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Tax Act 2011 Login

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Tax Act 2011 Login

Tax act 2011 login 10. Tax act 2011 login   Retirement Plans, Pensions, and Annuities Table of Contents What's New Reminder IntroductionThe General Rule. Tax act 2011 login Individual retirement arrangements (IRAs). Tax act 2011 login Civil service retirement benefits. Tax act 2011 login Useful Items - You may want to see: General InformationIn-plan rollovers to designated Roth accounts. Tax act 2011 login How To Report Cost (Investment in the Contract) Taxation of Periodic PaymentsExclusion limited to cost. Tax act 2011 login Exclusion not limited to cost. Tax act 2011 login Simplified Method Taxation of Nonperiodic PaymentsLump-Sum Distributions RolloversIn-plan rollovers to designated Roth accounts. Tax act 2011 login Special Additional TaxesTax on Early Distributions Tax on Excess Accumulation Survivors and Beneficiaries What's New For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Tax act 2011 login However, these distributions are taken into account when determining the modified adjusted gross income threshold. Tax act 2011 login Distributions from a nonqualified retirement plan are included in net investment income. Tax act 2011 login See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Tax act 2011 login Reminder Starting in 2013, the American Taxpayer Relief Act of 2012 expanded the rules for in-plan Roth rollovers to include more taxpayers. Tax act 2011 login For more information, see Designated Roth accounts discussed later. Tax act 2011 login Introduction This chapter discusses the tax treatment of distributions you receive from: An employee pension or annuity from a qualified plan, A disability retirement, and A purchased commercial annuity. Tax act 2011 login What is not covered in this chapter. Tax act 2011 login   The following topics are not discussed in this chapter. Tax act 2011 login The General Rule. Tax act 2011 login   This is the method generally used to determine the tax treatment of pension and annuity income from nonqualified plans (including commercial annuities). Tax act 2011 login For a qualified plan, you generally cannot use the General Rule unless your annuity starting date is before November 19, 1996. Tax act 2011 login For more information about the General Rule, see Publication 939, General Rule for Pensions and Annuities. Tax act 2011 login Individual retirement arrangements (IRAs). Tax act 2011 login   Information on the tax treatment of amounts you receive from an IRA is in chapter 17. Tax act 2011 login Civil service retirement benefits. Tax act 2011 login    If you are retired from the federal government (regular, phased, or disability retirement), see Publication 721, Tax Guide to U. Tax act 2011 login S. Tax act 2011 login Civil Service Retirement Benefits. Tax act 2011 login Publication 721 also covers the information that you need if you are the survivor or beneficiary of a federal employee or retiree who died. Tax act 2011 login Useful Items - You may want to see: Publication 575 Pension and Annuity Income 721 Tax Guide to U. Tax act 2011 login S. Tax act 2011 login Civil Service Retirement Benefits 939 General Rule for Pensions and Annuities Form (and Instructions) W-4P Withholding Certificate for Pension or Annuity Payments 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Tax act 2011 login 4972 Tax on Lump-Sum Distributions 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts General Information Designated Roth accounts. Tax act 2011 login   A designated Roth account is a separate account created under a qualified Roth contribution program to which participants may elect to have part or all of their elective deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth contributions. Tax act 2011 login Elective deferrals that are designated as Roth contributions are included in your income. Tax act 2011 login However, qualified distributions are not included in your income. Tax act 2011 login See Publication 575 for more information. Tax act 2011 login In-plan rollovers to designated Roth accounts. Tax act 2011 login   If you are a participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Tax act 2011 login The rollover of any untaxed amounts must be included in income. Tax act 2011 login See Publication 575 for more information. Tax act 2011 login More than one program. Tax act 2011 login   If you receive benefits from more than one program under a single trust or plan of your employer, such as a pension plan and a profit-sharing plan, you may have to figure the taxable part of each pension or annuity contract separately. Tax act 2011 login Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract. Tax act 2011 login Section 457 deferred compensation plans. Tax act 2011 login    If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. Tax act 2011 login If your plan is an eligible plan, you are not taxed currently on pay that is deferred under the plan or on any earnings from the plan's investment of the deferred pay. Tax act 2011 login You are generally taxed on amounts deferred in an eligible state or local government plan only when they are distributed from the plan. Tax act 2011 login You are taxed on amounts deferred in an eligible tax-exempt organization plan when they are distributed or otherwise made available to you. Tax act 2011 login   Your 457(b) plan may have a designated Roth account option. Tax act 2011 login If so, you may be able to roll over amounts to the designated Roth account or make contributions. Tax act 2011 login Elective deferrals to a designated Roth account are included in your income. Tax act 2011 login Qualified distributions from a designated Roth account are not subject to tax. Tax act 2011 login   This chapter covers the tax treatment of benefits under eligible section 457 plans, but it does not cover the treatment of deferrals. Tax act 2011 login For information on deferrals under section 457 plans, see Retirement Plan Contributions under Employee Compensation in Publication 525, Taxable and Nontaxable Income. Tax act 2011 login   For general information on these deferred compensation plans, see Section 457 Deferred Compensation Plans in Publication 575. Tax act 2011 login Disability pensions. Tax act 2011 login   If you retired on disability, you generally must include in income any disability pension you receive under a plan that is paid for by your employer. Tax act 2011 login You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Tax act 2011 login Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled. Tax act 2011 login    You may be entitled to a tax credit if you were permanently and totally disabled when you retired. Tax act 2011 login For information on the credit for the elderly or the disabled, see chapter 33. Tax act 2011 login   Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Tax act 2011 login Report the payments on Form 1040, lines 16a and 16b, or on Form 1040A, lines 12a and 12b. Tax act 2011 login    Disability payments for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies) are not included in income. Tax act 2011 login For more information about payments to survivors of terrorist attacks, see Publication 3920, Tax Relief for Victims of Terrorist Attacks. Tax act 2011 login   For more information on how to report disability pensions, including military and certain government disability pensions, see chapter 5. Tax act 2011 login Retired public safety officers. Tax act 2011 login   An eligible retired public safety officer can elect to exclude from income distributions of up to $3,000 made directly from a government retirement plan to the provider of accident, health, or long-term disability insurance. Tax act 2011 login See Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information. Tax act 2011 login Railroad retirement benefits. Tax act 2011 login   Part of any railroad retirement benefits you receive is treated for tax purposes as social security benefits, and part is treated as an employee pension. Tax act 2011 login For information about railroad retirement benefits treated as social security benefits, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Tax act 2011 login For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement Benefits in Publication 575. Tax act 2011 login Withholding and estimated tax. Tax act 2011 login   The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. Tax act 2011 login You can tell the payer how much to withhold, or not to withhold, by filing Form W-4P. Tax act 2011 login If you choose not to have tax withheld, or you do not have enough tax withheld, you may have to pay estimated tax. Tax act 2011 login   If you receive an eligible rollover distribution, you cannot choose not to have tax withheld. Tax act 2011 login Generally, 20% will be withheld, but no tax will be withheld on a direct rollover of an eligible rollover distribution. Tax act 2011 login See Direct rollover option under Rollovers, later. Tax act 2011 login   For more information, see Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Tax act 2011 login Qualified plans for self-employed individuals. Tax act 2011 login   Qualified plans set up by self-employed individuals are sometimes called Keogh or H. Tax act 2011 login R. Tax act 2011 login 10 plans. Tax act 2011 login Qualified plans can be set up by sole proprietors, partnerships (but not a partner), and corporations. Tax act 2011 login They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees. Tax act 2011 login    Distributions from a qualified plan are usually fully taxable because most recipients have no cost basis. Tax act 2011 login If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method. Tax act 2011 login For more information about qualified plans, see Publication 560, Retirement Plans for Small Business. Tax act 2011 login Purchased annuities. Tax act 2011 login   If you receive pension or annuity payments from a privately purchased annuity contract from a commercial organization, such as an insurance company, you generally must use the General Rule to figure the tax-free part of each annuity payment. Tax act 2011 login For more information about the General Rule, get Publication 939. Tax act 2011 login Also, see Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts. Tax act 2011 login Loans. Tax act 2011 login   If you borrow money from your retirement plan, you must treat the loan as a nonperiodic distribution from the plan unless certain exceptions apply. Tax act 2011 login This treatment also applies to any loan under a contract purchased under your retirement plan, and to the value of any part of your interest in the plan or contract that you pledge or assign. Tax act 2011 login This means that you must include in income all or part of the amount borrowed. Tax act 2011 login Even if you do not have to treat the loan as a nonperiodic distribution, you may not be able to deduct the interest on the loan in some situations. Tax act 2011 login For details, see Loans Treated as Distributions in Publication 575. Tax act 2011 login For information on the deductibility of interest, see chapter 23. Tax act 2011 login Tax-free exchange. Tax act 2011 login   No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. Tax act 2011 login However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income. Tax act 2011 login See Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts. Tax act 2011 login How To Report If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. Tax act 2011 login If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a. Tax act 2011 login If you file Form 1040A, report your total annuity on line 12a and the taxable part on line 12b. Tax act 2011 login If your pension or annuity is fully taxable, enter it on line 12b; do not make an entry on line 12a. Tax act 2011 login More than one annuity. Tax act 2011 login   If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on Form 1040, line 16a, or Form 1040A, line 12a, and enter the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Tax act 2011 login If all the annuities you receive are fully taxable, enter the total of all of them on Form 1040, line 16b, or Form 1040A, line 12b. Tax act 2011 login Joint return. Tax act 2011 login   If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on Form 1040, line 16a, or Form 1040A, line 12a, and report the taxable part on Form 1040, line 16b, or Form 1040A, line 12b. Tax act 2011 login Cost (Investment in the Contract) Before you can figure how much, if any, of a distribution from your pension or annuity plan is taxable, you must determine your cost (your investment in the contract) in the pension or annuity. Tax act 2011 login Your total cost in the plan includes the total premiums, contributions, or other amounts you paid. Tax act 2011 login This includes the amounts your employer contributed that were taxable to you when paid. Tax act 2011 login Cost does not include any amounts you deducted or were excluded from your income. Tax act 2011 login From this total cost, subtract any refunds of premiums, rebates, dividends, unrepaid loans that were not included in your income, or other tax-free amounts that you received by the later of the annuity starting date or the date on which you received your first payment. Tax act 2011 login Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed. Tax act 2011 login Designated Roth accounts. Tax act 2011 login   Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements. Tax act 2011 login Your cost will also include any in-plan Roth rollovers you included in income. Tax act 2011 login Foreign employment contributions. Tax act 2011 login   If you worked in a foreign country and contributions were made to your retirement plan, special rules apply in determining your cost. Tax act 2011 login See Foreign employment contributions under Cost (Investment in the Contract) in Publication 575. Tax act 2011 login Taxation of Periodic Payments Fully taxable payments. Tax act 2011 login   Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost from your pay while you worked, the amounts you receive each year are fully taxable. Tax act 2011 login You must report them on your income tax return. Tax act 2011 login Partly taxable payments. Tax act 2011 login   If you paid part of the cost of your pension or annuity, you are not taxed on the part of the pension or annuity you receive that represents a return of your cost. Tax act 2011 login The rest of the amount you receive is generally taxable. Tax act 2011 login You figure the tax-free part of the payment using either the Simplified Method or the General Rule. Tax act 2011 login Your annuity starting date and whether or not your plan is qualified determine which method you must or may use. Tax act 2011 login   If your annuity starting date is after November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. Tax act 2011 login Generally, you must use the General Rule if your annuity is paid under a nonqualified plan, and you cannot use this method if your annuity is paid under a qualified plan. Tax act 2011 login   If you had more than one partly taxable pension or annuity, figure the tax-free part and the taxable part of each separately. Tax act 2011 login   If your annuity is paid under a qualified plan and your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the General Rule or the Simplified Method. Tax act 2011 login Exclusion limit. Tax act 2011 login   Your annuity starting date determines the total amount of annuity payments that you can exclude from your taxable income over the years. Tax act 2011 login Once your annuity starting date is determined, it does not change. Tax act 2011 login If you calculate the taxable portion of your annuity payments using the simplified method worksheet, the annuity starting date determines the recovery period for your cost. Tax act 2011 login That recovery period begins on your annuity starting date and is not affected by the date you first complete the worksheet. Tax act 2011 login Exclusion limited to cost. Tax act 2011 login   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost cannot exceed your total cost. Tax act 2011 login Any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Tax act 2011 login This deduction is not subject to the 2%-of-adjusted-gross-income limit. Tax act 2011 login Exclusion not limited to cost. Tax act 2011 login   If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. Tax act 2011 login If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. Tax act 2011 login The total exclusion may be more than your cost. Tax act 2011 login Simplified Method Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. Tax act 2011 login For an annuity that is payable for the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. Tax act 2011 login For any other annuity, this number is the number of monthly annuity payments under the contract. Tax act 2011 login Who must use the Simplified Method. Tax act 2011 login   You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you both: Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity (403(b)) plan, and On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments. Tax act 2011 login Guaranteed payments. Tax act 2011 login   Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. Tax act 2011 login If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. Tax act 2011 login How to use the Simplified Method. Tax act 2011 login    Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2013. Tax act 2011 login Single-life annuity. Tax act 2011 login    If your annuity is payable for your life alone, use Table 1 at the bottom of the worksheet to determine the total number of expected monthly payments. Tax act 2011 login Enter on line 3 the number shown for your age at the annuity starting date. Tax act 2011 login Multiple-lives annuity. Tax act 2011 login   If your annuity is payable for the lives of more than one annuitant, use Table 2 at the bottom of the worksheet to determine the total number of expected monthly payments. Tax act 2011 login Enter on line 3 the number shown for the combined ages of you and the youngest survivor annuitant at the annuity starting date. Tax act 2011 login   However, if your annuity starting date is before 1998, do not use Table 2 and do not combine the annuitants' ages. Tax act 2011 login Instead you must use Table 1 and enter on line 3 the number shown for the primary annuitant's age on the annuity starting date. Tax act 2011 login    Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year. Tax act 2011 login Example. Tax act 2011 login Bill Smith, age 65, began receiving retirement benefits in 2013, under a joint and survivor annuity. Tax act 2011 login Bill's annuity starting date is January 1, 2013. Tax act 2011 login The benefits are to be paid for the joint lives of Bill and his wife Kathy, age 65. Tax act 2011 login Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Tax act 2011 login Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death. Tax act 2011 login Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. Tax act 2011 login Because his annuity is payable over the lives of more than one annuitant, he uses his and Kathy's combined ages and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet. Tax act 2011 login His completed worksheet is shown in Worksheet 10-A. Tax act 2011 login Bill's tax-free monthly amount is $100 ($31,000 ÷ 310) as shown on line 4 of the worksheet. Tax act 2011 login Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. Tax act 2011 login The full amount of any annuity payments received after 310 payments are paid must be included in gross income. Tax act 2011 login If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. Tax act 2011 login This deduction is not subject to the 2%-of-adjusted- gross-income limit. Tax act 2011 login Worksheet 10-A. Tax act 2011 login Simplified Method Worksheet for Bill Smith 1. Tax act 2011 login Enter the total pension or annuity payments received this year. Tax act 2011 login Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a 1. Tax act 2011 login 14,400 2. Tax act 2011 login Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. Tax act 2011 login See Cost (Investment in the Contract) , earlier 2. Tax act 2011 login 31,000       Note: If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the amount of your pension or annuity has changed). Tax act 2011 login Otherwise, go to line 3. Tax act 2011 login         3. Tax act 2011 login Enter the appropriate number from Table 1 below. Tax act 2011 login But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below 3. Tax act 2011 login 310     4. Tax act 2011 login Divide line 2 by the number on line 3 4. Tax act 2011 login 100     5. Tax act 2011 login Multiply line 4 by the number of months for which this year's payments were made. Tax act 2011 login If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Tax act 2011 login Otherwise, go to line 6 5. Tax act 2011 login 1,200     6. Tax act 2011 login Enter any amounts previously recovered tax free in years after 1986. Tax act 2011 login This is the amount shown on line 10 of your worksheet for last year 6. Tax act 2011 login -0-     7. Tax act 2011 login Subtract line 6 from line 2 7. Tax act 2011 login 31,000     8. Tax act 2011 login Enter the smaller of line 5 or line 7 8. Tax act 2011 login 1,200 9. Tax act 2011 login Taxable amount for year. Tax act 2011 login Subtract line 8 from line 1. Tax act 2011 login Enter the result, but not less than zero. Tax act 2011 login Also, add this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b 9. Tax act 2011 login 13,200   Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. Tax act 2011 login If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Publication 575 before entering an amount on your tax return. Tax act 2011 login     10. Tax act 2011 login Was your annuity starting date before 1987? □ Yes. Tax act 2011 login STOP. Tax act 2011 login Do not complete the rest of this worksheet. Tax act 2011 login  ☑ No. Tax act 2011 login Add lines 6 and 8. Tax act 2011 login This is the amount you have recovered tax free through 2013. Tax act 2011 login You will need this number if you need to fill out this worksheet next year 10. Tax act 2011 login 1,200 11. Tax act 2011 login Balance of cost to be recovered. Tax act 2011 login Subtract line 10 from line 2. Tax act 2011 login If zero, you will not have to complete this worksheet next year. Tax act 2011 login The payments you receive next year will generally be fully taxable 11. Tax act 2011 login 29,800 TABLE 1 FOR LINE 3 ABOVE   AND your annuity starting date was— IF the age at annuity starting date was. Tax act 2011 login . Tax act 2011 login . Tax act 2011 login before November 19, 1996, enter on line 3. Tax act 2011 login . Tax act 2011 login . Tax act 2011 login after November 18, 1996, enter on line 3. Tax act 2011 login . Tax act 2011 login . Tax act 2011 login 55 or under 300 360 56–60 260 310 61–65 240 260 66–70 170 210 71 or older 120 160 TABLE 2 FOR LINE 3 ABOVE IF the combined ages at annuity starting date were. Tax act 2011 login . Tax act 2011 login . Tax act 2011 login   THEN enter on line 3. Tax act 2011 login . Tax act 2011 login . Tax act 2011 login 110 or under   410 111–120   360 121–130   310 131–140   260 141 or older   210 * A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996. Tax act 2011 login Who must use the General Rule. Tax act 2011 login   You must use the General Rule if you receive pension or annuity payments from: A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at least 5 years. Tax act 2011 login Annuity starting before November 19, 1996. Tax act 2011 login   If your annuity starting date is after July 1, 1986, and before November 19, 1996, you had to use the General Rule for either circumstance just described. Tax act 2011 login You also had to use it for any fixed-period annuity. Tax act 2011 login If you did not have to use the General Rule, you could have chosen to use it. Tax act 2011 login If your annuity starting date is before July 2, 1986, you had to use the General Rule unless you could use the Three-Year Rule. Tax act 2011 login   If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost. Tax act 2011 login Who cannot use the General Rule. Tax act 2011 login   You cannot use the General Rule if you receive your pension or annuity from a qualified plan and none of the circumstances described in the preceding discussions apply to you. Tax act 2011 login See Who must use the Simplified Method , earlier. Tax act 2011 login More information. Tax act 2011 login   For complete information on using the General Rule, including the actuarial tables you need, see Publication 939. Tax act 2011 login Taxation of Nonperiodic Payments Nonperiodic distributions are also known as amounts not received as an annuity. Tax act 2011 login They include all payments other than periodic payments and corrective distributions. Tax act 2011 login Examples of nonperiodic payments are cash withdrawals, distributions of current earnings, certain loans, and the value of annuity contracts transferred without full and adequate consideration. Tax act 2011 login Corrective distributions of excess plan contributions. Tax act 2011 login   Generally, if the contributions made for you during the year to certain retirement plans exceed certain limits, the excess is taxable to you. Tax act 2011 login To correct an excess, your plan may distribute it to you (along with any income earned on the excess). Tax act 2011 login For information on plan contribution limits and how to report corrective distributions of excess contributions, see Retirement Plan Contributions under Employee Compensation in Publication 525. Tax act 2011 login Figuring the taxable amount of nonperiodic payments. Tax act 2011 login   How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. Tax act 2011 login If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. Tax act 2011 login If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982. Tax act 2011 login Annuity starting date. Tax act 2011 login   The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later. Tax act 2011 login Distribution on or after annuity starting date. Tax act 2011 login   If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you generally must include all of the payment in gross income. Tax act 2011 login Distribution before annuity starting date. Tax act 2011 login   If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you generally can allocate only part of it to the cost of the contract. Tax act 2011 login You exclude from your gross income the part that you allocate to the cost. Tax act 2011 login You include the remainder in your gross income. Tax act 2011 login   If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). Tax act 2011 login This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. Tax act 2011 login    Distributions from nonqualified plans are subject to the net investment income tax. Tax act 2011 login See the Instructions for Form 8960. Tax act 2011 login   For more information, see Figuring the Taxable Amount under Taxation of Nonperiodic Payments in Publication 575. Tax act 2011 login Lump-Sum Distributions This section on lump-sum distributions only applies if the plan participant was born before January 2, 1936. Tax act 2011 login If the plan participant was born after January 1, 1936, the taxable amount of this nonperiodic payment is reported as discussed earlier. Tax act 2011 login A lump-sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Tax act 2011 login A distribution from a nonqualified plan (such as a privately purchased commercial annuity or a section 457 deferred compensation plan of a state or local government or tax-exempt organization) cannot qualify as a lump-sum distribution. Tax act 2011 login The participant's entire balance from a plan does not include certain forfeited amounts. Tax act 2011 login It also does not include any deductible voluntary employee contributions allowed by the plan after 1981 and before 1987. Tax act 2011 login For more information about distributions that do not qualify as lump-sum distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575. Tax act 2011 login If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. Tax act 2011 login The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. Tax act 2011 login The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. Tax act 2011 login You may be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part. Tax act 2011 login Use Form 4972 to figure the separate tax on a lump-sum distribution using the optional methods. Tax act 2011 login The tax figured on Form 4972 is added to the regular tax figured on your other income. Tax act 2011 login This may result in a smaller tax than you would pay by including the taxable amount of the distribution as ordinary income in figuring your regular tax. Tax act 2011 login How to treat the distribution. Tax act 2011 login   If you receive a lump-sum distribution, you may have the following options for how you treat the taxable part. Tax act 2011 login Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part from participation after 1973 as ordinary income. Tax act 2011 login Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). Tax act 2011 login Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). Tax act 2011 login Roll over all or part of the distribution. Tax act 2011 login See Rollovers , later. Tax act 2011 login No tax is currently due on the part rolled over. Tax act 2011 login Report any part not rolled over as ordinary income. Tax act 2011 login Report the entire taxable part of the distribution as ordinary income on your tax return. Tax act 2011 login   The first three options are explained in the following discussions. Tax act 2011 login Electing optional lump-sum treatment. Tax act 2011 login   You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. Tax act 2011 login If you make this choice, you cannot use either of these optional treatments for any future distributions for the participant. Tax act 2011 login Taxable and tax-free parts of the distribution. Tax act 2011 login    The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. Tax act 2011 login You may recover your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free. Tax act 2011 login Cost. Tax act 2011 login   In general, your cost is the total of: The plan participant's nondeductible contributions to the plan, The plan participant's taxable costs of any life insurance contract distributed, Any employer contributions that were taxable to the plan participant, and Repayments of any loans that were taxable to the plan participant. Tax act 2011 login You must reduce this cost by amounts previously distributed tax free. Tax act 2011 login Net unrealized appreciation (NUA). Tax act 2011 login   The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. Tax act 2011 login (For more information, see Distributions of employer securities under Taxation of Nonperiodic Payments in Publication 575. Tax act 2011 login ) Capital Gain Treatment Capital gain treatment applies only to the taxable part of a lump-sum distribution resulting from participation in the plan before 1974. Tax act 2011 login The amount treated as capital gain is taxed at a 20% rate. Tax act 2011 login You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Tax act 2011 login Complete Part II of Form 4972 to choose the 20% capital gain election. Tax act 2011 login For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575. Tax act 2011 login 10-Year Tax Option The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. Tax act 2011 login You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. Tax act 2011 login You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936. Tax act 2011 login The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. Tax act 2011 login You also can treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part. Tax act 2011 login Complete Part III of Form 4972 to choose the 10-year tax option. Tax act 2011 login You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax. Tax act 2011 login Publication 575 illustrates how to complete Form 4972 to figure the separate tax. Tax act 2011 login Rollovers If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA. Tax act 2011 login For this purpose, the following plans are qualified retirement plans. Tax act 2011 login A qualified employee plan. Tax act 2011 login A qualified employee annuity. Tax act 2011 login A tax-sheltered annuity plan (403(b) plan). Tax act 2011 login An eligible state or local government section 457 deferred compensation plan. Tax act 2011 login Eligible rollover distributions. Tax act 2011 login   Generally, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan. Tax act 2011 login For information about exceptions to eligible rollover distributions, see Publication 575. Tax act 2011 login Rollover of nontaxable amounts. Tax act 2011 login   You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. Tax act 2011 login The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA. Tax act 2011 login   If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution. Tax act 2011 login   Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Tax act 2011 login To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Tax act 2011 login For more information, see the Form 8606 instructions. Tax act 2011 login Direct rollover option. Tax act 2011 login   You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA. Tax act 2011 login If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. Tax act 2011 login Payment to you option. Tax act 2011 login   If an eligible rollover distribution is paid to you, 20% generally will be withheld for income tax. Tax act 2011 login However, the full amount is treated as distributed to you even though you actually receive only 80%. Tax act 2011 login You generally must include in income any part (including the part withheld) that you do not roll over within 60 days to another qualified retirement plan or to a traditional or Roth IRA. Tax act 2011 login (See Pensions and Annuities under Tax Withholding for 2014 in chapter 4. Tax act 2011 login )    If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. Tax act 2011 login Time for making rollover. Tax act 2011 login   You generally must complete the rollover of an eligible rollover distribution paid to you by the 60th day following the day on which you receive the distribution from your employer's plan. Tax act 2011 login (If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended for the period during which the distribution is in a frozen deposit in a financial institution. Tax act 2011 login )   The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Tax act 2011 login   The administrator of a qualified plan must give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution. Tax act 2011 login Qualified domestic relations order (QDRO). Tax act 2011 login   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. Tax act 2011 login If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee. Tax act 2011 login You can roll over the distribution from the plan into a traditional IRA or to another eligible retirement plan. Tax act 2011 login See Rollovers in Publication 575 for more information on benefits received under a QDRO. Tax act 2011 login Rollover by surviving spouse. Tax act 2011 login   You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. Tax act 2011 login The rollover rules apply to you as if you were the employee. Tax act 2011 login You can roll over a distribution into a qualified retirement plan or a traditional or Roth IRA. Tax act 2011 login For a rollover to a Roth IRA, see Rollovers to Roth IRAs , later. Tax act 2011 login    A distribution paid to a beneficiary other than the employee's surviving spouse is generally not an eligible rollover distribution. Tax act 2011 login However, see Rollovers by nonspouse beneficiary next. Tax act 2011 login Rollovers by nonspouse beneficiary. Tax act 2011 login   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you may be able to roll over tax free all or a portion of a distribution you receive from an eligible retirement plan of the employee. Tax act 2011 login The distribution must be a direct trustee-to-trustee transfer to your traditional or Roth IRA that was set up to receive the distribution. Tax act 2011 login The transfer will be treated as an eligible rollover distribution and the receiving plan will be treated as an inherited IRA. Tax act 2011 login For information on inherited IRAs, see What if You Inherit an IRA? in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs). Tax act 2011 login Retirement bonds. Tax act 2011 login   If you redeem retirement bonds purchased under a qualified bond purchase plan, you can roll over the proceeds that exceed your basis tax free into an IRA (as discussed in Publication 590) or a qualified employer plan. Tax act 2011 login Designated Roth accounts. Tax act 2011 login   You can roll over an eligible rollover distribution from a designated Roth account into another designated Roth account or a Roth IRA. Tax act 2011 login If you want to roll over the part of the distribution that is not included in income, you must make a direct rollover of the entire distribution or you can roll over the entire amount (or any portion) to a Roth IRA. Tax act 2011 login For more information on rollovers from designated Roth accounts, see Rollovers in Publication 575. Tax act 2011 login In-plan rollovers to designated Roth accounts. Tax act 2011 login   If you are a plan participant in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll over amounts in those plans to a designated Roth account within the same plan. Tax act 2011 login The rollover of any untaxed amounts must be included in income. Tax act 2011 login See Designated Roth accounts under Rollovers in Publication 575 for more information. Tax act 2011 login Rollovers to Roth IRAs. Tax act 2011 login   You can roll over distributions directly from a qualified retirement plan (other than a designated Roth account) to a Roth IRA. Tax act 2011 login   You must include in your gross income distributions from a qualified retirement plan (other than a designated Roth account) that you would have had to include in income if you had not rolled them over into a Roth IRA. Tax act 2011 login You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan that were taxable to you when paid. Tax act 2011 login In addition, the 10% tax on early distributions does not apply. Tax act 2011 login More information. Tax act 2011 login   For more information on the rules for rolling over distributions, see Rollovers in Publication 575. Tax act 2011 login Special Additional Taxes To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds and on failures to withdraw the funds timely. Tax act 2011 login Ordinarily, you will not be subject to these taxes if you roll over all early distributions you receive, as explained earlier, and begin drawing out the funds at a normal retirement age, in reasonable amounts over your life expectancy. Tax act 2011 login These special additional taxes are the taxes on: Early distributions, and Excess accumulation (not receiving minimum distributions). Tax act 2011 login These taxes are discussed in the following sections. Tax act 2011 login If you must pay either of these taxes, report them on Form 5329. Tax act 2011 login However, you do not have to file Form 5329 if you owe only the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Tax act 2011 login Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58. Tax act 2011 login Even if you do not owe any of these taxes, you may have to complete Form 5329 and attach it to your Form 1040. Tax act 2011 login This applies if you meet an exception to the tax on early distributions but box 7 of your Form 1099-R does not indicate an exception. Tax act 2011 login Tax on Early Distributions Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. Tax act 2011 login This tax applies to the part of the distribution that you must include in gross income. Tax act 2011 login For this purpose, a qualified retirement plan is: A qualified employee plan, A qualified employee annuity plan, A tax-sheltered annuity plan, or An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA). Tax act 2011 login 5% rate on certain early distributions from deferred annuity contracts. Tax act 2011 login   If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. Tax act 2011 login A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. Tax act 2011 login On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Tax act 2011 login Attach an explanation to your return. Tax act 2011 login Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period. Tax act 2011 login   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from an eligible retirement plan to a Roth IRA, you take a distribution from the Roth IRA, you may have to pay the additional 10% tax on early distributions. Tax act 2011 login You generally must pay the 10% additional tax on any amount attributable to the part of the rollover that you had to include in income. Tax act 2011 login The additional tax is figured on Form 5329. Tax act 2011 login For more information, see Form 5329 and its instructions. Tax act 2011 login For information on qualified distributions from Roth IRAs, see Additional Tax on Early Distributions in chapter 2 of Publication 590. Tax act 2011 login Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. Tax act 2011 login   If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from a 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. Tax act 2011 login You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan rollover that you had to include in income. Tax act 2011 login The additional tax is figured on Form 5329. Tax act 2011 login For more information, see Form 5329 and its instructions. Tax act 2011 login For information on qualified distributions from designated Roth accounts, see Designated Roth accounts under Taxation of Periodic Payments in Publication 575. Tax act 2011 login Exceptions to tax. Tax act 2011 login    Certain early distributions are excepted from the early distribution tax. Tax act 2011 login If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. Tax act 2011 login If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Tax act 2011 login Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. Tax act 2011 login On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions. Tax act 2011 login    If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Tax act 2011 login Enter exception number “12” on line 2. Tax act 2011 login General exceptions. Tax act 2011 login   The tax does not apply to distributions that are: Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after your separation from service), Made because you are totally and permanently disabled, or Made on or after the death of the plan participant or contract holder. Tax act 2011 login Additional exceptions for qualified retirement plans. Tax act 2011 login   The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees), From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order, From a qualified retirement plan to the extent you have deductible medical expenses that exceed 10% (or 7. Tax act 2011 login 5% if you or your spouse are age 65 or older) of your adjusted gross income, whether or not you itemize your deductions for the year, From an employer plan under a written election that provides a specific schedule for distribution of your entire interest if, as of March 1, 1986, you had separated from service and had begun receiving payments under the election, From an employee stock ownership plan for dividends on employer securities held by the plan, From a qualified retirement plan due to an IRS levy of the plan, From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions, or Phased retirement annuity payments made to federal employees. Tax act 2011 login See Pub. Tax act 2011 login 721 for more information on the phased retirement program. Tax act 2011 login Qualified public safety employees. Tax act 2011 login   If you are a qualified public safety employee, distributions made from a governmental defined benefit pension plan are not subject to the additional tax on early distributions. Tax act 2011 login You are a qualified public safety employee if you provide police protection, firefighting services, or emergency medical services for a state or municipality, and you separated from service in or after the year you attained age 50. Tax act 2011 login Qualified reservist distributions. Tax act 2011 login   A qualified reservist distribution is not subject to the additional tax on early distributions. Tax act 2011 login A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement, (b) to an individual ordered or called to active duty (because he or she is a member of a reserve component) for a period of more than 179 days or for an indefinite period, and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. Tax act 2011 login You must have been ordered or called to active duty after September 11, 2001. Tax act 2011 login For more information, see Qualified reservist distributions under Special Additional Taxes in Publication 575. Tax act 2011 login Additional exceptions for nonqualified annuity contracts. Tax act 2011 login   The tax does not apply to distributions from: A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982, A deferred annuity contract under a qualified personal injury settlement, A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee annuity plan and held by your employer until your separation from service, or An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within 1 year from the date of purchase and are paid at least annually). Tax act 2011 login Tax on Excess Accumulation To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). Tax act 2011 login The payments each year cannot be less than the required minimum distribution. Tax act 2011 login Required distributions not made. Tax act 2011 login   If the actual distributions to you in any year are less than the minimum required distribution for that year, you are subject to an additional tax. Tax act 2011 login The tax equals 50% of the part of the required minimum distribution that was not distributed. Tax act 2011 login   For this purpose, a qualified retirement plan includes: A qualified employee plan, A qualified employee annuity plan, An eligible section 457 deferred compensation plan, or A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986). Tax act 2011 login Waiver. Tax act 2011 login   The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. Tax act 2011 login See the Instructions for Form 5329 for the procedure to follow if you believe you qualify for a waiver of this tax. Tax act 2011 login State insurer delinquency proceedings. Tax act 2011 login   You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. Tax act 2011 login If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Tax act 2011 login Under certain conditions, you will not have to pay the 50% excise tax. Tax act 2011 login Required beginning date. Tax act 2011 login   Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of: The calendar year in which you reach age 70½, or The calendar year in which you retire from employment with the employer maintaining the plan. Tax act 2011 login However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you have not retired. Tax act 2011 login   If you reached age 70½ in 2013, you may be required to receive your first distribution by April 1, 2014. Tax act 2011 login Your required distribution then must be made for 2014 by December 31, 2014. Tax act 2011 login 5% owners. Tax act 2011 login   If you are a 5% owner, you must begin to receive distributions by April 1 of the year that follows the calendar year in which you reach age 70½. Tax act 2011 login   You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 70½, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer. Tax act 2011 login Age 70½. Tax act 2011 login   You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday. Tax act 2011 login   For example, if you are retired and your 70th birthday was on June 30, 2013, you were age 70½ on December 30, 2013. Tax act 2011 login If your 70th birthday was on July 1, 2013, you reached age 70½ on January 1, 2014. Tax act 2011 login Required distributions. Tax act 2011 login   By the required beginning date, as explained earlier, you must either: Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest (for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period). Tax act 2011 login Additional information. Tax act 2011 login   For more information on this rule, see Tax on Excess Accumulation in Publication 575. Tax act 2011 login Form 5329. Tax act 2011 login   You must file Form 5329 if you owe tax because you did not receive a minimum required distribution from your qualified retirement plan. Tax act 2011 login Survivors and Beneficiaries Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. Tax act 2011 login However, some special rules apply. Tax act 2011 login See Publication 575 for more information. Tax act 2011 login Survivors of employees. Tax act 2011 login   If you are entitled to receive a survivor annuity on the death of an employee who died, you can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. Tax act 2011 login You must figure the taxable and tax-free parts of your annuity payments using the method that applies as if you were the employee. Tax act 2011 login Survivors of retirees. Tax act 2011 login   If you receive benefits as a survivor under a joint and survivor annuity, include those benefits in income in the same way the retiree would have included them in income. Tax act 2011 login If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule and recovered all of the cost tax free, your survivor payments are fully taxable. Tax act 2011 login    If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage to your initial survivor annuity payment called for in the contract. Tax act 2011 login The resulting tax-free amount will then remain fixed. Tax act 2011 login Any increases in the survivor annuity are fully taxable. Tax act 2011 login    If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. Tax act 2011 login This amount remains fixed even if the annuity payments are increased or decreased. Tax act 2011 login See Simplified Method , earlier. Tax act 2011 login   In any case, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost. Tax act 2011 login Estate tax deduction. Tax act 2011 login   If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. Tax act 2011 login You can deduct the part of the total estate tax that was based on the annuity. Tax act 2011 login The deceased annuitant must have died after the annuity starting date. Tax act 2011 login (For details, see section 1. Tax act 2011 login 691(d)-1 of the regulations. Tax act 2011 login ) Deduct it in equal amounts over your remaining life expectancy. Tax act 2011 login   If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive (either in a lump sum or as periodic payments) in excess of the decedent's cost is included in your gross income as income in respect of a decedent for which you may be able to claim an estate tax deduction. Tax act 2011 login   You can take the estate tax deduction as an itemized deduction on Schedule A, Form 1040. Tax act 2011 login This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. Tax act 2011 login See Publication 559, Survivors, Executors, and Administrators, for more information on the estate tax deduction. Tax act 2011 login Prev  Up  Next   Home   More Online Publications
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Educating Your Employees About Tax Compliance

Employers can use these communication products to help employees understand their tax compliance responsibilities and find the many IRS resources that are available to help them file and pay their taxes on time.

Communication Products:

  • IRS You Tube Channel Numerous tax tip videos covering a broad range of topics.
  •  Voice recordings and text transcripts of each recording, which are all downloadable.
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  • "What if ... " Scenarios that cover a wide range of situations and their possible tax impact (ex.: job loss, inability to pay, death, divorce, etc.).
  • Outreach Corner --- Drop-in articles, audio and video files, social media tools and much more —  just click, copy and paste. Subscribe today!

Helpful Publications:

  • Publ 4849 Can't Pay the Tax You Owe Fact Sheet 
  • Publ 4852 Talkpoints for Managers - Federal Employee Tax Compliance Responsibilities
  • Publ 4854 Employee Tax Compliance Messages

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The Tax Act 2011 Login

Tax act 2011 login 4. Tax act 2011 login   How Income of Aliens Is Taxed Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Resident Aliens Nonresident AliensTrade or Business in the United States Effectively Connected Income The 30% Tax Income From Real Property Transportation Tax Interrupted Period of Residence Expatriation TaxExpatriation Before June 4, 2004 Expatriation After June 3, 2004, and Before June 17, 2008 Expatriation After June 16, 2008 Introduction Resident and nonresident aliens are taxed in different ways. Tax act 2011 login Resident aliens are generally taxed in the same way as U. Tax act 2011 login S. Tax act 2011 login citizens. Tax act 2011 login Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login The following discussions will help you determine if income you receive during the tax year is effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business and how it is taxed. Tax act 2011 login Topics - This chapter discusses: Income that is effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login Income that is not effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login Interrupted period of residence. Tax act 2011 login Expatriation tax. Tax act 2011 login Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 1212 List of Original Issue Discount Instruments Form (and Instructions) 6251 Alternative Minimum Tax—Individuals Schedule D (Form 1040) Capital Gains and Losses See chapter 12 for information about getting these publications and forms. Tax act 2011 login Resident Aliens Resident aliens are generally taxed in the same way as U. Tax act 2011 login S. Tax act 2011 login citizens. Tax act 2011 login This means that their worldwide income is subject to U. Tax act 2011 login S. Tax act 2011 login tax and must be reported on their U. Tax act 2011 login S. Tax act 2011 login tax return. Tax act 2011 login Income of resident aliens is subject to the graduated tax rates that apply to U. Tax act 2011 login S. Tax act 2011 login citizens. Tax act 2011 login Resident aliens use the Tax Table or Tax Computation Worksheets located in the Form 1040 instructions, which apply to U. Tax act 2011 login S. Tax act 2011 login citizens. Tax act 2011 login Nonresident Aliens A nonresident alien's income that is subject to U. Tax act 2011 login S. Tax act 2011 login income tax must be divided into two categories: Income that is effectively connected with a trade or business in the United States, and Income that is not effectively connected with a trade or business in the United States (discussed under The 30% Tax, later). Tax act 2011 login The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. Tax act 2011 login These are the same rates that apply to U. Tax act 2011 login S. Tax act 2011 login citizens and residents. Tax act 2011 login Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate. Tax act 2011 login If you were formerly a U. Tax act 2011 login S. Tax act 2011 login citizen or resident alien, these rules may not apply. Tax act 2011 login See Expatriation Tax, later, in this chapter. Tax act 2011 login Trade or Business in the United States Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year as effectively connected with that trade or business. Tax act 2011 login Whether you are engaged in a trade or business in the United States depends on the nature of your activities. Tax act 2011 login The discussions that follow will help you determine whether you are engaged in a trade or business in the United States. Tax act 2011 login Personal Services If you perform personal services in the United States at any time during the tax year, you usually are considered engaged in a trade or business in the United States. Tax act 2011 login Certain compensation paid to a nonresident alien by a foreign employer is not included in gross income. Tax act 2011 login For more information, see Services Performed for Foreign Employer in chapter 3. Tax act 2011 login Other Trade or Business Activities Other examples of being engaged in a trade or business in the United States follow. Tax act 2011 login Students and trainees. Tax act 2011 login   You are considered engaged in a trade or business in the United States if you are temporarily present in the United States as a nonimmigrant under an “F,” “J,” “M,” or “Q” visa. Tax act 2011 login A nonresident alien temporarily present in the United States under a “J” visa includes a nonresident alien individual admitted to the United States as an exchange visitor under the Mutual Educational and Cultural Exchange Act of 1961. Tax act 2011 login The taxable part of any scholarship or fellowship grant that is U. Tax act 2011 login S. Tax act 2011 login source income is treated as effectively connected with a trade or business in the United States. Tax act 2011 login Business operations. Tax act 2011 login   If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the United States. Tax act 2011 login Partnerships. Tax act 2011 login   If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States. Tax act 2011 login Beneficiary of an estate or trust. Tax act 2011 login   If you are the beneficiary of an estate or trust that is engaged in a trade or business in the United States, you are treated as being engaged in the same trade or business. Tax act 2011 login Trading in stocks, securities, and commodities. Tax act 2011 login   If your only U. Tax act 2011 login S. Tax act 2011 login business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U. Tax act 2011 login S. Tax act 2011 login resident broker or other agent, you are not engaged in a trade or business in the United States. Tax act 2011 login   For transactions in stocks or securities, this applies to any nonresident alien, including a dealer or broker in stocks and securities. Tax act 2011 login   For transactions in commodities, this applies to commodities that are usually traded on an organized commodity exchange and to transactions that are usually carried out at such an exchange. Tax act 2011 login   This discussion does not apply if you have a U. Tax act 2011 login S. Tax act 2011 login office or other fixed place of business at any time during the tax year through which, or by the direction of which, you carry out your transactions in stocks, securities, or commodities. Tax act 2011 login Trading for a nonresident alien's own account. Tax act 2011 login   You are not engaged in a trade or business in the United States if trading for your own account in stocks, securities, or commodities is your only U. Tax act 2011 login S. Tax act 2011 login business activity. Tax act 2011 login This applies even if the trading takes place while you are present in the United States or is done by your employee or your broker or other agent. Tax act 2011 login   This does not apply to trading for your own account if you are a dealer in stocks, securities, or commodities. Tax act 2011 login This does not necessarily mean, however, that as a dealer you are considered to be engaged in a trade or business in the United States. Tax act 2011 login Determine that based on the facts and circumstances in each case or under the rules given above in Trading in stocks, securities, and commodities . Tax act 2011 login Effectively Connected Income If you are engaged in a U. Tax act 2011 login S. Tax act 2011 login trade or business, all income, gain, or loss for the tax year that you get from sources within the United States (other than certain investment income) is treated as effectively connected income. Tax act 2011 login This applies whether or not there is any connection between the income and the trade or business being carried on in the United States during the tax year. Tax act 2011 login Two tests, described next under Investment Income, determine whether certain items of investment income (such as interest, dividends, and royalties) are treated as effectively connected with that business. Tax act 2011 login In limited circumstances, some kinds of foreign source income may be treated as effectively connected with a trade or business in the United States. Tax act 2011 login For a discussion of these rules, see Foreign Income , later. Tax act 2011 login Investment Income Investment income from U. Tax act 2011 login S. Tax act 2011 login sources that may or may not be treated as effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business generally falls into the following three categories. Tax act 2011 login Fixed or determinable income (interest, dividends, rents, royalties, premiums, annuities, etc. Tax act 2011 login ). Tax act 2011 login Gains (some of which are considered capital gains) from the sale or exchange of the following types of property. Tax act 2011 login Timber, coal, or domestic iron ore with a retained economic interest. Tax act 2011 login Patents, copyrights, and similar property on which you receive contingent payments after October 4, 1966. Tax act 2011 login Patents transferred before October 5, 1966. Tax act 2011 login Original issue discount obligations. Tax act 2011 login Capital gains (and losses). Tax act 2011 login Use the two tests, described next, to determine whether an item of U. Tax act 2011 login S. Tax act 2011 login source income falling in one of the three categories above and received during the tax year is effectively connected with your U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login If the tests indicate that the item of income is effectively connected, you must include it with your other effectively connected income. Tax act 2011 login If the item of income is not effectively connected, include it with all other income discussed under The 30% Tax later, in this chapter. Tax act 2011 login Asset-use test. Tax act 2011 login   This test usually applies to income that is not directly produced by trade or business activities. Tax act 2011 login Under this test, if an item of income is from assets (property) used in, or held for use in, the trade or business in the United States, it is considered effectively connected. Tax act 2011 login   An asset is used in, or held for use in, the trade or business in the United States if the asset is: Held for the principal purpose of promoting the conduct of a trade or business in the United States, Acquired and held in the ordinary course of the trade or business conducted in the United States (for example, an account receivable or note receivable arising from that trade or business), or Otherwise held to meet the present needs of the trade or business in the United States and not its anticipated future needs. Tax act 2011 login Generally, stock of a corporation is not treated as an asset used in, or held for use in, a trade or business in the United States. Tax act 2011 login Business-activities test. Tax act 2011 login   This test usually applies when income, gain, or loss comes directly from the active conduct of the trade or business. Tax act 2011 login The business-activities test is most important when: Dividends or interest are received by a dealer in stocks or securities, Royalties are received in the trade or business of licensing patents or similar property, or Service fees are earned by a servicing business. Tax act 2011 login Under this test, if the conduct of the U. Tax act 2011 login S. Tax act 2011 login trade or business was a material factor in producing the income, the income is considered effectively connected. Tax act 2011 login Personal Service Income You usually are engaged in a U. Tax act 2011 login S. Tax act 2011 login trade or business when you perform personal services in the United States. Tax act 2011 login Personal service income you receive in a tax year in which you are engaged in a U. Tax act 2011 login S. Tax act 2011 login trade or business is effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login Income received in a year other than the year you performed the services is also effectively connected if it would have been effectively connected if received in the year you performed the services. Tax act 2011 login Personal service income includes wages, salaries, commissions, fees, per diem allowances, and employee allowances and bonuses. Tax act 2011 login The income may be paid to you in the form of cash, services, or property. Tax act 2011 login If you are engaged in a U. Tax act 2011 login S. Tax act 2011 login trade or business only because you perform personal services in the United States during the tax year, income and gains from assets, and gains and losses from the sale or exchange of capital assets are generally not effectively connected with your trade or business. Tax act 2011 login However, if there is a direct economic relationship between your holding of the asset and your trade or business of performing personal services, the income, gain, or loss is effectively connected. Tax act 2011 login Pensions. Tax act 2011 login   If you were a nonresident alien engaged in a U. Tax act 2011 login S. Tax act 2011 login trade or business after 1986 because you performed personal services in the United States, and you later receive a pension or retirement pay attributable to these services, such payments are effectively connected income in each year you receive them. Tax act 2011 login This is true whether or not you are engaged in a U. Tax act 2011 login S. Tax act 2011 login trade or business in the year you receive the retirement pay. Tax act 2011 login Transportation Income Transportation income (defined in chapter 2) is effectively connected if you meet both of the following conditions. Tax act 2011 login You had a fixed place of business in the United States involved in earning the income. Tax act 2011 login At least 90% of your U. Tax act 2011 login S. Tax act 2011 login source transportation income is attributable to regularly scheduled transportation. Tax act 2011 login “Fixed place of business” generally means a place, site, structure, or other similar facility through which you engage in a trade or business. Tax act 2011 login “Regularly scheduled transportation” means that a ship or aircraft follows a published schedule with repeated sailings or flights at regular intervals between the same points for voyages or flights that begin or end in the United States. Tax act 2011 login This definition applies to both scheduled and chartered air transportation. Tax act 2011 login If you do not meet the two conditions above, the income is not effectively connected and is taxed at a 4% rate. Tax act 2011 login See Transportation Tax, later, in this chapter. Tax act 2011 login Business Profits and Losses and Sales Transactions All profits or losses from U. Tax act 2011 login S. Tax act 2011 login sources that are from the operation of a business in the United States are effectively connected with a trade or business in the United States. Tax act 2011 login For example, profit from the sale in the United States of inventory property purchased either in this country or in a foreign country is effectively connected trade or business income. Tax act 2011 login A share of U. Tax act 2011 login S. Tax act 2011 login source profits or losses of a partnership that is engaged in a trade or business in the United States is also effectively connected with a trade or business in the United States. Tax act 2011 login Real Property Gain or Loss Gains and losses from the sale or exchange of U. Tax act 2011 login S. Tax act 2011 login real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. Tax act 2011 login You must treat the gain or loss as effectively connected with that trade or business. Tax act 2011 login U. Tax act 2011 login S. Tax act 2011 login real property interest. Tax act 2011 login   This is any interest in real property located in the United States or the U. Tax act 2011 login S. Tax act 2011 login Virgin Islands or any interest (other than as a creditor) in a domestic corporation that is a U. Tax act 2011 login S. Tax act 2011 login real property holding corporation. Tax act 2011 login Real property includes the following. Tax act 2011 login Land and unsevered natural products of the land, such as growing crops and timber, and mines, wells, and other natural deposits. Tax act 2011 login Improvements on land, including buildings, other permanent structures, and their structural components. Tax act 2011 login Personal property associated with the use of real property, such as equipment used in farming, mining, forestry, or construction or property used in lodging facilities or rented office space, unless the personal property is: Disposed of more than one year before or after the disposition of the real property, or Separately sold to persons unrelated either to the seller or to the buyer of the real property. Tax act 2011 login U. Tax act 2011 login S. Tax act 2011 login real property holding corporation. Tax act 2011 login   A corporation is a U. Tax act 2011 login S. Tax act 2011 login real property holding corporation if the fair market value of the corporation's U. Tax act 2011 login S. Tax act 2011 login real property interests are at least 50% of the total fair market value of: The corporation's U. Tax act 2011 login S. Tax act 2011 login real property interests, plus The corporation's interests in real property located outside the United States, plus The corporation's other assets that are used in, or held for use in, a trade or business. Tax act 2011 login   Gain or loss on the sale of the stock in any domestic corporation is taxed as if you are engaged in a U. Tax act 2011 login S. Tax act 2011 login trade or business unless you establish that the corporation is not a U. Tax act 2011 login S. Tax act 2011 login real property holding corporation. Tax act 2011 login   A U. Tax act 2011 login S. Tax act 2011 login real property interest does not include a class of stock of a corporation that is regularly traded on an established securities market, unless you hold more than 5% of the fair market value of that class of stock. Tax act 2011 login An interest in a foreign corporation owning U. Tax act 2011 login S. Tax act 2011 login real property generally is not a U. Tax act 2011 login S. Tax act 2011 login real property interest unless the corporation chooses to be treated as a domestic corporation. Tax act 2011 login Qualified investment entities. Tax act 2011 login   Special rules apply to qualified investment entities (QIEs). Tax act 2011 login A QIE is any real estate investment trust (REIT) or any regulated investment company (RIC) that is a U. Tax act 2011 login S. Tax act 2011 login real property holding corporation. Tax act 2011 login    Generally, any distribution from a QIE to a shareholder that is attributable to gain from the sale or exchange of a U. Tax act 2011 login S. Tax act 2011 login real property interest is treated as a U. Tax act 2011 login S. Tax act 2011 login real property gain by the shareholder receiving the distribution. Tax act 2011 login A distribution by a QIE on stock regularly traded on an established securities market in the United States is not treated as gain from the sale or exchange of a U. Tax act 2011 login S. Tax act 2011 login real property interest if you did not own more than 5% of that stock at any time during the 1-year period ending on the date of the distribution. Tax act 2011 login A distribution that you do not treat as gain from the sale or exchange of a U. Tax act 2011 login S. Tax act 2011 login real property interest is included in your gross income as a regular dividend. Tax act 2011 login Note. Tax act 2011 login Beginning January 1, 2014 (unless extended by legislation), a RIC that is a U. Tax act 2011 login S. Tax act 2011 login real property holding corporation will only be treated as a QIE for certain distributions from the RIC that are directly or indirectly attributable to distributions received by the RIC from a REIT. Tax act 2011 login Domestically controlled QIE. Tax act 2011 login   The sale of an interest in a domestically controlled QIE is not the sale of a U. Tax act 2011 login S. Tax act 2011 login real property interest. Tax act 2011 login The entity is domestically controlled if at all times during the testing period less than 50% in value of its stock was held, directly or indirectly, by foreign persons. Tax act 2011 login The testing period is the shorter of (a) the 5-year period ending on the date of disposition, or (b) the period during which the entity was in existence. Tax act 2011 login Wash sale. Tax act 2011 login    If you dispose of an interest in a domestically controlled QIE in an applicable wash sale transaction, special rules apply. Tax act 2011 login An applicable wash sale transaction is one in which you: Dispose of an interest in the domestically controlled QIE during the 30-day period before the ex-dividend date of a distribution that you would (but for the disposition) have treated as gain from the sale or exchange of a U. Tax act 2011 login S. Tax act 2011 login real property interest, and Acquire, or enter into a contract or option to acquire, a substantially identical interest in that entity during the 61-day period that began on the first day of the 30-day period. Tax act 2011 login If this occurs, you are treated as having gain from the sale or exchange of a U. Tax act 2011 login S. Tax act 2011 login real property interest in an amount equal to the distribution made after June 15, 2006, that would have been treated as such gain. Tax act 2011 login This also applies to any substitute dividend payment. Tax act 2011 login   A transaction is not treated as an applicable wash sale transaction if: You actually receive the distribution from the domestically controlled QIE related to the interest disposed of, or acquired, in the transaction, or You dispose of any class of stock in a QIE that is regularly traded on an established securities market in the United States but only if you did not own more than 5% of that class of stock at any time during the 1-year period ending on the date of the distribution. Tax act 2011 login Alternative minimum tax. Tax act 2011 login   There may be a minimum tax on your net gain from the disposition of U. Tax act 2011 login S. Tax act 2011 login real property interests. Tax act 2011 login Figure the amount of this tax, if any, on Form 6251. Tax act 2011 login Withholding of tax. Tax act 2011 login   If you dispose of a U. Tax act 2011 login S. Tax act 2011 login real property interest, the buyer may have to withhold tax. Tax act 2011 login See the discussion of Tax Withheld on Real Property Sales in chapter 8. Tax act 2011 login Foreign Income You must treat three kinds of foreign source income as effectively connected with a trade or business in the United States if: You have an office or other fixed place of business in the United States to which the income can be attributed, That office or place of business is a material factor in producing the income, and The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Tax act 2011 login An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Tax act 2011 login The three kinds of foreign source income are listed below. Tax act 2011 login Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the United States or from any interest in such property. Tax act 2011 login Included are rents or royalties for the use, or for the privilege of using, outside the United States, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the United States. Tax act 2011 login Dividends, interest, or amounts received for the provision of a guarantee of indebtedness issued after September 27, 2010, from the active conduct of a banking, financing, or similar business in the United States. Tax act 2011 login A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. Tax act 2011 login Income, gain, or loss from the sale outside the United States, through the U. Tax act 2011 login S. Tax act 2011 login office or other fixed place of business, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Tax act 2011 login Item (3) will not apply if you sold the property for use, consumption, or disposition outside the United States and an office or other fixed place of business in a foreign country was a material factor in the sale. Tax act 2011 login Any foreign source income that is equivalent to any item of income described above is treated as effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login For example, foreign source interest and dividend equivalents are treated as U. Tax act 2011 login S. Tax act 2011 login effectively connected income if the income is derived by a foreign person in the active conduct of a banking, financing, or similar business within the United States. Tax act 2011 login Tax on Effectively Connected Income Income you receive during the tax year that is effectively connected with your trade or business in the United States is, after allowable deductions, taxed at the rates that apply to U. Tax act 2011 login S. Tax act 2011 login citizens and residents. Tax act 2011 login Generally, you can receive effectively connected income only if you are a nonresident alien engaged in trade or business in the United States during the tax year. Tax act 2011 login However, income you receive from the sale or exchange of property, the performance of services, or any other transaction in another tax year is treated as effectively connected in that year if it would have been effectively connected in the year the transaction took place or you performed the services. Tax act 2011 login Example. Tax act 2011 login Ted Richards, a nonresident alien, entered the United States in August 2012, to perform personal services in the U. Tax act 2011 login S. Tax act 2011 login office of his overseas employer. Tax act 2011 login He worked in the U. Tax act 2011 login S. Tax act 2011 login office until December 25, 2012, but did not leave this country until January 11, 2013. Tax act 2011 login On January 8, 2013, he received his final paycheck for services performed in the United States during 2012. Tax act 2011 login All of Ted's income during his stay here is U. Tax act 2011 login S. Tax act 2011 login source income. Tax act 2011 login During 2012, Ted was engaged in the trade or business of performing personal services in the United States. Tax act 2011 login Therefore, all amounts paid to him in 2012 for services performed in the United States during 2012 are effectively connected with that trade or business during 2012. Tax act 2011 login The salary payment Ted received in January 2013 is U. Tax act 2011 login S. Tax act 2011 login source income to him in 2013. Tax act 2011 login It is effectively connected with a trade or business in the United States because he was engaged in a trade or business in the United States during 2012 when he performed the services that earned the income. Tax act 2011 login Real property income. Tax act 2011 login   You may be able to choose to treat all income from real property as effectively connected. Tax act 2011 login See Income From Real Property , later, in this chapter. Tax act 2011 login The 30% Tax Tax at a 30% (or lower treaty) rate applies to certain items of income or gains from U. Tax act 2011 login S. Tax act 2011 login sources but only if the items are not effectively connected with your U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login Fixed or Determinable Income The 30% (or lower treaty) rate applies to the gross amount of U. Tax act 2011 login S. Tax act 2011 login source fixed or determinable annual or periodic gains, profits, or income. Tax act 2011 login Income is fixed when it is paid in amounts known ahead of time. Tax act 2011 login Income is determinable whenever there is a basis for figuring the amount to be paid. Tax act 2011 login Income can be periodic if it is paid from time to time. Tax act 2011 login It does not have to be paid annually or at regular intervals. Tax act 2011 login Income can be determinable or periodic even if the length of time during which the payments are made is increased or decreased. Tax act 2011 login Items specifically included as fixed or determinable income are interest (other than original issue discount), dividends, dividend equivalent payments (defined in chapter 2), rents, premiums, annuities, salaries, wages, and other compensation. Tax act 2011 login A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. Tax act 2011 login Other items of income, such as royalties, also may be subject to the 30% tax. Tax act 2011 login Some fixed or determinable income may be exempt from U. Tax act 2011 login S. Tax act 2011 login tax. Tax act 2011 login See chapter 3 if you are not sure whether the income is taxable. Tax act 2011 login Original issue discount (OID). Tax act 2011 login   If you sold, exchanged, or received a payment on a bond or other debt instrument that was issued at a discount after March 31, 1972, all or part of the original issue discount (OID) (other than portfolio interest) may be subject to the 30% tax. Tax act 2011 login The amount of OID is the difference between the stated redemption price at maturity and the issue price of the debt instrument. Tax act 2011 login The 30% tax applies in the following circumstances. Tax act 2011 login You received a payment on a debt instrument. Tax act 2011 login In this case, the amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the OID previously taken into account. Tax act 2011 login But the tax on the OID cannot be more than the payment minus the tax on the interest payment on the debt instrument. Tax act 2011 login You sold or exchanged the debt instrument. Tax act 2011 login The amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the amount already taxed in (1) above. Tax act 2011 login   Report on your return the amount of OID shown on Form 1042-S, Foreign Person's U. Tax act 2011 login S. Tax act 2011 login Source Income Subject to Withholding, if you bought the debt instrument at original issue. Tax act 2011 login However, you must recompute your proper share of OID shown on Form 1042-S if any of the following apply. Tax act 2011 login You bought the debt instrument at a premium or paid an acquisition premium. Tax act 2011 login The debt instrument is a stripped bond or a stripped coupon (including zero coupon instruments backed by U. Tax act 2011 login S. Tax act 2011 login Treasury securities). Tax act 2011 login The debt instrument is a contingent payment or inflation-indexed debt instrument. Tax act 2011 login For the definition of premium and acquisition premium and instructions on how to recompute OID, get Publication 1212. Tax act 2011 login   If you held a bond or other debt instrument that was issued at a discount before April 1, 1972, contact the IRS for further information. Tax act 2011 login See chapter 12. Tax act 2011 login Gambling Winnings In general, nonresident aliens are subject to the 30% tax on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business and is not exempted by treaty. Tax act 2011 login However, no tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. Tax act 2011 login Nonresident aliens are taxed at graduated rates on net gambling income won in the United States that is effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login Social Security Benefits A nonresident alien must include 85% of any U. Tax act 2011 login S. Tax act 2011 login social security benefit (and the social security equivalent part of a tier 1 railroad retirement benefit) in U. Tax act 2011 login S. Tax act 2011 login source fixed or determinable annual or periodic income. Tax act 2011 login Social security benefits include monthly retirement, survivor, and disability benefits. Tax act 2011 login This income is exempt under some tax treaties. Tax act 2011 login See Table 1 in Publication 901, U. Tax act 2011 login S. Tax act 2011 login Tax Treaties, for a list of tax treaties that exempt U. Tax act 2011 login S. Tax act 2011 login social security benefits from U. Tax act 2011 login S. Tax act 2011 login tax. Tax act 2011 login Sales or Exchanges of Capital Assets These rules apply only to those capital gains and losses from sources in the United States that are not effectively connected with a trade or business in the United States. Tax act 2011 login They apply even if you are engaged in a trade or business in the United States. Tax act 2011 login These rules do not apply to the sale or exchange of a U. Tax act 2011 login S. Tax act 2011 login real property interest or to the sale of any property that is effectively connected with a trade or business in the United States. Tax act 2011 login See Real Property Gain or Loss , earlier, under Effectively Connected Income. Tax act 2011 login A capital asset is everything you own except: Inventory. Tax act 2011 login Business accounts or notes receivable. Tax act 2011 login Depreciable property used in a trade or business. Tax act 2011 login Real property used in a trade or business. Tax act 2011 login Supplies regularly used in a trade or business. Tax act 2011 login Certain copyrights, literary or musical or artistic compositions, letters or memoranda, or similar property. Tax act 2011 login Certain U. Tax act 2011 login S. Tax act 2011 login government publications. Tax act 2011 login Certain commodities derivative financial instruments held by a commodities derivatives dealer. Tax act 2011 login Hedging transactions. Tax act 2011 login A capital gain is a gain on the sale or exchange of a capital asset. Tax act 2011 login A capital loss is a loss on the sale or exchange of a capital asset. Tax act 2011 login If the sale is in foreign currency, for the purpose of determining gain, the cost and selling price of the property should be expressed in U. Tax act 2011 login S. Tax act 2011 login currency at the rate of exchange prevailing as of the date of the purchase and date of the sale, respectively. Tax act 2011 login You may want to read Publication 544. Tax act 2011 login However, use Publication 544 only to determine what is a sale or exchange of a capital asset, or what is treated as such. Tax act 2011 login Specific tax treatment that applies to U. Tax act 2011 login S. Tax act 2011 login citizens or residents generally does not apply to you. Tax act 2011 login The following gains are subject to the 30% (or lower treaty) rate without regard to the 183-day rule, discussed later. Tax act 2011 login Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest. Tax act 2011 login Gains on contingent payments received from the sale or exchange of patents, copyrights, and similar property after October 4, 1966. Tax act 2011 login Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966. Tax act 2011 login Gains on the sale or exchange of original issue discount obligations. Tax act 2011 login Gains in (1) are not subject to the 30% (or lower treaty) rate if you choose to treat the gains as effectively connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login See Income From Real Property , later. Tax act 2011 login 183-day rule. Tax act 2011 login   If you were in the United States for 183 days or more during the tax year, your net gain from sales or exchanges of capital assets is taxed at a 30% (or lower treaty) rate. Tax act 2011 login For purposes of the 30% (or lower treaty) rate, net gain is the excess of your capital gains from U. Tax act 2011 login S. Tax act 2011 login sources over your capital losses from U. Tax act 2011 login S. Tax act 2011 login sources. Tax act 2011 login This rule applies even if any of the transactions occurred while you were not in the United States. Tax act 2011 login   To determine your net gain, consider the amount of your gains and losses that would be recognized and taken into account only if, and to the extent that, they would be recognized and taken into account if you were in a U. Tax act 2011 login S. Tax act 2011 login trade or business during the year and the gains and losses were effectively connected with that trade or business during the tax year. Tax act 2011 login   In arriving at your net gain, do not take the following into consideration. Tax act 2011 login The four types of gains listed earlier. Tax act 2011 login The deduction for a capital loss carryover. Tax act 2011 login Capital losses in excess of capital gains. Tax act 2011 login Exclusion for gain from the sale or exchange of qualified small business stock (section 1202 exclusion). Tax act 2011 login Losses from the sale or exchange of property held for personal use. Tax act 2011 login However, losses resulting from casualties or thefts may be deductible on Schedule A (Form 1040NR). Tax act 2011 login See Itemized Deductions in chapter 5. Tax act 2011 login   If you are not engaged in a trade or business in the United States and have not established a tax year for a prior period, your tax year will be the calendar year for purposes of the 183-day rule. Tax act 2011 login Also, you must file your tax return on a calendar-year basis. Tax act 2011 login   If you were in the United States for less than 183 days during the tax year, capital gains (other than gains listed earlier) are tax exempt unless they are effectively connected with a trade or business in the United States during your tax year. Tax act 2011 login Reporting. Tax act 2011 login   Report your gains and losses from the sales or exchanges of capital assets that are not effectively connected with a trade or business in the United States on page 4 of Form 1040NR. Tax act 2011 login Report gains and losses from sales or exchanges of capital assets (including real property) that are effectively connected with a trade or business in the United States on a separate Schedule D (Form 1040), Form 4797, or both. Tax act 2011 login Attach them to Form 1040NR. Tax act 2011 login Income From Real Property If you have income from real property located in the United States that you own or have an interest in and hold for the production of income, you can choose to treat all income from that property as income effectively connected with a trade or business in the United States. Tax act 2011 login The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. Tax act 2011 login This includes income from rents, royalties from mines, oil or gas wells, or other natural resources. Tax act 2011 login It also includes gains from the sale or exchange of timber, coal, or domestic iron ore with a retained economic interest. Tax act 2011 login You can make this choice only for real property income that is not otherwise effectively connected with your U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login If you make the choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed. Tax act 2011 login This choice does not treat a nonresident alien, who is not otherwise engaged in a U. Tax act 2011 login S. Tax act 2011 login trade or business, as being engaged in a trade or business in the United States during the year. Tax act 2011 login Example. Tax act 2011 login You are a nonresident alien and are not engaged in a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login You own a single-family house in the United States that you rent out. Tax act 2011 login Your rental income for the year is $10,000. Tax act 2011 login This is your only U. Tax act 2011 login S. Tax act 2011 login source income. Tax act 2011 login As discussed earlier under The 30% Tax, the rental income is subject to a tax at a 30% (or lower treaty) rate. Tax act 2011 login You received a Form 1042-S showing that your tenants properly withheld this tax from the rental income. Tax act 2011 login You do not have to file a U. Tax act 2011 login S. Tax act 2011 login tax return (Form 1040NR) because your U. Tax act 2011 login S. Tax act 2011 login tax liability is satisfied by the withholding of tax. Tax act 2011 login If you make the choice discussed earlier, you can offset the $10,000 income by certain rental expenses. Tax act 2011 login (See Publication 527, Residential Rental Property, for information on rental expenses. Tax act 2011 login ) Any resulting net income is taxed at graduated rates. Tax act 2011 login If you make this choice, report the rental income and expenses on Schedule E (Form 1040) and attach the schedule to Form 1040NR. Tax act 2011 login For the first year you make the choice, also attach the statement discussed next. Tax act 2011 login Making the choice. Tax act 2011 login   Make the initial choice by attaching a statement to your return, or amended return, for the year of the choice. Tax act 2011 login Include the following in your statement. Tax act 2011 login That you are making the choice. Tax act 2011 login Whether the choice is under Internal Revenue Code section 871(d) (explained earlier) or a tax treaty. Tax act 2011 login A complete list of all your real property, or any interest in real property, located in the United States. Tax act 2011 login Give the legal identification of U. Tax act 2011 login S. Tax act 2011 login timber, coal, or iron ore in which you have an interest. Tax act 2011 login The extent of your ownership in the property. Tax act 2011 login The location of the property. Tax act 2011 login A description of any major improvements to the property. Tax act 2011 login The dates you owned the property. Tax act 2011 login Your income from the property. Tax act 2011 login Details of any previous choices and revocations of the real property income choice. Tax act 2011 login   This choice stays in effect for all later tax years unless you revoke it. Tax act 2011 login Revoking the choice. Tax act 2011 login   You can revoke the choice without IRS approval by filing Form 1040X, Amended U. Tax act 2011 login S. Tax act 2011 login Individual Income Tax Return, for the year you made the choice and for later tax years. Tax act 2011 login You must file Form 1040X within 3 years from the date your return was filed or 2 years from the time the tax was paid, whichever is later. Tax act 2011 login If this time period has expired for the year of choice, you cannot revoke the choice for that year. Tax act 2011 login However, you may revoke the choice for later tax years only if you have IRS approval. Tax act 2011 login For information on how to get IRS approval, see Regulation section 1. Tax act 2011 login 871-10(d)(2). Tax act 2011 login Transportation Tax A 4% tax rate applies to transportation income that is not effectively connected because it does not meet the two conditions listed earlier under Transportation Income . Tax act 2011 login If you receive transportation income subject to the 4% tax, you should figure the tax and show it on line 57 of Form 1040NR. Tax act 2011 login Attach a statement to your return that includes the following information (if applicable). Tax act 2011 login Your name, taxpayer identification number, and tax year. Tax act 2011 login A description of the types of services performed (whether on or off board). Tax act 2011 login Names of vessels or registration numbers of aircraft on which you performed the services. Tax act 2011 login Amount of U. Tax act 2011 login S. Tax act 2011 login source transportation income derived from each type of service for each vessel or aircraft for the calendar year. Tax act 2011 login Total amount of U. Tax act 2011 login S. Tax act 2011 login source transportation income derived from all types of services for the calendar year. Tax act 2011 login This 4% tax applies to your U. Tax act 2011 login S. Tax act 2011 login source gross transportation income. Tax act 2011 login This only includes transportation income that is treated as derived from sources in the United States if the transportation begins or ends in the United States. Tax act 2011 login For transportation income from personal services, the transportation must be between the United States and a U. Tax act 2011 login S. Tax act 2011 login possession. Tax act 2011 login For personal services of a nonresident alien, this only applies to income derived from, or in connection with, an aircraft. Tax act 2011 login Interrupted Period of Residence You are subject to tax under a special rule if you interrupt your period of U. Tax act 2011 login S. Tax act 2011 login residence with a period of nonresidence. Tax act 2011 login The special rule applies if you meet all of the following conditions. Tax act 2011 login You were a U. Tax act 2011 login S. Tax act 2011 login resident for a period that includes at least 3 consecutive calendar years. Tax act 2011 login You were a U. Tax act 2011 login S. Tax act 2011 login resident for at least 183 days in each of those years. Tax act 2011 login You ceased to be treated as a U. Tax act 2011 login S. Tax act 2011 login resident. Tax act 2011 login You then again became a U. Tax act 2011 login S. Tax act 2011 login resident before the end of the third calendar year after the end of the period described in (1) above. Tax act 2011 login Under this special rule, you are subject to tax on your U. Tax act 2011 login S. Tax act 2011 login source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) for the period you were a nonresident alien, unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login For information on how to figure the special tax, see How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) under Expatriation Tax , below. Tax act 2011 login Example. Tax act 2011 login John Willow, a citizen of New Zealand, entered the United States on April 1, 2008, as a lawful permanent resident. Tax act 2011 login On August 1, 2010, John ceased to be a lawful permanent resident and returned to New Zealand. Tax act 2011 login During his period of residence, he was present in the United States for at least 183 days in each of three consecutive years (2008, 2009, and 2010). Tax act 2011 login He returned to the United States on October 5, 2013, as a lawful permanent resident. Tax act 2011 login He became a resident before the close of the third calendar year (2013) beginning after the end of his first period of residence (August 1, 2010). Tax act 2011 login Therefore, he is subject to tax under the special rule for the period of nonresidence (August 2, 2010, through October 4, 2013) if it is more than the tax that would normally apply to him as a nonresident alien. Tax act 2011 login Reporting requirements. Tax act 2011 login   If you are subject to this tax for any year in the period you were a nonresident alien, you must file Form 1040NR for that year. Tax act 2011 login The return is due by the due date (including extensions) for filing your U. Tax act 2011 login S. Tax act 2011 login income tax return for the year that you again become a U. Tax act 2011 login S. Tax act 2011 login resident. Tax act 2011 login If you already filed returns for that period, you must file amended returns. Tax act 2011 login You must attach a statement to your return that identifies the source of all of your U. Tax act 2011 login S. Tax act 2011 login and foreign gross income and the items of income subject to this special rule. Tax act 2011 login Expatriation Tax The expatriation tax provisions apply to U. Tax act 2011 login S. Tax act 2011 login citizens who have renounced their citizenship and long-term residents who have ended their residency. Tax act 2011 login The rules that apply are based on the dates of expatriation, which are described in the following sections. Tax act 2011 login Expatriation Before June 4, 2004. Tax act 2011 login Expatriation After June 3, 2004, and Before June 17, 2008. Tax act 2011 login Expatriation After June 16, 2008. Tax act 2011 login Long-term resident defined. Tax act 2011 login   You are a long-term resident if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your residency ends. Tax act 2011 login In determining if you meet the 8-year requirement, do not count any year that you are treated as a resident of a foreign country under a tax treaty and do not waive treaty benefits. Tax act 2011 login Expatriation Before June 4, 2004 If you expatriated before June 4, 2004, the expatriation rules apply if one of the principal purposes of the action is the avoidance of U. Tax act 2011 login S. Tax act 2011 login taxes. Tax act 2011 login Unless you received a ruling from the IRS that you did not expatriate to avoid U. Tax act 2011 login S. Tax act 2011 login taxes, you are presumed to have tax avoidance as a principal purpose if: Your average annual net income tax for the last 5 tax years ending before the date of your action to relinquish your citizenship or terminate your residency was more than $100,000, or Your net worth on the date of your action was $500,000 or more. Tax act 2011 login The amounts above are adjusted for inflation if your expatriation action is after 1997 (see Table 4-1). Tax act 2011 login Table 4-1. Tax act 2011 login Inflation-Adjusted Amounts for Expatriation Actions Before June 4, 2004 IF you expatriated during . Tax act 2011 login . Tax act 2011 login . Tax act 2011 login   THEN the rules outlined on this page apply if . Tax act 2011 login . Tax act 2011 login . Tax act 2011 login     Your 5-year average annual net income tax was more than . Tax act 2011 login . Tax act 2011 login . Tax act 2011 login OR Your net worth equaled or exceeded . Tax act 2011 login . Tax act 2011 login . Tax act 2011 login 1999   110,000   552,000 2000   112,000   562,000 2001   116,000   580,000 2002   120,000   599,000 2003   122,000   608,000 2004 (before June 4)*   124,000   622,000 *If you expatriated after June 3, 2004, see Expatriation After June 3, 2004, and Before June 17, 2008 or Expatriation After June 16, 2008. Tax act 2011 login Reporting requirements. Tax act 2011 login   If you lost your U. Tax act 2011 login S. Tax act 2011 login citizenship, you should have filed Form 8854 with a consular office or a federal court at the time of loss of citizenship. Tax act 2011 login If you ended your long-term residency, you should have filed Form 8854 with the Internal Revenue Service when you filed your dual-status tax return for the year your residency ended. Tax act 2011 login   Your U. Tax act 2011 login S. Tax act 2011 login residency is considered to have ended when you ceased to be a lawful permanent resident or you began to be treated as a resident of another country under a tax treaty and do not waive treaty benefits. Tax act 2011 login Penalties. Tax act 2011 login   If you failed to file Form 8854, you may have to pay a penalty equal to the greater of 5% of the expatriation tax or $1,000. Tax act 2011 login The penalty will be assessed for each year of the 10-year period beginning on the date of expatriation during which your failure to file continues. Tax act 2011 login The penalty will not be imposed if you can show that the failure is due to reasonable cause and not willful neglect. Tax act 2011 login Expatriation tax. Tax act 2011 login   The expatriation tax applies to the 10-year period following the date of expatriation or termination of residency. Tax act 2011 login It is figured in the same way as for those expatriating after June 3, 2004, and before June 17, 2008. Tax act 2011 login See How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) in the next section. Tax act 2011 login Expatriation After June 3, 2004, and Before June 17, 2008 If you expatriated after June 3, 2004, and before June 17, 2008, the expatriation rules apply to you if any of the following statements apply. Tax act 2011 login Your average annual net income tax for the 5 tax years ending before the date of expatriation or termination of residency is more than: $124,000 if you expatriated or terminated residency in 2004. Tax act 2011 login $127,000 if you expatriated or terminated residency in 2005. Tax act 2011 login $131,000 if you expatriated or terminated residency in 2006. Tax act 2011 login $136,000 if you expatriated or terminated residency in 2007. Tax act 2011 login $139,000 if you expatriated or terminated residency in 2008. Tax act 2011 login Your net worth is $2 million or more on the date of your expatriation or termination of residency. Tax act 2011 login You fail to certify on Form 8854 that you have complied with all U. Tax act 2011 login S. Tax act 2011 login federal tax obligations for the 5 tax years preceding the date of your expatriation or termination of residency. Tax act 2011 login Exception for dual-citizens and certain minors. Tax act 2011 login   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) earlier. Tax act 2011 login However, they still must provide the certification required in (3). Tax act 2011 login Certain dual-citizens. Tax act 2011 login   You may qualify for the exception described above if all of the following apply. Tax act 2011 login You became at birth a U. Tax act 2011 login S. Tax act 2011 login citizen and a citizen of another country and you continue to be a citizen of that other country. Tax act 2011 login You were never a resident alien of the United States (as defined in chapter 1). Tax act 2011 login You never held a U. Tax act 2011 login S. Tax act 2011 login passport. Tax act 2011 login You were present in the United States for no more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your loss of U. Tax act 2011 login S. Tax act 2011 login citizenship. Tax act 2011 login Certain minors. Tax act 2011 login   You may qualify for the exception described above if you meet all of the following requirements. Tax act 2011 login You became a U. Tax act 2011 login S. Tax act 2011 login citizen at birth. Tax act 2011 login Neither of your parents was a U. Tax act 2011 login S. Tax act 2011 login citizen at the time of your birth. Tax act 2011 login You expatriated before you were 18½. Tax act 2011 login You were present in the United States for not more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your expatriation. Tax act 2011 login Tax consequences of presence in the United States. Tax act 2011 login   The following rules apply if you do not meet the exception above for dual-citizens and certain minors and the expatriation rules would otherwise apply to you. Tax act 2011 login   The expatriation tax does not apply to any tax year during the 10-year period if you are physically present in the United States for more than 30 days during the calendar year ending in that year. Tax act 2011 login Instead, you are treated as a U. Tax act 2011 login S. Tax act 2011 login citizen or resident and taxed on your worldwide income for that tax year. Tax act 2011 login You must file Form 1040, 1040A, or 1040EZ and figure your tax as prescribed in the instructions for those forms. Tax act 2011 login   When counting the number of days of presence during a calendar year, count any day you were physically present in the United States at any time during the day. Tax act 2011 login However, do not count any days (up to a limit of 30 days) on which you performed personal services in the United States for an employer who is not related to you if either of the following apply. Tax act 2011 login You have ties with other countries. Tax act 2011 login You have ties with other countries if: You became (within a reasonable period after your expatriation or termination of residency) a citizen or resident of the country in which you, your spouse, or either of your parents were born, and You became fully liable for income tax in that country. Tax act 2011 login You were physically present in the United States for 30 days or less during each year in the 10-year period ending on the date of expatriation or termination of residency. Tax act 2011 login Do not count any day you were an exempt individual or were unable to leave the United States because of a medical condition that arose while you were in the United States. Tax act 2011 login See Exempt individual and Medical condition in chapter 1 under Substantial Presence Test, but disregard the information about Form 8843. Tax act 2011 login Related employer. Tax act 2011 login   If your employer in the United States is any of the following, then your employer is related to you. Tax act 2011 login You must count any days you performed services in the United States for that employer as days of presence in the United States. Tax act 2011 login Members of your family. Tax act 2011 login This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. Tax act 2011 login ), and lineal descendants (children, grandchildren, etc. Tax act 2011 login ). Tax act 2011 login A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. Tax act 2011 login A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. Tax act 2011 login (See Publication 550, chapter 4, Constructive ownership of stock, for how to determine whether you directly or indirectly own outstanding stock. Tax act 2011 login ) A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. Tax act 2011 login Date of tax expatriation. Tax act 2011 login   For purposes of U. Tax act 2011 login S. Tax act 2011 login tax rules, the date of your expatriation or termination of residency is the later of the dates on which you perform the following actions. Tax act 2011 login You notify either the Department of State or the Department of Homeland Security (whichever is appropriate) of your expatriating act or termination of residency. Tax act 2011 login You file Form 8854 in accordance with the form instructions. Tax act 2011 login Annual return. Tax act 2011 login   If the expatriation tax applies to you, you must file Form 8854 each year during the 10-year period following the date of expatriation. Tax act 2011 login You must file this form even if you owe no U. Tax act 2011 login S. Tax act 2011 login tax. Tax act 2011 login Penalty. Tax act 2011 login   If you fail to file Form 8854 for any tax year, fail to include all information required to be shown on the form, or include incorrect information, you may have to pay a penalty of $10,000. Tax act 2011 login You will not have to pay a penalty if you show that the failure is due to reasonable cause and not to willful neglect. Tax act 2011 login How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) If the expatriation tax applies to you, you are generally subject to tax on your U. Tax act 2011 login S. Tax act 2011 login source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. Tax act 2011 login S. Tax act 2011 login trade or business. Tax act 2011 login For this purpose, U. Tax act 2011 login S. Tax act 2011 login source gross income (defined in chapter 2) includes gains from the sale or exchange of: Property (other than stock or debt obligations) located in the United States, Stock issued by a U. Tax act 2011 login S. Tax act 2011 login domestic corporation, and Debt obligations of U. Tax act 2011 login S. Tax act 2011 login persons or of the United States, a state or political subdivision thereof, or the District of Columbia. Tax act 2011 login U. Tax act 2011 login S. Tax act 2011 login source income also includes any income or gain derived from stock in certain controlled foreign corporations if you owned, or were considered to own, at any time during the 2-year period ending on the date of expatriation, more than 50% of: The total combined voting power of all classes of that corporation's stock, or The total value of the stock. Tax act 2011 login The income or gain is considered U. Tax act 2011 login S. Tax act 2011 login source income only to the extent of your share of earnings and profits earned or accumulated before the date of expatriation and during the periods you met the ownership requirements discussed above. Tax act 2011 login Any exchange of property is treated as a sale of the property at its fair market value on the date of the exchange and any gain is treated as U. Tax act 2011 login S. Tax act 2011 login source gross income in the tax year of the exchange unless you enter into a gain recognition agreement under Notice 97-19. Tax act 2011 login Other information. Tax act 2011 login   For more information on the expatriation tax provisions, including exceptions to the tax and special U. Tax act 2011 login S. Tax act 2011 login source rules, see section 877 of the Internal Revenue Code. Tax act 2011 login Expatriation Tax Return If you expatriated or terminated your U. Tax act 2011 login S. Tax act 2011 login residency, or you are subject to the expatriation tax, you must file Form 8854, Initial and Annual Expatriation Statement. Tax act 2011 login Attach it to Form 1040NR if you are required to file that form. Tax act 2011 login If you are present in the United States following your expatriation and are subject to tax as a U. Tax act 2011 login S. Tax act 2011 login citizen or resident, file Form 8854 with Form 1040. Tax act 2011 login Expatriation After June 16, 2008 If you expatriated after June 16, 2008, the expatriation rules apply to you if you meet any of the following conditions. Tax act 2011 login Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than: $139,000 if you expatriated or terminated residency in 2008. Tax act 2011 login $145,000 if you expatriated or terminated residency in 2009 or 2010. Tax act 2011 login $147,000 if you expatriated or terminated residency in 2011. Tax act 2011 login $151,000 if you expatriated or terminated residency in 2012. Tax act 2011 login $155,000 if you expatriated or terminated residency in 2013. Tax act 2011 login Your net worth is $2 million or more on the date of your expatriation or termination of residency. Tax act 2011 login You fail to certify on Form 8854 that you have complied with all U. Tax act 2011 login S. Tax act 2011 login federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency. Tax act 2011 login Exception for dual-citizens and certain minors. Tax act 2011 login   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) above. Tax act 2011 login However, they still must provide the certification required in (3) above. Tax act 2011 login Certain dual-citizens. Tax act 2011 login   You may qualify for the exception described above if both of the following apply. Tax act 2011 login You became at birth a U. Tax act 2011 login S. Tax act 2011 login citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country. Tax act 2011 login You have been a resident of the United States for not more than 10 years during the 15-year tax period ending with the tax year during which the expatriation occurs. Tax act 2011 login For the purpose of determining U. Tax act 2011 login S. Tax act 2011 login residency, use the substantial presence test described in chapter 1. Tax act 2011 login Certain minors. Tax act 2011 login   You may qualify for the exception described earlier if you meet both of the following requirements. Tax act 2011 login You expatriated before you were 18½. Tax act 2011 login You have been a resident of the United States for not more than 10 tax years before the expatriation occurs. Tax act 2011 login For the purpose of determining U. Tax act 2011 login S. Tax act 2011 login residency, use the substantial presence test described in chapter 1. Tax act 2011 login Expatriation date. Tax act 2011 login   Your expatriation date is the date you relinquish U. Tax act 2011 login S. Tax act 2011 login citizenship (in the case of a former citizen) or terminate your long-term residency (in the case of a former U. Tax act 2011 login S. Tax act 2011 login resident). Tax act 2011 login Former U. Tax act 2011 login S. Tax act 2011 login citizen. Tax act 2011 login   You are considered to have relinquished your U. Tax act 2011 login S. Tax act 2011 login citizenship on the earliest of the following dates. Tax act 2011 login The date you renounced U. Tax act 2011 login S. Tax act 2011 login citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality). Tax act 2011 login The date you furnished to the State Department a signed statement of voluntary relinquishment of U. Tax act 2011 login S. Tax act 2011 login nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality). Tax act 2011 login The date the State Department issued a certificate of loss of nationality. Tax act 2011 login The date that a U. Tax act 2011 login S. Tax act 2011 login court canceled your certificate of naturalization. Tax act 2011 login Former long-term resident. Tax act 2011 login   You are considered to have terminated your long-term residency on the earliest of the following dates. Tax act 2011 login The date you voluntarily relinquished your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U. Tax act 2011 login S. Tax act 2011 login consular or immigration officer, and the Department of Homeland Security determined that you have, in fact, abandoned your lawful permanent resident status. Tax act 2011 login The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order. Tax act 2011 login If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you began to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and notify the IRS of that treatment on Forms 8833 and 8854. Tax act 2011 login See Effect of Tax Treaties in chapter 1 for more information about dual residents. Tax act 2011 login How To Figure the Expatriation Tax (If You Expatriate After June 16, 2008) In the year you expatriate, you are subject to income tax on the net unrealized gain (or loss) in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”). Tax act 2011 login This applies to most types of property interests you held on the date of relinquishment of citizenship or termination of residency. Tax act 2011 login But see Exceptions , later. Tax act 2011 login Gains arising from deemed sales must be taken into account for the tax year of the deemed sale without regard to other U. Tax act 2011 login S. Tax act 2011 login internal revenue laws. Tax act 2011 login Losses from deemed sales must be taken into account to the extent otherwise provided under U. Tax act 2011 login S. Tax act 2011 login internal revenue laws. Tax act 2011 login However, Internal Revenue Code section 1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. Tax act 2011 login The net gain that you otherwise must include in your income is reduced (but not below zero) by: $600,000 if you expatriated or terminated residency before January 1, 2009. Tax act 2011 login $626,000 if you expatriated or terminated residency in 2009. Tax act 2011 login $627,000 if you expatriated or terminated residency in 2010. Tax act 2011 login $636,000 if you expatriated or terminated residency in 2011. Tax act 2011 login $651,000 if you expatriated or terminated residency in 2012. Tax act 2011 login $668,000 if you expatriated or terminated residency in 2013. Tax act 2011 login Exceptions. Tax act 2011 login   The mark-to-market tax does not apply to the following. Tax act 2011 login Eligible deferred compensation items. Tax act 2011 login Ineligible deferred compensation items. Tax act 2011 login Interests in nongrantor trusts. Tax act 2011 login Specified tax deferred accounts. Tax act 2011 login Instead, items (1) and (3) may be subject to withholding at source. Tax act 2011 login In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. Tax act 2011 login In the case of item (4), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. Tax act 2011 login See paragraphs (d), (e), and (f) of section 877A for more information. Tax act 2011 login Expatriation Tax Return If you expatriated or terminated your U. Tax act 2011 login S. Tax act 2011 login residency, or you are subject to the expatriation rules (as discussed earlier in the first paragraph under Expatriation After June 16, 2008), you must file Form 8854. Tax act 2011 login Attach it to Form 1040 or Form 1040NR if you are required to file either of those forms. Tax act 2011 login Deferral of payment of mark-to-market tax. Tax act 2011 login   You can make an irrevocable election to defer payment of the mark-to-market tax imposed on the deemed sale of property. Tax act 2011 login If you make this election, the following rules apply. Tax act 2011 login You can make the election on a property-by-property basis. Tax act 2011 login The deferred tax attributable to a particular property is due on the return for the tax year in which you dispose of the property. Tax act 2011 login Interest is charged for the period the tax is deferred. Tax act 2011 login The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates. Tax act 2011 login The due date of the return required for the year of death. Tax act 2011 login The time that the security provided for the property fails to be adequate. Tax act 2011 login See item (6) below. Tax act 2011 login You make the election on Form 8854. Tax act 2011 login You must provide adequate security (such as a bond). Tax act 2011 login You must make an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of the mark-to-market tax. Tax act 2011 login   For more information about the deferral of payment, see the Instructions for Form 8854. Tax act 2011 login Prev  Up  Next   Home   More Online Publications