Taxable and   Nontaxable   Income

Taxmap/pubs/p525-000.htm#TXMP2f584229 What's New

Taxmap/pubs/p525-000.htm#TXMP6fc7f748
Education loan repayment assistance.

Beginning in 2004, education loan repayments made to you by the National Health Service Corps Loan Repayment Program (NHSC Loan Repayment Program) or a state education loan repayment program eligible for funds under the Public Health Service Act are not taxable if you agree to provide primary health services in health professional shortage areas. For more information, see Publication 970, Tax Benefits for Education.

Taxmap/pubs/p525-000.htm#TXMP4c77d7dd
Unlawful discrimination claims.

You may be able to take a deduction from gross income for attorney fees and court costs paid after October 22, 2004, for actions settled or decided after that date involving a claim of unlawful discrimination, a claim against the United States Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act, but only up to the amount included in gross income for the tax year from such claim. See Court awards and damages, under Other Income.

Taxmap/pubs/p525-000.htm#TXMP38eae55c
Elective deferrals.

The limit on the amount of your wages you can elect to defer into certain retirement plans (such as section 401(k) plans) increases each year through 2006. If you are age 50 or older, you may be able to make additional catch-up elective deferrals. See Elective Deferrals in the discussion on retirement plan contributions under Employee Compensation.

Taxmap/pubs/p525-000.htm#TXMP1871a4e9
Health Savings Accounts (HSAs).

Beginning in 2004, you may be able to make tax-deductible contributions to a health savings account to pay qualified medical expenses. Amounts from HSAs used for qualified medical expenses are not includible in gross income. Amounts from HSAs not used for qualified medical expenses are includible in income. HSAs are discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Taxmap/pubs/p525-000.htm#TXMP47ee4f9a
Smallpox vaccine injuries.

If you are an eligible individual who receives benefits under the Smallpox Emergency Personnel Protection Act of 2003 for a covered injury resulting from a covered countermeasure, you can exclude the payment from your income (to the extent it is not allowed as a medical and dental expense deduction on Schedule A (Form 1040)). Eligible individuals include health care workers, emergency personnel, and first responders in a smallpox emergency, who have received a smallpox vaccination.

Taxmap/pubs/p525-000.htm#TXMP622c21bd
Capital gains treatment for certain stock sales to comply with conflict-of-interest requirements.

You are considered to meet the holding period requirement and qualify for capital gain treatment for certain sales after October 22, 2004, of stock acquired from the exercise of statutory stock options. SeeStatutory Stock Options under Stock Options.

Taxmap/pubs/p525-000.htm#TXMP078adca7 Reminders

Taxmap/pubs/p525-000.htm#TXMP5ca1b355
Terrorist attacks.

You can exclude from income certain disaster assistance, disability, and death payments received as a result of a terrorist or military action. For more information, see Publication 3920, Tax Relief for Victims of Terrorist Attacks.

Astronauts. You can also exclude death payments for astronauts dying in the line of duty after 2002.

Taxmap/pubs/p525-000.htm#TXMP11317773
Foreign income.

If you are a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).

If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Taxmap/pubs/p525-000.htm#TXMP28e5e9aa
Photographs of missing children.

The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

You can receive income in the form of money, property, or services. This publication discusses many kinds of income and explains whether they are taxable or nontaxable. It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S corporations, and royalties. It also includes information on disability pensions, life insurance proceeds, and welfare and other public assistance benefits. Check the index for the location of a specific subject.

Generally, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but is not taxable.

Taxmap/pubs/p525-000.htm#TXMP7c829254 Constructively received income.

You are generally taxed on income that is available to you, regardless of whether it is actually in your possession.

A valid check that you received or that was made available to you before the end of the tax year is considered income constructively received in that year, even if you do not cash the check or deposit it to your account until the next year. For example, if the postal service tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you must include the amount in your income for that tax year. If the check was mailed so that it could not possibly reach you until after the end of the tax year, and you could not otherwise get the funds before the end of the year, you include the amount in your income for the next tax year.

Taxmap/pubs/p525-000.htm#TXMP3c5701cc Assignment of income.

Income received by an agent for you is income you constructively received in the year the agent received it. If you agree by contract that a third party is to receive income for you, you must include the amount in your income when the third party receives it.

Taxmap/pubs/p525-000.htm#TXMP5fa2056c
Example.

You and your employer agree that part of your salary is to be paid directly to your former spouse. You must include that amount in your income when your former spouse receives it.

Taxmap/pubs/p525-000.htm#TXMP35f5ee01 Prepaid income.

Prepaid income, such as compensation for future services, is generally included in your income in the year you receive it. However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. In this case, you include the payment in your income as you earn it by performing the services.

Taxmap/pubs/p525-000.htm#TXMP51236875 Comments and suggestions.

We welcome your comments about this publication and your suggestions for future editions.

You can write to us at the following address:

 
Internal Revenue Service  
Individual Forms and Publications Branch  
SE:W:CAR:MP:T:I  
1111 Constitution Ave. NW, IR-6406  
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

You can email us at *taxforms@irs.gov. (The asterisk must be included in the address.) Please put "Publications Comment" on the subject line. Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.

Taxmap/pubs/p525-000.htm#TXMP75ba833d Tax questions.

If you have a tax question, visit www.irs.gov or call 1-800-829-1040. We cannot answer tax questions at either of the addresses listed above.

Taxmap/pubs/p525-000.htm#TXMP0c15e625 Ordering forms and publications.

Visit www.irs.gov/formspubs to download forms and publications, call 1-800-829-3676, or write to one of the three addresses shown under How To Get Tax Help in the back of this publication.

Useful items

You may want to see:

See How To Get Tax Help, near the end of this publication, for information about getting these publications.

Taxmap/pubs/p525-000.htm#TXMP764e628c Employee Compensation

Employee Compensation

Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.

You should receive a Form W-2, Wage and Tax Statement, from your employer showing the pay you received for your services. Include your pay on line 7 of Form 1040 or Form 1040A or on line 1 of Form 1040EZ, even if you do not receive a Form W-2.

Taxmap/pubs/p525-000.htm#TXMP6ae08fec Childcare providers.

If you provide child care, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it.

Taxmap/pubs/p525-000.htm#TXMP70797be2 Baby-sitting.

If you baby-sit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.

Taxmap/pubs/p525-000.htm#TXMP724693ce Miscellaneous Compensation

Compensation, Miscellaneous

This section discusses many types of employee compensation. The subjects are arranged in alphabetical order.

Taxmap/pubs/p525-000.htm#TXMP3a02ede8 Advance commissions and other earnings.

If you receive advance commissions or other amounts for services to be performed in the future and you are a cash-method taxpayer, you must include these amounts in your income in the year you receive them.

If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. See Repayments, later.

Taxmap/pubs/p525-000.htm#TXMP03bf1364 Allowances and reimbursements.

If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. If you are reimbursed for moving expenses, see Publication 521, Moving Expenses.

Taxmap/pubs/p525-000.htm#TXMP4197ffa2 Back pay awards.

Include in income amounts you are awarded in a settlement or judgment for back pay. These include payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. They should be reported to you by your employer on Form W-2.

Taxmap/pubs/p525-000.htm#TXMP549a9add Bonuses and awards.

Bonuses or awards you receive for outstanding work are included in your income and should be shown on your Form W-2. These include prizes such as vacation trips for meeting sales goals. If the prize or award you receive is goods or services, you must include the fair market value of the goods or services in your income. However, if your employer merely promises to pay you a bonus or award at some future time, it is not taxable until you receive it or it is made available to you.

Taxmap/pubs/p525-000.htm#TXMP26d07131 Employee achievement award.

If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length-of-service or safety achievement, you generally can exclude its value from your income. However, the amount you can exclude is limited to your employer's cost and cannot be more than $1,600 ($400 for awards that are not qualified plan awards) for all such awards you receive during the year. Your employer can tell you whether your award is a qualified plan award. Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that do not create a significant likelihood of it being disguised pay.

However, the exclusion does not apply to the following awards.

• A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years.
• A safety achievement award if you are a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year.

Taxmap/pubs/p525-000.htm#TXMP5033d80e
Example.

Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, and two qualified plan awards of a stereo valued at $1,000 and a set of golf clubs valued at $500. Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 − $1,600) in his income.

Taxmap/pubs/p525-000.htm#TXMP25e6a779 Government cost-of-living allowances.

Cost-of-living allowances generally are included in your income. However, they are not included in your income if you are a federal civilian employee or a federal court employee who is stationed in Alaska, Hawaii, or outside the United States.

Allowances and differentials that increase your basic pay as an incentive for taking a less desirable post of duty are part of your compensation and must be included in income. For example, your compensation includes Foreign Post, Foreign Service, and Overseas Tropical differentials. For more information, see Publication 516, U.S. Government Civilian Employees Stationed Abroad.

Taxmap/pubs/p525-000.htm#TXMP1f202989 Note received for services.

If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Do not include that part again in your income. Include the rest of the payment in your income in the year of payment.

If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them.

Taxmap/pubs/p525-000.htm#TXMP2510f1ba Severance pay.

Amounts you receive as severance pay are taxable. A lump-sum payment for cancellation of your employment contract must be included in your income in the tax year you receive it.

Taxmap/pubs/p525-000.htm#TXMP192ba15a Accrued leave payment.

If you are a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2.

If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2.

Taxmap/pubs/p525-000.htm#TXMP78f0d7fd Outplacement services.

If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income.

However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2% limit) on Schedule A (Form 1040).

Taxmap/pubs/p525-000.htm#TXMP6cc982bd Sick pay.

Pay you receive from your employer while you are sick or injured is part of your salary or wages. In addition, you must include in your income sick pay benefits received from any of the following payers.

• A welfare fund.
• A state sickness or disability fund.
• An association of employers or employees.
• An insurance company, if your employer paid for the plan.

However, if you paid the premiums on an accident or health insurance policy, the benefits you receive under the policy are not taxable. For more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, later.

Taxmap/pubs/p525-000.htm#TXMP265be246 Social security and Medicare taxes paid by employer.

If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. The payment is also treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. However, these payments are not treated as social security and Medicare wages if you are a household worker or a farm worker.

Taxmap/pubs/p525-000.htm#TXMP056077aa Stock appreciation rights.

Do not include a stock appreciation right granted by your employer in income until you exercise (use) the right. When you use the right, you are entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use, minus the fair market value on the date the right was granted. You include the cash payment in income in the year you use the right.

Taxmap/pubs/p525-000.htm#TXMP44da7482 Fringe Benefits

Fringe Benefit

Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules.

See Valuation of Fringe Benefits, later in this discussion, for information on how to determine the amount to include in income.

Taxmap/pubs/p525-000.htm#TXMP01ae286e Recipient of fringe benefit.

You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. You are considered to be the recipient even if it is given to another person, such as a member of your family. An example is a car your employer gives to your spouse for services you perform. The car is considered to have been provided to you and not to your spouse.

You do not have to be an employee of the provider to be a recipient of a fringe benefit. If you are a partner, director, or independent contractor, you can also be the recipient of a fringe benefit.

Taxmap/pubs/p525-000.htm#TXMP2f74c4e0 Provider of benefit.

Your employer or another person for whom you perform services is the provider of a fringe benefit regardless of whether that person actually provides the fringe benefit to you. The provider can be a client or customer of an independent contractor.

Taxmap/pubs/p525-000.htm#TXMP633c6458 Accounting period.

You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Your employer has the option to report taxable noncash fringe benefits by using either of the following rules.

• The general rule: benefits are reported for a full calendar year (January 1 – December 31).
• The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year.

Your employer does not have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit.

You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example).

Taxmap/pubs/p525-000.htm#TXMP0ce98d8e Form W-2.

Your employer reports your taxable fringe benefits in box 1 (Wages, tips, other compensation) of Form W-2. The total value of your fringe benefits may also be noted in box 12. The value of your fringe benefits may be added to your other compensation on one Form W-2, or you may receive a separate Form W-2 showing just the value of your fringe benefits in box 1 with a notation in box 12.

Taxmap/pubs/p525-000.htm#TXMP0a0eeebc Accident or Health Plan

Accident or Health Plan

Generally, the value of accident or health plan coverage provided to you by your employer is not included in your income. Benefits you receive from the plan may be taxable, as explained, later, under Sickness and Injury Benefits.

Taxmap/pubs/p525-000.htm#TXMP11496d72 Long-term care coverage.

Contributions by your employer to provide coverage for long-term care services generally are not included in your income. However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in your income. This amount will be reported as wages in box 1 of your Form W-2.

Taxmap/pubs/p525-000.htm#TXMP072077f3 Archer MSA contributions.

Contributions by your employer to your Archer MSA generally are not included in your income. Their total will be reported in box 12 of Form W-2, with code R. You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. File the form with your return.

Taxmap/pubs/p525-000.htm#TXMP3011747e Health flexible spending arrangement (health FSA).

If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses and those of your spouse and dependents, generally are not included in your income.

Taxmap/pubs/p525-000.htm#TXMP0f8f4aea Health reimbursement arrangement (HRA).

If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses and those of your spouse and dependents generally are not included in your income.

See also Reimbursement for medical care under Other Sickness and Injury Benefits, later.

Taxmap/pubs/p525-000.htm#TXMP1011c5cb Adoption Assistance

Adoption Assistance

You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. See Publication 968, Tax Benefits for Adoption, for more information.

Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. They also are included as social security and Medicare wages in boxes 3 and 5. However, they are not included as wages in box 1. To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839, Qualified Adoption Expenses. File the form with your return.

Taxmap/pubs/p525-000.htm#TXMP04e621b4 Athletic Facilities

If your employer provides you with the free or low-cost use of an employer-operated gym or other athletic club on your employer's premises, the value is not included in your compensation. The gym must be used primarily by employees, their spouses, and their dependent children.

If your employer pays for a fitness program provided to you at an off-site resort hotel or athletic club, the value of the program is included in your compensation.

Taxmap/pubs/p525-000.htm#TXMP516b0fc8 De Minimis (Minimal) Benefits

If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, the value is not included in your income. Generally, the value of benefits such as discounts at company cafeterias, cab fares home when working overtime, and company picnics are not included in your income. Also see Employee Discounts, later.

Taxmap/pubs/p525-000.htm#TXMP7e86bb5d Holiday gifts.

If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.

Taxmap/pubs/p525-000.htm#TXMP4750a584 Dependent Care Benefits

Dependent Care Benefits

If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Dependent care benefits include:

• Amounts your employer pays directly to either you or your care provider for the care of your qualifying person while you work, and
• The fair market value of care in a daycare facility provided or sponsored by your employer.

The amount you can exclude is limited to the lesser of:

• The total amount of dependent care benefits you received during the year,
• The total amount of qualified expenses you incurred during the year,
• Your earned income,
• Your spouse's earned income, or
• $5,000 ($2,500 if married filing separately).

Your employer must show the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2. Your employer also will include any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2.

To claim the exclusion, you must complete either Part III of Form 2441, Child and Dependent Care Expenses, or Part III of Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers. (You cannot use Form 1040EZ.)

See the instructions for Form 2441 or Schedule 2 (Form 1040A) for more information.

Taxmap/pubs/p525-000.htm#TXMP2e382235 Educational Assistance

Educational Assistance

You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. The exclusion applies to undergraduate and graduate-level courses. For more information, see Publication 970.

Taxmap/pubs/p525-000.htm#TXMP217d99fc Employee Discounts

Employee Discounts

If your employer sells you property or services at a discount, you may be able to exclude the amount of the discount from your income. The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which you work. However, it does not apply to discounts on real property or property commonly held for investment (such as stocks or bonds).

The exclusion is limited to the price charged nonemployee customers multiplied by the following percentage.

• For a discount on property, your employer's gross profit percentage (gross profit divided by gross sales) on all property sold during the employer's previous tax year. (Ask your employer for this percentage.)
• For a discount on services, 20%.

Taxmap/pubs/p525-000.htm#TXMP091ab9a0 Financial Counseling Fees

Financial counseling fees paid for you by your employer are included in your income and must be reported as part of wages. If the fees are for tax or investment counseling, they can be deducted on Schedule A (Form 1040) as a miscellaneous deduction (subject to the 2% limit).

Qualified retirement planning services paid for you by your employer may be excluded from your income. For more information, see Retirement Planning Services, later.

Taxmap/pubs/p525-000.htm#TXMP549d65b7 Group-Term Life Insurance

Group-Term Life Insurance

Generally, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) is not included in your income. However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance.

For exceptions to this rule, see Entire cost excluded, and Entire cost taxed, later.

If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. It is also shown separately in box 12 with code C.

Taxmap/pubs/p525-000.htm#TXMP23e4eb57 Group-term life insurance.

This insurance is term life insurance protection (insurance for a fixed period of time) that:

• Provides a general death benefit,
• Is provided to a group of employees,
• Is provided under a policy carried by the employer, and
• Provides an amount of insurance to each employee based on a formula that prevents individual selection.

Taxmap/pubs/p525-000.htm#TXMP7bfa5370 Permanent benefits.

If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Your employer should be able to tell you the amount to include in your income.

Taxmap/pubs/p525-000.htm#TXMP43f5dbad Accidental death benefits.

Insurance that provides accidental or other death benefits but does not provide general death benefits (travel insurance, for example) is not group-term life insurance.

Taxmap/pubs/p525-000.htm#TXMP7d9a22bb Former employer.

If your former employer provides more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Also, it is shown separately in box 12 with code C. Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. You must pay these taxes with your income tax return. Include them in your total tax on line 62, Form 1040, and enter "UT" and the amount of the taxes on the dotted line next to line 62.

Taxmap/pubs/p525-000.htm#TXMP567453b2 Two or more employers.

Your exclusion for employer-provided group-term life insurance coverage cannot exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 will not be correct. You must figure how much to include in your income. Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return.

Taxmap/pubs/p525-000.htm#TXMP6e7b28a5 Figuring the taxable cost.

Use the following worksheet to figure the amount to include in your income. Taxmap/pubs/p525-000.htm#w15047d01

Worksheet 1. Figuring the Cost of Group-Term Life Insurance To Include in Income 1. Enter the total amount of your insurance coverage from your employer(s) 1.        2. Limit on exclusion for employer-provided group-term life insurance coverage 2. 50,000 3. Subtract line 2 from line 1 3.        4. Divide line 3 by $1,000. Figure to the nearest tenth 4.        5. Go to Table 1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5.        6. Multiply line 4 by line 5 6.             7. Enter the number of full months of coverage at this cost 7.        8. Multiply line 6 by line 7 8.        9. Enter the premiums you paid per month 9.               10. Enter the number of months you paid the premiums 10.               11. Multiply line 9 by line 10. 11.        12. Subtract line 11 from line 8. Include this amount in your income as wages 12.

Table 1. Cost of $1,000 of Group-Term Life Insurance for One Month

	Age	Cost
	Under 25	$ .05
	25 through 29	.06
	30 through 34	.08
	35 through 39	.09
	40 through 44	.10
	45 through 49	.15
	50 through 54	.23
	55 through 59	.43
	60 through 64	.66
	65 through 69	1.27
	70 and older	2.06

If you pay any part of the cost of the insurance, your entire payment reduces, dollar for dollar, the amount you would otherwise include in your income. However, you cannot reduce the amount to include in your income by:

• Payments for coverage in a different tax year,
• Payments for coverage through a cafeteria plan, unless the payments are after-tax contributions, or
• Payments for coverage not taxed to you because of the exceptions discussed later under Entire cost excluded.

Taxmap/pubs/p525-000.htm#TXMP3965fb65
Example.

You are 51 years old and work for employers A and B. Both employers provide group-term life insurance coverage for you for the entire year. Your coverage is $35,000 with employer A and $45,000 with employer B. You pay premiums of $4.15 a month under the employer B group plan. You figure the amount to include in your income as follows.  
 
Taxmap/pubs/p525-000.htm#w15047d02

Worksheet 1. Figuring the Cost of Group-Term Life Insurance To Include in Income—Illustrated 1. Enter the total amount of your insurance coverage from your employer(s) 1. 80,000 2. Limit on exclusion for employer-provided group-term life insurance coverage 2. 50,000 3. Subtract line 2 from line 1 3. 30,000 4. Divide line 3 by $1,000. Figure to the nearest tenth 4. 30.0 5. Go to Table 1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. .23 6. Multiply line 4 by line 5 6. 6.90 7. Enter the number of full months of coverage at this cost. 7. 12 8. Multiply line 6 by line 7 8. 82.80 9. Enter the premiums you paid per month 9. 4.15           10. Enter the number of months you paid the premiums 10. 12           11. Multiply line 9 by line 10. 11. 49.80 12. Subtract line 11 from line 8. Include this amount in your income as wages 12. 33.00

The total amount to include in income for the cost of excess group-term life insurance is $33. Neither employer provided over $50,000 insurance coverage, so the wages shown on your Forms W-2 do not include any part of that $33. You must add it to the wages shown on your Forms W-2 and include the total on your return.

Taxmap/pubs/p525-000.htm#TXMP32935291 Entire cost excluded.

You are not taxed on the cost of group-term life insurance if any of the following circumstances apply.

1. You are permanently and totally disabled and have ended your employment.
2. Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year.
3. A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. (You are not entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy.)
4. The plan existed on January 1, 1984, and:
   1. You retired before January 2, 1984, and were covered by the plan when you retired, or
   2. You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983.

Taxmap/pubs/p525-000.htm#TXMP058834b9 Entire cost taxed.

You are taxed on the entire cost of group-term life insurance if either of the following circumstances apply.

• The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan.
• You are a key employee and your employer's plan discriminates in favor of key employees.

Taxmap/pubs/p525-000.htm#TXMP410615a3 Meals and Lodging

Meals and Lodging

You do not include in your income the value of meals and lodging provided to you and your family by your employer at no charge if the following conditions are met.

1. The meals are:
   1. Furnished on the business premises of your employer, and
   2. Furnished for the convenience of your employer.
2. The lodging is:
   1. Furnished on the business premises of your employer,
   2. Furnished for the convenience of your employer, and
   3. A condition of your employment. (You must accept it in order to be able to properly perform your duties.)

You also do not include in your income the value of meals or meal money that qualifies as a de minimis fringe benefit. See De Minimis (Minimal) Benefits, earlier.

Taxmap/pubs/p525-000.htm#TXMP34510dfa Faculty lodging.

If you are an employee of an educational institution or an academic health center and you are provided with lodging that does not meet the three conditions above, you still may not have to include the value of the lodging in income. However, the lodging must be qualified campus lodging, and you must pay an adequate rent.

Taxmap/pubs/p525-000.htm#TXMP4635af6d Academic health center.

This is an organization that meets the following conditions.

• Its principal purpose or function is to provide medical or hospital care or medical education or research.
• It receives payments for graduate medical education under the Social Security Act.
• One of its principal purposes or functions is to provide and teach basic and clinical medical science and research using its own faculty.

Taxmap/pubs/p525-000.htm#TXMP6c35833c Qualified campus lodging.

Qualified campus lodging is lodging furnished to you, your spouse, or one of your dependents by, or on behalf of, the institution or center for use as a home. The lodging must be located on or near a campus of the educational institution or academic health center.

Taxmap/pubs/p525-000.htm#TXMP4d083d4e Adequate rent.

The amount of rent you pay for the year for qualified campus lodging is considered adequate if it is at least equal to the lesser of:

• 5% of the appraised value of the lodging, or
• The average of rentals paid by individuals (other than employees or students) for comparable lodging held for rent by the educational institution.

If the amount you pay is less than the lesser of these amounts, you must include the difference in your income.

The lodging must be appraised by an independent appraiser and the appraisal must be reviewed on an annual basis.

Taxmap/pubs/p525-000.htm#TXMP007c7207
Example.

Carl Johnson, a sociology professor for State University, rents a home from the university that is qualified campus lodging. The house is appraised at $100,000. The average rent paid for comparable university lodging by persons other than employees or students is $7,000 a year. Carl pays an annual rent of $5,500. Carl does not include in his income any rental value because the rent he pays equals at least 5% of the appraised value of the house (5% × $100,000 = $5,000). If Carl paid annual rent of only $4,000, he would have to include $1,000 in his income ($5,000 − $4,000).

Taxmap/pubs/p525-000.htm#TXMP5f387f33 Moving Expense Reimbursements

Moving Expense Reimbursements

Generally, if your employer pays for your moving expenses (either directly or indirectly) and the expenses would have been deductible if you paid them yourself, the value is not included in your income. See Publication 521 for more information.

Taxmap/pubs/p525-000.htm#TXMP286de92f No-Additional-Cost Services

The value of services you receive from your employer for free, at cost, or for a reduced price is not included in your income if your employer:

• Offers the same service for sale to customers in the ordinary course of the line of business in which you work, and
• Does not have a substantial additional cost (including any sales income given up) to provide you with the service (regardless of what you paid for the service).

Generally, no-additional-cost services are excess capacity services, such as airline, bus, or train tickets, hotel rooms, and telephone services.

Taxmap/pubs/p525-000.htm#TXMP42e2fb19
Example.

You are employed as a flight attendant for a company that owns both an airline and a hotel chain. Your employer allows you to take personal flights (if there is an unoccupied seat) and stay in any one of their hotels (if there is an unoccupied room) at no cost to you. The value of the personal flight is not included in your income. However, the value of the hotel room is included in your income because you do not work in the hotel business.

Taxmap/pubs/p525-000.htm#TXMP41f90c33 Retirement Planning Services

If your employer has a qualified retirement plan, qualified retirement planning services provided to you (and your spouse) by your employer are not included in your income. Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. You cannot exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer. Also, see Financial Counseling Fees, earlier.

Taxmap/pubs/p525-000.htm#TXMP32a1bfb4 Transportation

Local Travel

If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. A qualified transportation fringe benefit is:

• Transportation in a commuter highway vehicle (such as a van) between your home and work place,
• A transit pass, or
• Qualified parking.

Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass is not readily available for direct distribution to you.

Taxmap/pubs/p525-000.htm#TXMP352c1395 Exclusion limit.

The exclusion for commuter highway vehicle transportation and transit pass fringe benefits cannot be more than a total of $100 a month.

The exclusion for the qualified parking fringe benefit cannot be more than $195 a month.

If the benefits have a value that is more than these limits, the excess must be included in your income.

Taxmap/pubs/p525-000.htm#TXMP122aca98 Commuter highway vehicle.

This is a highway vehicle that seats at least six adults (not including the driver). At least 80% of the vehicle's mileage must reasonably be expected to be:

• For transporting employees between their homes and work place, and
• On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver).

Taxmap/pubs/p525-000.htm#TXMP70eb5734 Transit pass.

This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation.

Taxmap/pubs/p525-000.htm#TXMP7aa3c2b9 Qualified parking.

This is parking provided to an employee at or near the employer's place of business. It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. It does not include parking at or near the employee's home.

Taxmap/pubs/p525-000.htm#TXMP66827dbb Tuition Reduction

Tuition Reduction

You can exclude a qualified tuition reduction from your income. This is the amount of a reduction in tuition:

• For education (below graduate level) furnished by an educational institution to an employee, former employee who retired or became disabled, or his or her spouse and dependent children.
• For education furnished to a graduate student at an educational institution if the graduate student is engaged in teaching or research activities for that institution.
• Representing payment for teaching, research, or other services if you receive the amount under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.

For more information, see Publication 970.

Taxmap/pubs/p525-000.htm#TXMP76c8e768 Working Condition Benefits

Working Condition Benefits

If your employer provides you with a product or service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost is not included in your income.

Taxmap/pubs/p525-000.htm#TXMP70061e2c
Example.

You work as an engineer and your employer provides you with a subscription to an engineering trade magazine. The cost of the subscription is not included in your income because the cost would have been allowable to you as a business deduction if you had paid for the subscription yourself.

Taxmap/pubs/p525-000.htm#TXMP56a4382c Valuation of Fringe Benefits

Valuation of Fringe Benefits

If a fringe benefit is included in your income, the amount included is generally its value determined under the general valuation rule or under the special valuation rules. For an exception, see Group-Term Life Insurance, earlier.

Taxmap/pubs/p525-000.htm#TXMP364e69c2 General valuation rule.

You must include in your income the amount by which the fair market value of the fringe benefit is more than the sum of:

1. The amount, if any, you paid for the benefit, plus
2. The amount, if any, specifically excluded from your income by law.

If you pay fair market value for a fringe benefit, no amount is included in your income.

Taxmap/pubs/p525-000.htm#TXMP4510cbc2 Fair market value.

The fair market value of a fringe benefit is determined by all the facts and circumstances. It is the amount you would have to pay a third party to buy or lease the benefit. This is determined without regard to:

• Your perceived value of the benefit, or
• The amount your employer paid for the benefit.

Taxmap/pubs/p525-000.htm#TXMP16423058 Employer-provided vehicles.

If your employer provides a car (or other highway motor vehicle) to you, your personal use of the car is usually a taxable noncash fringe benefit.

Under the general valuation rules, the value of an employer-provided vehicle is the amount you would have to pay a third party to lease the same or a similar vehicle on the same or comparable terms in the same geographic area where you use the vehicle. An example of a comparable lease term is the amount of time the vehicle is available for your use, such as a 1-year period. The value cannot be determined by multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle could have been leased on a cents-per-mile basis.

Taxmap/pubs/p525-000.htm#TXMP127790cc Flights on employer-provided aircraft.

Under the general valuation rules, if your flight on an employer-provided piloted aircraft is primarily personal and you control the use of the aircraft for the flight, the value is the amount it would cost to charter the flight from a third party.

If there is more than one employee on the flight, the cost to charter the aircraft must be divided among those employees. The division must be based on all the facts, including which employee or employees control the use of the aircraft.

Taxmap/pubs/p525-000.htm#TXMP1714002c Special valuation rules.

You generally can use a special valuation rule for a fringe benefit only if your employer uses the rule. If your employer uses a special valuation rule, you cannot use a different special rule to value that benefit. You always can use the general valuation rule discussed earlier, based on facts and circumstances, even if your employer uses a special rule.

If you and your employer use a special valuation rule, you must include in your income the amount your employer determines under the special rule minus the sum of:

1. Any amount you repaid your employer, plus
2. Any amount specifically excluded from income by law.

The special valuation rules are the following.

• The automobile lease rule.
• The vehicle cents-per-mile rule.
• The commuting rule.
• The unsafe conditions commuting rule.
• The employer-operated eating-facility rule.

For more information on these rules, see Publication 15-B, Employer's Tax Guide to Fringe Benefits.

For information on the non-commercial flight and commercial flight valuation rules, see sections 1.61-21(g) and 1.61-21(h) of the regulations.

Taxmap/pubs/p525-000.htm#TXMP74d76423 Retirement Plan Contributions

Retirement Plan, Contribution

Your employer's contributions to a qualified retirement plan for you are not included in income at the time contributed. (Your employer can tell you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included. See Group-Term Life Insurance, earlier, under Fringe Benefits.

If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. However, if your interest in the plan is not transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you do not have to include the value of your interest in your income until it is transferable or is no longer subject to a substantial risk of forfeiture.

Taxmap/pubs/p525-000.htm#TXMP4f29e2d0 Elective Deferrals

Elective Deferrals

If you are covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. It is not included in wages subject to income tax at the time contributed. However, it is included in wages subject to social security and Medicare taxes.

Elective deferrals include elective contributions to the following retirement plans.

1. Cash or deferred arrangements (section 401(k) plans).
2. The Thrift Savings Plan for federal employees.
3. Salary reduction simplified employee pension plans (SARSEP).
4. Savings incentive match plans for employees (SIMPLE plans).
5. Tax-sheltered annuity plans (403(b) plans).
6. Section 501(c)(18)(D) plans. (But see Reporting by employer, later.)
7. Section 457 plans.

Taxmap/pubs/p525-000.htm#TXMP17611002 Overall limit on deferrals.

For 2004, you generally should not have deferred more than a total of $13,000 of contributions to the plans listed in (1) through (6) above. You should not have deferred more than the lesser of your includible compensation (defined later) or $13,000 of contributions to the plan listed in (7) above (section 457 plan).

Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you are responsible for monitoring the total you defer to ensure that the deferrals are not more than the overall limit.

Taxmap/pubs/p525-000.htm#TXMP5cef7aa4 Catch-up contributions.

You may be allowed catch-up contributions (additional elective deferrals) if you are age 50 or older by the end of your tax year. For more information about catch-up contributions to 403(b) plans, see chapter 6 of Publication 571, Tax Sheltered Annuity Plans (403(b) Plans).

For more information about additional elective deferrals to:

• SEPs (SARSEPs), see Salary Reduction Simplified Employee Pension in Publication 560, Retirement Plans for Small Business.
• SIMPLE plans, see How Much Can Be Contributed on Your Behalf in chapter 3 of Publication 590, Individual Retirement Arrangements (IRAs).
• Section 457 plans, see Limit for deferrals under section 457 plans, later.

Taxmap/pubs/p525-000.htm#TXMP4c170039 Limit for deferrals under SIMPLE plans.

If you are a participant in a SIMPLE plan, you generally should not have deferred more than $9,000 in 2004. Amounts you defer under a SIMPLE plan count toward the overall limit ($13,000 for 2004) and may affect the amount you can defer under other elective deferral plans.

Taxmap/pubs/p525-000.htm#TXMP333d4176 Limit for deferrals under section 457 plans.

If you are a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $13,000. However, if you are within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. See Increased limit, later.

Taxmap/pubs/p525-000.htm#TXMP2b352609 Includible compensation.

This is the pay you received for the year from the employer who maintained the section 457 plan. It generally includes all the following payments.

1. Wages and salaries.
2. Fees for professional services.
3. The value of any employer-provided qualified transportation fringe benefit (defined under Transportation, earlier) that is not included in your income.
4. Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items.
   1. Commissions and tips.
   2. Fringe benefits.
   3. Bonuses.
5. Employer contributions (elective deferrals) to:
   1. The section 457 plan.
   2. Qualified cash or deferred arrangements (section 401(k) plans) that are not included in your income.
   3. A salary reduction simplified employee pension (SARSEP).
   4. A tax-sheltered annuity (section 403(b) plan).
   5. A savings incentive match plan for employees (SIMPLE plan).
   6. A section 125 cafeteria plan.

Instead of using the amounts listed above to determine your includible compensation, your employer can use any of the following amounts.

• Your wages as defined for income tax withholding purposes.
• Your wages as reported in box 1 of Form W-2, Wage and Tax Statement.
• Your wages that are subject to social security withholding (including elective deferrals).

Taxmap/pubs/p525-000.htm#TXMP7497360b Increased limit.

During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of:

1. Twice the dollar limit for the year, or
2. The limit for prior years minus the amount you deferred in prior years plus the lesser of:
   1. Your includible compensation for the current year, or
   2. The dollar limit for the current year.

Taxmap/pubs/p525-000.htm#TXMP1c9c0803 Catch-up contributions.

You gen