. Irs free file Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain, as shown on Worksheet 2. Irs free file Example 2. Irs free file William owned and used a house as his main home from 2007 through 2010. Irs free file On January 1, 2011, he moved to another state. Irs free file He rented his house from that date until April 30, 2013, when he sold it. Irs free file During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. Irs free file Because it was rental property at the time of the sale, he must report the sale on Form 4797. Irs free file Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Irs free file Because he met the ownership and use tests, he can exclude gain up to $250,000. Irs free file However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. Irs free file Depreciation after May 6, 1997. Irs free file   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Irs free file If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. Irs free file Unrecaptured section 1250 gain. Irs free file   This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. Irs free file To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Irs free file Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. Irs free file Worksheet 2. Irs free file Taxable Gain on Sale of Home—Completed Example 1 for Amy Part 1. Irs free file Gain or (Loss) on Sale       1. Irs free file   Selling price of home 1. Irs free file     2. Irs free file   Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) 2. Irs free file     3. Irs free file   Subtract line 2 from line 1. Irs free file This is the amount realized 3. Irs free file     4. Irs free file   Adjusted basis of home sold (from Worksheet 1, line 13) 4. Irs free file     5. Irs free file   Gain or (loss) on the sale. Irs free file Subtract line 4 from line 3. Irs free file If this is a loss, stop here 5. Irs free file 200,000   Part 2. Irs free file Exclusion and Taxable Gain       6. Irs free file   Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. Irs free file If none, enter -0- 6. Irs free file 10,000   7. Irs free file   Subtract line 6 from line 5. Irs free file If the result is less than zero, enter -0- 7. Irs free file 190,000   8. Irs free file   Aggregate number of days of nonqualified use after 2008. Irs free file If none, enter -0-. Irs free file  If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 8. Irs free file 668   9. Irs free file   Number of days taxpayer owned the property 9. Irs free file 2,080   10. Irs free file   Divide the amount on line 8 by the amount on line 9. Irs free file Enter the result as a decimal (rounded to at least 3 places). Irs free file But do not enter an amount greater than 1. Irs free file 00 10. Irs free file 0. Irs free file 321   11. Irs free file   Gain allocated to nonqualified use. Irs free file (Line 7 multiplied by line 10) 11. Irs free file 60,990   12. Irs free file   Gain eligible for exclusion. Irs free file Subtract line 11 from line 7 12. Irs free file 129,010   13. Irs free file   If you qualify to exclude gain on the sale, enter your maximum exclusion (see Maximum Exclusion ). Irs free file  If you qualify for a reduced maximum exclusion, enter the amount from Worksheet 3, line 7. Irs free file If you do  not qualify to exclude gain, enter -0- 13. Irs free file 250,000   14. Irs free file   Exclusion. Irs free file Enter the smaller of line 12 or line 13 14. Irs free file 129,010   15. Irs free file   Taxable gain. Irs free file Subtract line 14 from line 5. Irs free file Report your taxable gain as described under Reporting the Sale . Irs free file If the amount on line 6 is more than zero, complete line 16 15. Irs free file 70,990   16. Irs free file   Enter the smaller of line 6 or line 15. Irs free file Enter this amount on line 12 of the Unrecaptured Section 1250 Gain  Worksheet in the instructions for Schedule D (Form 1040) 16. Irs free file 10,000 Property Used Partly for Business or Rental If you use property partly as a home and partly for business or to produce rental income, the treatment of any gain on the sale depends partly on whether the business or rental part of the property is part of your home or separate from it. Irs free file Part of Home Used for Business or Rental If the part of your property used for business or to produce rental income is within your home, such as a room used as a home office for a business, you do not need to allocate gain on the sale of the property between the business part of the property and the part used as a home. Irs free file In addition, you do not need to report the sale of the business or rental part on Form 4797. Irs free file This is true whether or not you were entitled to claim any depreciation. Irs free file However, you cannot exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997. Irs free file See Depreciation after May 6, 1997, earlier. Irs free file Example 1. Irs free file Ray sold his main home in 2013 at a $30,000 gain. Irs free file He has no gains or losses from the sale of property other than the gain from the sale of his home. Irs free file He meets the ownership and use tests to exclude the gain from his income. Irs free file However, he used part of the home as a business office in 2012 and claimed $500 depreciation. Irs free file Because the business office was part of his home (not separate from it), he does not have to allocate the gain on the sale between the business part of the property and the part used as a home. Irs free file In addition, he does not have to report any part of the gain on Form 4797. Irs free file Because Ray was entitled to take a depreciation deduction, he must recognize $500 of the gain as unrecaptured section 1250 gain. Irs free file He reports his gain, exclusion, and the taxable gain of $500 on Form 8949 and Schedule D (Form 1040). Irs free file Example 2. Irs free file The facts are the same as in Example 1 except that Ray was not entitled to claim depreciation for the business use of his home. Irs free file Since Ray did not claim any depreciation, he can exclude the entire $30,000 gain. Irs free file Separate Part of Property Used for Business or Rental You may have used part of your property as your home and a separate part of it for business or to produce rental income. Irs free file Examples are: A working farm on which your house was located, A duplex in w