| Publication 554 |
2008 Tax Year |
2.
Taxable and Nontaxable Income
Generally, income is taxable unless it is specifically exempt (not taxed) by law. Your taxable income may include compensation
for services, interest, dividends, rents, royalties, income from partnerships, estate or trust income, gain from sales or
exchanges of property, and business income of all kinds.
Under special provisions of the law, certain items are partially or fully exempt from tax. Provisions that are of special
interest to older taxpayers are discussed in this chapter.
Compensation for Services
Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages,
salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.
You need not receive the compensation in cash for it to be taxable. Payments you receive in the form of goods or services
generally must be included in gross income at their fair market value.
Volunteer work.
Do not include in your gross income amounts you receive for supportive services or reimbursements for out-of-pocket
expenses under any of the following volunteer programs.
-
Retired Senior Volunteer Program (RSVP).
-
Foster Grandparent Program.
-
Senior Companion Program.
-
Service Corps of Retired Executives (SCORE).
Unemployment compensation.
You must include in your income all unemployment compensation you receive.
More information.
See Publication 525, Taxable and Nontaxable Income, for more detailed information on specific types of income.
Retirement Plan Distributions
This section summarizes the tax treatment of amounts you receive from traditional individual retirement arrangements, employee
pensions or annuities, and disability pensions or annuities. A traditional IRA is any IRA that is not a Roth or SIMPLE IRA.
A Roth IRA is an individual retirement plan that can be either an account or an annuity and that features nondeductible contributions
and tax-free distributions. A SIMPLE IRA is a tax-favored retirement plan that certain small employers (including self-employed
individuals) can set up for the benefit of their employees. More detailed information can be found in Publication 590, Individual
Retirement Arrangements (IRAs), and Publication 575, Pension and Annuity Income.
Individual Retirement Arrangements (IRAs)
In general, distributions from a traditional IRA are taxable in the year you receive them. Exceptions to the general rule
are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. These are discussed in
Publication 590.
If you made nondeductible contributions to a traditional IRA, you must file Form 8606, Nondeductible IRAs. If you do not file
Form 8606 with your return, you may have to pay a $50 penalty. Also, when you receive distributions from your traditional
IRA, the amounts will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made.
Early distributions.
Generally, early distributions are amounts distributed from your traditional IRA account or annuity before you are
age 59½, or amounts you receive when you cash in retirement bonds before you are age 59½. You must include early distributions
of taxable amounts in your gross income. These taxable amounts are also subject to an additional 10% tax unless the distribution
qualifies for an exception. See Tax on Early Distributions, later.
After age 59½ and before age 70½.
After you reach age 59½, you can receive distributions from your traditional IRA without having to pay the 10% additional
tax. Even though you can receive distributions after you reach age 59½, distributions are not required until April 1 of the
year following the year in which you reach age 70½.
Required distributions.
If you are the owner of a traditional IRA, you must receive the entire balance in your IRA or start receiving periodic
distributions from your IRA by April 1 of the year following the year in which you reach age 70½. See When Must You Withdraw Assets? (Required Minimum Distributions) in Publication 590. If distributions from your traditional IRA(s) are less than the required minimum distribution for the
year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. See Tax on Excess Accumulations, later. See also Excess Accumulations (Insufficient Distributions) in Publication 590.
Generally, if you did not pay any part of the cost of your employee pension or annuity, and your employer did not withhold
part of the cost of the contract from your pay while you worked, the amounts you receive each year are fully taxable. However,
see Insurance Premiums for Retired Public Safety Officers, later.
If you paid part of the cost of your pension or annuity plan (see Cost, later), you can exclude part of each annuity payment from income as a recovery of your cost (investment in the contract).
This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of
the payment changes. The rest of each payment is taxable. However, see Insurance Premiums for Retired Public Safety Officers, later.
You figure the tax-free part of the payment using one of the following methods.
-
Simplified Method.
You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified
employee annuity, or a tax-sheltered annuity plan or contract). You cannot use this method if your annuity is paid under a
nonqualified plan.
-
General Rule.
You must use this method if your annuity is paid under a nonqualified plan. You generally cannot use this method if your annuity
is paid under a qualified plan.
Contact your employer or plan administrator to find out if your pension or annuity is paid under a qualified or nonqualified
plan.
You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you
recover part of your cost.
Exclusion limit.
If you contributed to your pension or annuity and your annuity starting date is before 1987, you can continue to take
your monthly exclusion for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor can
continue to take the survivor's exclusion figured as of the annuity starting date. The total exclusion may be more than your
cost.
If your annuity starting date is after 1986, the total amount of annuity income you can exclude over the years as
a recovery of the cost cannot exceed your total cost.
In either case, any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized
deduction on the final return of the decedent. This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous
deductions.
Cost.
Before you can figure how much, if any, of your pension or annuity benefits are taxable, you must determine your cost
in the plan (your investment in the contract). Your total cost in the plan includes everything that you paid. It also includes
amounts your employer contributed that were taxable to you when paid. However, see Foreign employment contributions, next.
From this total cost, subtract any refunded premiums, rebates, dividends, unrepaid loans, or other tax-free amounts
you received by the later of the annuity starting date or the date on which you received your first payment.
The annuity starting date is the later of the first day of the first period for which you received a payment from
the plan or the date on which the plan's obligations became fixed.
The amount of your contributions to the plan may be shown in box 9b of any Form 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that you receive.
Foreign employment contributions.
If you worked abroad, certain amounts your employer paid into your retirement plan that were not includible in your
gross income may be considered part of your cost. For details, see Foreign employment contributions in Publication 575.
Withholding.
The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income
tax on the taxable part of amounts paid to you. However, you can choose not to have tax withheld on the payments you receive,
unless they are eligible rollover distributions. (These are distributions that are eligible for rollover treatment but are
not paid directly to another qualified retirement plan or to a traditional IRA.) See Withholding Tax and Estimated Tax and Rollovers in Publication 575 for more information.
For payments other than eligible rollover distributions, you can tell the payer how much to withhold by filing a Form
W-4P, Withholding Certificate for Pension or Annuity Payments.
Simplified Method.
Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total
number of anticipated monthly payments. For an annuity that is payable over the lives of the annuitants, this number is based
on the annuitants' ages on the annuity starting date and is determined from a table. For any other annuity, this number is
the number of monthly annuity payments under the contract.
Who must use the Simplified Method.
You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you receive your
pension or annuity payments from a qualified plan or annuity, unless you were at least 75 years old and entitled to at least
5 years of guaranteed payments (defined next).
In addition, if your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen
to use the Simplified Method for payments from a qualified plan, unless you were at least 75 years old and entitled to at
least 5 years of guaranteed payments. If you chose to use the Simplified Method, you must continue to use it each year that
you recover part of your cost.
Guaranteed payments.
Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example,
the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. If the
minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after
payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments.
Who cannot use the Simplified Method.
You cannot use the Simplified Method and must use the General Rule if you receive pension or annuity payments from:
-
A nonqualified plan, such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan, or
-
A qualified plan if you are age 75 or older on your annuity starting date and you are entitled to at least 5 years of guaranteed
payments (defined above).
In addition, you had to use the General Rule for either circumstance described above if your annuity starting date
is after July 1, 1986, and before November 19, 1996. If you did not have to use the General Rule, you could have chosen to
use it. You also had to use the General Rule for payments from a qualified plan if your annuity starting date is before July
2, 1986, and you did not qualify to use the Three-Year Rule.
If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your
cost.
Complete information on the General Rule, including the actuarial tables you need, is contained in Publication 939,
General Rule for Pensions and Annuities.
How to use the Simplified Method.
Complete the Simplified Method Worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions or in Publication
575 to figure your taxable annuity for 2008. To complete line 3 of the worksheet, you must determine the total number of expected
monthly payments for your annuity. If your annuity is payable only over your life, use your age on the annuity starting date
to determine this number. For annuity starting dates beginning in 1998, if your annuity is payable over your life and the
lives of other individuals, use the combined ages of you and the youngest survivor annuitant at the annuity starting date.
If the annuity does not depend on anyone's life expectancy, use the total number of monthly annuity payments under the contract.
Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity in later years.
Example.
Bill Smith, age 65, began receiving retirement benefits in 2008, under a joint and survivor annuity. Bill's annuity starting
date is January 1, 2008. The benefits are to be paid over the joint lives of Bill and his wife, Kathy, age 65. Bill had contributed
$31,000 to a qualified plan and had received no distributions before the annuity starting date. Bill is to receive a retirement
benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death.
Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is
under age 75. See the illustrated Worksheet 2-A, Simplified Method Worksheet, later.
His annuity is payable over the lives of more than one annuitant, so Bill uses his and Kathy's combined ages, 130 (65 + 65),
and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet and finds the line 3 amount to be 310. Bill's
tax-free monthly amount is $100 ($31,000 ÷ 310 as shown on line 4 of the worksheet). Upon Bill's death, if Bill has not recovered
the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. The full amount of any annuity payments
received after 310 payments are paid must generally be included in gross income.
If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered
cost on the final income tax return of the last to die. This deduction is not subject to the 2%-of-adjusted-gross-income limit.
Worksheet 2-A. Simplified Method Worksheet—Illustrated
| 1. |
Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a;
Form 1040A, line 12a; or Form 1040NR, line 17a
|
1. |
$ 14,400 |
| 2. |
Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion* |
2. |
31,000 |
| |
Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the
amount from line 4 of last year's worksheet on line 4 below. Otherwise, go to line 3.
|
|
|
| 3. |
Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and the payments are for
your life and that of your beneficiary, enter the appropriate number from Table 2 below
|
3. |
310 |
| 4. |
Divide line 2 by line 3 |
4. |
100 |
| 5. |
Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before
1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6
|
5. |
1,200 |
| 6. |
Enter any amount previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet
for last year
|
6. |
0 |
| 7. |
Subtract line 6 from line 2 |
7. |
31,000 |
| 8. |
Enter the smaller of line 5 or line 7 |
8. |
1,200 |
| 9. |
Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040,
line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Note. If your Form 1099-R shows a larger taxable amount, use the amount on this line instead. If you are a retired public safety
officer, see Insurance Premiums for Retired Public Safety Officers, later, before entering an amount on your tax return.
|
9. |
$ 13,200 |
| 10. |
Was your annuity starting date before 1987?
□ Yes. STOP. Do not complete the rest of this worksheet.
□ No. Add lines 6 and 8. This is the amount you have recovered tax free through 2008. You will need this number if you need
to fill out this worksheet next year.
|
10. |
1,200 |
| 11. |
Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next
year will generally be fully taxable
|
11. |
$29,800 |
* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996.
Survivors of retirees.
Benefits paid to you as a survivor under a joint and survivor annuity must be included in your gross income in the
same way the retiree would have included them in gross income.
If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year
Rule, include the total received in your income. The retiree's cost has already been recovered tax free.
If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage
the retiree used to your initial payment called for in the contract. The resulting tax-free amount will then remain fixed.
Any increases in the survivor annuity are fully taxable.
If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax
free is the same as the tax-free amount figured by the retiree at the annuity starting date. See Simplified Method, earlier.
How to report.
If you file Form 1040, report your total annuity on line 16a, and the taxable part on line 16b. If your pension or
annuity is fully taxable, enter it on line 16b. Do not make an entry on line 16a.
If you file Form 1040A, report your total annuity on line 12a, and the taxable part on line 12b. If your pension or
annuity is fully taxable, enter it on line 12b. Do not make an entry on line 12a.
If you file Form 1040NR, report your total annuity on line 17a, and the taxable part on line 17b. If your pension
or annuity is fully taxable, enter it on line 17b. Do not make an entry on line 17a.
Example.
You are a Form 1040 filer and you received monthly payments totaling $1,200 during 2008 from a pension plan that was completely
financed by your employer. You had paid no tax on the payments that your employer made to the plan, and the payments were
not used to pay for accident, health, or long-term care insurance premiums (as discussed later under Insurance Premiums for Retired Public Safety Officers). The entire $1,200 is taxable. You include $1,200 only on Form 1040, line 16b.
Joint return.
If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total
of the pensions and annuities on line 16a of Form 1040, line 12a of Form 1040A, or line 17a of Form 1040NR. Report the total
of the taxable parts on line 16b of Form 1040, line 12b of Form 1040A, or line 17b of Form 1040NR.
Form 1099-R.
You should receive a Form 1099-R for your pension or annuity. Form 1099-R shows your pension or annuity for the year
and any income tax withheld. You should receive a Form W-2 if you receive distributions from certain nonqualified plans.
You must attach Forms 1099-R or Forms W-2 to your 2008 tax return if federal income tax was withheld. Generally, you should
be sent these forms by January 31, 2009.
Nonperiodic Distributions
If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your
income as a recovery of your cost. Nonperiodic distributions include cash withdrawals, distributions of current earnings (dividends)
on your investment, and certain loans. For information on how to figure the taxable amount of a nonperiodic distribution,
see Taxation of Nonperiodic Payments in Publication 575.
The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. See Tax on Early Distributions, later.
Lump-sum distributions.
If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant
was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. The part
from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. The part from participation
after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. You may
be able to use the 10-year tax option to figure tax on the ordinary income part.
Form 1099-R.
If you receive a total distribution from a plan, you should receive a Form 1099-R. If the distribution qualifies as
a lump-sum distribution, box 3 shows the capital gain part of the distribution. The amount in box 2a minus the amount in box
3 is the ordinary income part.
More information.
For more detailed information on lump-sum distributions, see Publication 575 or Form 4972, Tax on Lump-Sum Distributions.
Tax on Early Distributions
Most distributions you receive from your qualified retirement plan and nonqualified annuity contracts before you reach age
59½ are subject to an additional tax of 10%. The tax applies to the taxable part of the distribution.
For this purpose, a qualified retirement plan is:
-
A qualified employee plan,
-
A qualified employee annuity plan,
-
A tax-sheltered annuity plan (403(b) plan),
-
An IRA, or
-
An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable
to amounts the plan received in a direct transfer or rollover from one of the other plans listed here).
General exceptions to tax.
The early distribution tax does not apply to any distributions that are:
-
Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy)
or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan,
the payments must begin after separation from service),
-
Made because you are totally and permanently disabled, or
-
Made on or after the death of the plan participant or contract holder.
Additional exceptions.
There are additional exceptions to the early distribution tax for certain distributions from qualified retirement
plans and nonqualified annuity contracts. See Publication 575 for details.
Reporting tax.
If you owe only the tax on early distributions and distribution code 1 (early distribution, no known exception) is
correctly shown in Form 1099-R, box 7, multiply the taxable part of the early distribution by 10% (.10) and enter the result
on Form 1040, line 59, or Form 1040NR, line 54. See the instructions for line 59 of Form 1040 or line 54 of Form 1040NR for
more information about reporting the early distribution tax.
Tax on Excess Accumulation
To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries
after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning
date. Unless the rule for 5% owners applies, this is generally April 1 of the year that follows the later of:
-
The calendar year in which you reach age 70½, or
-
The calendar year in which you retire from employment with the employer maintaining the plan.
However, your plan may require you to begin to receive payments by April 1 of the year that follows the year in which you
reach 70½, even if you have not retired.
For this purpose, a qualified retirement plan includes:
-
A qualified employee plan,
-
A qualified employee annuity plan,
-
An eligible section 457 deferred compensation plan, or
-
A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986).
An excess accumulation is the undistributed remainder of the required minimum distribution that was left in your qualified
retirement plan.
5% owners.
If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining
your qualified retirement plan, you must begin to receive distributions from the plan by April 1 of the year after the calendar
year in which you reach age 70½. See Publication 575 for more information.
Amount of tax.
If you do not receive the required minimum distribution, you are subject to an additional tax. The tax equals 50%
of the difference between the amount that must be distributed and the amount that was distributed during the tax year. You
can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that
you are taking reasonable steps to remedy the shortfall.
Form 5329.
You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified
retirement plan.
Additional information.
For more detailed information on the tax on excess accumulation, see Publication 575.
Insurance Premiums for Retired Public Safety Officers
If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue
squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that
are used to pay the premiums for accident or health insurance or long-term care insurance. The premiums can be for coverage
for you, your spouse, or dependents. The distribution must be made directly from the plan to the insurance provider. You can
exclude from income the smaller of the amount of the insurance premiums or $3,000. You can only make this election for amounts
that would otherwise be included in your income. The amount excluded from your income cannot be used to claim a medical expense
deduction.
An eligible retirement plan is a governmental plan that is:
If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. The taxable
amount shown in box 2a of any Form 1099-R that you receive does not reflect the exclusion. Report your total distributions
on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Report the taxable amount on Form 1040, line 16b;
Form 1040A, line 12b; or Form 1040NR, line 17b. Enter “PSO” next to the appropriate line on which you report the taxable amount.
Railroad Retirement Benefits
Benefits paid under the Railroad Retirement Act fall into two categories. These categories are treated differently for income
tax purposes.
Social security equivalent benefits.
The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that
a railroad employee or beneficiary would have been entitled to receive under the social security system. This part of the
tier 1 benefit is the social security equivalent benefit (SSEB) and is treated (for tax purposes) like social security benefits.
(See Social Security and Equivalent Railroad Retirement Benefits, later.)
Non-social security equivalent benefits.
The second category contains the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB).
It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. This category of benefits
is treated as an amount received from a qualified employee plan. This allows for the tax-free (nontaxable) recovery of employee
contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Vested dual benefits and supplemental annuity
benefits are non-contributory pensions and are fully taxable.
More information.
For more information about railroad retirement benefits, see Publication 575.
Military retirement pay based on age or length of service is taxable and must be included in income as a pension on Form 1040,
lines 16a and 16b or on Form 1040A, lines 12a and 12b. But, certain military and government disability pensions that are based
on a percentage of disability from active service in the Armed Forces of any country generally are not taxable. For more information,
including information about veterans' benefits and insurance, see Publication 525.
Social Security and Equivalent Railroad Retirement Benefits
This discussion explains the federal income tax rules for social security benefits and equivalent tier 1 railroad retirement
benefits.
Social security benefits include monthly retirement, survivor, and disability benefits. They do not include supplemental security
income (SSI) payments, which are not taxable.
Equivalent tier 1 railroad retirement benefits are the part of tier 1 benefits that a railroad employee or beneficiary would
have been entitled to receive under the social security system. They commonly are called the social security equivalent benefit
(SSEB) portion of tier 1 benefits.
If you received these benefits during 2008, you should have received a Form SSA-1099 or Form RRB-1099 (Form SSA-1042S or Form
RRB-1042S if you are a nonresident alien), showing the amount of the benefits.
Note.
When the term “benefits” is used in this section, it applies to both social security benefits and the SSEB portion of tier 1 railroad retirement
benefits.
Are Any of Your Benefits Taxable?
To find out whether any of your benefits may be taxable, compare the base amount for your filing status (explained later)
with the total of:
-
One-half of your benefits, plus
-
All your other income, including tax-exempt interest.
When making this comparison, do not reduce your other income by any exclusions for:
-
Interest from qualified U.S. savings bonds,
-
Employer-provided adoption benefits,
-
Foreign earned income or foreign housing, or
-
Income earned in American Samoa or Puerto Rico by bona fide residents.
Figuring total income.
To figure the total of one-half of your benefits plus your other income, use Worksheet 2-B. If that total amount is
more than your base amount, part of your benefits may be taxable.
If you are married and file a joint return for 2008, you and your spouse must combine your incomes and your benefits to figure
whether any of your combined benefits are taxable. Even if your spouse did not receive any benefits, you must add your spouse's
income to yours to figure whether any of your benefits are taxable.
If the only income you received during 2008 was your social security or the SSEB portion of tier 1 railroad retirement benefits,
your benefits generally are not taxable and you probably do not have to file a return. If you have income in addition to your
benefits, you may have to file a return even if none of your benefits are taxable.
Worksheet 2-B.Are Any of Your Benefits Taxable?
| A. |
Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include
the full amount of any lump-sum benefit payments received in 2008, for 2008 and
earlier years. (If you received more than one form, combine the amounts from box 5
and enter the total.)
|
A. |
|
| |
Note. If the amount on line A is zero or less, stop here; none of your benefits are
taxable this year.
|
|
|
| B. |
Enter one-half of the amount on line A |
B. |
|
| C. |
Enter your taxable pensions, wages, interest, dividends, and other taxable income |
C. |
|
| D. |
Enter any tax-exempt interest income (such as interest on municipal bonds) plus any exclusions from income for:
•Interest from qualified U.S. savings bonds,
•Employer-provided adoption benefits,
•Foreign earned income or foreign housing, or
•Income earned in American Samoa or Puerto Rico by bona fide residents
|
D. |
|
| E. |
Add lines B, C, and D and enter the total |
E. |
|
| F. |
If you are:
•Married filing jointly, enter $32,000
•Single, head of household, qualifying widow(er), or married filing separately and you
lived apart from your spouse for all of 2008, enter $25,000
•Married filing separately and you lived with your spouse at any time during 2008,
enter -0-
|
F. |
|
| G. |
Is the amount on line F less than or equal to the amount on line E?
No.None of your benefits are taxable this year.
Yes.Some of your benefits may be taxable. To figure how much of your benefits
are taxable, see Which worksheet to use under How Much Is Taxable, later.
|
|
|
Your base amount is:
-
$25,000 if you are single, head of household, or qualifying widow(er),
-
$25,000 if you are married filing separately and lived apart from your spouse for all of 2008,
-
$32,000 if you are married filing jointly, or
-
$0 if you are married filing separately and lived with your spouse at any time during 2008.
Any repayment of benefits you made during 2008 must be subtracted from the gross benefits you received in 2008. It does not
matter whether the repayment was for a benefit you received in 2008 or in an earlier year. If you repaid more than the gross
benefits you received in 2008, see Repayments More Than Gross Benefits, later.
Your gross benefits are shown in box 3 of Form SSA-1099 or Form RRB-1099. Your repayments are shown in box 4. The amount in
box 5 shows your net benefits for 2008 (box 3 minus box 4). Use the amount in box 5 to figure whether any of your benefits
are taxable.
Tax Withholding and Estimated Tax
You can choose to have federal income tax withheld from your social security and/or the SSEB portion of your tier 1 railroad
retirement benefits. If you choose to do this, you must complete a Form W-4V, Voluntary Withholding Request. You can choose
withholding at 7%, 10%, 15%, or 25% of your total benefit payment.
If you do not choose to have income tax withheld, you may have to request additional withholding from other income, or pay
estimated tax during the year. For details, see Publication 505, Tax Withholding and Estimated Tax, or the instructions for
Form 1040-ES, Estimated Tax for Individuals.
If part of your benefits is taxable, how much is taxable depends on the total amount of your benefits and other income. Generally,
the higher that total amount, the greater the taxable part of your benefits.
Maximum taxable part.
The taxable part of your benefits usually cannot be more than 50%. However, up to 85% of your benefits can be taxable
if either of the following situations applies to you.
-
The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly).
-
You are married filing separately and lived with your spouse at any time during 2008.
If you are a nonresident alien, 85% of your benefits are taxable. However, this income is exempt under some tax treaties.
Which worksheet to use.
A worksheet to figure your taxable benefits is in the instructions for your Form 1040 or 1040A. However, you will
need to use a different worksheet(s) if any of the following situations applies to you.
-
You contributed to a traditional individual retirement arrangement (IRA) and you or your spouse were covered by a retirement
plan at work. In this situation, you must use the special worksheets in Appendix B of Publication 590 to figure both your
IRA deduction and your taxable benefits.
-
Situation (1) does not apply and you take an exclusion for interest from qualified U.S. savings bonds (Form 8815), for employer-provided
adoption benefits (Form 8839), for foreign earned income or housing (Form 2555 or Form 2555-EZ), or for income earned in American
Samoa (Form 4563) or Puerto Rico by bona fide residents. In this situation, you must use Worksheet 1 in Publication 915, Social
Security and Equivalent Railroad Retirement Benefits, to figure your taxable benefits.
-
You received a lump-sum payment for an earlier year. In this situation, also complete Worksheet 2 or 3 and Worksheet 4 in
Publication 915. See Lump-Sum Election, later.
How To Report Your Benefits
If part of your benefits are taxable, you must use Form 1040, Form 1040A, or Form 1040NR. You cannot use Form 1040EZ.
Reporting on Form 1040.
Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 20a and the taxable
part on line 20b. If you are married filing separately and you lived apart from your spouse for all of 2008, also enter “ D” to the right of the word “ benefits” on line 20a.
Reporting on Form 1040A.
Report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on line 14a and the taxable
part on line 14b. If you are married filing separately and you lived apart from your spouse for all of 2008, also enter “ D” to the right of the word “ benefits” on line 14a.
Reporting on Form 1040NR.
Report 85% of the total amount of your benefits (box 5 of your Form SSA-1042S or Form RRB-1042S) in the appropriate
column of line 83.
Benefits not taxable.
If you are filing Form 1040EZ, do not report any benefits on your tax return. If you are filing Form 1040 or Form
1040A, report your net benefits (the amount in box 5 of your Form SSA-1099 or Form RRB-1099) on Form 1040, line 20a, or Form
1040A, line 14a. Enter -0- on Form 1040, line 20b, or Form 1040A, line 14b. If you are married filing separately and you lived
apart from your spouse for all of 2008, also enter “ D” to the right of the word “ benefits” on Form 1040, line 20a, or Form 1040A, line 14a.
You must include the taxable part of a lump-sum (retroactive) payment of benefits received in 2008 in your 2008 income, even
if the payment includes benefits for an earlier year.
This type of lump-sum benefit payment should not be confused with the lump-sum death benefit that both the SSA and RRB pay
to many of their beneficiaries. No part of the lump-sum death benefit is subject to tax.
Generally, you use your 2008 income to figure the taxable part of the total benefits received in 2008. However, you may be
able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year.
You can elect this method if it lowers your taxable benefits. See Publication 915 for more information.
Repayments More Than Gross Benefits
In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than
the gross benefits (box 3) you received. If this occurred, your net benefits in box 5 will be a negative figure (a figure
in parentheses) and none of your benefits will be taxable. If you receive more than one form, a negative figure in box 5 of
one form is used to offset a positive figure in box 5 of another form for that same year.
If you have any questions about this negative figure, contact your local Social Security Administration office or your local
U.S. Railroad Retirement Board field office.
Joint return.
If you and your spouse file a joint return, and your Form SSA-1099 or RRB-1099 has a negative figure in box 5 but
your spouse's does not, subtract the amount in box 5 of your form from the amount in box 5 of your spouse's form. You do this
to get your net benefits when figuring if your combined benefits are taxable.
Repayment of benefits received in an earlier year.
If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an
itemized deduction for the part of this negative figure that represents benefits you included in gross income in an earlier
year.
If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain
miscellaneous itemized deductions. Claim it on Schedule A (Form 1040), line 23.
If this deduction is more than $3,000, you have to follow some special instructions. See Publication 915 for those
instructions.
Sickness and Injury Benefits
Generally, you must report as income any amount you receive for personal injury or sickness through an accident or health
plan that is paid for by your employer. If both you and your employer pay for the plan, only the amount you receive that is
due to your employer's payments is reported as income. However, certain payments may not be taxable to you. Some of these
payments are discussed later in this section. Also, see Military and Government Disability Pensions in Publication 525.
Cost paid by you.
If you pay the entire cost of an accident or health plan, do not include any amounts you receive from the plan for
personal injury or sickness as income on your tax return. If your plan reimbursed you for medical expenses you deducted in
an earlier year, you may have to include some, or all, of the reimbursement in your income.
If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for
by your employer. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A or on line
8 of Form 1040NR until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first
receive a pension or annuity if you are not disabled.
If you were 65 or older by the end of 2008, or you were retired on permanent and total disability and received taxable disability
income, you may be able to claim the credit for the elderly or the disabled. See Credit for the Elderly or the Disabled, later.
For more information on this credit, see Publication 524, Credit for the Elderly or the Disabled.
Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report
the payments on lines 16a and 16b of Form 1040, on lines 12a and 12b of Form 1040A, or on lines 17a and 17b of Form 1040NR.
For more information on pensions and annuities, see Publication 575.
Retirement and profit-sharing plans.
If you receive payments from a retirement or profit-sharing plan that does not provide for disability retirement,
do not treat the payments as a disability pension. The payments must be reported as a pension or annuity.
Accrued leave payment.
If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. The payment
is not a disability payment. Include it in your income in the tax year you receive it.
Long-Term Care Insurance Contracts
Long-term care insurance contracts generally are treated as accident and health insurance contracts. Amounts you receive from
them (other than policyholder dividends or premium refunds) generally are excludable from income as amounts received for personal
injury or sickness. However, the amount you can exclude may be limited. Long-term care insurance contracts are discussed in
more detail in Publication 525.
Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are
paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies
to your survivors. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length
of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.
If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that
part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For a discussion of the
taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier.
Return to work.
If you return to work after qualifying for workers' compensation, salary payments you receive for performing light
duties are taxable as wages.
Other Sickness and Injury Benefits
In addition to disability pensions and annuities, you may receive other payments for sickness or injury.
Federal Employees' Compensation Act (FECA).
Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death,
are not taxable. However, you are taxed on amounts you receive under this Act as continuation of pay for up to 45 days while
a claim is being decided. Report this income on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ. Also, pay for
sick leave while a claim is being processed is taxable and must be included in your income as wages.
If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits received,
that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For a discussion
of the taxability of these benefits, see Social Security and Equivalent Railroad Retirement Benefits, earlier.
Other compensation.
Many other amounts you receive as compensation for sickness or injury are not taxable. These include the following
amounts.
-
Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid
the premiums but you had to include them in your income.
-
Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance
policy.
-
Compensation you receive for permanent loss or loss of use of a part or function of your body, for your permanent disfigurement,
or for such loss or disfigurement suffered by your spouse or dependents. This compensation must be based only on the injury
and not on the period of your absence from work. These benefits are not taxable even if your employer pays for the accident
and health plan that provides these benefits.
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.
Installments for life.
If, as the beneficiary under an insurance contract, you are entitled to receive the proceeds in installments for the
rest of your life without a refund or period-certain guarantee, you figure the excluded part of each installment by dividing
the amount held by the insurance company by your life expectancy. If there is a refund or period-certain guarantee, the amount
held by the insurance company for this purpose is reduced by the actuarial value of the guarantee.
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, in any year, up to $1,000 of the interest included in the installments. If
you remarry, you can continue to take the exclusion.
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, lines 12a and 12b of Form 1040A, or lines 17a and 17b of Form 1040NR.
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 from the
total premiums (or other consideration) paid for the contract any amount that you previously received under the contract and
excluded from your income. Include in your income the part of the lump-sum payment that is more than your cost.
Endowment proceeds that you choose to receive in installments instead of a lump-sum payment at the maturity of the policy
are taxed as an annuity. The tax treatment of an annuity is explained in Publication 575. For this treatment to apply, you
must choose to receive the proceeds in installments before receiving any part of the lump sum. This election must be made
within 60 days after the lump-sum payment first becomes payable to you.
Accelerated Death Benefits
Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's
death are generally excluded from income if the insured is terminally or chronically ill. However, see Exception, later. For a chronically ill individual, 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 without regard to
the costs are excludable up to a limit.
In addition, if any portion of a death benefit under a life insurance contract on the life of a terminally or chronically
ill individual is sold or assigned to a viatical settlement provider, the amount received also is excluded from income. Generally,
a viatical settlement provider is one 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.
To report taxable 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.
Terminally or chronically ill defined.
A terminally ill person is one who has been certified by a physician as having an illness or physical condition that
reasonably can be expected to result in death within 24 months from the date of the certification. A chronically ill person
is one who is not terminally ill but has been certified (within the previous 12 months) by a licensed health care practitioner
as meeting either of the following conditions.
-
The person is unable to perform (without substantial help) at least two activities of daily living (eating, toileting, transferring,
bathing, dressing, and continence) for a period of 90 days or more because of a loss of functional capacity.
-
The person requires substantial supervision to protect himself or herself from threats to health and safety due to severe
cognitive impairment.
Exception.
The exclusion does not apply to any amount paid to a person other than the insured if that other person has an insurable
interest in the life of the insured because the insured:
-
Is a director, officer, or employee of the other person, or
-
Has a financial interest in the business of the other person.
You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return in most cases) on the sale of your
main home. Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return. You can choose
not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the
sale.
Main home.
Usually, your main home is the home you live in most of the time and can be a:
Maximum Amount of Exclusion
You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.
-
You meet the ownership test.
-
You meet the use test.
-
During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
You can exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return and meet
the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons.
You can exclude up to $500,000 of the gain if all of the following requirements are met.
-
You are an unmarried widow or widower on the date of the sale or exchange.
-
The sale or exchange took place not more than 2 years after the date of your spouse's death.
-
The ownership and use tests were met immediately before the date of your spouses's death.
-
You did not exclude gain from the sale of another home during the 2-year period ending on the date of the sale.
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the
date of the sale, you must have:
-
Owned the home for at least 2 years (the ownership test), and
-
Lived in the home as your main home for at least 2 years (the use test).
Exception to ownership and use tests.
If you owned and lived in the property as your main home for less than 2 years, you still can claim an exclusion in
some cases. Generally, you must have sold the home due to a change in place of employment, health, or unforeseen circumstances.
The maximum amount you can exclude will be reduced. See Publication 523, Selling Your Home, for more information.
Exception to use test for individuals with a disability.
There is an exception to the use test if, during the 5-year period before the sale of your home:
-
You become physically or mentally unable to care for yourself, and
-
You owned and lived in your home as your main home for a total of at least 1 year.
Under this exception, you are considered to live in your home during any time that you own the home and live in a facility
(including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition.
If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the
exclusion.
Exception to ownership test for property acquired in a like-kind exchange.
You must have owned your main home for at least 5 years to qualify for the exclusion if you acquired your main home
in a like-kind exchange. This special 5-year ownership rule continues to apply to a home you acquired in a like-kind exchange
and gave to another person. A like-kind exchange is an exchange of property held for productive use in a trade or business
or for investment. See Publication 523 for more information.
In the special situations discussed below, if you and your spouse file a joint return for the year of sale, you can exclude
up to $250,000 of gain if one of you meets the ownership and use tests as discussed earlier under Maximum Amount of Exclusion. However, see Special rules for joint returns, next.
Special rules for joint returns.
You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.
-
You are married and file a joint return for the year.
-
Either you or your spouse meets the ownership test.
-
Both you and your spouse meet the use test.
-
During the 2-year period ending on the date of the sale, neither you nor your spouse exclude gain from the sale of another
home.
Death of spouse before sale.
If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in
the property as your main home during any period of time when your spouse owned and lived in it as a main home.
Home transferred from spouse.
If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you
are considered to have owned it during any period of time when your spouse owned it.
Use of home after divorce.
You are considered to have used property as your main home during any period when:
Business Use or Rental of Home
You may be able to exclude gain from the sale of a home that you have used for business or to produce rental income. But,
you must meet the ownership and use tests. See Publication 523 for more information.
Depreciation after May 6, 1997.
If you were entitled to take depreciation deductions because you used your home for business purposes or as rental
property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods
after May 6, 1997. See Publication 523 for more information.
Do not report the 2008 sale of your main home on your tax return unless:
-
You have a gain and you do not qualify to exclude all of it, or
-
You have a gain and you choose not to exclude it.
If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire gain on Schedule D (Form
1040). If you used your home for business or to produce rental income, you may have to use Form 4797, Sales of Business Property,
to report the sale of the business or rental part. See Publication 523 for more information.
A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination
of all three) while you continue to live in your home. With a reverse mortgage, you retain title to your home. Depending on
the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan
period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable.
Any interest (including original interest discount) accrued on a reverse mortgage is not deductible until the loan is paid
in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt
discussed in Publication 936, Home Interest Mortgage Deduction.
The following items generally are excluded from taxable income. You should not report them on your return, unless otherwise
indicated as taxable or includable in income.
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 also is taxable to you. If
the gift, bequest, or inheritance is the income from property, that income is taxable to you.
Veterans' benefits.
Do not include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered
by the Department of Veterans Affairs (VA). See Publication 525.
Public assistance benefits.
Other items that are generally excluded from taxable income also include the following public assistance benefits.
Welfare benefits.
Do not include in your income benefit payments from a public welfare fund based upon need, such as payments due to
blindness. However, you must include in your income any welfare payments that are compensation for services or that are obtained
fraudulently.
Payments from a state fund for victims of crime.
These payments 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.
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.
Payments to reduce cost of winter energy use.
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 also are eligible for food benefits.
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.
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.
Previous | Index | Next
SEARCH:
You can search for information in the entire Tax Prep Help section, or in the entire site. For a more focused search, put your search word(s) in quotes.
Publication Index | Tax Prep Help Main | Home
|
|
 |
