Education
loan repayment assistance. Beginning
in 2004, education loan
repayments made under the
National Health Service Corps
Loan Repayment Program (NHSC
Loan Repayment Program) or a
state education loan repayment
program eligible for funds under
the Public Health Service Act
are not taxable if you agree to
provide primary health services
in health professional shortage
areas. For more information, see
Publication 970.
Unlawful
discrimination claims. You
may be able to take a deduction
for attorney fees and court
costs paid after October 22,
2004, for actions settled or
decided after that date
involving a claim of unlawful
discrimination, a claim against
the United States Government, or
a claim made under section
1862(b)(3)(A) of the Social
Security Act, but only up to the
amount included in gross income
for the tax year from such
claim. For more information, see
Publication 525.
Health
savings accounts (HSAs). Beginning
in 2004, you may be able to make
tax-deductible contributions to
a health savings account to pay
qualified medical expenses.
Amounts from HSAs used for
qualified medical expenses are
not includible in gross income.
Amounts from HSAs not used for
qualified medical expenses are
includible in income. HSAs are
discussed in Publication 969,
Health Savings Accounts and
Other Tax-Favored Health Plans.
Smallpox
vaccine injuries. If
you are an eligible individual
who receives benefits under the
Smallpox Emergency Personnel
Protection Act of 2003 for a
covered injury resulting from a
covered countermeasure, you can
exclude the payment from your
income (to the extent it is not
allowed as a medical and dental
expense deduction on Schedule A
(Form 1040)). Eligible
individuals include health care
workers, emergency personnel,
and first responders in a
smallpox emergency, who have
received a smallpox vaccination.
Introduction
This chapter discusses many
kinds of income and explains
whether they are taxable or
nontaxable.
Income that is
taxable must be reported
on your tax return and
is subject to tax.
Income that is
nontaxable may have to
be shown on your tax
return but is not
taxable.
This chapter begins with
discussions of the following
income items.
Bartering.
Canceled debts.
Life insurance
proceeds.
Partnership income.
S Corporation
income.
Recoveries
(including state income
tax refunds).
Rents from personal
property.
Repayments.
Royalties.
Unemployment
benefits.
Welfare and other
public assistance
benefits.
These discussions are
followed by brief discussions of
many income items arranged in
alphabetical order.
You must include on your
return all income you receive in
the form of money, property, and
services unless the tax law
states that you do not include
them. Some items, however, are
only partly excluded from
income.
Useful Items - You
may want to see:
Publication
525
Taxable and Nontaxable
Income
544
Sales and Other
Dispositions of Assets
550
Investment Income and
Expenses
Bartering
Bartering is an exchange of
property or services. You must
include in your income, at the
time received, the fair market
value of property or services
you receive in bartering. If you
exchange services with another
person and you both have agreed
ahead of time as to the value of
the services, that value will be
accepted as fair market value
unless the value can be shown to
be otherwise.
Generally, you report this
income on Schedule C, Profit or
Loss From Business, or Schedule
C-EZ, Net Profit From Business
(Form 1040). However, if the
barter involves an exchange of
something other than services,
such as in
Example 3 below, you
may have to use another form or
schedule instead.
Example
1.
You are a self-employed
attorney who performs legal
services for a client, a
small corporation. The
corporation gives you shares
of its stock as payment for
your services. You must
include the fair market
value of the shares in your
income on Schedule C or
Schedule C-EZ (Form 1040) in
the year you receive them.
Example
2.
You are self-employed and
a member of a barter club.
The club uses credit
units as a means of
exchange. It adds credit
units to your account for
goods or services you
provide to members, which
you can use to purchase
goods and services offered
by other members of the
barter club. The club
subtracts credit units from
your account when you
receive goods or services
from other members. You must
include in your income the
value of the credit units
that are added to your
account, even though you may
not actually receive goods
or services from other
members until a later tax
year.
Example
3.
You own a small apartment
building. In return for 6
months rent-free use of an
apartment, an artist gives
you a work of art she
created. You must report as
rental income on Schedule E,
Supplemental Income and Loss
(Form 1040), the fair market
value of the artwork, and
the artist must report as
income on Schedule C or
Schedule C-EZ (Form 1040)
the fair rental value of the
apartment.
Form 1099-B
from barter exchange.
If you exchanged property
or services through a barter
exchange, Form 1099-B,
Proceeds From Broker and
Barter Exchange
Transactions, or a similar
statement from the barter
exchange should be sent to
you by January 31, 2005. It
should show the value of
cash, property, services,
credits, or scrip you
received from exchanges
during 2004. The IRS will
also receive a copy of Form
1099-B.
Canceled Debts
Generally, if a debt you owe
is canceled or forgiven, other
than as a gift or bequest, you
must include the canceled amount
in your income. You have no
income from the canceled debt if
it is intended as a gift to you.
A debt includes any indebtedness
for which you are liable or
which attaches to property you
hold.
If the debt is a nonbusiness
debt, report the canceled amount
on Form 1040, line 21. If it is
a business debt, report the
amount on Schedule C or Schedule
C-EZ (Form 1040) (or on Schedule
F, Profit or Loss From Farming
(Form 1040), if the debt is farm
debt and you are a farmer).
Form
1099-C.
If a Federal Government
agency, financial
institution, or credit union
cancels or forgives a debt
you owe of $600 or more, you
will receive a Form 1099-C,
Cancellation of Debt. The
amount of the canceled debt
is shown in box 2.
Interest included in
canceled debt.
If any interest is
forgiven and included in the
amount of canceled debt in
box 2, the amount of
interest will also be shown
in box 3. Whether or not you
must include the interest
portion of the canceled debt
in your income depends on
whether the interest would
be deductible if you paid
it. See
Deductible debt, under
Exceptions,
later.
If the interest would not
be deductible (such as
interest on a personal
loan), include in your
income the amount from Form
1099-C, box 2. If the
interest would be deductible
(such as on a business
loan), include in your
income the net amount of the
canceled debt (the amount
shown in box 2 less the
interest amount shown in box
3).
Discounted
mortgage loan.
If your financial
institution offers a
discount for the early
payment of your mortgage
loan, the amount of the
discount is canceled debt.
You must include the
canceled amount in your
income.
Mortgage
relief upon sale or other
disposition.
If you are personally
liable for a mortgage
(recourse debt), and you are
relieved of the mortgage
when you dispose of the
property, you may realize
gain or loss up to the fair
market value of the
property. To the extent the
mortgage discharge exceeds
the fair market value of the
property, it is income from
discharge of indebtedness
unless it qualifies for
exclusion under
Excluded debt,
later. Report any income
from discharge of
indebtedness on nonbusiness
debt that does not qualify
for exclusion as other
income on Form 1040, line
21.
If you are not personally
liable for a mortgage
(nonrecourse debt), and you
are relieved of the mortgage
when you dispose of the
property (such as through
foreclosure or
repossession), that relief
is included in the amount
you realize. You may have a
taxable gain if the amount
you realize exceeds your
adjusted basis in the
property. Report any gain on
nonbusiness property as a
capital gain.
See Foreclosures and
Repossessions in
Publication 544 for more
information.
Stockholder
debt.
If you are a stockholder
in a corporation and the
corporation cancels or
forgives your debt to it,
the canceled debt is a
constructive distribution
that is generally dividend
income to you. For more
information, see Publication
542, Corporations.
If you are a stockholder
in a corporation and you
cancel a debt owed to you by
the corporation, you
generally do not realize
income. This is because the
canceled debt is considered
as a contribution to the
capital of the corporation
equal to the amount of debt
principal that you canceled.
Exceptions
There are several
exceptions to the inclusion
of canceled debt in income.
These are explained next.
Student
loans.
Certain student loans
contain a provision that
all or part of the debt
incurred to attend the
qualified educational
institution will be
canceled if you work for
a certain period of time
in certain professions
for any of a broad class
of employers.
You do not have income
if your student loan is
canceled after you
agreed to this provision
and then performed the
services required. To
qualify, the loan must
have been made by:
The Federal
Government, a
state or local
government, or
an
instrumentality,
agency, or
subdivision
thereof,
A tax-exempt
public benefit
corporation that
has assumed
control of a
state, county,
or municipal
hospital, and
whose employees
are considered
public employees
under state law,
or
An
educational
institution:
Under an
agreement
with an
entity
described
in (1)
or (2)
that
provided
the
funds to
the
institution
to make
the
loan, or
As
part of
a
program
of the
institution
designed
to
encourage
students
to serve
in
occupations
or areas
with
unmet
needs
and
under
which
the
services
provided
are for
or under
the
direction
of a
governmental
unit or
a
tax-exempt
section
501(c)(3)
organization.
Section 501(c)(3)
organizations are
defined in Publication
525.
A loan to refinance a
qualified student loan
will also qualify if it
was made by an
educational institution
or a tax-exempt 501(a)
organization under its
program designed as
described in (3)(b)
above.
Deductible debt.
You do not have income
from the cancellation of
a debt if your payment
of the debt would be
deductible. This
exception applies only
if you use the cash
method of accounting.
For more information,
see chapter 5 of
Publication 334, Tax
Guide for Small
Business.
Price
reduced after purchase.
Generally, if the
seller reduces the
amount of debt you owe
for property you
purchased, you do not
have income from the
reduction. The reduction
of the debt is treated
as a purchase price
adjustment and reduces
your basis in the
property.
Excluded debt.
Do not include a
canceled debt in your
gross income in the
following situations.
The debt is
canceled in a
bankruptcy case
under title 11
of the U.S.
Code. See
Publication 908,
Bankruptcy Tax
Guide.
The debt is
canceled when
you are
insolvent.
However, you
cannot exclude
any amount of
canceled debt
that is more
than the amount
by which you are
insolvent. See
Publication 908.
The debt is
qualified farm
debt and is
canceled by a
qualified
person. See
chapter 4 of
Publication 225,
Farmer's Tax
Guide.
The debt is
qualified real
property
business debt.
See chapter 5 of
Publication 334.
The
cancellation is
intended as a
gift.
Education Loan
Repayment Assistance
Beginning in 2004, education
loan repayments made to you by
the National Health Service
Corps Loan Repayment Program
(NHSC Loan Repayment Program) or
a state education loan repayment
program eligible for funds under
the Public Health Service Act
are not taxable if you agree to
provide primary health services
in health professional shortage
areas. For more information, see
Publication 970.
Life Insurance
Proceeds
Life insurance proceeds paid
to you because of the death of
the insured person are not
taxable unless the policy was
turned over to you for a price.
This is true even if the
proceeds were paid under an
accident or health insurance
policy or an endowment contract.
Proceeds
not received in
installments. If death
benefits are paid to you in
a lump sum or other than at
regular intervals, include
in your income only the
benefits that are more than
the amount payable to you at
the time of the insured
person's death. If the
benefit payable at death is
not specified, you include
in your income the benefit
payments that are more than
the present value of the
payments at the time of
death.
Proceeds
received in installments.
If you receive life
insurance proceeds in
installments, you can
exclude part of each
installment from your
income.
To determine the excluded
part, divide the amount held
by the insurance company
(generally the total lump
sum payable at the death of
the insured person) by the
number of installments to be
paid. Include anything over
this excluded part in your
income as interest.
Surviving spouse.
If your spouse died before
October 23, 1986, and
insurance proceeds paid to
you because of the death of
your spouse are received in
installments, you can
exclude up to $1,000 a year
of the interest included in
the installments. If you
remarry, you can continue to
take the exclusion.
More
information. For
more information, see
Life Insurance Proceeds in Publication 525.
Surrender
of policy for cash.
If you surrender a life
insurance policy for cash,
you must include in income
any proceeds that are more
than the cost of the life
insurance policy. In
general, your cost (or
investment in the contract)
is the total of premiums
that you paid for the life
insurance policy, less any
refunded premiums, rebates,
dividends, or unrepaid loans
that were not included in
your income.
You should receive a
Form 1099-R showing the
total proceeds and the
taxable part. Report these
amounts on lines 16a and 16b
of Form 1040 or lines 12a
and 12b of Form 1040A.
Endowment
Contract
Proceeds
An endowment contract is
a policy under which you are
paid a specified amount of
money on a certain date
unless you die before that
date, in which case, the
money is paid to your
designated beneficiary.
Endowment proceeds paid in a
lump sum to you at maturity
are taxable only if the
proceeds are more than the
cost of the policy. To
determine your cost,
subtract any amount that you
previously received under
the contract and excluded
from your income from the
total premiums (or other
consideration) paid for the
contract. Include the part
of the lump sum payment that
is more than your cost in
your income.
Public
Safety Officer
Killed in the
Line of Duty
If you are a survivor of
a public safety officer who
was killed in the line of
duty, you may be able to
exclude from income certain
amounts you receive.
For this purpose, the
term public safety officer
includes law enforcement
officers, firefighters,
chaplains, and rescue squad
and ambulance crew members.
See Publication 559 for more
information.
Accelerated
Death Benefits
Certain amounts paid as
accelerated death benefits
under a life insurance
contract or viatical
settlement before the
insured's death are excluded
from income if the insured
is terminally or chronically
ill.
Viatical settlement.
This is the sale or
assignment of any part
of the death benefit
under a life insurance
contract to a viatical
settlement provider. A
viatical settlement
provider is a person who
regularly engages in the
business of buying or
taking assignment of
life insurance contracts
on the lives of insured
individuals who are
terminally or
chronically ill and who
meets the requirements
of section 101(g)(2)(B)
of the Internal Revenue
Code.
Exclusion for terminal
illness.Accelerated death
benefits are fully
excludable if the
insured is a terminally
ill individual. This is
a person who has been
certified by a physician
as having an illness or
physical condition that
can reasonably be
expected to result in
death within 24 months
from the date of the
certification.
Exclusion for chronic
illness.If the insured is a
chronically ill
individual who is not
terminally ill,
accelerated death
benefits paid on the
basis of costs incurred
for qualified long-term
care services are fully
excludable. Accelerated
death benefits paid on a
per diem
or other periodic basis
are excludable up to a
limit. This limit
applies to the total of
the accelerated death
benefits and any
periodic payments
received from long-term
care insurance
contracts. For
information on the limit
and the definitions of
chronically ill
individual and long-term
care insurance
contracts, see
Long-Term Care
Insurance Contracts under
Sickness and Injury
Benefits in
chapter 6.
Exception. The
exclusion does not apply
to any amount paid to a
person (other than the
insured) who has an
insurable interest in
the life of the insured
because the insured:
Is a
director,
officer, or
employee of the
person, or
Has a
financial
interest in the
person's
business.
Form
8853.
To claim an exclusion
for accelerated death
benefits made on a
per diem
or other periodic basis,
you must file Form 8853,
Archer MSAs and
Long-term Care Insurance
Contracts, with your
return. You do not have
to file Form 8853 to
exclude accelerated
death benefits paid on
the basis of actual
expenses incurred.
Partnership Income
A partnership generally is
not a taxable entity. The
income, gains, losses,
deductions, and credits of a
partnership are passed through
to the partners based on each
partner's distributive share of
these items.
Schedule
K-1 (Form 1065).Although a partnership
generally pays no tax, it
must file an information
return on Form 1065, U.S.
Return of Partnership
Income, and send Schedule
K-1 (Form 1065) to each
partner. In addition, the
partnership will send each
partner a copy of the
Partner's Instructions for
Schedule K-1 (Form 1065) to
help each partner report his
or her share of the
partnership's income,
deductions, credits, and tax
preference items.
Keep Schedule K-1 (Form
1065) for your records. Do not
attach it to your Form 1040.
For more information on
partnerships, see Publication
541, Partnerships.
S
Corporation Income
In general, an S corporation
does not pay tax on its income.
Instead, the income, losses,
deductions, and credits of the
corporation are passed through
to the shareholders based on
each shareholder's
pro
rata share.
Schedule
K-1 (Form 1120S).
An S corporation must file
a return on Form 1120S, U.S.
Income Tax Return for an S
Corporation, and send
Schedule K-1 (Form 1120S) to
each shareholder. In
addition, the S corporation
will send each shareholder a
copy of the Shareholder's
Instructions for Schedule
K-1 (Form 1120S) to help
each shareholder report his
or her share of the S
corporation's income,
losses, credits, and
deductions.
Keep Schedule K-1 (Form
1120S) for your records. Do not
attach it to your Form 1040.
For more information on S
corporations and their
shareholders, see the
instructions for Form 1120S.
Recoveries
A recovery is a return of an
amount you deducted or took a
credit for in an earlier year.
The most common recoveries are
refunds, reimbursements, and
rebates of deductions itemized
on Schedule A (Form 1040). You
may also have recoveries of
non-itemized deductions (such as
payments on previously deducted
bad debts) and recoveries of
items for which you previously
claimed a tax credit.
Tax benefit
rule. You must include
a recovery in your income in
the year you receive it up
to the amount by which the
deduction or credit you took
for the recovered amount
reduced your tax in the
earlier year. For this
purpose, any increase to an
amount carried over to the
current year that resulted
from the deduction or credit
is considered to have
reduced your tax in the
earlier year. For more
information, see Publication
525.
Federal
income tax refund.
Refunds of federal income
taxes are not included in
your income because they are
never allowed as a deduction
from income.
State
income tax refund.If you received a state
or local income tax refund
(or credit or offset) in
2004, you generally must
include it in income if you
deducted the tax in an
earlier year. The payer
should send Form 1099-G,
Certain Government Payments,
to you by January 31, 2005.
The IRS will also receive a
copy of the Form 1099-G. Use
the State and Local Income
Tax Refund Worksheet in the
2004 Form 1040 Instructions
for line 10 to figure the
amount (if any) to include
in your income.
Mortgage
interest refund.If you received a refund
or credit in 2004 of
mortgage interest paid in an
earlier year, the amount
should be shown on your Form
1098, box 3, Mortgage
Interest Statement. Do not
subtract the refund amount
from the interest you paid
in 2004. You may have to
include it in your income
under the rules explained in
the following discussions.
Interest on
recovery.
Interest on any of the
amounts you recover must be
reported as interest income
in the year received. For
example, report any interest
you received on state or
local income tax refunds on
Form 1040, line 8a.
Recovery
and expense in same year.
If the refund or other
recovery and the expense
occur in the same year, the
recovery reduces the
deduction or credit and is
not reported as income.
Recovery
for 2 or more years.
If you receive a refund or
other recovery that is for
amounts you paid in 2 or
more separate years, you
must allocate, on a
pro rata basis,
the recovered amount between
the years in which you paid
it. This allocation is
necessary to determine the
amount of recovery from any
earlier years and to
determine the amount, if
any, of your allowable
deduction for this item for
the current year. For
information on how to
compute the allocation, see
Recoveries in
Publication 525.
Itemized
Deduction
Recoveries
If you recover any amount
that you deducted in an
earlier year on Schedule A
(Form 1040), you generally
must include the full amount
of the recovery in your
income in the year you
receive it.
Where
to report.
Enter your state or
local income tax refund
on Form 1040, line 10,
and the total of all
other recoveries as
other income on Form
1040, line 21. You
cannot use Form 1040A or
Form 1040EZ.
Standard deduction
limit. You
generally are allowed to
claim the standard
deduction if you do not
itemize your deductions.
Only your itemized
deductions that are more
than your standard
deduction are subject to
the recovery rule
(unless you are required
to itemize your
deductions). If your
total deductions on the
earlier year return were
not more than your
income for that year,
include in your income
this year the lesser of:
Your
recoveries, or
The amount
by which your
itemized
deductions
exceeded the
standard
deduction.
Example.
For 2003, you
filed a joint
return. Your taxable
income was $60,000
and you were not
entitled to any tax
credits. Your
standard deduction
was $9,500, and you
had itemized
deductions of
$11,000. In 2004,
you received the
following recoveries
for amounts deducted
on your 2003 return:
Medical
expenses
$200
State
and
local
income
tax
refund
400
Refund
of
mortgage
interest
325
Total
recoveries
$925
None of the
recoveries were more
than the deductions
taken for 2003.
Your total
recoveries are less
than the amount by
which your itemized
deductions exceeded
the standard
deduction ($11,000 -
9,500 = $1,500), so
you must include
your total
recoveries in your
income for 2004.
Report the state and
local income tax
refund of $400 on
Form 1040, line 10,
and the balance of
your recoveries,
$525, on Form 1040,
line 21.
Standard deduction for
earlier years. To
determine if amounts
recovered in 2004 must
be included in your
income, you must know
the standard deduction
for your filing status
for the year the
deduction was claimed.
Standard deduction
amounts for 2003, 2002,
and 2001 are in
Publication 525.
Example.
You filed a joint
return for 2003 with
taxable income of
$45,000. Your
itemized deductions
were $10,350. The
standard deduction
that you could have
claimed was $9,500.
In 2004 you
recovered $2,400 of
your 2003 itemized
deductions. None of
the recoveries were
more than the actual
deductions for 2003.
Include $850 of the
recoveries in your
2004 income. This is
the smaller of your
recoveries ($2,400)
or the amount by
which your itemized
deductions were more
than the standard
deduction ($10,350 -
9,500 = $850).
Recovery limited to
deduction. You do
not include in your
income any amount of
your recovery that is
more than the amount you
deducted in the earlier
year. The amount you
include in your income
is limited to the
smaller of:
The amount
deducted on
Schedule A (Form
1040), or
The amount
recovered.
Example.
During 2003 you
paid $1,700 for
medical expenses.
From this amount you
subtracted $1,500,
which was 7.5% of
your adjusted gross
income. Your actual
medical expense
deduction was $200.
In 2004, you
received a $500
reimbursement from
your medical
insurance for your
2003 expenses. The
only amount of the
$500 reimbursement
that must be
included in your
income for 2004 is
$200the amount
actually deducted.
Other
recoveries. See
Recoveries in Publication
525 if:
You have
recoveries of
items other than
itemized
deductions, or
You received
a recovery for
an item for
which you
claimed a tax
credit (other
than investment
credit or
foreign tax
credit) in a
prior year.
Rents from Personal
Property
If you rent out personal
property, such as equipment or
vehicles, how you report your
income and expenses is generally
determined by:
Whether or not the
rental activity is a
business, and
Whether or not the
rental activity is
conducted for profit.
Generally, if your primary
purpose is income or profit and
you are involved in the rental
activity with continuity and
regularity, your rental activity
is a business. See Publication
535 for details on deducting
expenses for both business and
not-for-profit activities.
Reporting
business income and
expenses.If you are in the
business of renting personal
property, report your income
and expenses on Schedule C
or Schedule C-EZ (Form
1040). The form instructions
have information on how to
complete them.
Reporting
nonbusiness income. If
you are not in the business
of renting personal
property, report your rental
income on Form 1040, line
21. List the type and amount
of the income on the dotted
line next to line 21.
Reporting
nonbusiness expenses.
If you rent personal
property for profit, include
your rental expenses in the
total amount you enter on
Form 1040, line 35. Also
enter the amount and PPR
on the dotted line next to
line 35.
If you do not rent
personal property for
profit, your deductions are
limited and you cannot
report a loss to offset
other income. See
Activity not for profit,
under
Other Income,
later.
Repayments
If you had to repay an
amount that you included in your
income in an earlier year, you
may be able to deduct the amount
repaid from your income for the
year in which you repaid it. Or,
if the amount you repaid is more
than $3,000, you may be able to
take a credit against your tax
for the year in which you repaid
it. Generally, you can claim a
deduction or credit only if the
repayment qualifies as an
expense or loss incurred in your
trade or business or in a
for-profit transaction.
Type of
deduction. The type of
deduction you are allowed in
the year of repayment
depends on the type of
income you included in the
earlier year. You generally
deduct the repayment on the
same form or schedule on
which you previously
reported it as income. For
example, if you reported it
as self-employment income,
deduct it as a business
expense on Schedule C or
Schedule C-EZ (Form 1040) or
Schedule F (Form 1040). If
you reported it as a capital
gain, deduct it as a capital
loss on Schedule D (Form
1040). If you reported it as
wages, unemployment
compensation, or other
nonbusiness income, deduct
it as a miscellaneous
itemized deduction on
Schedule A (Form 1040).
Repayment
of $3,000 or less. If
the amount you repaid was
$3,000 or less, deduct it
from your income in the year
you repaid it. If you must
deduct it as a miscellaneous
itemized deduction, enter it
on Schedule A (Form 1040),
line 22.
Repayment
over $3,000. If the
amount you repaid was more
than $3,000, you can deduct
the repayment (see
Type of deduction,
earlier). However, you can
instead choose to take a tax
credit for the year of
repayment if you included
the income under a claim of
right. This means that at
the time you included the
income, it appeared that you
had an unrestricted right to
it. If you qualify for this
choice, figure your tax
under both methods and
compare the results. Use the
method (deduction or credit)
that results in less tax.
Method
1. Figure your
tax for 2004 claiming a
deduction for the repaid
amount. If you must deduct
it as a miscellaneous
itemized deduction, enter it
on Schedule A (Form 1040),
line 27.
Method
2. Figure your
tax for 2004 claiming a
credit for the repaid
amount. Follow these steps.
Figure your tax
for 2004 without
deducting the repaid
amount.
Refigure your
tax from the earlier
year without
including in income
the amount you
repaid in 2004.
Subtract the tax
in (2) from the tax
shown on your return
for the earlier
year. This is the
credit.
Subtract the
answer in (3) from
the tax for 2004
figured without the
deduction (Step 1).
If method 1 results in
less tax, deduct the amount
repaid. If method 2 results
in less tax, claim a credit
for the amount repaid on
Form 1040, line 69, and
enter I.R.C.
1341 next to line
69.
An example of this
computation can be found in
Publication 525.
Repaid
social security benefits.
If you repaid social
security benefits, see
Repayment of benefits in chapter 12.
Royalties
Royalties from copyrights,
patents, and oil, gas, and
mineral properties are taxable
as ordinary income.
You generally report
royalties on Schedule E (Form
1040), Part I. However, if you
hold an operating oil, gas, or
mineral interest or are in
business as a self-employed
writer, inventor, artist, etc.,
report your income and expenses
on Schedule C or Schedule C-EZ
(Form 1040).
Copyrights
and patents.
Royalties from copyrights
on literary, musical, or
artistic works, and similar
property, or from patents on
inventions, are amounts paid
to you for the right to use
your work over a specified
period of time. Royalties
generally are based on the
number of units sold, such
as the number of books,
tickets to a performance, or
machines sold.
Oil, gas,
and minerals.
Royalty income from oil,
gas, and mineral properties
is the amount you receive
when natural resources are
extracted from your
property. The royalties are
based on units, such as
barrels, tons, etc., and are
paid to you by a person or
company who leases the
property from you.
Depletion.
If you are the owner of an
economic interest in mineral
deposits or oil and gas
wells, you can recover your
investment through the
depletion allowance. For
information on this subject,
see chapter 10 of
Publication 535, Business
Expenses.
Coal
and iron ore.
Under certain
circumstances, you can treat
amounts you receive from the
disposal of coal and iron
ore as payments from the
sale of a capital asset,
rather than as royalty
income. For information
about gain or loss from the
sale of coal and iron ore,
see Publication 544.
Sale of
property interest.
If you sell your complete
interest in oil, gas, or
mineral rights, the amount
you receive is considered
payment for the sale of
section 1231 property, not
royalty income. Under
certain circumstances, the
sale is subject to capital
gain or loss treatment on
Schedule D (Form 1040). For
more information on selling
section 1231 property, see
chapter 3 of Publication
544.
If you retain a royalty,
an overriding royalty, or a
net profit interest in a
mineral property for the
life of the property, you
have made a lease or a
sublease, and any cash you
receive for the assignment
of other interests in the
property is ordinary income
subject to a depletion
allowance.
Part of
future production sold.
If you own mineral
property but sell part of
the future production, you
generally treat the money
you receive from the buyer
at the time of the sale as a
loan from the buyer. Do not
include it in your income or
take depletion based on it.
When production begins,
you include all the proceeds
in your income, deduct all
the production expenses, and
deduct depletion from that
amount to arrive at your
taxable income from the
property.
Unemployment
Benefits
The tax treatment of
unemployment benefits you
receive depends on the type of
program paying the benefits.
Unemployment compensation.You must include in your
income all unemployment
compensation you receive.
You should receive a Form
1099-G, Certain Government
Payments, showing the amount
paid to you. Generally, you
enter unemployment
compensation on line 19 of
Form 1040, line 13 of Form
1040A, or line 3 of Form
1040EZ.
Types
of unemployment
compensation.
Unemployment compensation
generally includes any
amount received under an
unemployment compensation
law of the United States or
of a state. It includes the
following benefits.
Benefits paid by
a state or the
District of Columbia
from the Federal
Unemployment Trust
Fund.
State
unemployment
insurance benefits.
Railroad
unemployment
compensation
benefits.
Disability
payments from a
government program
paid as a substitute
for unemployment
compensation.
(Amounts received as
workers'
compensation for
injuries or illness
are not unemployment
compensation. See
chapter 6 for more
information.)
Trade
readjustment
allowances under the
Trade Act of 1974.
Unemployment
assistance under the
Disaster Relief and
Emergency Assistance
Act.
Governmental program.
If you contribute to a
governmental unemployment
compensation program and
your contributions are not
deductible, amounts you
receive under the program
are not included as
unemployment compensation
until you recover your
contributions.
Repayment of unemployment
compensation.
If you repaid in 2004
unemployment compensation
you received in 2004,
subtract the amount you
repaid from the total amount
you received and enter the
difference on line 19 of
Form 1040, line 13 of Form
1040A, or line 3 of Form
1040EZ. On the dotted line
next to your entry enter Repaid
and the amount you repaid.
If you repaid unemployment
compensation in 2004 that
you included in income in an
earlier year, you can deduct
the amount repaid on
Schedule A (Form 1040), line
22, if you itemize
deductions. If the amount is
more than $3,000, see
Repayments,
earlier.
Tax
withholding.
You can choose to have
federal income tax withheld
from your unemployment
compensation. To make this
choice, complete Form W-4V,
Voluntary Withholding
Request, and give it to the
paying office. Tax will be
withheld at 10% of your
payment.
If you do not choose to
have tax withheld from your
unemployment compensation,
you may be liable for
estimated tax. For more
information on estimated
tax, see chapter 5.
Supplemental unemployment
benefits.
Benefits received from an
employer-financed fund (to
which the employees did not
contribute) are not
unemployment compensation.
They are taxable as wages
and are subject to
withholding for income tax.
They may be subject to
social security and Medicare
taxes. For more information,
see Supplemental
Unemployment Benefits
in section 5 of Publication
15-A, Employer's
Supplemental Tax Guide.
Report these payments on
line 7 of Form 1040 or Form
1040A or on line 1 of Form
1040EZ.
Repayment of benefits.
You may have to repay some
of your supplemental
unemployment benefits to
qualify for trade
readjustment allowances
under the Trade Act of 1974.
If you repay supplemental
unemployment benefits in the
same year you receive them,
reduce the total benefits by
the amount you repay. If you
repay the benefits in a
later year, you must include
the full amount of the
benefits received in your
income for the year you
received them.
Deduct the repayment in
the later year as an
adjustment to gross income
on Form 1040. (You cannot
use Form 1040A or Form
1040EZ.) Include the
repayment on Form 1040, line
35, and enter Sub-Pay
TRA and the amount
on the dotted line next to
line 35. If the amount you
repay in a later year is
more than $3,000, you may be
able to take a credit
against your tax for the
later year instead of
deducting the amount repaid.
For more information on
this, see
Repayments,
earlier.
Private
unemployment fund.
Unemployment benefit
payments from a private
(nonunion) fund to which you
voluntarily contribute are
taxable only if the amounts
you receive are more than
your total payments into the
fund. Report the taxable
amount on Form 1040, line
21.
Payments by
a union.
Benefits paid to you as an
unemployed member of a union
from regular union dues are
included in your gross
income on Form 1040, line
21. However, if the
unemployment benefits are
paid from a special fund to
which you contributed, your
payments to the fund are not
deductible, and the benefit
payments are includible in
your income only to the
extent they are more than
your contributions.
Guaranteed
annual wage. Payments
you receive from your
employer during periods of
unemployment, under a union
agreement that guarantees
you full pay during the
year, are taxable as wages.
Include them on line 7 of
Form 1040 or Form 1040A or
on line 1 of Form 1040EZ.
State
employees.
Payments similar to a
state's unemployment
compensation may be made by
the state to its employees
who are not covered by the
state's unemployment
compensation law. Although
the payments are fully
taxable, do not report them
as unemployment
compensation. Report these
payments on Form 1040, line
21.
Welfare and Other
Public Assistance
Benefits
Do not include in your income
governmental benefit payments
from a public welfare fund based
upon need, such as payments due
to blindness. Payments from a
state fund for the victims of
crime should not be included in
the victims' incomes if they are
in the nature of welfare
payments. Do not deduct medical
expenses that are reimbursed by
such a fund. You must include in
your income any welfare payments
that are compensation for
services or that are obtained
fraudulently.
Persons
with disabilities.
If you have a disability,
you must include in income
compensation you receive for
services you perform unless
the compensation is
otherwise excluded. However,
you do not include in income
the value of goods,
services, and cash that you
receive, not in return for
your services, but for your
training and rehabilitation
because you have a
disability. Excludable
amounts include payments for
transportation and attendant
care, such as interpreter
services for the deaf,
reader services for the
blind, and services to help
mentally retarded persons do
their work.
Disaster
relief grants.Do not include
post-disaster grants
received under the Disaster
Relief and Emergency
Assistance Act in your
income if the grant payments
are made to help you meet
necessary expenses or
serious needs for medical,
dental, housing, personal
property, transportation, or
funeral expenses. Do not
deduct casualty losses or
medical expenses that are
specifically reimbursed by
these disaster relief
grants. Unemployment
assistance payments under
the Act are taxable
unemployment compensation.
See Unemployment
compensation
under Unemployment Benefits,
earlier.
Disaster
relief payments.
You can exclude from
income any amount you
receive that is a qualified
disaster relief payment. A
qualified disaster relief
payment is an amount paid to
you:
To reimburse or
pay reasonable and
necessary personal,
family, living, or
funeral expenses
that result from a
qualified disaster,
To reimburse or
pay reasonable and
necessary expenses
incurred for the
repair or
rehabilitation of
your home or repair
or replacement of
its contents to the
extent it is due to
a qualified
disaster,
By a person
engaged in the
furnishing or sale
of transportation as
a common carrier
because of the death
or personal physical
injuries incurred as
a result of a
qualified disaster,
or
By a federal,
state, or local
government, or
agency, or
instrumentality in
connection with a
qualified disaster
in order to promote
the general welfare.
You can only exclude this
amount to the extent any
expense it pays for is not
paid for by insurance or
otherwise. The exclusion
does not apply if you were a
participant or conspirator
in a terrorist action or his
or her representative.
A qualified disaster is:
A disaster which
results from a
terrorist or
military action.
A Presidentially
declared disaster.
A disaster which
results from an
accident involving a
common carrier, or
from any other
event, which is
determined to be
catastrophic by the
Secretary of the
Treasury or his or
her delegate.
For amounts paid under
item (4), a disaster is
qualified if it is
determined by an applicable
federal, state, or local
authority to warrant
assistance from the federal,
state, or local government,
agency, or instrumentality.
Mortgage
assistance payments.
Payments made under
section 235 of the National
Housing Act for mortgage
assistance are not included
in the homeowner's income.
Interest paid for the
homeowner under the mortgage
assistance program cannot be
deducted.
Medicare.
Medicare benefits received
under title XVIII of the
Social Security Act are not
includible in the gross
income of the individuals
for whom they are paid. This
includes basic (part A
(Hospital Insurance Benefits
for the Aged)) and
supplementary (part B
(Supplementary Medical
Insurance Benefits for the
Aged)).
Old-age,
survivors, and disability
insurance benefits (OASDI).
OASDI payments under
section 202 of title II of
the Social Security Act are
not includible in the gross
income of the individuals
for whom they are paid. This
applies to old-age insurance
benefits, and insurance
benefits for wives,
husbands, children, widows,
widowers, mothers and
fathers, and parents, as
well as the lump-sum death
payment.
Payments to
reduce cost of winter
energy.
Payments made by a state
to qualified people to
reduce their cost of winter
energy use are not taxable.
Nutrition
Program for the Elderly.Food benefits you
receive under the Nutrition
Program for the Elderly are
not taxable. If you prepare
and serve free meals for the
program, include in your
income as wages the cash pay
you receive, even if you are
also eligible for food
benefits.
Other Income
The following brief
discussions are arranged in
alphabetical order. Income items
that are discussed in greater
detail in another publication
include a reference to that
publication.
Activity
not for profit.
You must include on your
return income from an
activity from which you do
not expect to make a profit.
An example of this type of
activity is a hobby or a
farm you operate mostly for
recreation and pleasure.
Enter this income on Form
1040, line 21. Deductions
for expenses related to the
activity are limited. They
cannot total more than the
income you report and can be
taken only if you itemize
deductions on Schedule A
(Form 1040). See
Not-for-Profit Activities
in chapter 1 of
Publication 535 for
information on whether an
activity is considered
carried on for a profit.
Alaska
Permanent Fund dividend.
If you received a payment
from Alaska's mineral income
fund (Alaska Permanent Fund
dividend), report it as
income on line 21 of Form
1040, line 13 of Form 1040A,
or line 3 of Form 1040EZ.
The state of Alaska sends
each recipient a document
that shows the amount of the
payment with the check. The
amount is also reported to
IRS.
Alimony.
Include in your income on
Form 1040, line 11, any
alimony payments you
receive. Amounts you receive
for child support are not
income to you. Alimony and
child support payments are
discussed in chapter 20.
Bribes.
If you receive a bribe,
include it in your income.
Campaign
contributions.
These contributions are
not income to a candidate
unless they are diverted to
his or her personal use. To
be exempt from tax, the
contributions must be spent
for campaign purposes or
kept in a fund for use in
future campaigns. However,
interest earned on bank
deposits, dividends received
on contributed securities,
and net gains realized on
sales of contributed
securities are taxable and
must be reported on Form
1120-POL, U.S. Income Tax
Return for Certain Political
Organizations. Excess
campaign funds transferred
to an office account must be
included in the
officeholder's income on
Form 1040, line 21, in the
year transferred.
Cash
rebates.
A cash rebate you receive
from a dealer or
manufacturer of an item you
buy is not income, but you
must reduce your basis by
the amount of the rebate.
Example.
You buy a new car for
$9,000 cash and receive
a $400 rebate check from
the manufacturer. The
$400 is not income to
you. Your basis in the
car is $8,600. This is
your basis on which you
figure gain or loss if
you sell the car, and
depreciation if you use
it for business.
Casualty
insurance and other
reimbursements.
You generally should not
report these reimbursements
on your return. See
Publication 547, Casualties,
Disasters, and Thefts, for
more information.
Child
support payments.
You should not report
these payments on your
return. See Publication 504,
Divorced or Separated
Individuals, for more
information.
Court
awards and damages.
To determine if settlement
amounts you receive by
compromise or judgment must
be included in your income,
you must consider the item
that the settlement
replaces. Include the
following as ordinary
income.
Interest on any
award.
Compensation for
lost wages or lost
profits in most
cases.
Punitive
damages. It does not
matter if they
relate to a physical
injury or physical
sickness.
Amounts received
in settlement of
pension rights (if
you did not
contribute to the
plan).
Damages for:
Patent
or copyright
infringement,
Breach
of contract,
or
Interference
with
business
operations.
Back pay and
damages for
emotional distress
received to satisfy
a claim under Title
VII of the Civil
Rights Act of 1964.
Do not include in your
income compensatory damages
for personal physical injury
or physical sickness
(whether received in a lump
sum or installments).
Emotional distress.
Emotional distress itself
is not a physical injury or
physical sickness, but
damages you receive for
emotional distress due to a
physical injury or sickness
are treated as received for
the physical injury or
sickness. Do not include
them in your income.
If the emotional distress
is due to a personal injury
that is not due to a
physical injury or sickness
(for example, employment
discrimination or injury to
reputation), you must
include the damages in your
income, except for any
damages you receive for
medical care due to that
emotional distress.
Emotional distress includes
physical symptoms that
result from emotional
distress, such as headaches,
insomnia, and stomach
disorders.
Unlawful discrimination
claims. You may
be able to take a deduction
for attorney fees and court
costs paid after October 22,
2004, for actions settled or
decided after that date
involving a claim of
unlawful discrimination, a
claim against the United
States Government, or a
claim made under section
1862(b)(3)(A) of the Social
Security Act, but only up to
the amount included in gross
income for the tax year from
such claim. For more
information, see Publication
525.
Credit card
insurance.
Generally, if you receive
benefits under a credit card
disability or unemployment
insurance plan, the benefits
are taxable to you. These
plans make the minimum
monthly payment on your
credit card account if you
cannot make the payment due
to injury, illness,
disability, or unemployment.
Report on Form 1040, line
21, the amount of benefits
you received during the year
that is more than the amount
of the premiums you paid
during the year.
Employment
agency fees.
If you get a job through
an employment agency, and
the fee is paid by your
employer, the fee is not
includible in your income if
you are not liable for it.
However, if you pay it and
your employer reimburses you
for it, it is includible in
your income.
Energy
conservation subsidies.
You can exclude from gross
income any subsidy provided,
either directly or
indirectly, by public
utilities for the purchase
or installation of an energy
conservation measure for a
dwelling unit.
Energy
conservation measure.
This includes
installations or
modifications that are
primarily designed to reduce
consumption of electricity
or natural gas, or improve
the management of energy
demand.
Dwelling unit.
This includes a house,
apartment, condominium,
mobile home, boat, or
similar property. If a
building or structure
contains both dwelling and
other units, any subsidy
must be properly allocated.
Estate and
trust income.An estate or trust,
unlike a partnership, may
have to pay federal income
tax. If you are a
beneficiary of an estate or
trust, you may be taxed on
your share of its income
distributed or required to
be distributed to you.
However, there is never a
double tax. Estates and
trusts file their returns on
Form 1041, U.S. Income Tax
Return for Estates and
Trusts, and your share of
the income is reported to
you on Schedule K-1 (Form
1041).
Current
income required to be
distributed.
If you are the beneficiary
of an estate or trust that
must distribute all of its
current income, you must
report your share of the
distributable net income,
whether or not you actually
received it.
Current
income not required to be
distributed.If you are the
beneficiary of an estate or
trust and the fiduciary has
the choice of whether to
distribute all or part of
the current income, you must
report:
All income that
is required to be
distributed to you,
whether or not it is
actually
distributed, plus
All other
amounts actually
paid or credited to
you,
up to the amount of your
share of distributable net
income.
How to
report. Treat
each item of income the same
way that the estate or trust
would treat it. For example,
if a trust's dividend income
is distributed to you, you
report the distribution as
dividend income on your
return. The same rule
applies to distributions of
tax-exempt interest and
capital gains.
The fiduciary of the
estate or trust must tell
you the type of items making
up your share of the estate
or trust income and any
credits you are allowed on
your individual income tax
return.
Losses.
Losses of estates and
trusts generally are not
deductible by the
beneficiaries.
Grantor
trust.
Income earned by a grantor
trust is taxable to the
grantor, not the
beneficiary, if the grantor
keeps certain control over
the trust. (The grantor is
the one who transferred
property to the trust.) This
rule applies if the property
(or income from the
property) put into the trust
will or may revert (be
returned) to the grantor or
the grantor's spouse.
Generally, a trust is a
grantor trust if the grantor
has a reversionary interest
valued (at the date of
transfer) at more than 5% of
the value of the transferred
property.
Expenses
paid by another.
If your personal expenses
are paid for by another
person, such as a
corporation, the payment may
be taxable to you depending
upon your relationship with
that person and the nature
of the payment. But if the
payment makes up for a loss
caused by that person, and
only restores you to the
position you were in before
the loss, the payment is not
includible in your income.
Fees for
services.
Include all fees for your
services in your income.
Examples of these fees are
amounts you receive for
services you perform as:
A corporate
director,
An executor,
administrator, or
personal
representative of an
estate,
A notary public,
or
An election
precinct official.
Nonemployee compensation.
If you are not an employee
and the fees for your
services from the same payer
total $600 or more for the
year, you may receive a Form
1099-MISC. You may need to
report your fees as
self-employment income. See
Self-Employed Persons, in chapter 1, for a
discussion of when you are
considered self-employed.
Corporate director.
Corporate director fees
are self-employment income.
Report these payments on
Schedule C or Schedule C-EZ
(Form 1040).
Executor, administrator, or
personal representative of
an estate.
All personal
representatives must include
in their gross income fees
paid to them from an estate.
If you are not in the trade
