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Turbotax for students free Publication 939 - Main Content Table of Contents General Information Taxation of Periodic PaymentsInvestment in the Contract Expected Return Computation Under the General Rule How To Use Actuarial TablesUnisex Annuity Tables Special Elections Worksheets for Determining Taxable Annuity Actuarial Tables Requesting a Ruling on Taxation of Annuity How To Get Tax HelpLow Income Taxpayer Clinics General Information Some of the terms used in this publication are defined in the following paragraphs. Turbotax for students free A pension is generally a series of payments made to you after you retire from work. Turbotax for students free Pension payments are made regularly and are for past services with an employer. Turbotax for students free An annuity is a series of payments under a contract. Turbotax for students free You can buy the contract alone or you can buy it with the help of your employer. Turbotax for students free Annuity payments are made regularly for more than one full year. Turbotax for students free Note. Turbotax for students free Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. Turbotax for students free Types of pensions and annuities. Turbotax for students free   Particular types of pensions and annuities include: Fixed period annuities. Turbotax for students free You receive definite amounts at regular intervals for a definite length of time. Turbotax for students free Annuities for a single life. Turbotax for students free You receive definite amounts at regular intervals for life. Turbotax for students free The payments end at death. Turbotax for students free Joint and survivor annuities. Turbotax for students free The first annuitant receives a definite amount at regular intervals for life. Turbotax for students free After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Turbotax for students free The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Turbotax for students free Variable annuities. Turbotax for students free You receive payments that may vary in amount for a definite length of time or for life. Turbotax for students free The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. Turbotax for students free Disability pensions. Turbotax for students free You are under minimum retirement age and receive payments because you retired on disability. Turbotax for students free If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524. Turbotax for students free If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. Turbotax for students free A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries. Turbotax for students free This plan must meet Internal Revenue Code requirements. Turbotax for students free It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. Turbotax for students free However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. Turbotax for students free A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. Turbotax for students free A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. Turbotax for students free   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. Turbotax for students free A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. Turbotax for students free It does not qualify for most of the tax benefits of a qualified plan. Turbotax for students free Annuity worksheets. Turbotax for students free   The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity. Turbotax for students free Request for a ruling. Turbotax for students free   If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. Turbotax for students free This is treated as a request for a ruling. Turbotax for students free See Requesting a Ruling on Taxation of Annuity near the end of this publication. Turbotax for students free Withholding tax and estimated tax. Turbotax for students free   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. Turbotax for students free If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments. Turbotax for students free Taxation of Periodic Payments This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. Turbotax for students free Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Turbotax for students free These payments are also known as amounts received as an annuity. Turbotax for students free If you receive an amount from your plan that is a nonperiodic payment (amount not received as an annuity), see Taxation of Nonperiodic Payments in Publication 575. Turbotax for students free In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. Turbotax for students free The amount of each payment that is more than the part that represents your net cost is taxable. Turbotax for students free Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. Turbotax for students free These terms are explained in the following discussions. Turbotax for students free Investment in the Contract In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the contract. Turbotax for students free First, find your net cost of the contract as of the annuity starting date (defined later). Turbotax for students free To find this amount, you must first figure the total premiums, contributions, or other amounts paid. Turbotax for students free This includes the amounts your employer contributed if you were required to include these amounts in income. Turbotax for students free It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). Turbotax for students free From this total cost you subtract: Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment. Turbotax for students free Any additional premiums paid for double indemnity or disability benefits. Turbotax for students free Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). Turbotax for students free The annuity starting date   is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes fixed. Turbotax for students free Example. Turbotax for students free On January 1 you completed all your payments required under an annuity contract providing for monthly payments starting on August 1, for the period beginning July 1. Turbotax for students free The annuity starting date is July 1. Turbotax for students free This is the date you use in figuring your investment in the contract and your expected return (discussed later). Turbotax for students free Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. Turbotax for students free Foreign employment. Turbotax for students free   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. Turbotax for students free The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (without regard to the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to you. Turbotax for students free Foreign employment contributions while a nonresident alien. Turbotax for students free   In determining your cost, special rules apply if you are a U. Turbotax for students free S. Turbotax for students free citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. Turbotax for students free Your contributions and your employer's contributions are not included in your cost if the contributions: Were made based on compensation which was for services performed outside the United States which you were a nonresident alien, and Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were performed. Turbotax for students free Death benefit exclusion. Turbotax for students free   If you are the beneficiary of a deceased employee (or former employee), who died before August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. Turbotax for students free The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. Turbotax for students free How to adjust your total cost. Turbotax for students free   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. Turbotax for students free Add it to the cost or unrecovered cost of the annuity at the annuity starting date. Turbotax for students free See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. Turbotax for students free Net cost. Turbotax for students free   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. Turbotax for students free This is the unrecovered investment in the contract as of the annuity starting date. Turbotax for students free If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. Turbotax for students free Refund feature. Turbotax for students free   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. Turbotax for students free Your annuity contract has a refund feature if: The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals, The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and The payments are a refund of the amount you paid for the annuity contract. Turbotax for students free   If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see How To Use Actuarial Tables , later) to find the investment in the contract. Turbotax for students free Zero value of refund feature. Turbotax for students free   For a joint and survivor annuity, the value of the refund feature is zero if: Both annuitants are age 74 or younger, The payments are guaranteed for less than 2½ years, and The survivor's annuity is at least 50% of the first annuitant's annuity. Turbotax for students free   For a single-life annuity without survivor benefit, the value of the refund feature is zero if: The payments are guaranteed for less than 2½ years, and The annuitant is: Age 57 or younger (if using the new (unisex) annuity tables), Age 42 or younger (if male and using the old annuity tables), or Age 47 or younger (if female and using the old annuity tables). Turbotax for students free   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. Turbotax for students free Examples. Turbotax for students free The first example shows how to figure the value of the refund feature when there is only one beneficiary. Turbotax for students free Example 2 shows how to figure the value of the refund feature when the contract provides, in addition to a whole life annuity, one or more temporary life annuities for the lives of children. Turbotax for students free In both examples, the taxpayer elects to use Tables V through VIII. Turbotax for students free If you need the value of the refund feature for a joint and survivor annuity, write to the Internal Revenue Service as explained under Requesting a Ruling on Taxation of Annuity near the end of this publication. Turbotax for students free Example 1. Turbotax for students free At age 65, Barbara bought for $21,053 an annuity with a refund feature. Turbotax for students free She will get $100 a month for life. Turbotax for students free Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. Turbotax for students free In this case, the contract cost and the total guaranteed return are the same ($21,053). Turbotax for students free Barbara's investment in the contract is figured as follows: Net cost $21,053 Amount to be received annually $1,200   Number of years for which payment is guaranteed ($21,053 divided by $1,200) 17. Turbotax for students free 54   Rounded to nearest whole number of years 18   Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments 15%   Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 3,158 Investment in the contract, adjusted for value of refund feature $17,895       If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. Turbotax for students free For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). Turbotax for students free In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of $17,895. Turbotax for students free Example 2. Turbotax for students free John died while still employed. Turbotax for students free His widow, Eleanor, age 48, receives $171 a month for the rest of her life. Turbotax for students free John's son, Elmer, age 9, receives $50 a month until he reaches age 18. Turbotax for students free John's contributions to the retirement fund totaled $7,559. Turbotax for students free 45, with interest on those contributions of $1,602. Turbotax for students free 53. Turbotax for students free The guarantee or total refund feature of the contract is $9,161. Turbotax for students free 98 ($7,559. Turbotax for students free 45 plus $1,602. Turbotax for students free 53). Turbotax for students free The adjustment in the investment in the contract is figured as follows: A) Expected return:*       1) Widow's expected return:         Annual annuity ($171 × 12) $2,052       Multiplied by factor from Table V         (nearest age 48) 34. Turbotax for students free 9 $71,614. Turbotax for students free 80   2) Child's expected return:         Annual annuity ($50 × 12) $600       Multiplied by factor from         Table VIII (nearest age 9         for term of 9 years) 9. Turbotax for students free 0 5,400. Turbotax for students free 00   3) Total expected return   $77,014. Turbotax for students free 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. Turbotax for students free 45   2) Guaranteed amount (contributions of $7,559. Turbotax for students free 45 plus interest of $1,602. Turbotax for students free 53) $9,161. Turbotax for students free 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. Turbotax for students free 00   4) Net guaranteed amount $3,761. Turbotax for students free 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. Turbotax for students free 98 at $171 a month to nearest whole year)) 0%   6) Adjustment required for value of refund feature rounded to the nearest whole dollar  (0% × $3,761. Turbotax for students free 98, the smaller of B(3) or B(6)) 0 *Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Turbotax for students free See the discussion of expected return, later in this publication. Turbotax for students free Free IRS help. Turbotax for students free   If you need to request assistance to figure the value of the refund feature, see Requesting a Ruling on Taxation of Annuity near the end of this publication. Turbotax for students free Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Turbotax for students free The following discussions explain how to figure the expected return with each type of annuity. Turbotax for students free A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. Turbotax for students free Fixed period annuity. Turbotax for students free   If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. Turbotax for students free It is the total amount you will get beginning at the annuity starting date. Turbotax for students free You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). Turbotax for students free To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each period. Turbotax for students free Single life annuity. Turbotax for students free   If you are to get annuity payments for the rest of your life, find your expected return as follows. Turbotax for students free You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. Turbotax for students free These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). Turbotax for students free   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. Turbotax for students free See Adjustments to Tables I, II, V, VI, and VIA following Table I. Turbotax for students free Example. Turbotax for students free Henry bought an annuity contract that will give him an annuity of $500 a month for his life. Turbotax for students free If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table V, age 66 × 19. Turbotax for students free 2 Expected return $115,200 If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19. Turbotax for students free 2 multiple by +. Turbotax for students free 1. Turbotax for students free His expected return would then be $115,800 ($6,000 × 19. Turbotax for students free 3). Turbotax for students free Annuity for shorter of life or specified period. Turbotax for students free   With this type of annuity, you are to get annuity payments either for the rest of your life or until the end of a specified period, whichever period is shorter. Turbotax for students free To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. Turbotax for students free Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified period. Turbotax for students free Example. Turbotax for students free Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. Turbotax for students free She was age 65 at her birthday nearest the annuity starting date. Turbotax for students free She figures the expected return as follows: Annual payment ($200 × 12 months) $2,400 Multiple shown in Table VIII, age 65, 5-year term × 4. Turbotax for students free 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. Turbotax for students free See Special Elections, later. Turbotax for students free Joint and survivor annuities. Turbotax for students free   If you have an annuity that pays you a periodic income for life and after your death provides an identical lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. Turbotax for students free To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. Turbotax for students free If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. Turbotax for students free See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. Turbotax for students free Example. Turbotax for students free John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. Turbotax for students free At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. Turbotax for students free The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. Turbotax for students free 0 Expected return $132,000 Different payments to survivor. Turbotax for students free   If your contract provides that payments to a survivor annuitant will be different from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the survivor. Turbotax for students free Example 1. Turbotax for students free Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. Turbotax for students free If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows: Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI)   22. Turbotax for students free 0 Multiple for Gerald, age 70 (from Table V)   16. Turbotax for students free 0 Difference: Multiple applicable to Mary   6. Turbotax for students free 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. Turbotax for students free 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. Turbotax for students free 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. Turbotax for students free Your husband died while still employed. Turbotax for students free Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. Turbotax for students free Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. Turbotax for students free You were 50 years old at the annuity starting date. Turbotax for students free Marie was 16 and Jean was 14. Turbotax for students free Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows: Widow, age 50 (multiple from Table V—33. Turbotax for students free 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. Turbotax for students free 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. Turbotax for students free 0 × $1,800 annual payment) 7,200 Total expected return $169,680 No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting date. Turbotax for students free Computation Under the General Rule Note. Turbotax for students free Variable annuities use a different computation for determining the exclusion amounts. Turbotax for students free See Variable annuities later. Turbotax for students free Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. Turbotax for students free   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. Turbotax for students free See Death benefit exclusion , earlier. Turbotax for students free Step 2. Turbotax for students free   Figure your expected return. Turbotax for students free Step 3. Turbotax for students free   Divide Step 1 by Step 2 and round to three decimal places. Turbotax for students free This will give you the exclusion percentage. Turbotax for students free Step 4. Turbotax for students free   Multiply the exclusion percentage by the first regular periodic payment. Turbotax for students free The result is the tax-free part of each pension or annuity payment. Turbotax for students free   The tax-free part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. Turbotax for students free However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net cost. Turbotax for students free   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. Turbotax for students free Step 5. Turbotax for students free   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. Turbotax for students free This will give you the tax-free part of the total payment for the year. Turbotax for students free    In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. Turbotax for students free This fractional amount is multiplied by your exclusion percentage to get the tax-free part. Turbotax for students free Step 6. Turbotax for students free   Subtract the tax-free part from the total payment you received. Turbotax for students free The rest is the taxable part of your pension or annuity. Turbotax for students free Example 1. Turbotax for students free You purchased an annuity with an investment in the contract of $10,800. Turbotax for students free Under its terms, the annuity will pay you $100 a month for life. Turbotax for students free The multiple for your age (age 65) is 20. Turbotax for students free 0 as shown in Table V. Turbotax for students free Your expected return is $24,000 (20 × 12 × $100). Turbotax for students free Your cost of $10,800, divided by your expected return of $24,000, equals 45. Turbotax for students free 0%. Turbotax for students free This is the percentage you will not have to include in income. Turbotax for students free Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. Turbotax for students free If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). Turbotax for students free Example 2. Turbotax for students free Gerald bought a joint and survivor annuity. Turbotax for students free Gerald's investment in the contract is $62,712 and the expected return is $121,200. Turbotax for students free The exclusion percentage is 51. Turbotax for students free 7% ($62,712 ÷ $121,200). Turbotax for students free Gerald will receive $500 a month ($6,000 a year). Turbotax for students free Each year, until his net cost is recovered, $3,102 (51. Turbotax for students free 7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. Turbotax for students free If Gerald dies, his wife will receive $350 a month ($4,200 a year). Turbotax for students free If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. Turbotax for students free 7%). Turbotax for students free Each year, until the entire net cost is recovered, his wife will receive $2,171. Turbotax for students free 40 (51. Turbotax for students free 7% of her payments received of $4,200) tax free. Turbotax for students free She will include $2,028. Turbotax for students free 60 ($4,200 − $2,171. Turbotax for students free 40) in her income tax return. Turbotax for students free Example 3. Turbotax for students free Using the same facts as Example 2 under Different payments to survivor, you are to receive an annual annuity of $4,800 until you die or remarry. Turbotax for students free Your two daughters each receive annual annuities of $1,800 until they reach age 18. Turbotax for students free Your husband contributed $25,576 to the plan. Turbotax for students free You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. Turbotax for students free Adjusted Investment in the Contract Contributions $25,576 Plus: Death benefit exclusion 5,000 Adjusted investment in the contract $30,576 The total expected return, as previously figured (in Example 2 under Different payments to survivor), is $169,680. Turbotax for students free The exclusion percentage of 18. Turbotax for students free 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. Turbotax for students free Each full year $864 (18. Turbotax for students free 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. Turbotax for students free Each year, until age 18, $324 (18. Turbotax for students free 0% × $1,800) of each of your daughters' payments will be tax free and each must include the balance, $1,476, as income on her own income tax return. Turbotax for students free Part-year payments. Turbotax for students free   If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year. Turbotax for students free   If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. Turbotax for students free For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the year. Turbotax for students free   If you received a fractional payment, follow Step 5, discussed earlier. Turbotax for students free This gives you the tax-free part of your total payment. Turbotax for students free Example. Turbotax for students free On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. Turbotax for students free The applicable multiple from Table V is 23. Turbotax for students free 3 (age 61). Turbotax for students free Her expected return is $34,950 ($125 × 12 × 23. Turbotax for students free 3). Turbotax for students free Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. Turbotax for students free 1%. Turbotax for students free Each payment received will consist of 63. Turbotax for students free 1% return of cost and 36. Turbotax for students free 9% taxable income, until her net cost of the contract is fully recovered. Turbotax for students free During the first year, Mary received three payments of $125, or $375, of which $236. Turbotax for students free 63 (63. Turbotax for students free 1% × $375) is a return of cost. Turbotax for students free The remaining $138. Turbotax for students free 37 is included in income. Turbotax for students free Increase in annuity payments. Turbotax for students free   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. Turbotax for students free All increases in the installment payments are fully taxable. Turbotax for students free   However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1. Turbotax for students free 72-5(a)(5) of the regulations. Turbotax for students free Example. Turbotax for students free Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. Turbotax for students free In figuring the taxable part, Joe elects to use Tables V through VIII. Turbotax for students free The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. Turbotax for students free His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. Turbotax for students free 0 × $1,764 annual payment). Turbotax for students free The exclusion percentage is $7,938 ÷ $35,280, or 22. Turbotax for students free 5%. Turbotax for students free During the year he received 11 monthly payments of $147, or $1,617. Turbotax for students free Of this amount, 22. Turbotax for students free 5% × $147 × 11 ($363. Turbotax for students free 83) is tax free as a return of cost and the balance of $1,253. Turbotax for students free 17 is taxable. Turbotax for students free Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). Turbotax for students free The tax-free part is still only 22. Turbotax for students free 5% of the annuity payments as of the annuity starting date (22. Turbotax for students free 5% × $147 × 12 = $396. Turbotax for students free 90 for a full year). Turbotax for students free The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. Turbotax for students free Variable annuities. Turbotax for students free   For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the contract. Turbotax for students free   If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. Turbotax for students free If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. Turbotax for students free Example. Turbotax for students free Frank purchased a variable annuity at age 65. Turbotax for students free The total cost of the contract was $12,000. Turbotax for students free The annuity starting date is January 1 of the year of purchase. Turbotax for students free His annuity will be paid, starting July 1, in variable annual installments for his life. Turbotax for students free The tax-free amount of each payment, until he has recovered his cost of his contract, is: Investment in the contract $12,000 Number of expected annual payments (multiple for age 65 from Table V) 20 Tax-free amount of each payment ($12,000 ÷ 20) $600 If Frank's first payment is $920, he includes only $320 ($920 − $600) in his gross income. Turbotax for students free   If the tax-free amount for a year is more than the payments you receive in that year, you may choose, when you receive the next payment, to refigure the tax-free part. Turbotax for students free Divide the amount of the periodic tax-free part that is more than the payment you received by the remaining number of payments you expect. Turbotax for students free The result is added to the previously figured periodic tax-free part. Turbotax for students free The sum is the amount of each future payment that will be tax free. Turbotax for students free Example. Turbotax for students free Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. Turbotax for students free Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. Turbotax for students free Since the $500 payment is less than the $600 annual tax-free amount, he may choose to refigure his tax-free part when he receives his $1,200 (third year) payment, as follows: Amount tax free in second year $600. Turbotax for students free 00 Amount received in second year 500. Turbotax for students free 00 Difference $100. Turbotax for students free 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. Turbotax for students free 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. Turbotax for students free 4) $5. Turbotax for students free 43 Revised annual tax-free part for third and later years ($600 + $5. Turbotax for students free 43) $605. Turbotax for students free 43 Amount taxable in third year ($1,200 − $605. Turbotax for students free 43) $594. Turbotax for students free 57 If you choose to refigure your tax-free amount,   you must file a statement with your income tax return stating that you are refiguring the tax-free amount in accordance with the rules of section 1. Turbotax for students free 72–4(d)(3) of the Income Tax Regulations. Turbotax for students free The statement must also show the following information: The annuity starting date and your age on that date. Turbotax for students free The first day of the first period for which you received an annuity payment in the current year. Turbotax for students free Your investment in the contract as originally figured. Turbotax for students free The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year. Turbotax for students free Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. Turbotax for students free Exclusion limited to net cost. Turbotax for students free   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). Turbotax for students free This is the unrecovered investment in the contract as of the annuity starting date. Turbotax for students free   If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Turbotax for students free This deduction is not subject to the 2%-of-adjusted-gross-income limit. Turbotax for students free Example 1. Turbotax for students free Your annuity starting date is after 1986. Turbotax for students free Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. Turbotax for students free There is no refund feature. Turbotax for students free Your monthly annuity payment is $833. Turbotax for students free 33. Turbotax for students free Your exclusion ratio is 12% and you exclude $100 a month. Turbotax for students free Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. Turbotax for students free Thereafter, your annuity payments are fully taxable. Turbotax for students free Example 2. Turbotax for students free The facts are the same as in Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. Turbotax for students free The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. Turbotax for students free The exclusion ratio is 10. Turbotax for students free 8%, and your monthly exclusion is $90. Turbotax for students free After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). Turbotax for students free An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. Turbotax for students free Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. Turbotax for students free Exclusion not limited to net cost. Turbotax for students free   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. Turbotax for students free If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. Turbotax for students free The total exclusion may be more than your investment in the contract. Turbotax for students free How To Use Actuarial Tables In figuring, under the General Rule, the taxable part of your annuity payments that you are to get for the rest of your life (rather than for a fixed number of years), you must use one or more of the actuarial tables in this publication. Turbotax for students free Unisex Annuity Tables Effective July 1, 1986, the Internal Revenue Service adopted new annuity Tables V through VIII, in which your sex is not considered when determining the applicable factor. Turbotax for students free These tables correspond to the old Tables I through IV. Turbotax for students free In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. Turbotax for students free If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. Turbotax for students free However, if you received an annuity payment after June 30, 1986, you may elect to use Tables V through VIII (see Annuity received after June 30, 1986, later). Turbotax for students free Special Elections Although you generally must use Tables V through VIII if you made contributions to the retirement plan after June 30, 1986, and Tables I through IV if you made no contributions after June 30, 1986, you can make the following special elections to select which tables to use. Turbotax for students free Contributions made both before July 1986 and after June 1986. Turbotax for students free   If you made contributions to the retirement plan both before July 1986 and after June 1986, you may elect to use Tables I through IV for the pre-July 1986 cost of the contract, and Tables V through VIII for the post-June 1986 cost. Turbotax for students free (See the examples below. Turbotax for students free )    Making the election. Turbotax for students free Attach this statement to your income tax return for the first year in which you receive an annuity:    “I elect to apply the provisions of paragraph (d) of section 1. Turbotax for students free 72–6 of the Income Tax Regulations. Turbotax for students free ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. Turbotax for students free   If your investment in the contract includes post-June 1986 contributions to the plan, and you do not make the election to use Tables I through IV and Tables V through VIII, then you can only use Tables V through VIII in figuring the taxable part of your annuity. Turbotax for students free You must also use Tables V through VIII if you are unable or do not wish to determine the portions of your contributions which were made before July 1, 1986, and after June 30, 1986. Turbotax for students free    Advantages of election. Turbotax for students free In general, a lesser amount of each annual annuity payment is taxable if you separately figure your exclusion ratio for pre-July 1986 and post-June 1986 contributions. Turbotax for students free    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. Turbotax for students free If the death benefit exclusion applies (see discussion, earlier), you do not have to apportion it between the pre-July 1986 and the post-June 1986 investment in the contract. Turbotax for students free   The following examples illustrate the separate computations required if you elect to use Tables I through IV for your pre-July 1986 investment in the contract and Tables V through VIII for your post-June 1986 investment in the contract. Turbotax for students free Example 1. Turbotax for students free Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. Turbotax for students free Payment of the $42,000 contribution is guaranteed under a refund feature. Turbotax for students free Bill is 55 years old as of the annuity starting date. Turbotax for students free For figuring the taxable part of Bill's annuity, he chose to make separate computations for his pre-July 1986 investment in the contract of $41,300, and for his post-June 1986 investment in the contract of $700. Turbotax for students free       Pre- July 1986   Post- June 1986 A. Turbotax for students free Adjustment for refund feature         1) Net cost $41,300   $700   2) Annual annuity—$24,000  ($41,300/$42,000 × $24,000) $23,600       ($700/$42,000 × $24,000)     $400   3) Guarantee under contract $41,300   $700   4) No. Turbotax for students free of years payments  guaranteed (rounded), A(3) ÷ A(2) 2   2   5) Applicable percentage from  Tables III and VII 1%   0%   6) Adjustment for value of refund  feature, A(5) × smaller of A(1)  or A(3) $413   $0 B. Turbotax for students free Investment in the contract         1) Net cost $41,300   $700   2) Minus: Amount in A(6) 413   0   3) Investment in the contract $40,887   $700 C. Turbotax for students free Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. Turbotax for students free 7   28. Turbotax for students free 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. Turbotax for students free Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . Turbotax for students free 079   . Turbotax for students free 001   2) Tax-free part, C(1) × D(1) $1,896   $24 The tax-free part of Bill's total annuity is $1,920 ($1,896 plus $24). Turbotax for students free The taxable part of his annuity is $22,080 ($24,000 minus $1,920). Turbotax for students free If the annuity starting date is after 1986, the exclusion over the years cannot exceed the net cost (figured without any reduction for a refund feature). Turbotax for students free Example 2. Turbotax for students free Al is age 62 at his nearest birthday to the annuity starting date. Turbotax for students free Al's wife is age 60 at her nearest birthday to the annuity starting date. Turbotax for students free The joint and survivor annuity pays $1,000 per month to Al for life, and $500 per month to Al's surviving wife after his death. Turbotax for students free The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. Turbotax for students free Al makes the election described in Example 1 . Turbotax for students free For purposes of this example, assume the refund feature adjustment is zero. Turbotax for students free If an adjustment is required, IRS will figure the amount. Turbotax for students free See Requesting a Ruling on Taxation of Annuity near the end of this publication. Turbotax for students free       Pre-  July 1986   Post-  June 1986 A. Turbotax for students free Adjustment for refund feature         1) Net cost $53,100   $7,000   2) Annual annuity—$12,000  ($53,100/$60,100 × $12,000) $10,602       ($7,000/$60,100 × $12,000)     $1,398   3) Guaranteed under the contract $53,100   $7,000   4) Number of years guaranteed,  rounded, A(3) ÷ A(2) 5   5   5) Applicable percentages 0%   0%   6) Refund feature adjustment, A(5) × smaller of A(1) or A(3) 0   0 B. Turbotax for students free Investment in the contract         1) Net cost $53,100   $7,000   2) Refund feature adjustment 0   0   3) Investment in the contract adjusted for refund feature $53,100   $7,000 C. Turbotax for students free Expected return         1) Multiple for both annuitants from Tables II and VI 25. Turbotax for students free 4   28. Turbotax for students free 8   2) Multiple for first annuitant from Tables I and V 16. Turbotax for students free 9   22. Turbotax for students free 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. Turbotax for students free 5   6. Turbotax for students free 3   4) Annual annuity to surviving annuitant $6,000   $6,000   5) Portion of expected return for surviving annuitant, C(4) × C(3) $51,000   $37,800   6) Annual annuity to first annuitant $12,000   $12,000   7) Plus: Portion of expected return for first annuitant, C(6) × C(2) $202,800   $270,000   8) Expected return for both annuitants, C(5) + C(7) $253,800   $307,800 D. Turbotax for students free Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . Turbotax for students free 209   . Turbotax for students free 023   2) Retiree's tax-free part of annuity, C(6) × D(1) $2,508   $276   3) Survivor's tax-free part of annuity, C(4) × D(1) $1,254   $138 The tax-free part of Al's total annuity is $2,784 ($2,508 + $276). Turbotax for students free The taxable part of his annuity is $9,216 ($12,000 − $2,784). Turbotax for students free The exclusion over the years cannot exceed the net cost of the contract (figured without any reduction for a refund feature) if the annuity starting date is after 1986. Turbotax for students free After Al's death, his widow will apply the same exclusion percentages (20. Turbotax for students free 9% and 2. Turbotax for students free 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. Turbotax for students free Annuity received after June 30, 1986. Turbotax for students free   If you receive an annuity payment after June 30, 1986, (regardless of your annuity starting date), you may elect to treat the entire cost of the contract as post-June 1986 cost (even if you made no post-June 1986 contributions to the plan) and use Tables V through VIII. Turbotax for students free Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. Turbotax for students free    Make the election by attaching the following statement to your income tax return. Turbotax for students free    “I elect, under section 1. Turbotax for students free 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. Turbotax for students free ”   The statement must also include your name, address, and social security number. Turbotax for students free   You should also indicate you are making this election if you are unable or do not wish to determine the parts of your contributions which were made before July 1, 1986, and after June 30, 1986. Turbotax for students free Disqualifying form of payment or settlement. Turbotax for students free   If your annuity starting date is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract, the entire investment in the contract is treated as post-June 1986 investment in the contract. Turbotax for students free See regulations section 1. Turbotax for students free 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. Turbotax for students free You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. Turbotax for students free Worksheets for Determining Taxable Annuity Worksheets I and II. Turbotax for students free   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. Turbotax for students free 72–6(d)(6) Election. Turbotax for students free Worksheet I For Determining Taxable Annuity Under Regulations Section 1. Turbotax for students free 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. Turbotax for students free   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Turbotax for students free )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)   Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages* from Tables III and VII                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Turbotax for students free If not, the IRS will calculate the refund feature percentage. Turbotax for students free             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Turbotax for students free   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund feature:                   B(1) minus B(2)                             C. Turbotax for students free   Expected Return             1)   Annual Annuity:                   12 times monthly annuity**             2)   Expected return multiples from Tables I and V             3)     Expected return:                   C(1) times C(2)                             D. Turbotax for students free   Tax-Free Part of Annuity             1)     Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(3)             2)     Tax-free part of annuity:                   C(1) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Turbotax for students free     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. Turbotax for students free 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. Turbotax for students free   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Turbotax for students free )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)     Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages*                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Turbotax for students free If not, the IRS will calculate the refund feature percentage. Turbotax for students free             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Turbotax for students free   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund future:                   B(1) minus B(2)                             C. Turbotax for students free   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. Turbotax for students free Tables I and VI             3)   Multiple for survivor:                   C(1) minus C(2)             4)   Annual annuity to survivor:                   12 times potential monthly rate for survivor**             5)   Expected return for survivor:                   C(3) times C(4)             6)   Annual annuity to retiree:                   12 times monthly rate for retiree**             7)   Expected return for retiree:                   C(2) times C(6)             8)   Total expected return:                   C(5) plus C(7)                             D. Turbotax for students free   Tax-Free Part of Annuity             1)   Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(8)             2)   Retiree's tax-free part of annuity:                   C(6) times D(1)             3)   Survivor's tax-free part of annuity, if surviving after death of retiree:                   C(4) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Turbotax for students free   Actuarial Tables Please click here for the text description of the image. Turbotax for students free Actuarial Tables Please click here for the text description of the image. Turbotax for students free Actuarial Tables Please click here for the text description of the image. Turbotax for students free Actuarial tables Please click here for the text description of the image. 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Turbotax for students free Actuarial tables Please click here for the text description of the image. Turbotax for students free Actuarial tables Please click here for the text description of the image. Turbotax for students free Actuarial tables Please click here for the text description of the image. Turbotax for students free Actuarial tables Please click here for the text description of the image. Turbotax for students free Actuarial tables Please click here for the text description of the image. Turbotax for students free Actuarial tables Requesting a Ruling on Taxation of Annuity If you are a retiree, or the survivor of an employee or retiree, you may ask the Internal Revenue Service to help you determine the taxation of your annuity. Turbotax for students free If you make this request, you are asking for a ruling. Turbotax for students free User fee. Turbotax for students free   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. Turbotax for students free You should call the IRS for the proper fee. Turbotax for students free A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. Turbotax for students free Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. Turbotax for students free O. Turbotax for students free Box 27063 McPherson Station Washington, DC 20038 The user fee is allowed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. Turbotax for students free When to make the request. Turbotax for students free   Please note that requests sent between February 1 and April 15 may experience some delay. Turbotax for students free We process requests in the order received, and we will reply to your request as soon as we can process it. Turbotax for students free If you do not receive your ruling by the required filing date, you may use Form 4868, Application for Automatic Extension of Time To File U. Turbotax for students free S. Turbotax for students free Individual Income Tax Return, to get an extension of time to file. Turbotax for students free Information you must furnish. Turbotax for students free   You must furnish the information listed below so the IRS can comply with your request. Turbotax for students free Failure to furnish the information will result in a delay in processing your request. Turbotax for students free Please send only copies of the following documents, as the IRS retains all material sent for its records: A letter explaining the question(s) you wish to have resolved or the information you need from the ruling. Turbotax for students free Copies of any documents showing distributions, annuity rates, and annuity options available to you. Turbotax for students free A copy of any Form 1099–R you received since your annuity began. Turbotax for students free A statement indicating whether you have filed your return for the year for which you are making the request. Turbotax for students free If you have requested an extension of time to file that return, please indicate the extension date. Turbotax for students free Your daytime phone number. Turbotax for students free Your current mailing address. Turbotax for students free A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. Turbotax for students free Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. Turbotax for students free A completed Tax Information Sheet (or facsimile) shown on the next page. Turbotax for students free Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. Turbotax for students free This statement must be signed by the retiree or the survivor annuitant. Turbotax for students free It cannot be signed by a representative. Turbotax for students free Tax Information Sheet Please click here for the text description of the image. Turbotax for students free Tax Information Sheet Please click here for the text description of the image. Turbotax for students free Tax Information Sheet (continued) How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Turbotax for students free Free help with your tax return. Turbotax for students free   You can get free help preparing your return nationwide from IRS-certified volunteers. Turbotax for students free The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Turbotax for students free The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Turbotax for students free Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Turbotax for students free In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Turbotax for students free To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Turbotax for students free gov, download the IRS2Go app, or call 1-800-906-9887. Turbotax for students free   As part of the TCE program, AARP offers the Tax-Aide counseling program. Turbotax for students free To find the nearest AARP Tax-Aide site, visit AARP's website at www. Turbotax for students free aarp. Turbotax for students free org/money/taxaide or call 1-888-227-7669. Turbotax for students free For more information on these programs, go to IRS. Turbotax for students free gov and enter “VITA” in the search box. Turbotax for students free Internet. Turbotax for students free    IRS. Turbotax for students free gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Turbotax for students free Download the free IRS2Go app from the iTunes app store or from Google Play. Turbotax for students free Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Turbotax for students free Check the status of your 2013 refund with the Where's My Refund? application on IRS. Turbotax for students free gov or download the IRS2Go app and select the Refund Status option. Turbotax for students free The IRS issues more than 9 out of 10 refunds in less than 21 days. Turbotax for students free Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. Turbotax for students free You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Turbotax for students free The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Turbotax for students free Use the Interactive Tax Assistant (ITA) to research your tax questions. Turbotax for students free No need to wait on the phone or stand in line. Turbotax for students free The ITA is available 24 hours a day, 7 days a week, and provides you with a variety of tax information related to general filing topics, deductions, credits, and income. Turbotax for students free When you reach the response screen, you can print the entire interview and the final response for your records. Turbotax for students free New subject areas are added on a regular basis. Turbotax for students free  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Turbotax for students free gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Turbotax for students free You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Turbotax for students free The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Turbotax for students free When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Turbotax for students free Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. 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Turbotax for students free Check the status of your amended return using Where's My Amended Return? Go to IRS. Turbotax for students free gov and enter Where's My Amended Return? in the search box. Turbotax for students free You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Turbotax for students free It can take up to 3 weeks from the date you mailed it to show up in our system. Turbotax for students free Make a payment using one of several safe and convenient electronic payment options available on IRS. Turbotax for students free gov. Turbotax for students free Select the Payment tab on the front page of IRS. Turbotax for students free gov for more information. Turbotax for students free Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Turbotax for students free Figure your income tax withholding with the IRS Withholding Calculator on IRS. Turbotax for students free gov. Turbotax for students free Use it if you've had too much or too little withheld, your personal situation has changed, you're starting a new job or you just want to see if you're having the right amount withheld. Turbotax for students free Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Turbotax for students free gov. Turbotax for students free Request an Electronic Filing PIN by going to IRS. Turbotax for students free gov and entering Electronic Filing PIN in the search box. Turbotax for students free Download forms, instructions and publications, including accessible versions for people with disabilities. Turbotax for students free Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Turbotax for students free gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Turbotax for students free An employee can answer questions about your tax account or help you set up a payment plan. Turbotax for students free Before you visit, check the Office Locator on IRS. Turbotax for students free gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Turbotax for students free If you have a special need, such as a disability, you can request an appointment. Turbotax for students free Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Turbotax for students free Apply for an Employer Identification Number (EIN). Turbotax for students free Go to IRS. Turbotax for students free gov and enter Apply for an EIN in the search box. Turbotax for students free Read the Internal Revenue Code, regulations, or other official guidance. Turbotax for students free Read Internal Revenue Bulletins. Turbotax for students free Sign up to receive local and national tax news and more by email. Turbotax for students free Just click on “subscriptions” above the search box on IRS. Turbotax for students free gov and choose from a variety of options. Turbotax for students free    Phone. Turbotax for students free You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Turbotax for students free Download the free IRS2Go app from the iTunes app store or from Google Play. Turbotax for students free Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. Turbotax for students free gov, or download the IRS2Go app. Turbotax for students free Low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers can get free help with their tax return from the nationwide Volunteer Income Tax Assistance (VITA) program. Turbotax for students free The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Turbotax for students free Mos
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Safeguards Program

The Safeguards Program and staff are responsible for ensuring that federal, state and local agencies receiving federal tax information protect it as if the information remained in IRS’s hands.

These agencies and their contractors receiving federal tax information must protect the confidentiality of return information and are periodically reviewed by Safeguards personnel to ensure they meet the safeguarding requirements of IRC 6103(p)(4). These requirements include employee awareness programs, proper disposal, secure storage and computer security among others.

Publication 1075, Tax Information Security Guidelines for Federal, State and Local Agencies (PDF)
This document contains specific requirements for safeguarding federal tax information. This revision becomes effective on Jan. 1, 2014.

Publication 1075, Tax Information Security Guidelines for Federal, State and Local Agencies (PDF)
This revision of 1075 became effective on Aug. 24, 2010 and is superceded by the Jan. 1, 2014 version.

Comments and suggestions on the revised Publication 1075 can be forwarded to the safeguards mailbox at: safeguardreports@irs.gov.

Additional Requirements for Publication 1075
Safeguarding requirements may be supplemented or modified between editions of Publication 1075 by guidance issued by the Office of Safeguards.
 

ALERTS

See “Safeguards Alert Memorandums” below for trending security concerns.


Publication 1075

Recommendations on How to Become Compliant with the New Requirements
Given the significant changes in technical safeguards requirements found in Sections 4, 5 and 6, the IRS has some recommendations for agencies to become compliant with the new requirements.

Reporting Requirements
Publication 1075 requires agencies to use approved report templates and to transmit the reports electronically. These reports must be encrypted and submitted to the safeguardreports@irs.gov mailbox.

Reporting Unauthorized Accesses, Disclosures or Data Breaches
Local, state and federal agencies receiving federal tax information must follow the revised provisions of Section 10 of Publication 1075 (PDF) upon discovering a possible improper inspection or disclosure of FTI, including breaches and security incidents. Agencies must contact Treasury Inspector General for Tax Administration and the IRS Office of Safeguards immediately, but no later than 24-hours after identification of a possible issue involving federal tax information. Agencies are not to wait until after their own internal investigation as been conducted.

Contacting TIGTA is critical to expedite the recovery of compromised data and identify potential criminal acts. The IRS Office of Safeguards investigation focuses on identifying processes, procedures or systems within the agency with inadequate security controls which led to the incident.

Internal Inspections Reports
Section 6.3 of Publication 1075, Tax Information Security guidelines for Federal, State and Local Agencies and Entities, requires that agencies receiving federal tax information (FTI) establish a review cycle for internal inspections of headquarters offices and all local/field offices that receive FTI. The Internal Inspections Report – Headquarters Office and Internal Inspections Report – Field Office are for these inspections. 

In addition, these agencies must also include an internal inspection of IT operations, using the Internal Inspections Report – IT Operations. Internal inspections of contractors with access to FTI and any off-site storage facilities must also be completed. All scheduled and completed internal inspections should be provided to the IRS Office of Safeguards on the Internal Inspections Implementation Report.

Safeguards Technical Assistance by Topic
The IRS has recommendations and discussions on various Safeguards Program topics available for agencies to help stay in compliance. These documents may assist with preparation of reports, protecting federal tax information, and knowing the legalities of the Safeguards Program.

IRS Disclosure Awareness Videos
IRS Disclosure Awareness training videos are available for local, state and federal governmental agencies that receive federal tax information (FTI). The IRS Office of Safeguards created videos (with captions in English and Spanish) to help explain several key concepts in protecting the confidentiality of FTI.

References/Related Topics

Physical Security and Disclosure References/Related Topics
Publication 1075 requirements pertaining to the protection of FTI in a physical environment and the disclosure of FTI to other persons are available in the Safeguard Disclosure Security Evaluation Matrix.

Document

Version

Release Date

Safeguard Disclosure Security Evaluation Matrix (SDSEM) (XLS)

3.0

9/12/2012


Safeguards Alert Memorandums
The following resources address recent security trends regarding the protection of FTI.

Document

Version

Release Date

Alert Memo – Multi-factor Authentication Implementation

N/A

6/17/2013

Alert Memo – Protecting FTI On Mainframes with Open Port 23

N/A

6/17/2013


Computer Security Compliance References/Related Topics
The following Computer Security Evaluation Matrix (SCSEM) downloads are available for use in preparing an IT environment that will receive, process, or store FTI.

Document

Version

Release Date

Application – Generic Application SCSEM (XLS)

1.3

9/26/2013

Application – GenTax SCSEM (XLS)

1.3

9/26/2013

Application – Internet Explorer SCSEM (XLS)

1.2

9/26/2013

Database – DB2 SCSEM (XLS)

1.2

2/12/2013

Database – Oracle 11g SCSEM (XLS)

1.1

9/26/2013

Database – Oracle 10g SCSEM (XLS)

1.3

9/26/2013

Database – Oracle 9i SCSEM (XLS)

1.2

2/12/2013

Database – SQL Server 2000 SCSEM (XLS)

1.2

2/12/2013

Database – SQL Server 2005 SCSEM (XLS)

1.2

2/12/2013

Mainframe – ACF2 SCSEM (XLS)

1.3

9/26/2013

Mainframe – i5 OS SCSEM (XLS)

1.3

9/26/2013

Mainframe – RACF SCSEM (XLS)

1.3

9/26/2013

Mainframe – Top Secret SCSEM (XLS)

1.3

9/26/2013

Mainframe – UNISYS SCSEM (XLS)

2.4

9/26/2013

Management, Operational and Technical (MOT) (XLS)

2.0

9/27/2013

MOT Appendix – Data Warehouse SCSEM (XLS)

1.3

2/12/2013

MOT Appendix – Multi-functional Device SCSEM (MFD) (XLS)

2.2

2/12/2013

Network – Cisco IOS SCSEM (XLS)

1.2

9/26/2013

Network – Firewall SCSEM (XLS)

1.2

9/26/2013

Network – Network Assessment SCSEM (XLS)

1.2

9/26/2013

Network – Storage Area Network SCSEM (SAN) (XLS)

1.2

9/26/2013

Network – Virtual Private Network (VPN) SCSEM (XLS)

1.2

9/26/2013

Network – Voice Over Internet Protocol (VoIP) SCSEM (XLS)

1.2

9/26/2013

Network – Wireless Local Area Network (LAN) SCSEM (XLS)

1.2

9/26/2013

Other – Cloud Computing SCSEM (XLS)

1.0

4/1/2013

Other - Oracle Public Sector Revenue Management (PSRM) (formerly Enterprise Taxation and Policy Management (ETPM))

1.1

2/5/2014

Other – Generic Operating System SCSEM (XLS)

1.3

2/12/2013

Other – Mobile Devices SCSEM (XLS)

1.0

4/1/2013

Other – OpenVMS SCSEM (XLS)

1.2

9/26/2013

Other - RSI Revenue Premier

1.0

9/23/2013

Other - Teradata

1.0

9/23/2013

Other – Web Server SCSEM (XLS)

1.3

9/26/2013

UNIX and Linux – Solaris, HP-UX, AIX, Red Hat, SuSE SCSEM (XLS)

1.4

2/12/2013

Virtualization – VMWare ESX 4.x SCSEM (XLS)

1.2

2/12/2013

Virtualization – VMWare ESXi 5.x SCSEM (XLS)

1.1

3/7/2013

Microsoft Windows 7 SCSEM (XLS)

1.2

2/12/2013

Microsoft Windows Server 2003 SCSEM (XLS)

1.2

2/12/2013

Microsoft Windows Server 2008 and 2008 R2 SCSEM (XLS)

1.2

2/12/2013

Microsoft Windows Vista SCSEM (XLS)

1.2

2/12/2013

Microsoft Windows XP SCSEM (XLS)

1.2

2/12/2013

 

Page Last Reviewed or Updated: 25-Mar-2014

The Turbotax For Students Free

Turbotax for students free 2. Turbotax for students free   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. Turbotax for students free Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. Turbotax for students free Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. Turbotax for students free Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. Turbotax for students free The annual accounting period for your income tax return is called a tax year. Turbotax for students free You can use one of the following tax years. Turbotax for students free A calendar tax year. Turbotax for students free A fiscal tax year. Turbotax for students free Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Turbotax for students free A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Turbotax for students free Calendar tax year. Turbotax for students free   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. 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Turbotax for students free   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. Turbotax for students free Fiscal tax year. Turbotax for students free   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Turbotax for students free A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Turbotax for students free   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. Turbotax for students free   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. Turbotax for students free Change in tax year. Turbotax for students free   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. Turbotax for students free See the Instructions for Form 1128 for exceptions. Turbotax for students free If you qualify for an automatic approval request, a user fee is not required. Turbotax for students free If you do not qualify for automatic approval, a ruling must be requested. Turbotax for students free See the instructions for Form 1128 for information about user fees if you are requesting a ruling. Turbotax for students free Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Turbotax for students free Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. Turbotax for students free You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. Turbotax for students free After that, if you want to change your accounting method, you must generally get IRS approval. Turbotax for students free See Change in Accounting Method, later. Turbotax for students free Kinds of methods. Turbotax for students free   Generally, you can use any of the following accounting methods. Turbotax for students free Cash method. Turbotax for students free An accrual method. Turbotax for students free Special methods of accounting for certain items of income and expenses. Turbotax for students free Combination method using elements of two or more of the above. Turbotax for students free You must use the same accounting method to figure your taxable income and to keep your books. Turbotax for students free Also, you must use an accounting method that clearly shows your income. Turbotax for students free Business and personal items. Turbotax for students free   You can account for business and personal items under different accounting methods. Turbotax for students free For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Turbotax for students free Two or more businesses. Turbotax for students free   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. Turbotax for students free They are separate and distinct only if you maintain complete and separate books and records for each business. Turbotax for students free Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. Turbotax for students free However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. Turbotax for students free For more information, see Inventories, later. Turbotax for students free Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. Turbotax for students free If you receive property or services, you must include their fair market value in income. Turbotax for students free Example. Turbotax for students free On December 30, 2012, Mrs. Turbotax for students free Sycamore sent you a check for interior decorating services you provided to her. Turbotax for students free You received the check on January 2, 2013. Turbotax for students free You must include the amount of the check in income for 2013. Turbotax for students free Constructive receipt. Turbotax for students free   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. Turbotax for students free You do not need to have possession of it. Turbotax for students free If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. Turbotax for students free Example. Turbotax for students free Interest is credited to your bank account in December 2013. Turbotax for students free You do not withdraw it or enter it into your passbook until 2014. Turbotax for students free You must include it in your gross income for 2013. Turbotax for students free Delaying receipt of income. Turbotax for students free   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Turbotax for students free You must report the income in the year the property is received or made available to you without restriction. Turbotax for students free Example. Turbotax for students free Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. Turbotax for students free She was told in December that her payment was available. Turbotax for students free At her request, she was not paid until January 2014. Turbotax for students free She must include this payment in her 2013 income because it was constructively received in 2013. Turbotax for students free Checks. Turbotax for students free   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. Turbotax for students free Example. Turbotax for students free Dr. Turbotax for students free Redd received a check for $500 on December 31, 2013, from a patient. Turbotax for students free She could not deposit the check in her business account until January 2, 2014. Turbotax for students free She must include this fee in her income for 2013. Turbotax for students free Debts paid by another person or canceled. Turbotax for students free   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Turbotax for students free If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Turbotax for students free For more information, see Canceled Debt under Kinds of Income in chapter 5. Turbotax for students free Repayment of income. Turbotax for students free   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. Turbotax for students free If the amount you repay is over $3,000, a special rule applies. Turbotax for students free For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. Turbotax for students free Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. Turbotax for students free This includes business expenses for which you contest liability. Turbotax for students free However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Turbotax for students free Expenses paid in advance. Turbotax for students free   You can deduct an expense you pay in advance only in the year to which it applies. Turbotax for students free Example. Turbotax for students free You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. Turbotax for students free You can deduct $500 in 2013 and $500 in 2014. Turbotax for students free Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Turbotax for students free The purpose of an accrual method of accounting is to match income and expenses in the correct year. Turbotax for students free Income—General Rule Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Turbotax for students free Example. Turbotax for students free You are a calendar year accrual method taxpayer. Turbotax for students free You sold a computer on December 28, 2013. Turbotax for students free You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. Turbotax for students free You must include the amount received for the computer in your 2013 income. Turbotax for students free Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. Turbotax for students free Estimated income. Turbotax for students free   If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. Turbotax for students free Change in payment schedule for services. Turbotax for students free   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference. Turbotax for students free Advance payments for services. Turbotax for students free   Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. Turbotax for students free However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. Turbotax for students free However, you cannot postpone including any payment beyond that tax year. Turbotax for students free   For more information, see Advance Payment for Services under Accrual Method in Publication 538. Turbotax for students free That publication also explains special rules for reporting the following types of income. Turbotax for students free Advance payments for service agreements. Turbotax for students free Prepaid rent. Turbotax for students free Advance payments for sales. Turbotax for students free   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. Turbotax for students free If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. Turbotax for students free An agreement includes a gift certificate that can be redeemed for goods. Turbotax for students free Treat amounts that are due and payable as amounts you received. Turbotax for students free   You generally include an advance payment in income for the tax year in which you receive it. Turbotax for students free However, you can use an alternative method. Turbotax for students free For information about the alternative method, see Publication 538. Turbotax for students free Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Turbotax for students free The all-events test has been met. Turbotax for students free The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Turbotax for students free Economic performance has occurred. Turbotax for students free Economic performance. Turbotax for students free   You generally cannot deduct or capitalize a business expense until economic performance occurs. Turbotax for students free If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Turbotax for students free If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Turbotax for students free An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Turbotax for students free For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. Turbotax for students free Example. Turbotax for students free You are a calendar year taxpayer and use an accrual method of accounting. Turbotax for students free You buy office supplies in December 2013. Turbotax for students free You receive the supplies and the bill in December, but you pay the bill in January 2014. Turbotax for students free You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. Turbotax for students free Your office supplies may qualify as a recurring expense. Turbotax for students free In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). Turbotax for students free Keeping inventories. Turbotax for students free   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. Turbotax for students free If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. Turbotax for students free For more information, see Inventories , later. Turbotax for students free Special rule for related persons. Turbotax for students free   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. Turbotax for students free Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Turbotax for students free If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. Turbotax for students free   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Turbotax for students free For a list of other related persons, see section 267 of the Internal Revenue Code. Turbotax for students free Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Turbotax for students free However, the following restrictions apply. Turbotax for students free If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. Turbotax for students free (See, however, Inventories, later. Turbotax for students free ) You can use the cash method for all other items of income and expenses. Turbotax for students free If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Turbotax for students free If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Turbotax for students free If you use a combination method that includes the cash method, treat that combination method as the cash method. Turbotax for students free Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. Turbotax for students free However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Turbotax for students free These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Turbotax for students free A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Turbotax for students free A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Turbotax for students free Qualifying taxpayer. Turbotax for students free   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. Turbotax for students free (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. Turbotax for students free ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. Turbotax for students free Qualifying small business taxpayer. Turbotax for students free   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. Turbotax for students free (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Turbotax for students free ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Turbotax for students free Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). Turbotax for students free Business not owned or not in existence for 3 years. Turbotax for students free   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. Turbotax for students free If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. Turbotax for students free Materials and supplies that are not incidental. Turbotax for students free   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. Turbotax for students free If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. Turbotax for students free Changing accounting method. Turbotax for students free   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. Turbotax for students free See Change in Accounting Method, later. Turbotax for students free More information. Turbotax for students free    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Turbotax for students free For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Turbotax for students free Items included in inventory. Turbotax for students free   If you are required to account for inventories, include the following items when accounting for your inventory. Turbotax for students free Merchandise or stock in trade. Turbotax for students free Raw materials. Turbotax for students free Work in process. Turbotax for students free Finished products. Turbotax for students free Supplies that physically become a part of the item intended for sale. Turbotax for students free Valuing inventory. Turbotax for students free   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). Turbotax for students free To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. Turbotax for students free   Inventory valuation rules cannot be the same for all kinds of businesses. Turbotax for students free The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Turbotax for students free Your inventory practices must be consistent from year to year. Turbotax for students free More information. Turbotax for students free   For more information about inventories, see Publication 538. Turbotax for students free Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. Turbotax for students free Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Turbotax for students free You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Turbotax for students free Activities subject to the uniform capitalization rules. Turbotax for students free   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Turbotax for students free Produce real or tangible personal property. Turbotax for students free For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Turbotax for students free Acquire property for resale. Turbotax for students free Exceptions. Turbotax for students free   These rules do not apply to the following property. Turbotax for students free Personal property you acquire for resale if your average annual gross receipts are $10 million or less. Turbotax for students free Property you produce if you meet either of the following conditions. Turbotax for students free Your indirect costs of producing the property are $200,000 or less. Turbotax for students free You use the cash method of accounting and do not account for inventories. Turbotax for students free For more information, see Inventories, earlier. Turbotax for students free Special Methods There are special methods of accounting for certain items of income or expense. Turbotax for students free These include the following. Turbotax for students free Amortization, discussed in chapter 8 of Publication 535, Business Expenses. Turbotax for students free Bad debts, discussed in chapter 10 of Publication 535. Turbotax for students free Depletion, discussed in chapter 9 of Publication 535. Turbotax for students free Depreciation, discussed in Publication 946, How To Depreciate Property. Turbotax for students free Installment sales, discussed in Publication 537, Installment Sales. Turbotax for students free Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Turbotax for students free A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. Turbotax for students free To get approval, you must file Form 3115, Application for Change in Accounting Method. Turbotax for students free You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. Turbotax for students free You may have to pay a user fee. Turbotax for students free For more information, see the form instructions. Turbotax for students free Automatic change procedures. Turbotax for students free   Certain taxpayers can presume to have IRS approval to change their method of accounting. Turbotax for students free The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. Turbotax for students free No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. Turbotax for students free   Generally, you must use Form 3115 to request an automatic change. Turbotax for students free For more information, see the Instructions for Form 3115. Turbotax for students free Prev  Up  Next   Home   More Online Publications