In most cases, 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 (Form 1040) or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming,
if the debt is farm debt and you are a farmer).
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 when you paid it. See
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
, 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.
You may be able to exclude part of the mortgage relief on your principal residence. See Excluded debt
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), 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
See Publication 4681 for more information.
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
There are several exceptions to the inclusion of canceled debt in income. These are explained next.
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 its students to serve in occupations with unmet needs or in
areas with unmet needs and under which the services provided by the students (or former students) are for or under the direction
of a governmental unit or a tax-exempt organization described in section 501(c)(3).
A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a qualified
tax-exempt organization under its program designed as described in (3)(b) above.
Education loan repayment assistance.
Education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment
Program), a state education loan repayment program eligible for funds under the Public Health Service Act, or any other state
loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in
underserved or health professional shortage areas are not taxable.
The provision relating to the “other state loan repayment or loan forgiveness program
” was added to this exclusion for amounts received in tax years beginning after December 31, 2008. If you included these amounts
in income in 2010, 2011, or 2012, you should file an amended tax return to exclude this income. See Form 1040X and its instructions
for details on filing.
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
Price reduced after purchase.
In most cases, 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.
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.
The debt is qualified principal residence indebtedness. See Publication 525 for additional information.
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 as explained in the Instructions
for 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).
Repaid social security benefits.
If you repaid social security benefits or equivalent railroad retirement benefits, see
Repayment of benefits
in chapter 11.
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 23.
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.
When determining whether the amount you repaid was more or less than $3,000, consider the total amount being repaid on the
return. Each instance of repayment is not considered separately.
Figure your tax for 2013 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 28.
Figure your tax for 2013 claiming a credit for the repaid amount. Follow these steps.
Figure your tax for 2013 without deducting the repaid amount.
Refigure your tax from the earlier year without including in income the amount you repaid in 2013.
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 2013 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 71, by adding the amount of the credit to any other credits on this line, and entering “I.R.C. 1341
” in the column to the right of line 71.
An example of this computation can be found in Publication 525.
Repaid wages subject to social security and Medicare taxes.
If you had to repay an amount that you included in your wages or compensation in an earlier year on which social security,
Medicare, or tier 1 RRTA taxes were paid, ask your employer to refund the excess amount to you. If the employer refuses to
refund the taxes, ask for a statement indicating the amount of the overcollection to support your claim. File a claim for
refund using Form 843, Claim for Refund and Request for Abatement.
Repaid wages subject to Additional Medicare Tax.
Employers cannot make an adjustment or file a claim for refund for Additional Medicare Tax withholding when there
is a repayment of wages received by an employee in a prior year because the employee determines liability for Additional Medicare
Tax on the employee's income tax return for the prior year. If you had to repay an amount that you included in your wages
or compensation in an earlier year, and on which Additional Medicare Tax was paid, you may be able to recover the Additional
Medicare Tax paid on the amount. To recover Additional Medicare Tax on the repaid wages or compensation, you must file Form
1040X, Amended U.S. Individual Income Tax Return, for the prior year in which the wages or compensation were originally received.
See the Instructions for Form 1040X.
The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.
You must include in income all unemployment compensation you receive. You should receive a Form 1099-G showing in
box 1 the total unemployment compensation paid to you. In most cases, 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.
Unemployment assistance under the Airline Deregulation Act of 1974 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. If you deducted
all of your contributions to the program, the entire amount you receive under the program is included in your income.
Repayment of unemployment compensation.
If you repaid in 2013 unemployment compensation you received in 2013, 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 2013 that you included in income in an earlier year,
you can deduct the amount repaid on Schedule A (Form 1040), line 23, if you itemize deductions. If the amount is more than
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. If you
do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty.
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
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.
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 to
blind individuals under a state public assistance law. 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
Reemployment Trade Adjustment Assistance (RTAA) payments.
RTAA payments received from a state 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 individuals with an intellectual disability do their work.
Disaster relief grants.
Do not include post-disaster grants received under the Robert T. Stafford 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, child care, or funeral expenses. Do not deduct casualty losses or medical expenses that
are specifically reimbursed by these disaster relief grants. If you have deducted a casualty loss for the loss of your personal
residence and you later receive a disaster relief grant for the loss of the same residence, you may have to include part or
all of the grant in your taxable income. See
, earlier. Unemployment assistance payments under the Act are taxable unemployment compensation. See
under Unemployment Benefits
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 a representative of one.
A qualified disaster is:
A disaster which results from a terrorist or military action;
A federally 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. 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 used 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
Home Affordable Modification Program (HAMP).
If you benefit from Pay-for-Performance Success Payments under HAMP, the payments are not taxable.
Mortgage assistance payments under section 235 of the National Housing Act.
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 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).
Generally, 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. Other income items briefly discussed below are referenced
to publications which provide more topical information.
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.
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
If you receive a bribe, include it in your income.
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.
Do not include in your income amounts you receive from the passengers for driving a car in a car pool to and from
work. These amounts are considered reimbursement for your expenses. However, this rule does not apply if you have developed
car pool arrangements into a profit-making business of transporting workers for hire.
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.
You buy a new car for $24,000 cash and receive a $2,000 rebate check from the manufacturer. The $2,000 is not income to you.
Your basis in the car is $22,000. This is the 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 chapter 25
for more information.
Child support payments.
You should not report these payments on your return. See chapter 18
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. The character of the income as ordinary income or capital gain depends on
the nature of the underlying claim. 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).
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 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
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.
In most cases, 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.
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 of estates and trusts generally are not deductible by the beneficiaries.
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
A corporate director,
An executor, administrator, or personal representative of an estate,
A manager of a trade or business you operated before declaring Chapter 11 bankruptcy,
A notary public, or
An election precinct official.
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
, in chapter 1, for a discussion of when you are considered self-employed.
Corporate director fees are self-employment income. Report these payments on Schedule C or Schedule C-EZ (Form 1040).
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.
Manager of trade or business for bankruptcy estate.
Include in your income all payments received from your bankruptcy estate for managing or operating a trade or business
that you operated before you filed for bankruptcy. Report this income on Form 1040, line 21.
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.
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, to help you
determine the amount you can deduct for the use of your home.
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.
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).
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.
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.
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 4 on Form 1040,
line 62, as federal income tax withheld.
Gifts and inheritances.
In most cases, 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.
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
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.
Income from illegal activities, 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 pay you receive must be included in your income on Form 1040, line 21. 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 36. Enter “Jury Pay
” and the amount on the dotted line next to line 36.
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.
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).
In most cases, you 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
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
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.
In most cases, the beneficiary 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 Publication 575, Pension and Annuity Income.
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 your main home. 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 as explained in the Instructions for Schedule D (Form 1040). You cannot deduct
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.
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 as explained in the Instructions for 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.
In most cases, 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.
Allowances paid by the Department of Veterans Affairs are not included in your income. These allowances are not considered
scholarship or fellowship grants.
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
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.
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.