The three chapters in this part discuss some of the adjustments to income that you can deduct in figuring your adjusted gross income. These chapters cover:
Other adjustments to income are discussed elsewhere. See Table V below.
Table V. Other Adjustments to Income
Use this table to find information about other adjustments to income
not covered in this part of the publication.
----------------------------------------------------------------------
IF you are looking for more
information about the deduction
for... THEN see...
----------------------------------------------------------------------
Certain business expenses of Chapter 26.
reservists, performing artists,
and fee-basis officials
----------------------------------------------------------------------
Contributions to a health savings Publication 969, Health Savings
account Accounts and Other Tax-Favored
Health Plans.
----------------------------------------------------------------------
Moving expenses Publication 521, Moving
Expenses.
----------------------------------------------------------------------
One-half of self-employment tax Chapter 22.
----------------------------------------------------------------------
Self-employed health insurance Chapter 21.
----------------------------------------------------------------------
Payments to self-employed SEP, Publication 560, Retirement
SIMPLE, and qualified plans Plans for Small Business.
----------------------------------------------------------------------
Penalty on the early withdrawal Chapter 7.
of savings
----------------------------------------------------------------------
Contributions to an Archer MSA Chapter 21.
----------------------------------------------------------------------
Reforestation amortization or Chapter 9 of Publication 535,
expense Business Expenses.
----------------------------------------------------------------------
Contributions to Internal Revenue Publication 525, Taxable and
Code section 501(c)(18)(D) pension Nontaxable Income.
plans
----------------------------------------------------------------------
Expenses from the rental of Chapter 12.
personal property
----------------------------------------------------------------------
Certain required repayments of Chapter 12.
supplemental unemployment benefits
(sub-pay)
----------------------------------------------------------------------
Foreign housing costs Chapter 4 of Publication 54,
Tax Guide for U.S. Citizens and
Resident Aliens Abroad.
----------------------------------------------------------------------
Jury duty pay given to your Chapter 12.
employer
----------------------------------------------------------------------
Contributions by certain chaplains Publication 517, Social
to Internal Revenue Code section Security and Other Information
403(b) plans for Members of the Clergy and
Religious Workers.
----------------------------------------------------------------------
Attorney fees and certain costs Publication 525.
for actions involving certain
unlawful discrimination claims
----------------------------------------------------------------------
Domestic production activities Form 8903.
deduction
----------------------------------------------------------------------
Modified AGI limit for traditional IRA contributions increased. For 2007, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:
If you lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $156,000 but less than $166,000. If your modified AGI is $166,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? later.
Modified AGI limit for Roth IRA contributions increased. For 2007, your Roth IRA contribution limit is reduced (phased out) in the following situations.
See Can You Contribute to a Roth IRA? later.
Rollover by nonspouse beneficiary. A direct transfer from a deceased employee's qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity (section 403(b)) plan, or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. The IRA is treated as an inherited IRA. For more information about rollovers, see Rollovers in Publication 590.
Qualified health savings account (HSA) funding distribution. If you are covered by a high deductible health plan (HDHP), you may be able to make a nontaxable HSA funding distribution from your IRA (other than a SEP or SIMPLE IRA) that would otherwise be included in income. The distribution must be a direct trustee-to-trustee transfer to an HSA. The distribution will be nontaxable to the extent it is not more than the limit on your annual HSA contributions.
Generally, you can make only one nontaxable HSA funding distribution during your lifetime. However, if you change your HDHP coverage from self-only to family, you may be able to make an additional distribution during the same year. For more information, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
Catch-up contributions in certain employer bankruptcies. If you participated in a 401(k) plan and the employer who maintained the plan went into bankruptcy in an earlier year, you may be able to contribute up to $7,000 to your IRA. For more information, see Catch-up contributions in certain employer bankruptcies in Publication 590.
Traditional IRA contribution and deduction limit. The contribution limit to your traditional IRA for 2008 will be increased to the smaller of the following amounts:
If you were age 50 or older before 2009, the most that can be contributed to your traditional IRA for 2008 will be the smaller of the following amounts:
For more information, see How Much Can Be Contributed? later.
Roth IRA contribution limit. If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2008 will generally be the lesser of:
If you were age 50 or older before 2009 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2008 will generally be the lesser of:
However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? later.
Modified AGI limit for traditional IRA contributions increased. For 2008, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified adjusted gross income (AGI) is:
If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your AGI is more than $159,000 but less than $169,000. If your AGI is $169,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? later.
Modified AGI limit for Roth IRA contributions increased. For 2008, your Roth IRA contribution limit is reduced (phased out) in the following situations.
See Can You Contribute to a Roth IRA? later.
Rollovers from other retirement plans. For 2008, you can roll over amounts from an eligible retirement plan into a Roth IRA. For more information, see Rollovers from other retirement plans in chapter 2 of Publication 590.
Statement of required minimum distribution. If a minimum distribution is required from your IRA, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the required minimum distribution to you, or offer to calculate it for you. The report or offer must include the date by which the amount must be distributed. The report is due January 31 of the year in which the minimum distribution is required. It can be provided with the year-end fair market value statement that you normally get each year. No report is required for IRAs of owners who have died.
IRA interest. Although interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt interest. Do not report this interest on your tax return as tax-exempt interest.
Form 8606. If you make nondeductible contributions to a traditional IRA and you do not file Form 8606, Nondeductible IRAs, with your tax return, you may have to pay a $50 penalty.
Hurricane tax relief. Special rules apply to the use of retirement funds (including IRAs) by qualified individuals who suffered an economic loss as a result of Hurricane Katrina, Rita, or Wilma. While qualified hurricane distributions can no longer be made, special rules apply to the repayments of these distributions. See Hurricane-Related Relief in chapter 4 of Publication 590.
Tip: The term "50 or older" is used several times in this chapter. It refers to an IRA owner who is age 50 or older by the end of the tax year.
An individual retirement arrangement (IRA) is a personal savings plan that gives you tax advantages for setting aside money for your retirement.
This chapter discusses the following topics.
Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs) are not discussed in this chapter. For more information on these plans and employees' SEP IRAs and SIMPLE IRAs that are part of these plans, see Publications 560 and 590.
For information about contributions, deductions, withdrawals, transfers, rollovers, and other transactions for 2008, see Publication 590.
Useful Items
You may want to see:
Publication
Form (and Instructions)
In this chapter the original IRA (sometimes called an ordinary or regular IRA) is referred to as a "traditional IRA." Two advantages of a traditional IRA are:
What Is a Traditional IRA?
A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA.
Who Can Set Up a Traditional IRA?
You can set up and make contributions to a traditional IRA if:
What is compensation? Generally, compensation is what you earn from working. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans).
Scholarship and fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2.
Compensation also includes commissions and taxable alimony and separate maintenance payments.
Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs.
Nontaxable combat pay. For IRA purposes, your compensation includes any nontaxable combat pay you receive.
What is not compensation? Compensation does not include any of the following items.
When and How Can a Traditional IRA Be Set Up?
You can set up a traditional IRA at any time. However, the time for making contributions for any year is limited. See When Can Contributions Be Made, later.
You can set up different kinds of IRAs with a variety of organizations. You can set up an IRA at a bank or other financial institution or with a mutual fund or life insurance company. You can also set up an IRA through your stockbroker. Any IRA must meet Internal Revenue Code requirements.
Kinds of traditional IRAs. Your traditional IRA can be an individual retirement account or annuity. It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account.
There are limits and other rules that affect the amount that can be contributed to a traditional IRA. These limits and other rules are explained below.
Community property laws. Except as discussed later under Spousal IRA limit, each spouse figures his or her limit separately, using his or her own compensation. This is the rule even in states with community property laws.
Brokers' commissions. Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit.
Trustees' fees. Trustees' administrative fees are not subject to the contribution limit.
Qualified reservist repayments. If you are (or were) a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions you received. You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or similar arrangement.
For more information, see Qualified reservist repayments under How Much Can Be Contributed in chapter 1 of Publication 590.
Caution: Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. (See Roth IRAs, later.)
General limit. For 2007, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts.
This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. (See Nondeductible Contributions, later.) Qualified reservist repayments do not affect this limit.
Example 1. Betty, who is 34 years old and single, earned $24,000 in 2007. Her IRA contributions for 2007 are limited to $4,000.
Example 2. John, an unmarried college student working part time, earned $3,500 in 2007. His IRA contributions for 2007 are limited to $3,500, the amount of his compensation.
Catch-up contributions in certain employer bankruptcies. If you participated in a 401(k) plan and the employer who maintained the plan went into bankruptcy in an earlier year, you may be able to contribute an additional $3,000 to your IRA. See Publication 590 to see if you qualify to make these additional contributions. If you qualify and chose to make these catch-up contributions, the higher contribution and deduction limits for individuals who are age 50 or older do not apply. The most that you can contribute to your IRA is $7,000.
Spousal IRA limit. For 2007, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following amounts.
This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $8,000 ($9,000 if only one of you is 50 or older, or $10,000 if both of you are 50 or older).
When Can Contributions Be Made?
As soon as you set up your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). Contributions must be in the form of money (cash, check, or money order). Property cannot be contributed.
Contributions must be made by due date. Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions.
Nontaxable combat pay. If you received nontaxable combat pay in 2004 or 2005, and the treatment of the combat pay as compensation means that you can contribute more than you already have, you can make additional contributions to an IRA for 2004 or 2005 by May 28, The contributions will be treated as having been made on the last day of the year for which they were made. If you have already filed your return for a year for which you make a contribution, you must file Form 1040X, Amended U.S. Individual Income Tax Return.
For more information, see When Can Contributions Be Made in chapter 1 of Publication 590.
Age 70 1/2 rule. Contributions cannot be made to your traditional IRA for the year in which you reach age 70 1/2 or for any later year.
You attain age 70 1/2 on the date that is 6 calendar months after the 70th anniversary of your birth. If you were born on June 30, 1937, the 70th anniversary of your birth is June 30, 2007, and you attained age 70 1/2 on December 30, 2007. If you were born on July 1, 1937, the 70th anniversary of your birth was July 1, 2007, and you attained age 70 1/2 on January 1, 2008.
Designating year for which contribution is made. If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it).
Filing before a contribution is made. You can file your return claiming a traditional IRA contribution before the contribution is actually made. Generally, the contribution must be made by the due date of your return, not including extensions.
Contributions not required. You do not have to contribute to your traditional IRA for every tax year, even if you can.
Generally, you can deduct the lesser of:
However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. See Limit If Covered by Employer Plan, later.
Tip: You may be eligible to claim a credit for contributions to your traditional IRA. For more information see chapter 37.
Trustees' fees. Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). See chapter 28.
Brokers' commissions. Brokers' commissions are part of your IRA contribution and, as such, are deductible subject to the limits.
Full deduction. If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more traditional IRAs of up to the lesser of the following amounts.
This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf.
Spousal IRA. In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of the following amounts.
This limit is reduced by any contributions to a 501(c)(18) plan on behalf of the spouse with the lesser compensation.
Note. If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions to your spouse's IRA. After a divorce or legal separation, you can deduct only contributions to your own IRA. Your deductions are subject to the rules for single individuals.
Covered by an employer retirement plan. If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. This is discussed later under Limit If Covered by Employer Plan. Limits on the amount you can deduct do not affect the amount that can be contributed. See Nondeductible Contributions, later.
Are You Covered by an Employer Plan?
The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. The "Retirement plan" box should be checked if you were covered.
Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered, later.
If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer.
Federal judges. For purposes of the IRA deduction, federal judges are covered by an employer retirement plan.
For Which Year(s) Are You Covered?
Special rules apply to determine the tax years for which you are covered by an employer plan. These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan.
Tax year. Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. For almost all people, the tax year is the calendar year.
Defined contribution plan. Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year.
A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans.
Defined benefit plan. If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. This rule applies even if you:
A defined benefit plan is any plan that is not a defined contribution plan. Defined benefit plans include pension plans and annuity plans.
No vested interest. If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual.
Situations in Which You Are Not Covered
Unless you are covered under another employer plan, you are not covered by an employer plan if you are in one of the situations described below.
Social security or railroad retirement. Coverage under social security or railroad retirement is not coverage under an employer retirement plan.
Benefits from a previous employer's plan. If you receive retirement benefits from a previous employer's plan, you are not covered by that plan.
Reservists. If the only reason you participate in a plan is because you are a member of a reserve unit of the armed forces, you may not be covered by the plan. You are not covered by the plan if both of the following conditions are met.
Volunteer firefighters. If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be covered by the plan. You are not covered by the plan if both of the following conditions are met.
Limit If Covered by Employer Plan
If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status.
Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. These amounts vary depending on your filing status.
To determine if your deduction is subject to phaseout, you must determine your modified adjusted gross income (AGI) and your filing status. See Filing status and Modified adjusted gross income (AGI), later. Then use Table 17-1 or 17-2 to determine if the phaseout applies.
Social security recipients. Instead of using Table 17-1 or 17-2, use the worksheets in Appendix B of Publication 590 if, for the year, all of the following apply.
Use those worksheets to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits.
Deduction phaseout. If you were covered by an employer retirement plan and you did not receive any social security retirement benefits, your IRA deduction may be reduced or eliminated depending on your filing status and modified AGI as shown in Table 17-1.
Table 17-1. Effect of Modified AGI1 on Deduction if You Are Covered by Retirement Plan at Work
If you are covered by a retirement plan at work, use this table
to determine if your modified AGI affects the amount of your
deduction.
------------------------------------------------------------------
IF your filing AND your modified
status is... AGI is... THEN you can take...
------------------------------------------------------------------
single $52,000 or less a full deduction.
---------------------------------------------
or more than $52,000 a partial deduction.
but less than $62,000
---------------------------------------------
head of household $62,000 or more no deduction.
------------------------------------------------------------------
married filing $83,000 or less a full deduction.
jointly ---------------------------------------------
more than $83,000 a partial deduction.
or but less than $103,000
---------------------------------------------
qualifying $103,000 or more no deduction.
widow(er)
------------------------------------------------------------------
married filing less than $10,000 a partial deduction.
separately2 ---------------------------------------------
$10,000 or more no deduction.
------------------------------------------------------------------
1 Modified AGI (adjusted gross income). See Modified adjusted
gross income (AGI).
2 If you did not live with your spouse at any time during the
year, your filing status is considered Single for this purpose
(therefore, your IRA deduction is determined under the "Single"
column).
==================================================================
If your spouse is covered. If you are not covered by an employer retirement plan, but your spouse is, and you did not receive any social security benefits, your IRA deduction may be reduced or eliminated entirely depending on your filing status and modified AGI as shown in Table 17-2.
Table 17-2. Effect of Modified AGI1 on Deduction if You Are NOT Covered by Retirement Plan at Work
If you are not covered by a retirement plan at work, use this
table to determine if your modified AGI affects the amount of
your deduction.
-----------------------------------------------------------------
IF your filing AND your modified
status is... AGI is... THEN you can take...
-----------------------------------------------------------------
single, any amount a full deduction.
head of household, or
qualifying widow(er)
-----------------------------------------------------------------
married filing jointly any amount a full deduction.
or separately with a
spouse who is not
covered by a plan at
work
-----------------------------------------------------------------
married filing jointly $156,000 or less a full deduction.
with a spouse who is ----------------------------------------
covered by a plan more than $156,000 a partial deduction.
at work but less than
$166,000
----------------------------------------
$166,000 or more no deduction.
-----------------------------------------------------------------
married filing less than $10,000 a partial deduction.
separately with a ----------------------------------------
spouse who is covered $10,000 or more no deduction.
by a plan
at work2
-----------------------------------------------------------------
1 Modified AGI (adjusted gross income). See Modified adjusted
gross income (AGI).
2 You are entitled to the full deduction if you did not live with
your spouse at any time during the year.
=================================================================
Filing status. Your filing status depends primarily on your marital status. For this purpose, you need to know if your filing status is single or head of household, married filing jointly or qualifying widow(er), or married filing separately. If you need more information on filing status, see chapter 2.
Lived apart from spouse. If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single.
Modified adjusted gross income (AGI). How you figure your modified AGI depends on whether you are filing Form 1040 or Form 1040A. If you made contributions to your IRA for 2007 and received a distribution from your IRA in 2007, see Publication 590.
Caution: Do not assume that your modified AGI is the same as your compensation. Your modified AGI may include income in addition to your compensation (discussed earlier), such as interest, dividends, and income from IRA distributions.
Form 1040. If you file Form 1040, refigure the amount on the page 1 "adjusted gross income" line without taking into account any of the following amounts.
This is your modified AGI.
Form 1040A. If you file Form 1040A, refigure the amount on the page 1 "adjusted gross income" line without taking into account any of the following amounts.
This is your modified AGI.
Both contributions for 2007 and distributions in 2007. If all three of the following apply, any IRA distributions you received in 2007 may be partly tax free and partly taxable.
If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. To do this, you can use Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution, in Publication 590.
If at least one of the above does not apply, figure your modified AGI using Worksheet 17-1 in this chapter.
Worksheet 17-1. Figuring Your Modified AGI
Keep for Your Records
Use this worksheet to figure your modified adjusted gross income
for traditional IRA purposes.
-----------------------------------------------------------------
1. Enter your adjusted gross income (AGI) from
Form 1040, line 38, or Form 1040A, line 22 1. ______
2. Enter any traditional IRA deduction from
Form 1040, line 32, or Form 1040A, line 17 2. ______
3. Enter any student loan interest deduction from
Form 1040, line 33, or Form 1040A, line 18 3. ______
4. Enter any tuition and fees deduction from
Form 1040, line 34, or Form 1040A, line 19 4. ______
5. Enter any domestic production activities
deduction from Form 1040, line 35 5. ______
6. Enter any foreign earned income and/or
housing exclusion from Form 2555, line 45,
or Form 2555-EZ, line 18 6. ______
7. Enter any foreign housing deduction from
Form 2555, line 50 7. ______
8. Enter any excludable savings bond interest
from Form 8815, line 14 8. ______
9. Enter any excluded employer-provided adoption
benefits from Form 8839, line 30 9. ______
10. Add lines 1 through 9. This is your Modified
AGI for traditional IRA purposes 10. ______
-----------------------------------------------------------------
How to figure your reduced IRA deduction. You can figure your reduced IRA deduction for either Form 1040 or Form 1040A by using the worksheets in chapter 1 of Publication 590. Also, the instructions for Form 1040 and Form 1040A include similar worksheets that you may be able to use instead.
Reporting Deductible Contributions
If you file Form 1040, enter your IRA deduction on line 32 of that form. If you file Form 1040A, enter your IRA deduction on line 17. You cannot deduct IRA contributions on Form 1040EZ.
Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA up to the general limit or, if it applies, the spousal IRA limit. The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution.
Example. Mike is 28 years old and single. In 2007, he was covered by a retirement plan at work. His salary was $57,312. His modified AGI was $65,000. Mike made a $4,000 IRA contribution for 2007. Because he was covered by a retirement plan and his modified AGI was over $62,000, he cannot deduct his $4,000 IRA contribution. He must designate this contribution as a nondeductible contribution by reporting it on Form 8606, as explained next.
Form 8606. To designate contributions as nondeductible, you must file Form 8606.
You do not have to designate a contribution as nondeductible until you file your tax return. When you file, you can even designate otherwise deductible contributions as nondeductible.
You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year.
Failure to report nondeductible contributions. If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated as deductible. All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made.
Penalty for overstatement. If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause.
Penalty for failure to file Form 8606. You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause.
Tax on earnings on nondeductible contributions. As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed. See When Can You Withdraw or Use IRA Assets, later.
Cost basis. You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions.
If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive.
Inherited from spouse. If you inherit a traditional IRA from your spouse, you generally have the following three choices.
Treating it as your own. You will be considered to have chosen to treat the IRA as your own if:
You will only be considered to have chosen to treat the IRA as your own if:
However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA.
Inherited from someone other than spouse. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.
For more information, see the discussion of inherited IRAs under Rollover From One IRA Into Another, later.
Can You Move Retirement Plan Assets?
You can transfer, tax free, assets (money or property) from other retirement plans (including traditional IRAs) to a traditional IRA. You can make the following kinds of transfers.
Transfers to Roth IRAs. Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. See Can You Move Amounts Into a Roth IRA under Roth IRAs, later.
Trustee-to-Trustee Transfer
A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. Because there is no distribution to you, the transfer is tax free. Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers, discussed later under Rollover From One IRA Into Another. For information about direct transfers to IRAs from retirement plans other than IRAs, see Publication 590.
Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute (roll over) to another retirement plan. The contribution to the second retirement plan is called a "rollover contribution."
Note. An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan.
Kinds of rollovers to a traditional IRA. You can roll over amounts from the following plans into a traditional IRA:
Treatment of rollovers. You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and under Reporting rollovers from employer plans.
Kinds of rollovers from a traditional IRA. You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. These plans include the federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but are not required to, accept such rollovers.
Time limit for making a rollover contribution. You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan.
The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. For more information, see Publication 590.
Extension of rollover period. If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, special rules extend the rollover period. For more information, see Publication 590.
More information. For more information on rollovers, see Publication 590.
Rollover From One IRA Into Another
You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA.
Waiting period between rollovers. Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover.
The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA.
Example. You have two traditional IRAs, IRA-1 and IRA-2. You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA.
However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2.
Exception. There is an exception to the rule that amounts rolled over tax free into an IRA cannot be rolled over tax free again within the 1-year period beginning on the date of the original distribution. The exception applies to a distribution which meets all three of the following requirements.
Partial rollovers. If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions). The amount you keep may be subject to the 10% additional tax on early distributions, discussed later under What Acts Result in Penalties or Additional Taxes.
Required distributions. Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment.
Inherited IRAs. If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own. See Treating it as your own, earlier.
Not inherited from spouse. If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. You must withdraw the IRA assets within a certain period. For more information, see Publication 590.
Reporting rollovers from IRAs. Report any rollover from one traditional IRA to the same or another traditional IRA on lines 15a and 15b, Form 1040, or lines 11a and 11b, Form 1040A.
Enter the total amount of the distribution on Form 1040, line 15a, or Form 1040A, line 11a. If the total amount on Form 1040, line 15a, or Form 1040A, line 11a, was rolled over, enter zero on Form 1040, line 15b, or Form 1040A, line 11b. If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b, or Form 1040A, line 11b. Put "Rollover" next to Form 1040, line 15b, or Form 1040A, line 11b. See the forms instructions.
If you rolled over the distribution in 2008 or from an IRA into a qualified plan (other than an IRA), attach a statement explaining what you did.
Rollover From Employer's Plan Into an IRA
You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's):
A qualified plan is one that meets the requirements of the Internal Revenue Code.
Eligible rollover distribution. Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following.
Rollover by nonspouse beneficiary. A direct transfer from a deceased employee's qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity (section 403(b)) plan, or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. The IRA is treated as an inherited IRA. For more information about inherited IRAs, see Inherited IRAs, earlier.
Reporting rollovers from employer plans. Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a, or Form 1040A, line 12a. This amount should be shown in box 1 of Form 1099-R. From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Enter the remaining amount, even if zero, on Form 1040, line 16b, or Form 1040A, line 12b. Also, enter "Rollover" next to Form 1040, line 16b, or Form 1040A, line 12b.
Transfers Incident to Divorce
If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. The transfer is tax free. For detailed information, see Publication 590.
Converting From Any Traditional IRA to a Roth IRA
You can convert amounts from a traditional IRA into a Roth IRA if, for the tax year you make the withdrawal from the traditional IRA, both of the following requirements are met.
Note. If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single.
Required distributions. You cannot convert amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70 1/2) under the required distribution rules (discussed later).
Inherited IRAs. If you inherited a traditional IRA from someone other than your spouse, you cannot convert it to a Roth IRA.
Income. You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed later.
If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. See chapter 4.
You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution. More detailed information is in Publication 590.
How to recharacterize a contribution. To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. If you recharacterize your contribution, you must do all three of the following.
No deduction allowed. You cannot deduct the contribution to the first IRA. Any net income you transfer with the recharacterized contribution is treated as earned in the second IRA.
Required notifications. To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. The notification(s) must include all of the following information.
Reporting a recharacterization. If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on your tax return as directed by Form 8606 and its instructions. You must treat the contribution as having been made to the second IRA.
When Can You Withdraw or Use IRA Assets?
There are rules limiting use of your IRA assets and distributions from it. Violation of the rules generally results in additional taxes in the year of violation. See What Acts Result in Penalties or Additional Taxes, later.
Contributions returned before the due date of return. If you made IRA contributions in 2007, you can withdraw them tax free by the due date of your return. If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. You can do this if, for each contribution you withdraw, both of the following conditions apply.
Note. To calculate the amount you must withdraw, see Publication 590.
Earnings includible in income. You must include in income any earnings on the contributions you withdraw. Include the earnings in income for the year in which you made the contributions, not in the year in which you withdraw them.
Caution: Generally, except for any part of a withdrawal that is a return of nondeductible contributions (basis), any withdrawal of your contributions after the due date (or extended due date) of your return will be treated as a taxable distribution. Excess contributions can also be recovered tax free as discussed under What Acts Result in Penalties or Additional Taxes, later.
Early distributions tax. The 10% additional tax on distributions made before you reach age 59 1/2 does not apply to these tax-free withdrawals of your contributions. However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59 1/2 rule, it will be subject to this tax.
When Must You Withdraw IRA Assets? (Required Minimum Distributions)
You cannot keep funds in a traditional IRA indefinitely. Eventually they must be distributed. If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. See Excess Accumulations (Insufficient Distributions), later. The requirements for distributing IRA funds differ depending on whether you are the IRA owner or the beneficiary of a decedent's IRA.
Required minimum distribution. The amount that must be distributed each year is referred to as the required minimum distribution.
Required distributions not eligible for rollover. Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment.
IRA owners. If you are the owner of a traditional IRA, you must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70 1/2. April 1 of the year following the year in which you reach age 70 1/2 is referred to as the required beginning date.
Distributions by the required beginning date. You must receive at least a minimum amount for each year starting with the year you reach age 70 1/2 (your 70 1/2 year). If you do not (or did not) receive that minimum amount in your 70 1/2 year, then you must receive distributions for your 70 1/2 year by April 1 of the next year.
If an IRA owner dies after reaching age 70 1/2, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date.
Caution: Even if you begin receiving distributions before you attain age 70 1/2, you must begin calculating and receiving required minimum distributions by your required beginning date.
Distributions after the required beginning date. The required minimum distribution for any year after the year you turn 70 1/2 must be made by December 31 of that later year.
Beneficiaries. If you are the beneficiary of a decedent's traditional IRA, the requirements for distributions from that IRA generally depend on whether the IRA owner died before or after the required beginning date for distributions.
More information. For more information, including how to figure your minimum required distribution each year and how to figure your required distribution if you are a beneficiary of a decedent's IRA, see Publication 590.
In general, distributions from a traditional IRA are taxable in the year you receive them.
Exceptions. Exceptions to distributions from traditional IRAs being taxable in the year you receive them are:
Caution: Although a conversion of a traditional IRA is considered a rollover for Roth IRA purposes, it is not an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them. Conversion distributions are includible in your gross income subject to this rule and the special rules for conversions explained in Publication 590.
Qualified charitable distributions. A qualified charitable distribution (QCD) is a nontaxable distribution made directly by the trustee of your IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions. You must have been at least age 70 1/2 when the distribution was made. Your total QCDs for the year cannot be more than $100,000. If you file a joint return, your spouse can also have a QCD of up to $100,000. However, the amount of the QCD is limited to the amount of the distribution that would otherwise be included in income. If your IRA includes non-deductible contributions, the distribution is first considered to be paid out of otherwise taxable income. For more information see Publication 590.
Caution: You cannot claim a charitable contribution deduction for any QCD not included in your income.
Ordinary income. Distributions from traditional IRAs that you include in income are taxed as ordinary income.
No special treatment. In figuring your tax, you cannot use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified employer plans.
Distributions Fully or Partly Taxable
Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions.
Fully taxable. If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. Because you have no basis in your IRA, any distributions are fully taxable when received. See Reporting taxable distributions on your return, later.
Partly taxable. If you made nondeductible contributions to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. These nondeductible contributions are not taxed when they are distributed to you. They are a return of your investment in your IRA.
Only the part of the distribution that represents nondeductible contributions (your cost basis) is tax free. If nondeductible contributions have been made, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable.
Form 8606. You must complete Form 8606 and attach it to your return if you receive a distribution from a traditional IRA and have ever made nondeductible contributions to any of your traditional IRAs. Using the form, you will figure the nontaxable distributions for 2007 and your total IRA basis for 2007 and earlier years.
Note. If you are required to file Form 8606, but you are not required to file an income tax return, you still must file Form 8606. Send it to the IRS at the time and place you would otherwise file an income tax return.
Distributions reported on Form 1099-R. If you receive a distribution from your traditional IRA, you will receive Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or a similar statement. IRA distributions are shown in boxes 1 and 2a of Form 1099-R. A number or letter code in box 7 tells you what type of distribution you received from your IRA.
Withholding. Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld. See chapter 4.
IRA distributions delivered outside the United States. In general, if you are a U.S. citizen or resident alien and your home address is outside the United States or its possessions, you cannot choose exemption from withholding on distributions from your traditional IRA.
Reporting taxable distributions on your return. Report fully taxable distributions, including early distributions on Form 1040, line 15b, or Form 1040A, line 11b (no entry is required on Form 1040, line 15a, or Form 1040A, line 11a). If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a, or Form 1040A, line 11a, and the taxable part on Form 1040, line 15b, or Form 1040A, line 11b. You cannot report distributions on Form 1040EZ.
What Acts Result in Penalties or Additional Taxes?
The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules.
There are additions to the regular tax for using your IRA funds in prohibited transactions. There are also additional taxes for the following activities.
There are penalties for overstating the amount of nondeductible contributions and for failure to file a Form 8606, if required.
Prohibited Transactions
Generally, a prohibited transaction is any improper use of your traditional IRA by you, your beneficiary, or any disqualified person.
Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendent, and any spouse of a lineal descendent).
The following are examples of prohibited transactions with a traditional IRA.
Effect on an IRA account. Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year.
Effect on you or your beneficiary. If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. For information on figuring your gain and reporting it in income, see Are Distributions Taxable, earlier. The distribution may be subject to additional taxes or penalties.
Taxes on prohibited transactions. If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected.
More information. For more information on prohibited transactions, see Publication 590.
Investment in Collectibles
If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. You may have to pay the 10% additional tax on early distributions, discussed later.
Collectibles. These include:
Exception. Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
Generally, an excess contribution is the amount contributed to your traditional IRA(s) for the year that is more than the smaller of the following amounts.
Tax on excess contributions. In general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. The tax cannot be more than 6% of the combined value of your IRAs as of the end of your tax year.
Excess contributions withdrawn by due date of return. You will not have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions.
How to treat withdrawn contributions. Do not include in your gross income an excess contribution that you withdraw from your traditional IRA before your tax return is due if both the following conditions are met.
You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. If there was a loss, the net income you must withdraw may be a negative amount.
How to treat withdrawn interest or other income. You must include in your gross income the interest or other income that was earned on the excess contribution. Report it on your return for the year in which the excess contribution was made. Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions, discussed later.
Excess contributions withdrawn after due date of return. In general, you must include all distributions (withdrawals) from your traditional IRA in your gross income. However, if the following conditions are met, you can withdraw excess contributions from your IRA and not include the amount withdrawn in your gross income.
The withdrawal can take place at any time, even after the due date, including extensions, for filing your tax return for the year.
Excess contribution deducted in an earlier year. If you deducted an excess contribution in an earlier year for which the total contributions were not more than the maximum deductible amount for that year ($2,000 for 2001 and earlier years, $3,000 for 2002 through 2004 ($3,500 if you were age 50 or older), $4,000 for 2005 ($4,500 if you were age 50 or older), $4,000 for 2006 ($5,000 if you were age 50 or older)), you can still remove the excess from your traditional IRA and not include it in your gross income. To do this, file Form 1040X for that year and do not deduct the excess contribution on the amended return. Generally, you can file an amended return within 3 years after you filed your return, or 2 years from the time the tax was paid, whichever is later.
Excess due to incorrect rollover information. If an excess contribution in your traditional IRA is the result of a rollover and the excess occurred because the information the plan was required to give you was incorrect, you can withdraw the excess contribution. The limits mentioned above are increased by the amount of the excess that is due to the incorrect information. You will have to amend your return for the year in which the excess occurred to correct the reporting of the rollover amounts in that year. Do not include in your gross income the part of the excess contribution caused by the incorrect information.
You must include early distributions of taxable amounts from your traditional IRA in your gross income. Early distributions are also subject to an additional 10% tax. See the discussion of Form 5329 under Reporting Additional Taxes, later, to figure and report the tax.
Early distributions defined. Early distributions generally are amounts distributed from your traditional IRA account or annuity before you are age 59 1/2.
Age 59 1/2 rule. Generally, if you are under age 59 1/2, you must pay a 10% additional tax on the distribution of any assets (money or other property) from your traditional IRA. Distributions before you are age 59 1/2 are called early distributions.
The 10% additional tax applies to the part of the distribution that you have to include in gross income. It is in addition to any regular income tax on that amount.
Exceptions. There are several exceptions to the age 59 1/2 rule. Even if you receive a distribution before you are age 59 1/2, you may not have to pay the 10% additional tax if you are in one of the following situations.
Most of these exceptions are explained in Publication 590.
Note. Distributions that are timely and properly rolled over, as discussed earlier, are not subject to either regular income tax or the 10% additional tax. Certain withdrawals of excess contributions after the due date of your return are also tax free and therefore not subject to the 10% additional tax. (See Excess contributions withdrawn after due date of return, earlier.) This also applies to transfers incident to divorce, as discussed earlier.
Receivership distributions. Early distributions (with or without your consent) from savings institutions placed in receivership are subject to this tax unless one of the exceptions listed earlier applies. This is true even if the distribution is from a receiver that is a state agency.
Additional 10% tax. The additional tax on early distributions is 10% of the amount of the early distribution that you must include in your gross income. This tax is in addition to any regular income tax resulting from including the distribution in income.
Nondeductible contributions. The tax on early distributions does not apply to the part of a distribution that represents a return of your nondeductible contributions (basis).
More information. For more information on early distributions, see Publication 590.
Excess Accumulations (Insufficient Distributions)
You cannot keep amounts in your traditional IRA indefinitely. Generally, you must begin receiving distributions by April 1 of the year following the year in which you reach age 70 1/2. The required minimum distribution for any year after the year in which you reach age 70 1/2 must be made by December 31 of that later year.
Tax on excess. If distributions are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required.
Request to waive the tax. If the excess accumulation is due to reasonable error, and you have taken, or are taking, steps to remedy the insufficient distribution, you can request that the tax be excused. If you believe you qualify for this relief, attach a statement of explanation and complete Form 5329 as instructed under Waiver of tax in the Instructions for Form 5329.
Exemption from tax. If you are unable to take required distributions because you have a traditional IRA invested in a contract issued by an insurance company that is in state insurer delinquency proceedings, the 50% excise tax does not apply if the conditions and requirements of Revenue Procedure 92-10 are satisfied.
More information. For more information on excess accumulations, see Publication 590.
Reporting Additional Taxes
Generally, you must use Form 5329 to report the tax on excess contributions, early distributions, and excess accumulations. If you must file Form 5329, you cannot use Form 1040A or Form 1040EZ.
Filing a tax return. If you must file an individual income tax return, complete Form 5329 and attach it to your Form 1040. Enter the total amount of additional taxes due on Form 1040, line 60.
Not filing a tax return. If you do not have to file a tax return but do have to pay one of the additional taxes mentioned earlier, file the completed Form 5329 with the IRS at the time and place you would have filed your Form 1040. Be sure to include your address on page 1 and your signature and date on page 2. Enclose, but do not attach, a check or money order payable to the United States Treasury for the tax you owe, as shown on Form 5329. Enter your social security number and "2007 Form 5329" on your check or money order.
Form 5329 not required. You do not have to use Form 5329 if either of the following situations exist.
Regardless of your age, you may be able to establish and make nondeductible contributions to a retirement plan called a Roth IRA.
Contributions not reported. You do not report Roth IRA contributions on your return.
What Is a Roth IRA?
A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined earlier). It can be either an account or an annuity. Individual retirement accounts and annuities are described in Publication 590.
To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA.
Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. Contributions can be made to your Roth IRA after you reach age 70 1/2 and you can leave amounts in your Roth IRA as long as you live.
When Can a Roth IRA Be Set Up?
You can set up a Roth IRA at any time. However, the time for making contributions for any year is limited. See When Can You Make Contributions, later under Can You Contribute to a Roth IRA?
Can You Contribute to a Roth IRA?
Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than:
Tip: You may be eligible to claim a credit for contributions to your Roth IRA. For more information, see chapter 37.
Is there an age limit for contributions? Contributions can be made to your Roth IRA regardless of your age.
Can you contribute to a Roth IRA for your spouse? You can contribute to a Roth IRA for your spouse provided the contributions satisfy the spousal IRA limit (discussed in How Much Can Be Contributed under Traditional IRAs), you file jointly, and your modified AGI is less than $166,000.
Compensation. Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. It also includes commissions, self-employment income, nontaxable combat pay, and taxable alimony and separate maintenance payments.
Modified AGI. Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return modified as follows.
You can use Worksheet 17-2 to figure your modified AGI.
Worksheet 17-2. Modified Adjusted Gross Income for Roth IRA Purposes
Keep for Your Records
Use this worksheet to figure your modified adjusted gross income for
Roth IRA purposes.
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1. Enter your adjusted gross income from
Form 1040, line 38, or Form 1040A, line 22 1. ______
2. Enter any income resulting from the conversion
of an IRA (other than a Roth IRA) to a Roth
IRA or a minimum required distribution from
an IRA (if figuring MAGI for conversion
purposes) 2. ______
3. Subtract line 2 from line 1 3. ______
4. Enter any traditional IRA deduction from Form 1040,
line 32, or Form 1040A, line 17 4. ______
5. Enter any student loan interest deduction from
Form 1040, line 33, or Form 1040A, line 18 5. ______
6. Enter any tuition and fees deduction from
Form 1040, line 34, or Form 1040A, line 19 6. ______
7. Enter any domestic production activities deduction
from Form 1040, line 35 7. ______
8. Enter any foreign earned income and/or housing
exclusion from Form 2555, line 45, or Form 2555-EZ,
line 18 8. ______
9. Enter any foreign housing deduction from
Form 2555, line 50 9. ______
10. Enter any excludable savings bond interest from
Form 8815, line 14 10. ______
11. Enter any excluded employer-provided adoption
benefits from Form 8839, line 30 11. ______
12. Add the amounts on lines 3 through 11 12. ______
13. Enter:
• $166,000 if married filing jointly or
qualifying widow(er)
• $10,000 if married filing separately
and you lived with your spouse at any time
during the year
• $114,000 for all others 13. ______
Is the amount on line 12 more than the
amount on line 13?
If yes, then see the Note below.
If no, then the amount on line 13 is your
modified AGI for Roth IRA purposes.
Note. If the amount on line 12 is more than the amount on
line 13 and you have other income or loss items, such as social
security income or passive activity losses, that are subject to
AGI-based phaseouts, you can refigure your AGI solely for the
purpose of figuring your modified AGI for Roth IRA purposes. When
figuring your modified AGI for conversion purposes, refigure your
AGI without taking into account any income from conversions or
minimum required distributions from IRAs. (If you receive social
security benefits, use Worksheet 1 in Appendix B of
Publication 590 to refigure your AGI.) Then go to list item (2)
under Modified AGI or line 3 above in Worksheet 17-2 to
refigure your modified AGI. If you do not have other income or loss
items subject to AGI-based phaseouts, your modified AGI for Roth
IRA purposes is the amount on line 12.
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The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs.
Roth IRAs only. If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of the following amounts.
However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced.
Roth IRAs and traditional IRAs. If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions for the year to all IRAs other than Roth IRAs. Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit.
This means that your contribution limit is the lesser of the following amounts.
However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced.
Catch-up contributions in certain employer bankruptcies. If you participated in a 401(k) plan and the employer who maintained the plan went into bankruptcy in an earlier year, you may be able to contribute an additional $3,000 to your IRA. See Publication 590 to see if you qualify to make these additional contributions. If you qualify and choose to make these catch-up contributions, the higher contribution and deduction limits for individuals who are age 50 or older do not apply. The most that you can contribute to your Roth IRA is $7,000.
Contribution limit reduced. If your modified AGI is above a certain amount, your contribution limit is gradually reduced. Use Table 17-3 to determine if this reduction applies to you.
Table 17-3. Effect of Modified AGI on Roth IRA Contribution
This table shows whether your contribution to a Roth IRA is affected
by the amount of your modified adjusted gross income (modified AGI).
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IF you have taxable
compensation and your AND your modified
filing status is... AGI is... THEN...
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married filing jointly, or less than $156,000 you can contribute
qualifying widow(er) up to $4,000
($5,000 if you are
50 or older in
2007).
-----------------------------------------
at least $156,000 the amount you can
but less than contribute is
$166,000 reduced as
explained under
Contribution
limit reduced in
Publication 590.
-----------------------------------------
$166,000 or more you cannot
contribute to a
Roth IRA.
----------------------------------------------------------------------
married filing separately zero (-0-) you can contribute
and you lived with your up to $4,000
spouse at any time during ($5,000 if you are
the year 50 or older in
2007).
-----------------------------------------
more than zero the amount you can
(-0-) but less contribute is
than $10,000 reduced as
explained under
Contribution limit
reduced in
Publication 590.
-----------------------------------------
$10,000 or more you cannot
contribute to a
Roth IRA.
----------------------------------------------------------------------
single, less than $99,000 you can contribute
head of household, or up to $4,000
married filing separately ($5,000 if you are
and you did not live with 50 or older in
your spouse at any time 2007).
during the year -----------------------------------------
at least $99,000 the amount you can
but less than contribute is
$114,000 reduced as
explained under
Contribution limit
reduced in
Publication 590.
-----------------------------------------
$114,000 or more you cannot
contribute to a
Roth IRA.
----------------------------------------------------------------------
Figuring the reduction. If the amount you can contribute to your Roth IRA is reduced, see Publication 590 for how to figure the reduction.
When Can You Make Contributions?
You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions).
Tip: You can make contributions for 2007 by the due date (not including extensions) for filing your 2007 tax return.
What if You Contribute Too Much?
A 6% excise tax applies to any excess contribution to a Roth IRA.
Excess contributions. These are the contributions to your Roth IRAs for a year that equal the total of:
Withdrawal of excess contributions. For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment applies only if any earnings on the contributions are also withdrawn. The earnings are considered to have been earned and received in the year the excess contribution was made.
Applying excess contributions. If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year.
Can You Move Amounts Into a Roth IRA?
You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. You can roll amounts over from a designated Roth account or from one Roth IRA to another Roth IRA.
You can convert a traditional IRA to a Roth IRA. The conversion is treated as a rollover, regardless of the conversion method used. Most of the rules for rollovers, described earlier under Rollover From One IRA Into Another under Traditional IRAs, apply to these rollovers. However, the 1-year waiting period does not apply.
Conversion methods. You can convert amounts from a traditional IRA to a Roth IRA in any of the following ways.
Same trustee. Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract.
Converting from a SIMPLE IRA. Generally, you can convert an amount in your SIMPLE IRA to a Roth IRA under the same rules explained earlier under Converting From Any Traditional IRA to a Roth IRA.
However, you cannot convert any amount distributed from the SIMPLE IRA during the 2-year period beginning on the date you first participated in any SIMPLE IRA plan maintained by your employer.
More information. For more detailed information on conversions, see Publication 590.
If, when you converted amounts from a traditional IRA into a Roth IRA, you expected to have modified AGI of less than $100,000 and a filing status other than married filing separately, but your expectations did not come true, you have made a failed conversion.
Results of failed conversions. If the converted amount (contribution) is not recharacterized (explained earlier), the contribution will be treated as a regular contribution to the Roth IRA and subject to the following tax consequences.
How to avoid. You must move the amount converted (including all earnings from the date of conversion) into a traditional IRA by the due date (including extensions) for your tax return for the year during which you made the conversion to the Roth IRA. You do not have to include this distribution (withdrawal) in income. See Recharacterizations, earlier, for more information.
Rollover From a Roth IRA
You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. Most of the rules for rollovers, explained earlier under Rollover From One IRA Into Another under Traditional IRAs, apply to these rollovers.
You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering rules for distributions, later.
Rollover from designated Roth account. A rollover from a designated Roth account can only be made to another designated Roth account or to a Roth IRA.
What are qualified distributions? A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.
Additional tax on distributions of conversion contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted (the conversion contribution) that you had to include in income. A separate 5-year period applies to each conversion. See Ordering rules for distributions, later, to determine the amount, if any, of the distribution that is attributable to the part of the conversion contribution that you had to include in income.
Additional tax on other early distributions. Unless an exception applies, the taxable part of other distributions from your Roth IRA(s) that are not qualified distributions is subject to the 10% additional tax on early distributions. See Publication 590 for more information.
Ordering rules for distributions. If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. There is a set order in which contributions (including conversion contributions) and earnings are considered to be distributed from your Roth IRA. Regular contributions are distributed first. See Publication 590 for more information.
Must you withdraw or use Roth IRA assets? You are not required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs.
More information. For more detailed information on Roth IRAs, see Publication 590.
This chapter discusses the rules that apply if you pay or receive alimony. It covers the following topics.
Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument.
Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. Although this chapter is generally written for the payer of the alimony, the recipient can use the information to determine whether an amount received is alimony.
To be alimony, a payment must meet certain requirements. Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. This chapter discusses the rules for payments under instruments executed after 1984. If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. That was the last year the information on pre-1985 instruments was included in Publication 504.
Use Table 18-1 in this chapter as a guide to determine whether certain payments are considered alimony.
Table 18-1. Alimony Requirements (Instruments Executed After 1984)
----------------------------------------------------------------------
Payments ARE alimony if all of the Payments are NOT alimony if any
following are true: of the following are true:
Payments are required by a divorce Payments are not required by a
or separation instrument. divorce or separation
instrument.
Payer and recipient spouse do not Payer and recipient spouse file
file a joint return with each other. a joint return with each other.
Payment is in cash (including Payment is:
checks or money orders).
• Not in cash,
• A noncash property
settlement,
• Spouse's part of community
income, or
• To keep up the payer's
property.
Payment is not designated in the Payment is designated in the
instrument as not alimony. instrument as not alimony.
Spouses legally separated under a Spouses legally separated under
decree of divorce or separate a decree of divorce or separate
maintenance are not members of maintenance are members of the
the same household. same household.
Payments are not required after Payments are required after
death of the recipient spouse. death of the recipient spouse.
Payment is not treated as child Payment is treated as child
support. support.
----------------------------------------------------------------------
These payments are deductible by the These payments are neither
payer and includible in income by the deductible by the payer nor
recipient. includible in income by the
recipient.
----------------------------------------------------------------------
Definitions. The following definitions apply throughout this chapter.
Spouse or former spouse. Unless otherwise stated, the term "spouse" includes former spouse.
Divorce or separation instrument. The term "divorce or separation instrument" means:
Useful Items
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Publication
The following rules apply to alimony regardless of when the divorce or separation instrument was executed.
Payments not alimony. Not all payments under a divorce or separation instrument are alimony. Alimony does not include:
Payments to a third party. Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be alimony, if they otherwise qualify. These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc.), taxes, tuition, etc. The payments are treated as received by your spouse and then paid to the third party.
Life insurance premiums. Alimony includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy.
Payments for jointly-owned home. If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse or former spouse, some of your payments may be alimony.
Mortgage payments. If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. If you itemize deductions and the home is a qualified home, you can claim half of the interest in figuring your deductible interest. Your spouse must report one-half of the payments as alimony received. If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest.
Taxes and insurance. If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. Your spouse must report one-half of these payments as alimony received. If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance.
If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance.
Other payments to a third party. If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony.
The following rules for alimony apply to payments under divorce or separation instruments executed after 1984.
Exception for instruments executed before 1985. There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985.
For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, see the 2004 revision of Publication 504 on the IRS website at www.irs.gov.
Example 1. In November 1984, you and your former spouse executed a written separation agreement. In February 1985, a decree of divorce was substituted for the written separation agreement. The decree of divorce did not change the terms for the alimony you pay your former spouse. The decree of divorce is treated as executed before 1985. Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984.
Example 2. Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. In this example, the decree of divorce is not treated as executed before 1985. The alimony payments are subject to the rules for payments under instruments executed after 1984.
Alimony requirements. A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met.
Each of these requirements is discussed next.
Cash payment requirement. Only cash payments, including checks and money orders, qualify as alimony. The following do not qualify as alimony.
Payments to a third party. Cash payments to a third party under the terms of your divorce or separation instrument can qualify as cash payments to your spouse. See Payments to a third party under General Rules, earlier.
Also, cash payments made to a third party at the written request of your spouse may qualify as alimony if all the following requirements are met.
Payments designated as not alimony. You and your spouse can designate that otherwise qualifying payments are not alimony. You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order.
Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. The copy must be attached each year the designation applies.
Spouses cannot be members of the same household. Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. A home you formerly shared is considered one household, even if you physically separate yourselves in the home.
You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than 1 month after the date of the payment.
Exception. If you are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement, support decree, or other court order may qualify as alimony even if you are members of the same household when the payment is made.
Liability for payments after death of recipient spouse. If any part of payments you make must continue to be made for any period after your spouse's death, that part of your payments is not alimony, whether made before or after the death. If all of the payments would continue, then none of the payments made before or after the death are alimony.
The divorce or separation instrument does not have to expressly state that the payments cease upon the death of your spouse if, for example, the liability for continued payments would end under state law.
Example. You must pay your former spouse $10,000 in cash each year for 10 years. Your divorce decree states that the payments will end upon your former spouse's death. You must also pay your former spouse or your former spouse's estate $20,000 in cash each year for 10 years. The death of your spouse would not terminate these payments under state law.
The $10,000 annual payments may qualify as alimony. The $20,000 annual payments that do not end upon your former spouse's death are not alimony.
Substitute payments. If you must make any payments in cash or property after your spouse's death as a substitute for continuing otherwise qualifying payments before the death, the otherwise qualifying payments are not alimony. To the extent that your payments begin, accelerate, or increase because of the death of your spouse, otherwise qualifying payments you made may be treated as payments that were not alimony. Whether or not such payments will be treated as not alimony depends on all the facts and circumstances.
Example 1. Under your divorce decree, you must pay your former spouse $30,000 annually. The payments will stop at the end of 6 years or upon your former spouse's death, if earlier.
Your former spouse has custody of your minor children. The decree provides that if any child is still a minor at your spouse's death, you must pay $10,000 annually to a trust until the youngest child reaches the age of majority. The trust income and corpus (principal) are to be used for your children's benefit.
These facts indicate that the payments to be made after your former spouse's death are a substitute for $10,000 of the $30,000 annual payments. Of each of the $30,000 annual payments, $10,000 is not alimony.
Example 2. Under your divorce decree, you must pay your former spouse $30,000 annually. The payments will stop at the end of 15 years or upon your former spouse's death, if earlier. The decree provides that if your former spouse dies before the end of the 15-year period, you must pay the estate the difference between $450,000 ($30,000 ó 15) and the total amount paid up to that time. For example, if your spouse dies at the end of the tenth year, you must pay the estate $150,000 ($450,000 - $300,000).
These facts indicate that the lump-sum payment to be made after your former spouse's death is a substitute for the full amount of the $30,000 annual payments. None of the annual payments are alimony. The result would be the same if the payment required at death were to be discounted by an appropriate interest factor to account for the prepayment.
Child support. A payment that is specifically designated as child support or treated as specifically designated as child support under your divorce or separation instrument is not alimony. The amount of child support may vary over time. Child support payments are not deductible by the payer and are not taxable to the recipient.
Specifically designated as child support. A payment will be treated as specifically designated as child support to the extent that the payment is reduced either:
A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support.
Contingency relating to your child. A contingency relates to your child if it depends on any event relating to that child. It does not matter whether the event is certain or likely to occur. Events relating to your child include the child's:
Clearly associated with a contingency. Payments that would otherwise qualify as alimony are presumed to be reduced at a time clearly associated with the happening of a contingency relating to your child only in the following situations.
In all other situations, reductions in payments are not treated as clearly associated with the happening of a contingency relating to your child.
Either you or the IRS can overcome the presumption in the two situations above. This is done by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to your children. For example, if you can show that the period of alimony payments is customary in the local jurisdiction, such as a period equal to one-half of the duration of the marriage, you can overcome the presumption and may be able to treat the amount as alimony.
You can deduct alimony you paid, whether or not you itemize deductions on your return. You must file Form 1040. You cannot use Form 1040A or Form 1040EZ.
Enter the amount of alimony you paid on Form 1040, line 31a. In the space provided on line 31b, enter your spouse's social security number.
If you paid alimony to more than one person, enter the social security number of one of the recipients. Show the social security number and amount paid to each other recipient on an attached statement. Enter your total payments on line 31a.
Caution: If you do not provide your spouse's social security number, you may have to pay a $50 penalty and your deduction may be disallowed.
Report alimony you received as income on Form 1040, line 11. You cannot use Form 1040A or Form 1040EZ.
Caution: You must give the person who paid the alimony your social security number. If you do not, you may have to pay a $50 penalty.
If your alimony payments decrease or terminate during the first 3 calendar years, you may be subject to the recapture rule. If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Your spouse can deduct in the third year part of the alimony payments he or she previously included in income.
The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Do not include any time in which payments were being made under temporary support orders. The second and third years are the next 2 calendar years, whether or not payments are made during those years.
The reasons for a reduction or termination of alimony payments that can require a recapture include:
When to apply the recapture rule. You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year.
When you figure a decrease in alimony, do not include the following amounts.
Figuring the recapture. You can use Worksheet 1 in Publication 504 to figure recaptured alimony.
Including the recapture in income. If you must include a recapture amount in income, show it on Form 1040, line 11 ("Alimony received"). Cross out "received" and enter "recapture." On the dotted line next to the amount, enter your spouse's last name and social security number.
Deducting the recapture. If you can deduct a recapture amount, show it on Form 1040, line 31a ("Alimony paid"). Cross out "paid" and enter "recapture." In the space provided, enter your spouse's social security number.
Income limits increased. The amount of your student loan interest deduction for 2007 is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $55,000 and $70,000 ($110,000 and $140,000 if you file a joint return). You cannot take a deduction if your MAGI is $70,000 or more ($140,000 or more if you file a joint return). This is an increase from the 2006 limits of $50,000 and $65,000 ($105,000 and $135,000 if filing a joint return). See chapter 4 of Publication 970 for more information.
This chapter discusses the education-related adjustments you can deduct in figuring your adjusted gross income.
This chapter covers:
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Form (and Instructions)
If you were an eligible educator in 2007, you can deduct up to $250 of qualified expenses you paid in 2007 as an adjustment to gross income, rather than as a miscellaneous itemized deduction. If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses.
Eligible educator. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year.
Qualified expenses. Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. An ordinary expense is one that is common and accepted in your educational field. A necessary expense is one that is helpful and appropriate for your profession as an educator. An expense does not have to be required to be considered necessary.
Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education.
You must reduce your qualified expenses by the following amounts.
How the deduction is claimed. To claim the deduction, enter the allowable amount on line 23 of Form 1040, or line 16 of Form 1040A.
Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $70,000 ($140,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2007. Table 19-1 summarizes the features of the student loan interest deduction.
Table 19-1. Student Loan Interest Deduction at a Glance
Do not rely on this table alone.
Refer to the text for more details.
------------------------------------------------------
Feature Description
------------------------------------------------------
Maximum You can reduce your income
benefit subject to tax by up to $2,500.
------------------------------------------------------
Loan Your student loan:
qualifications • must have been taken out
solely to pay qualified
education expenses, and
• cannot be from a related
person or made under a
------------------------------------------------------
Student The student must be:
qualifications • you, your spouse, or your
dependent, and
• enrolled at least half-time in
a degree program.
------------------------------------------------------
Time limit on You can deduct interest paid
deduction during the remaining period of
your student loan.
------------------------------------------------------
Phaseout The amount of your deduction
depends on your income level.
------------------------------------------------------
Student Loan Interest Defined
Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.
Qualified Student Loan
This is a loan you took out solely to pay qualified education expenses (defined later) that were:
Loans from the following sources are not qualified student loans.
Exceptions. For purposes of the student loan interest deduction, the following are exceptions to the general rules for dependents.
Reasonable period of time. Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program.
Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met.
If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances.
Academic period. An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.
Eligible student. This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
Enrolled at least half-time. A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.
The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the Department of Education under the Higher Education Act of 1965.
Loan from a related person. You cannot deduct interest on a loan you get from a related person. Related persons include:
Loan from a qualified employer plan. You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan.
Qualified Education Expenses
For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items.
The cost of room and board qualifies only to the extent that it is not more than the greater of:
Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training.
An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility.
Tip: The educational institution should be able to tell you if it is an eligible educational institution.
Adjustments to qualified education expenses. You must reduce your qualified education expenses by certain tax-free items (such as the tax-free part of scholarships and fellowships). See chapter 4 of Publication 970 for details.
Include as Interest
In addition to simple interest on the loan, certain loan origination fees, capitalized interest, interest on revolving lines of credit, and interest on refinanced student loans can be student loan interest if all other requirements are met.
Loan origination fee. This is a one-time fee charged by the lender when a loan is made. It is for the use of money and is treated as interest accrued over the life of the loan. This fee cannot be for property or services provided by the lender, such as commitment fees or processing costs.
Capitalized interest. This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan.
Interest on revolving lines of credit. This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. See Qualified Education Expenses, earlier.
Interest on refinanced student loans. This includes interest on both:
Caution: If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan.
Voluntary interest payments. These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status.
Do Not Include as Interest
You cannot claim a student loan interest deduction for any of the following items.
Can You Claim the Deduction
Generally, you can claim the deduction if all four of the following requirements are met.
Interest paid by others. If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. See chapter 4 of Publication 970 for more information.
No Double Benefit Allowed
You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest).
How Much Can You Deduct
Your student loan interest deduction for 2007 is generally the smaller of:
The amount determined above is phased out (gradually reduced) if your MAGI is between $55,000 and $70,000 ($110,000 and $140,000 if you file a joint return). You cannot take a student loan interest deduction if your MAGI is $70,000 or more ($140,000 or more if you file a joint return). For details on figuring your MAGI, see chapter 4 of Publication 970.
How Do You Figure the Deduction
Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or Form 1040A instructions. However, if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1 in chapter 4 of Publication 970.
To help you figure your student loan interest deduction, you should receive Form 1098-E, Student Loan Interest Statement. Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2007 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2008.
For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. For information on allocating payments between interest and principal, see chapter 4 of Publication 970.
To claim the deduction, enter the allowable amount on line 33 (Form 1040), or line 18 (Form 1040A).
You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or a dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education, as explained later under What Expenses Qualify.
The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000.
Table 19-2 summarizes the features of the tuition and fees deduction.
Table 19-2. Tuition and Fees Deduction at a Glance
Do not rely on this table alone.
Refer to the text for more details.
--------------------------------------------------
Question Answer
--------------------------------------------------
What is the You can reduce your income
maximum subject to tax by up to $4,000.
benefit?
--------------------------------------------------
Where is As an adjustment to income on
the Form 1040, line 34, or 1040A,
deduction line 19.
taken?
--------------------------------------------------
For whom A student enrolled in an eligible
must the educational institution who is
expenses either:
be paid? • you,
• your spouse, or
• your dependent for whom you
claim an exemption.
--------------------------------------------------
What tuition Tuition and fees required for
and fees enrollment or attendance at an
are eligible postsecondary
deductible? educational institution, but not
including personal, living, or
family expenses, such as room
and board.
--------------------------------------------------
Tip: You may be able to take a credit for your education expenses instead of a deduction. You can choose the one that will give you the lower tax. See chapter 35 for details about the credits.
Can You Claim the Deduction
The following rules will help you determine if you can claim the tuition and fees deduction.
Who Can Claim the Deduction
Generally, you can claim the tuition and fees deduction if all three of the following requirements are met.
Qualified education expenses are defined later under What Expenses Qualify. Eligible students are defined later under Who Is an Eligible Student.
Who Cannot Claim the Deduction
You cannot claim the tuition and fees deduction if any of the following apply.
What Expenses Qualify
The tuition and fees deduction is based on qualified education expenses you pay for yourself, your spouse, or your dependent for whom you claim an exemption on your tax return. Generally, the deduction is allowed for qualified education expenses paid in 2007 in connection with enrollment at an institution of higher education during 2007 or for an academic period (defined earlier under Student Loan Interest Deduction) beginning in 2007 or in the first 3 months of 2008.
Payments with borrowed funds. You can claim a tuition and fees deduction for qualified education expenses paid with the proceeds of a loan. You use the expenses to figure the deduction for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.
Student withdraws from class(es). You can claim a tuition and fees deduction for qualified education expenses not refunded when a student withdraws.
Qualified Education Expenses
For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's FSA programs.
Related expenses. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
No Double Benefit Allowed
You cannot do any of the following.
Adjustments to qualified education expenses. If you paid qualified education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance and refunds you received.
Tax-free educational assistance. This includes:
Refunds. Qualified education expenses do not include expenses for which you, or someone else who paid qualified education expenses on behalf of a student, receive a refund. (For information on expenses paid by a dependent student or third party, see Who Can Claim a Dependent's Expenses, later.)
If a refund of expenses paid in 2007 is received before you file your tax return for 2007, simply reduce the amount of the expenses paid by the amount of the refund received. If the refund is received after you file your 2007 tax return, see When Must the Deduction Be Repaid (Recaptured), in chapter 6 of Publication 970.
You are considered to receive a refund of expenses when an eligible educational institution refunds loan proceeds to the lender on behalf of the borrower. Follow the above instructions according to when you are considered to receive the refund.
Amounts that do not reduce qualified education expenses. Do not reduce qualified education expenses by amounts paid with funds the student receives as:
Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.
Expenses That Do Not Qualify
Qualified education expenses do not include amounts paid for:
This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.
Sports, games, hobbies, and noncredit courses. Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify.
Comprehensive or bundled fees. Some eligible educational institutions combine all of their fees for an academic period into one amount. If you do not receive, or do not have access to, an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. See How Do You Figure the Deduction, below, for more information about Form 1098-T.
Who Is an Eligible Student
For purposes of the tuition and fees deduction, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (defined earlier). The student must have either a high school diploma or a General Educational Development (GED) credential.
Who Can Claim a Dependent's Expenses
Generally, to claim the tuition and fees deduction for qualified education expenses for a dependent, you must:
Table 19-3 summarizes who can claim the deduction.
Table 19-3. Who Can Claim a Dependent's Expenses
Do not rely on this table alone.
See Who Can Claim a
Dependent's Expenses in chapter
6 of Publication 970.
--------------------------------------------------
IF your
dependent is
an eligible
student and
you... AND... THEN...
--------------------------------------------------
claim an you paid only you can
exemption for all deduct the
your qualified qualified
dependent education education
expenses expenses that
for your you paid. Your
dependent dependent cannot
take a deduction.
--------------------------------------------------
claim an your no one is allowed
exemption for dependent to take a
your paid all deduction.
dependent qualified
education
expenses
--------------------------------------------------
do not claim you paid no one is allowed
an exemption all to take a
for your qualified deduction.
dependent, education
but are expenses
eligible to
--------------------------------------------------
do not claim your no one is allowed
an exemption dependent to take a
for your paid all deduction.
dependent, qualified
but are education
eligible to expenses
--------------------------------------------------
are not you paid only your
eligible to all dependent can
claim an qualified deduct the
exemption for education amount you paid.
your expenses The amount you
dependent paid is treated
as a gift to your
dependent.
--------------------------------------------------
are not your only your
eligible to dependent dependent can
claim an paid all take a deduction.
exemption for qualified
your education
dependent expenses
--------------------------------------------------
How Much Can You Deduct
The maximum tuition and fees deduction in 2007 is $4,000, $2,000, or $0, depending on the amount of your MAGI. For details on figuring your MAGI, see chapter 6 of Publication 970.
How Do You Figure the Deduction
Figure the deduction using Form 8917.
To help you figure your tuition and fees deduction, you should receive Form 1098-T, Tuition Statement. Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2008.
To claim the deduction, enter the allowable amount on Form 1040, line 34, or Form 1040A, line 19, and attach your completed Form 8917.
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