| Publication 17, Your Federal Income Tax |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Katrina Emergency Tax Relief Act of 2005 and Gulf Opportunity Zone Act of 2005. These Acts provide tax relief for persons affected by Hurricanes Katrina, Rita, and Wilma. You may be able to exclude from
income canceled
nonbusiness debt. See Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma.
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. This chapter discusses many kinds of income and explains
whether they are
taxable or nontaxable.
This chapter begins with discussions of the following income items.
-
Bartering.
-
Canceled debts.
-
Host or Hostess.
-
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 other income items arranged in alphabetical order.
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 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 or 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, 2007. It should show the value of cash, property,
services, credits, or scrip
you received from exchanges during 2006. The IRS also will receive a copy of Form 1099-B.
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 also will
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.
Repayment of canceled debt.
If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund
for the year the amount was
included in income. You can file a claim on Form 1040X if the statute of limitations for filing a claim is still open. The
statute of limitations
generally does not end until 3 years after the due date of your original return.
There are several exceptions to the inclusion of canceled debt in income. These are explained next.
Debt canceled as a result of Hurricane Katrina.
If your main home was in the Hurricane Katrina disaster area on August 25, 2005, you may be able to exclude from
income a nonbusiness debt
canceled after August 24, 2005, and before January 1, 2007. For more information, see Publication 525.
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 also will 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.
Education loan repayment assistance.
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, Tax Benefits for Education.
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 3 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.
If you host a party at which sales are made, any gift you receive for giving the party is a payment for helping a direct seller
make sales. You
must report it as income at its fair market value.
Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. These expenses are deductible
as miscellaneous
itemized deductions subject to the 2% of AGI limit on Schedule A (Form 1040), but only up to the amount of income you receive
for giving the party.
For more information about the 50% limit for meal and entertainment expenses, see 50% Limit in Publication 463, Travel, Entertainment,
Gift, and Car Expenses.
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.
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, qualified
long-term care services, and long-term care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury
Benefits in Publication 525.
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.
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. For more information, see Publication 559,
Survivors, Executors, and
Administrators.
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.
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 Instructions for Form 1120S.
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 also may 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 tax refund.
If you received a state or local income tax refund (or credit or offset) in 2006, 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, 2007. The IRS also
will receive a copy of
the Form 1099-G. Use the State and Local Income Tax Refund worksheet in the 2006 Form 1040 instructions for line 10 to figure
the amount (if any) to
include in your income. See Publication 525 for when you must use another worksheet.
After 2003, you could choose to deduct for a tax year either:
For 2006, the maximum refund that you may have to include in income is limited to the excess of the tax you chose
to deduct for that year over the
tax you did not choose to deduct for that year. For examples, see Publication 525.
Mortgage interest refund.
If you received a refund or credit in 2006 of mortgage interest paid in an earlier year,
the amount should be shown in box 3 of your Form 1098, Mortgage Interest Statement. Do not subtract the refund amount from
the interest you paid in
2006. 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:
Example.
For 2005, you filed a joint return. Your taxable income was $60,000 and you were not entitled to any tax credits. Your standard
deduction was
$10,000, and you had itemized deductions of $11,000. In 2006, you received the following recoveries for amounts deducted on
your 2005 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 2005. The difference between the state and local income tax
you deducted and
your local general sales tax was more than $400.
Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($11,000
- 10,000 = $1,000),
so you must include your total recoveries in your income for 2006. 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 2006 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 2005, 2004, and 2003, are in Publication 525.
Example.
You filed a joint return for 2005 with taxable income of $45,000. Your itemized deductions were $10,350. The standard deduction
that you could have
claimed was $10,000. In 2006, you recovered $2,100 of your 2005 itemized deductions. None of the recoveries were more than
the actual deductions for
2005. Include $350 of the recoveries in your 2006 income. This is the smaller of your recoveries ($2,100) or the amount by
which your itemized
deductions were more than the standard deduction ($10,350 - 10,000 = $350).
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:
Example.
During 2005 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 2006, you received a $500 reimbursement from your medical insurance for your 2005 expenses.
The only amount of
the $500 reimbursement that must be included in your income for 2006 is $200—the 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, Business Expenses, 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 36. Also enter the amount
and “ PPR” on the dotted line next to line 36.
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.
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 (as explained under Type of deduction, earlier). However,
you can choose instead 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 2006 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 2006 claiming a credit for the repaid amount. Follow these steps.
-
Figure your tax for 2006 without deducting the repaid amount.
-
Refigure your tax from the earlier year without including in income the amount you repaid in 2006.
-
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 2006 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 the credit figured
in (3) above on Form 1040,
line 70, and enter “ I.R.C. 1341” in the column to the right of line 70.
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 11.
Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income.
You generally report royalties in Part I of Schedule E (Form 1040). 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.
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.
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 5 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 2006 unemployment compensation you received in 2006, 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 2006 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 4.
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 36, and enter “ Sub-Pay TRA” and the amount on the dotted line next to line 36. 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 income on Form
1040, line 21. However, if you
contribute to a special union fund and your payments to the fund are not deductible, the unemployment benefits you receive
from the fund 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.
Alternative trade adjustment assistance (ATAA) payments.
Payments you receive from a state agency under the Demonstration Project for Alternative Trade Adjustment Assistance
for Older Workers (ATAA) must
be included in your income. The state must send you Form 1099-G to advise you of the amount you should include in income.
The amount should be
reported on Form 1040, line 21.
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 exclude this amount only 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, or
-
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.
Disaster mitigation payments.
You also can exclude from income any amount you receive that is a qualified disaster mitigation payment. Like qualified
disaster relief payments,
qualified disaster mitigation payments are also most commonly paid to you in the period immediately following damage to property
as a result of a
natural disaster. However, disaster mitigation payments are grants you use to mitigate (reduce the severity of) potential
damage from future natural
disasters. They are paid to you through state and local governments based on the provisions of the Robert T. Stafford Disaster
Relief and Emergency
Assistance Act or the National Flood Insurance Act.
You cannot increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation
payments.
If in a previous year you filed a tax return reporting disaster mitigation payments as taxable income, you should
file Form 1040X to claim a
refund. You must file an amended return for tax years that are not closed by the statute of limitations. The statute of limitations
generally does not
end until 3 years after the due date of your original return.
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 to 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.
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.
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.
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 also is 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 18.
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, unless you are figuring gain or loss from the
casualty or theft. 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, in most cases. 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.
-
Attorney fees and costs (including contingent fees) where the underlying recovery is included in gross income.
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.
Deduction for costs involved in unlawful discrimination suits.
You may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful
discrimination under
various provisions of federal, state, and local law listed in Internal Revenue Code section 62(e), a claim against the United
States government, or a
claim under section 1862(b)(3)(A) of the Social Security Act. 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.
Down payment assistance.
If you purchase a home and receive assistance from a nonprofit corporation to make the down payment, that assistance
is not included in your
income. If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift and is included
in your basis of the
house. If the corporation does not qualify, the assistance is treated as a rebate or reduction of the purchase price and is
not included in your
basis.
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).
Personal representatives.
All personal representatives must include in their gross income fees paid to them from an estate. If you are not in
the trade or business of being
an executor (for instance, you are the executor of a friend's or relative's estate), report these fees on Form 1040, line
21. If you are in the trade
or business of being an executor, report these fees as self-employment income on Schedule C or Schedule C-EZ (Form 1040).
The fee is not includible in
income if it is waived.
Notary public.
Report payments for these services on Schedule C or Schedule C-EZ (Form 1040). These payments are not
subject to self-employment tax. (See the separate instructions for Schedule SE (Form 1040) for details.)
Election precinct official.
You should receive a Form W-2 showing payments for services performed as an election
official or election worker. Report these payments on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.
Foster-care providers.
Payments you receive from a state, political subdivision, or a qualified foster care placement agency for providing
care to qualified foster
individuals in your home generally are not included in your income. However, you must include in your income payments received
for the care of more
than 5 individuals age 19 or older and certain difficulty-of-care payments.
A qualified foster individual is a person who:
-
Is living in a foster family home, and
-
Was placed there by:
-
An agency of a state or one of its political subdivisions, or
-
A qualified foster care placement agency.
Difficulty-of-care payments.
These are additional payments that are designated by the payer as compensation for providing the additional care that
is required for physically,
mentally, or emotionally handicapped qualified foster individuals. A state must determine that the additional compensation
is needed, and the care for
which the payments are made must be provided in your home.
You must include in your income difficulty-of-care payments received for more than:
Maintaining space in home.
If you are paid to maintain space in your home for emergency foster care, you must include the payment in your income.
Reporting taxable payments.
If you receive payments that you must include in your income, you are in business as a
foster-care provider and you are self-employed. Report the payments on Schedule C or Schedule C-EZ (Form 1040). See Publication
587, Business Use of
Your Home (Including Use by Daycare Providers), to help you determine the amount you can deduct for the use of your home.
Found property.
If you find and keep property that does not belong to you that has been lost or abandoned (treasure-trove), it is
taxable to you at its fair market
value in the first year it is your undisputed possession.
Free tour.
If you received a free tour from a travel agency for organizing a group of tourists, you must include its value in
your income. Report the fair
market value of the tour on Form 1040, line 21, if you are not in the trade or business of organizing tours. You cannot deduct
your expenses in
serving as the voluntary leader of the group at the group's request. If you organize tours as a trade or business, report
the tour's value on Schedule
C or Schedule C-EZ (Form 1040).
Gambling winnings.
You must include your gambling winnings in income on Form 1040, line 21. If you itemize your deductions on Schedule
A (Form 1040), you can deduct
gambling losses you had during the year, but only up to the amount of your winnings. See chapter 28 for information on recordkeeping.
Lotteries and raffles.
Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your
income the fair market value of
bonds, cars, houses, and other noncash prizes.
If you win a state lottery prize payable in installments, see Publication 525 for more information.
Form W-2G.
You may have received a Form W-2G, Certain Gambling Winnings, showing the amount of your gambling winnings and any
tax taken out of them. Include
the amount from box 1 on Form 1040, line 21. Include the amount shown in box 2 on Form 1040, line 64, as federal income tax
withheld.
Gifts and inheritances.
Generally, property you receive as a gift, bequest, or inheritance is not included in your
income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income
is taxable to you. If
property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable
to you. If the gift,
bequest, or inheritance is the income from the property, that income is taxable to you.
Inherited pension or IRA.
If you inherited a pension or an individual retirement arrangement (IRA), you may have to include part of the inherited
amount in your income. See
chapter 10 if you inherited a pension. See chapter 17 if you inherited an IRA.
Hobby losses.
Losses from a hobby are not deductible from other income. A hobby is an activity from which you do not expect to make
a profit. See Activity
not for profit, earlier.
If you collect stamps, coins, or other items as a hobby for recreation and pleasure, and you
sell any of the items, your gain is taxable as a capital gain. (See chapter 16.) However, if you sell items from your collection
at a loss, you cannot
deduct the loss.
Holocaust victims restitution.
Restitution payments you receive as a Holocaust victim (or the heir of a Holocaust victim) and interest earned on
the payments, including interest
earned on amounts held in certain escrow accounts or funds, are not taxable. You also do not include them in any computations
in which you would
ordinarily add excludable income to your adjusted gross income, such as the computation to determine the taxable part of social
security benefits. If
the payments are made in property, your basis in the property is its fair market value when you receive it.
Excludable restitution payments are payments or distributions made by any country or any other entity because of persecution
of an individual on
the basis of race, religion, physical or mental disability, or sexual orientation by Nazi Germany, any other Axis regime,
or any other Nazi-controlled
or Nazi-allied country, whether the payments are made under a law or as a result of a legal action. They include compensation
or reparation for
property losses resulting from Nazi persecution, including proceeds under insurance policies issued before and during World
War II by European
insurance companies.
Illegal income.
Illegal income, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or
on Schedule C or Schedule C-EZ
(Form 1040) if from your self-employment activity.
Indian fishing rights.
If you are a member of a qualified Indian tribe that has fishing rights secured by treaty, executive order, or an
Act of Congress as of March 17,
1988, do not include in your income amounts you receive from activities related to those fishing rights. The income is not
subject to income tax,
self-employment tax, or employment taxes.
Interest on frozen deposits.
In general, you exclude from your income the amount of interest earned on a frozen deposit. See Interest income on frozen deposits in
chapter 7.
Interest on qualified savings bonds.
You may be able to exclude from income the interest from qualified U.S. savings bonds you redeem if you pay qualified
higher educational expenses
in the same year. For more information on this exclusion, see Education Savings Bond Program under U.S. Savings Bonds in chapter
7.
Job interview expenses.
If a prospective employer asks you to appear for an interview and either pays you an allowance or reimburses you for
your transportation and other
travel expenses, the amount you receive is generally not taxable. You include in income only the amount you receive that is
more than your actual
expenses.
Jury duty.
Jury duty pay you receive must be included in your income on Form 1040, line 21, or Form 1040A, line 13. If you
must give the pay to your employer because your employer continues to pay your salary while you serve on the jury, you can
deduct the amount turned
over to your employer as an adjustment to your income. Enter the amount you repay your employer on Form 1040, line 34, or
Form 1040A, line 19.
Kickbacks.
You must include kickbacks, side commissions, push money, or similar payments you receive in your income on
Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040), if from your self-employment activity.
Example.
You sell cars and help arrange car insurance for buyers. Insurance brokers pay back part of their commissions to you for referring
customers to
them. You must include the kickbacks in your income.
Medical savings accounts (MSAs).
You generally do not include in income amounts you withdraw from your Archer MSA or Medicare
Advantage MSA if you use the money to pay for qualified medical expenses. Generally, qualified medical expenses are those
you can deduct on Schedule A
(Form 1040), Itemized Deductions. For more information about qualified medical expenses, see chapter 21. For more information
about Archer MSAs or
Medicare Advantage MSAs, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
Prizes and awards.
If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you
must include it in your income.
For example, if you win a $50 prize in a photography contest, you must report this income on Form 1040, line 21. If you refuse
to accept a prize, do
not include its value in your income.
Prizes and awards in goods or services must be included in your income at their fair market value.
Employee awards or bonuses.
Cash awards or bonuses given to you by your employer for good work or suggestions generally must be included in your
income as wages. However,
certain noncash employee achievement awards can be excluded from income. See Bonuses and awards in chapter 5.
Pulitzer, Nobel, and similar prizes.
If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational,
literary, or civic
fields, you generally must include the value of the prize in your income. However, you do not include this prize in your income
if you meet all of the
following requirements.
-
You were selected without any action on your part to enter the contest or proceeding.
-
You are not required to perform substantial future services as a condition to receiving the prize or award.
-
The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated
by
you.
See Publication 525 for more information about the conditions that apply to the transfer.
Qualified tuition programs (QTPs).
A qualified tuition program (also known as a 529 program) is a program set up to allow you to either prepay or contribute
to an account established
for paying a student's qualified higher education expenses at an eligible educational institution. A program can be established
and maintained by a
state, an agency or instrumentality of a state, or an eligible educational institution.
The part of a distribution representing the amount paid or contributed to a QTP is not included in income. This is
a return of the investment in
the program.
The beneficiary generally does not include in income any earnings distributed from a QTP if the total distribution
is less than or equal to
adjusted qualified higher education expenses. See Publication 970 for more information.
Railroad retirement annuities.
The following types of payments are treated as pension or annuity income and are taxable under the rules explained
in chapter 11.
Rewards.
If you receive a reward for providing information, include it in your income.
Sale of home.
You may be able to exclude from income all or part of any gain from the sale or exchange of a personal residence.
See chapter 15.
Sale of personal items.
If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo,
jewelry, or silverware, your gain is taxable as a capital gain. Report it on Schedule D (Form 1040). You cannot deduct a loss.
However, if you sold an item you held for investment, such as gold or silver bullion, coins, or gems,
any gain is taxable as a capital gain and any loss is deductible as a capital loss.
Example.
You sold a painting on an online auction website for $100. You bought the painting for $20 at a garage sale years ago. Report
your gain as a
capital gain on Schedule D (Form 1040).
Scholarships and fellowships.
A candidate for a degree can exclude amounts received as a qualified scholarship or fellowship. A qualified scholarship
or fellowship is any amount
you receive that is for:
-
Tuition and fees to enroll at or attend an educational institution, or
-
Fees, books, supplies, and equipment required for courses at the educational institution.
Amounts used for room and board do not qualify for the exclusion. See Publication 970 for more information on qualified scholarships
and
fellowship grants.
Payment for services.
Generally, you must include in income the part of any scholarship or fellowship that
represents payment for past, present, or future teaching, research, or other services. This applies even if all candidates
for a degree must perform
the services to receive the degree.
For information about the rules that apply to a tax-free qualified tuition reduction provided to employees and their
families by an educational
institution, see Publication 970.
VA payments.
Allowances paid by the Department of Veterans Affairs are not included in your income. These allowances are not considered
scholarship or
fellowship grants.
Prizes.
Scholarship prizes won in a contest are not scholarships or fellowships if you do not have to use the prizes for educational
purposes. You must
include these amounts in your income on Form 1040, line 21, whether or not you use the amounts for educational purposes.
Stolen property.
If you steal property, you must report its fair market value in your income in the year you steal it unless in the
same year, you return it to its
rightful owner.
Transporting school children.
Do not include in your income a school board mileage allowance for taking children to and from school if you are not
in the business of taking
children to school. You cannot deduct expenses for providing this transportation.
Union benefits and dues.
Amounts deducted from your pay for union dues, assessments, contributions, or other payments to a union cannot be
excluded from your income.
You may be able to deduct some of these payments as a miscellaneous deduction subject to the 2% of AGI limit if they
are related to your job and if
you itemize deductions on Schedule A (Form 1040). For more information, see Union Dues and Expenses in chapter 28.
Strike and lockout benefits.
Benefits paid to you by a union as strike or lockout benefits, including both cash and the fair market value of other
property, are usually
included in your income as compensation. You can exclude these benefits from your income only when the facts clearly show
that the union intended them
as gifts to you.
Utility rebates.
If you are a customer of an electric utility company and you participate in the utility's energy conservation
program, you may receive on your monthly electric bill either:
-
A reduction in the purchase price of electricity furnished to you (rate reduction), or
-
A nonrefundable credit against the purchase price of the electricity.
The amount of the rate reduction or nonrefundable credit is not included in your income.
Previous | Up | Next
Publications Index | 2006 Tax Help Archives | Tax Help Archives Main | Home
|
|
 |
