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Www taxact com 2011 Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. Www taxact com 2011 S. Www taxact com 2011 Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. Www taxact com 2011 Full-time student. Www taxact com 2011 Adjusted gross income. Www taxact com 2011 More information. Www taxact com 2011 Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). Www taxact com 2011 Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Www taxact com 2011 Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. Www taxact com 2011 You are a member of a religious order who has taken a vow of poverty. Www taxact com 2011 You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. Www taxact com 2011 See Exemption From Self-Employment (SE) Tax , later. Www taxact com 2011 You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. Www taxact com 2011 For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. Www taxact com 2011 Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. Www taxact com 2011 See Ministerial Services , later. Www taxact com 2011 Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. Www taxact com 2011 However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. Www taxact com 2011 For the specific services covered, see Ministerial Services , later. Www taxact com 2011 Ministers defined. Www taxact com 2011   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Www taxact com 2011 Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. Www taxact com 2011   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. Www taxact com 2011 Employment status for other tax purposes. Www taxact com 2011   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. Www taxact com 2011 For income tax or retirement plan purposes, your income earned as an employee will be considered wages. Www taxact com 2011 Common-law employee. Www taxact com 2011   Under common-law rules, you are considered either an employee or a self-employed person. Www taxact com 2011 Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. Www taxact com 2011 For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. Www taxact com 2011   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. Www taxact com 2011 However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. Www taxact com 2011 Example. Www taxact com 2011 A church hires and pays you a salary to perform ministerial services subject to its control. Www taxact com 2011 Under the common-law rules, you are an employee of the church while performing those services. Www taxact com 2011 Form SS-8. Www taxact com 2011   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. Www taxact com 2011 Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. Www taxact com 2011 See Ministerial Services , later. Www taxact com 2011 However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Www taxact com 2011 Vow of poverty. Www taxact com 2011   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. Www taxact com 2011 You do not need to request a separate exemption. Www taxact com 2011 For income tax purposes, the earnings are tax free to you. Www taxact com 2011 Your earnings are considered the income of the religious order. Www taxact com 2011 Services covered under FICA at the election of the order. Www taxact com 2011   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Www taxact com 2011 Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. Www taxact com 2011   The order or subdivision elects coverage by filing Form SS-16. Www taxact com 2011 The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. Www taxact com 2011 If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. Www taxact com 2011 You do not pay any of the FICA tax. Www taxact com 2011 Services performed outside the order. Www taxact com 2011   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. Www taxact com 2011   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. Www taxact com 2011 You may, however, be able to take a charitable deduction for the amount you turn over to the order. Www taxact com 2011 See Publication 526, Charitable Contributions. Www taxact com 2011 Rulings. Www taxact com 2011   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. Www taxact com 2011 To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. Www taxact com 2011 R. Www taxact com 2011 B. Www taxact com 2011 1, available at www. Www taxact com 2011 irs. Www taxact com 2011 gov/irb/2014-1_IRB/ar05. Www taxact com 2011 html. Www taxact com 2011 Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. Www taxact com 2011 However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Www taxact com 2011 Practitioners. Www taxact com 2011   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. Www taxact com 2011 State law specifically exempts Christian Science practitioners from licensing requirements. Www taxact com 2011   Some Christian Science practitioners also are Christian Science teachers or lecturers. Www taxact com 2011 Income from teaching or lecturing is considered the same as income from their work as practitioners. Www taxact com 2011 Readers. Www taxact com 2011   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. Www taxact com 2011 Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Www taxact com 2011 Some exceptions are discussed next. Www taxact com 2011 Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. Www taxact com 2011 If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Www taxact com 2011 Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. Www taxact com 2011 28 during the tax year. Www taxact com 2011 However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. Www taxact com 2011 Churches and church organizations make this election by filing two copies of Form 8274. Www taxact com 2011 For more information about making this election, see Form 8274. Www taxact com 2011 Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. Www taxact com 2011 This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. Www taxact com 2011 Make this choice by filing Form 4029. Www taxact com 2011 See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. Www taxact com 2011 U. Www taxact com 2011 S. Www taxact com 2011 Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Www taxact com 2011 Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. Www taxact com 2011 S. Www taxact com 2011 social security system. Www taxact com 2011 To determine your alien status, see Publication 519, U. Www taxact com 2011 S. Www taxact com 2011 Tax Guide for Aliens. Www taxact com 2011 Residents of Puerto Rico, the U. Www taxact com 2011 S. Www taxact com 2011 Virgin Islands, Guam, the CNMI, and American Samoa. Www taxact com 2011   If you are a resident of one of these U. Www taxact com 2011 S. Www taxact com 2011 possessions but not a U. Www taxact com 2011 S. Www taxact com 2011 citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. Www taxact com 2011 For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. Www taxact com 2011 Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Www taxact com 2011 Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Www taxact com 2011 Even if you have an exemption, only the income you receive for performing ministerial services is exempt. Www taxact com 2011 The exemption does not apply to any other income. Www taxact com 2011 The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. Www taxact com 2011 Ministers Most services you perform as a minister, priest, rabbi, etc. Www taxact com 2011 , are ministerial services. Www taxact com 2011 These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. Www taxact com 2011 You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. Www taxact com 2011 A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith. Www taxact com 2011 Services for nonreligious organizations. Www taxact com 2011   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Www taxact com 2011 Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. Www taxact com 2011   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. Www taxact com 2011 Services that are not part of your ministry. Www taxact com 2011   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. Www taxact com 2011 The following are not ministerial services. Www taxact com 2011 Services you perform for nonreligious organizations other than the services stated above. Www taxact com 2011 Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. Www taxact com 2011 These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. Www taxact com 2011 (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. Www taxact com 2011 ) Services you perform in a government-owned and operated hospital. Www taxact com 2011 (These services are considered performed by a government employee, not by a minister as part of the ministry. Www taxact com 2011 ) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services. Www taxact com 2011 Books or articles. Www taxact com 2011   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. Www taxact com 2011   This rule also applies to members of religious orders and to Christian Science practitioners and readers. Www taxact com 2011 Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. Www taxact com 2011 The services are considered ministerial because you perform them as an agent of the order. Www taxact com 2011 For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order. Www taxact com 2011 However, if the order directs you to work outside the order, this employment will not be considered a duty required by the order unless: Your services are the kind that are ordinarily performed by members of the order, and Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent. Www taxact com 2011 Effect of employee status. Www taxact com 2011   Ordinarily, if your services are not considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. Www taxact com 2011 In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. Www taxact com 2011 This result is true even if you have taken a vow of poverty. Www taxact com 2011 Example. Www taxact com 2011 Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. Www taxact com 2011 They renounce all claims to their earnings. Www taxact com 2011 The earnings belong to the order. Www taxact com 2011 Pat is a licensed attorney. Www taxact com 2011 The superiors of the order instructed her to get a job with a law firm. Www taxact com 2011 Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. Www taxact com 2011 Chris is a secretary. Www taxact com 2011 The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Www taxact com 2011 Chris took the job and gave all his earnings to the order. Www taxact com 2011 Pat's services are not duties required by the order. Www taxact com 2011 Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. Www taxact com 2011 Chris' services are duties required by the order. Www taxact com 2011 He is acting as an agent of the order and not as an employee of a third party. Www taxact com 2011 He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. Www taxact com 2011 Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Www taxact com 2011 Amounts you receive for performing these services are generally subject to SE tax. Www taxact com 2011 You may request an exemption from SE tax, discussed next, which applies only to those services. Www taxact com 2011 Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. Www taxact com 2011 Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. Www taxact com 2011 They do not have to request the exemption. Www taxact com 2011 Who cannot be exempt. Www taxact com 2011   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. Www taxact com 2011 These elections are irrevocable. Www taxact com 2011 You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. Www taxact com 2011 You elected before 1968 to be covered under social security for your ministerial services. Www taxact com 2011 Requesting exemption. Www taxact com 2011    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. Www taxact com 2011 More detailed explanations follow. Www taxact com 2011 If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. Www taxact com 2011 It does not apply to any other self-employment income. Www taxact com 2011 Table 2. Www taxact com 2011 The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. Www taxact com 2011 You file Form 4361, described below under Requesting Exemption—Form 4361 . Www taxact com 2011 You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. Www taxact com 2011 You file for other than economic reasons. Www taxact com 2011 You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). Www taxact com 2011 This requirement does not apply to Christian Science practitioners or readers. Www taxact com 2011 You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. Www taxact com 2011 You establish that the organization is a church or a convention or association of churches. Www taxact com 2011 You did not make an election discussed earlier under Who cannot be exempt . Www taxact com 2011 You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. Www taxact com 2011 Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. Www taxact com 2011 The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. Www taxact com 2011 If it is approved, keep the approved copy of Form 4361 in your permanent records. Www taxact com 2011 When to file. Www taxact com 2011   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. Www taxact com 2011 You have net earnings from self-employment of at least $400. Www taxact com 2011 Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. Www taxact com 2011 The 2 years do not have to be consecutive tax years. Www taxact com 2011    The approval process can take some time, so you should file Form 4361 as soon as possible. Www taxact com 2011 Example 1. Www taxact com 2011 Rev. Www taxact com 2011 Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. Www taxact com 2011 He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. Www taxact com 2011 However, if Rev. Www taxact com 2011 Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. Www taxact com 2011 Example 2. Www taxact com 2011 Rev. Www taxact com 2011 Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. Www taxact com 2011 She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. Www taxact com 2011 However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. Www taxact com 2011 Example 3. Www taxact com 2011 In 2011, Rev. Www taxact com 2011 David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. Www taxact com 2011 In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. Www taxact com 2011 Therefore, he had no net self-employment earnings as a minister in 2012. Www taxact com 2011 Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. Www taxact com 2011 In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. Www taxact com 2011 Rev. Www taxact com 2011 Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. Www taxact com 2011 Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. Www taxact com 2011 Death of individual. Www taxact com 2011   The right to file an application for exemption ends with an individual's death. Www taxact com 2011 A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. Www taxact com 2011 Effective date of exemption. Www taxact com 2011   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. Www taxact com 2011 Once the exemption is approved, it is irrevocable. Www taxact com 2011 Example. Www taxact com 2011 Rev. Www taxact com 2011 Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. Www taxact com 2011 She files an application for exemption on February 20, 2014. Www taxact com 2011 If an exemption is granted, it is effective for 2010 and the following years. Www taxact com 2011 Refunds of SE tax. Www taxact com 2011   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Www taxact com 2011 Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. Www taxact com 2011 A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. Www taxact com 2011   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. Www taxact com 2011 Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. Www taxact com 2011 Exception. Www taxact com 2011   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. Www taxact com 2011 However, if you pay your benefits back, you may be considered for exemption. Www taxact com 2011 Contact your local Social Security Administration office to find out the amount you must pay back. Www taxact com 2011 Eligibility requirements. Www taxact com 2011   To claim this exemption from SE tax, all the following requirements must be met. Www taxact com 2011 You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . Www taxact com 2011 As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. Www taxact com 2011 You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. Www taxact com 2011 The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. Www taxact com 2011 Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. Www taxact com 2011 The sect or division must complete part of the form. Www taxact com 2011 The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. Www taxact com 2011 If it is approved, keep the approved copy of Form 4029 in your permanent records. Www taxact com 2011 When to file. Www taxact com 2011   You can file Form 4029 at any time. Www taxact com 2011   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. Www taxact com 2011 See Effective date of exemption next for information on when the newly approved exemption would become effective. Www taxact com 2011    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. Www taxact com 2011 Effective date of exemption. Www taxact com 2011   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. Www taxact com 2011 (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. Www taxact com 2011 )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. Www taxact com 2011 You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. Www taxact com 2011 The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. Www taxact com 2011 Refunds of SE tax paid. Www taxact com 2011    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. Www taxact com 2011 For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. Www taxact com 2011 Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Www taxact com 2011 Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. Www taxact com 2011 A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. Www taxact com 2011 If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. Www taxact com 2011 Information for employers. Www taxact com 2011   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. Www taxact com 2011   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. Www taxact com 2011 Form W-2. Www taxact com 2011   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. Www taxact com 2011 ” Do not make any entries in boxes 3, 4, 5, or 6. Www taxact com 2011 Forms 941, 943, and 944. Www taxact com 2011   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. Www taxact com 2011 Instead, follow the instructions given below. Www taxact com 2011 Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. Www taxact com 2011 Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. Www taxact com 2011 Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. Www taxact com 2011 Effective date. Www taxact com 2011   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. Www taxact com 2011 The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. Www taxact com 2011 Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. Www taxact com 2011 Regular method. Www taxact com 2011 Nonfarm optional method. Www taxact com 2011 You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Www taxact com 2011 Blank worksheets are in the back of this publication, after the Comprehensive Example. Www taxact com 2011 Regular Method Most people use the regular method. Www taxact com 2011 Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. Www taxact com 2011 Then, subtract your allowable business deductions and multiply the difference by 92. Www taxact com 2011 35% (. Www taxact com 2011 9235). Www taxact com 2011 Use Schedule SE (Form 1040) to figure your net earnings and SE tax. Www taxact com 2011 If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92. Www taxact com 2011 35% (. Www taxact com 2011 9235). Www taxact com 2011 Do not reduce your wages by any business deductions when making this computation. Www taxact com 2011 Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. Www taxact com 2011 If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. Www taxact com 2011 Amounts included in gross income. Www taxact com 2011   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. Www taxact com 2011 , The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience, The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. Www taxact com 2011 This amount is also subject to income tax. Www taxact com 2011   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. Www taxact com 2011 Example. Www taxact com 2011 Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. Www taxact com 2011 The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. Www taxact com 2011 His church owns a parsonage that has a fair rental value of $12,000 per year. Www taxact com 2011 The church gives Pastor Adams the use of the parsonage. Www taxact com 2011 He is not exempt from SE tax. Www taxact com 2011 He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. Www taxact com 2011 The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. Www taxact com 2011 Overseas duty. Www taxact com 2011   Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U. Www taxact com 2011 S. Www taxact com 2011 citizen or resident alien serving abroad and living in a foreign country. Www taxact com 2011   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. Www taxact com 2011 Example. Www taxact com 2011 Diane Jones was the minister of a U. Www taxact com 2011 S. Www taxact com 2011 church in Mexico. Www taxact com 2011 She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. Www taxact com 2011 The United States does not have a social security agreement with Mexico, so Mrs. Www taxact com 2011 Jones is subject to U. Www taxact com 2011 S. Www taxact com 2011 SE tax and must include $35,000 when figuring net earnings from self-employment. Www taxact com 2011 Specified U. Www taxact com 2011 S. Www taxact com 2011 possessions. Www taxact com 2011    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Www taxact com 2011 Also see Residents of Puerto Rico, the U. Www taxact com 2011 S. Www taxact com 2011 Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. Www taxact com 2011 S. Www taxact com 2011 Citizens and Resident and Nonresident Aliens. Www taxact com 2011 Amounts not included in gross income. Www taxact com 2011   Do not include the following amounts in gross income when figuring your net earnings from self-employment. Www taxact com 2011 Offerings that others made to the church. Www taxact com 2011 Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income. Www taxact com 2011 Pension payments or retirement allowances you receive for your past ministerial services. Www taxact com 2011 The rental value of a parsonage or a parsonage allowance provided to you after you retire. Www taxact com 2011 Allowable deductions. Www taxact com 2011   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. Www taxact com 2011 These are ministerial expenses you incurred while working other than as a common-law employee of the church. Www taxact com 2011 They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Www taxact com 2011 Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. Www taxact com 2011   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . Www taxact com 2011 Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Www taxact com 2011 Do not complete Schedule C or C-EZ (Form 1040). Www taxact com 2011 However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. Www taxact com 2011 Employee reimbursement arrangements. Www taxact com 2011   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Www taxact com 2011 Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. Www taxact com 2011 Accountable plans. Www taxact com 2011   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. Www taxact com 2011 Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. Www taxact com 2011 You must adequately account to your employer for these expenses within a reasonable period of time. Www taxact com 2011 You must return any excess reimbursement or allowance within a reasonable period of time. Www taxact com 2011   The reimbursement is not reported on your Form W-2. Www taxact com 2011 Generally, if your expenses equal your reimbursement, you have no deduction. Www taxact com 2011 If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. Www taxact com 2011 Nonaccountable plan. Www taxact com 2011   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. Www taxact com 2011 In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. Www taxact com 2011 Excess reimbursements you fail to return to your employer. Www taxact com 2011 Reimbursement of nondeductible expenses related to your employer's business. Www taxact com 2011   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Www taxact com 2011 Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. Www taxact com 2011   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Www taxact com 2011 Married Couple Missionary Team If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement. Www taxact com 2011 If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement. Www taxact com 2011 Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. Www taxact com 2011 The tax rate for the social security part is 12. Www taxact com 2011 4%. Www taxact com 2011 In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. Www taxact com 2011 This tax rate is 2. Www taxact com 2011 9%. Www taxact com 2011 The combined self-employment tax rate is 15. Www taxact com 2011 3%. Www taxact com 2011 Additional Medicare Tax. Www taxact com 2011   Beginning in 2013, a 0. Www taxact com 2011 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Www taxact com 2011 Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Www taxact com 2011 A self-employment loss is not considered for purposes of this tax. Www taxact com 2011 RRTA compensation is separately compared to the threshold. Www taxact com 2011 For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. Www taxact com 2011 Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. Www taxact com 2011 In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low. Www taxact com 2011 You may use the nonfarm optional method if you meet all the following tests. Www taxact com 2011 You are self-employed on a regular basis. Www taxact com 2011 You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Www taxact com 2011 The net earnings can be from either farm or nonfarm earnings or both. Www taxact com 2011 You have used this method less than 5 prior years. Www taxact com 2011 (There is a 5-year lifetime limit. Www taxact com 2011 ) The years do not have to be consecutive. Www taxact com 2011 Your net nonfarm profits were: Less than $5,024, and Less than 72. Www taxact com 2011 189% of your gross nonfarm income. Www taxact com 2011 If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. Www taxact com 2011 Table 3. Www taxact com 2011 Figuring Nonfarm Net Earnings IF your gross nonfarm income is . Www taxact com 2011 . Www taxact com 2011 . Www taxact com 2011 THEN your net earnings are equal to . Www taxact com 2011 . Www taxact com 2011 . Www taxact com 2011 $6,960 or less Two-thirds of your gross nonfarm income. Www taxact com 2011 More than $6,960 $4,640. Www taxact com 2011 Actual net earnings. Www taxact com 2011   Multiply your total earnings subject to SE tax by 92. Www taxact com 2011 35% (. Www taxact com 2011 9235) to get actual net earnings. Www taxact com 2011 Actual net earnings are equivalent to net earnings under the “Regular Method. Www taxact com 2011 ” More information. Www taxact com 2011   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. Www taxact com 2011 Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. Www taxact com 2011 Note. Www taxact com 2011 For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. Www taxact com 2011 Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. Www taxact com 2011 Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Www taxact com 2011 , in addition to your salary. Www taxact com 2011 If the offering is made to the religious institution, it is not taxable to you. Www taxact com 2011 Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. Www taxact com 2011 However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Www taxact com 2011 For more information, see Publication 526. Www taxact com 2011 Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Www taxact com 2011 Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. Www taxact com 2011 This exclusion applies only for income tax purposes. Www taxact com 2011 It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. Www taxact com 2011 Designation requirement. Www taxact com 2011   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. Www taxact com 2011 It must designate a definite amount. Www taxact com 2011 It cannot determine the amount of the housing allowance at a later date. Www taxact com 2011 If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. Www taxact com 2011   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. Www taxact com 2011 The local congregation must officially designate the part of your salary that is a housing allowance. Www taxact com 2011 However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. Www taxact com 2011 Rental allowances. Www taxact com 2011   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. Www taxact com 2011   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. Www taxact com 2011 Fair rental value of parsonage. Www taxact com 2011   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. Www taxact com 2011 However, the exclusion cannot be more than the reasonable pay for your services. Www taxact com 2011 If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. Www taxact com 2011 Example. Www taxact com 2011 Rev. Www taxact com 2011 Joanna Baker is a full-time minister. Www taxact com 2011 The church allows her to use a parsonage that has an annual fair rental value of $24,000. Www taxact com 2011 The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Www taxact com 2011 Her actual utility costs during the year were $7,000. Www taxact com 2011 For income tax purposes, Rev. Www taxact com 2011 Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Www taxact com 2011 She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Www taxact com 2011 Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). Www taxact com 2011 Home ownership. Www taxact com 2011   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. Www taxact com 2011 Excess rental allowance. Www taxact com 2011   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. Www taxact com 2011   Include in the total on Form 1040, line 7. Www taxact com 2011 On the dotted line next to line 7, enter “Excess allowance” and the amount. Www taxact com 2011 You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. Www taxact com 2011 However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). Www taxact com 2011 Retired ministers. Www taxact com 2011   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. Www taxact com 2011 However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. Www taxact com 2011 Teachers or administrators. Www taxact com 2011   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. Www taxact com 2011 However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. Www taxact com 2011    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. Www taxact com 2011 In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. Www taxact com 2011   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. Www taxact com 2011 Theological students. Www taxact com 2011   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. Www taxact com 2011 Traveling evangelists. Www taxact com 2011   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. Www taxact com 2011 You are an ordained minister. Www taxact com 2011 You perform ministerial services at churches located away from your community. Www taxact com 2011 You actually use the rental allowance to maintain your permanent home. Www taxact com 2011 Cantors. Www taxact com 2011   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. Www taxact com 2011 Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. Www taxact com 2011 See Members of Religious Orders , earlier, under Social Security Coverage. Www taxact com 2011 Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. Www taxact com 2011 S. Www taxact com 2011 possession. Www taxact com 2011 Publication 54 discusses the foreign earned income exclusion. Www taxact com 2011 Publication 570, Tax Guide for Individuals With Income From U. Www taxact com 2011 S. Www taxact com 2011 Possessions, covers the rules for taxpayers with income from U. Www taxact com 2011 S. Www taxact com 2011 possessions. Www taxact com 2011 You can get these free publications from the Internal Revenue Service at IRS. Www taxact com 2011 gov or from most U. Www taxact com 2011 S. Www taxact com 2011 Embassies or consulates. Www taxact com 2011 Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. Www taxact com 2011 Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. Www taxact com 2011 You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). Www taxact com 2011 You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. Www taxact com 2011 See Publication 529 for more information on this limit. Www taxact com 2011 However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). Www taxact com 2011 Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. Www taxact com 2011 You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. Www taxact com 2011 Exception. Www taxact com 2011   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. Www taxact com 2011 Figuring the allocation. Www taxact com 2011   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. Www taxact com 2011    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. Www taxact com 2011 Example. Www taxact com 2011 Rev. Www taxact com 2011 Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. Www taxact com 2011 He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. Www taxact com 2011 $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. Www taxact com 2011 Rev. Www taxact com 2011 Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. Www taxact com 2011 Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. Www taxact com 2011   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. Www taxact com 2011 The statement must contain all of the following information. Www taxact com 2011 A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. Www taxact com 2011 ) plus the amount. Www taxact com 2011 A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. Www taxact com 2011 A list of each item of otherwise deductible ministerial expenses plus the amount. Www taxact com 2011 How you figured the nondeductible part of your otherwise deductible expenses. Www taxact com 2011 A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. Www taxact com 2011   See the attachments prepared for the Comprehensive Example , later. Www taxact com 2011 Following the example, you will find blank worksheets for your own use. Www taxact com 2011 Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. Www taxact com 2011 If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. Www taxact com 2011 See the Instructions for Form 1040 to figure your deduction. Www taxact com 2011 The following special rules apply to the self-employed health insurance deduction. Www taxact com 2011 You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. Www taxact com 2011 You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. Www taxact com 2011 The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Www taxact com 2011 Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. Www taxact com 2011 More information. Www taxact com 2011   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. Www taxact com 2011 Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. Www taxact com 2011 This is an income tax deduction only, on Form 1040, line 27. Www taxact com 2011 Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. Www taxact com 2011 Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. Www taxact com 2011 You must pay the tax as you earn or receive income during the year. Www taxact com 2011 An employee usually has income tax withheld from his or her wages or salary. Www taxact com 2011 However, your salary is not subject to federal income tax withholding if both of the following conditions apply. Www taxact com 2011 You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. Www taxact com 2011 Your salary is for ministerial services (see Ministerial Services , earlier). Www taxact com 2011 If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. Www taxact com 2011 You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. Www taxact com 2011 Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. Www taxact com 2011 Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. Www taxact com 2011 See Form 1040-ES for the different payment methods. Www taxact com 2011 The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. Www taxact com 2011 For more information, see chapter 2 of Publication 505. Www taxact com 2011 If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. Www taxact com 2011 Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. Www taxact com 2011 Table 4. Www taxact com 2011 2013 Filing Requirements for Most Taxpayers IF your filing status is . Www taxact com 2011 . Www taxact com 2011 . Www taxact com 2011 AND at the end of 2013 you were* . Www taxact com 2011 . Www taxact com 2011 . Www taxact com 2011 THEN file a return if your gross income** was at least . Www taxact com 2011 . Www taxact com 2011 . Www taxact com 2011 single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Www taxact com 2011 ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Www taxact com 2011 Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). Www taxact com 2011 If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. Www taxact com 2011 Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Www taxact com 2011 Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Www taxact com 2011 But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Www taxact com 2011 *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. Www taxact com 2011 Additional requirements. Www taxact com 2011   Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:    You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. Www taxact com 2011 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). Www taxact com 2011 Self-employment tax. Www taxact com 2011   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. Www taxact com 2011   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. Www taxact com 2011 You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). Www taxact com 2011 You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. Www taxact com 2011 However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). Www taxact com 2011 Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Www taxact com 2011 Note. Www taxact com 2011 For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. Www taxact com 2011 You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. Www taxact com 2011 Exemption from SE tax. Www taxact com 2011   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Www taxact com 2011 Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. Www taxact com 2011 However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. Www taxact com 2011    If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Www taxact com 2011 Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. Www taxact com 2011 More information. Www taxact com 2011   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. Www taxact com 2011 Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. Www taxact com 2011 You generally can deduct your contributions to the plan. Www taxact com 2011 Your contributions and the earnings on them are not taxed until they are distributed. Www taxact com 2011 Retirement plans for the self-employed. Www taxact com 2011   To set up one of the following plans you must be self-employed. Www taxact com 2011 SEP (simplified employee pension) plan. Www taxact com 2011 SIMPLE (savings incentive match plan for employees) plan. Www taxact com 2011 Qualified retirement plan (also called a Keogh or H. Www taxact com 2011 R. Www taxact com 2011 10 plan). Www taxact com 2011   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. Www taxact com 2011 See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. Www taxact com 2011 This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. Www taxact com 2011   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. Www taxact com 2011 You are not a self-employed person for purposes of setting up a retirement plan. Www taxact com 2011 This result is true even if your salary is subject to SE tax. Www taxact com 2011   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. Www taxact com 2011   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Www taxact com 2011 Individual retirement arrangements (IRAs). Www taxact com 2011   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Www taxact com 2011 Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). Www taxact com 2011   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. Www taxact com 2011 You cannot deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed. Www taxact com 2011   If you contribute to a traditional IRA, your contribution may be deductible. Www taxact com 2011 However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). Www taxact com 2011   For more information on IRAs, see Publication 590. Www taxact com 2011 Tax-sheltered annuity plans. Www taxact com 2011   Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. Www taxact com 2011 For more
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The Www Taxact Com 2011

Www taxact com 2011 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. Www taxact com 2011 A pension is generally a series of payments made to you after you retire from work. Www taxact com 2011 Pension payments are made regularly and are for past services with an employer. Www taxact com 2011 An annuity is a series of payments under a contract. Www taxact com 2011 You can buy the contract alone or you can buy it with the help of your employer. Www taxact com 2011 Annuity payments are made regularly for more than one full year. Www taxact com 2011 Note. Www taxact com 2011 Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. Www taxact com 2011 Types of pensions and annuities. Www taxact com 2011   Particular types of pensions and annuities include: Fixed period annuities. Www taxact com 2011 You receive definite amounts at regular intervals for a definite length of time. Www taxact com 2011 Annuities for a single life. Www taxact com 2011 You receive definite amounts at regular intervals for life. Www taxact com 2011 The payments end at death. Www taxact com 2011 Joint and survivor annuities. Www taxact com 2011 The first annuitant receives a definite amount at regular intervals for life. Www taxact com 2011 After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Www taxact com 2011 The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Www taxact com 2011 Variable annuities. Www taxact com 2011 You receive payments that may vary in amount for a definite length of time or for life. Www taxact com 2011 The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. Www taxact com 2011 Disability pensions. Www taxact com 2011 You are under minimum retirement age and receive payments because you retired on disability. Www taxact com 2011 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. Www taxact com 2011 If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. Www taxact com 2011 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. Www taxact com 2011 This plan must meet Internal Revenue Code requirements. Www taxact com 2011 It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. Www taxact com 2011 However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. Www taxact com 2011 A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. Www taxact com 2011 A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. Www taxact com 2011   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. Www taxact com 2011 A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. Www taxact com 2011 It does not qualify for most of the tax benefits of a qualified plan. Www taxact com 2011 Annuity worksheets. Www taxact com 2011   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. Www taxact com 2011 Request for a ruling. Www taxact com 2011   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. Www taxact com 2011 This is treated as a request for a ruling. Www taxact com 2011 See Requesting a Ruling on Taxation of Annuity near the end of this publication. Www taxact com 2011 Withholding tax and estimated tax. Www taxact com 2011   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 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). Www taxact com 2011 These payments are also known as amounts received as an annuity. Www taxact com 2011 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. Www taxact com 2011 In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. Www taxact com 2011 The amount of each payment that is more than the part that represents your net cost is taxable. Www taxact com 2011 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. Www taxact com 2011 These terms are explained in the following discussions. Www taxact com 2011 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. Www taxact com 2011 First, find your net cost of the contract as of the annuity starting date (defined later). Www taxact com 2011 To find this amount, you must first figure the total premiums, contributions, or other amounts paid. Www taxact com 2011 This includes the amounts your employer contributed if you were required to include these amounts in income. Www taxact com 2011 It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). Www taxact com 2011 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. Www taxact com 2011 Any additional premiums paid for double indemnity or disability benefits. Www taxact com 2011 Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). Www taxact com 2011 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. Www taxact com 2011 Example. Www taxact com 2011 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. Www taxact com 2011 The annuity starting date is July 1. Www taxact com 2011 This is the date you use in figuring your investment in the contract and your expected return (discussed later). Www taxact com 2011 Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. Www taxact com 2011 Foreign employment. Www taxact com 2011   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. Www taxact com 2011 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. Www taxact com 2011 Foreign employment contributions while a nonresident alien. Www taxact com 2011   In determining your cost, special rules apply if you are a U. Www taxact com 2011 S. Www taxact com 2011 citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. Www taxact com 2011 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. Www taxact com 2011 Death benefit exclusion. Www taxact com 2011   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. Www taxact com 2011 The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. Www taxact com 2011 How to adjust your total cost. Www taxact com 2011   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. Www taxact com 2011 Add it to the cost or unrecovered cost of the annuity at the annuity starting date. Www taxact com 2011 See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. Www taxact com 2011 Net cost. Www taxact com 2011   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. Www taxact com 2011 This is the unrecovered investment in the contract as of the annuity starting date. Www taxact com 2011 If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. Www taxact com 2011 Refund feature. Www taxact com 2011   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. Www taxact com 2011 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. Www taxact com 2011   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. Www taxact com 2011 Zero value of refund feature. Www taxact com 2011   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. Www taxact com 2011   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). Www taxact com 2011   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. Www taxact com 2011 Examples. Www taxact com 2011 The first example shows how to figure the value of the refund feature when there is only one beneficiary. Www taxact com 2011 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. Www taxact com 2011 In both examples, the taxpayer elects to use Tables V through VIII. Www taxact com 2011 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. Www taxact com 2011 Example 1. Www taxact com 2011 At age 65, Barbara bought for $21,053 an annuity with a refund feature. Www taxact com 2011 She will get $100 a month for life. Www taxact com 2011 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. Www taxact com 2011 In this case, the contract cost and the total guaranteed return are the same ($21,053). Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 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). Www taxact com 2011 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. Www taxact com 2011 Example 2. Www taxact com 2011 John died while still employed. Www taxact com 2011 His widow, Eleanor, age 48, receives $171 a month for the rest of her life. Www taxact com 2011 John's son, Elmer, age 9, receives $50 a month until he reaches age 18. Www taxact com 2011 John's contributions to the retirement fund totaled $7,559. Www taxact com 2011 45, with interest on those contributions of $1,602. Www taxact com 2011 53. Www taxact com 2011 The guarantee or total refund feature of the contract is $9,161. Www taxact com 2011 98 ($7,559. Www taxact com 2011 45 plus $1,602. Www taxact com 2011 53). Www taxact com 2011 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. Www taxact com 2011 9 $71,614. Www taxact com 2011 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. Www taxact com 2011 0 5,400. Www taxact com 2011 00   3) Total expected return   $77,014. Www taxact com 2011 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. Www taxact com 2011 45   2) Guaranteed amount (contributions of $7,559. Www taxact com 2011 45 plus interest of $1,602. Www taxact com 2011 53) $9,161. Www taxact com 2011 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. Www taxact com 2011 00   4) Net guaranteed amount $3,761. Www taxact com 2011 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 See the discussion of expected return, later in this publication. Www taxact com 2011 Free IRS help. Www taxact com 2011   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. Www taxact com 2011 Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Www taxact com 2011 The following discussions explain how to figure the expected return with each type of annuity. Www taxact com 2011 A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. Www taxact com 2011 Fixed period annuity. Www taxact com 2011   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. Www taxact com 2011 It is the total amount you will get beginning at the annuity starting date. Www taxact com 2011 You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). Www taxact com 2011 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. Www taxact com 2011 Single life annuity. Www taxact com 2011   If you are to get annuity payments for the rest of your life, find your expected return as follows. Www taxact com 2011 You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. Www taxact com 2011 These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). Www taxact com 2011   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. Www taxact com 2011 See Adjustments to Tables I, II, V, VI, and VIA following Table I. Www taxact com 2011 Example. Www taxact com 2011 Henry bought an annuity contract that will give him an annuity of $500 a month for his life. Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 2 multiple by +. Www taxact com 2011 1. Www taxact com 2011 His expected return would then be $115,800 ($6,000 × 19. Www taxact com 2011 3). Www taxact com 2011 Annuity for shorter of life or specified period. Www taxact com 2011   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. Www taxact com 2011 To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. Www taxact com 2011 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. Www taxact com 2011 Example. Www taxact com 2011 Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. Www taxact com 2011 She was age 65 at her birthday nearest the annuity starting date. Www taxact com 2011 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. Www taxact com 2011 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. Www taxact com 2011 See Special Elections, later. Www taxact com 2011 Joint and survivor annuities. Www taxact com 2011   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. Www taxact com 2011 To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. Www taxact com 2011 If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. Www taxact com 2011 See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. Www taxact com 2011 Example. Www taxact com 2011 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. Www taxact com 2011 At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. Www taxact com 2011 The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. Www taxact com 2011 0 Expected return $132,000 Different payments to survivor. Www taxact com 2011   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. Www taxact com 2011 Example 1. Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 0 Multiple for Gerald, age 70 (from Table V)   16. Www taxact com 2011 0 Difference: Multiple applicable to Mary   6. Www taxact com 2011 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. Www taxact com 2011 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. Www taxact com 2011 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. Www taxact com 2011 Your husband died while still employed. Www taxact com 2011 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. Www taxact com 2011 Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. Www taxact com 2011 You were 50 years old at the annuity starting date. Www taxact com 2011 Marie was 16 and Jean was 14. Www taxact com 2011 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. Www taxact com 2011 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. Www taxact com 2011 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. Www taxact com 2011 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. Www taxact com 2011 Computation Under the General Rule Note. Www taxact com 2011 Variable annuities use a different computation for determining the exclusion amounts. Www taxact com 2011 See Variable annuities later. Www taxact com 2011 Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. Www taxact com 2011   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. Www taxact com 2011 See Death benefit exclusion , earlier. Www taxact com 2011 Step 2. Www taxact com 2011   Figure your expected return. Www taxact com 2011 Step 3. Www taxact com 2011   Divide Step 1 by Step 2 and round to three decimal places. Www taxact com 2011 This will give you the exclusion percentage. Www taxact com 2011 Step 4. Www taxact com 2011   Multiply the exclusion percentage by the first regular periodic payment. Www taxact com 2011 The result is the tax-free part of each pension or annuity payment. Www taxact com 2011   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. Www taxact com 2011 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. Www taxact com 2011   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. Www taxact com 2011 Step 5. Www taxact com 2011   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. Www taxact com 2011 This will give you the tax-free part of the total payment for the year. Www taxact com 2011    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. Www taxact com 2011 This fractional amount is multiplied by your exclusion percentage to get the tax-free part. Www taxact com 2011 Step 6. Www taxact com 2011   Subtract the tax-free part from the total payment you received. Www taxact com 2011 The rest is the taxable part of your pension or annuity. Www taxact com 2011 Example 1. Www taxact com 2011 You purchased an annuity with an investment in the contract of $10,800. Www taxact com 2011 Under its terms, the annuity will pay you $100 a month for life. Www taxact com 2011 The multiple for your age (age 65) is 20. Www taxact com 2011 0 as shown in Table V. Www taxact com 2011 Your expected return is $24,000 (20 × 12 × $100). Www taxact com 2011 Your cost of $10,800, divided by your expected return of $24,000, equals 45. Www taxact com 2011 0%. Www taxact com 2011 This is the percentage you will not have to include in income. Www taxact com 2011 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. Www taxact com 2011 If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). Www taxact com 2011 Example 2. Www taxact com 2011 Gerald bought a joint and survivor annuity. Www taxact com 2011 Gerald's investment in the contract is $62,712 and the expected return is $121,200. Www taxact com 2011 The exclusion percentage is 51. Www taxact com 2011 7% ($62,712 ÷ $121,200). Www taxact com 2011 Gerald will receive $500 a month ($6,000 a year). Www taxact com 2011 Each year, until his net cost is recovered, $3,102 (51. Www taxact com 2011 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. Www taxact com 2011 If Gerald dies, his wife will receive $350 a month ($4,200 a year). Www taxact com 2011 If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. Www taxact com 2011 7%). Www taxact com 2011 Each year, until the entire net cost is recovered, his wife will receive $2,171. Www taxact com 2011 40 (51. Www taxact com 2011 7% of her payments received of $4,200) tax free. Www taxact com 2011 She will include $2,028. Www taxact com 2011 60 ($4,200 − $2,171. Www taxact com 2011 40) in her income tax return. Www taxact com 2011 Example 3. Www taxact com 2011 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. Www taxact com 2011 Your two daughters each receive annual annuities of $1,800 until they reach age 18. Www taxact com 2011 Your husband contributed $25,576 to the plan. Www taxact com 2011 You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. Www taxact com 2011 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. Www taxact com 2011 The exclusion percentage of 18. Www taxact com 2011 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. Www taxact com 2011 Each full year $864 (18. Www taxact com 2011 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. Www taxact com 2011 Each year, until age 18, $324 (18. Www taxact com 2011 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. Www taxact com 2011 Part-year payments. Www taxact com 2011   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. Www taxact com 2011   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. Www taxact com 2011 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. Www taxact com 2011   If you received a fractional payment, follow Step 5, discussed earlier. Www taxact com 2011 This gives you the tax-free part of your total payment. Www taxact com 2011 Example. Www taxact com 2011 On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. Www taxact com 2011 The applicable multiple from Table V is 23. Www taxact com 2011 3 (age 61). Www taxact com 2011 Her expected return is $34,950 ($125 × 12 × 23. Www taxact com 2011 3). Www taxact com 2011 Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. Www taxact com 2011 1%. Www taxact com 2011 Each payment received will consist of 63. Www taxact com 2011 1% return of cost and 36. Www taxact com 2011 9% taxable income, until her net cost of the contract is fully recovered. Www taxact com 2011 During the first year, Mary received three payments of $125, or $375, of which $236. Www taxact com 2011 63 (63. Www taxact com 2011 1% × $375) is a return of cost. Www taxact com 2011 The remaining $138. Www taxact com 2011 37 is included in income. Www taxact com 2011 Increase in annuity payments. Www taxact com 2011   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. Www taxact com 2011 All increases in the installment payments are fully taxable. Www taxact com 2011   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. Www taxact com 2011 72-5(a)(5) of the regulations. Www taxact com 2011 Example. Www taxact com 2011 Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. Www taxact com 2011 In figuring the taxable part, Joe elects to use Tables V through VIII. Www taxact com 2011 The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. Www taxact com 2011 His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. Www taxact com 2011 0 × $1,764 annual payment). Www taxact com 2011 The exclusion percentage is $7,938 ÷ $35,280, or 22. Www taxact com 2011 5%. Www taxact com 2011 During the year he received 11 monthly payments of $147, or $1,617. Www taxact com 2011 Of this amount, 22. Www taxact com 2011 5% × $147 × 11 ($363. Www taxact com 2011 83) is tax free as a return of cost and the balance of $1,253. Www taxact com 2011 17 is taxable. Www taxact com 2011 Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). Www taxact com 2011 The tax-free part is still only 22. Www taxact com 2011 5% of the annuity payments as of the annuity starting date (22. Www taxact com 2011 5% × $147 × 12 = $396. Www taxact com 2011 90 for a full year). Www taxact com 2011 The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. Www taxact com 2011 Variable annuities. Www taxact com 2011   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. Www taxact com 2011   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. Www taxact com 2011 If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. Www taxact com 2011 Example. Www taxact com 2011 Frank purchased a variable annuity at age 65. Www taxact com 2011 The total cost of the contract was $12,000. Www taxact com 2011 The annuity starting date is January 1 of the year of purchase. Www taxact com 2011 His annuity will be paid, starting July 1, in variable annual installments for his life. Www taxact com 2011 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. Www taxact com 2011   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. Www taxact com 2011 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. Www taxact com 2011 The result is added to the previously figured periodic tax-free part. Www taxact com 2011 The sum is the amount of each future payment that will be tax free. Www taxact com 2011 Example. Www taxact com 2011 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. Www taxact com 2011 Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. Www taxact com 2011 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. Www taxact com 2011 00 Amount received in second year 500. Www taxact com 2011 00 Difference $100. Www taxact com 2011 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. Www taxact com 2011 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. Www taxact com 2011 4) $5. Www taxact com 2011 43 Revised annual tax-free part for third and later years ($600 + $5. Www taxact com 2011 43) $605. Www taxact com 2011 43 Amount taxable in third year ($1,200 − $605. Www taxact com 2011 43) $594. Www taxact com 2011 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. Www taxact com 2011 72–4(d)(3) of the Income Tax Regulations. Www taxact com 2011 The statement must also show the following information: The annuity starting date and your age on that date. Www taxact com 2011 The first day of the first period for which you received an annuity payment in the current year. Www taxact com 2011 Your investment in the contract as originally figured. Www taxact com 2011 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. Www taxact com 2011 Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. Www taxact com 2011 Exclusion limited to net cost. Www taxact com 2011   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). Www taxact com 2011 This is the unrecovered investment in the contract as of the annuity starting date. Www taxact com 2011   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. Www taxact com 2011 This deduction is not subject to the 2%-of-adjusted-gross-income limit. Www taxact com 2011 Example 1. Www taxact com 2011 Your annuity starting date is after 1986. Www taxact com 2011 Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. Www taxact com 2011 There is no refund feature. Www taxact com 2011 Your monthly annuity payment is $833. Www taxact com 2011 33. Www taxact com 2011 Your exclusion ratio is 12% and you exclude $100 a month. Www taxact com 2011 Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. Www taxact com 2011 Thereafter, your annuity payments are fully taxable. Www taxact com 2011 Example 2. Www taxact com 2011 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. Www taxact com 2011 The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. Www taxact com 2011 The exclusion ratio is 10. Www taxact com 2011 8%, and your monthly exclusion is $90. Www taxact com 2011 After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). Www taxact com 2011 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. Www taxact com 2011 Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. Www taxact com 2011 Exclusion not limited to net cost. Www taxact com 2011   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. Www taxact com 2011 If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. Www taxact com 2011 The total exclusion may be more than your investment in the contract. Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 These tables correspond to the old Tables I through IV. Www taxact com 2011 In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. Www taxact com 2011 If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. Www taxact com 2011 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). Www taxact com 2011 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. Www taxact com 2011 Contributions made both before July 1986 and after June 1986. Www taxact com 2011   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. Www taxact com 2011 (See the examples below. Www taxact com 2011 )    Making the election. Www taxact com 2011 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. Www taxact com 2011 72–6 of the Income Tax Regulations. Www taxact com 2011 ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. Www taxact com 2011   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. Www taxact com 2011 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. Www taxact com 2011    Advantages of election. Www taxact com 2011 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. Www taxact com 2011    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. Www taxact com 2011 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. Www taxact com 2011   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. Www taxact com 2011 Example 1. Www taxact com 2011 Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. Www taxact com 2011 Payment of the $42,000 contribution is guaranteed under a refund feature. Www taxact com 2011 Bill is 55 years old as of the annuity starting date. Www taxact com 2011 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. Www taxact com 2011       Pre- July 1986   Post- June 1986 A. Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. Www taxact com 2011 7   28. Www taxact com 2011 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. Www taxact com 2011 Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . Www taxact com 2011 079   . Www taxact com 2011 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). Www taxact com 2011 The taxable part of his annuity is $22,080 ($24,000 minus $1,920). Www taxact com 2011 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). Www taxact com 2011 Example 2. Www taxact com 2011 Al is age 62 at his nearest birthday to the annuity starting date. Www taxact com 2011 Al's wife is age 60 at her nearest birthday to the annuity starting date. Www taxact com 2011 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. Www taxact com 2011 The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. Www taxact com 2011 Al makes the election described in Example 1 . Www taxact com 2011 For purposes of this example, assume the refund feature adjustment is zero. Www taxact com 2011 If an adjustment is required, IRS will figure the amount. Www taxact com 2011 See Requesting a Ruling on Taxation of Annuity near the end of this publication. Www taxact com 2011       Pre-  July 1986   Post-  June 1986 A. Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 Expected return         1) Multiple for both annuitants from Tables II and VI 25. Www taxact com 2011 4   28. Www taxact com 2011 8   2) Multiple for first annuitant from Tables I and V 16. Www taxact com 2011 9   22. Www taxact com 2011 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. Www taxact com 2011 5   6. Www taxact com 2011 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. Www taxact com 2011 Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . Www taxact com 2011 209   . Www taxact com 2011 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). Www taxact com 2011 The taxable part of his annuity is $9,216 ($12,000 − $2,784). Www taxact com 2011 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. Www taxact com 2011 After Al's death, his widow will apply the same exclusion percentages (20. Www taxact com 2011 9% and 2. Www taxact com 2011 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. Www taxact com 2011 Annuity received after June 30, 1986. Www taxact com 2011   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. Www taxact com 2011 Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. Www taxact com 2011    Make the election by attaching the following statement to your income tax return. Www taxact com 2011    “I elect, under section 1. Www taxact com 2011 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. Www taxact com 2011 ”   The statement must also include your name, address, and social security number. Www taxact com 2011   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. Www taxact com 2011 Disqualifying form of payment or settlement. Www taxact com 2011   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. Www taxact com 2011 See regulations section 1. Www taxact com 2011 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. Www taxact com 2011 You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. Www taxact com 2011 Worksheets for Determining Taxable Annuity Worksheets I and II. Www taxact com 2011   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. Www taxact com 2011 72–6(d)(6) Election. Www taxact com 2011 Worksheet I For Determining Taxable Annuity Under Regulations Section 1. Www taxact com 2011 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. Www taxact com 2011   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Www taxact com 2011 )             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. Www taxact com 2011 If not, the IRS will calculate the refund feature percentage. Www taxact com 2011             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Www taxact com 2011   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. Www taxact com 2011   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. Www taxact com 2011   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. Www taxact com 2011     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. Www taxact com 2011 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. Www taxact com 2011   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Www taxact com 2011 )             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. Www taxact com 2011 If not, the IRS will calculate the refund feature percentage. Www taxact com 2011             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Www taxact com 2011   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. Www taxact com 2011   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. Www taxact com 2011 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. Www taxact com 2011   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. Www taxact com 2011   Actuarial Tables Please click here for the text description of the image. Www taxact com 2011 Actuarial Tables Please click here for the text description of the image. Www taxact com 2011 Actuarial Tables Please click here for the text description of the image. Www taxact com 2011 Actuarial tables Please click here for the text description of the image. 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Www taxact com 2011 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. Www taxact com 2011 If you make this request, you are asking for a ruling. Www taxact com 2011 User fee. Www taxact com 2011   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. Www taxact com 2011 You should call the IRS for the proper fee. Www taxact com 2011 A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. Www taxact com 2011 Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. Www taxact com 2011 O. Www taxact com 2011 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. Www taxact com 2011 When to make the request. Www taxact com 2011   Please note that requests sent between February 1 and April 15 may experience some delay. Www taxact com 2011 We process requests in the order received, and we will reply to your request as soon as we can process it. Www taxact com 2011 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. Www taxact com 2011 S. Www taxact com 2011 Individual Income Tax Return, to get an extension of time to file. Www taxact com 2011 Information you must furnish. Www taxact com 2011   You must furnish the information listed below so the IRS can comply with your request. Www taxact com 2011 Failure to furnish the information will result in a delay in processing your request. Www taxact com 2011 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. Www taxact com 2011 Copies of any documents showing distributions, annuity rates, and annuity options available to you. Www taxact com 2011 A copy of any Form 1099–R you received since your annuity began. Www taxact com 2011 A statement indicating whether you have filed your return for the year for which you are making the request. Www taxact com 2011 If you have requested an extension of time to file that return, please indicate the extension date. Www taxact com 2011 Your daytime phone number. Www taxact com 2011 Your current mailing address. Www taxact com 2011 A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. Www taxact com 2011 Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. Www taxact com 2011 A completed Tax Information Sheet (or facsimile) shown on the next page. Www taxact com 2011 Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. Www taxact com 2011 This statement must be signed by the retiree or the survivor annuitant. Www taxact com 2011 It cannot be signed by a representative. Www taxact com 2011 Tax Information Sheet Please click here for the text description of the image. Www taxact com 2011 Tax Information Sheet Please click here for the text description of the image. Www taxact com 2011 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. Www taxact com 2011 Free help with your tax return. Www taxact com 2011   You can get free help preparing your return nationwide from IRS-certified volunteers. Www taxact com 2011 The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Www taxact com 2011 The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Www taxact com 2011 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. Www taxact com 2011 In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Www taxact com 2011 To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Www taxact com 2011 gov, download the IRS2Go app, or call 1-800-906-9887. Www taxact com 2011   As part of the TCE program, AARP offers the Tax-Aide counseling program. Www taxact com 2011 To find the nearest AARP Tax-Aide site, visit AARP's website at www. Www taxact com 2011 aarp. Www taxact com 2011 org/money/taxaide or call 1-888-227-7669. Www taxact com 2011 For more information on these programs, go to IRS. Www taxact com 2011 gov and enter “VITA” in the search box. Www taxact com 2011 Internet. Www taxact com 2011    IRS. Www taxact com 2011 gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Www taxact com 2011 Download the free IRS2Go app from the iTunes app store or from Google Play. Www taxact com 2011 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. Www taxact com 2011 Check the status of your 2013 refund with the Where's My Refund? application on IRS. Www taxact com 2011 gov or download the IRS2Go app and select the Refund Status option. Www taxact com 2011 The IRS issues more than 9 out of 10 refunds in less than 21 days. Www taxact com 2011 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. Www taxact com 2011 You will also be given a personalized refund date as soon as the IRS processes your tax return and approves your refund. Www taxact com 2011 The IRS updates Where's My Refund? every 24 hours, usually overnight, so you only need to check once a day. Www taxact com 2011 Use the Interactive Tax Assistant (ITA) to research your tax questions. Www taxact com 2011 No need to wait on the phone or stand in line. Www taxact com 2011 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. Www taxact com 2011 When you reach the response screen, you can print the entire interview and the final response for your records. Www taxact com 2011 New subject areas are added on a regular basis. Www taxact com 2011  Answers not provided through ITA may be found in Tax Trails, one of the Tax Topics on IRS. Www taxact com 2011 gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Www taxact com 2011 You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Www taxact com 2011 The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Www taxact com 2011 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. Www taxact com 2011 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. Www taxact com 2011 You can also ask the IRS to mail a return or an account transcript to you. Www taxact com 2011 Only the mail option is available by choosing the Tax Records option on the IRS2Go app by selecting Mail Transcript on IRS. Www taxact com 2011 gov or by calling 1-800-908-9946. Www taxact com 2011 Tax return and tax account transcripts are generally available for the current year and the past three years. Www taxact com 2011 Determine if you are eligible for the EITC and estimate the amount of the credit with the Earned Income Tax Credit (EITC) Assistant. Www taxact com 2011 Visit Understanding Your IRS Notice or Letter to get answers to questions about a notice or letter you received from the IRS. Www taxact com 2011 If you received the First Time Homebuyer Credit, you can use the First Time Homebuyer Credit Account Look-up tool for information on your repayments and account balance. Www taxact com 2011 Check the status of your amended return using Where's My Amended Return? Go to IRS. Www taxact com 2011 gov and enter Where's My Amended Return? in the search box. Www taxact com 2011 You can generally expect your amended return to be processed up to 12 weeks from the date we receive it. Www taxact com 2011 It can take up to 3 weeks from the date you mailed it to show up in our system. Www taxact com 2011 Make a payment using one of several safe and convenient electronic payment options available on IRS. Www taxact com 2011 gov. Www taxact com 2011 Select the Payment tab on the front page of IRS. Www taxact com 2011 gov for more information. Www taxact com 2011 Determine if you are eligible and apply for an online payment agreement, if you owe more tax than you can pay today. Www taxact com 2011 Figure your income tax withholding with the IRS Withholding Calculator on IRS. Www taxact com 2011 gov. Www taxact com 2011 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. Www taxact com 2011 Determine if you might be subject to the Alternative Minimum Tax by using the Alternative Minimum Tax Assistant on IRS. Www taxact com 2011 gov. Www taxact com 2011 Request an Electronic Filing PIN by going to IRS. Www taxact com 2011 gov and entering Electronic Filing PIN in the search box. Www taxact com 2011 Download forms, instructions and publications, including accessible versions for people with disabilities. Www taxact com 2011 Locate the nearest Taxpayer Assistance Center (TAC) using the Office Locator tool on IRS. Www taxact com 2011 gov, or choose the Contact Us option on the IRS2Go app and search Local Offices. Www taxact com 2011 An employee can answer questions about your tax account or help you set up a payment plan. Www taxact com 2011 Before you visit, check the Office Locator on IRS. Www taxact com 2011 gov, or Local Offices under Contact Us on IRS2Go to confirm the address, phone number, days and hours of operation, and the services provided. Www taxact com 2011 If you have a special need, such as a disability, you can request an appointment. Www taxact com 2011 Call the local number listed in the Office Locator, or look in the phone book under United States Government, Internal Revenue Service. Www taxact com 2011 Apply for an Employer Identification Number (EIN). Www taxact com 2011 Go to IRS. Www taxact com 2011 gov and enter Apply for an EIN in the search box. Www taxact com 2011 Read the Internal Revenue Code, regulations, or other official guidance. Www taxact com 2011 Read Internal Revenue Bulletins. Www taxact com 2011 Sign up to receive local and national tax news and more by email. Www taxact com 2011 Just click on “subscriptions” above the search box on IRS. Www taxact com 2011 gov and choose from a variety of options. Www taxact com 2011    Phone. Www taxact com 2011 You can call the IRS, or you can carry it in your pocket with the IRS2Go app on your smart phone or tablet. Www taxact com 2011 Download the free IRS2Go app from the iTunes app store or from Google Play. Www taxact com 2011 Call to locate the nearest volunteer help site, 1-800-906-9887 or you can use the VITA Locator Tool on IRS. Www taxact com 2011 gov, or download the IRS2Go app. Www taxact com 2011 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. Www taxact com 2011 The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Www taxact com 2011 Mos