Qualified joint venture. . A qualified joint venture conducted by you and your spouse may not be treated as a partnership if you file a joint return
for the tax year. See
Partnership Income,
later.
Expiration of relief granted for Hurricane Katrina. The exclusion from income for the discharge of certain nonbusiness debt as a result of Hurricane Katrina expired.
You must include on your return all income you receive in the form of money, property, and services unless the tax law states
that you do not include them. Some items, however, are only partly excluded from income. This chapter discusses many kinds
of income and explains whether they are taxable or nontaxable.
This chapter begins with discussions of the following income items.
-
Bartering.
-
Canceled debts.
-
Host or hostess.
-
Life insurance proceeds.
-
Partnership income.
-
S Corporation income.
-
Recoveries (including state income tax refunds).
-
Rents from personal property.
-
Repayments.
-
Royalties.
-
Unemployment benefits.
-
Welfare and other public assistance benefits.
These discussions are followed by brief discussions of other income items arranged in alphabetical order.
Useful Items - You may want to see:
Publication
-
525
Taxable and Nontaxable Income
-
544
Sales and Other Dispositions of Assets
-
550
Investment Income and Expenses
Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value
of property or services you receive in bartering. If you exchange services with another person and you both have agreed ahead
of time as to the value of the services, that value will be accepted as fair market value unless the value can be shown to
be otherwise.
Generally, you report this income on Schedule C, Profit or Loss From Business, or Schedule C-EZ, Net Profit From Business
(Form 1040). However, if the barter involves an exchange of something other than services, such as in
Example 3 below, you may have to use another form or schedule instead.
Example 1.
You are a self-employed attorney who performs legal services for a client, a small corporation. The corporation gives you
shares of its stock as payment for your services. You must include the fair market value of the shares in your income on Schedule
C or Schedule C-EZ (Form 1040) in the year you receive them.
Example 2.
You are self-employed and a member of a barter club. The club uses
“credit units” as a means of exchange. It adds credit units to your account for goods or services you provide to members, which you can
use to purchase goods or services offered by other members of the barter club. The club subtracts credit units from your account
when you receive goods or services from other members. You must include in your income the value of the credit units that
are added to your account, even though you may not actually receive goods or services from other members until a later tax
year.
Example 3.
You own a small apartment building. In return for 6 months rent-free use of an apartment, an artist gives you a work of art
she created. You must report as rental income on Schedule E, Supplemental Income and Loss (Form 1040), the fair market value
of the artwork, and the artist must report as income on Schedule C or Schedule C-EZ (Form 1040) the fair rental value of the
apartment.
Form 1099-B from barter exchange.
If you exchanged property or services through a barter exchange, Form 1099-B, Proceeds From Broker and Barter Exchange
Transactions, or a similar statement from the barter exchange should be sent to you by January 31, 2008. It should show the
value of cash, property, services, credits, or scrip you received from exchanges during 2007. The IRS also will receive a
copy of Form 1099-B.
Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount
in your income. You have no income from the canceled debt if it is intended as a gift to you. A debt includes any indebtedness
for which you are liable or which attaches to property you hold.
If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. If it is a business debt, report the
amount on Schedule C or Schedule C-EZ (Form 1040) (or on Schedule F, Profit or Loss From Farming (Form 1040), if the debt
is farm debt and you are a farmer).
Form 1099-C.
If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600
or more, you will receive a Form 1099-C, Cancellation of Debt. The amount of the canceled debt is shown in box 2.
Interest included in canceled debt.
If any interest is forgiven and included in the amount of canceled debt in box 2, the amount of interest also will
be shown in box 3. Whether or not you must include the interest portion of the canceled debt in your income depends on whether
the interest would be deductible if you paid it. See
Deductible debt,
under
Exceptions, later.
If the interest would not be deductible (such as interest on a personal loan), include in your income the amount from
Form 1099-C, box 2. If the interest would be deductible (such as on a business loan), include in your income the net amount
of the canceled debt (the amount shown in box 2 less the interest amount shown in box 3).
Discounted mortgage loan.
If your financial institution offers a discount for the early payment of your mortgage loan, the amount of the discount
is canceled debt. You must include the canceled amount in your income.
Mortgage relief upon sale or other disposition.
If you are personally liable for a mortgage (recourse debt), and you are relieved of the mortgage when you dispose
of the property, you may realize gain or loss up to the fair market value of the property. To the extent the mortgage discharge
exceeds the fair market value of the property, it is income from discharge of indebtedness unless it qualifies for exclusion
under
Excluded debt,
later. Report any income from discharge of indebtedness on nonbusiness debt that does not qualify for exclusion as other
income on Form 1040, line 21.
If you are not personally liable for a mortgage (nonrecourse debt), and you are relieved of the mortgage when you
dispose of the property (such as through foreclosure or repossession), that relief is included in the amount you realize.
You may have a taxable gain if the amount you realize exceeds your adjusted basis in the property. Report any gain on nonbusiness
property as a capital gain.
See
Foreclosures and Repossessions in Publication 544 for more information.
Stockholder debt.
If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt
is a constructive distribution that is generally dividend income to you. For more information, see Publication 542, Corporations.
If you are a stockholder in a corporation and you cancel a debt owed to you by the corporation, you generally do not
realize income. This is because the canceled debt is considered as a contribution to the capital of the corporation equal
to the amount of debt principal that you canceled.
Repayment of canceled debt.
If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund
for the year the amount was included in income. You can file a claim on Form 1040X if the statute of limitations for filing
a claim is still open. The statute of limitations generally does not end until 3 years after the due date of your original
return.
There are several exceptions to the inclusion of canceled debt in income. These are explained next.
Student loans.
Certain student loans contain a provision that all or part of the debt incurred to attend the qualified educational
institution will be canceled if you work for a certain period of time in certain professions for any of a broad class of employers.
You do not have income if your student loan is canceled after you agreed to this provision and then performed the
services required. To qualify, the loan must have been made by:
-
The Federal Government, a state or local government, or an instrumentality, agency, or subdivision thereof,
-
A tax-exempt public benefit corporation that has assumed control of a state, county, or municipal hospital, and whose employees
are considered public employees under state law, or
-
An educational institution
-
Under an agreement with an entity described in (1) or (2) that provided the funds to the institution to make the loan, or
-
As part of a program of the institution designed to encourage students to serve in occupations or areas with unmet needs and
under which the services provided are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3)
organization.
Section 501(c)(3) organizations are defined in Publication 525.
A loan to refinance a qualified student loan also will qualify if it was made by an educational institution or a tax-exempt
501(a) organization under its program designed as described in (3)(b) above.
Education loan repayment assistance.
Education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment
Program) or a state education loan repayment program eligible for funds under the Public Health Service Act are not taxable
if you agree to provide primary health services in health professional shortage areas.
Deductible debt.
You do not have income from the cancellation of a debt if your payment of the debt would be deductible. This exception
applies only if you use the cash method of accounting. For more information, see chapter 5 of Publication 334, Tax Guide for
Small Business.
Price reduced after purchase.
Generally, if the seller reduces the amount of debt you owe for property you purchased, you do not have income from
the reduction. The reduction of the debt is treated as a purchase price adjustment and reduces your basis in the property.
Excluded debt.
Do not include a canceled debt in your gross income in the following situations.
-
The debt is canceled in a bankruptcy case under title 11 of the U.S. Code. See Publication 908, Bankruptcy Tax Guide.
-
The debt is canceled when you are insolvent. However, you cannot exclude any amount of canceled debt that is more than the
amount by which you are insolvent. See Publication 908.
-
The debt is qualified farm debt and is canceled by a qualified person. See chapter 3 of Publication 225, Farmer's Tax Guide.
-
The debt is qualified real property business debt. See chapter 5 of Publication 334.
-
The cancellation is intended as a gift.
If you host a party at which sales are made, any gift you receive for giving the party is a payment for helping a direct seller
make sales. You must report it as income at its fair market value.
Your out-of-pocket party expenses are subject to the 50% limit for meal and entertainment expenses. These expenses are deductible
as miscellaneous itemized deductions subject to the 2% of AGI limit on Schedule A (Form 1040), but only up to the amount of
income you receive for giving the party.
For more information about the 50% limit for meal and entertainment expenses, see
50% Limit in Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned
over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment
contract.
Proceeds not received in installments.
If death benefits are paid to you in a lump sum or other than at regular intervals, include in your income only the
benefits that are more than the amount payable to you at the time of the insured person's death. If the benefit payable at
death is not specified, you include in your income the benefit payments that are more than the present value of the payments
at the time of death.
Proceeds received in installments.
If you receive life insurance proceeds in installments, you can exclude part of each installment from your income.
To determine the excluded part, divide the amount held by the insurance company (generally the total lump sum payable
at the death of the insured person) by the number of installments to be paid. Include anything over this excluded part in
your income as interest.
Surviving spouse.
If your spouse died before October 23, 1986, and insurance proceeds paid to you because of the death of your spouse
are received in installments, you can exclude up to $1,000 a year of the interest included in the installments. If you remarry,
you can continue to take the exclusion.
More information.
For more information, see
Life Insurance Proceeds in Publication 525.
Surrender of policy for cash.
If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the
cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you
paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included
in your income.
You should receive a Form 1099-R showing the total proceeds and the taxable part. Report these amounts on lines 16a and 16b
of Form 1040 or lines 12a and 12b of Form 1040A.
Endowment Contract Proceeds
An endowment contract is a policy under which you are paid a specified amount of money on a certain date unless you die before
that date, in which case, the money is paid to your designated beneficiary. Endowment proceeds paid in a lump sum to you at
maturity are taxable only if the proceeds are more than the cost of the policy. To determine your cost, subtract any amount
that you previously received under the contract and excluded from your income from the total premiums (or other consideration)
paid for the contract. Include the part of the lump sum payment that is more than your cost in your income.
Accelerated Death Benefits
Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's
death are excluded from income if the insured is terminally or chronically ill.
Viatical settlement.
This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement
provider. A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment
of life insurance contracts on the lives of insured individuals who are terminally or chronically ill and who meets the requirements
of section 101(g)(2)(B) of the Internal Revenue Code.
Exclusion for terminal illness.
Accelerated death benefits are fully excludable if the insured is a terminally ill individual. This is a person who has been
certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within
24 months from the date of the certification.
Exclusion for chronic illness.
If the insured is a chronically ill individual who is not terminally ill, accelerated death benefits paid on the basis of
costs incurred for qualified long-term care services are fully excludable. Accelerated death benefits paid on a
per diem or other periodic basis are excludable up to a limit. This limit applies to the total of the accelerated death benefits and
any periodic payments received from long-term care insurance contracts. For information on the limit and the definitions of
chronically ill individual, qualified long-term care services, and long-term care insurance contracts, see
Long-Term Care Insurance Contracts under
Sickness and Injury Benefits in Publication 525.
Exception.
The exclusion does not apply to any amount paid to a person (other than the insured) who has an insurable interest
in the life of the insured because the insured:
-
Is a director, officer, or employee of the person, or
-
Has a financial interest in the person's business.
Form 8853.
To claim an exclusion for accelerated death benefits made on a
per diem or other periodic basis, you must file Form 8853, Archer MSAs and Long-term Care Insurance Contracts, with your return. You
do not have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred.
Public Safety Officer Killed in the Line of Duty
If you are a survivor of a public safety officer who was killed in the line of duty, you may be able to exclude from income
certain amounts you receive.
For this purpose, the term public safety officer includes law enforcement officers, firefighters, chaplains, and rescue squad
and ambulance crew members. For more information, see Publication 559, Survivors, Executors, and Administrators.
A partnership generally is not a taxable entity. The income, gains, losses, deductions, and credits of a partnership are passed
through to the partners based on each partner's distributive share of these items.
Schedule K-1 (Form 1065).
Although a partnership generally pays no tax, it must file an information return on Form 1065, U.S. Return of Partnership
Income, and send Schedule K-1 (Form 1065) to each partner. In addition, the partnership will send each partner a copy of the
Partner's Instructions for Schedule K-1 (Form 1065) to help each partner report his or her share of the partnership's income,
deductions, credits, and tax preference items.
Keep Schedule K-1 (Form 1065) for your records. Do not attach it to your Form 1040.
For more information on partnerships, see Publication 541, Partnerships.
Qualified joint venture.
If you and your spouse materially participate as the only members of a jointly owned and operated business, and you
file a joint return for the tax year, you can make a joint election to be taxed as a qualified joint venture instead of a
partnership. To make this election, you must divide all items of income, gain, loss, deduction, and credit between you and
your spouse in accordance with your respective interests in the venture. Each of you must file a separate Schedule C or Schedule
C-EZ (Form 1040).
In general, an S corporation does not pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation
are passed through to the shareholders based on each shareholder's
pro rata share.
Schedule K-1 (Form 1120S).
An S corporation must file a return on Form 1120S, U.S. Income Tax Return for an S Corporation, and send Schedule
K-1 (Form 1120S) to each shareholder. In addition, the S corporation will send each shareholder a copy of the Shareholder's
Instructions for Schedule K-1 (Form 1120S) to help each shareholder report his or her share of the S corporation's income,
losses, credits, and deductions.
Keep Schedule K-1 (Form 1120S) for your records. Do not attach it to your Form 1040.
For more information on S corporations and their shareholders, see Instructions for Form 1120S.
A recovery is a return of an amount you deducted or took a credit for in an earlier year. The most common recoveries are refunds,
reimbursements, and rebates of deductions itemized on Schedule A (Form 1040). You also may have recoveries of non-itemized
deductions (such as payments on previously deducted bad debts) and recoveries of items for which you previously claimed a
tax credit.
Tax benefit rule.
You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit
you took for the recovered amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried
over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier
year. For more information, see Publication 525.
Federal income tax refund.
Refunds of federal income taxes are not included in your income because they are never allowed as a deduction from
income.
State tax refund.
If you received a state or local income tax refund (or credit or offset) in 2007, you generally must include it in
income if you deducted the tax in an earlier year. The payer should send Form 1099-G, Certain Government Payments, to you
by January 31, 2008. The IRS also will receive a copy of the Form 1099-G. Use the State and Local Income Tax Refund worksheet
in the 2007 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income. See Publication 525
for when you must use another worksheet.
After 2003, you could choose to deduct for a tax year either:
For 2007, the maximum refund that you may have to include in income is limited to the excess of the tax you chose
to deduct for that year over the tax you did not choose to deduct for that year. For examples, see Publication 525.
Mortgage interest refund.
If you received a refund or credit in 2007 of mortgage interest paid in an earlier year, the amount should be shown in box
3 of your Form 1098, Mortgage Interest Statement. Do not subtract the refund amount from the interest you paid in 2007. You
may have to include it in your income under the rules explained in the following discussions.
Interest on recovery.
Interest on any of the amounts you recover must be reported as interest income in the year received. For example,
report any interest you received on state or local income tax refunds on Form 1040, line 8a.
Recovery and expense in same year.
If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit
and is not reported as income.
Recovery for 2 or more years.
If you receive a refund or other recovery that is for amounts you paid in 2 or more separate years, you must allocate,
on a
pro rata basis, the recovered amount between the years in which you paid it. This allocation is necessary to determine the amount
of recovery from any earlier years and to determine the amount, if any, of your allowable deduction for this item for the
current year. For information on how to compute the allocation, see
Recoveries in Publication 525.
Itemized Deduction Recoveries
If you recover any amount that you deducted in an earlier year on Schedule A (Form 1040), you generally must include the full
amount of the recovery in your income in the year you receive it.
Where to report.
Enter your state or local income tax refund on Form 1040, line 10, and the total of all other recoveries as other
income on Form 1040, line 21. You cannot use Form 1040A or Form 1040EZ.
Standard deduction limit.
You generally are allowed to claim the standard deduction if you do not itemize your deductions. Only your itemized
deductions that are more than your standard deduction are subject to the recovery rule (unless you are required to itemize
your deductions). If your total deductions on the earlier year return were not more than your income for that year, include
in your income this year the lesser of:
Example.
For 2006, you filed a joint return. Your taxable income was $60,000 and you were not entitled to any tax credits. Your standard
deduction was $10,300, and you had itemized deductions of $12,000. In 2007, you received the following recoveries for amounts
deducted on your 2006 return:
None of the recoveries were more than the deductions taken for 2006. The difference between the state and local income tax
you deducted and your local general sales tax was more than $400.
Your total recoveries are less than the amount by which your itemized deductions exceeded the standard deduction ($12,000
− 10,300 = $1,700), so you must include your total recoveries in your income for 2007. Report the state and local income tax
refund of $400 on Form 1040, line 10, and the balance of your recoveries, $525, on Form 1040, line 21.
Standard deduction for earlier years.
To determine if amounts recovered in 2007 must be included in your income, you must know the standard deduction for
your filing status for the year the deduction was claimed. Standard deduction amounts for 2006, 2005, and 2004, are in Publication
525.
Example.
You filed a joint return for 2006 with taxable income of $45,000. Your itemized deductions were $10,650. The standard deduction
that you could have claimed was $10,300. In 2007, you recovered $2,100 of your 2006 itemized deductions. None of the recoveries
were more than the actual deductions for 2006. Include $350 of the recoveries in your 2007 income. This is the smaller of
your recoveries ($2,100) or the amount by which your itemized deductions were more than the standard deduction ($10,650 −
10,300 = $350).
Recovery limited to deduction.
You do not include in your income any amount of your recovery that is more than the amount you deducted in the earlier
year. The amount you include in your income is limited to the smaller of:
Example.
During 2006 you paid $1,700 for medical expenses. From this amount you subtracted $1,500, which was 7.5% of your adjusted
gross income. Your actual medical expense deduction was $200. In 2007, you received a $500 reimbursement from your medical
insurance for your 2006 expenses. The only amount of the $500 reimbursement that must be included in your income for 2007
is $200—the amount actually deducted.
Other recoveries.
See
Recoveries in Publication 525 if:
-
You have recoveries of items other than itemized deductions, or
-
You received a recovery for an item for which you claimed a tax credit (other than investment credit or foreign tax credit)
in a prior year.
Rents from Personal Property
If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is generally determined
by:
-
Whether or not the rental activity is a business, and
-
Whether or not the rental activity is conducted for profit.
Generally, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity,
your rental activity is a business. See Publication 535, Business Expenses, for details on deducting expenses for both business
and not-for-profit activities.
Reporting business income and expenses.
If you are in the business of renting personal property, report your income and expenses on Schedule C or Schedule C-EZ (Form
1040). The form instructions have information on how to complete them.
Reporting nonbusiness income.
If you are not in the business of renting personal property, report your rental income on Form 1040, line 21. List
the type and amount of the income on the dotted line next to line 21.
Reporting nonbusiness expenses.
If you rent personal property for profit, include your rental expenses in the total amount you enter on Form 1040,
line 36. Also enter the amount and
“
PPR” on the dotted line next to line 36.
If you do not rent personal property for profit, your deductions are limited and you cannot report a loss to offset
other income. See
Activity not for profit,
under
Other Income, later.
If you had to repay an amount that you included in your income in an earlier year, you may be able to deduct the amount repaid
from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may be able to
take a credit against your tax for the year in which you repaid it. Generally, you can claim a deduction or credit only if
the repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit transaction.
Type of deduction.
The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier
year. You generally deduct the repayment on the same form or schedule on which you previously reported it as income. For example,
if you reported it as self-employment income, deduct it as a business expense on Schedule C or Schedule C-EZ (Form 1040) or
Schedule F (Form 1040). If you reported it as a capital gain, deduct it as a capital loss on Schedule D (Form 1040). If you
reported it as wages, unemployment compensation, or other nonbusiness income, deduct it as a miscellaneous itemized deduction
on Schedule A (Form 1040).
Repayment of $3,000 or less.
If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. If you must deduct
it as a miscellaneous itemized deduction, enter it on Schedule A (Form 1040), line 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.
Method 1.
Figure your tax for 2007 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.
Method 2.
Figure your tax for 2007 claiming a credit for the repaid amount. Follow these steps.
-
Figure your tax for 2007 without deducting the repaid amount.
-
Refigure your tax from the earlier year without including in income the amount you repaid in 2007.
-
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 2007 figured without the deduction (Step 1).
If method 1 results in less tax, deduct the amount repaid. If method 2 results in less tax, claim the credit figured
in (3) above on Form 1040, line 70, and enter
“
I.R.C. 1341” in the column to the right of line 70.
An example of this computation can be found in Publication 525.
Repaid social security benefits.
If you repaid social security benefits, see
Repayment of benefits
in chapter 11.
Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income.
You generally report royalties in Part I of Schedule E (Form 1040). However, if you hold an operating oil, gas, or mineral
interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule
C or Schedule C-EZ (Form 1040).
Copyrights and patents.
Royalties from copyrights on literary, musical, or artistic works, and similar property, or from patents on inventions,
are amounts paid to you for the right to use your work over a specified period of time. Royalties generally are based on the
number of units sold, such as the number of books, tickets to a performance, or machines sold.
Oil, gas, and minerals.
Royalty income from oil, gas, and mineral properties is the amount you receive when natural resources are extracted
from your property. The royalties are based on units, such as barrels, tons, etc., and are paid to you by a person or company
who leases the property from you.
Depletion.
If you are the owner of an economic interest in mineral deposits or oil and gas wells, you can recover your investment
through the depletion allowance. For information on this subject, see chapter 9 of Publication 535.
Coal and iron ore.
Under certain circumstances, you can treat amounts you receive from the disposal of coal and iron ore as payments
from the sale of a capital asset, rather than as royalty income. For information about gain or loss from the sale of coal
and iron ore, see Publication 544.
Sale of property interest.
If you sell your complete interest in oil, gas, or mineral rights, the amount you receive is considered payment for
the sale of section 1231 property, not royalty income. Under certain circumstances, the sale is subject to capital gain or
loss treatment on Schedule D (Form 1040). For more information on selling section 1231 property, see chapter 3 of Publication
544.
If you retain a royalty, an overriding royalty, or a net profit interest in a mineral property for the life of the
property, you have made a lease or a sublease, and any cash you receive for the assignment of other interests in the property
is ordinary income subject to a depletion allowance.
Part of future production sold.
If you own mineral property but sell part of the future production, you generally treat the money you receive from
the buyer at the time of the sale as a loan from the buyer. Do not include it in your income or take depletion based on it.
When production begins, you include all the proceeds in your income, deduct all the production expenses, and deduct
depletion from that amount to arrive at your taxable income from the property.
The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.
Unemployment compensation.
You must include in your income all unemployment compensation you receive. You should receive a Form 1099-G, Certain Government
Payments, showing the amount paid to you. Generally, you enter unemployment compensation on line 19 of Form 1040, line 13
of Form 1040A, or line 3 of Form 1040EZ.
Types of unemployment compensation.
Unemployment compensation generally includes any amount received under an unemployment compensation law of the United
States or of a state. It includes the following benefits.
-
Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund.
-
State unemployment insurance benefits.
-
Railroad unemployment compensation benefits.
-
Disability payments from a government program paid as a substitute for unemployment compensation. (Amounts received as workers'
compensation for injuries or illness are not unemployment compensation. See
chapter 5 for more information.)
-
Trade readjustment allowances under the Trade Act of 1974.
-
Unemployment assistance under the Disaster Relief and Emergency Assistance Act.
Governmental program.
If you contribute to a governmental unemployment compensation program and your contributions are not deductible, amounts
you receive under the program are not included as unemployment compensation until you recover your contributions. 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 2007 unemployment compensation you received in 2007, 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 2007 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
$3,000, see
Repayments,
earlier.
Tax withholding.
You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete
Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 10% of your payment.
If you do not choose to have tax withheld from your unemployment compensation, you may be liable for estimated tax. For more
information on estimated tax, see
chapter 4.
Supplemental unemployment benefits.
Benefits received from an employer-financed fund (to which the employees did not contribute) are not unemployment
compensation. They are taxable as wages and are subject to withholding for income tax. They may be subject to social security
and Medicare taxes. For more information, see
Supplemental Unemployment Benefits in section 5 of Publication 15-A, Employer's Supplemental Tax Guide. Report these payments on line 7 of Form 1040 or Form
1040A or on line 1 of Form 1040EZ.
Repayment of benefits.
You may have to repay some of your supplemental unemployment benefits to qualify for trade readjustment allowances
under the Trade Act of 1974. If you repay supplemental unemployment benefits in the same year you receive them, reduce the
total benefits by the amount you repay. If you repay the benefits in a later year, you must include the full amount of the
benefits received in your income for the year you received them.
Deduct the repayment in the later year as an adjustment to gross income on Form 1040. (You cannot use Form 1040A or
Form 1040EZ.) Include the repayment on Form 1040, line 36, and enter
“
Sub-Pay TRA” and the amount on the dotted line next to line 36. If the amount you repay in a later year is more than $3,000, you may
be able to take a credit against your tax for the later year instead of deducting the amount repaid. For more information
on this, see
Repayments,
earlier.
Private unemployment fund.
Unemployment benefit payments from a private (nonunion) fund to which you voluntarily contribute are taxable only
if the amounts you receive are more than your total payments into the fund. Report the taxable amount on Form 1040, line 21.
Payments by a union.
Benefits paid to you as an unemployed member of a union from regular union dues are included in your income on Form
1040, line 21. However, if you contribute to a special union fund and your payments to the fund are not deductible, the unemployment
benefits you receive from the fund are includible in your income only to the extent they are more than your contributions.
Guaranteed annual wage.
Payments you receive from your employer during periods of unemployment, under a union agreement that guarantees you
full pay during the year, are taxable as wages. Include them on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ.
State employees.
Payments similar to a state's unemployment compensation may be made by the state to its employees who are not covered
by the state's unemployment compensation law. Although the payments are fully taxable, do not report them as unemployment
compensation. Report these payments on Form 1040, line 21.
Welfare and Other Public Assistance Benefits
Do not include in your income governmental benefit payments from a public welfare fund based upon need, such as payments due
to blindness. Payments from a state fund for the victims of crime should not be included in the victims' incomes if they are
in the nature of welfare payments. Do not deduct medical expenses that are reimbursed by such a fund. You must include in
your income any welfare payments that are compensation for services or that are obtained fraudulently.
Alternative trade adjustment assistance (ATAA) payments.
Payments you receive from a state agency under the Demonstration Project for Alternative Trade Adjustment Assistance
for Older Workers (ATAA) must be included in your income. The state must send you Form 1099-G to advise you of the amount
you should include in income. The amount should be reported on Form 1040, line 21.
Persons with disabilities.
If you have a disability, you must include in income compensation you receive for services you perform unless the
compensation is otherwise excluded. However, you do not include in income the value of goods, services, and cash that you
receive, not in return for your services, but for your training and rehabilitation because you have a disability. Excludable
amounts include payments for transportation and attendant care, such as interpreter services for the deaf, reader services
for the blind, and services to help mentally retarded persons do their work.
Disaster relief grants.
Do not include post-disaster grants received under the Disaster Relief and Emergency Assistance Act in your income if the
grant payments are made to help you meet necessary expenses or serious needs for medical, dental, housing, personal property,
transportation, or funeral expenses. Do not deduct casualty losses or medical expenses that are specifically reimbursed by
these disaster relief grants. 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
Recoveries,
earlier. Unemployment assistance payments under the Act are taxable unemployment compensation. See
Unemployment compensation
under
Unemployment Benefits, earlier.
Disaster relief payments.
You can exclude from income any amount you receive that is a qualified disaster relief payment. A qualified disaster
relief payment is an amount paid to you:
-
To reimburse or pay reasonable and necessary personal, family, living, or funeral expenses that result from a qualified disaster,
-
To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of your home or repair or
replacement of its contents to the extent it is due to a qualified disaster,
-
By a person engaged in the furnishing or sale of transportation as a common carrier because of the death or personal physical
injuries incurred as a result of a qualified disaster, or
-
By a federal, state, or local government, or agency, or instrumentality in connection with a qualified disaster in order to
promote the general welfare.
You can exclude this amount only to the extent any expense it pays for is not paid for by insurance or otherwise. The exclusion
does not apply if you were a participant or conspirator in a terrorist action or his or her representative.
A qualified disaster is:
-
A disaster which results from a terrorist or military action,
-
A Presidentially declared disaster, or
-
A disaster which results from an accident involving a common carrier, or from any other event, which is determined to be catastrophic
by the Secretary of the Treasury or his or her delegate.
For amounts paid under item (4), a disaster is qualified if it is determined by an applicable federal, state, or local
authority to warrant assistance from the federal, state, or local government, agency, or instrumentality.
Disaster mitigation payments.
You also can exclude from income any amount you receive that is a qualified disaster mitigation payment. Like qualified
disaster relief payments, qualified disaster mitigation payments are also most commonly paid to you in the period immediately
following damage to property as a result of a natural disaster. However, disaster mitigation payments are grants you use to
mitigate (reduce the severity of) potential damage from future natural disasters. They are paid to you through state and local
governments based on the provisions of the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National
Flood Insurance Act.
You cannot increase the basis or adjusted basis of your property for improvements made with nontaxable disaster mitigation
payments.
Mortgage assistance payments.
Payments made under section 235 of the National Housing Act for mortgage assistance are not included in the homeowner's
income. Interest paid for the homeowner under the mortgage assistance program cannot be deducted.
Medicare.
Medicare benefits received under title XVIII of the Social Security Act are not includible in the gross income of
the individuals for whom they are paid. This includes basic (part A (Hospital Insurance Benefits for the Aged)) and supplementary
(part B (Supplementary Medical Insurance Benefits for the Aged)).
Old-age, survivors, and disability insurance benefits (OASDI).
OASDI payments under section 202 of title II of the Social Security Act are not includible in the gross income of
the individuals to whom they are paid. This applies to old-age insurance benefits, and insurance benefits for wives, husbands,
children, widows, widowers, mothers and fathers, and parents, as well as the lump-sum death payment.
Nutrition Program for the Elderly.
Food benefits you receive under the Nutrition Program for the Elderly are not taxable. If you prepare and serve free meals
for the program, include in your income as wages the cash pay you receive, even if you are also eligible for food benefits.
Payments to reduce cost of winter energy.
Payments made by a state to qualified people to reduce their cost of winter energy use are not taxable.
The following brief discussions are arranged in alphabetical order. Income items that are discussed in greater detail in another
publication include a reference to that publication.
Activity not for profit.
You must include on your return income from an activity from which you do not expect to make a profit. An example
of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. Enter this income on Form 1040,
line 21. Deductions for expenses related to the activity are limited. They cannot total more than the income you report and
can be taken only if you itemize deductions on Schedule A (Form 1040). See
Not-for-Profit Activities in chapter 1 of Publication 535 for information on whether an activity is considered carried on for a profit.
Alaska Permanent Fund dividend.
If you received a payment from Alaska's mineral income fund (Alaska Permanent Fund dividend), report it as income
on line 21 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ. The state of Alaska sends each recipient a document
that shows the amount of the payment with the check. The amount also is reported to IRS.
Alimony.
Include in your income on Form 1040, line 11, any alimony payments you receive. Amounts you receive for child support
are not income to you. Alimony and child support payments are discussed in chapter 18.
Bribes.
If you receive a bribe, include it in your income.
Campaign contributions.
These contributions are not income to a candidate unless they are diverted to his or her personal use. To be exempt
from tax, the contributions must be spent for campaign purposes or kept in a fund for use in future campaigns. However, interest
earned on bank deposits, dividends received on contributed securities, and net gains realized on sales of contributed securities
are taxable and must be reported on Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations. Excess campaign
funds transferred to an office account must be included in the officeholder's income on Form 1040, line 21, in the year transferred.
Cash rebates.
A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your
basis by the amount of the rebate.
Example.
You buy a new car for $9,000 cash and receive a $400 rebate check from the manufacturer. The $400 is not income to you. Your
basis in the car is $8,600. This is your basis on which you figure gain or loss if you sell the car, and depreciation if you
use it for business.
Casualty insurance and other reimbursements.
You generally should not report these reimbursements on your return, unless you are figuring gain or loss from the
casualty or theft. See Publication 547, Casualties, Disasters, and Thefts, for more information.
Child support payments.
You should not report these payments on your return. See Publication 504, Divorced or Separated Individuals, for more
information.
Court awards and damages.
To determine if settlement amounts you receive by compromise or judgment must be included in your income, you must
consider the item that the settlement replaces. 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.
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