2023 Publication 525

Future Developments

For the latest information about developments

related to Pub. 525, such as legislation enacted

after it was published, go to IRS.gov/Pub525.

What's New

Deferred compensation contribution limit

increased. If you participate in a 401(k),

403(b), or the federal government's Thrift Sav-

ings Plan (TSP), the total annual amount you

can contribute is increased to $22,500 ($30,000

if age 50 or older). This also applies to most 457

plans.

Health flexible spending arrangements

(health FSAs) under cafeteria plans. For tax

years beginning in 2023, the dollar limitation un-

der section 125(i) on voluntary employee salary

reductions for contributions to health FSAs is

$3,050.

Temporary allowance of 100% business

meal deduction has expired. The temporary

allowance of a 100% business meal deduction

for food or beverages provided by a restaurant

and paid or incurred after December 31, 2020,

and before January 1, 2023, has expired. Tax-

payers may continue to deduct 50% of the cost

of business meals if the taxpayer (or an em-

ployee of the taxpayer) is present and the food

or beverages aren’t considered lavish or extrav-

agant.

Contributions to simplified employee pen-

sion plan (SEP) and savings incentive

match plan for employees (SIMPLE) Roth

IRAs. Section 601 of the SECURE 2.0 Act of

2022 provided that your employer may provide

for contributions to a Roth IRA under a SEP or

SIMPLE IRA plan.

Designated Roth nonelective contributions

and designated Roth matching contribu-

tions. Section 604 of the SECURE 2.0 Act of

2022 permits certain nonelective contributions

and matching contributions that are made after

December 29, 2022, to be designated as Roth

contributions.

De minimis financial incentives. Section 113

of the SECURE 2.0 Act of 2022 provided that

employers can offer their employees de minimis

financial incentives to make elective deferrals.

These incentives may not exceed $250 in value,

and, in general, are includible in employees’ in-

come.

Reminders

Paycheck Protection Program loan forgive-

ness. Gross income doesn’t include any

amount arising from the forgiveness of a Pay-

check Protection Program (PPP) loan, effective

for taxable years ending after March 27, 2020.

(See P.L. 116-136.) Likewise, gross income

does not include any amount arising from the

forgiveness of Second Draw PPP loans, effec-

tive December 27, 2020. (See P.L. 116-260.)

When a taxpayer who does not factually satisfy

the conditions for a qualifying forgiveness cau-

ses its lender to forgive the PPP loan by

Department

of the

Treasury

Internal

Revenue

Service

Publication 525

Cat. No. 15047D

Taxable and

Nontaxable

Income

For use in preparing

2023 Returns

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inaccurately representing that the taxpayer sat-

isfies them, the taxpayer may not exclude the

amount of the forgiven loan from gross income

under 15 U.S.C. section 636m(i) or section

276(b)(1) of the COVID-related Tax Relief Act of

2020. For more information, see Forgiveness of

Paycheck Protection Program (PPP) Loans.

Emergency financial aid grants. Certain

emergency financial aid grants under the

CARES Act are excluded from the income of

college and university students, effective for

grants made after March 26, 2020. (See P.L.

116-136 and P.L. 116-260.)

Other loan forgiveness under the CARES

Act. Gross income does not include any

amount arising from the forgiveness of certain

loans, emergency Economic Injury Disaster

Loan (EIDL) grants, and certain loan repayment

assistance, each as provided by the CARES

Act, effective for tax years ending after March

27, 2020. (See P.L. 116-136 and P.L. 116-260.)

Exclusion of income for volunteer firefight-

ers and emergency medical responders. If

you are a volunteer firefighter or emergency

medical responder, you may be able to exclude

from gross income certain rebates or reductions

of state or local property or income taxes and

up to $50 per month provided by a state or local

government. For more information, see

Volun-

teer firefighters and emergency medical res-

ponders.

Repeal of deduction for alimony payments

and corresponding inclusion in gross in-

come. Alimony received under a divorce or

separation instrument executed after 2018

won't be includible in your income. The same is

true of alimony received under a divorce or sep-

aration instrument executed before 2019 and

modified after 2018, if the modification ex-

pressly states that the alimony isn't deductible

to the payer or includible in your income. For

more information, see Pub. 504.

Forms 1040A and 1040EZ no longer availa-

ble. Forms 1040A and 1040EZ aren't available

to file your 2023 taxes. If you used one of these

forms in the past, you’ll now file Form 1040 or

1040-SR.

Qualified equity grants. For tax years begin-

ning after 2017, certain qualified employees can

make a new election to defer income taxation

for up to 5 years for the qualified stocks re-

ceived. See Qualified Equity Grants under Em-

ployee Compensation, later.

Suspension of qualified bicycle commuting

reimbursement exclusion. For tax years be-

ginning after 2017, reimbursement you receive

from your employer for the purchase, repair, or

storage of a bicycle you regularly use for travel

between your residence and place of employ-

ment must be included in your gross income.

Unemployment compensation. If you re-

ceived unemployment compensation but did not

receive Form 1099-G, Certain Government Pay-

ments, through the mail, you may need to ac-

cess your information through your state’s web-

site to get your electronic Form 1099-G.

Achieving a Better Life Experience (ABLE)

account. This is a type of savings account for

individuals with disabilities and their families.

Distributions are tax free if used to pay the ben-

eficiary's qualified disability expenses. See Pub.

907 for more information.

Certain amounts received by wrongfully in-

carcerated individuals. Certain amounts you

receive due to a wrongful incarceration may be

excluded from gross income. See IRS.gov/

Newsroom/IRS-Updates-Frequently-Asked-

Questions-Related-to-Wrongful-Incarceration

for more information.

Foreign income. If you're a U.S. citizen or resi-

dent alien, you must report income from sour-

ces outside the United States (foreign income)

on your tax return unless it’s exempt by U.S. law.

This is true whether you reside inside or outside

the United States and whether or not you re-

ceive a Form W-2, Wage and Tax Statement, or

Form 1099 from the foreign payer. This applies

to earned income (such as wages and tips) as

well as unearned income (such as interest, divi-

dends, capital gains, pensions, rents, and royal-

ties).

If you reside outside the United States, you

may be able to exclude part or all of your foreign

source earned income. For details, see Pub. 54,

Tax Guide for U.S. Citizens and Resident Aliens

Abroad.

Olympic and Paralympic medals and United

States Olympic Committee (USOC) prize

money. If you receive Olympic and Paralympic

medals and USOC prize money, the value of the

medals and the amount of the prize money may

be nontaxable. See the Instructions for Sched-

ule 1 (Form 1040), line 8m, at IRS.gov/

Form1040 for more information.

Public safety officers. A spouse, former

spouse, and child of a public safety officer killed

in the line of duty can exclude from gross in-

come survivor benefits received from a govern-

mental section 401(a) plan attributable to the of-

ficer's service. See section 101(h).

A public safety officer that's permanently

and totally disabled or killed in the line of duty

and a surviving spouse or child can exclude

from income death or disability benefits re-

ceived from the federal Bureau of Justice Assis-

tance or death benefits paid by a state program.

See section 104(a)(6).

Qualified Medicaid waiver payments. Cer-

tain payments you receive for providing care to

an eligible individual in your home under a

state's Medicaid waiver program may be exclu-

ded from your income under Notice 2014-7.

See also Instructions for Schedule 1 (Form

1040), line 8s.

Qualified settlement income. If you're a

qualified taxpayer, you can contribute all or part

of your qualified settlement income, up to

$100,000, to an eligible retirement plan, includ-

ing an IRA. Contributions to eligible retirement

plans, other than a Roth IRA or a designated

Roth contribution, reduce the qualified settle-

ment income that you must include in income.

See Exxon Valdez settlement income under

Other Income, later. Also, see Pub. 590-A for

more information.

Taxpayer identification number (TIN). A TIN

is your social security number (SSN), individual

taxpayer identification number (ITIN), adoption

taxpayer identification number (ATIN), or em-

ployer identification number (EIN).

Terrorist attacks. You can exclude from in-

come certain disaster assistance, disability, and

death payments received as a result of a terro-

rist or military action. For more information, see

Sickness and Injury Benefits, later; Pub. 3920,

Tax Relief for Victims of Terrorist Attacks; and

Pub. 907, Tax Highlights for Persons With Disa-

bilities.

Photographs of missing children. The Inter-

nal Revenue Service is a proud partner with the

National Center for Missing & Exploited

Children® (NCMEC). Photographs of missing

children selected by the Center may appear in

this publication on pages that would otherwise

be blank. You can help bring these children

home by looking at the photographs and calling

800-THE-LOST (800-843-5678) if you recog-

nize a child.

Introduction

You can receive income in the form of money,

property, or services. This publication discusses

many kinds of income and explains whether

they are taxable or nontaxable. It includes dis-

cussions on employee wages and fringe bene-

fits, and income from bartering, partnerships, S

corporations, and royalties. It also includes in-

formation on disability pensions, life insurance

proceeds, and welfare and other public assis-

tance benefits. Check the index for the location

of a specific subject.

In most cases, an amount included in your

income is taxable unless it is specifically ex-

empted by law. Income that is taxable must be

reported on your return and is subject to tax. In-

come that is nontaxable may have to be shown

on your tax return but isn’t taxable.

Constructively received income. If you are a

cash method taxpayer, you are generally taxed

on income that is available to you, regardless of

whether it is actually in your possession.

A valid check that you received or that was

made available to you before the end of the tax

year is considered income constructively re-

ceived in that year, even if you don’t cash the

check or deposit it to your account until the next

year. For example, if the postal service tries to

deliver a check to you on the last day of the tax

year but you aren’t at home to receive it, you

must include the amount in your income for that

tax year. If the check was mailed so that it

couldn’t possibly reach you until after the end of

the tax year, and you otherwise couldn’t get the

funds before the end of the year, you include the

amount in your income for the next tax year.

Assignment of income. Income received

by an agent for you is income you constructively

received in the year the agent received it. If you

agree by contract that a third party is to receive

income for you, you must include the amount in

your income when the third party receives it.

Example 1. You and your employer agree

that part of your salary is to be paid directly to

one of your creditors. You must include that

amount in your income when your creditor re-

ceives it.

Advance payments. Generally, you report an

advance payment for goods, services, or other

items as income in the year you receive the pay-

ment. However, if you use an accrual method of

accounting and are otherwise eligible, you can

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2 Publication 525 (2023)

elect to postpone including the advance pay-

ment in income until the next year. See Pub.

538 for more information.

Comments and suggestions. We welcome

your comments about this publication and sug-

gestions for future editions.

You can send us comments through

IRS.gov/FormComments. Or, you can write to

the Internal Revenue Service, Tax Forms and

Publications, 1111 Constitution Ave. NW,

IR-6526, Washington, DC 20224.

Although we can’t respond individually to

each comment received, we do appreciate your

feedback and will consider your comments and

suggestions as we revise our tax forms, instruc-

tions, and publications. Don’t send tax ques-

tions, tax returns, or payments to the above ad-

dress.

Getting answers to your tax questions.

If you have a tax question not answered by this

publication or the How To Get Tax Help section

at the end of this publication, go to the IRS In-

teractive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the

search feature or viewing the categories listed.

Getting tax forms, instructions, and pub-

lications. Go to IRS.gov/Forms to download

current and prior-year forms, instructions, and

publications.

Ordering tax forms, instructions, and

publications. Go to IRS.gov/OrderForms to or-

der current forms, instructions, and publica-

tions; call 800-829-3676 to order prior-year

forms and instructions. The IRS will process

your order for forms and publications as soon

as possible. Don’t resubmit requests you’ve al-

ready sent us. You can get forms and publica-

tions faster online.

Useful Items

You may want to see:

Publication

334 Tax Guide for Small Business

523 Selling Your Home

527 Residential Rental Property

541 Partnerships

544 Sales and Other Dispositions of

Assets

550 Investment Income and Expenses

554 Tax Guide for Seniors

559 Survivors, Executors, and

Administrators

575 Pension and Annuity Income

907 Tax Highlights for Persons With

Disabilities

915 Social Security and Equivalent

Railroad Retirement Benefits

970 Tax Benefits for Education

4681 Canceled Debts, Foreclosures,

Repossessions, and Abandonments

334

523

527

541

544

550

554

559

575

907

915

970

4681

Form (and Instructions)

1040 U.S. Individual Income Tax Return

1040-NR U.S. Nonresident Alien Income

Tax Return

1040-SR U.S. Tax Return for Seniors

1099-R Distributions From Pensions,

Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance

Contracts, etc.

W-2 Wage and Tax Statement

See How To Get Tax Help at the end of this pub-

lication for information about getting these pub-

lications.

Employee Compensation

In most cases, you must include in gross in-

come everything you receive in payment for per-

sonal services. In addition to wages, salaries,

commissions, fees, and tips, this includes other

forms of compensation such as fringe benefits

and stock options.

You should receive a Form W-2 from your

employer or former employer showing the pay

you received for your services. Include all your

pay on Form 1040 or 1040-SR, line 1a, even if

you don’t receive Form W-2, or you receive a

Form W-2 that doesn’t include all pay that

should be included on the Form W-2.

If you performed services, other than as an

independent contractor, and your employer

didn’t withhold social security and Medicare

taxes from your pay, you must file Form 8919

with your Form 1040 or 1040-SR. These wages

must be included on Form 1040 or 1040-SR,

line 1g. See Form 8919 for more information.

Fair market value (FMV). The FMV of an

item of property is the price at which the item

would change hands between a willing buyer

and a willing seller, neither being required to

buy or sell and both having reasonable knowl-

edge of the relevant facts.

Childcare providers. If you provide childcare,

either in the child's home or in your home or

other place of business, the pay you receive

must be included in your income. If you're not

an employee, you're probably self-employed

and must include payments for your services on

Schedule C (Form 1040), Profit or Loss From

Business. You generally aren’t an employee un-

less you're subject to the will and control of the

person who employs you as to what you're to

do, and how you're to do it.

Babysitting. If you babysit for relatives or

neighborhood children, whether on a regular

basis or only periodically, the rules for childcare

providers apply to you.

Self-employment tax. Whether you're an

employee or self-employed person, your in-

come could be subject to self-employment tax.

See the Instructions for Schedule C (Form

1040) and the Instructions for Schedule SE

(Form 1040) if you're self-employed. Also see

Pub. 926 for more information.

Bankruptcy. If you filed for bankruptcy under

chapter 11 of the Bankruptcy Code, you must

1040

1040-NR

1040-SR

1099-R

W-2

allocate your wages and withheld income tax.

Your Form W-2 will show your total wages and

withheld income tax for the year. On your tax re-

turn, you report the wages and withheld income

tax for the period before you filed for bank-

ruptcy. Your bankruptcy estate reports the wa-

ges and withheld income tax for the period after

you filed for bankruptcy. If you receive other in-

formation returns (such as Form 1099-DIV or

Form 1099-INT) that report gross income to

you, rather than to the bankruptcy estate, you

must allocate that income.

The only exception is for purposes of figur-

ing your self-employment tax if you're self-em-

ployed. For that purpose, you must take into ac-

count all your self-employment income for the

year from services performed both before and

after the beginning of the case.

You must file a statement with your income

tax return stating you filed a chapter 11 bank-

ruptcy case. The statement must show the allo-

cation and describe the method used to make

the allocation. For a sample of this statement

and other information, see Notice 2006-83,

2006-40 I.R.B. 596, available at IRS.gov/irb/

2006-40_IRB#NOT-2006-83.

Miscellaneous

Compensation

This section discusses many types of employee

compensation. The subjects are arranged in al-

phabetical order.

Advance commissions and other earnings.

If you receive advance commissions or other

amounts for services to be performed in the fu-

ture and you're a cash-method taxpayer, you

must include these amounts in your income in

the year you receive them.

If you repay unearned commissions or other

amounts in the same year you receive them, re-

duce the amount of unearned commissions in-

cluded in your income by the repayment. If you

repay them in a later tax year, you can deduct

the repayment as an itemized deduction on your

Schedule A (Form 1040), Other Itemized De-

ductions, line 16, or you may be able to take a

credit for that year. See Repayments, later.

Allowances and reimbursements. If you re-

ceive travel, transportation, or other business

expense allowances or reimbursements from

your employer, see Pub. 463.

Back pay awards. Include in income amounts

you're awarded in a settlement or judgment for

back pay. These include payments made to you

for damages, unpaid life insurance premiums,

and unpaid health insurance premiums. They

should be reported to you by your employer on

Form W-2.

Bonuses and awards. Bonuses or awards

you receive for outstanding work are included in

your income and should be shown on your Form

W-2. These include prizes such as vacation

trips for meeting sales goals. If the prize or

award you receive is goods or services, you

must include the FMV of the goods or services

in your income. However, if your employer

merely promises to pay you a bonus or award at

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Publication 525 (2023) 3

some future time, it isn’t taxable until you re-

ceive it or it’s made available to you.

Employee achievement award. If you re-

ceive tangible personal property (other than

cash, a gift certificate, or an equivalent item) as

an award for length of service or safety achieve-

ment, you must generally exclude its value from

your income. However, the amount you can ex-

clude is limited to your employer's cost and

can’t be more than $1,600 ($400 for awards that

aren’t qualified plan awards) for all such awards

you receive during the year. Your employer can

tell you whether your award is a qualified plan

award. Your employer must make the award as

part of a meaningful presentation, under condi-

tions and circumstances that don’t create a sig-

nificant likelihood of it being disguised pay.

However, the exclusion doesn’t apply to the

following awards.

•

A length-of-service award if you received it

for less than 5 years of service or if you re-

ceived another length-of-service award

during the year or the previous 4 years.

•

A safety achievement award if you're a

manager, administrator, clerical employee,

or other professional employee or if more

than 10% of eligible employees previously

received safety achievement awards dur-

ing the year.

Example 2. You received three employee

achievement awards during the year: a nonqua-

lified plan award of a watch valued at $250, and

two qualified plan awards of a stereo valued at

$1,000 and a set of golf clubs valued at $500.

Assuming that the requirements for qualified

plan awards are otherwise satisfied, each award

by itself would be excluded from income. How-

ever, because the $1,750 total value of the

awards is more than $1,600, you must include

$150 ($1,750 − $1,600) in your income.

Differential wage payments. This is any pay-

ment made by an employer to an individual for

any period during which the individual is, for a

period of more than 30 days, an active duty

member of the uniformed services and repre-

sents all or a portion of the wages the individual

would have received from the employer for that

period. These payments are treated as wages

and are subject to income tax withholding, but

not FICA or FUTA taxes. The payments are re-

ported as wages on Form W-2.

Government cost-of-living allowances.

Most payments received by U.S. Government

civilian employees for working abroad are taxa-

ble. However, certain cost-of-living allowances

are tax free. Pub. 516 explains the tax treatment

of allowances, differentials, and other special

pay you receive for employment abroad.

Nonqualified deferred compensation plans.

Your employer will report to you the total amount

of deferrals for the year under a nonqualified de-

ferred compensation plan. This amount is

shown in Form W-2, box 12, using code Y. This

amount isn’t included in your income.

However, if at any time during the tax year,

the plan fails to meet certain requirements, or

isn’t operated under those requirements, all

amounts deferred under the plan for the tax

year and all preceding tax years are included in

your income for the current year. This amount is

included in your wages shown in Form W-2,

box 1. It’s also shown in Form W-2, box 12, us-

ing code Z.

Nonqualified deferred compensation plans

of nonqualified entities. In most cases, any

compensation deferred under a nonqualified

deferred compensation plan of a nonqualified

entity is included in gross income when there is

no substantial risk of forfeiture of the rights to

such compensation. For this purpose, a non-

qualified entity is one of the following.

1. A foreign corporation, unless substantially

all of its income is:

a. Effectively connected with the con-

duct of a trade or business in the Uni-

ted States, or

b. Subject to a comprehensive foreign

income tax.

2. A partnership, unless substantially all of its

income is allocated to persons other than:

a. Foreign persons for whom the income

isn’t subject to a comprehensive for-

eign income tax, and

b. Tax-exempt organizations.

Note received for services. If your employer

gives you a secured note as payment for your

services, you must include the FMV (usually the

discount value) of the note in your income for

the year you receive it. When you later receive

payments on the note, a proportionate part of

each payment is the recovery of the FMV that

you previously included in your income. Don’t

include that part again in your income. Include

the rest of the payment in your income in the

year of payment.

If your employer gives you a nonnegotiable

unsecured note as payment for your services,

payments on the note that are credited toward

the principal amount of the note are compensa-

tion income when you receive them.

Severance pay. You must include in income

amounts you receive as severance pay and any

payment for the cancellation of your employ-

ment contract.

Severance payments are subject to social

security and Medicare taxes, income tax

withholding, and FUTA tax. Severance pay-

ments are wages subject to social security and

Medicare taxes. As noted in section 15 of Pub.

15, Special Rules for Various Types of Services

and Payments, severance payments are also

subject to income tax withholding and FUTA

tax.

Accrued leave payment. If you're a federal

employee and receive a lump-sum payment for

accrued annual leave when you retire or resign,

this amount will be included as wages on your

Form W-2.

If you resign from one agency and are reem-

ployed by another agency, you may have to re-

pay part of your lump-sum annual leave pay-

ment to the second agency. You can reduce

gross wages by the amount you repaid in the

same tax year in which you received it. Attach to

your tax return a copy of the receipt or state-

ment given to you by the agency you repaid to

explain the difference between the wages on

your return and the wages on your Forms W-2.

Outplacement services. If you choose to

accept a reduced amount of severance pay so

that you can receive outplacement services

(such as training in résumé writing and inter-

view techniques), you must include the unre-

duced amount of the severance pay in income.

Sick pay. Pay you receive from your employer

while you're sick or injured is part of your salary

or wages. In addition, you must include in your

income sick pay benefits received from any of

the following payers.

•

A welfare fund.

•

A state sickness or disability fund.

•

An association of employers or employees.

•

An insurance company, if your employer

paid for the plan.

However, if you paid the premiums on an acci-

dent or health insurance policy, the benefits you

receive under the policy aren’t taxable. For

more information, see Other Sickness and In-

jury Benefits under Sickness and Injury Bene-

fits, later.

Social security and Medicare taxes paid by

employer. If you and your employer have an

agreement that your employer pays your social

security and Medicare taxes without deducting

them from your gross wages, you must report

the amount of tax paid for you as taxable wages

on your tax return. The payment is also treated

as wages for figuring your social security and

Medicare taxes and your social security and

Medicare benefits. However, these payments

aren’t treated as social security and Medicare

wages if you're a household worker or a farm

worker.

Stock appreciation rights. Don’t include a

stock appreciation right granted by your em-

ployer in income until you exercise (use) the

right. When you use the right, you're entitled to

a cash payment equal to the FMV of the corpo-

ration's stock on the date of use minus the FMV

on the date the right was granted. You include

the cash payment in income in the year you use

the right.

Digital assets. If your employer gives you digi-

tal assets (such as Bitcoin) as payment for your

services, you must include the FMV of the digi-

tal assets as of the date(s) of receipt in your in-

come. The FMV of digital assets paid as wages

is subject to federal income tax withholding,

Federal Insurance Contribution Act (FICA) tax,

and Federal Unemployment Tax Act (FUTA) tax

and must be reported on Form W-2. Notice

2014-21, 2014-16 I.R.B. 938, describes how

digital assets are treated for federal tax purpo-

ses and is available at IRS.gov/irb/

2014-16_IRB#NOT-2014-21. For further infor-

mation, see IRS.gov/DigitalAssets.

Fringe Benefits

Fringe benefits received in connection with the

performance of your services are included in

your income as compensation unless you pay

FMV for them or they’re specifically excluded by

law. Refraining from the performance of serv-

ices (for example, under a covenant not to

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4 Publication 525 (2023)

compete) is treated as the performance of serv-

ices for purposes of these rules.

See Valuation of Fringe Benefits, later in this

discussion, for information on how to determine

the amount to include in income.

Recipient of fringe benefit. You're the recipi-

ent of a fringe benefit if you perform the serv-

ices for which the fringe benefit is provided.

You're considered to be the recipient even if it’s

given to another person, such as a member of

your family. An example is a car your employer

gives to your spouse for services you perform.

The car is considered to have been provided to

you and not to your spouse.

You don’t have to be an employee of the pro-

vider to be a recipient of a fringe benefit. If

you're a partner, a director, or an independent

contractor, you can also be the recipient of a

fringe benefit.

Provider of benefit. Your employer or another

person for whom you perform services is the

provider of a fringe benefit regardless of

whether that person actually provides the fringe

benefit to you. The provider can be a client or

customer of an independent contractor.

Accounting period. You must use the same

accounting period your employer uses to report

your taxable noncash fringe benefits. Your em-

ployer has the option to report taxable noncash

fringe benefits by using either of the following

rules.

•

The general rule: benefits are reported for

a full calendar year (January 1–December

31).

•

The special accounting period rule: bene-

fits provided during the last 2 months of the

calendar year (or any shorter period) are

treated as paid during the following calen-

dar year. For example, each year your em-

ployer reports the value of benefits provi-

ded during the last 2 months of the prior

year and the first 10 months of the current

year.

Your employer doesn’t have to use the same ac-

counting period for each fringe benefit, but must

use the same period for all employees who re-

ceive a particular benefit.

You must use the same accounting period

that you use to report the benefit to claim an

employee business deduction (for example, use

of a car).

Form W-2. Your employer must include all tax-

able fringe benefits in Form W-2, box 1, as wa-

ges, tips, and other compensation, and, if appli-

cable, in boxes 3 and 5 as social security and

Medicare wages. Although not required, your

employer may include the total value of fringe

benefits in box 14 (or on a separate statement).

However, if your employer provided you with a

vehicle and included 100% of its annual lease

value in your income, the employer must sepa-

rately report this value to you in box 14 (or on a

separate statement).

Accident or Health Plan

In most cases, the value of accident or health

plan coverage provided to you by your employer

isn’t included in your income. Benefits you

receive from the plan may be taxable, as ex-

plained under Sickness and Injury Benefits,

later.

For information on the items covered in this

section, other than Long-term care coverage,

see Pub. 969.

Long-term care coverage. Contributions by

your employer to provide coverage for long-term

care services generally aren’t included in your

income. However, contributions made through a

flexible spending or similar arrangement (such

as a cafeteria plan) must be included in your in-

come. This amount will be reported as wages in

Form W-2, box 1.

Archer MSA contributions. Contributions by

your employer to your Archer MSA generally

aren’t included in your income. Their total will be

reported in Form W-2, box 12, with code R. You

must report this amount on Form 8853, Archer

MSAs and Long-Term Care Insurance Con-

tracts. File the form with your return.

Health flexible spending arrangement

(health FSA). If your employer provides a

health FSA that qualifies as an accident or

health plan, the amount of your salary reduc-

tion, and reimbursements of your medical care

expenses, in most cases aren’t included in your

income.

For 2023, health FSAs are subject to a

$3,050 limit on salary reduction contributions.

Health reimbursement arrangement (HRA).

If your employer offers an HRA that qualifies as

an accident or health plan, your coverage under

the HRA and reimbursements of your medical

care expenses from the HRA generally aren’t in-

cluded in your income.

Health savings account (HSA). If you’re an

eligible individual, you and any other person, in-

cluding your employer or a family member, can

make contributions to your HSA. Contributions,

other than employer contributions, are deducti-

ble on your return whether or not you itemize

deductions. Contributions made by your em-

ployer aren’t included in your income. Distribu-

tions from your HSA that are used to pay quali-

fied medical expenses aren’t included in your

income. Distributions not used for qualified

medical expenses are included in your income.

See Pub. 969 for the requirements of an HSA.

Contributions by a partnership to a bona fide

partner's HSA aren’t contributions by an em-

ployer. The contributions are treated as a distri-

bution of money and aren’t included in the part-

ner's gross income. Contributions by a

partnership to a partner's HSA for services ren-

dered are treated as guaranteed payments that

are includible in the partner's gross income. In

both situations, the partner can deduct the con-

tribution made to the partner's HSA.

Contributions by an S corporation to a

2%-shareholder-employee's HSA for services

rendered are treated as guaranteed payments

and are includible in the shareholder-employ-

ee's gross income. The shareholder-employee

can deduct the contribution made to the share-

holder-employee's HSA.

Qualified HSA funding distribution. You

can make a one-time distribution from your indi-

vidual retirement arrangement (IRA) to an HSA

and you generally won’t include any of the distri-

bution in your income. See Pub. 590-B for the

requirements for these qualified HSA funding

distributions.

Adoption Assistance

You may be able to exclude from your income

amounts paid or expenses incurred by your em-

ployer for qualified adoption expenses in con-

nection with your adoption of an eligible child.

See the Instructions for Form 8839 for more in-

formation.

Adoption benefits are reported by your em-

ployer in Form W-2, box 12, with code T. They

are also included as social security and Medi-

care wages in boxes 3 and 5. However, they

aren’t included as wages in box 1. To determine

the taxable and nontaxable amounts, you must

complete Part III of Form 8839. File the form

with your return.

Athletic Facilities

If your employer provides you with the free or

low-cost use of an employer-operated gym or

other athletic club on your employer's premises,

the value isn’t included in your compensation.

The gym must be used primarily by employees,

their spouses, and their dependent children.

If your employer pays for a fitness program

provided to you at an off-site resort hotel or ath-

letic club, the value of the program is included in

your compensation.

De Minimis (Minimal) Benefits

If your employer provides you with a product or

service and the cost of it is so small that it would

be unreasonable for the employer to account for

it, the value isn’t included in your income. In

most cases, the value of benefits such as dis-

counts at company cafeterias, cab fares home

when working overtime, occasional personal

use of an employer’s copying machine (where

at least 85% of the use of the machine is for

business), and company picnics aren’t included

in your income. Also, see Employee Discounts,

later.

Holiday gifts. If your employer gives you a tur-

key, ham, or other item of nominal value at

Christmas or other holidays, don’t include the

value of the gift in your income. However, if your

employer gives you cash, a gift certificate, or a

similar item that you can easily exchange for

cash, you include the value of that gift as extra

salary or wages regardless of the amount in-

volved.

Dependent Care Benefits

If your employer provides dependent care bene-

fits under a dependent care assistance plan,

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Publication 525 (2023) 5

you may be able to exclude these benefits from

your income. Dependent care benefits include:

•

Amounts your employer pays directly to ei-

ther you or your care provider for the care

of your qualifying person while you work,

•

The FMV of care in a daycare facility provi-

ded or sponsored by your employer, and

•

Pre-tax contributions you made under a

dependent care FSA.

The amount you can exclude is limited to the

lesser of:

•

The total amount of dependent care bene-

fits you received during the year,

•

The total amount of qualified expenses you

incurred during the year,

•

Your earned income,

•

Your spouse's earned income, or

•

$5,000 ($2,500 if married filing separately).

Your employer must show the total amount

of dependent care benefits provided to you dur-

ing the year under a dependent care assistance

plan in Form W-2, box 10. Any amount over

your employer’s plan limit is also included in

box 1. See Form 2441.

To claim the exclusion, you must complete

Part III of Form 2441. See the Instructions for

Form 2441 for more information.

Educational Assistance

You can exclude from your income up to $5,250

of qualified employer-provided educational as-

sistance. For more information, see Pub. 970.

Employee Discounts

If your employer sells you property or services

at a discount, you may be able to exclude the

amount of the discount from your income. The

exclusion applies to discounts on property or

services offered to customers in the ordinary

course of the line of business in which you

work. However, it doesn’t apply to discounts on

real property or property commonly held for in-

vestment (such as stocks or bonds).

The exclusion is limited to the price charged

nonemployee customers multiplied by the fol-

lowing percentage.

•

For a discount on property, your employer's

gross profit percentage (gross profit divi-

ded by gross sales) on all property sold

during the employer's previous tax year.

(Ask your employer for this percentage.)

•

For a discount on services, 20% (0.20).

Financial Counseling Fees

Financial counseling fees paid for you by your

employer are included in your income and must

be reported as part of wages. Fees for tax or in-

vestment counseling are miscellaneous item-

ized deductions and are no longer deductible.

Qualified retirement planning services paid

for you by your employer may be excluded from

your income. For more information, see Retire-

ment Planning Services, later.

Employer-Provided Group-Term

Life Insurance

In most cases, the cost of up to $50,000 of

group-term life insurance coverage provided to

you by your employer (or former employer) isn’t

included in your income. However, you must in-

clude in income the cost of employer-provided

insurance that is more than the cost of $50,000

of coverage reduced by any amount you pay to-

ward the purchase of the insurance.

For exceptions to this rule, see Entire cost

excluded and Entire cost taxed, later.

If your employer provided more than

$50,000 of coverage, the amount included in

your income is reported as part of your wages in

Form W-2, box 1. Also, it's shown separately in

box 12 with code C.

Group-term life insurance. This insurance is

term life insurance protection (insurance for a

fixed period of time) that:

•

Provides a general death benefit,

•

Is provided to a group of employees,

•

Is provided under a policy carried by the

employer, and

•

Provides an amount of insurance to each

employee based on a formula that prevents

individual selection.

Permanent benefits. If your group-term

life insurance policy includes permanent bene-

fits, such as a paid-up or cash surrender value,

you must include in your income, as wages, the

cost of the permanent benefits minus the

amount you pay for them. Your employer should

be able to tell you the amount to include in your

income.

Accidental death benefits. Insurance that

provides accidental or other death benefits but

doesn't provide general death benefits (for ex-

ample, travel insurance) isn’t group-term life in-

surance.

Former employer. If your former employer

provided more than $50,000 of group-term life

insurance coverage during the year, the amount

included in your income is reported as wages in

Form W-2, box 1. Also, it's shown separately in

box 12 with code C. Box 12 will also show the

amount of uncollected social security and Medi-

care taxes on the excess coverage, with codes

M and N. You must pay these taxes with your in-

come tax return. Include them on Schedule 2

(Form 1040), line 13. For more information, see

the Instructions for Forms 1040 and 1040-SR.

Two or more employers. Your exclusion for

employer-provided group-term life insurance

coverage can’t exceed the cost of $50,000 of

coverage, whether the insurance is provided by

a single employer or multiple employers. If two

or more employers provide insurance coverage

that totals more than $50,000, the amounts re-

ported as wages on your Forms W-2 won’t be

correct. You must figure how much to include in

your income. Reduce the amount you figure by

any amount reported in Form W-2, box 12, with

code C, add the result to the wages reported in

box 1, and report the total on your return.

Figuring the taxable cost. Use the following

worksheet to figure the amount to include in

your income.

If you pay any part of the cost of the insur-

ance, your entire payment reduces, dollar for

dollar, the amount you would otherwise include

in your income. However, you can’t reduce the

amount to include in your income by:

•

Payments for coverage in a different tax

year;

•

Payments for coverage through a cafeteria

plan, unless the payments are after-tax

contributions; or

•

Payments for coverage not taxed to you

because of the exceptions discussed later

under Entire cost excluded.

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6 Publication 525 (2023)

Worksheet 1. Figuring the

Cost of Group-Term Life

Insurance To Include in

Income

Keep for Your Records

1. Enter the total amount of

your insurance coverage

from your

employer(s) ........... 1.

2. Limit on exclusion for

employer-provided

group-term life insurance

coverage ............. 2.

50,000

3. Subtract line 2 from

line 1 ................ 3.

4. Divide line 3 by $1,000.

Figure to the nearest

tenth ................ 4.

5. Go to Table 1. Using your

age on the last day of the

tax year, find your age group

in the left column, and enter

the cost from the column on

the right for your age

group ............... 5.

6. Multiply line 4 by

line 5 ................ 6.

7. Enter the number of full

months of coverage at this

cost ................. 7.

8. Multiply line 6 by

line 7 ................ 8.

9. Enter the

premiums you

paid per

month ........ 9.

10. Enter the number

of months you

paid the

premiums .....

10.

11. Multiply line 9 by

line 10 ...............

11.

12. Subtract line 11 from line 8.

Include this amount in

your income as

wages ..............

12.

Table 1. Cost of $1,000 of

Group-Term Life Insurance for 1

Month

Age Cost

Under 25 ................. $ .05

25 through 29 .............. .06

30 through 34 .............. .08

35 through 39 .............. .09

40 through 44 .............. .10

45 through 49 .............. .15

50 through 54 .............. .23

55 through 59 .............. .43

60 through 64 .............. .66

65 through 69 .............. 1.27

70 and above .............. 2.06

Example 3. You're 51 years old and work

for employers A and B. Both employers provide

group-term life insurance coverage for you for

the entire year. Your coverage is $35,000 with

employer A and $45,000 with employer B. You

pay premiums of $4.15 a month under the em-

ployer B group plan. You figure the amount to

include in your income as follows.

Worksheet 1. Figuring the

Cost of Group-Term Life

Insurance To Include in

Income—Illustrated

Keep for Your Records

1. Enter the total amount of

your insurance coverage

from your

employer(s) ............ 1.

80,000

2. Limit on exclusion for

employer-provided

group-term life insurance

coverage .............. 2.

50,000

3. Subtract line 2 from

line 1 ................. 3.

30,000

4. Divide line 3 by $1,000.

Figure to the nearest

tenth ................. 4.

30.0

5. Go to Table 1. Using your

age on the last day of the tax

year, find your age group in

the left column, and enter the

cost from the column on the

right for your age

group ................ 5.

.23

6. Multiply line 4 by

line 5 ................. 6.

6.90

7. Enter the number of full

months of coverage at this

cost .................. 7.

8. Multiply line 6 by

line 7 ................. 8.

82.80

9. Enter the

premiums you paid

per month ..... 9.

4.15

10.

Enter the number

of months you paid

the

premiums .....

10.

11.

Multiply line 9 by

line 10 ................

11.

49.80

12.

Subtract line 11 from line 8.

Include this amount in

your income as

wages ...............

12.

33.00

The total amount to include in income for the

cost of excess group-term life insurance is $33.

Neither employer provided over $50,000 insur-

ance coverage, so the wages shown on your

Forms W-2 don't include any part of that $33.

You must add it to the wages shown on your

Forms W-2 and include the total on your return.

Entire cost excluded. You aren't taxed on the

cost of group-term life insurance if any of the fol-

lowing circumstances apply.

1. You’re permanently and totally disabled

and have ended your employment.

2. Your employer is the beneficiary of the pol-

icy for the entire period the insurance is in

force during the tax year.

3. A charitable organization to which contri-

butions are deductible is the only benefi-

ciary of the policy for the entire period the

insurance is in force during the tax year.

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Publication 525 (2023) 7

(You aren’t entitled to a deduction for a

charitable contribution for naming a chari-

table organization as the beneficiary of

your policy.)

4. The plan existed on January 1, 1984, and:

a. You retired before January 2, 1984,

and were covered by the plan when

you retired; or

b. You reached age 55 before January 2,

1984, and were employed by the em-

ployer or its predecessor in 1983.

Entire cost taxed. You’re taxed on the entire

cost of group-term life insurance if either of the

following circumstances applies.

•

The insurance is provided by your em-

ployer through a qualified employees' trust,

such as a pension trust or a qualified annu-

ity plan.

•

You’re a key employee and your employer's

plan discriminates in favor of key employ-

ees.

Meals and Lodging

You don't include in your income the value of

meals and lodging provided to you and your

family by your employer at no charge if the fol-

lowing conditions are met.

1. The meals are:

a. Furnished on the business premises

of your employer, and

b. Furnished for the convenience of your

employer.

2. The lodging is:

a. Furnished on the business premises

of your employer,

b. Furnished for the convenience of your

employer, and

c. A condition of your employment. (You

must accept it in order to be able to

properly perform your duties.)

You also don't include in your income the

value of meals or meal money that qualifies as a

minimal fringe benefit. See De Minimis (Mini-

mal) Benefits, earlier.

Faculty lodging. If you're an employee of an

educational institution or an academic health

center and you're provided with lodging that

doesn't meet the three conditions given earlier,

you may still not have to include the value of the

lodging in income. However, the lodging must

be qualified campus lodging, and you must pay

an Adequate rent.

Academic health center. This is an organ-

ization that meets the following conditions.

•

Its principal purpose or function is to pro-

vide medical or hospital care or medical

education or research.

•

It receives payments for graduate medical

education under the Social Security Act.

•

One of its principal purposes or functions is

to provide and teach basic and clinical

medical science and research using its

own faculty.

Qualified campus lodging. Qualified cam-

pus lodging is lodging furnished to you, your

spouse, or any of your dependents by, or on be-

half of, the institution or center for use as a

home. The lodging must be located on or near a

campus of the educational institution or aca-

demic health center.

Adequate rent. The amount of rent you

pay for the year for qualified campus lodging is

considered adequate if it's at least equal to the

lesser of:

•

5% of the appraised value of the lodging,

•

The average of rentals paid by individuals

(other than employees or students) for

comparable lodging held for rent by the ed-

ucational institution.

If the amount you pay is less than the lesser of

these amounts, you must include the difference

in your income.

The lodging must be appraised by an inde-

pendent appraiser and the appraisal must be

reviewed on an annual basis.

Example 4. You are a sociology professor

for State University and rent a home from the

university that is qualified campus lodging. The

house is appraised at $200,000. The average

rent paid for comparable university lodging by

persons other than employees or students is

$14,000 a year. You pay an annual rent of

$11,000. You don’t include in your income any

rental value because the rent you pay equals at

least 5% of the appraised value of the house

(5% × $200,000 = $10,000). If you paid annual

rent of only $8,000, you would have to include

$2,000 in your income ($10,000 − $8,000).

Moving Expense Reimbursements

For tax years 2018 through 2025, reimburse-

ments for certain moving expenses are no lon-

ger excluded from the gross income of nonmili-

tary taxpayers.

No-Additional-Cost Services

The value of services you receive from your em-

ployer for free, at cost, or for a reduced price

isn't included in your income if your employer:

•

Offers the same service for sale to custom-

ers in the ordinary course of the line of

business in which you work, and

•

Doesn’t have a substantial additional cost

(including any sales income given up) to

provide you with the service (regardless of

what you paid for the service).

In most cases, no-additional-cost services

are excess capacity services, such as airline,

bus, or train tickets; hotel rooms; and telephone

services.

Example 5. You're employed as a flight at-

tendant for a company that owns both an airline

and a hotel chain. Your employer allows you to

take personal flights (if there is an unoccupied

seat) and stay in any one of their hotels (if there

is an unoccupied room) at no cost to you. The

value of the personal flight isn't included in your

income. However, the value of the hotel room is

included in your income because you don't work

in the hotel business.

Retirement Planning Services

If your employer has a qualified retirement plan,

qualified retirement planning services provided

to you (and your spouse) by your employer

aren't included in your income. Qualified serv-

ices include retirement planning advice, infor-

mation about your employer's retirement plan,

and information about how the plan may fit into

your overall individual retirement income plan.

You can't exclude the value of any tax prepara-

tion, accounting, legal, or brokerage services

provided by your employer. Also, see Financial

Counseling Fees, earlier.

Transportation

If your employer provides you with a qualified

transportation fringe benefit, it can be excluded

from your income, up to certain limits. A quali-

fied transportation fringe benefit is:

•

Transportation in a commuter highway ve-

hicle (such as a van) between your home

and work place,

•

A transit pass, or

•

Qualified parking.

Cash reimbursement by your employer for

these expenses under a bona fide reimburse-

ment arrangement is also excludable. However,

cash reimbursement for a transit pass is exclud-

able only if a voucher or similar item that can be

exchanged only for a transit pass isn't readily

available for direct distribution to you.

Exclusion limit. The exclusion for commuter

vehicle transportation and transit pass fringe

benefits can't be more than $300 a month.

The exclusion for the qualified parking fringe

benefit can't be more than $300 a month.

If the benefits have a value that is more than

these limits, the excess must be included in

your income.

Commuter highway vehicle. This is a high-

way vehicle that seats at least six adults (not in-

cluding the driver). At least 80% of the vehicle's

mileage must reasonably be expected to be:

•

For transporting employees between their

homes and workplace, and

•

On trips during which employees occupy at

least half of the vehicle's adult seating ca-

pacity (not including the driver).

Transit pass. This is any pass, token, farecard,

voucher, or similar item entitling a person to ride

mass transit (whether public or private) free or

at a reduced rate or to ride in a commuter high-

way vehicle operated by a person in the busi-

ness of transporting persons for compensation.

Qualified parking. This is parking provided to

an employee at or near the employer's place of

business. It also includes parking provided on

or near a location from which the employee

commutes to work by mass transit, in a com-

muter highway vehicle, or by car pool. It doesn't

include parking at or near the employee's home.

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8 Publication 525 (2023)

Tuition Reduction

You can exclude a qualified tuition reduction

from your income. This is the amount of a

reduction in tuition:

•

For education (below graduate level) fur-

nished by an educational institution to an

employee, former employee who retired or

became disabled, or his or her spouse and

dependent children;

•

For education furnished to a graduate stu-

dent at an educational institution if the

graduate student is engaged in teaching or

research activities for that institution; or

•

Representing payment for teaching, re-

search, or other services if you receive the

amount under the National Health Service

Corps Scholarship Program or the Armed

Forces Health Professions Scholarship

and Financial Assistance program.

For more information, see Pub. 970.

Working Condition Benefits

If your employer provides you with a product or

service and the cost of it would have been al-

lowable as a business or depreciation deduc-

tion if you paid for it yourself, the cost isn't inclu-

ded in your income.

Example 6. You work as an engineer and

your employer provides you with a subscription

to an engineering trade magazine. The cost of

the subscription isn't included in your income

because the cost would have been allowable to

you as a business deduction if you had paid for

the subscription yourself.

Valuation of Fringe Benefits

If a fringe benefit is included in your income, the

amount included is generally its value deter-

mined under the general valuation rule or under

the special valuation rules. For an exception,

see Employer-Provided Group-Term Life Insur-

ance, earlier.

General valuation rule. You must include in

your income the amount by which the FMV of

the fringe benefit is more than the sum of:

1. The amount, if any, you paid for the bene-

fit, plus

2. The amount, if any, specifically excluded

from your income by law.

If you pay FMV for a fringe benefit, no amount is

included in your income.

Fringe benefit FMV. The FMV of a fringe

benefit is determined by all the facts and cir-

cumstances. It’s the amount you would have to

pay a third party to buy or lease the benefit. This

is determined without regard to:

•

Your perceived value of the benefit, or

•

The amount your employer paid for the

benefit.

Employer-provided vehicles. If your em-

ployer provides a car (or other highway motor

vehicle) to you, your personal use of the car is

usually a taxable noncash fringe benefit.

Under the general valuation rules, the value

of an employer-provided vehicle is the amount

you would have to pay a third party to lease the

same or a similar vehicle on the same or com-

parable terms in the same geographic area

where you use the vehicle. An example of a

comparable lease term is the amount of time

the vehicle is available for your use, such as a

1-year period. The value can't be determined by

multiplying a cents-per-mile rate times the num-

ber of miles driven unless you prove the vehicle

could have been leased on a cents-per-mile ba-

sis. See Notice 2021-7 for more information on

temporary relief for employers and employees

using the automobile lease valuation rule to de-

termine the value of an employer-provided vehi-

cle in 2020 or 2021. The special valuation rule

used for 2021 under the Notice must continue

to be used by the employer and the employee

for all subsequent years, except to the extent

the employer uses the commuting valuation

rule. See Special valuation rules below.

Flights on employer-provided aircraft.

Under the general valuation rules, if your flight

on an employer-provided piloted aircraft is pri-

marily personal and you control the use of the

aircraft for the flight, the value is the amount it

would cost to charter the flight from a third party.

If there is more than one employee on the

flight, the cost to charter the aircraft must be

divided among those employees. The division

must be based on all the facts, including which

employee or employees control the use of the

aircraft.

Special valuation rules. Generally, you can

use a special valuation rule for a fringe benefit

only if your employer uses the rule. If your em-

ployer uses a special valuation rule, you can't

use a different special rule to value that benefit.

You can always use the general valuation rule

discussed earlier, based on facts and circum-

stances, even if your employer uses a special

rule.

If you and your employer use a special valu-

ation rule, you must include in your income the

amount your employer determines under the

special rule minus the sum of:

1. Any amount you repaid your employer,

plus

2. Any amount specifically excluded from in-

come by law.

The special valuation rules are the following.

•

The automobile lease rule.

•

The vehicle cents-per-mile rule.

•

The commuting rule.

•

The unsafe conditions commuting rule.

•

The employer-operated eating-facility rule.

For more information on these rules, see

Pub. 15-B.

For information on the noncommercial flight

and commercial flight valuation rules, see sec-

tions 1.61-21(g) and 1.61-21(h) of the regula-

tions.

Retirement Plan

Contributions

Except for Roth contributions, your employer's

contributions to a qualified retirement plan for

you aren’t included in income at the time con-

tributed. (Your employer can tell you whether

your retirement plan is qualified.) However, the

cost of life insurance coverage included in the

plan may have to be included.

If your employer pays into a nonqualified

plan for you, you must generally include the

contributions in your income as wages for the

tax year in which the contributions are made.

However, if your interest in the plan isn't trans-

ferable or is subject to a substantial risk of for-

feiture (you have a good chance of losing it) at

the time of the contribution, you don't have to in-

clude the value of your interest in your income

until it's transferable or is no longer subject to a

substantial risk of forfeiture.

For information on distributions from re-

tirement plans, see Pub. 575 (or Pub.

721 if you’re a federal employee or re-

tiree).

Elective Deferrals

If you’re covered by certain kinds of retirement

plans, you can choose to have part of your com-

pensation contributed by your employer to a re-

tirement fund, rather than have it paid to you.

The amount you set aside (called an “elective

deferral”) is treated as an employer contribution

to a qualified plan. An elective deferral, other

than a designated Roth contribution (discussed

later), isn't included in wages subject to income

tax at the time contributed. However, it’s inclu-

ded in wages subject to social security and

Medicare taxes.

Elective deferrals include elective contribu-

tions to the following retirement plans.

1. Cash or deferred arrangements (section

401(k) plans).

2. The TSP for federal employees.

3. Salary reduction simplified employee pen-

sion plans (SARSEP plans).

4. Savings incentive match plans for employ-

ees (SIMPLE plans).

5. Tax-sheltered annuity plans (section

403(b) plans).

6. Section 501(c)(18)(D) plans. (But see Re-

porting by employer, later.)

7. Section 457 plans.

Qualified automatic contribution arrange-

ments. Under a qualified automatic contribu-

tion arrangement, your employer can treat you

as having elected to have a part of your com-

pensation contributed to a section 401(k) plan.

You’re to receive written notice of your rights

and obligations under the qualified automatic

contribution arrangement. The notice must ex-

plain:

•

Your rights to elect not to have elective

contributions made, or to have contribu-

tions made at a different percentage; and

•

How contributions made will be invested in

the absence of any investment decision by

you.

You must be given a reasonable period of

time after receipt of the notice and before the

first elective contribution is made to make an

election with respect to the contributions.

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Publication 525 (2023) 9

Overall limit on deferrals. For 2023, you

shouldn't have deferred more than a total of

$22,500 of contributions to the plans listed in

(1) through (3), earlier, unless you are 50 or

older. The specific plan limits for the plans listed

in (4) through (7), earlier, are discussed later.

Amounts deferred under specific plan limits are

part of the overall limit on deferrals.

Your employer or plan administrator should

apply the proper annual limit when figuring your

plan contributions. However, you’re responsible

for monitoring the total you defer to ensure that

the deferrals aren't more than the overall limit.

Catch-up contributions. You may be allowed

catch-up contributions (additional elective de-

ferrals) if you're age 50 or older by the end of

your tax year. For 2023, the catch-up limit for

section 401(k) and 403(b) plans, the TSP, SAR-

SEP plans, and governmental section 457 plans

is $7,500. For SIMPLE plans, it’s $3,500.

For more information about catch-up contri-

butions to:

•

Section 401(k) plans, see Elective Defer-

rals in chapter 4 of Pub. 560;

•

SARSEPs, see Salary Reduction Simpli-

fied Employee Pensions in chapter 2 of

Pub. 560;

•

SIMPLE plans, see SIMPLE Plans in chap-

ter 3 of Pub. 560; and

•

Section 457 plans, see Limit for deferrals

under section 457 plans, later.

Limit for deferrals under SIMPLE plans. If

you're a participant in a SIMPLE plan, you gen-

erally shouldn't have deferred more than

$15,500 in 2023. Amounts you defer under a

SIMPLE plan count toward the overall limit

($22,500 for 2023) and may affect the amount

you can defer under other elective deferral

plans.

Limit for tax-sheltered annuities. If you're a

participant in a tax-sheltered annuity plan (sec-

tion 403(b) plan), the limit on elective deferrals

for 2023 is generally $22,500. However, if you

have at least 15 years of service with a public

school system, a hospital, a home health serv-

ice agency, a health and welfare service

agency, a church, or a convention or associa-

tion of churches (or associated organization),

the limit on elective deferrals is increased by the

least of the following amounts.

1. $3,000.

2. $15,000, reduced by the sum of:

a. The additional pre-tax elective defer-

rals made in earlier years because of

this rule, plus

b. The aggregate amount of designated

Roth contributions permitted for prior

tax years because of this rule.

3. $5,000 times the number of your years of

service for the organization, minus the to-

tal elective deferrals made by your em-

ployer on your behalf for earlier years.

If you qualify for the 15-year rule, your elec-

tive deferrals under this limit can be as high as

$25,500 for 2023.

For more information, see Pub. 571.

Limit for deferral under section 501(c)(18)

plans. If you're a participant in a section

501(c)(18) plan (a trust created before June 25,

1959, funded only by employee contributions),

you should have deferred no more than the

lesser of $7,000 or 25% of your compensation.

Amounts you defer under a section 501(c)(18)

plan count toward the overall limit ($22,500 in

2023) and may affect the amount you can defer

under other elective deferral plans.

Limit for deferrals under section 457 plans.

If you're a participant in a section 457 plan (a

deferred compensation plan for employees of

state or local governments or tax-exempt organ-

izations), you should have deferred no more

than the lesser of your includible compensation

or $22,500 in 2023. However, if you're within 3

years of normal retirement age, you may be al-

lowed an increased limit if the plan allows it.

See Increased limit, later.

Includible compensation. Generally, this

is your Form W-2 wages plus elective deferrals.

In most cases, it includes all the following pay-

ments.

1. Wages and salaries.

2. Fees for professional services.

3. The value of any employer-provided quali-

fied transportation fringe benefit (defined

under Transportation, earlier) that isn't in-

cluded in your income.

4. Other amounts received (cash or non-

cash) for personal services you per-

formed, including, but not limited to, the

following items.

a. Commissions and tips.

b. Fringe benefits.

c. Bonuses.

d. De minimis financial incentives to

make elective deferrals to a qualified

cash or deferred arrangement.

5. Employer contributions (elective deferrals)

to the following.

a. The section 457 plan.

b. Section 401(k) plans that aren't inclu-

ded in your income.

c. A SARSEP plan.

d. A tax-sheltered annuity (section

403(b) plan).

e. A SIMPLE plan.

f. A section 125 cafeteria plan.

Instead of using the amounts listed earlier to

determine your includible compensation, your

employer can use any of the following amounts.

•

Your wages as defined for income tax with-

holding purposes.

•

Your wages as reported in Form W-2,

box 1.

•

Your wages that are subject to social se-

curity withholding (including elective defer-

rals).

Increased limit. During any, or all, of the

last 3 years ending before you reach normal re-

tirement age under the plan, your plan may pro-

vide that your limit is the lesser of:

1. Twice the annual limit ($45,000 for 2023),

2. The basic annual limit plus the amount of

the basic limit not used in prior years (only

allowed if not using age 50-or-over

catch-up contributions).

Catch-up contributions. You can gener-

ally have additional elective deferrals made to

your governmental section 457 plan if:

•

You reached age 50 by the end of the year,

and

•

No other elective deferrals can be made for

you to the plan for the year because of lim-

its or restrictions.

If you qualify, your limit can be the lesser of your

includible compensation or $22,500, plus

$7,500. However, if you're within 3 years of re-

tirement age and your plan provides the in-

creased limit, discussed earlier, that limit may

be higher.

Designated Roth contributions. Employers

with section 401(k) plans, section 403(b) plans,

and governmental section 457 plans can create

qualified Roth contribution programs so that you

may elect to have part or all of your elective de-

ferrals to the plan designated as after-tax Roth

contributions. Designated Roth contributions

are treated as elective deferrals, except that

they're included in income. Your retirement plan

must maintain separate accounts and record-

keeping for the designated Roth contributions.

In addition, your retirement plan may allow you

to designate certain nonelective contributions or

matching contributions as Roth contributions.

These Roth contributions are also included in

income.

Qualified distributions from a Roth account

aren't included in income. A distribution made

before the end of the 5-tax-year period begin-

ning with the first tax year for which you made a

Roth contribution to the account isn't a qualified

distribution.

Reporting by employer. Your employer gen-

erally shouldn't include elective deferrals in your

wages in Form W-2, box 1. Instead, your em-

ployer should mark the Retirement plan check-

box in box 13 and show the total amount defer-

red in box 12.

Section 501(c)(18)(D) contributions.

Wages shown in Form W-2, box 1, shouldn't

have been reduced for contributions you made

to a section 501(c)(18)(D) plan. The amount

you contributed should be identified with code

H in box 12. You may deduct the amount defer-

red subject to the limits that apply. Include your

deduction in the total on Schedule 1 (Form

1040), line 24f.

Designated Roth contributions. These

contributions are elective deferrals but are inclu-

ded in your wages in Form W-2, box 1. Desig-

nated Roth contributions to a section 401(k)

plan are reported using code AA in box 12, or,

for section 403(b) plans, code BB in box 12.

Designated Roth contributions to a governmen-

tal section 457 plan are reported using code EE

in box 12.

Designated Roth nonelective contribu-

tions and designated Roth matching

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10 Publication 525 (2023)

contributions. These contributions are repor-

ted on Form 1099-R for the year in which the

contributions are allocated to your account. The

total amount of designated Roth nonelective

contributions and designated Roth matching

contributions that are allocated to your account

in the year is reported in box 1 and in box 2a.

These contributions are reported using code G

in box 7.

Excess deferrals. If your deferrals exceed the

limit, you must notify your plan by the date re-

quired by the plan. If the plan permits, the ex-

cess amount will be distributed to you. If you

participate in more than one plan, you can have

the excess paid out of any of the plans that per-

mit these distributions. You must notify each

plan by the date required by that plan of the

amount to be paid from that particular plan. The

plan must then pay you the amount of the ex-

cess, along with any income earned on that

amount, by April 15 of the following year.

You must include the excess deferral in your

income for the year of the deferral. File Form

1040 or 1040-SR to add the excess deferral

amount to earned income on line 1h.

Excess not distributed. If you don't take

out the excess amount, you can't include it in

the cost of the contract even though you inclu-

ded it in your income. Therefore, you're taxed

twice on the excess deferral left in the

plan—once when you contribute it, and again

when you receive it as a distribution (unless the

excess deferral was a designated Roth contri-

bution).

Excess distributed to you. If you take out

the excess after the year of the deferral and you

receive the corrective distribution by April 15 of

the following year, don't include it in income

again in the year you receive it. If you receive it

later, you must include it in income in both the

year of the deferral and the year you receive it

(unless the excess deferral was a designated

Roth contribution). Any income on the excess

deferral taken out is taxable in the tax year in

which you take it out. If you take out part of the

excess deferral and the income on it, allocate

the distribution proportionately between the ex-

cess deferral and the income.

You should receive a Form 1099-R for the

year in which the excess deferral is distributed

to you. Use the following rules to report a cor-

rective distribution shown on Form 1099-R for

2023.

•

If the distribution was for a 2023 excess

deferral, your Form 1099-R should have

code 8 in box 7. Add the excess deferral

amount to your wages on your 2023 tax re-

turn.

•

If the distribution was for a 2023 excess

deferral to a designated Roth account, your

Form 1099-R should have codes B and 8

in box 7. Don’t add this amount to your wa-

ges on your 2023 return.

•

If the distribution was for a 2022 excess

deferral, your Form 1099-R should have

code P in box 7. If you didn't add the ex-

cess deferral amount to your wages on

your 2022 tax return, you must file an

amended return on Form 1040-X. If you

didn't receive the distribution by April 15,

2023, you must also add it to your wages

on your 2023 tax return.

•

If the distribution was for the income

earned on an excess deferral, your Form

1099-R should have code 8 in box 7. Add

the income amount to your wages on your

2023 income tax return, regardless of

when the excess deferral was made.

Report a loss on a corrective distribution of an

excess deferral in the year the excess amount

(reduced by the loss) is distributed to you. In-

clude the loss as a negative amount on Sched-

ule 1 (Form 1040), line 8z, and identify it as

“Loss on Excess Deferral Distribution.”

Even though a corrective distribution of

excess deferrals is reported on Form

1099-R, it isn't otherwise treated as a

distribution from the plan. It can't be rolled over

into another plan, and it isn't subject to the addi-

tional tax on early distributions.

Excess Contributions

If you're a highly compensated employee, the

total of your elective deferrals made for you for

any year under a section 401(k) plan or SAR-

SEP plan may be limited by the average defer-

rals, as a percentage of pay, made by all eligible

non-highly compensated employees.

If you contributed more to the plan than al-

lowed, the excess contributions may be distrib-

uted to you. You must include the distribution in

your income on Form 1040 or 1040-SR, line 1h.

If you receive a corrective distribution of ex-

cess contributions (and allocable income), it's

included in your income in the year of the distri-

bution. The allocable income is the amount of

gain or loss through the end of the plan year for

which the contribution was made that is alloca-

ble to the excess contributions. You should re-

ceive a Form 1099-R for the year the excess

contributions are distributed to you. Add the dis-

tribution to your wages for that year.

Even though a corrective distribution of

excess contributions is reported on

Form 1099-R, it isn't otherwise treated

as a distribution from the plan. It can't be rolled

over into another plan, and it isn't subject to the

additional tax on early distributions.

Excess Annual Additions

The amount contributed in 2023 to a defined

contribution plan is generally limited to the

lesser of 100% of your compensation or

$66,000. Under certain circumstances, contri-

butions that exceed these limits (excess annual

additions) may be corrected by a distribution of

your elective deferrals or a return of your af-

ter-tax contributions and earnings from these

contributions.

A corrective payment of excess annual addi-

tions consisting of elective deferrals or earnings

from your after-tax contributions is fully taxable

in the year paid. A corrective payment consist-

ing of your after-tax contributions isn't taxable.

If you received a corrective payment of ex-

cess annual additions, you should receive a

separate Form 1099-R for the year of the

TIP

payment with code E in box 7. Report the total

payment shown in Form 1099-R, box 1, on

Form 1040 or 1040-SR, line 5a. Report the tax-

able amount shown in Form 1099-R, box 2a, on

Form 1040 or 1040-SR, line 5b.

Even though a corrective distribution of

excess annual additions is reported on

Form 1099-R, it isn't otherwise treated

as a distribution from the plan. It can't be rolled

over into another plan, and it isn't subject to the

additional tax on early distributions.

Stock Options

Employee stock options aren’t subject to

Railroad Retirement Tax. In Wisconsin Cen-

tral Ltd. v. United States, 138 S. Ct. 2067, the

U.S. Supreme Court ruled that “money remu-

neration” is “currency issued by a recognized

authority as a medium of exchange,” and that

employee stock options aren’t “money remuner-

ation” subject to the Railroad Retirement Tax

Act (RRTA). Tier 1 and Tier 2 taxes aren’t with-

held when employees covered by the RRTA ex-

ercise stock options. Federal income tax must

still be withheld on taxable compensation from

railroad employees exercising their options. If

you receive an option to buy or sell stock or

other property as payment for your services,

you may have income when you receive the op-

tion (the grant), when you exercise the option

(use it to buy or sell the stock or other property),

or when you sell or otherwise dispose of the op-

tion or property acquired through exercise of the

option. The timing, type, and amount of income

inclusion depend on whether you receive a non-

statutory stock option or a statutory stock op-

tion. Your employer can tell you which kind of

option you hold.

Nonstatutory Stock Options

Grant of option. If you're granted a nonstatu-

tory stock option, you may have income when

you receive the option. The amount of income

to include and the time to include it depend on

whether the FMV of the option can be readily

determined. The FMV of an option can be read-

ily determined if it’s actively traded on an estab-

lished market.

The FMV of an option that isn't traded on an

established market can be readily determined

only if all of the following conditions exist.

•

You can transfer the option.

•

You can exercise the option immediately in

full.

•

The option or the property subject to the

option isn't subject to any condition or re-

striction (other than a condition to secure

payment of the purchase price) that has a

significant effect on the FMV of the option.

•

The FMV of the option privilege can be

readily determined.

The option privilege for an option to buy is the

opportunity to benefit during the option's exer-

cise period from any increase in the value of

property subject to the option without risking

any capital. For example, if during the exercise

period the FMV of stock subject to an option is

greater than the option's exercise price, a profit

may be realized by exercising the option and

immediately selling the stock at its higher value.

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Publication 525 (2023) 11

The option privilege for an option to sell is the

opportunity to benefit during the exercise period

from a decrease in the value of the property

subject to the option.

If you or a member of your family is an

officer, director, or more-than-10%

owner of an expatriated corporation,

you may owe an excise tax on the value of non-

statutory options and other stock-based com-

pensation from that corporation. For more infor-

mation on the excise tax, see section 4985.

Option with readily determinable value.

If you receive a nonstatutory stock option that

has a readily determinable FMV at the time it's

granted to you, the option is treated like other

property received as compensation. See Re-

stricted Property, later, for rules on how much

income to include and when to include it. How-

ever, the rule described in that discussion for

choosing to include the value of property in your

income for the year of the transfer doesn't apply

to a nonstatutory option.

Option without readily determinable

value. If the FMV of the option isn't readily de-

terminable at the time it's granted to you (even if

it's determined later), you don't have income un-

til you exercise or transfer the option.

Exercise or transfer of option. When you ex-

ercise a nonstatutory stock option, the amount

to include in your income depends on whether

the option had a readily determinable value.

Option with readily determinable value.

When you exercise a nonstatutory stock option

that had a readily determinable value at the time

the option was granted, you don't have to in-

clude any amount in income.

Option without readily determinable

value. When you exercise a nonstatutory

stock option that didn't have a readily determi-

nable value at the time the option was granted,

the restricted property rules apply to the prop-

erty received. The amount to include in your in-

come is the difference between the amount you

pay for the property and its FMV when it be-

comes substantially vested. If it isn't substan-

tially vested at the time you exercise this non-

statutory stock option (so that you may have to

give the stock back), you don't have to include

any amount in income. You include the differ-

ence in income when the option becomes sub-

stantially vested. For more information on re-

stricted property, see Restricted Property, later.

Transfer in arm's-length transaction. If

you transfer a nonstatutory stock option without

a readily determinable value in an arm's-length

transaction to an unrelated person, you must in-

clude in your income the money or other prop-

erty you received for the transfer as if you had

exercised the option.

Transfer in non-arm's-length transaction.

If you transfer a nonstatutory stock option with-

out a readily determinable value in a

non-arm's-length transaction (for example, a

gift), the option isn't treated as exercised or

closed at that time. You must include in your in-

come, as compensation, any money or property

received. When the transferee exercises the

CAUTION

option, you must include in your income, as

compensation, the excess of the FMV of the

stock acquired by the transferee over the sum of

the exercise price paid and any amount you in-

cluded in income at the time you transferred the

option. At the time of the exercise, the trans-

feree recognizes no income and has a basis in

the stock acquired equal to the FMV of the

stock.

Any transfer of this kind of option to a related

person is treated as a non-arm's-length transac-

tion. See Regulations section 1.83-7 for the def-

inition of a related person.

Recourse note in satisfaction of the ex-

ercise price of an option. If you're an em-

ployee, and you issue a recourse note to your

employer in satisfaction of the exercise price of

an option to acquire your employer's stock, and

your employer and you subsequently agree to

reduce the stated principal amount of the note,

you generally recognize compensation income

at the time and in the amount of the reduction.

Tax form. If you have income from the exercise

of nonstatutory stock options, your employer

should report the amount to you in Form W-2,

box 12, with code V. The employer should show

the spread (that is, the FMV of stock over the

exercise price of options granted to you for that

stock) from your exercise of the nonstatutory

stock options. Your employer should include

this amount in boxes 1, 3 (up to the social se-

curity wage base), and 5. Your employer should

include this amount in box 14 if it's a railroad

employer.

If you're a nonemployee spouse and you ex-

ercise nonstatutory stock options you received

incident to a divorce, the income is reported to

you in box 3 of Form 1099-MISC.

Sale of the stock. There are no special in-

come rules for the sale of stock acquired

through the exercise of a nonstatutory stock op-

tion. Report the sale as explained in the Instruc-

tions for Schedule D (Form 1040) for the year of

the sale. You may receive a Form 1099-B re-

porting the sales proceeds.

Your basis in the property you acquire under

the option is the amount you pay for it plus any

amount you included in income upon grant or

exercise of the option.

Your holding period begins as of the date

you acquired the option, if it had a readily deter-

minable value, or as of the date you exercised

or transferred the option if it had no readily de-

terminable value.

For options granted on or after January 1,

2014, the basis information reported to you on

Form 1099-B won't reflect any amount you in-

cluded in income upon grant or exercise of the

option. For options granted before January 1,

2014, any basis information reported to you on

Form 1099-B may or may not reflect any

amount you included in income upon grant or

exercise; therefore, the basis may need to be

adjusted.

It’s your responsibility to make any ap-

propriate adjustments to the basis in-

formation reported on Form 1099-B by

completing Form 8949.

CAUTION

Statutory Stock Options

There are two kinds of statutory stock options.

•

Incentive stock options (ISOs).

•

Options granted under employee stock

purchase plans.

For either kind of option, you must be an em-

ployee of the company granting the option, or a

related company, at all times during the period

beginning on the date the option is granted and

ending 3 months before the date you exercise

the option (for an ISO, 1 year before if you're

disabled). Also, the option must be nontransfer-

able except at death.

If you don't meet the employment require-

ments, or you receive a transferable option,

your option is a nonstatutory stock option.

Grant of option. If you receive a statutory

stock option, don't include any amount in your

income when the option is granted.

Exercise of option. If you exercise a statutory

stock option, don't include any amount in in-

come when you exercise the option.

Alternative minimum tax (AMT). For the

AMT, you must treat stock acquired through the

exercise of an ISO as if no special treatment ap-

plied. This means that, when your rights in the

stock are transferable or no longer subject to a

substantial risk of forfeiture, you must include as

an adjustment in figuring alternative minimum

taxable income the amount by which the FMV

of the stock exceeds the option price. Enter this

adjustment on Form 6251, line 2i. Increase your

AMT basis in any stock you acquire by exercis-

ing the ISO by the amount of the adjustment.

However, no adjustment is required if you dis-

pose of the stock in the same year you exercise

the option.

See Restricted Property, later, for more in-

formation.

Your AMT basis in stock acquired

through an ISO is likely to differ from

your regular tax basis. Therefore, keep

adequate records for both the AMT and regular

tax so that you can figure your adjusted gain or

loss.

Example 7. Your employer, Elm Company,

granted you an ISO on April 8, 2022, to buy 100

shares of Elm Company at $9 a share, its FMV

at the time. You exercised the option on January

7, 2023, when the stock was selling on the open

market for $14 a share. On January 27, 2023,

when the stock was selling on the open market

for $16 a share, your rights to the stock first be-

came transferable. You include $700 ($1,600

value when your rights first became transferable

minus $900 option price) as an adjustment on

Form 6251, line 2i.

If you exercise an ISO during 2023, you

should receive Form 3921, or a state-

ment, from the corporation for each

transfer made during 2023. The corporation

must send or provide you with the form by Janu-

ary 31, 2024. Keep this information for your re-

cords.

RECORDS

TIP

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12 Publication 525 (2023)

Sale of the stock. You have taxable income

or a deductible loss when you sell the stock that

you bought by exercising the option. Your in-

come or loss is the difference between the

amount you paid for the stock (the option price)

and the amount you receive when you sell it.

You generally treat this amount as capital gain

or loss and report it as explained in the Instruc-

tions for Schedule D (Form 1040) for the year of

the sale.

However, you may have ordinary income for

the year that you sell or otherwise dispose of

the stock in either of the following situations.

•

You don't satisfy the holding period re-

quirement.

•

You satisfy the conditions described under

Option granted at a discount under Em-

ployee stock purchase plan, later.

Your employer or former employer should report

the ordinary income to you as wages in Form

W-2, box 1, and you must report this ordinary

income amount on Form 1040 or 1040-SR,

line 1a. Enter on Schedule 1 (Form 1040),

line 8k, any income from the exercise of stock

options not otherwise reported on Form 1040 or

1040-SR, line 1a.

For options granted on or after January 1,

2014, the basis information reported to you on

Form 1099-B won't reflect any amount you in-

cluded in income upon grant or exercise of the

option. For options granted before January 1,

2014, any basis information reported to you on

Form 1099-B may or may not reflect any

amount you included in income upon grant or

exercise; therefore, the basis may need to be

adjusted.

It’s your responsibility to make any ap-

propriate adjustments to the basis in-

formation reported on Form 1099-B by

completing Form 8949.

Holding period requirement. You satisfy

the holding period requirement if you don't sell

the stock until the end of the later of the 1-year

period after the stock was transferred to you or

the 2-year period after the option was granted.

However, you're considered to satisfy the hold-

ing period requirement if you sold the stock to

comply with conflict-of-interest requirements.

Your holding period for the property you ac-

quire when you exercise an option begins on

the day after you exercise the option.

ISOs. If you sell stock acquired by exercising

an ISO, you need to determine if you satisfied

the holding period requirement.

Holding period requirement satisfied. If

you sell stock acquired by exercising an ISO

and satisfy the holding period requirement, your

gain or loss from the sale is capital gain or loss.

Report the sale as explained in the Instructions

for Schedule D (Form 1040). The basis of your

stock is the amount you paid for the stock.

Holding period requirement not satis-

fied. If you sell stock acquired by exercising an

ISO, don't satisfy the holding period require-

ment, and have a gain from the sale, the gain is

ordinary income up to the amount by which the

stock's FMV when you exercised the option ex-

ceeded the option price. Any excess gain is

capital gain. If you have a loss from the sale, it's

CAUTION

a capital loss and you don't have any ordinary

income.

Your employer or former employer should re-

port the ordinary income to you as wages in

Form W-2, box 1, and you must report this ordi-

nary income amount on Form 1040 or 1040-SR,

line 1a. If your employer or former employer

doesn't provide you with a Form W-2, or if the

Form W-2 doesn't include the ordinary income

in box 1, you must report the ordinary income

as wages on Schedule 1 (Form 1040), line 8k,

for the year of the sale or other disposition of

the stock. Report the capital gain or loss as ex-

plained in the Instructions for Schedule D (Form

1040). In determining capital gain or loss, your

basis is the amount you paid when you exer-

cised the option plus the amount reported as

wages.

Example 8. Your employer, Oak Corpora-

tion, granted you an ISO on March 12, 2021, to

buy 100 shares of Oak Corporation stock at $10

a share, its FMV at the time. You exercised the

option on January 7, 2022, when the stock was

selling on the open market for $12 a share. On

January 27, 2023, you sold the stock for $15 a

share. Although you held the stock for more

than a year, less than 2 years had passed from

the time you were granted the option. In 2023,

you must report the difference between the op-

tion price ($10) and the value of the stock when

you exercised the option ($12) as wages. The

rest of your gain is capital gain, figured as fol-

lows.

Selling price ($15 × 100 shares)

......... $ 1,500

Purchase price ($10 × 100 shares) ....... − 1,000

Gain ............................ $ 500

Amount reported as wages

[($12 × 100 shares) − $1,000] ..........

− 200

Amount reported as capital gain ..... $ 300

Employee stock purchase plan. If you sold

stock acquired by exercising an option granted

under an employee stock purchase plan, you

need to determine if you satisfied the holding

period requirement.

Holding period requirement satisfied. If

you sold stock acquired by exercising an option

granted under an employee stock purchase

plan, and you satisfy the holding period require-

ment, determine your ordinary income as fol-

lows.

Your basis is equal to the option price at the

time you exercised your option and acquired the

stock. The timing and amount of pay period de-

ductions don't affect your basis.

Example 9. Pine Company has an em-

ployee stock purchase plan. The option price is

the lower of the stock price at the time the op-

tion is granted or at the time the option is exer-

cised. The value of the stock when the option

was granted was $25. Pine Company deducts

$5 from Adrian's pay every week for 48 weeks

(total = $240 ($5 × 48)). The value of the stock

when the option is exercised is $20. Adrian re-

ceives 12 shares of Pine Company’s stock

($240 ÷ $20). Adrian's holding period for all 12

shares begins the day after the option is exer-

cised, even though the money used to purchase

the shares was deducted from Adrian's pay on

48 separate days. Adrian's basis in each share

is $20.

Option granted at a discount. If, at the

time the option was granted, the option price

per share was less than 100% (but not less than

85%) of the FMV of the share, and you dispose

of the share after meeting the holding period re-

quirement, or you die while owning the share,

you must include in your income as compensa-

tion the lesser of:

•

The excess of the FMV of the share at the

time the option was granted over the option

price, or

•

The excess of the FMV of the share at the

time of the disposition or death over the

amount paid for the share under the option.

For this purpose, if the option price wasn't fixed

or determinable at the time the option was gran-

ted, the option price is figured as if the option

had been exercised at the time it was granted.

Any excess gain is capital gain. If you have a

loss from the sale, it's a capital loss, and you

don't have any ordinary income.

Example 10. Your employer, Willow Cor-

poration, granted you an option under its em-

ployee stock purchase plan to buy 100 shares

of stock of Willow Corporation for $20 a share at

a time when the stock had a value of $22 a

share. Eighteen months later, when the value of

the stock was $23 a share, you exercised the

option, and 14 months after that you sold your

stock for $30 a share. In the year of sale, you

must report as wages the difference between

the option price ($20) and the value at the time

the option was granted ($22). The rest of your

gain ($8 per share) is capital gain, figured as

follows.

Selling price ($30 × 100 shares)

......... $ 3,000

Purchase price (option price)

($20 × 100 shares) ..................

− 2,000

Gain ............................ $ 1,000

Amount reported as wages

[($22 × 100 shares) − $2,000] ...........

− 200

Amount reported as capital gain ..... $ 800

Holding period requirement not satis-

fied. If you don't satisfy the holding period re-

quirement, your ordinary income is the amount

by which the stock's FMV when you exercised

the option exceeded the option price. This ordi-

nary income isn't limited to your gain from the

sale of the stock. Increase your basis in the

stock by the amount of this ordinary income.

The difference between your increased basis

and the selling price of the stock is a capital

gain or loss.

Example 11. The facts are the same as in

Example 10, except that you sold the stock only

6 months after you exercised the option. You

didn't satisfy the holding period requirement, so

you must report $300 as wages and $700 as

capital gain, figured as follows.

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Publication 525 (2023) 13

Selling price ($30 × 100 shares) ......... $3,000

Purchase price (option price)

($20 × 100 shares) ..................

− 2,000

Gain ............................ $1,000

Amount reported as wages

[($23 × 100 shares) − $2,000] ...........

− 300

Amount reported as capital gain

[$3,000 – ($2,000 + $300)] .............

$700

If you sold stock in 2023 that you ac-

quired by exercising an option granted

at a discount under an employee stock

purchase plan, you should receive Form 3922

from the corporation. The corporation must

send or provide you with the form by January

31, 2024. Keep this information for your records.

Qualified Equity Grants

P.L. 115-97 made a change in the law that al-

lows a new election for “qualified employees” of

private corporations to elect to defer income

taxation for up to 5 years from the date of vest-

ing on “qualified stock” granted in connection

with broad-based compensatory stock option

and restricted stock unit (RSU) programs. This

election is available for stock attributable to op-

tions exercised or RSUs settled after 2017. The

corporation must have a written plan providing

RSU or option to at least 80% of U.S. employ-

ees. The recipients must have the same rights

and privileges under RSU or option plan.

The term “qualified employee” doesn’t in-

clude:

•

1% owner of corporation (current or any

point during prior 10 calendar years),

•

Current or former CEO or CFO (current or

any point previously),

•

Family of previously mentioned individuals,

•

One of the four highest compensated offi-

cers (current or any point during prior 10

calendar years).

The term “qualified stock” means any stock

in a corporation that is the employer of the em-

ployee if:

•

Stock is received relating to the exercise of

an option, or

•

Stock is received in settlement of an RSU,

and

•

Option or RSU was granted by the corpo-

ration.

The term “qualified stock” can’t include

stock from stock-settled stock appreciation

rights or restricted stock awards (restricted

property). It won’t include any stock if the em-

ployee may receive cash instead of stock. The

election is made in a manner similar to the elec-

tion described under Choosing to include in in-

come for year of transfer, later, under Restricted

Property, even though the “qualified stock” isn't

restricted property. The election must be made

no later than 30 days after the first date the

rights of the employee in such stock are trans-

ferable or aren’t subject to a substantial risk of

forfeiture, whichever occurs earlier. See Restric-

ted Property, later, for how to make the choice.

If an employee elects to defer income inclu-

sion under the provision, the income must be in-

cluded in the employee's income for the year

TIP

that includes the earliest of (1) the first date the

qualified stock becomes transferable, (2) the

date the employee first becomes an excluded

employee (as excluded from “qualified em-

ployee”), (3) the first date on which any stock of

the employer becomes readily tradable on an

established securities market, (4) the date 5

years after the first date the employee's right to

the stock becomes substantially vested, or (5)

the date on which the employee revokes his or

her inclusion deferral election.

The employer corporation is required to pro-

vide notification of rights to employees covered

under a qualified program or face penalties.

There will be withholding at the highest mar-

ginal rate.

Restricted Property

In most cases, if you receive property for your

services, you must include its FMV in your in-

come in the year you receive the property. How-

ever, if you receive stock or other property that

has certain restrictions that affect its value, you

don't include the value of the property in your in-

come until it has been substantially vested. (You

can choose to include the value of the property

in your income in the year it's transferred to you,

as discussed later, rather than the year it's sub-

stantially vested.)

Until the property becomes substantially

vested, it's owned by the person who makes the

transfer to you, usually your employer. However,

any income from the property, or the right to use

the property, is included in your income as addi-

tional compensation in the year you receive the

income or have the right to use the property.

When the property becomes substantially

vested, you must include its FMV, minus any

amount you paid for it, in your income for that

year. Your holding period for this property be-

gins when the property becomes substantially

vested.

Example 12. Your employer, the Holly Cor-

poration, sells you 100 shares of its stock at $10

a share. At the time of the sale, the FMV of the

stock is $100 a share. Under the terms of the

sale, the stock is under a substantial risk of for-

feiture (you have a good chance of losing it) for

a 5-year period. Your stock isn't substantially

vested when it's transferred, so you don't in-

clude any amount in your income in the year

you buy it. At the end of the 5-year period, the

FMV of the stock is $200 a share. You must in-

clude $19,000 in your income [100 shares ×

($200 FMV − $10 you paid)]. Dividends paid by

the Holly Corporation on your 100 shares of

stock are taxable to you as additional compen-

sation during the period the stock can be forfei-

ted.

Substantially vested. Property is substantially

vested when:

•

It’s transferable, or

•

It isn't subject to a substantial risk of forfei-

ture. (You don't have a good chance of los-

ing it.)

Transferable property. Property is trans-

ferable if you can sell, assign, or pledge your in-

terest in the property to any person (other than

the transferor), and if the person receiving your

interest in the property isn't required to give up

the property, or its value, if the substantial risk of

forfeiture occurs.

Substantial risk of forfeiture. Generally, a

substantial risk of forfeiture exists only if rights

in property that are transferred are conditioned,

directly or indirectly, on the future performance

(or refraining from performance) of substantial

services by any person, or on the occurrence of

a condition related to a purpose of the transfer if

the possibility of forfeiture is substantial.

Example 13. The Redwood Corporation

transfers to you as compensation for services

100 shares of its corporate stock for $100 a

share. Under the terms of the transfer, you must

resell the stock to the corporation at $100 a

share if you leave your job for any reason within

3 years from the date of transfer. You must per-

form substantial services over a period of time,

and you must resell the stock to the corporation

at $100 a share (regardless of its value) if you

don't perform the services; so, your rights to the

stock are subject to a substantial risk of forfei-

ture.

Choosing to include in income for year of

transfer. You can choose to include the value

of restricted property at the time of transfer (mi-

nus any amount you paid for the property) in

your income for the year it's transferred. If you

make this choice, the substantial vesting rules

don't apply and, generally, any later apprecia-

tion in value isn't included in your compensation

when the property becomes substantially ves-

ted. Your basis for figuring gain or loss when

you sell the property is the amount you paid for

it plus the amount you included in income as

compensation.

If you make this choice, you can't re-

voke it without the consent of the IRS.

Consent will be given only if you were

under a mistake of fact as to the underlying

transaction.

If you forfeit the property after you have in-

cluded its value in income, your loss is the

amount you paid for the property minus any

amount you realized on the forfeiture.

You can't make this choice for a non-

statutory stock option.

How to make the choice. You make the

choice by filing a written statement with the In-

ternal Revenue Service Center where you file

your return. You must file this statement no later

than 30 days after the date the property was

transferred. Mail your statement to the address

listed for your state under “Are requesting a re-

fund or aren’t enclosing a check or money or-

der...” given in Where Do You File in the Instruc-

tions for Forms 1040 and 1040-SR. You must

give a copy of this statement to the person for

whom you performed the services and, if some-

one other than you received the property, to that

person.

You must sign the statement and indicate on

it that you're making the choice under section

CAUTION

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14 Publication 525 (2023)

83(b) of the Internal Revenue Code. The state-

ment must contain all of the following informa-

tion.

•

Your name, address, and TIN.

•

A description of each property for which

you're making the choice.

•

The date or dates on which the property

was transferred and the tax year for which

you're making the choice.

•

The nature of any restrictions on the prop-

erty.

•

The FMV at the time of transfer (ignoring

restrictions except those that will never

lapse) of each property for which you're

making the choice.

•

Any amount that you paid for the property.

•

A statement that you have provided copies

to the appropriate persons.

You can't make this choice for a non-

statutory stock option.

Dividends received on restricted stock. Div-

idends you receive on restricted stock are trea-

ted as compensation and not as dividend in-

come. Your employer should include these

payments on your Form W-2. If they are also re-

ported on a Form 1099-DIV, you should list

them on Schedule B (Form 1040), with a state-

ment that you have included them as wages.

Don’t include them in the total dividends re-

ceived.

Stock you chose to include in your in-

come. Dividends you receive on restricted

stock you chose to include in your income in the

year transferred are treated the same as any

other dividends. You should receive a Form

1099-DIV showing these dividends. Don’t in-

clude the dividends in your wages on your re-

turn. Report them as dividends.

Sale of property not substantially vested.

These rules apply to the sale or other disposi-

tion of property that you didn't choose to include

in your income in the year transferred and that

isn't substantially vested.

If you sell or otherwise dispose of the prop-

erty in an arm's-length transaction, include in

your income as compensation for the year of

sale the amount realized minus the amount you

paid for the property. If you exchange the prop-

erty in an arm's-length transaction for other

property that isn't substantially vested, treat the

new property as if it were substituted for the ex-

changed property.

The sale or other disposition of a nonstatu-

tory stock option to a related person isn't con-

sidered an arm's-length transaction. See Regu-

lations section 1.83-7 for the definition of a

“related person.”

If you sell the property in a transaction that

isn't at arm's length, include in your income as

compensation for the year of sale the total of

any money you received and the FMV of any

substantially vested property you received on

the sale. In addition, you'll have to report in-

come when the original property becomes sub-

stantially vested, as if you still held it. Report as

compensation its FMV minus the total of the

amount you paid for the property and the

amount included in your income from the earlier

sale.

CAUTION

Example 14. In 2020, you paid your em-

ployer $50 for a share of stock that had an FMV

of $100 and was subject to forfeiture until 2023.

In 2022, you sold the stock to your spouse for

$10 in a transaction not at arm's length. You had

compensation of $10 from this transaction. In

2023, when the stock had an FMV of $120, it

became substantially vested. For 2022, you

must report additional compensation of $60, fig-

ured as follows.

FMV of stock at time of substantial

vesting ...................... $120

Minus: Amount paid for stock ....... $50

Minus: Compensation previously

included in income from sale to

spouse ......................

10 − 60

Additional income .......... $60

Inherited property not substantially vested.

If you inherit property not substantially vested at

the time of the decedent's death, any income

you receive from the property is considered in-

come in respect of a decedent and is taxed ac-

cording to the rules for restricted property re-

ceived for services. For information about

income in respect of a decedent, see Pub. 559.

Special Rules for

Certain Employees

This part of the publication deals with special

rules for people in certain types of employment:

members of the clergy, members of religious or-

ders, people working for foreign employers, mili-

tary personnel, and volunteers.

Clergy

If you’re a member of the clergy, you must in-

clude in your income offerings and fees you re-

ceive for marriages, baptisms, funerals,

masses, etc., in addition to your salary. If the of-

fering is made to the religious institution, it isn't

taxable to you.

If you’re a member of a religious organiza-

tion and you give your outside earnings to the

organization, you must still include the earnings

in your income. However, you may be entitled to

a charitable contribution deduction for the

amount paid to the organization. See Pub. 526.

Also, see Members of Religious Orders, later.

Pension. A pension or retirement pay for a

member of the clergy is usually treated as any

other pension or annuity. It must be reported on

lines 5a and 5b of Form 1040 or 1040-SR.

Housing

Special rules for housing apply to members of

the clergy. Under these rules, you don't include

in your income the rental value of a home (in-

cluding utilities) or a designated housing allow-

ance provided to you as part of your pay. How-

ever, the exclusion can't be more than the

reasonable pay for your service. If you pay for

the utilities, you can exclude any allowance des-

ignated for utility cost, up to your actual cost.

The home or allowance must be provided as

compensation for your services as an ordained,

licensed, or commissioned minister. However,

you must include the rental value of the home or

the housing allowance as earnings from

self-employment on Schedule SE (Form 1040)

if you’re subject to the self-employment tax. For

more information, see Pub. 517.

Members of Religious

Orders

If you're a member of a religious order who has

taken a vow of poverty, how you treat earnings

that you renounce and turn over to the order de-

pends on whether your services are performed

for the order.

Services performed for the order. If you're

performing the services as an agent of the order

in the exercise of duties required by the order,

don't include in your income the amounts turned

over to the order.

If your order directs you to perform services

for another agency of the supervising church or

an associated institution, you're considered to

be performing the services as an agent of the

order. Any wages you earn as an agent of an or-

der that you turn over to the order aren't inclu-

ded in your income.

Example 15. You're a member of a church

order and have taken a vow of poverty. You re-

nounce any claims to your earnings and turn

over to the order any salaries or wages you

earn. You're a registered nurse, so your order

assigns you to work in a hospital that is an as-

sociated institution of the church. However, you

remain under the general direction and control

of the order. You're considered to be an agent of

the order and any wages you earn at the hospi-

tal that you turn over to your order aren't inclu-

ded in your income.

Services performed outside the order. If

you're directed to work outside the order, your

services aren't an exercise of duties required by

the order unless they meet both of the following

requirements.

•

They're the kind of services that are ordi-

narily the duties of members of the order.

•

They're part of the duties that you must ex-

ercise for, or on behalf of, the religious or-

der as its agent.

If you're an employee of a third party, the serv-

ices you perform for the third party won't be

considered directed or required of you by the

order. Amounts you receive for these services

are included in your income, even if you have

taken a vow of poverty.

Example 16. You are a member of a reli-

gious order and have taken a vow of poverty.

You renounce all claims to your earnings and

turn over your earnings to the order.

You are a schoolteacher. You were instruc-

ted by the superiors of the order to get a job

with a private tax-exempt school. You became

an employee of the school, and, at your re-

quest, the school made the salary payments di-

rectly to the order.

Because you are an employee of the school,

you’re performing services for the school rather

than as an agent of the order. The wages you

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Publication 525 (2023) 15

earn working for the school are included in your

income.

Example 17. You are a member of a reli-

gious order who, as a condition of membership,

have taken vows of poverty and obedience. All

claims to your earnings are renounced. You re-

ceived permission from the order to establish a

private practice as a psychologist and counsel

members of religious orders as well as non-

members. Although the order reviews your

budget annually, you control not only the details

of your practice but also the means by which

your work as a psychologist is accomplished.

Your private practice as a psychologist

doesn't make you an agent of the religious or-

der. The psychological services you provide

aren't the type of services that are provided by

the order. The income you earn as a psycholo-

gist is earned in your individual capacity. You

must include in your income the earnings from

your private practice.

Foreign Employer

Special rules apply if you work for a foreign em-

ployer.

U.S. citizen. If you're a U.S. citizen who works

in the United States for a foreign government,

an international organization, a foreign em-

bassy, or any foreign employer, you must in-

clude your salary in your income.

Social security and Medicare taxes.

You're exempt from social security and Medi-

care employee taxes if you're employed in the

United States by an international organization or

a foreign government. However, you must pay

self-employment tax on your earnings from

services performed in the United States, even

though you aren't self-employed. This rule also

applies if you're an employee of a qualifying

wholly owned instrumentality of a foreign gov-

ernment.

Employees of international organizations or

foreign governments. Your compensation for

official services to an international organization

is exempt from federal income tax if you aren't a

citizen of the United States or you're a citizen of

the Philippines (whether or not you're a citizen

of the United States).

Your compensation for official services to a

foreign government is exempt from federal in-

come tax if all of the following are true.

•

You aren't a citizen of the United States or

you're a citizen of the Philippines (whether

or not you're a citizen of the United States).

•

Your work is like the work done by employ-

ees of the United States in foreign coun-

tries.

•

The foreign government gives an equal ex-

emption to employees of the United States

in its country.

Waiver of alien status. If you're an alien

who works for a foreign government or interna-

tional organization and you file a waiver under

section 247(b) of the Immigration and National-

ity Act to keep your immigrant status, any salary

you receive after the date you file the waiver

isn't exempt under this rule. However, it may be

exempt under a treaty or agreement. See Pub.

519, U.S. Tax Guide for Aliens, for more infor-

mation about treaties.

Nonwage income. This exemption applies

only to employees' wages, salaries, and fees.

Pensions and other income, such as investment

income, don't qualify for this exemption.

Employment abroad. For information on the

tax treatment of income earned abroad, see

Pub. 54.

Military

Payments you receive as a member of a military

service are generally taxed as wages except for

retirement pay, which is taxed as a pension. Al-

lowances generally aren't taxed. For more infor-

mation on the tax treatment of military allowan-

ces and benefits, see Pub. 3.

Differential wage payments. Any payments

made to you by an employer during the time

you're performing service in the uniformed serv-

ices are treated as compensation. These wages

are subject to income tax withholding and are

reported on Form W-2. See the discussion un-

der Miscellaneous Compensation, earlier.

Military retirement pay. If your retirement pay

is based on age or length of service, it’s taxable

and must be included in your income as a pen-

sion on lines 5a and 5b of Form 1040 or

1040-SR. Don’t include in your income the

amount of any reduction in retirement or re-

tainer pay to provide a survivor annuity for your

spouse or children under the Retired Service-

man's Family Protection Plan or the Survivor

Benefit Plan.

For a more detailed discussion of survivor

annuities, see Pub. 575.

Disability. If you're retired on disability, see

Military and Government Disability Pensions un-

der Sickness and Injury Benefits, later.

Qualified reservist distribution (QRD). If you

received a QRD of all or part of the balance in

your health FSA because you're a reservist and

you have been ordered or called to active duty

for a period of 180 days or more, the QRD is

treated as wages and is reportable on Form

W-2.

Veterans' benefits. Don’t include in your in-

come any veterans' benefits paid under any law,

regulation, or administrative practice adminis-

tered by the Department of Veterans Affairs

(VA). The following amounts paid to veterans or

their families aren't taxable.

•

Education, training, and subsistence allow-

ances.

•

Disability compensation and pension pay-

ments for disabilities paid either to veter-

ans or their families.

•

Grants for homes designed for wheelchair

living.

•

Grants for motor vehicles for veterans who

lost their sight or the use of their limbs.

•

Veterans' insurance proceeds and divi-

dends paid either to veterans or their bene-

ficiaries, including the proceeds of a veter-

an's endowment policy paid before death.

•

Interest on insurance dividends left on de-

posit with the VA.

•

Benefits under a dependent-care assis-

tance program.

•

The death gratuity paid to a survivor of a

member of the U.S. Armed Forces who

died after September 10, 2001.

•

Payments made under the compensated

work therapy program.

•

Any bonus payment by a state or political

subdivision because of service in a combat

zone.

Note. If, in a previous year, you received a

bonus payment by a state or political subdivi-

sion because of service in a combat zone that

you included in your income, you can file a

claim for refund of the taxes on that income.

Use Form 1040-X to file the claim. File a sepa-

rate form for each tax year involved. In most ca-

ses, you must file your claim within 3 years after

the date you filed your original return or within 2

years after the date you paid the tax, whichever

is later. See the Instructions for Form 1040-X for

information on filing that form.

Volunteers

The tax treatment of amounts you receive as a

volunteer is covered in the following discus-

sions.

Peace Corps. Living allowances you receive

as a Peace Corps volunteer or volunteer leader

for housing, utilities, household supplies, food,

and clothing are exempt from tax.

Taxable allowances. The following allow-

ances must be included in your income and re-

ported as wages.

•

Allowances paid to your spouse and minor

children while you're a volunteer leader

training in the United States.

•

Living allowances designated by the Direc-

tor of the Peace Corps as basic compen-

sation. These are allowances for personal

items such as domestic help, laundry and

clothing maintenance, entertainment and

recreation, transportation, and other mis-

cellaneous expenses.

•

Leave allowances.

•

Readjustment allowances or termination

payments. These are considered received

by you when credited to your account.

Example 18. You are a Peace Corps vol-

unteer and get $175 a month as a readjustment

allowance during your period of service, to be

paid to you in a lump sum at the end of your tour

of duty. Although the allowance isn't available to

you until the end of your service, you must in-

clude it in your income on a monthly basis as it’s

credited to your account.

Volunteers in Service to America (VISTA). If

you're a VISTA volunteer, you must include meal

and lodging allowances paid to you in your in-

come as wages.

National Senior Service Corps programs.

Don’t include in your income amounts you re-

ceive for supportive services or reimbursements

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16 Publication 525 (2023)

for out-of-pocket expenses from the following

programs.

•

Retired Senior Volunteer Program (RSVP).

•

Foster Grandparent Program.

•

Senior Companion Program.

Service Corps of Retired Executives

(SCORE). If you receive amounts for suppor-

tive services or reimbursements for

out-of-pocket expenses from SCORE, don't in-

clude these amounts in gross income.

Volunteer tax counseling. Don’t include in

your income any reimbursements you receive

for transportation, meals, and other expenses

you have in training for, or actually providing,

volunteer federal income tax counseling for the

elderly (TCE).

You can deduct as a charitable contribution

your unreimbursed out-of-pocket expenses in

taking part in the volunteer income tax assis-

tance (VITA) program.

Volunteer firefighters and emergency medi-

cal responders. If you are a volunteer fire-

fighter or emergency medical responder, do not

include in your income the following benefits

you receive from a state or local government.

•

Rebates or reductions of property or in-

come taxes you receive because of serv-

ices you performed as a volunteer fire-

fighter or emergency medical responder.

•

Payments you receive because of services

you performed as a volunteer firefighter or

emergency medical responder, up to $50

for each month you provided services.

The excluded income reduces any related

tax or contribution deduction.

Business and

Investment Income

This section provides information on the treat-

ment of income from certain rents and royalties,

and from interests in partnerships and S corpo-

rations.

Note. You may be subject to the Net Invest-

ment Income Tax (NIIT). The NIIT is a 3.8% tax

on the lesser of net investment income or the

excess of your modified adjusted gross income

(MAGI) over a threshold amount. For details,

see Form 8960 and its instructions.

Income from sales at auctions, includ-

ing online auctions, may be business

income. For more information, see Pub.

334.

Rents From Personal

Property

If you rent out personal property, such as equip-

ment or vehicles, how you report your income

and expenses is in most cases determined by:

•

Whether or not the rental activity is a busi-

ness, and

•

Whether or not the rental activity is con-

ducted for profit.

In most cases, if your primary purpose is in-

come or profit and you're involved in the rental

CAUTION

activity with continuity and regularity, your rental

activity is a business.

Reporting business income and expenses.

If you're in the business of renting personal

property, report your income and expenses on

Schedule C (Form 1040). The form instructions

have information on how to complete them.

Reporting nonbusiness income. If you

aren't in the business of renting personal prop-

erty, report your rental income on Schedule 1

(Form 1040), line 8l.

Reporting nonbusiness expenses. If you

rent personal property for profit, include your

rental expenses in the total amount you enter on

Schedule 1 (Form 1040), line 24b.

If you don't rent personal property for profit,

your deductions are limited and you can't report

a loss to offset other income. See Activity not

for profit under Other Income, later.

Royalties

Royalties from copyrights; patents; and oil, gas,

and mineral properties are taxable as ordinary

income.

In most cases, you report royalties on

Schedule E (Form 1040). However, if you hold

an operating oil, gas, or mineral interest or are

in business as a self-employed writer, inventor,

artist, etc., report your income and expenses on

Schedule C (Form 1040).

Copyrights and patents. Royalties from copy-

rights on literary, musical, or artistic works, and

similar property, or from patents on inventions,

are amounts paid to you for the right to use your

work over a specified period of time. Royalties

are generally based on the number of units

sold, such as the number of books, tickets to a

performance, or machines sold.

Oil, gas, and minerals. Royalty income from

oil, gas, and mineral properties is the amount

you receive when natural resources are extrac-

ted from your property. The royalties are gener-

ally based on production or revenue and are

paid to you by a person or company who leases

the property from you.

Depletion. If you're the owner of an eco-

nomic interest in mineral deposits or oil and gas

wells, you can recover your investment through

the depletion allowance.

Coal and iron ore. Under certain circum-

stances, you can treat amounts you receive

from the disposal of coal and iron ore as pay-

ments from the sale of a capital asset, rather

than as royalty income. For information about

gain or loss from the sale of coal and iron ore,

see chapter 2 of Pub. 544.

Sale of property interest. If you sell your

complete interest in oil, gas, or mineral rights,

the amount you receive is considered payment

for the sale of section 1231 property, not royalty

income. Under certain circumstances, the sale

is subject to capital gain or loss treatment as ex-

plained in the Instructions for Schedule D (Form

1040). For more information on selling section

1231 property, see chapter 3 of Pub. 544.

If you retain a royalty, an overriding royalty,

or a net profit interest in a mineral property for

the life of the property, you have made a lease

or a sublease, and any cash you receive for the

assignment of other interests in the property is

ordinary income subject to a depletion allow-

ance.

Part of future production sold (carved

out production payment). If you own mineral

property but sell part of the future production, in

most cases you treat the money you receive

from the buyer at the time of the sale as a loan

from the buyer. Don’t include it in your income

or take depletion based on it.

When production begins, you include all the

proceeds in your income, deduct all the produc-

tion expenses, and deduct depletion from that

amount to arrive at your taxable income from

the property.

Partnership Income

A partnership generally isn't a taxable entity.

The income, gains, losses, deductions, and

credits of a partnership are passed through to

the partners based on each partner's distribu-

tive share of these items. For more information,

see Pub. 541.

Partner's distributive share. Your distributive

share of partnership income, gains, losses, de-

ductions, or credits is generally based on the

partnership agreement. You must report your

distributive share of these items on your return

whether or not they are actually distributed to

you. However, your distributive share of the

partnership losses is limited to the adjusted ba-

sis of your partnership interest at the end of the

partnership year in which the losses took place.

Partnership agreement. The partnership

agreement usually covers the distribution of

profits, losses, and other items. However, if the

agreement doesn't state how a specific item of

gain or loss will be shared, or the allocation sta-

ted in the agreement doesn't have substantial

economic effect, your distributive share is fig-

ured according to your interest in the partner-

ship.

Partnership return. Although a partnership

generally pays no tax, it must file an information

return on Form 1065. This shows the result of

the partnership's operations for its tax year and

the items that must be passed through to the

partners.

Schedule K-1 (Form 1065). You should

receive from each partnership in which you're a

member a copy of Schedule K-1 (Form 1065)

showing your share of income, deductions,

credits, and tax preference items of the partner-

ship for the tax year. Keep Schedule K-1 for

your records. Don’t attach it to your Form 1040

or 1040-SR, unless you're specifically required

to do so.

Partner's return. You must generally report

partnership items on your individual return the

same way as they're reported on the partner-

ship return. That is, if the partnership had a cap-

ital gain, you report your share as explained in

the Instructions for Schedule D (Form 1040).

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Publication 525 (2023) 17

You report your share of partnership ordinary in-

come on Schedule E (Form 1040).

In many cases, Schedule K-1 (Form

1065) will tell you where to report an

item of income on your individual re-

turn.

Qualified joint venture. If you and your

spouse each materially participate as the only

members of a jointly owned and operated busi-

ness, and you file a joint return for the tax year,

you can make a joint election to be treated as a

qualified joint venture instead of a partnership.

To make this election, you must divide all items

of income, gain, loss, deduction, and credit at-

tributable to the business between you and your

spouse in accordance with your respective in-

terests in the venture. For further information on

how to make the election and which sched-

ule(s) to file, see the instructions for your indi-

vidual tax return.

S Corporation Income

In most cases, an S corporation doesn't pay tax

on its income. Instead, the income, losses, de-

ductions, and credits of the corporation are

passed through to the shareholders based on

each shareholder's pro rata share. You must re-

port your share of these items on your return. In

most cases, the items passed through to you

will increase or decrease the basis of your S

corporation stock as appropriate.

S corporation return. An S corporation must

file a return on Form 1120-S. This shows the re-

sults of the corporation's operations for its tax

year and the items of income, losses, deduc-

tions, or credits that affect the shareholders' in-

dividual income tax returns.

Schedule K-1 (Form 1120-S). You should

receive a copy of Schedule K-1 (Form 1120-S)

from any S corporation in which you're a share-

holder. Schedule K-1 (Form 1120-S) shows

your share of income, losses, deductions, and

credits for the tax year. Keep Schedule K-1

(Form 1120-S) for your records. Don’t attach it

to your Form 1040 or 1040-SR, unless you're

specifically required to do so.

Shareholder's return. Your distributive share

of the items of income, losses, deductions, or

credits of the S corporation must be shown sep-

arately on your Form 1040 or 1040-SR. The

character of these items is generally the same

as if you had realized or incurred them person-

ally.

In many cases, Schedule K-1 (Form

1120-S) will tell you where to report an

item of income on your individual re-

turn.

Distributions. In most cases, S corpora-

tion distributions are a nontaxable return of your

basis in the corporation stock. However, in cer-

tain cases, part of the distributions may be taxa-

ble as a dividend, or as a long-term or

short-term capital gain, or as both. The corpora-

tion's distributions may be in the form of cash or

property.

TIP

More information. For more information, see

the Instructions for Form 1120-S.

Sickness and

Injury Benefits

In most cases, you must report as income any

amount you receive for personal injury or sick-

ness through an accident or health plan that is

paid for by your employer. If both you and your

employer pay for the plan, only the amount you

receive that is due to your employer's payments

is reported as income. However, certain pay-

ments may not be taxable to you. For informa-

tion on nontaxable payments, see Military and

Government Disability Pensions and Other

Sickness and Injury Benefits, later in this dis-

cussion.

Don’t report as income any amounts

paid to reimburse you for medical ex-

penses you incurred after the plan was

established.

Cost paid by you. If you pay the entire cost of

an accident or health plan, don't include any

amounts you receive from the plan for personal

injury or sickness as income on your tax return.

If your plan reimbursed you for medical expen-

ses you deducted in an earlier year, you may

have to include some, or all, of the reimburse-

ment in your income. See Recoveries under

Miscellaneous Income, later.

Cafeteria plans. In most cases, if you're cov-

ered by an accident or health insurance plan

through a cafeteria plan, and the amount of the

insurance premiums wasn't included in your in-

come, you aren't considered to have paid the

premiums and you must include any benefits

you receive in your income. If the amount of the

premiums was included in your income, you're

considered to have paid the premiums and any

benefits you receive aren't taxable.

Disability Pensions

If you retired on disability, you must include in

income any disability pension you receive under

a plan that is paid for by your employer. You

must report your taxable disability payments on

line 1h of Form 1040 or 1040-SR until you reach

minimum retirement age. Minimum retirement

age is generally the age at which you can first

receive a pension or annuity if you aren't disa-

bled.

You may be entitled to a tax credit if

you were permanently and totally disa-

bled when you retired. For information

on this credit, see Pub. 524.

Beginning on the day after you reach mini-

mum retirement age, payments you receive are

taxable as a pension or annuity. Report the pay-

ments on lines 5a and 5b of Form 1040 or

1040-SR. For more information on pensions

and annuities, see Pub. 575.

Terrorist attacks or military action. Don’t in-

clude in your income disability payments you re-

ceive for injuries incurred as a direct result of

TIP

terrorist attacks or military action directed

against the United States (or its allies), whether

outside or within the United States. In the case

of the September 11 attacks, injuries eligible for

coverage by the September 11 Victim Compen-

sation Fund are treated as incurred as a direct

result of the attack. However, you must include

in your income any amounts that you received

that you would have received in retirement had

you not become disabled as a result of a terro-

rist attack or military action. Accordingly, you

must include in your income any payments you

receive from a 401(k), pension, or other retire-

ment plan to the extent that you would have re-

ceived the amount at the same or later time re-

gardless of whether you had become disabled.

See Pub. 907.

A terrorist action is one that is directed

against the United States or any of its allies (in-

cluding a multinational force in which the United

States is participating). A military action is one

that involves the U.S. Armed Forces and is a re-

sult of actual or threatened violence or aggres-

sion against the United States or any of its al-

lies, but doesn't include training exercises.

Contact the company or agency mak-

ing these payments if it incorrectly re-

ports your payments as taxable income

to the IRS on Form W-2, or on Form 1099-R, to

request that it reissue the form to report some or

all of these payments as nontaxable income in

box 12 (under code J) of Form W-2 or in box 1

but not in box 2a of Form 1099-R. If income

taxes are being incorrectly withheld from these

payments, you may also submit Form W-4 to

the company or agency to stop the withholding

of income taxes from payments reported on

Form W-2 or you may submit Form W-4P to

stop the withholding of income taxes from pay-

ments reported on Form 1099-R.

Disability payments you receive for injuries

not incurred as a direct result of a terrorist at-

tack or military action or for illnesses or disea-

ses not resulting from an injury incurred as a di-

rect result of a terrorist attack or military action

can't be excluded from your income under this

provision but may be excludable for other rea-

sons. See Pub. 907.

Retirement and profit-sharing plans. If you

receive payments from a retirement or

profit-sharing plan that doesn't provide for disa-

bility retirement, don't treat the payments as a

disability pension. The payments must be re-

ported as a pension or annuity.

Accrued leave payment. If you retire on disa-

bility, any lump-sum payment you receive for ac-

crued annual leave is a salary payment. The

payment isn't a disability payment. Include it in

your income in the tax year you receive it.

Military and Government

Disability Pensions

Certain military and government disability pen-

sions aren't taxable.

Service-connected disability. You may be

able to exclude from income amounts you re-

ceive as a pension, annuity, or similar allowance

TIP

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18 Publication 525 (2023)

for personal injury or sickness resulting from ac-

tive service in one of the following government

services.

•

The armed forces of any country.

•

The National Oceanic and Atmospheric

Administration.

•

The Public Health Service.

•

The Foreign Service.

Conditions for exclusion. Don’t include

the disability payments in your income if any of

the following conditions apply.

1. You were entitled to receive a disability

payment before September 25, 1975.

2. You were a member of a listed government

service or its reserve component, or were

under a binding written commitment to be-

come a member, on September 24, 1975.

3. You receive the disability payments for a

combat-related injury. This is a personal

injury or sickness that:

a. Results directly from armed conflict;

b. Takes place while you're engaged in

extra-hazardous service;

c. Takes place under conditions simulat-

ing war, including training exercises

such as maneuvers; or

d. Is caused by an instrumentality of war.

4. You would be entitled to receive disability

compensation from the VA if you filed an

application for it. Your exclusion under this

condition is equal to the amount you would

be entitled to receive from the VA.

Pension based on years of service. If you

receive a disability pension based on years of

service, in most cases, you must include it in

your income. However, if the pension qualifies

for the exclusion for a service-connected disa-

bility (discussed earlier), don't include in income

the part of your pension that you would have re-

ceived if the pension had been based on a per-

centage of disability. You must include the rest

of your pension in your income.

Retroactive VA determination. If you re-

tire from the U.S. Armed Forces based on years

of service and are later given a retroactive serv-

ice-connected disability rating by the VA, your

retirement pay for the retroactive period is ex-

cluded from income up to the amount of VA dis-

ability benefits you would have been entitled to

receive. You can claim a refund of any tax paid

on the excludable amount (subject to the statute

of limitations) by filing an amended return on

Form 1040-X for each previous year during the

retroactive period. You must include with each

Form 1040-X a copy of the official VA determi-

nation letter granting the retroactive benefit. The

letter must show the amount withheld and the

effective date of the benefit.

Generally, the VA determination letter will

contain a table with five headings. The table on

the letter must cover the same dates for the tax

year reported on the Form 1040-X. To calculate

the correct tax reduction, multiply the Effective

Months by the Amount Withheld for the tax year.

For example, Form 1040-X filed for tax year

2020. The table shows the Amount Withheld ef-

fective December 2019 is $320.00. To calculate

the amount for the tax reduction, multiply the

2020 Effective Months by the Amount Withheld.

In this case, January–December (2020) is 12

months x $320.00 (Amount Withheld) =

$3,840.00; this amount should be the amount

claimed as a reduction on Line 1 Adjusted

Gross Income (AGI), Column B, of the 2020

Form 1040-X.

If you receive a lump-sum disability sever-

ance payment and are later awarded VA disabil-

ity benefits, exclude 100% of the severance

benefit from your income. However, you must

include in your income any lump-sum readjust-

ment or other nondisability severance payment

you received on release from active duty, even if

you're later given a retroactive disability rating

by the VA.

Special statute of limitations. In most ca-

ses, under the statute of limitations a claim for

credit or refund must be filed within 3 years from

the time a return was filed. However, if you re-

ceive a retroactive service-connected disability

rating determination, the statute of limitations is

extended by a 1-year period beginning on the

date of the determination. This 1-year extended

period applies to claims for credit or refund filed

after June 17, 2008, and doesn't apply to any

tax year that began more than 5 years before

the date of the determination.

Example 19. You retired in 2017 and re-

ceive a pension based on your years of service.

On August 3, 2023, you receive a determination

of service-connected disability retroactive to

2017. Generally, you could claim a refund for

the taxes paid on your pension for 2020, 2021,

and 2022. However, under the special limitation

period, you can also file a claim for 2019 as long

as you file the claim by August 3, 2024. You

can't file a claim for 2017 and 2018 because

those tax years began more than 5 years before

the determination.

Combat-related special compensation.

Combat-related special compensation, as de-

scribed under 10 U.S.C. section 1413a, is a

specific entitlement payable to only retirees of

the Uniformed Services. If you are in receipt of

combat-related special compensation, you may

exclude the amount of your combat-related spe-

cial compensation from your income. Other por-

tions of your military or disability retirement pay

may still be included in your income.

Terrorist attack or military action. Don’t in-

clude in your income disability payments you re-

ceive for injuries resulting directly from a terro-

rist or military action. In the case of the

September 11 attacks, injuries eligible for cov-

erage by the September 11 Victim Compensa-

tion Fund are treated as incurred as a direct re-

sult of the attack. However, you must include in

your income any amounts that you received that

you would have received in retirement had you

not become disabled as a result of a terrorist or

military action. Accordingly, you must include in

your income any payments you receive from a

401(k), pension, or other retirement plan to the

extent that you would have received the amount

at the same or later time regardless of whether

you had become disabled. Disability payments

you receive for injuries not incurred as a direct

result of a terrorist or military action or for ill-

nesses or diseases not resulting from an injury

incurred as a direct result of a terrorist or mili-

tary action may be excludable from income for

other reasons. See Pub. 907.

A terrorist action is one that is directed

against the United States or any of its allies (in-

cluding a multinational force in which the United

States is participating). A military action is one

that involves the U.S. Armed Forces and is a re-

sult of actual or threatened violence or aggres-

sion against the United States or any of its al-

lies, but doesn't include training exercises.

Long-Term Care

Insurance Contracts

In most cases, long-term care insurance con-

tracts are treated as accident and health insur-

ance contracts. Amounts you receive from them

(other than policyholder dividends or premium

refunds) are excludable in most cases from in-

come as amounts received for personal injury

or sickness. To claim an exclusion for payments

made on a per diem or other periodic basis un-

der a long-term care insurance contract, you

must file Form 8853 with your return.

A long-term care insurance contract is an in-

surance contract that only provides coverage

for qualified long-term care services. The con-

tract must:

•

Be guaranteed renewable;

•

Not provide for a cash surrender value or

other money that can be paid, assigned,

pledged, or borrowed;

•

Provide that refunds, other than refunds on

the death of the insured or complete sur-

render or cancellation of the contract, and

dividends under the contract may be used

only to reduce future premiums or increase

future benefits; and

•

In most cases, not pay or reimburse expen-

ses incurred for services or items that

would be reimbursed under Medicare, ex-

cept where Medicare is a secondary payer

or the contract makes per diem or other

periodic payments without regard to ex-

penses.

Qualified long-term care services. Qualified

long-term care services are:

•

Necessary diagnostic, preventive, thera-

peutic, curing, treating, mitigating, rehabili-

tative services, and maintenance and per-

sonal care services; and

•

Required by a chronically ill individual and

provided pursuant to a plan of care prescri-

bed by a licensed health care practitioner.

Chronically ill individual. A chronically ill indi-

vidual is one who has been certified by a li-

censed health care practitioner within the previ-

ous 12 months as one of the following.

•

An individual who, for at least 90 days, is

unable to perform at least two activities of

daily living without substantial assistance

due to a loss of functional capacity. Activi-

ties of daily living are eating, toileting,

transferring, bathing, dressing, and conti-

nence.

•

An individual who requires substantial su-

pervision to be protected from threats to

health and safety due to severe cognitive

impairment.

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Publication 525 (2023) 19

Limit on exclusion. The exclusion for pay-

ments made on a per diem or other periodic ba-

sis under a long-term care insurance contract is

subject to a limit. The limit applies to the total of

these payments and any accelerated death

benefits made on a per diem or other periodic

basis under a life insurance contract because

the insured is chronically ill. (For more informa-

tion on accelerated death benefits, see Life In-

surance Proceeds under Miscellaneous In-

come, later.)

Under this limit, the excludable amount for

any period is figured by subtracting any reim-

bursement received (through insurance or oth-

erwise) for the cost of qualified long-term care

services during the period from the larger of the

following amounts.

•

The cost of qualified long-term care serv-

ices during the period.

•

The dollar amount for the period ($420 per

day for any period in 2023).

See Section C of Form 8853 and its instructions

for more information.

Workers' Compensation

Amounts you receive as workers' compensation

for an occupational sickness or injury are fully

exempt from tax if they're paid under a workers'

compensation act or a statute in the nature of a

workers' compensation act. The exemption also

applies to your survivors. The exemption, how-

ever, doesn't apply to retirement plan benefits

you receive based on your age, length of serv-

ice, or prior contributions to the plan, even if you

retired because of an occupational sickness or

injury.

If part of your workers' compensation

reduces your social security or equiva-

lent railroad retirement benefits re-

ceived, that part is considered social security

(or equivalent railroad retirement) benefits and

may be taxable. See Pub. 554 and Pub. 915,

Social Security and Equivalent Railroad Retire-

ment Benefits, for more information.

Return to work. If you return to work after

qualifying for workers' compensation, salary

payments you receive for performing light duties

are taxable as wages.

Disability pension. If your disability pension is

paid under a statute that provides benefits only

to employees with service-connected disabili-

ties, part of it may be workers' compensation.

That part is exempt from tax. The rest of your

pension, based on years of service, is taxable

as pension or annuity income. If you die, the

part of your survivors' benefit that is a continua-

tion of the workers' compensation is exempt

from tax.

Other Sickness

and Injury Benefits

In addition to disability pensions and annuities,

you may receive other payments for sickness or

injury.

Railroad sick pay. Payments you receive as

sick pay under the Railroad Unemployment In-

CAUTION

surance Act are taxable and you must include

them in your income. However, don't include

them in your income if they're for an on-the-job

injury.

Black lung benefit payments. These pay-

ments are similar to workers' compensation and

aren't taxable in most cases.

Federal Employees' Compensation Act

(FECA). Payments received under FECA for

personal injury or sickness, including payments

to beneficiaries in case of death, aren't taxable.

However, you're taxed on amounts you receive

under FECA as continuation of pay for up to 45

days while a claim is being decided. Report this

income on line 1a of Form 1040 or 1040-SR.

Also, pay for sick leave while a claim is being

processed is taxable and must be included in

your income as wages.

If part of the payments you receive un-

der FECA reduces your social security

or equivalent railroad retirement bene-

fits received, that part is considered social se-

curity (or equivalent railroad retirement) benefits

and may be taxable. See Pub. 554 for more in-

formation.

Qualified Indian health care benefit. For

benefits and coverage provided after March 23,

2010, the value of any qualified Indian health

care benefit isn't taxable. These benefits in-

clude any health service or benefits provided by

the Indian Health Service, amounts to reim-

burse medical care expenses provided by an In-

dian tribe, coverage under accident or health in-

surance, and any other medical care provided

by an Indian tribe.

Other compensation. Many other amounts

you receive as compensation for sickness or in-

jury aren't taxable. These include the following

amounts.

•

Compensatory damages you receive for

physical injury or physical sickness,

whether paid in a lump sum or in periodic

payments. See Court awards and dam-

ages under Other Income, later.

•

Benefits you receive under an accident or

health insurance policy on which either you

paid the premiums or your employer paid

the premiums but you had to include them

in your income.

•

Disability benefits you receive for loss of in-

come or earning capacity as a result of in-

juries under a no-fault car insurance policy.

•

Compensation you receive for permanent

loss or loss of use of a part or function of

your body, or for your permanent disfigure-

ment. This compensation must be based

only on the injury and not on the period of

your absence from work. These benefits

aren't taxable even if your employer pays

for the accident and health plan that pro-

vides these benefits.

Reimbursement for medical care. A reim-

bursement for medical care is generally not tax-

able. However, it may reduce your medical ex-

pense deduction. If you receive reimbursement

for an expense you deducted in an earlier year,

see Recoveries, later.

CAUTION

If you receive an advance reimbursement or

loan for future medical expenses from your em-

ployer without regard to whether you suffered a

personal injury or sickness or incurred medical

expenses, that amount is included in your in-

come, whether or not you incur uninsured medi-

cal expenses during the year.

Reimbursements received under your em-

ployer's plan for expenses incurred before the

plan was established are included in income.

Amounts you receive under a reimburse-

ment plan that provides for the payment of un-

used reimbursement amounts in cash or other

benefits are included in your income. For de-

tails, see Pub. 969.

Miscellaneous Income

This section discusses various types of income.

You may have taxable income from certain

transactions even if no money changes hands.

For example, you may have taxable income if

you lend money at a below-market interest rate

or have a debt you owe canceled.

Bartering

Bartering is an exchange of property or serv-

ices. You must include in your income, at the

time received, the FMV of property or services

you receive in bartering. If you exchange serv-

ices with another person and you both have

agreed ahead of time on the value of the serv-

ices, that value will be accepted as FMV unless

the value can be shown to be otherwise.

Generally, you report this income on Sched-

ule C (Form 1040). However, if the barter in-

volves an exchange of something other than

services, such as in Example 23, later, you may

have to use another form or schedule instead.

Example 20. You're a self-employed attor-

ney who performs legal services for a client, a

small corporation. The corporation gives you

shares of its stock as payment for your services.

You must include the FMV of the shares in your

income on Schedule C (Form 1040) in the year

you receive them.

Example 21. You're a self-employed ac-

countant. You and a house painter are members

of a barter club. Members contact each other

directly and bargain for the value of the services

to be performed. In return for accounting serv-

ices you provided, the house painter painted

your home. You must report as your income on

Schedule C (Form 1040) the FMV of the house

painting services you received. The house

painter must include in income the FMV of the

accounting services you provided.

Example 22. You're self-employed and a

member of a barter club. The club uses credit

units as a means of exchange. It adds credit

units to your account for goods or services you

provide to members, which you can use to pur-

chase goods or services offered by other mem-

bers of the barter club. The club subtracts credit

units from your account when you receive

goods or services from other members. You

must include in your income the value of the

credit units that are added to your account,

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20 Publication 525 (2023)

even though you may not actually receive goods

or services from other members until a later tax

year.

Example 23. You own a small apartment

building. In return for 6 months rent-free use of

an apartment, an artist gives you a work of art

she created. You must report as rental income

on Schedule E (Form 1040) the FMV of the art-

work, and the artist must report as income on

Schedule C (Form 1040) the fair rental value of

the apartment.

Form 1099-B from barter exchange. If you

exchanged property or services through a bar-

ter exchange, Form 1099-B or a similar state-

ment from the barter exchange should be sent

to you by February 15, 2024. It should show the

value of cash, property, services, credits, or

scrip you received from exchanges during 2023.

The IRS will also receive a copy of Form

1099-B.

Backup withholding. In most cases, the in-

come you receive from bartering isn't subject to

regular income tax withholding. However,

backup withholding will apply in certain circum-

stances to ensure that income tax is collected

on this income.

Under backup withholding, the barter ex-

change must withhold, as income tax, 24% of

the income if:

•

You don't give the barter exchange your

TIN, or

•

The IRS notifies the barter exchange that

you gave it an incorrect TIN.

If you join a barter exchange, you must certify

under penalties of perjury that your TIN is cor-

rect and that you aren't subject to backup with-

holding. If you don't make this certification,

backup withholding may begin immediately. The

barter exchange will give you a Form W-9, or a

similar form, for you to make this certification.

The barter exchange will withhold tax only up to

the amount of any cash paid to you or deposited

in your account and any scrip or credit issued to

you (and converted to cash).

If tax is withheld from your barter in-

come, the barter exchange will report

the amount of tax withheld on Form

1099-B or similar statement.

Canceled Debts

In most cases, if a debt you owe is canceled or

forgiven, other than as a gift or bequest, you

must include the canceled amount in your in-

come. You have no income from the canceled

debt if it's intended as a gift to you. A debt in-

cludes any indebtedness for which you're liable

or which attaches to property you hold.

If the debt is a nonbusiness debt, report the

canceled amount on Schedule 1 (Form 1040),

line 8c. If it's a business debt, report the amount

on Schedule C (Form 1040) or on Schedule F

(Form 1040) if the debt is farm debt and you're a

farmer.

Starting in 2014, you must include the in-

come you elected to defer in 2009 or 2010 from

a cancellation, reacquisition, or modification of

a business debt. For information on this

TIP

election, see Revenue Procedure 2009-37,

available at IRS.gov/irb/

2009-36_IRB#RP-2009-37.

Form 1099-C. If a federal government agency,

financial institution, or credit union cancels or

forgives a debt you owe of $600 or more, you

may receive a Form 1099-C. Form 1099-C,

box 2, shows the amount of debt either actually

or deemed discharged. If you don't agree with

the amount reported in box 2, contact your

creditor.

Interest included in canceled debt. If any

interest is forgiven and included in the amount

of canceled debt in box 2, the amount of inter-

est will also be shown in box 3. Whether or not

you must include the interest portion of the can-

celed debt in your income depends on whether

the interest would be deductible if you paid it.

See Deductible debt under Exceptions, later.

If the interest would not be deductible (such

as interest on a personal loan), include in your

income the amount from box 2 of Form 1099-C.

If the interest would be deductible (such as on a

business loan), include in your income the net

amount of the canceled debt (the amount

shown in box 2 less the interest amount shown

in box 3).

Discounted mortgage loan. If your financial

institution offers a discount for the early pay-

ment of your mortgage loan, the amount of the

discount is canceled debt. You must include the

canceled amount in your income.

Mortgage relief upon sale or other disposi-

tion. If you're personally liable for a mortgage

(recourse debt), and you're relieved of the mort-

gage when you dispose of the property, you

may realize gain or loss up to the FMV of the

property. To the extent the mortgage discharge

exceeds the FMV of the property, it's income

from discharge of indebtedness unless it quali-

fies for exclusion under Excluded debt, later.

Report any income from discharge of indebted-

ness on nonbusiness debt that doesn't qualify

for exclusion as other income on Schedule 1

(Form 1040), line 8c.

You may be able to exclude part of the

mortgage relief on your principal resi-

dence. See Excluded debt, later.

If you aren't personally liable for a mortgage

(nonrecourse debt), and you're relieved of the

mortgage when you dispose of the property

(such as through foreclosure), that relief is inclu-

ded in the amount you realize. You may have a

taxable gain if the amount you realize exceeds

your adjusted basis in the property. Report any

gain on nonbusiness property as a capital gain.

See Pub. 4681 for more information.

Stockholder debt. If you're a stockholder in a

corporation and the corporation cancels or for-

gives your debt to it, the canceled debt is a con-

structive distribution that is generally dividend

income to you. For more information, see Pub.

542.

If you're a stockholder in a corporation and

you cancel a debt owed to you by the corpora-

tion, you generally don't realize income. This is

because the canceled debt is considered as a

contribution to the capital of the corporation

TIP

equal to the amount of debt principal that you

canceled.

Repayment of canceled debt. If you inclu-

ded a canceled amount in your income and

later pay the debt, you may be able to file a

claim for refund for the year the amount was in-

cluded in income. You can file a claim on Form

1040-X if the statute of limitations for filing a

claim is still open. The statute of limitations gen-

erally doesn't end until 3 years after the due

date of your original return.

Exceptions

There are several exceptions to the inclusion of

canceled debt in income. These are explained

next.

Student loans. Generally, if you are responsi-

ble for making loan payments, and the loan is

canceled or repaid by someone else, you must

include the amount that was canceled or paid

on your behalf in your gross income for tax pur-

poses. However, in certain circumstances, you

may be able to exclude amounts from gross in-

come as a result of the cancellation or repay-

ment of certain student loans. These exclusions

are for:

•

Student loan cancellation due to meeting

certain work requirements;

•

Cancellation of certain loans after Decem-

ber 31, 2020, and before January 1, 2026

(see Special rule for student loan dis-

charges for 2021 through 2025); or

•

Certain student loan repayment assistance

programs.

Exclusion for student loan cancellation due

to meeting certain work requirements. If

your student loan is canceled in part or in whole

in 2023 due to meeting certain work require-

ments, you may not have to include the can-

celed debt in your income. To qualify for this

work-related exclusion, your loan must have

been made by a qualified lender to assist you in

attending an eligible educational organization

described in section 170(b)(1)(A)(ii). In addition,

the cancellation must be pursuant to a provision

in the student loan that all or part of the debt will

be canceled if you work:

•

For a certain period of time,

•

In certain professions, and

•

For any of a broad class of employers.

The cancellation of your loan won’t

qualify for tax-free treatment if it was

made by an educational organization or

tax-exempt section 501(c)(3) organization and

was canceled because of the services you per-

formed for either organization. See Exception,

later.

Educational organization described in

section 170(b)(1)(A)(ii). This is an educa-

tional organization that maintains a regular fac-

ulty and curriculum and normally has a regularly

enrolled body of students in attendance at the

place where it carries on its educational activi-

ties.

Qualified lenders. These include the fol-

lowing.

CAUTION

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Publication 525 (2023) 21

1. The United States, or an instrumentality or

agency thereof.

2. A state or territory of the United States; or

the District of Columbia; or any political

subdivision thereof.

3. A public benefit corporation that is tax-ex-

empt under section 501(c)(3); and that

has assumed control of a state, county, or

municipal hospital; and whose employees

are considered public employees under

state law.

4. An educational organization described in

section 170(b)(1)(A)(ii), if the loan is

made:

a. As part of an agreement with an entity

described in (1), (2), or (3) under

which the funds to make the loan were

provided to the educational organiza-

tion; or

b. Under a program of the educational

organization that is designed to en-

courage its students to serve in occu-

pations with unmet needs or in areas

with unmet needs where services pro-

vided by the students (or former stu-

dents) are for or under the direction of

a governmental unit or a tax-exempt

section 501(c)(3) organization.

Special rule for student loan discharges for

2021 through 2025. The American Rescue

Plan Act of 2021 modified the treatment of stu-

dent loan forgiveness for discharges in 2021

through 2025. Generally, if you are responsible

for making loan payments, and the loan is can-

celed or repaid by someone else, you must in-

clude the amount that was canceled or paid on

your behalf in your gross income for tax purpo-

ses. However, in certain circumstances you may

be able to exclude this amount from gross in-

come if the loan was one of the following.

•

A loan for postsecondary educational ex-

penses.

•

A private education loan.

•

A loan from an educational organization

described in section 170(b)(1)(A)(ii).

•

A loan from an organization exempt from

tax under section 501(a) to refinance a stu-

dent loan.

See Pubs. 4681 and 970 for further details.

Loan for postsecondary educational expen-

ses. This is any loan provided expressly for

postsecondary education, regardless of

whether provided through the educational or-

ganization or directly to the borrower, if such

loan was made, insured, or guaranteed by one

of the following.

•

The United States, or an instrumentality or

agency thereof.

•

A state or territory of the United States; or

the District of Columbia; or any political

subdivision thereof.

•

An eligible educational organization.

Eligible educational organization. An eligi-

ble educational organization is generally any

accredited public, nonprofit, or proprietary (pri-

vately owned profit-making) college, university,

vocational school, or other postsecondary edu-

cational organization. Also, the organization

must be eligible to participate in a student aid

program administered by the U.S. Department

of Education.

An eligible educational organization also in-

cludes certain educational organizations loca-

ted outside the United States that are eligible to

participate in a student aid program adminis-

tered by the U.S. Department of Education.

The educational organization should

be able to tell you if it is an eligible edu-

cational organization.

Private education loan. A private education

loan is a loan provided by a private educational

lender that:

•

Is not made, insured, or guaranteed under

Title IV of the Higher Education Act of

1965; and

•

Is issued expressly for postsecondary edu-

cational expenses to a borrower, regard-

less of whether the loan is provided

through the educational organization that

the student attends or directly to the bor-

rower from the private educational lender.

A private education loan does not include

an extension of credit under an open end

consumer credit plan, a reverse mortgage

transaction, a residential mortgage trans-

action, or any other loan that is secured by

real property or a dwelling.

Private educational lender. A private educa-

tional lender is one of the following.

•

A financial institution that solicits, makes,

or extends private education loans.

•

A federal credit union that solicits, makes,

or extends private education loans.

•

Any other person engaged in the business

of soliciting, making, or extending private

education loans.

The cancellation of your loan won’t

qualify for tax-free treatment if it is can-

celed because of services you per-

formed for the private educational lender that

made the loan or other organization that provi-

ded the funds.

Loan from an educational organization de-

scribed in section 170(b)(1)(A)(ii). This is

any loan made by the organization if the loan is

made:

•

As part of an agreement with an entity de-

scribed earlier under which the funds to

make the loan were provided to the educa-

tional organization; or

•

Under a program of the educational organi-

zation that is designed to encourage its

students to serve in occupations with un-

met needs or in areas with unmet needs

where the services provided by the stu-

dents (or former students) are for or under

the direction of a governmental unit or a

tax-exempt section 501(c)(3) organization.

Educational organization described in sec-

tion 170(b)(1)(A)(ii). This is an educational

organization that maintains a regular faculty and

curriculum and normally has a regularly enrolled

body of students in attendance at the place

where it carries on its educational activities.

TIP

CAUTION

The cancellation of your loan won’t

qualify for tax-free treatment if it was

made by an educational organization, a

tax-exempt section 501(c)(3) organization, or a

private education lender (as defined in section

140(a)(7) of the Truth in Lending Act) and was

canceled because of the services you per-

formed for either such organization or private

education lender. See Exception, later.

Section 501(c)(3) organization. This is

any corporation, community chest, fund, or

foundation organized and operated exclusively

for one or more of the following purposes.

•

Charitable.

•

Religious.

•

Educational.

•

Scientific.

•

Literary.

•

Testing for public safety.

•

Fostering national or international amateur

sports competition (but only if none of its

activities involve providing athletic facilities

or equipment).

•

The prevention of cruelty to children or ani-

mals.

Exception. In most cases, the cancellation

of a student loan made by an educational or-

ganization because of services you performed

for that organization or another organization that

provided the funds for the loan must be inclu-

ded in gross income on your tax return.

Refinanced loan. If you refinanced a stu-

dent loan with another loan from an eligible ed-

ucational organization or a tax-exempt organi-

zation, that loan may also be considered as

made by a qualified lender. The refinanced loan

is considered made by a qualified lender if it’s

made under a program of the refinancing organ-

ization that is designed to encourage students

to serve in occupations with unmet needs or in

areas with unmet needs where the services re-

quired of the students are for or under the direc-

tion of a governmental unit or a tax-exempt sec-

tion 501(c)(3) organization.

Student loan repayment assistance. Stu-

dent loan repayments made to you are tax free

if you received them for any of the following.

•

The National Health Service Corps

(NHSC) Loan Repayment Program.

•

A state education loan repayment program

eligible for funds under the Public Health

Service Act.

•

Any other state loan repayment or loan for-

giveness program that is intended to pro-

vide for the increased availability of health

services in underserved or health profes-

sional shortage areas (as determined by

such state).

You can’t deduct the interest you paid

on a student loan to the extent pay-

ments were made through your partici-

pation in any of the above programs.

Deductible debt. You don't have income from

the cancellation of a debt if your payment of the

debt would be deductible. This exception ap-

plies only if you use the cash method of ac-

counting. For more information, see chapter 5 of

Pub. 334.

CAUTION

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22 Publication 525 (2023)

Price reduced after purchase. In most ca-

ses, if the seller reduces the amount of debt you

owe for property you purchased, you don't have

income from the reduction. The reduction of the

debt is treated as a purchase price adjustment

and reduces your basis in the property.

Excluded debt. Don’t include a canceled debt

in your gross income in the following situations.

•

The debt is canceled in a bankruptcy case

under title 11 of the U.S. Code. See Pub.

908.

•

The debt is canceled when you're insol-

vent. However, you can't exclude any

amount of canceled debt that is more than

the amount by which you're insolvent. See

Pub. 908.

•

The debt is qualified farm debt and is can-

celed by a qualified person. See chapter 3

of Pub. 225.

•

The debt is qualified real property business

debt. See chapter 5 of Pub. 334.

•

The cancellation is intended as a gift.

•

The debt is qualified principal residence in-

debtedness, discussed next.

Qualified principal residence indebted-

ness (QPRI). This is debt secured by your

principal residence that you took out to buy,

build, or substantially improve your principal

residence. QPRI can't be more than the cost of

your principal residence plus improvements.

You must reduce the basis of your principal

residence by the amount excluded from gross

income. To claim the exclusion, you must file

Form 982 with your tax return.

Principal residence. Your principal resi-

dence is the home where you ordinarily live

most of the time. You can have only one princi-

pal residence at any one time.

Amount eligible for exclusion. The ex-

clusion applies only to debt discharged after

2006 and in most cases before 2026. The maxi-

mum amount you can treat as QPRI is $750,000

($375,000 if married filing separately). You can't

exclude debt canceled because of services per-

formed for the lender or on account of any other

factor not directly related to a decline in the

value of your residence or to your financial con-

dition.

Limitation. If only part of a loan is QPRI,

the exclusion applies only to the extent the can-

celed amount is more than the amount of the

loan immediately before the cancellation that

isn't QPRI.

Example 24. You file a joint return. Your

principal residence is secured by a debt of

$900,000, of which $700,000 is QPRI. Your resi-

dence is sold for $600,000 and $300,000 of

debt is canceled. Only $100,000 of the can-

celed debt may be excluded from income (the

$300,000 that was discharged minus the

$200,000 of nonqualified debt).

Forgiveness of Paycheck Protection Pro-

gram (PPP) Loans. The forgiveness of a PPP

loan creates tax-exempt income, so although

you don't need to report the income from the

forgiveness of your PPP loan on Form 1040 or

1040-SR, you do need to report certain informa-

tion related to your PPP loan.

Rev. Proc. 2021-48, 2021-49 I.R.B. 835, per-

mits taxpayers to treat tax-exempt income re-

sulting from the forgiveness of a PPP loan as re-

ceived or accrued: (1) as, and to the extent that,

eligible expenses are paid or incurred; (2) when

you apply for forgiveness of the PPP loan; or (3)

when forgiveness of the PPP loan is granted. If

you have tax-exempt income resulting from the

forgiveness of a PPP loan, attach a statement to

your return reporting each taxable year for

which you are applying Rev. Proc. 2021-48, and

which section of Rev. Proc. 2021-48 you are ap-

plying—either section 3.01(1), (2), or (3). Any

statement should include the following informa-

tion for each PPP loan.

1. Your name, address, and ITIN or SSN;

2. A statement that you are applying or ap-

plied section 3.01(1), (2), or (3) of Rev.

Proc. 2021-48, and for what taxable year;

3. The amount of tax-exempt income from

forgiveness of the PPP loan that you are

treating as received or accrued and for

what taxable year; and

4. Whether forgiveness of the PPP loan has

been granted as of the date you file your

return.

Write “RP 2021-48” at the top of your at-

tached statement.

Host

If you host a party or event at which sales are

made, any gift or gratuity you receive for giving

the event is a payment for helping a direct seller

make sales. You must report this item as in-

come at its FMV.

Your out-of-pocket party expenses are sub-

ject to the 50% limit for meal expenses. For tax

years beginning after 2017, no deduction is al-

lowed for any expenses related to activities gen-

erally considered entertainment, amusement, or

recreation. Taxpayers may continue to deduct

50% of the cost of business meals if the tax-

payer (or an employee of the taxpayer) is

present and the food or beverages aren’t con-

sidered lavish or extravagant. The meals may

be provided to a current or potential business

customer, client, consultant, or similar business

contact. Food and beverages that are provided

during entertainment events won’t be consid-

ered entertainment if purchased separately

from the event.

For more information about the limit for meal

expenses, see 50% Limit in Pub. 463.

Life Insurance Proceeds

Life insurance proceeds paid to you because of

the death of the insured person aren't taxable

unless the policy was turned over to you for a

price. This is true even if the proceeds were

paid under an accident or health insurance pol-

icy or an endowment contract issued on or be-

fore December 31, 1984. However, interest in-

come received as a result of life insurance

proceeds may be taxable.

Proceeds not received in installments. If

death benefits are paid to you in a lump sum or

other than at regular intervals, include in your in-

come only the benefits that are more than the

amount payable to you at the time of the insured

person's death. If the benefit payable at death

isn't specified, you include in your income the

benefit payments that are more than the present

value of the payments at the time of death.

Proceeds received in installments. If you

receive life insurance proceeds in installments,

you can exclude part of each installment from

your income.

To determine the excluded part, divide the

amount held by the insurance company (gener-

ally, the total lump sum payable at the death of

the insured person) by the number of install-

ments to be paid. Include anything over this ex-

cluded part in your income as interest.

Example 25. The face amount of the pol-

icy is $75,000 and, as beneficiary, you choose

to receive 120 monthly installments of $1,000

each. The excluded part of each installment is

$625 ($75,000 ÷ 120), or $7,500 for an entire

year. The rest of each payment, $375 a month

(or $4,500 for an entire year), is interest income

to you.

Installments for life. If, as the beneficiary

under an insurance contract, you're entitled to

receive the proceeds in installments for the rest

of your life without a refund or period-certain

guarantee, you figure the excluded part of each

installment by dividing the amount held by the

insurance company by your life expectancy. If

there is a refund or period-certain guarantee,

the amount held by the insurance company for

this purpose is reduced by the actuarial value of

the guarantee.

Surviving spouse. If your spouse died be-

fore October 23, 1986, and insurance proceeds

paid to you because of the death of your spouse

are received in installments, you can exclude up

to $1,000 a year of the interest included in the

installments. If you remarry, you can continue to

take the exclusion.

Employer-owned life insurance contract. If

you're the policyholder of an employer-owned

life insurance contract, you must include in in-

come any life insurance proceeds received that

are more than the premiums and any other

amounts you paid on the policy. You're subject

to this rule if you have a trade or business, you

own a life insurance contract on the life of your

employee, and you (or a related person) are a

beneficiary under the contract.

However, you may exclude the full amount of

the life insurance proceeds if the following ap-

ply.

1. Before the policy is issued, you provide

written notice about the insurance to the

employee and the employee provides writ-

ten consent to be insured.

2. Either:

a. The employee was your employee

within the 12-month period before

death, or, at the time the contract was

issued, was a director or highly com-

pensated employee; or

b. The amount is paid to the family or

designated beneficiary of the em-

ployee.

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Publication 525 (2023) 23

Interest option on insurance. If an insurance

company pays you interest only on proceeds

from life insurance left on deposit, the interest

you're paid is taxable.

If your spouse died before October 23,

1986, and you chose to receive only the interest

from your insurance proceeds, the $1,000 inter-

est exclusion for a surviving spouse doesn't ap-

ply. If you later decide to receive the proceeds

from the policy in installments, you can take the

interest exclusion from the time you begin to re-

ceive the installments.

Surrender of policy for cash. If you surren-

der a life insurance policy for cash, you must in-

clude in income any proceeds that are more

than the cost of the life insurance policy. In most

cases, your cost (or investment in the contract)

is the total of premiums that you paid for the life

insurance policy, less any refunded premiums,

rebates, dividends, or unrepaid loans that

weren’t included in your income.

You should receive a Form 1099-R showing

the total proceeds and the taxable part. Report

these amounts on lines 5a and 5b of Form 1040

or 1040-SR.

For information on when the proceeds

are excluded from income, see Accel-

erated Death Benefits, later.

Split-dollar life insurance. In most cases, a

split-dollar life insurance arrangement is an ar-

rangement between an owner and a nonowner

of a life insurance contract under which either

party to the arrangement pays all or part of the

premiums, and one of the parties paying the

premiums is entitled to recover all or part of

those premiums from the proceeds of the con-

tract. There are two mutually exclusive rules to

tax split-dollar life insurance arrangements.

1. Under the economic benefit rule, the

owner of the life insurance contract is trea-

ted as providing current life insurance pro-

tection and other taxable economic bene-

fits to the nonowner of the contract.

2. Under the loan rule, the nonowner of the

life insurance contract is treated as loaning

premium payments to the owner of the

contract.

Only one of these rules applies to any one pol-

icy. For more information, see sections 1.61-22

and 1.7872-15 of the regulations.

Endowment Contract Proceeds

An endowment contract is a policy under which

you're paid a specified amount of money on a

certain date unless you die before that date, in

which case the money is paid to your designa-

ted beneficiary. Endowment proceeds paid in a

lump sum to you at maturity are taxable only if

the proceeds are more than the cost (invest-

ment in the contract) of the policy. To determine

your cost, subtract any amount that you previ-

ously received under the contract and excluded

from your income from the total premiums (or

other consideration) paid for the contract. In-

clude the part of the lump payment that is more

than your cost in your income.

TIP

Endowment proceeds that you choose to re-

ceive in installments instead of a lump sum pay-

ment at the maturity of the policy are taxed as

an annuity. This is explained in Pub. 575. For

this treatment to apply, you must choose to re-

ceive the proceeds in installments before re-

ceiving any part of the lump sum. This election

must be made within 60 days after the

lump-sum payment first becomes payable to

you.

Accelerated Death Benefits

Certain amounts paid as accelerated death

benefits under a life insurance contract or viati-

cal settlement before the insured's death are ex-

cluded from income if the insured is terminally

or chronically ill.

Viatical settlement. This is the sale or assign-

ment of any part of the death benefit under a life

insurance contract to a viatical settlement pro-

vider. A viatical settlement provider is a person

who regularly engages in the business of buy-

ing or taking assignment of life insurance con-

tracts on the lives of insured individuals who are

terminally or chronically ill and who meets the

requirements of section 101(g)(2)(B) of the In-

ternal Revenue Code.

Exclusion for terminal illness. Accelerated

death benefits are fully excludable if the insured

is a terminally ill individual. This is a person who

has been certified by a physician as having an

illness or physical condition that can reasonably

be expected to result in death within 24 months

from the date of the certification.

Exclusion for chronic illness. If the insured is

a chronically ill individual who isn't terminally ill,

accelerated death benefits paid on the basis of

costs incurred for qualified long-term care serv-

ices are fully excludable. Accelerated death

benefits paid on a per diem or other periodic ba-

sis are excludable up to a limit. For 2023, this

limit is $420. It applies to the total of the accel-

erated death benefits and any periodic pay-

ments received from long-term care insurance

contracts. For information on the limit and the

definitions of chronically ill individual, qualified

long-term care services, and long-term care in-

surance contracts, see Long-Term Care Insur-

ance Contracts under Sickness and Injury Ben-

efits, earlier.

Exception. The exclusion doesn't apply to any

amount paid to a person (other than the in-

sured) who has an insurable interest in the life

of the insured because the insured:

•

Is a director, officer, or employee of the

person; or

•

Has a financial interest in the person's

business.

Form 8853. To claim an exclusion for acceler-

ated death benefits made on a per diem or

other periodic basis, you must file Form 8853

with your return. You don't have to file Form

8853 to exclude accelerated death benefits paid

on the basis of actual expenses incurred.

Recoveries

A recovery is a return of an amount you deduc-

ted or took a credit for in an earlier year. The

most common recoveries are refunds, reim-

bursements, and rebates of itemized deduc-

tions. You may also have recoveries of nonitem-

ized deductions (such as payments on

previously deducted bad debts) and recoveries

of items for which you previously claimed a tax

credit.

Tax benefit rule. You must include a recovery

in your income in the year you receive it up to

the amount by which the deduction or credit you

took for the recovered amount reduced your tax

in the earlier year. For this purpose, any in-

crease to an amount carried over to the current

year that resulted from the deduction or credit is

considered to have reduced your tax in the ear-

lier year.

Federal income tax refund. Refunds of fed-

eral income taxes aren't included in your in-

come because they're never allowed as a de-

duction from income.

State tax refund. If you received a state or lo-

cal income tax refund (or credit or offset) in

2023, you must generally include it in income if

you deducted the tax in an earlier year. The

payer should send Form 1099-G to you by Jan-

uary 31, 2024. The IRS will also receive a copy

of the Form 1099-G. If you file Form 1040 or

1040-SR, use the worksheet in the 2023 In-

structions for Schedule 1 (Form 1040) to figure

the amount (if any) to include in your income.

See Itemized Deduction Recoveries, later, for

when you must use Worksheet 2, later in this

publication.

If you could choose to deduct for a tax year

either:

•

State and local income taxes, or

•

State and local general sales taxes, then

the maximum refund that you may have to in-

clude in income is limited to the excess of the

tax you chose to deduct for that year over the

tax you didn't choose to deduct for that year.

Example 26. For 2022, you can choose a

$10,000 state income tax deduction or a $9,000

state general sales tax deduction. You choose

to deduct the state income tax. In 2023, you re-

ceive a $2,500 state income tax refund. The

maximum refund that you may have to include

in income is $1,000, because you could have

deducted $9,000 in state general sales tax.

Example 27. For 2022, you can choose a

$9,500 state general sales tax deduction based

on actual expenses or a $9,200 state income

tax deduction. You choose to deduct the gen-

eral sales tax deduction. In 2023, you return an

item you had purchased and receive a $500

sales tax refund. In 2023, you also receive a

$1,500 state income tax refund. The maximum

refund that you may have to include in income is

$500, because it's less than the excess of the

tax deducted ($9,500) over the tax you didn't

choose to deduct ($9,200 − $1,500 = $7,700).

Because you didn't choose to deduct the state

income tax, you don't include the state income

tax refund in income.

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24 Publication 525 (2023)

Mortgage interest refund. If you received a

refund or credit in 2023 of mortgage interest

paid in an earlier year, the amount should be

shown in Form 1098, box 4. Don’t subtract the

refund amount from the interest you paid in

2023. You may have to include it in your income

under the rules explained in the following dis-

cussions.

Interest on recovery. Interest on any of the

amounts you recover must be reported as inter-

est income in the year received. For example,

report any interest you received on state or local

income tax refunds on Form 1040, 1040-SR, or

1040-NR, line 2b.

Recovery and expense in same year. If the

refund or other recovery and the expense occur

in the same year, the recovery reduces the de-

duction or credit and isn't reported as income.

Recovery for 2 or more years. If you receive

a refund or other recovery that is for amounts

you paid in 2 or more separate years, you must

allocate, on a pro rata basis, the recovered

amount between the years in which you paid it.

This allocation is necessary to determine the

amount of recovery from any earlier years and

to determine the amount, if any, of your allowa-

ble deduction for this item for the current year.

Example 28. You paid 2022 estimated

state income tax of $4,000 in four equal pay-

ments. You made your fourth payment in Janu-

ary 2023. You had no state income tax withheld

during 2022. In 2023, you received a $400 tax

refund based on your 2022 state income tax re-

turn. You claimed itemized deductions each

year on Schedule A (Form 1040).

You must allocate the $400 refund between

2022 and 2023, the years in which you paid the

tax on which the refund is based. You paid 75%

($3,000 ÷ $4,000) of the estimated tax in 2022,

so 75% of the $400 refund, or $300, is for

amounts you paid in 2022 and is a recovery

item. If all of the $300 is a taxable recovery item,

you'll include $300 on Schedule 1 (Form 1040),

line 1, for 2023, and attach a copy of your calcu-

lation showing why that amount is less than the

amount shown on the Form 1099-G you re-

ceived from the state.

The balance ($100) of the $400 refund is for

your January 2023 estimated tax payment.

When you figure your deduction for state and lo-

cal income taxes paid during 2023, you'll re-

duce the $1,000 paid in January by $100. Your

deduction for state and local income taxes paid

during 2023 will include the January net amount

of $900 ($1,000 − $100), plus any estimated

state income taxes paid in 2023 for 2023, and

any state income tax withheld during 2023.

Joint state or local income tax return. If you

filed a joint state or local income tax return in an

earlier year and you aren't filing a joint Form

1040 or 1040-SR with the same person for

2023, any refund of a deduction claimed on that

state or local income tax return must be alloca-

ted to the person that paid the expense. If both

persons paid a portion of the expense, allocate

the refund based on your individual portion. For

example, if you paid 25% of the expense, then

you would use 25% of the refund to figure if you

must include any portion of the refund in your in-

come.

Registered domestic partners (RDPs) domi-

ciled in community property states. For the

rules that apply to RDPs who are domiciled in

community property states, see Pub. 555 and

Form 8958.

Deductions not itemized. If you didn't item-

ize deductions for the year for which you re-

ceived the recovery of an expense that was de-

ductible only if you itemized, don't include any

of the recovery amount in your income.

Example 29. You claimed the standard de-

duction on your 2022 federal income tax return.

In 2023, you received a refund of your 2022

state income tax. Don’t report any of the refund

as income because you didn't itemize deduc-

tions for 2022.

Itemized Deduction Recoveries

The following discussion explains how to deter-

mine the amount to include in your income from

a recovery of an amount deducted in an earlier

year as an itemized deduction. However, you

generally don't need to use this discussion if

you file Form 1040 or 1040-SR and the recovery

is for state or local income taxes paid in 2022.

Instead, use the State and Local Income Tax

Refund Worksheet—Schedule 1, Line 1, in the

2023 Instructions for Schedule 1 (Form 1040)

for line 1 to figure the amount (if any) to include

in your income. See the Instructions for Forms

1040 and 1040-SR.

You can't use the State and Local Income

Tax Refund Worksheet—Schedule 1, Line 1,

and must use this discussion if you're a nonresi-

dent alien (discussed later) or any of the follow-

ing statements are true.

1. You received a refund in 2023 that is for a

tax year other than 2022.

2. You received a refund other than an in-

come tax refund, such as a general sales

tax or real property tax refund, in 2023 of

an amount deducted or credit claimed in

an earlier year.

3. The amount on your 2022 Form 1040,

line 13, was more than the amount on your

2022 Form 1040, line 11 minus line 12.

4. You had taxable income on your 2022

Form 1040, line 15, but no tax on your

Form 1040, line 16, because of the 0% tax

rate on net capital gains and qualified divi-

dends in certain situations. See Capital

gains, later.

5. Your 2022 state and local income tax re-

fund is more than your 2022 state and lo-

cal income tax deduction minus the

amount you could have deducted as your

2022 state and local general sales taxes.

6. You made your last payment of 2022 esti-

mated state or local income tax in 2023.

7. You owed AMT in 2022.

8. You couldn't use the full amount of credits

you were entitled to in 2022 because the

total credits were more than the amount

shown on your 2022 Form 1040, line 18.

9. You could be claimed as a dependent by

someone else in 2022.

10.

You received a refund because of a jointly

filed state or local income tax return, but

you aren't filing a joint 2023 Form 1040 or

1040-SR with the same person.

If you also recovered an amount de-

ducted as a nonitemized deduction, fig-

ure the amount of that recovery to in-

clude in your income and add it to your adjusted

gross income (AGI) before applying the rules

explained here. See

Nonitemized Deduction

Recoveries, later.

Nonresident aliens. If you're a nonresident

alien and file Form 1040-NR, you can't claim the

standard deduction. If you recover an itemized

deduction that you claimed in an earlier year,

you must generally include the full amount of

the recovery in your income in the year you re-

ceive it. However, if you had no taxable income

in that earlier year (see Negative taxable in-

come, later), you should complete Worksheet 2

to determine the amount you must include in in-

come. If any other statement under Total recov-

ery included in income isn't true, see the discus-

sion referenced in the statement to determine

the amount to include in income.

Capital gains. If you determined your tax in

the earlier year by using the Schedule D Tax

Worksheet, or the Qualified Dividends and Cap-

ital Gain Tax Worksheet, and you receive a re-

fund in 2023 of a deduction claimed in that year,

you'll have to refigure your tax for the earlier

year to determine if the recovery must be inclu-

ded in your income. If inclusion of the recovery

doesn't change your total tax, you don't include

the recovery in income. However, if your total

tax increases by any amount, you must include

the recovery in your income up to the amount of

the deduction that reduced your tax in the ear-

lier year.

Total recovery included in income. If you re-

cover any itemized deduction that you claimed

in an earlier year, you must generally include

the full amount of the recovery in your income in

the year you receive it. This rule applies if, for

the earlier year, all of the following statements

are true.

1. Your itemized deductions exceeded the

standard deduction by at least the amount

of the recovery. (If your itemized deduc-

tions didn't exceed the standard deduction

by at least the amount of the recovery, see

Standard deduction limit, later.)

2. You had taxable income. (If you had no

taxable income, see Negative taxable in-

come, later.)

3. Your deduction for the item recovered

equals or exceeds the amount recovered.

(If your deduction was less than the

amount recovered, see Recovery limited

to deduction, later.)

4. You had no unused tax credits. (If you had

unused tax credits, see Unused tax cred-

its, later.)

CAUTION

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Publication 525 (2023) 25

5. You weren’t subject to AMT. (If you were

subject to AMT, see Subject to AMT, later.)

If any of the earlier statements aren’t true,

see Total recovery not included in income, later.

State tax refund. In addition to the previ-

ous five items, you must include in your income

the full amount of a refund of state or local in-

come tax or general sales tax if the excess of

the tax you deducted over the tax you didn't de-

duct is more than the refund of the tax deduc-

ted.

If the refund is more than the excess, see

Total recovery not included in income, later.

Where to report. Enter your state or local

income tax refund on Schedule 1 (Form 1040),

line 1, and the total of all other recoveries as

other income on Schedule 1 (Form 1040),

line 8z.

Example 30. For 2022, you filed a joint re-

turn on Form 1040. Your taxable income was

$60,000 and you weren’t entitled to any tax

credits. Your standard deduction was $25,900,

and you had itemized deductions of $27,400. In

2023, you received the following recoveries for

amounts deducted on your 2022 return.

Medical expenses

................... $200

State and local income tax refund ......... 400

Refund of mortgage interest ............ 325

Total recoveries ............... $925

None of the recoveries were more than the

deductions taken for 2022. The difference be-

tween the state and local income tax you de-

ducted and your local general sales tax you

could have deducted was more than $400.

Your total recoveries are less than the

amount by which your itemized deductions ex-

ceeded the standard deduction ($27,400 −

$25,900 = $1,500), so you must include your to-

tal recoveries in your income for 2023. Report

the state and local income tax refund of $400

on Schedule 1 (Form 1040), line 1, and the bal-

ance of your recoveries, $525, on Schedule 1

(Form 1040), line 8z.

Total recovery not included in income. If

one or more of the five statements listed earlier

under Total recovery included in income isn't

true, you may be able to exclude at least part of

the recovery from your income. See the discus-

sion referenced in the statement. You may be

able to use Worksheet 2 to determine the part

of your recovery to include in your income. You

can also use Worksheet 2 to determine the part

of a state tax refund (discussed earlier) to in-

clude in income.

Allocating the included part. If you aren't

required to include all of your recoveries in your

income, and you have both a state income tax

refund and other itemized deduction recoveries,

you must allocate the taxable recoveries be-

tween the state income tax refund you report on

Schedule 1 (Form 1040 or 1040-NR), line 1,

and the amount you report as other income on

Schedule 1 (Form 1040 or 1040-NR), line 8z. If

you don't use Worksheet 2, make the allocation

as follows.

1. Divide your state income tax refund by the

total of all your itemized deduction

recoveries.

2. Multiply the amount of taxable recoveries

by the percentage in (1). This is the

amount you report as a state income tax

refund.

3. Subtract the result in (2) above from the

amount of taxable recoveries. This is the

amount you report as other income.

Example 31. In 2023, you recovered

$2,500 of your 2022 itemized deductions

claimed on Schedule A (Form 1040), but the re-

coveries you must include in your 2023 income

are only $1,500. Of the $2,500 you recovered,

$500 was due to your state income tax refund.

Your state income tax was more than your state

general sales tax by $600. The amount you re-

port as a state tax refund on Schedule 1 (Form

1040), line 1, is $300 [($500 ÷ $2,500) ×

$1,500]. The balance of the taxable recoveries,

$1,200, is reported as other income on Sched-

ule 1 (Form 1040), line 8z.

Standard deduction limit. You are generally

allowed to claim the standard deduction if you

don't itemize your deductions. Only your item-

ized deductions that are more than your stand-

ard deduction are subject to the recovery rule

(unless you're required to itemize your deduc-

tions). If your total deductions on the earlier

year return weren’t more than your income for

that year, include in your income this year the

lesser of:

•

Your recoveries, or

•

The amount by which your itemized deduc-

tions exceeded the standard deduction.

Standard deduction for earlier years. To

determine if amounts recovered in the current

year must be included in your income, you must

know the standard deduction for your filing sta-

tus for the year the deduction was claimed.

Look in the instructions for your tax return from

prior years to locate the standard deduction for

the filing status for that prior year. If you filed

Form 1040-NR, you couldn't claim the standard

deduction except for certain nonresident aliens

from India (see Pub. 519).

Example 32. You filed a joint return on

Form 1040 for 2022 with taxable income of

$45,000. Your itemized deductions were

$26,150. The standard deduction that you could

have claimed was $25,900. In 2023, you recov-

ered $2,100 of your 2022 itemized deductions.

None of the recoveries were more than the ac-

tual deductions for 2022. Include $250 of the re-

coveries in your 2023 income. This is the

smaller of your recoveries ($2,100) or the

amount by which your itemized deductions were

more than the standard deduction ($26,150 −

$25,900 = $250).

Negative taxable income. If your taxable in-

come for the prior year (Worksheet 2, line 10)

was a negative amount, the recovery you must

include in income is reduced by that amount.

You have a negative taxable income for 2022 if

your:

•

Form 1040, the sum of lines 12 and 13,

was more than line 11; or

•

Form 1040-NR, line 14, was more than

line 11.

Example 33. The facts are the same as in

Example 32, except line 14 was $200 more than

line 11 on your 2022 Form 1040, giving you a

negative taxable income of $200. You must in-

clude $50 in your 2023 income, rather than

$250.

Recovery limited to deduction. You don't in-

clude in your income any amount of your recov-

ery that is more than the amount you deducted

in the earlier year. The amount you include in

your income is limited to the smaller of:

•

The amount deducted, or

•

The amount recovered.

Example 34. For 2022, you paid $1,700 for

medical expenses. Because of the limit on de-

ducting medical expenses, you deducted only

$200 as an itemized deduction. In 2023, you re-

ceived a $500 reimbursement from your medi-

cal insurance for your 2022 expenses. The only

amount of the $500 reimbursement that must

be included in your income for 2023 is $200, the

amount actually deducted.

Overall limitation on itemized deductions

no longer applies. For tax years beginning

after 2017, there is no limitation on itemized de-

ductions based on your AGI.

To determine the part of the recovery you

must include in income, follow the two steps be-

low.

1. Figure the greater of:

a. The standard deduction for the earlier

year, or

b. The amount of itemized deductions

you would have been allowed for the

earlier year if you had figured them us-

ing only the net amount of the recov-

ery item. The net amount is the

amount you actually paid reduced by

the recovery amount.

Note. If you were required to itemize

your deductions in the earlier year, use

step 1b and not step 1a.

2. Subtract the amount in step 1 from the

amount of itemized deductions actually al-

lowed in the earlier year after applying the

limit on itemized deductions.

The result of step 2 is the amount of the recov-

ery to include in your income for the year you re-

ceive the recovery. If your taxable income for

the earlier year was a negative amount, reduce

your recovery by the negative amount.

If you had unused tax credits in the earlier

year, see Unused tax credits, later.

For more information on this calculation, see

Revenue Ruling 93-75. This ruling is in Cumula-

tive Bulletin 1993-2.

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26 Publication 525 (2023)

Worksheet 2a. Computations for Worksheet 2, lines 1a and 1b

Keep for Your Records

To determine amounts to enter on lines 1a and 1b of Worksheet 2, complete the following.

1. Enter the income tax refund from Form(s) 1099-G (or similar statement) ......................

2. Enter the refunds received for state and local real estate taxes and state and local personal

property taxes ...................................................................... 2.

3. Total state and local refunds. Add lines 1 and 2. But don’t enter more than the amount of your state

and local taxes shown on your 2022 Schedule A, line 5d ................................... 3.

4. Is the amount of state and local income taxes (or general sales taxes), real estate taxes, and

personal property taxes paid in 2022 (generally, this is the amount reported on your 2022

Schedule A, line 5d) more than the amount on your 2022 Schedule A, line 5e?

No. Enter the amount from line 3 on line 4 and go to line 5.

Yes. Subtract the amount on your 2022 Schedule A, line 5e, from the amount of state and local

income taxes (or general sales taxes), real estate taxes, and personal property taxes paid in 2022

(generally, this is the amount reported on your 2022 Schedule A, line 5d). Enter the result

here .............................................................................. 4.

5. Is the amount on line 3 more than the amount on line 4?

No. [STOP] None of the refunds on line 1 or 2 are taxable.

Yes. Subtract line 4 from line 3 and enter the result here ................................. 5.

6. Add lines 1 and 2 and enter the result here ..............................................

7. Divide line 1 by line 6. Then multiply by the amount on line 5 and enter the result here and on

Worksheet 2, line 1a ................................................................. 7.

8. Divide line 2 by line 6. Then multiply by the amount on line 5 and enter the result here and on

Worksheet 2, line 1b ................................................................. 8.

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Publication 525 (2023) 27

Worksheet 2. Recoveries of Itemized Deductions

Keep for Your Records

To determine whether you should complete this worksheet to figure the part of a recovery amount to include in income on your 2023

tax return, see Itemized Deduction Recoveries. If you recovered amounts from more than 1 year, such as a state income tax refund

from 2022 and a casualty loss reimbursement from 2021, complete a separate worksheet for each year. Use information from your

tax return for the year the expense was deducted.

A recovery is included in income only to the extent of the deduction amount that reduced your tax in the prior year (year of the

deduction). If you were subject to the AMT or your tax credits reduced your tax to zero, see Unused tax credits and Subject to AMT

under Itemized Deduction Recoveries. If your recovery was for an itemized deduction that was limited, you should read Itemized

deductions limited under Itemized Deduction Recoveries.

NOTE: Before completing lines 1a and 1b, see Worksheet 2a, Computations for Worksheet 2, lines 1a and 1b.

1a. State/local income tax refund or credit

.................................................

1a.

1b. State/local real estate and personal property taxes

......................................

1b.

2. Enter the total of all other Schedule A refunds or reimbursements

(excluding the amounts you entered on lines 1a and 1b)

................................... 2.

3. Add lines 1a, 1b, and 2 ..............................................................

4. Itemized deductions for the prior year. For 2022:

•

Form 1040, Schedule A, line 17 ................................

•

Form 1040-NR, Schedule A, line 8 .............................. 4.

5. Enter any amount previously refunded to you

(don't enter an amount from line 1a or line 1b or line 2) ............... 5.

6. Subtract line 5 from line 4 .......................................

7. Standard deduction for the prior year.

If you filed Form 1040-NR,

enter -0- ...................................................... 7.

8. Subtract line 7 from line 6. If the result is zero or less, stop here.

The amounts on lines 1a, 1b, and 2 aren't taxable ........................................ 8.

9. Enter the smaller of line 3 or line 8 .....................................................

10. Taxable income for prior year

(2022 Form 1040, line 15; or 2022 Form

1040-NR, line 15) ..............................................

10.

11. Amount to include in income for 2023:

•

If line 10 is zero or more, enter the amount from line 9.

•

If line 10 is a negative amount, add lines 9 and 10 and enter the result

(but not less than zero)

............................. ............................. 11.

If line 11 equals line 3—

Enter the amount from line 1a on Schedule 1 (Form 1040), line 1.

Enter the amounts from lines 1b and 2 on Schedule 1 (Form 1040), line 8z.

If line 11 is less than line 3 and either line 1a or line 1b or line 2 is zero—

If there is an amount on line 1a, enter the amount from line 11 on Schedule 1 (Form 1040), line 1.

If there is an amount on lines 1b and/or 2, enter the amount from line 11 on Schedule 1 (Form 1040), line 8z.

If line 11 is less than line 3, and there are amounts on line 1a and on line 1b or 2, complete the following

worksheet.

Divide the amount on line 1a by the amount on line 3. Enter the

percentage .................................................. A.

Multiply the amount on line 11 by the percentage on line A.

Enter the result here and on Schedule 1 (Form 1040), line 1 .............................. B.

Subtract the amount on line B from the amount on line 11.

Enter the result here and on Schedule 1 (Form 1040), line 8z ............................. C.

Don’t enter more than the amount deducted for the prior year. Don’t enter more than the excess of your state and local income tax deduction over your

state and local general sales taxes you could have deducted.

Don’t enter more than the amount deducted for the prior year. If you deducted state and local general sales taxes and received a refund of those taxes,

include the amount on line 2, but don't enter more than the excess of your sales tax deduction over your state and local income tax you could have

deducted.

See the instructions for prior year forms at IRS.gov for prior year standard deduction.

If taxable income is a negative amount, enter that amount in brackets. Don’t enter zero unless your taxable income is exactly zero. See Negative taxable

income. Taxable income will have to be adjusted for any net operating loss carryover. For more information, see Pub. 536.

For example, $700 + ($400) = $300.

Unused tax credits. If you recover an item de-

ducted in an earlier year in which you had un-

used tax credits, you must refigure the earlier

year's tax to determine if you must include the

recovery in your income. To do this, add the

amount of the recovery to your earlier year's

taxable income and refigure the tax and the

credits on the refigured amount. If the refigured

tax, after application of the credits, is more than

the actual tax in the earlier year, include the re-

covery in your income up to the amount of the

deduction that reduced the tax in the earlier

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28 Publication 525 (2023)

year. For this purpose, any increase to a credit

carried over to the current year that resulted

from deducting the recovered amount in the

earlier year is considered to have reduced your

tax in the earlier year. If the recovery is for an

itemized deduction claimed in a year in which

the deductions were limited, see Itemized de-

ductions limited, earlier.

If your tax, after application of the credits,

doesn't change, you didn't have a tax benefit

from the deduction. Don’t include the recovery

in your income.

Example 35. In 2022, you filed as head of

household and itemized your deductions on

Schedule A (Form 1040). Your taxable income

was $5,260 and your tax was $528. You

claimed a child care credit of $1,200. The credit

reduced your tax to zero, and you had an un-

used tax credit of $672 ($1,200 − $528). In

2023, you recovered $1,000 of your itemized

deductions. You reduce your 2022 itemized de-

ductions by $1,000 and refigure that year's tax

on taxable income of $6,260. However, the child

care credit exceeds the refigured tax of $628.

Your tax liability for 2022 isn't changed by re-

ducing your deductions by the recovery. You

didn't have a tax benefit from the recovered de-

duction and don’t include any of the recovery in

your income for 2023.

Subject to AMT. If you were subject to the

AMT in the year of the deduction, you'll have to

refigure your tax for the earlier year to determine

if the recovery must be included in your income.

This will require a refiguring of your regular tax,

as shown in Example 35, and a refiguring of

your AMT. If inclusion of the recovery doesn't

change your total tax, you don't include the re-

covery in your income. However, if your total tax

increases by any amount, you received a tax

benefit from the deduction and you must in-

clude the recovery in your income up to the

amount of the deduction that reduced your tax

in the earlier year.

Nonitemized Deduction Recoveries

This section discusses recovery of deductions

other than itemized deductions.

Total recovery included in income. If you re-

cover an amount that you deducted in an earlier

year when you were figuring your AGI, you must

generally include the full amount of the recovery

in your income in the year received.

Total recovery not included in income. If

any part of the deduction you took for the recov-

ered amount didn't reduce your tax, you may be

able to exclude at least part of the recovery from

your income. You must include the recovery in

your income only up to the amount of the de-

duction that reduced your tax in the year of the

deduction. (See Tax benefit rule, earlier.)

Negative taxable income. If your taxable in-

come for the prior year was a negative amount,

the recovery you must include in income is re-

duced by that amount. You have a negative tax-

able income for 2022 if your:

•

Form 1040, the sum of lines 12 and 13,

was more than line 11; or

•

Form 1040-NR, line 14, was more than

line 11.

If you had a net operating loss (NOL) in a prior

year, you'll have to adjust your taxable income

for any NOL carryover. See Pub. 536 for more

information.

Unused tax credits. If you recover an item de-

ducted in an earlier year in which you had un-

used tax credits, you must refigure the earlier

year's tax to determine if you must include the

recovery in your income. To do this, add the

amount of the recovery to your earlier year's

taxable income and refigure the tax and the

credits on the refigured amount. If the refigured

tax, after application of the credits, is more than

the actual tax in the earlier year, include the re-

covery in your income up to the amount of the

deduction that reduced the tax in the earlier

year. For this purpose, any increase to a credit

carried over to the current year that resulted

from deducting the recovered amount in the

earlier year is considered to have reduced your

tax in the earlier year.

If your tax, after application of the credits,

doesn't change, you didn't have a tax benefit

from the deduction. Don’t include the recovery

in your income.

Capital gains. If you determined your tax in

the earlier year by using the Schedule D Tax

Worksheet, or the Qualified Dividends and Cap-

ital Gain Tax Worksheet, and you receive a re-

fund in 2023 of a deduction claimed in that year,

you'll have to refigure your tax for the earlier

year to determine if the recovery must be inclu-

ded in your income. If inclusion of the recovery

doesn't change your total tax, you don't include

the recovery in income. However, if your total

tax increases by any amount, you must include

the recovery in your income up to the amount of

the deduction that reduced your tax in the ear-

lier year.

Amounts Recovered for Credits

If you received a recovery in 2023 for an item for

which you claimed a tax credit in an earlier year,

you must increase your 2022 tax by the amount

of the recovery, up to the amount by which the

credit reduced your tax in the earlier year. You

had a recovery if there was a downward price

adjustment or similar adjustment on the item for

which you claimed a credit.

This rule doesn't apply to the investment

credit or the foreign tax credit. Recoveries of

these credits are covered by other provisions of

the law. See Pub. 514 or Form 4255 for details.

Sharing/Gig Economy

A sharing economy is one in which assets are

shared between individuals for a fee, usually

through the internet. For example, you rent out

your car when you don’t need it, or you share

your wi-fi account for a fee.

A gig economy is one in which a short-term

contract or freelance work is the norm, as op-

posed to a permanent job. For example, you

drive for a ride-sharing service, or work as a fit-

ness trainer, babysitter, or tutor.

Generally, if you have income from sharing

economy transactions, or you did gig work, you

must include all income received whether you

received a Form 1099-K, Payment Card and

Third Party Network Transactions, or not. See

the Instructions for Schedule C (Form 1040)

and the Instructions for Schedule SE (Form

1040).

Survivor Benefits

In most cases, payments made by or for an em-

ployer because of an employee's death must be

included in income. The following discussions

explain the tax treatment of certain payments

made to survivors. For additional information,

see Pub. 559.

Lump-sum payments. Lump-sum payments

you receive from a decedent's employer as the

surviving spouse or beneficiary may be accrued

salary payments; distributions from employee

profit-sharing, pension, annuity, or stock bonus

plans; or other items that should be treated sep-

arately for tax purposes. The tax treatment of

these lump-sum payments depends on the type

of payment.

Salary or wages. Salary or wages re-

ceived after the death of the employee are usu-

ally ordinary income to you.

Qualified employee retirement plans.

Lump-sum distributions from qualified em-

ployee retirement plans are subject to special

tax treatment. For information on these distribu-

tions, see Pub. 575 (or Pub. 721 if you're the

survivor of a federal employee or retiree).

Public safety officer killed in the line of

duty. If you're a survivor of a public safety offi-

cer who was killed in the line of duty, you can

exclude from income any amount received as a

survivor annuity on account of the death of a

public safety officer killed in the line of duty.

For this purpose, the term “public safety offi-

cer” includes law enforcement officers, firefight-

ers, chaplains, and rescue squad and ambu-

lance crew members. For more information, see

Pub. 559.

Unemployment Benefits

The tax treatment of unemployment benefits

you receive depends on the type of program

paying the benefits.

Unemployment compensation. Generally,

you must include in income all unemployment

compensation you receive. You should receive

a Form 1099-G showing in box 1 the total un-

employment compensation paid to you. In most

cases, you enter unemployment compensation

on Schedule 1 (Form 1040), line 7.

If you received unemployment com-

pensation but didn't receive Form

1099-G, Certain Government Pay-

ments, through the mail, you may need to ac-

cess your information through your state’s web-

site to get your electronic Form 1099-G.

Types of unemployment compensation.

Unemployment compensation generally

CAUTION

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Publication 525 (2023) 29

includes any amount received under an unem-

ployment compensation law of the United

States or of a state. It includes the following

benefits.

•

Benefits paid by a state or the District of

Columbia from the Federal Unemployment

Trust Fund.

•

State unemployment insurance benefits.

•

Railroad unemployment compensation

benefits.

•

Disability payments from a government

program paid as a substitute for unemploy-

ment compensation. (Amounts received as

workers' compensation for injuries or ill-

ness aren't unemployment compensation.

See Workers' Compensation under Sick-

ness and Injury Benefits, earlier.)

•

Trade readjustment allowances under the

Trade Act of 1974.

•

Unemployment assistance under the Dis-

aster Relief and Emergency Assistance

Act of 1974.

•

Unemployment assistance under the Air-

line Deregulation Act of 1978 Program.

Governmental program. If you contribute

to a governmental unemployment compensa-

tion program and your contributions aren't de-

ductible, amounts you receive under the pro-

gram aren't included as unemployment

compensation until you recover your contribu-

tions. If you deducted all of your contributions to

the program, the entire amount you receive un-

der the program is included in your income.

Repayment of unemployment compen-

sation. If you repaid in 2023 unemployment

compensation you received in 2023, subtract

the amount you repaid from the total amount

you received and enter the difference on

Schedule 1 (Form 1040), line 7. On the dotted

line next to your entry, enter “Repaid” and the

amount you repaid. If you repaid unemployment

compensation in 2023 that you included in your

income in an earlier year and the amount is

more than $3,000, you can deduct the amount

repaid on Schedule A (Form 1040), line 16, if

you itemize deductions or you can take a credit

against your tax on Schedule 3 (Form 1040),

line 13b. See Repayments, later.

Tax withholding. You can choose to have

federal income tax withheld from your unem-

ployment compensation. To make this choice,

complete Form W-4V and give it to the paying

office. Tax will be withheld at 10% of your pay-

ment.

If you don't choose to have tax withheld

from your unemployment compensa-

tion, you may be liable for estimated

tax. If you don't pay enough tax, either through

withholding or estimated tax, or a combination

of both, you may have to pay a penalty. For

more information, see Pub. 505.

Supplemental unemployment benefits.

Benefits received from an employer-financed

fund (to which the employees didn't contribute)

aren't unemployment compensation. They're

taxable as wages and are subject to withholding

for income tax. They may be subject to social

security and Medicare taxes. For more informa-

tion, see Supplemental Unemployment Benefits

CAUTION

in section 5 of Pub. 15-A. Report these pay-

ments on line 1a of Form 1040 or 1040-SR.

Repayment of benefits. You may have to

repay some of your supplemental unemploy-

ment benefits to qualify for trade readjustment

allowances under the Trade Act of 1974. If you

repay supplemental unemployment benefits in

the same year you receive them, reduce the to-

tal benefits by the amount you repay. If you re-

pay the benefits in a later year, you must include

the full amount of the benefits in your income for

the year you received them.

Deduct the repayment in the later year as an

adjustment to gross income on Form 1040 or

1040-SR. Include the repayment on Schedule 1

(Form 1040), line 24e. If the amount you repay

in a later year is more than $3,000, you may be

able to take a credit against your tax for the later

year instead of deducting the amount repaid.

For information on this, see Repayments, later.

Private unemployment fund. Unemployment

benefit payments from a private (nonunion) fund

to which you voluntarily contribute are taxable

only if the amounts you receive are more than

your total payments into the fund. Report the

taxable amount on Schedule 1 (Form 1040),

line 8z.

Payments by a union. Benefits paid to you as

an unemployed member of a union from regular

union dues are included in your income on

Schedule 1 (Form 1040), line 8z. However, if

you contribute to a special union fund and your

payments to the fund aren't deductible, the un-

employment benefits you receive from the fund

are includible in your income only to the extent

they're more than your contributions.

Guaranteed annual wage. Payments you re-

ceive from your employer during periods of un-

employment, under a union agreement that

guarantees you full pay during the year, are tax-

able as wages. Include them on line 1a of Form

1040 or 1040-SR.

State employees. Payments similar to a

state's unemployment compensation may be

made by the state to its employees who aren't

covered by the state's unemployment compen-

sation law. Although the payments are fully tax-

able, don't report them as unemployment com-

pensation. Report these payments on Schedule

1 (Form 1040), line 8z.

Welfare and Other

Public Assistance Benefits

Don’t include in your income governmental ben-

efit payments from a public welfare fund based

upon need, such as payments due to blindness.

Payments from a state fund for the victims of

crime shouldn't be included in the victims' in-

comes if they're in the nature of welfare pay-

ments. Don’t deduct medical expenses that are

reimbursed by such a fund. You must include in

your income any welfare payments that are

compensation for services or that are obtained

fraudulently.

Work-training program. Payments you re-

ceive from a state welfare agency for taking part

in a work-training program aren't included in

your income, as long as the payments (exclu-

sive of extra allowances for transportation or

other costs) don't total more than the public wel-

fare benefits you would have received other-

wise. If the payments are more than the welfare

benefits you would have received, the entire

amount must be included in your income as wa-

ges.

Reemployment Trade Adjustment Assis-

tance (RTAA) payments. Payments you re-

ceive from a state agency under the RTAA must

be included in your income. The state must

send you Form 1099-G to advise you of the

amount you should include in income. The

amount should be reported on Schedule 1

(Form 1040), line 8z.

Persons with disabilities. If you have a disa-

bility, you must include in income compensation

you receive for services you perform unless the

compensation is otherwise excluded. However,

you don't include in income the value of goods,

services, and cash that you receive, not in re-

turn for your services, but for your training and

rehabilitation because you have a disability. Ex-

cludable amounts include payments for trans-

portation and attendant care, such as inter-

preter services for the deaf, reader services for

the blind, and services to help individuals with

an intellectual disability do their work.

Disaster relief grants. Don’t include post-dis-

aster grants received under the Disaster Relief

and Emergency Assistance Act in your income

if the grant payments are made to help you

meet necessary expenses or serious needs for

medical, dental, housing, personal property,

transportation, or funeral expenses. Don’t de-

duct casualty losses or medical expenses that

are specifically reimbursed by these disaster re-

lief grants. If you have deducted a casualty loss

for the loss of your personal residence and you

later receive a disaster relief grant for the loss of

the same residence, you may have to include

part or all of the grant in your taxable income.

See Recoveries, earlier. Unemployment assis-

tance payments under the Act are taxable un-

employment compensation. See Unemploy-

ment compensation under Unemployment

Benefits, earlier.

Disaster relief payments. You can exclude

from income any amount you receive that is a

qualified disaster relief payment. A qualified dis-

aster relief payment is an amount paid to you:

1. To reimburse or pay reasonable and nec-

essary personal, family, living, or funeral

expenses that result from a qualified dis-

aster;

2. To reimburse or pay reasonable and nec-

essary expenses incurred for the repair or

rehabilitation of your home or repair or re-

placement of its contents to the extent it’s

due to a qualified disaster;

3. By a person engaged in the furnishing or

sale of transportation as a common carrier

because of the death or personal physical

injuries incurred as a result of a qualified

disaster; or

4. By a federal, state, or local government, or

agency or instrumentality in connection

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30 Publication 525 (2023)

with a qualified disaster in order to pro-

mote the general welfare.

You can exclude this amount only to the extent

any expense it pays for isn't paid for by insur-

ance or otherwise. The exclusion doesn't apply

if you were a participant or conspirator in a ter-

rorist action or a representative of one.

A qualified disaster is:

•

A disaster that results from a terrorist or

military action;

•

A federally declared disaster; or

•

A disaster that results from an accident in-

volving a common carrier, or from any

other event, which is determined to be

catastrophic by the Secretary of the Treas-

ury or his or her delegate.

For amounts paid under item 4, a disaster is

qualified if it's determined by an applicable fed-

eral, state, or local authority to warrant assis-

tance from the federal, state, or local govern-

ment, agency, or instrumentality.

Disaster mitigation payments. You can

also exclude from income any amount you re-

ceive that is a qualified disaster mitigation pay-

ment. Qualified disaster mitigation payments

are commonly paid to you in the period immedi-

ately following damage to property as a result of

a natural disaster. However, disaster mitigation

payments are used to mitigate (reduce the se-

verity of) potential damage from future natural

disasters. They're paid to you through state and

local governments based on the provisions of

the Robert T. Stafford Disaster Relief and Emer-

gency Assistance Act or the National Flood In-

surance Act.

You can't increase the basis or adjusted ba-

sis of your property for improvements made with

nontaxable disaster mitigation payments.

Home Affordable Modification Program

(HAMP). If you benefit from Pay-for-Perform-

ance Success Payments under HAMP, the pay-

ments aren't taxable.

Hardest Hit Fund and Emergency Home-

owners' Loan Program. If you receive or ben-

efit from payments made under:

•

A State Housing Finance agency (State

HFA) Hardest Hit Fund program in which

program payments can be used to pay

mortgage interest, or

•

An Emergency Homeowners' Loan Pro-

gram (EHLP) administered by the Depart-

ment of Housing and Urban Development

(HUD) or a state,

•

The Homeowner Assistance Fund (HAF)

program in which program payments are

used to provide financial assistance to eli-

gible homeowners for purposes of paying

certain expenses related to their principal

residence to prevent mortgage delinquen-

cies, defaults, foreclosures, loss of utilities

or home energy services, and also dis-

placements of homeowners experiencing

financial hardship after January 21, 2020,

the payments aren't included in gross income

and aren't taxable.

For more details about the HAF program, go

to Home.Treasury.gov/Policy-Issues/

Coronavirus/Assistance-for-State-Local-and-

Tribal-Governments/Homeowner-Assistance-

Fund.

If you are a tribal member and wish more de-

tails about the HAF program, go to IRS.gov/

Newsroom/FAQs-for-Payments-by-Indian-Tribal-

Governments-and-Alaska-Native-Corporations-

to-Individuals-Under-Covid-Relief-Legislation.

Mortgage assistance payments under sec-

tion 235 of the National Housing Act. Pay-

ments made under section 235 of the National

Housing Act for mortgage assistance aren't in-

cluded in the homeowner's income. Interest

paid for the homeowner under the mortgage as-

sistance program can't be deducted.

Replacement housing payments. Replace-

ment housing payments made under the Uni-

form Relocation Assistance and Real Property

Acquisition Policies Act for Federal and Feder-

ally Assisted Programs aren't includible in gross

income, but are includible in the basis of the

newly acquired property.

Relocation payments and home rehabilita-

tion grants. A relocation payment under sec-

tion 105(a)(11) of the Housing and Community

Development Act made by a local jurisdiction to

a displaced individual moving from a flood-dam-

aged residence to another residence isn't in-

cludible in gross income. Home rehabilitation

grants received by low-income homeowners in

a defined area under the same Act are also not

includible in gross income.

Indian financing grants. Nonreimbursable

grants under title IV of the Indian Financing Act

of 1974 to Indians to expand profit-making In-

dian-owned economic enterprises on or near

reservations aren't includible in gross income.

Indian general welfare benefit. Gross in-

come doesn't include the value of any Indian

general welfare benefit. “Indian general welfare

benefit” includes any payment made or services

provided to or on behalf of a member (or any

spouse or dependent of that member) of an In-

dian tribe or Alaska Native Corporation under

an Indian tribal government program, but only if:

1. The program is administered under speci-

fied guidelines and doesn't discriminate in

favor of members of the governing body of

the Indian tribe or Alaska Native Corpora-

tion; and

2. The benefits provided under the program

(a) are available to any tribal member who

meets guidelines, (b) are for the promotion

of general welfare, (c) aren't lavish or ex-

travagant, and (d) aren't compensation for

services.

Generally, any items of cultural significance,

reimbursement of costs, or cash honorarium for

participation in cultural or ceremonial activities

for the transmission of tribal culture aren't trea-

ted as compensation for services.

Note. The above exclusion was enacted by

the Tribal General Welfare Exclusion Act of

2014, September 26, 2014. The exclusion ap-

plies to tax years for which the period of limita-

tion on refund or credit under section 6511 has

not expired (generally, within 3 years from the

time the return was filed or 2 years from the time

the tax was paid, whichever expires later). Addi-

tionally, a claim for the above exclusion will be

allowed if made within 1 year of the enactment

of the exclusion.

Note. The enactment of the above exclusion

generally codifies the exclusion afforded under

Revenue Procedure 2014-35, June 4, 2014.

See Revenue Procedure 2014-35 for more de-

tails.

Medicare. Medicare benefits received under ti-

tle XVIII of the Social Security Act aren't includi-

ble in the gross income of the individuals for

whom they're paid. This includes basic (Part A

(Hospital Insurance Benefits for the Aged)) and

supplementary (Part B (Supplementary Medical

Insurance Benefits for the Aged)).

Social security benefits (including

lump-sum payments attributable to prior

years), Supplemental Security Income (SSI)

benefits, and lump-sum death benefits.

The Social Security Administration (SSA) pro-

vides benefits such as old-age benefits, bene-

fits to disabled workers, and benefits to spou-

ses and dependents. These benefits may be

subject to federal income tax depending on

your filing status and other income. See Pub.

915 for more information. An individual origi-

nally denied benefits, but later approved, may

receive a lump-sum payment for the period

when benefits were denied (which may be prior

years). See Pub. 915 for information on how to

make a lump-sum election, which may reduce

your tax liability. There are also other types of

benefits paid by the SSA. However, SSI benefits

and lump-sum death benefits (one-time pay-

ment to spouse and children of deceased)

aren't subject to federal income tax. For more

information on these benefits, go to SSA.gov.

Form SSA-1099. If you received social se-

curity benefits during the year, you'll receive

Form SSA-1099, Social Security Benefit State-

ment. An IRS Notice 703 will be enclosed with

your Form SSA-1099. This notice includes a

worksheet you can use to figure whether any of

your benefits are taxable.

For an explanation of the information found

on your Form SSA-1099, see Pub. 915.

Form RRB-1099. If you received equivalent

railroad retirement or special guaranty benefits

during the year, you'll receive Form RRB-1099,

Payments by the Railroad Retirement Board.

For an explanation of the information found

on your Form RRB-1099, see Pub. 915.

Joint return. If you're married and file a

joint return, you and your spouse must combine

your incomes and your social security and

equivalent railroad retirement benefits when fig-

uring whether any of your combined benefits

are taxable. Even if your spouse didn't receive

any benefits, you must add your spouse's in-

come to yours when figuring if any of your bene-

fits are taxable.

Taxable amount. Use the worksheet in the

Forms 1040 and 1040-SR instruction package

to determine the amount of your benefits to in-

clude in your income. Pub. 915 also has work-

sheets you can use. However, you must use the

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Publication 525 (2023) 31

worksheets in Pub. 915 if any of the following

situations apply.

•

You received a lump-sum benefit payment

during the year that is for one or more

earlier years.

•

You exclude employer-provided adoption

benefits or interest from qualified U.S. sav-

ings bonds.

•

You take the foreign earned income exclu-

sion, the foreign housing exclusion or de-

duction, the exclusion of income from

American Samoa, or the exclusion of in-

come from Puerto Rico by bona fide resi-

dents of Puerto Rico.

Benefits may affect your IRA deduction.

You must use the special worksheets in Appen-

dix B of Pub. 590-A to figure your taxable bene-

fits and your IRA deduction if all of the following

conditions apply.

•

You receive social security or equivalent

railroad retirement benefits.

•

You have taxable compensation.

•

You contribute to your IRA.

•

You or your spouse is covered by a retire-

ment plan at work.

How to report. If any of your benefits are

taxable, you must use Form 1040 or 1040-SR to

report the taxable part. Report your net benefits

(as shown on your Forms SSA-1099 and

RRB-1099) on line 6a of Form 1040 or

1040-SR. Report the taxable part on line 6b of

Form 1040 or 1040-SR. If you elect to use the

lump-sum election method, check the box on

line 6c of Form 1040 or 1040-SR and see the in-

structions.

Nutrition Program for the Elderly. Food ben-

efits you receive under the Nutrition Program for

the Elderly aren't taxable. If you prepare and

serve free meals for the program, include in

your income as wages the cash pay you re-

ceive, even if you're also eligible for food bene-

fits.

Payments to reduce cost of winter energy.

Payments made by a state to qualified people to

reduce their cost of winter energy use aren't

taxable.

Other Income

The following brief discussions are arranged in

alphabetical order. Other income items briefly

discussed below are referenced to publications

that provide more information.

Activity not for profit. You must include on

your return income from an activity from which

you don't expect to make a profit. An example of

this type of activity is a hobby or a farm you op-

erate mostly for recreation and pleasure. Enter

this income on Schedule 1 (Form 1040), line 8j.

Deductions for expenses related to the activity

are limited. They can't total more than the in-

come you report and can be taken only if you

itemize deductions on Schedule A (Form 1040).

Alaska Permanent Fund dividend. If you re-

ceived a payment from Alaska's mineral income

fund (Alaska Permanent Fund dividend), report

it as income on Schedule 1 (Form 1040),

line 8g. The state of Alaska sends each recipi-

ent a document that shows the amount of the

payment with the check. The amount is also re-

ported to the IRS.

Alimony. Include in your income on Schedule

1 (Form 1040), line 2a, any taxable alimony pay-

ments you receive. Amounts you receive for

child support aren't income to you. For com-

plete information, see Pub. 504 and the Instruc-

tions for Forms 1040 and 1040-SR.

Don’t include alimony payments you re-

ceive under a divorce or separation in-

strument (1) executed after 2018, or (2)

executed before 2019 but modified after 2018, if

the modification expressly states the alimony

isn’t deductible to the payer or includible in your

income.

Below-market loans. A below-market loan is a

loan on which no interest is charged or on which

the interest is charged at a rate below the appli-

cable federal rate. If you make a below-market

gift or demand loan, you must include the for-

gone interest (at the federal rate) as interest in-

come on your return. These loans are consid-

ered a transaction in which you, the lender, are

treated as having made:

•

A loan to the borrower in exchange for a

note that requires the payment of interest

at the applicable federal rate; and

•

An additional payment to the borrower,

which the borrower transfers back to you

as interest.

Depending on the transaction, the additional

payment to the borrower is treated as a:

•

Gift,

•

Dividend,

•

Contribution to capital,

•

Payment of compensation, or

•

Another type of payment.

The borrower may have to report this payment

as income, depending on its classification.

For more information on below-market

loans, see chapter 1 of Pub. 550.

Bribes. If you receive a bribe, include it in your

income.

Campaign contributions. These contributions

aren't income to a candidate unless they're di-

verted to the candidate’s personal use. To be

exempt from tax, the contributions must be

spent for campaign purposes or kept in a fund

for use in future campaigns. However, interest

earned on bank deposits, dividends received on

contributed securities, and net gains realized on

sales of contributed securities are taxable and

must be reported on Form 1120-POL. Excess

campaign funds transferred to an office account

must be included in the officeholder's income

on Schedule 1 (Form 1040), line 8z, in the year

transferred.

Canceled sales contract. If you sell property

(such as land or a residence) under a contract,

but the contract is canceled and you return the

buyer's money in the same tax year as the origi-

nal sale, you have no income from the sale. If

the contract is canceled and you return the buy-

er's money in a later tax year, you must include

your gain in your income for the year of the sale.

When you return the money and take back the

CAUTION

property in the later year, you treat the transac-

tion as a purchase that gives you a new basis in

the property equal to the funds you return to the

buyer.

Special rules apply to the reacquisition of

real property where a secured indebtedness

(mortgage) to the original seller is involved. For

further information, see Repossession in Pub.

537.

Carpools. Don’t include in your income

amounts you receive from the passengers for

driving a car in a carpool to and from work.

These amounts are considered reimbursement

for your expenses. However, this rule doesn't

apply if you have developed carpool arrange-

ments into a profit-making business of trans-

porting workers for hire.

Cash rebates. A cash rebate you receive from

a dealer or manufacturer of an item you buy isn't

income, but you must reduce your basis by the

amount of the rebate.

Example 36. You buy a new car for

$24,000 cash and receive a $2,000 rebate

check from the manufacturer. The $2,000 isn't

income to you. Your basis in the car is $22,000.

This is the basis on which you figure gain or

loss if you sell the car, and figure depreciation if

you use it for business.

Casualty insurance and other reimburse-

ments. You generally shouldn't report these re-

imbursements on your return unless you're fig-

uring gain or loss from the casualty or theft. See

Pub. 547.

Charitable gift annuities. If you're the benefi-

ciary of a charitable gift annuity, you must in-

clude the yearly annuity or fixed percentage

payment in your income.

The payer will report the types of income

you received on Form 1099-R. Report the gross

distribution from box 1 on Form 1040 or

1040-SR, line 5a, and the part taxed as ordinary

income (box 2a minus box 3) on Form 1040 or

1040-SR, line 5b. Report the portion taxed as

capital gain as explained in the Instructions for

Schedule D (Form 1040).

Child support payments. You shouldn't report

these payments on your return. See Pub. 504

for more information.

Court awards and damages. To determine if

settlement amounts you receive by compromise

or judgment must be included in your income,

you must consider the item that the settlement

replaces. The character of the income as ordi-

nary income or capital gain depends on the na-

ture of the underlying claim. Include the follow-

ing as ordinary income.

1. Interest on any award.

2. Compensation for lost wages or lost profits

in most cases.

3. Punitive damages in most cases. It doesn't

matter if they relate to a physical injury or

physical sickness.

4. Amounts received in settlement of pension

rights (if you didn't contribute to the plan).

5. Damages for:

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32 Publication 525 (2023)

a. Patent or copyright infringement,

b. Breach of contract, or

c. Interference with business operations.

6. Back pay and damages for emotional dis-

tress received to satisfy a claim under title

VII of the Civil Rights Act of 1964.

7. Attorney fees and costs (including contin-

gent fees) where the underlying recovery

is included in gross income.

8. Attorney fees and costs relating to whistle-

blower awards where the underlying re-

covery is included in gross income.

Don’t include in your income compensatory

damages for personal physical injury or physical

sickness (whether received in a lump sum or in-

stallments).

Emotional distress. Emotional distress it-

self isn't a physical injury or physical sickness,

but damages you receive for emotional distress

due to a physical injury or sickness are treated

as received for the physical injury or sickness.

Don’t include them in your income.

If the emotional distress is due to a personal

injury that isn't due to a physical injury or sick-

ness (for example, unlawful discrimination or in-

jury to reputation), you must include the dam-

ages in your income, except for any damages

you receive for medical care due to that emo-

tional distress. Emotional distress includes

physical symptoms that result from emotional

distress, such as headaches, insomnia, and

stomach disorders.

Deduction for costs involved in unlawful

discrimination suits. You may be able to de-

duct attorney fees and court costs paid to re-

cover a judgment or settlement for a claim of

unlawful discrimination under various provisions

of federal, state, and local law listed in section

62(e), a claim against the U.S. Government, or

a claim under section 1862(b)(3)(A) of the So-

cial Security Act. You can claim this deduction

as an adjustment to income on Schedule 1

(Form 1040), line 24h. The following rules apply.

•

The attorney fees and court costs may be

paid by you or on your behalf in connection

with the claim for unlawful discrimination,

the claim against the U.S. Government, or

the claim under section 1862(b)(3)(A) of

the Social Security Act.

•

The deduction you're claiming can't be

more than the amount of the judgment or

settlement you're including in income for

the tax year.

•

The judgment or settlement to which your

attorney fees and court costs apply must

occur after October 22, 2004.

Pre-existing agreement. If you receive

damages under a written binding agreement,

court decree, or mediation award that was in ef-

fect (or issued on or before) September 13,

1995, don't include in income any of those dam-

ages received on account of personal injuries or

sickness.

Credit card insurance. In most cases, if you

receive benefits under a credit card disability or

unemployment insurance plan, the benefits are

taxable to you. These plans make the minimum

monthly payment on your credit card account if

you can't make the payment due to injury, ill-

ness, disability, or unemployment. Report on

Schedule 1 (Form 1040), line 8z, the amount of

benefits you received during the year that is

more than the amount of the premiums you paid

during the year.

Down payment assistance. If you purchase

a home and receive assistance from a nonprofit

corporation to make the down payment, that as-

sistance isn't included in your income. If the cor-

poration qualifies as a tax-exempt charitable or-

ganization, the assistance is treated as a gift

and is included in your basis of the house. If the

corporation doesn't qualify, the assistance is

treated as a rebate or reduction of the purchase

price and isn't included in your basis.

Employment agency fees. If you get a job

through an employment agency, and the fee is

paid by your employer, the fee isn't includible in

your income if you aren't liable for it. However, if

you pay it and your employer reimburses you for

it, it’s includible in your income.

Energy conservation subsidies. You can ex-

clude from gross income any subsidy provided,

either directly or indirectly, by public utilities for

the purchase or installation of an energy con-

servation measure for a dwelling unit.

Energy conservation measure. This in-

cludes installations or modifications that are pri-

marily designed to reduce consumption of elec-

tricity or natural gas, or improve the

management of energy demand.

Dwelling unit. This includes a house,

apartment, condominium, mobile home, boat,

or similar property. If a building or structure con-

tains both dwelling and other units, any subsidy

must be properly allocated.

Estate and trust income. An estate or trust,

unlike a partnership, may have to pay federal in-

come tax. If you're a beneficiary of an estate or

trust, you may be taxed on your share of its in-

come distributed or required to be distributed to

you. However, there is never a double tax. Es-

tates and trusts file their returns on Form 1041,

and your share of the income is reported to you

on Schedule K-1 (Form 1041).

Current income required to be distrib-

uted. If you're the beneficiary of an estate or

trust that must distribute all of its current in-

come, you must report your share of the distrib-

utable net income, whether or not you actually

received it.

Current income not required to be dis-

tributed. If you're the beneficiary of an estate

or trust and the fiduciary has the choice of

whether to distribute all or part of the current in-

come, you must report all income that is re-

quired to be distributed to you, whether or not

it's actually distributed, plus all other amounts

actually paid or credited to you, up to the

amount of your share of distributable net in-

come.

How to report. Treat each item of income

the same way that the estate or trust would treat

it. For example, if a trust's dividend income is

distributed to you, you report the distribution as

dividend income on your return. The same rule

applies to distributions of tax-exempt interest

and capital gains.

The fiduciary of the estate or trust must tell

you the type of items making up your share of

the estate or trust income and any credits you're

allowed on your individual income tax return.

Losses. Losses of estates and trusts gen-

erally aren't deductible by the beneficiaries.

Grantor trust. Income earned by a grantor

trust is taxable to the grantor, not the benefi-

ciary, if the grantor keeps certain control over

the trust. (The grantor is the one who transfer-

red property to the trust.) This rule applies if the

property (or income from the property) put into

the trust will or may revert (be returned) to the

grantor or the grantor's spouse.

Generally, a trust is a grantor trust if the

grantor has a reversionary interest valued (at

the date of transfer) at more than 5% of the

value of the transferred property, or has certain

other powers.

Expenses paid by another. If your personal

expenses are paid for by another person, such

as a corporation, the payment may be taxable

to you depending upon your relationship with

that person and the nature of the payment. But

if the payment makes up for a loss caused by

that person, and only restores you to the posi-

tion you were in before the loss, the payment

isn't includible in your income.

Exxon Valdez settlement income. Include in

your income on Schedule 1 (Form 1040),

line 8z, any qualified settlement income you re-

ceive as a qualified taxpayer. See Statement,

later. Qualified settlement income is any interest

and punitive damage awards that are:

•

Otherwise includible in taxable income,

and

•

Received in connection with the civil action

In re Exxon Valdez, No. 89-095-CV (HRH)

(Consolidated) (D. Alaska).

You're a qualified taxpayer if you were a

plaintiff in the civil action mentioned earlier or

you were a beneficiary of the estate of your

spouse or a close relative who was such a

plaintiff and from whom you acquired the right to

receive qualified settlement income.

The income can be received as a lump sum

or as periodic payments. You'll receive a Form

1099-MISC showing the gross amount of the

settlement income paid to you in the tax year.

Contributions to eligible retirement plan.

If you're a qualified taxpayer, you can contribute

all or part of your qualified settlement income,

up to $100,000, to an eligible retirement plan,

including an IRA. Contributions to eligible retire-

ment plans, other than a Roth IRA or a designa-

ted Roth account, reduce the qualified settle-

ment income that you must include in income.

See Statement, later. For more information on

these contributions, see Pubs. 575 and 590-A.

Legal expenses. For tax years after 2017,

you can no longer deduct legal expenses that

were subject to the 2%-of-adjusted-gross-in-

come floor. If the qualified settlement income

was received in connection with your trade or

business (other than as an employee), you can

reduce the taxable amount of qualified settle-

ment income by these expenses.

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Publication 525 (2023) 33

Statement. If you report on Schedule 1

(Form 1040), line 8z, qualified settlement in-

come that is less than the gross amount shown

on Form 1099-MISC, you must attach a state-

ment to your tax return. The statement must

identify and show the gross amount of the quali-

fied settlement income, the reductions for the

amount contributed to an eligible retirement

plan, and the net amount.

Income averaging. For purposes of the in-

come averaging rules that apply to an individual

engaged in a farming or fishing business, quali-

fied settlement income is treated as attributable

to a fishing business for the tax year in which it's

received. See Schedule J (Form 1040) and its

instructions for more information.

Fees for services. Include all fees for your

services in your income. Examples of these

fees are amounts you receive for services you

perform as:

•

A corporate director;

•

An executor, administrator, or personal

representative of an estate;

•

A manager of a trade or business you op-

erated before declaring chapter 11 bank-

ruptcy;

•

A notary public; or

•

An election precinct official.

If you aren't an employee and the fees

for your services from a single payer in

the course of the payer's trade or busi-

ness total $600 or more for the year, the payer

should send you Form 1099-MISC.

Corporate director. Corporate director

fees are self-employment income. Report these

payments on Schedule C (Form 1040).

Personal representatives. All personal

representatives must include in their gross in-

come fees paid to them from an estate. If you

aren't in the trade or business of being an exec-

utor (for instance, you're the executor of a

friend's or relative's estate), report these fees on

Schedule 1 (Form 1040), line 8z. If you're in the

trade or business of being an executor, report

these fees as self-employment income on

Schedule C (Form 1040). The fee isn't includi-

ble in income if it's waived.

Manager of trade or business for bank-

ruptcy estate. Include in your income all pay-

ments received from your bankruptcy estate for

managing or operating a trade or business that

you operated before you filed for bankruptcy.

Report this income on Schedule 1 (Form 1040),

line 8z.

Notary public. Report payments for these

services on Schedule C (Form 1040). These

payments aren't subject to self-employment tax.

See the separate Instructions for Schedule SE

(Form 1040) for details.

Election precinct official. You should re-

ceive a Form W-2 showing payments for serv-

ices performed as an election official or election

worker. Report these payments on line 1a of

Form 1040 or 1040-SR.

Food program payments to daycare provid-

ers. If you operate a daycare service and re-

ceive payments under the Child and Adult Care

TIP

Food Program administered by the Department

of Agriculture that aren't for your services, the

payments aren't included in your income in

most cases. However, you must include in your

income any part of the payments you don't use

to provide food to individuals eligible for help

under the program.

Foreign currency transactions. If you have a

gain on a personal foreign currency transaction

because of changes in exchange rates, you

don't have to include that gain in your income

unless it's more than $200. If the gain is more

than $200, report it as a capital gain.

Foster care providers. Generally, payment

you receive from a state, political subdivision, or

a qualified foster care placement agency for

caring for a qualified foster individual in your

home is excluded from your income. However,

you must include in your income payment to the

extent it's received for the care of more than 5

qualified foster individuals age 19 years or

older.

A qualified foster individual is a person who:

1. Is living in a foster family home; and

2. Was placed there by:

a. An agency of a state or one of its polit-

ical subdivisions, or

b. A qualified foster care placement

agency.

Difficulty-of-care payments. These are

payments that are designated by the payer as

compensation for providing the additional care

that is required for physically, mentally, or emo-

tionally handicapped qualified foster individuals.

A state must determine that the additional com-

pensation is needed, and the care for which the

payments are made must be provided in the

foster care provider's home in which the quali-

fied foster individual was placed.

Certain Medicaid waiver payments are trea-

ted as difficulty-of-care payments when re-

ceived by an individual care provider for caring

for an eligible individual (whether related or un-

related) living in the provider's home. See No-

tice 2014-7, available at IRS.gov/irb/

2014-4_IRB#NOT-2014-7, and related ques-

tions and answers, available at IRS.gov/

Individuals/Certain-Medicaid-Waiver-Payments-

May-Be-Excludable-From-Income, for more in-

formation.

You must include in your income diffi-

culty-of-care payments to the extent they're re-

ceived for more than:

•

10 qualified foster individuals under age

19, or

•

Five qualified foster individuals age 19 or

older.

Maintaining space in home. If you're paid

to maintain space in your home for emergency

foster care, you must include the payment in

your income.

Reporting taxable payments. If you re-

ceive payments that you must include in your in-

come and you're in business as a foster care

provider, report the payments on Schedule C

(Form 1040). See Pub. 587 to help you deter-

mine the amount you can deduct for the use of

your home.

Found property. If you find and keep property

that doesn't belong to you that has been lost or

abandoned (treasure trove), it's taxable to you

at its FMV in the first year it's your undisputed

possession.

Free tour. If you received a free tour from a

travel agency for organizing a group of tourists,

you must include its value in your income. Re-

port the FMV of the tour on Schedule 1 (Form

1040), line 8z, if you aren't in the trade or busi-

ness of organizing tours. You can't deduct your

expenses in serving as the voluntary leader of

the group at the group's request. If you organize

tours as a trade or business, report the tour's

value on Schedule C (Form 1040).

Gambling winnings. You must include your

gambling winnings in your income on Schedule

1 (Form 1040), line 8b. Winnings from fantasy

sports leagues are gambling winnings. If you

itemize your deductions on Schedule A (Form

1040), you can deduct gambling losses you had

during the year, but only up to the amount of

your winnings. If you're in the trade or business

of gambling, use Schedule C (Form 1040). For

tax years 2018 through 2025, professional gam-

bling losses and expenses are limited to the

amount of your winnings.

Lotteries and raffles. Winnings from lotter-

ies and raffles are gambling winnings. In addi-

tion to cash winnings, you must include in your

income the FMV of bonds, cars, houses, and

other noncash prizes. However, the difference

between the FMV and the cost of an oil and gas

lease obtained from the government through a

lottery isn't includible in income.

Installment payments. Generally, if you

win a state lottery prize payable in installments,

you must include in your gross income the an-

nual payments and any amounts you receive

designated as interest on the unpaid install-

ments. If you sell future lottery payments for a

lump sum, you must report the amount you re-

ceive from the sale as ordinary income (on

Schedule 1 (Form 1040), line 8b) in the year

you receive it.

Form W-2G. You may have received a

Form W-2G showing the amount of your gam-

bling winnings and any tax taken out of them.

Include the amount from box 1 on Schedule 1

(Form 1040), line 8b. Include the amount shown

in box 4 on Form 1040 or 1040-SR, line 25c, as

federal income tax withheld.

Gifts and inheritances. In most cases, prop-

erty you receive as a gift, bequest, or inheri-

tance isn't included in your income. However, if

property you receive this way later produces in-

come such as interest, dividends, or rents, that

income is taxable to you. If property is given to a

trust and the income from it is paid, credited, or

distributed to you, that income is also taxable to

you. If the gift, bequest, or inheritance is the in-

come from the property, that income is taxable

to you.

Inherited pension or IRA. If you inherited

a pension or an IRA, you may have to include

part of the inherited amount in your income. See

Survivors and Beneficiaries in Pub. 575 if you

inherited a pension. See What if You Inherit an

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34 Publication 525 (2023)

IRA? in Pubs. 590-A and 590-B if you inherited

an IRA.

Expected inheritance. If you sell an inter-

est in an expected inheritance from a living per-

son, include the entire amount you receive in

gross income on Schedule 1 (Form 1040),

line 8z.

Bequest for services. If you receive cash

or other property as a bequest for services you

performed while the decedent was alive, the

value is taxable compensation.

Gulf oil spill. If you received payments for lost

wages or income, property damage, or physical

injury due to the Gulf oil spill, the payment may

be taxable.

Lost wages or income. Payments you re-

ceived for lost wages, lost business income, or

lost profits are taxable.

Property damage. Payments you received

for property damage aren't taxable if the pay-

ments aren't more than your adjusted basis in

the property. If the payments are more than your

adjusted basis, you'll realize a gain. If the dam-

age was due to an involuntary conversion, you

may defer the tax on the gain if you purchase

qualified replacement property. See Pub. 544.

If the payments (including insurance pro-

ceeds) you received, or expect to receive, are

less than your adjusted basis, you may be able

to claim a casualty deduction. See Pub. 547.

Physical injury. Payments you received

for personal physical injuries or physical sick-

ness aren't taxable. This includes payments for

emotional distress that is attributable to per-

sonal physical injuries or physical sickness.

Payments for emotional distress that aren't at-

tributable to personal physical injuries or physi-

cal sickness are taxable.

More information. For the most recent

guidance, go to IRS.gov and enter “Gulf Oil

Spill” in the search box.

Historic preservation grants. Don’t include in

your income any payment you receive under the

National Historic Preservation Act to preserve a

historically significant property.

Hobby losses. Losses from a hobby aren't de-

ductible from other income. A hobby is an activ-

ity from which you don't expect to make a profit.

See Activity not for profit, earlier, under Other

Income.

If you collect stamps, coins, or other

items as a hobby for recreation and

pleasure, and you sell any of the items,

your gain is taxable as a capital gain. However,

if you sell items from your collection at a loss,

you can't deduct the loss.

Holocaust victims restitution. Restitution

payments you receive as a Holocaust victim (or

the heir of a Holocaust victim) and interest

earned on the payments aren't taxable. Exclud-

able interest is earned by escrow accounts or

settlement funds established for holding funds

prior to the settlement. You also don't include

the restitution payments and interest the funds

earned prior to disbursement in any calculation

CAUTION

in which you ordinarily would add excludable in-

come to your AGI, such as the calculation to de-

termine the taxable part of social security bene-

fits. If the payments are made in property, your

basis in the property is its FMV when you re-

ceive it.

Excludable restitution payments are pay-

ments or distributions made by any country or

any other entity because of persecution of an

individual on the basis of race, religion, physical

or mental disability, or sexual orientation by Nazi

Germany, any other Axis regime, or any other

Nazi-controlled or Nazi-allied country, whether

the payments are made under a law or as a re-

sult of a legal action. They include compensa-

tion or reparation for property losses resulting

from Nazi persecution, including proceeds un-

der insurance policies issued before and during

World War II by European insurance compa-

nies.

Illegal activities. Income from illegal activities,

such as money from dealing illegal drugs, must

be included in your income on Schedule 1

(Form 1040), line 8z, or on Schedule C (Form

1040) if from your self-employment activity.

Indian fishing rights. If you're a member of a

qualified Indian tribe that has fishing rights se-

cured by treaty, executive order, or an Act of

Congress as of March 17, 1988, don't include in

your income amounts you receive from activities

related to those fishing rights. The income isn't

subject to income tax, self-employment tax, or

employment taxes.

Indian money account litigation settlement.

Amounts received by an individual Indian as a

lump sum or periodic payment pursuant to the

Class Action Settlement Agreement dated De-

cember 7, 2009, aren't included in gross in-

come. This amount won't be used to figure AGI

or MAGI in applying any Internal Revenue Code

provision that takes into account excludable in-

come.

Interest on frozen deposits. In general, you

exclude from your income the amount of inter-

est earned on a frozen deposit. A deposit is fro-

zen if, at the end of the calendar year, you can't

withdraw any part of the deposit because:

•

The financial institution is bankrupt or in-

solvent, or

•

The state where the institution is located

has placed limits on withdrawals because

other financial institutions in the state are

bankrupt or insolvent.

Excludable amount. The amount of inter-

est you exclude from income for the year is the

interest that was credited on the frozen deposit

for that tax year minus the sum of:

1. The net amount withdrawn from the de-

posit during that year, and

2. The amount that could have been with-

drawn at the end of that tax year (not re-

duced by any penalty for premature with-

drawals of a time deposit).

The excluded part of the interest is included in

your income in the tax year it becomes with-

drawable.

Interest on qualified savings bonds. You

may be able to exclude from income the interest

from qualified U.S. savings bonds you redeem if

you pay qualified higher education expenses in

the same year. Qualified higher education ex-

penses are those you pay for tuition and re-

quired fees at an eligible educational institution

for you, your spouse, or your dependent. A

qualified U.S. savings bond is a series EE bond

issued after 1989 or a series I bond. The bond

must have been issued to you when you were

24 years of age or older. For more information

on this exclusion, see Education Savings Bond

Program in chapter 1 of Pub. 550 and in chap-

ter 10 of Pub. 970.

Interest on state and local government obli-

gations. This interest is usually exempt from

federal tax. However, you must show the

amount of any tax-exempt interest on your fed-

eral income tax return. For more information,

see State or Local Government Obligations in

chapter 1 of Pub. 550.

Job interview expenses. If a prospective em-

ployer asks you to appear for an interview and

either pays you an allowance or reimburses you

for your transportation and other travel expen-

ses, the amount you receive isn't taxable in

most cases. You include in income only the

amount you receive that is more than your ac-

tual expenses.

Jury duty. Jury duty pay you receive must be

included in your income on Schedule 1 (Form

1040), line 8h. If you must give the pay to your

employer because your employer continues to

pay your salary while you serve on the jury, you

can deduct the amount turned over to your em-

ployer as an adjustment to income. Enter the

amount you repay your employer on Schedule 1

(Form 1040), line 24a.

Kickbacks. You must include kickbacks, side

commissions, push money, or similar payments

you receive in your income on Schedule 1

(Form 1040), line 8z, or on Schedule C (Form

1040) if from your self-employment activity.

Example 37. You sell cars and help ar-

range car insurance for buyers. Insurance brok-

ers pay back part of their commissions to you

for referring customers to them. You must in-

clude the kickbacks in your income.

Manufacturer incentive payments. You must

include as other income on Schedule 1 (Form

1040), line 8z (or Schedule C (Form 1040) if

you're self-employed), incentive payments from

a manufacturer that you receive as a salesper-

son. This is true whether you receive the pay-

ment directly from the manufacturer or through

your employer.

Example 38. You sell cars for an automo-

bile dealership and receive incentive payments

from the automobile manufacturer every time

you sell a particular model of car. You report the

incentive payments on Schedule 1 (Form 1040),

line 8z.

Medical savings accounts (Archer MSAs

and Medicare Advantage MSAs). In most ca-

ses, you don't include in income amounts you

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Publication 525 (2023) 35

withdraw from your Archer MSA or Medicare

Advantage MSA if you use the money to pay for

qualified medical expenses. Generally, qualified

medical expenses are those you can deduct on

Schedule A (Form 1040). For more information

about Archer MSAs or Medicare Advantage

MSAs, see Pub. 969.

Moving expense reimbursements. For tax

years beginning after 2017, reimbursements for

certain moving expenses are no longer exclu-

ded from the gross income of nonmilitary tax-

payers.

Prizes and awards. If you win a prize in a

lucky number drawing, television or radio quiz

program, beauty contest, or other event, you

must include it in your income. For example, if

you win a $50 prize in a photography contest,

you must report this income on Schedule 1

(Form 1040), line 8i. If you refuse to accept a

prize, don't include its value in your income.

Prizes and awards in goods or services

must be included in your income at their FMV.

Employee awards or bonuses. Cash

awards or bonuses given to you by your em-

ployer for good work or suggestions must gen-

erally be included in your income as wages.

However, certain noncash employee achieve-

ment awards can be excluded from income.

See Bonuses and awards under Miscellaneous

Compensation, earlier.

Prize points. If you're a salesperson and

receive prize points redeemable for merchan-

dise that are awarded by a distributor or manu-

facturer to employees of dealers, you must in-

clude their FMV in your income. The prize

points are taxable in the year they're paid or

made available to you, rather than in the year

you redeem them for merchandise.

Pulitzer, Nobel, and similar prizes. If you

were awarded a prize in recognition of accom-

plishments in religious, charitable, scientific, ar-

tistic, educational, literary, or civic fields, you

must generally include the value of the prize in

your income. However, you don't include this

prize in your income if you meet all of the follow-

ing requirements.

1. You were selected without any action on

your part to enter the contest or proceed-

ing.

2. You aren't required to perform substantial

future services as a condition for receiving

the prize or award.

3. The prize or award is transferred by the

payer directly to a governmental unit or

tax-exempt charitable organization as des-

ignated by you. The following conditions

apply to the transfer.

a. You can't use the prize or award be-

fore it's transferred.

b. You should provide the designation

before the prize or award is presented

to prevent a disqualifying use. The

designation should contain:

i. The purpose of the designation

by making a reference to section

74(b)(3);

ii. A description of the prize or

award;

iii. The name and address of the or-

ganization to receive the prize or

award;

iv. Your name, address, and TIN;

and

v. Your signature and the date

signed.

c. In the case of an unexpected presen-

tation, you must return the prize or

award before using it (or spending,

depositing, or investing it, etc., in the

case of money) and then prepare the

statement as described in (b) above.

d. After the transfer, you should receive

from the payer a written response

stating when and to whom the desig-

nated amounts were transferred.

These rules don't apply to scholarship or fel-

lowship awards. See Scholarships and fellow-

ships, later.

Qualified opportunity fund (QOF). Effective

December 22, 2017, section 1400Z-2 provides

a temporary deferral of inclusion in gross in-

come for eligible gains invested in QOFs, and a

stepped-up basis to fair market value of the in-

vestment in the QOF at time of sale or ex-

change, if the investment is held for at least 10

years. See the Form 8949 instructions on how

to report your election to defer eligible gains in-

vested in a QOF. See Form 8997, Initial and An-

nual Statement of Qualified Opportunity Fund

(QOF) Investments, and its instructions for re-

porting information. For additional information,

see Opportunity Zones Frequently Asked Ques-

tions, available at

IRS.gov/Newsroom/

Opportunity-Zones-Frequently-Asked-

Questions.

Qualified tuition program (QTP). A QTP

(also known as a 529 program) is a program set

up to allow you to either prepay or contribute to

an account established for paying a student's

qualified higher education expenses at an eligi-

ble educational institution. A program can be

established and maintained by a state, an

agency or instrumentality of a state, or an eligi-

ble educational institution.

The part of a distribution representing the

amount paid or contributed to a QTP isn't inclu-

ded in income. This is a return of the investment

in the program.

In most cases, the beneficiary doesn't in-

clude in income any earnings distributed from a

QTP if the total distribution is less than or equal

to adjusted qualified higher education expen-

ses. See Pub. 970 for more information.

Railroad retirement annuities. The following

types of payments are treated as pension or an-

nuity income and are taxable under the rules

explained in Pub. 575.

•

Tier 1 railroad retirement benefits that are

more than the social security equivalent

benefit.

•

Tier 2 benefits.

•

Vested dual benefits.

Rewards. If you receive a reward for providing

information, include it in your income.

Sale of home. You may be able to exclude

from income all or part of any gain from the sale

or exchange of your main home. See Pub. 523.

Sale of personal items. If you sold an item

you owned for personal use, such as a car, re-

frigerator, furniture, stereo, jewelry, or silver-

ware, your gain is taxable as a capital gain. Re-

port it as explained in the Instructions for

Schedule D (Form 1040). You can't deduct a

loss.

However, if you sold an item you held for in-

vestment, such as gold or silver bullion, coins,

or gems, any gain is taxable as a capital gain

and any loss is deductible as a capital loss.

Example 39. You sold a painting on an on-

line auction website for $100. You bought the

painting for $20 at a garage sale years ago. Re-

port your $80 gain as a capital gain as ex-

plained in the Instructions for Schedule D (Form

1040).

Scholarships and fellowships. A candidate

for a degree can exclude amounts received as a

qualified scholarship or fellowship. A qualified

scholarship or fellowship is any amount you re-

ceive that is for:

•

Tuition and fees required to enroll at or at-

tend an eligible educational institution; or

•

Course-related expenses, such as fees,

books, and equipment that are required for

courses at the eligible educational institu-

tion. These items must be required of all

students in your course of instruction.

Amounts used for room and board don't qualify

for the exclusion. See Pub. 970 for more infor-

mation on qualified scholarships and fellowship

grants.

Payment for services. Generally, you

can't exclude from your gross income the part of

any scholarship or fellowship that represents

payment for teaching, research, or other serv-

ices required as a condition for receiving the

scholarship. This applies even if all candidates

for a degree must perform the services to re-

ceive the degree.

Exceptions. You don't have to include in

income the part of any scholarship or fellowship

that represents payment for teaching, research,

or other services if you receive the amount un-

der:

•

The National Health Services Corps Schol-

arship Program,

•

The Armed Forces Health Professions

Scholarship and Financial Assistance Pro-

gram, or

•

A comprehensive student work-learn-

ing-service program (as defined in section

448(e) of the Higher Education Act of

1965) operated by a work college (as de-

fined in that section).

For information about the rules that apply to

a tax-free qualified tuition reduction provided to

employees and their families by an educational

institution, see Pub. 970.

VA payments. Allowances paid by the VA

for education, training, or subsistence under

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36 Publication 525 (2023)

any law administered by the Department of Vet-

erans Affairs, aren't included in your income.

These allowances aren't considered scholar-

ship or fellowship grants.

Prizes. Scholarship prizes won in a contest

aren't scholarships or fellowships if you don't

have to use the prizes for educational purposes.

You must include these amounts in your income

on Schedule 1 (Form 1040), line 8i, whether or

not you use the amounts for educational purpo-

ses.

Smallpox vaccine injuries. If you're an eligi-

ble individual who receives benefits under the

Smallpox Emergency Personnel Protection Act

of 2003 for a covered injury resulting from a

covered countermeasure, you can exclude the

payment from your income (to the extent it isn't

allowed as a medical and dental expense de-

duction on Schedule A (Form 1040)). Eligible in-

dividuals include health care workers, emer-

gency personnel, and first responders in a

smallpox emergency who have received a

smallpox vaccination.

State tax payments. Do not include payments

on your tax return made by states under legisla-

tively provided social benefit programs for the

promotion of the general welfare. To qualify for

the general welfare exclusion, state payments

must be paid from a governmental fund, be for

the promotion of general welfare (that is, based

on the need of the individual or family receiving

such payments), and not represent compensa-

tion for services.

Spillover payments under certain 2022

state tax payment programs. In 2022, some

states implemented programs to provide state

payments to certain individuals residing in their

states. Many of these programs were related to

the various consequences of the COVID-19

pandemic. Some of those 2022 programs provi-

ded for payments to be made in early 2023. For

special tax refunds or payments that were ex-

cluded from federal income in 2022, the same

tax treatment applies to the special tax refund or

payments received in 2023. This means taxpay-

ers who didn’t get a payment under the program

during 2022 may exclude from federal income a

state payment provided under the 2022 pro-

gram even if they actually received the payment

in 2023. See IRS News Release IR-2023-158 at

IRS.gov/Newsroom/IRS-Issues-Guidance-on-

State-Tax-Payments for more information.

Stolen property. If you steal property, you

must report its FMV in your income in the year

you steal it, unless in the same year you return it

to its rightful owner.

Transporting school children. Don’t include

in your income a school board mileage allow-

ance for taking children to and from school if

you aren't in the business of taking children to

school. You can't deduct expenses for providing

this transportation.

Union benefits and dues. Amounts deducted

from your pay for union dues, assessments,

contributions, or other payments to a union can't

be excluded from your income.

For tax years beginning after 2017, you can

no longer deduct job-related expenses or other

miscellaneous itemized deductions subject to

the 2%-of-adjusted-gross-income floor.

Strike and lockout benefits. Benefits paid

to you by a union as strike or lockout benefits,

including both cash and the FMV of other prop-

erty, are usually included in your income as

compensation. You can exclude these benefits

from your income only when the facts clearly

show that the union intended them as gifts to

you.

Reimbursed union convention expen-

ses. If you're a delegate of your local union

chapter and you attend the annual convention

of the international union, don't include in your

income amounts you receive from the interna-

tional union to reimburse you for expenses of

traveling away from home to attend the conven-

tion. You can't deduct the reimbursed expenses,

even if you're reimbursed in a later year. If you're

reimbursed for lost salary, you must include that

reimbursement in your income.

Utility rebates. If you're a customer of an elec-

tric utility company and you participate in the

utility's energy conservation program, you may

receive on your monthly electric bill either:

•

A reduction in the purchase price of elec-

tricity furnished to you (rate reduction), or

•

A nonrefundable credit against the pur-

chase price of the electricity.

The amount of the rate reduction or nonrefunda-

ble credit isn't included in your income.

Whistleblower's award. If you receive a whis-

tleblower's award from the IRS, you must in-

clude it in your income. Any deduction allowed

for attorney fees and court costs paid by you, or

on your behalf, in connection with the award are

deducted as an adjustment to income, but can't

be more than the amount included in income for

the tax year.

Repayments

If you had to repay an amount that you included

in your income in an earlier year, you may be

able to deduct the amount repaid from your in-

come for the year in which you repaid it. Or, if

the amount you repaid is more than $3,000, you

may be able to take a credit against your tax for

the year in which you repaid it. In most cases,

you can claim a deduction or credit only if the

repayment qualifies as an expense or loss in-

curred in your trade or business or in a for-profit

transaction.

Type of deduction. The type of deduction

you're allowed in the year of repayment de-

pends on the type of income you included in the

earlier year. In most cases, you deduct the re-

payment on the same form or schedule on

which you previously reported it as income. For

example, if you reported it as self-employment

income, deduct it as a business expense on

Schedule C (Form 1040) or Schedule F (Form

1040). If you reported it as a capital gain, de-

duct it as a capital loss as explained in the In-

structions for Schedule D (Form 1040). If you

reported it as wages, unemployment compen-

sation, or other nonbusiness income, you may

be able to deduct it as an other itemized deduc-

tion if the amount repaid is over $3,000.

For tax years beginning after 2017, you

can no longer claim any miscellaneous

itemized deductions; so, if the amount

repaid was $3,000 or less, you aren’t able to de-

duct it from your income in the year you repaid

it.

Repaid social security benefits. If you re-

paid social security or equivalent railroad retire-

ment benefits, see Pub. 915.

Repayment over $3,000. If the amount you

repaid was more than $3,000, you can deduct

the repayment as an other itemized deduction

on Schedule A (Form 1040), line 16, if you in-

cluded the income under a claim of right. This

means that at the time you included the income,

it appeared that you had an unrestricted right to

it. However, you can choose to take a credit for

the year of repayment. Figure your tax under

both methods and compare the results. Use the

method (deduction or credit) that results in less

tax.

When determining whether the amount

you repaid was less than $3,000, con-

sider the total amount being repaid on

the return. Each instance of repayment isn't

considered separately.

Method 1. Figure your tax for the year of

repayment claiming a deduction for the repaid

amount.

Method 2. Figure your tax for the year of

repayment claiming a credit for the repaid

amount. Follow these steps.

1. Figure your tax for the year of repayment

without deducting the repaid amount.

2. Refigure your tax from the earlier year

without including in income the amount

you repaid in the year of repayment.

3. Subtract the tax in (2) from the tax shown

on your return for the earlier year. This is

the credit.

4. Subtract the answer in (3) from the tax for

the year of repayment figured without the

deduction (step 1).

If method 1 results in less tax, deduct the

amount repaid. If method 2 results in less tax,

claim the credit figured in (3) above on Form

1040 or 1040-SR. (If the year of repayment is

2022, and you're taking the credit, enter the

credit on Schedule 3 (Form 1040), line 13b, and

see the instructions for it.)

Example 40. For 2022, you filed a return

and reported your income on the cash method.

In 2023, you repaid $5,000 included in your

2022 income under a claim of right. Your filing

status in 2023 and 2022 is single. Your income

and tax for both years are as follows.

CAUTION

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Publication 525 (2023) 37

2022

With Income Without Income

Taxable

Income $15,000 $10,000

Tax $1,598 $1,003

2023

Without Deduction With Deduction

Taxable

Income $49,950 $44,950

Tax $6,297 $5,197

Your tax under method 1 is $5,197. Your tax

under method 2 is $6,297, figured as follows.

Tax previously determined for 2022

....... $1,598

Less: Tax as refigured ................ − 1,003

Decrease in 2022 tax ............ $ 595

Regular tax liability for 2023 ............ $6,297

Less: Decrease in 2022 tax ............ − 595

Refigured tax for 2023 ........... $5,702

You pay less tax using method 1, so you should

take a deduction for the repayment in 2023.

Repaid wages subject to social security

and Medicare taxes. If you had to repay an

amount that you included in your wages or com-

pensation in an earlier year on which social se-

curity, Medicare, or tier 1 RRTA taxes were paid,

ask your employer to refund the excess amount

to you. If the employer refuses to refund the

taxes, ask for a statement indicating the amount

of the overcollection to support your claim. File

a claim for refund using Form 843.

Repaid wages subject to Additional Medi-

care Tax. Employers can't make an adjust-

ment or file a claim for refund for Additional

Medicare Tax withholding when there is a re-

payment of wages received by an employee in a

prior year because the employee determines li-

ability for Additional Medicare Tax on the em-

ployee's income tax return for the prior year. If

you had to repay an amount that you included in

your wages or compensation in an earlier year,

and on which Additional Medicare Tax was

paid, you may be able to recover the Additional

Medicare Tax paid on the amount. To recover

Additional Medicare Tax on the repaid wages or

compensation, you must file Form 1040-X for

the prior year in which the wages or compensa-

tion were originally received. See the Instruc-

tions for Form 1040-X.

Repayment rules don’t apply. This discus-

sion doesn't apply to:

•

Deductions for bad debts;

•

Deductions for theft losses due to criminal

fraud or embezzlement in a transaction en-

tered into for profit;

•

Deductions from sales to customers, such

as returns and allowances, and similar

items; or

•

Deductions for legal and other expenses of

contesting the repayment.

Year of deduction (or credit). If you use the

cash method, you can take the deduction (or

credit, if applicable) for the tax year in which you

actually make the repayment. If you use any

other accounting method, you can deduct the

repayment or claim a credit for it only for the tax

year in which it’s a proper deduction under your

accounting method. For example, if you use an

accrual method, you're entitled to the deduction

or credit in the tax year in which the obligation

for the repayment accrues.

How To Get Tax Help

If you have questions about a tax issue; need

help preparing your tax return; or want to down-

load free publications, forms, or instructions, go

to IRS.gov to find resources that can help you

right away.

Preparing and filing your tax return. After

receiving all your wage and earnings state-

ments (Forms W-2, W-2G, 1099-R, 1099-MISC,

1099-NEC, etc.); unemployment compensation

statements (by mail or in a digital format) or

other government payment statements (Form

1099-G); and interest, dividend, and retirement

statements from banks and investment firms

(Forms 1099), you have several options to

choose from to prepare and file your tax return.

You can prepare the tax return yourself, see if

you qualify for free tax preparation, or hire a tax

professional to prepare your return.

Free options for tax preparation. Your op-

tions for preparing and filing your return online

or in your local community, if you qualify, include

the following.

•

Free File. This program lets you prepare

and file your federal individual income tax

return for free using software or Free File

Fillable Forms. However, state tax prepara-

tion may not be available through Free File.

Go to IRS.gov/FreeFile to see if you qualify

for free online federal tax preparation, e-fil-

ing, and direct deposit or payment options.

•

VITA. The Volunteer Income Tax Assis-

tance (VITA) program offers free tax help to

people with low-to-moderate incomes, per-

sons with disabilities, and limited-Eng-

lish-speaking taxpayers who need help

preparing their own tax returns. Go to

IRS.gov/VITA, download the free IRS2Go

app, or call 800-906-9887 for information

on free tax return preparation.

•

TCE. The Tax Counseling for the Elderly

(TCE) program offers free tax help for all

taxpayers, particularly those who are 60

years of age and older. TCE volunteers

specialize in answering questions about

pensions and retirement-related issues

unique to seniors. Go to IRS.gov/TCE or

download the free IRS2Go app for informa-

tion on free tax return preparation.

•

MilTax. Members of the U.S. Armed

Forces and qualified veterans may use Mil-

Tax, a free tax service offered by the De-

partment of Defense through Military One-

Source. For more information, go to

MilitaryOneSource (MilitaryOneSource.mil/

MilTax).

Also, the IRS offers Free Fillable Forms,

which can be completed online and then

e-filed regardless of income.

Using online tools to help prepare your re-

turn. Go to IRS.gov/Tools for the following.

•

The Earned Income Tax Credit Assistant

(IRS.gov/EITCAssistant) determines if

you’re eligible for the earned income credit

(EIC).

•

The Online EIN Application (IRS.gov/EIN)

helps you get an employer identification

number (EIN) at no cost.

•

The Tax Withholding Estimator (IRS.gov/

W4App) makes it easier for you to estimate

the federal income tax you want your em-

ployer to withhold from your paycheck.

This is tax withholding. See how your with-

holding affects your refund, take-home pay,

or tax due.

•

The First-Time Homebuyer Credit Account

Look-up (IRS.gov/HomeBuyer) tool pro-

vides information on your repayments and

account balance.

•

The Sales Tax Deduction Calculator

(IRS.gov/SalesTax) figures the amount you

can claim if you itemize deductions on

Schedule A (Form 1040).

Getting answers to your tax ques-

tions. On IRS.gov, you can get

up-to-date information on current

events and changes in tax law.

•

IRS.gov/Help: A variety of tools to help you

get answers to some of the most common

tax questions.

•

IRS.gov/ITA: The Interactive Tax Assistant,

a tool that will ask you questions and,

based on your input, provide answers on a

number of tax topics.

•

IRS.gov/Forms: Find forms, instructions,

and publications. You will find details on

the most recent tax changes and interac-

tive links to help you find answers to your

questions.

•

You may also be able to access tax infor-

mation in your e-filing software.

Need someone to prepare your tax return?

There are various types of tax return preparers,

including enrolled agents, certified public ac-

countants (CPAs), accountants, and many oth-

ers who don’t have professional credentials. If

you choose to have someone prepare your tax

return, choose that preparer wisely. A paid tax

preparer is:

•

Primarily responsible for the overall sub-

stantive accuracy of your return,

•

Required to sign the return, and

•

Required to include their preparer tax iden-

tification number (PTIN).

Although the tax preparer always signs

the return, you're ultimately responsible

for providing all the information re-

quired for the preparer to accurately prepare

your return and for the accuracy of every item

reported on the return. Anyone paid to prepare

tax returns for others should have a thorough

understanding of tax matters. For more informa-

tion on how to choose a tax preparer, go to Tips

for Choosing a Tax Preparer on IRS.gov.

Employers can register to use Business

Services Online. The Social Security Admin-

istration (SSA) offers online service at SSA.gov/

CAUTION

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38 Publication 525 (2023)

employer for fast, free, and secure W-2 filing op-

tions to CPAs, accountants, enrolled agents,

and individuals who process Form W-2, Wage

and Tax Statement, and Form W-2c, Corrected

Wage and Tax Statement.

IRS social media. Go to IRS.gov/SocialMedia

to see the various social media tools the IRS

uses to share the latest information on tax

changes, scam alerts, initiatives, products, and

services. At the IRS, privacy and security are

our highest priority. We use these tools to share

public information with you. Don’t post your so-

cial security number (SSN) or other confidential

information on social media sites. Always pro-

tect your identity when using any social net-

working site.

The following IRS YouTube channels provide

short, informative videos on various tax-related

topics in English, Spanish, and ASL.

•

Youtube.com/irsvideos.

•

Youtube.com/irsvideosmultilingua.

•

Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal

(IRSVideos.gov) contains video and audio pre-

sentations for individuals, small businesses,

and tax professionals.

Online tax information in other languages.

You can find information on IRS.gov/

MyLanguage if English isn’t your native lan-

guage.

Free Over-the-Phone Interpreter (OPI) Serv-

ice. The IRS is committed to serving taxpayers

with limited-English proficiency (LEP) by offer-

ing OPI services. The OPI Service is a federally

funded program and is available at Taxpayer

Assistance Centers (TACs), most IRS offices,

and every VITA/TCE tax return site. The OPI

Service is accessible in more than 350 lan-

guages.

Accessibility Helpline available for taxpay-

ers with disabilities. Taxpayers who need in-

formation about accessibility services can call

833-690-0598. The Accessibility Helpline can

answer questions related to current and future

accessibility products and services available in

alternative media formats (for example, braille,

large print, audio, etc.). The Accessibility Help-

line does not have access to your IRS account.

For help with tax law, refunds, or account-rela-

ted issues, go to IRS.gov/LetUsHelp.

Note. Form 9000, Alternative Media Prefer-

ence, or Form 9000(SP) allows you to elect to

receive certain types of written correspondence

in the following formats.

•

Standard Print.

•

Large Print.

•

Braille.

•

Audio (MP3).

•

Plain Text File (TXT).

•

Braille Ready File (BRF).

Disasters. Go to IRS.gov/DisasterRelief to re-

view the available disaster tax relief.

Getting tax forms and publications. Go to

IRS.gov/Forms to view, download, or print all

the forms, instructions, and publications you

may need. Or, you can go to IRS.gov/

OrderForms to place an order.

Getting tax publications and instructions in

eBook format. Download and view most tax

publications and instructions (including the In-

structions for Form 1040) on mobile devices as

eBooks at IRS.gov/eBooks.

IRS eBooks have been tested using Apple's

iBooks for iPad. Our eBooks haven’t been tes-

ted on other dedicated eBook readers, and

eBook functionality may not operate as inten-

ded.

Access your online account (individual tax-

payers only). Go to IRS.gov/Account to se-

curely access information about your federal tax

account.

•

View the amount you owe and a break-

down by tax year.

•

See payment plan details or apply for a

new payment plan.

•

Make a payment or view 5 years of pay-

ment history and any pending or sched-

uled payments.

•

Access your tax records, including key

data from your most recent tax return, and

transcripts.

•

View digital copies of select notices from

the IRS.

•

Approve or reject authorization requests

from tax professionals.

•

View your address on file or manage your

communication preferences.

Get a transcript of your return. With an on-

line account, you can access a variety of infor-

mation to help you during the filing season. You

can get a transcript, review your most recently

filed tax return, and get your adjusted gross in-

come. Create or access your online account at

IRS.gov/Account.

Tax Pro Account. This tool lets your tax pro-

fessional submit an authorization request to ac-

cess your individual taxpayer IRS online ac-

count. For more information, go to IRS.gov/

TaxProAccount.

Using direct deposit. The safest and easiest

way to receive a tax refund is to e-file and

choose direct deposit, which securely and elec-

tronically transfers your refund directly into your

financial account. Direct deposit also avoids the

possibility that your check could be lost, stolen,

destroyed, or returned undeliverable to the IRS.

Eight in 10 taxpayers use direct deposit to re-

ceive their refunds. If you don’t have a bank ac-

count, go to IRS.gov/DirectDeposit for more in-

formation on where to find a bank or credit

union that can open an account online.

Reporting and resolving your tax-related

identity theft issues.

•

Tax-related identity theft happens when

someone steals your personal information

to commit tax fraud. Your taxes can be af-

fected if your SSN is used to file a fraudu-

lent return or to claim a refund or credit.

•

The IRS doesn’t initiate contact with tax-

payers by email, text messages (including

shortened links), telephone calls, or social

media channels to request or verify per-

sonal or financial information. This includes

requests for personal identification num-

bers (PINs), passwords, or similar informa-

tion for credit cards, banks, or other finan-

cial accounts.

•

Go to IRS.gov/IdentityTheft, the IRS Iden-

tity Theft Central webpage, for information

on identity theft and data security protec-

tion for taxpayers, tax professionals, and

businesses. If your SSN has been lost or

stolen or you suspect you’re a victim of

tax-related identity theft, you can learn

what steps you should take.

•

Get an Identity Protection PIN (IP PIN). IP

PINs are six-digit numbers assigned to tax-

payers to help prevent the misuse of their

SSNs on fraudulent federal income tax re-

turns. When you have an IP PIN, it pre-

vents someone else from filing a tax return

with your SSN. To learn more, go to

IRS.gov/IPPIN.

Ways to check on the status of your refund.

•

Go to IRS.gov/Refunds.

•

Download the official IRS2Go app to your

mobile device to check your refund status.

•

Call the automated refund hotline at

800-829-1954.

The IRS can’t issue refunds before

mid-February for returns that claimed

the EIC or the additional child tax credit

(ACTC). This applies to the entire refund, not

just the portion associated with these credits.

Making a tax payment. Payments of U.S. tax

must be remitted to the IRS in U.S. dollars.

Digital assets are not accepted. Go to IRS.gov/

Payments for information on how to make a pay-

ment using any of the following options.

•

IRS Direct Pay: Pay your individual tax bill

or estimated tax payment directly from your

checking or savings account at no cost to

you.

•

Debit Card, Credit Card, or Digital Wallet:

Choose an approved payment processor

to pay online or by phone.

•

Electronic Funds Withdrawal: Schedule a

payment when filing your federal taxes us-

ing tax return preparation software or

through a tax professional.

•

Electronic Federal Tax Payment System:

Best option for businesses. Enrollment is

required.

•

Check or Money Order: Mail your payment

to the address listed on the notice or in-

structions.

•

Cash: You may be able to pay your taxes

with cash at a participating retail store.

•

Same-Day Wire: You may be able to do

same-day wire from your financial institu-

tion. Contact your financial institution for

availability, cost, and time frames.

Note. The IRS uses the latest encryption

technology to ensure that the electronic pay-

ments you make online, by phone, or from a

mobile device using the IRS2Go app are safe

and secure. Paying electronically is quick, easy,

and faster than mailing in a check or money or-

der.

CAUTION

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Publication 525 (2023) 39

What if I can’t pay now? Go to IRS.gov/

Payments for more information about your

options.

•

Apply for an online payment agreement

(IRS.gov/OPA) to meet your tax obligation

in monthly installments if you can’t pay

your taxes in full today. Once you complete

the online process, you will receive imme-

diate notification of whether your agree-

ment has been approved.

•

Use the Offer in Compromise Pre-Qualifier

to see if you can settle your tax debt for

less than the full amount you owe. For

more information on the Offer in Compro-

mise program, go to IRS.gov/OIC.

Filing an amended return. Go to IRS.gov/

Form1040X for information and updates.

Checking the status of your amended re-

turn. Go to IRS.gov/WMAR to track the status

of Form 1040-X amended returns.

It can take up to 3 weeks from the date

you filed your amended return for it to

show up in our system, and processing

it can take up to 16 weeks.

Understanding an IRS notice or letter

you’ve received. Go to IRS.gov/Notices to find

additional information about responding to an

IRS notice or letter.

Responding to an IRS notice or letter. You

can now upload responses to all notices and

letters using the Document Upload Tool. For no-

tices that require additional action, taxpayers

will be redirected appropriately on IRS.gov to

take further action. To learn more about the tool,

go to IRS.gov/Upload.

Note. You can use Schedule LEP (Form

1040), Request for Change in Language Prefer-

ence, to state a preference to receive notices,

letters, or other written communications from

the IRS in an alternative language. You may not

immediately receive written communications in

the requested language. The IRS’s commitment

to LEP taxpayers is part of a multi-year timeline

that began providing translations in 2023. You

will continue to receive communications, includ-

ing notices and letters, in English until they are

translated to your preferred language.

CAUTION

Contacting your local TAC. Keep in mind,

many questions can be answered on IRS.gov

without visiting a TAC. Go to IRS.gov/LetUsHelp

for the topics people ask about most. If you still

need help, TACs provide tax help when a tax is-

sue can’t be handled online or by phone. All

TACs now provide service by appointment, so

you’ll know in advance that you can get the

service you need without long wait times. Be-

fore you visit, go to IRS.gov/TACLocator to find

the nearest TAC and to check hours, available

services, and appointment options. Or, on the

IRS2Go app, under the Stay Connected tab,

choose the Contact Us option and click on “Lo-

cal Offices.”

The Taxpayer Advocate

Service (TAS) Is Here To

Help You

What Is TAS?

TAS is an independent organization within the

IRS that helps taxpayers and protects taxpayer

rights. TAS strives to ensure that every taxpayer

is treated fairly and that you know and under-

stand your rights under the Taxpayer Bill of

Rights.

How Can You Learn About Your

Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic

rights that all taxpayers have when dealing with

the IRS. Go to TaxpayerAdvocate.IRS.gov to

help you understand what these rights mean to

you and how they apply. These are your rights.

Know them. Use them.

What Can TAS Do for You?

TAS can help you resolve problems that you

can’t resolve with the IRS. And their service is

free. If you qualify for their assistance, you will

be assigned to one advocate who will work with

you throughout the process and will do every-

thing possible to resolve your issue. TAS can

help you if:

•

Your problem is causing financial difficulty

for you, your family, or your business;

•

You face (or your business is facing) an im-

mediate threat of adverse action; or

•

You’ve tried repeatedly to contact the IRS

but no one has responded, or the IRS

hasn’t responded by the date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of

Columbia, and Puerto Rico. To find your advo-

cate’s number:

•

Go to TaxpayerAdvocate.IRS.gov/Contact-

Us;

•

Download Pub. 1546, The Taxpayer Advo-

cate Service Is Your Voice at the IRS, avail-

able at IRS.gov/pub/irs-pdf/p1546.pdf;

•

Call the IRS toll free at 800-TAX-FORM

(800-829-3676) to order a copy of Pub.

1546;

•

Check your local directory; or

•

Call TAS toll free at 877-777-4778.

How Else Does TAS Help

Taxpayers?

TAS works to resolve large-scale problems that

affect many taxpayers. If you know of one of

these broad issues, report it to TAS at IRS.gov/

SAMS. Be sure to not include any personal tax-

payer information.

Low Income Taxpayer Clinics

(LITCs)

LITCs are independent from the IRS and TAS.

LITCs represent individuals whose income is

below a certain level and who need to resolve

tax problems with the IRS. LITCs can represent

taxpayers in audits, appeals, and tax collection

disputes before the IRS and in court. In addi-

tion, LITCs can provide information about tax-

payer rights and responsibilities in different lan-

guages for individuals who speak English as a

second language. Services are offered for free

or a small fee. For more information or to find an

LITC near you, go to the LITC page at

TaxpayerAdvocate.IRS.gov/LITC or see IRS

Pub. 4134, Low Income Taxpayer Clinic List, at

IRS.gov/pub/irs-pdf/p4134.pdf.

To help us develop a more useful index, please let us know if you have ideas for index entries.

See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Index

1231 property sale 17

401(k) plans 9

Excess contributions 11

403(b) plans 9

Limit for 10

457 plans 9

Limit for deferrals under 10

501(c)(18)(D) plans 9

Contributions 10

529 program 36

83(b) election 14

Academic health centers:

Meals and lodging when

teaching and research

organization 8

Accelerated death benefits 24

Accident insurance 5

Accidental death benefits 6

Accrual method taxpayers 2

Accrued leave payment:

At time of retirement or

resignation 4

Disability retirement 18

Activity not for profit 32

Adoption:

Employer assistance 5

Advance commissions 3

Advance payments 2

Aircraft 9

Airlines:

No-additional-cost services 8

Valuation of flights on

employer-provided aircraft 9

Alaska Permanent Fund

dividend 32

Alien status, waiver of 16

Aliens:

Nonresident 25

Alimony 32

Alternative minimum tax (AMT):

Recoveries, refiguring of 29

Stock options 12

Annuities:

Charitable gift 32

Railroad retirement 36

Tax-sheltered 10

Archer MSAs 5, 35

Armed forces 16

Combat zone bonus 16

Disability 16

Disability pensions 18

Health professions

scholarship 9

Military action as cause of

disability injuries 19

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40 Publication 525 (2023)

Qualified reservist

distribution 16

Rehabilitative program

payments 16

Retirement pay 16

Veterans benefits 16

Assistance (See Tax help)

Athletic facilities,

employer-provided 5

Automobile (See Vehicle,

employer-provided)

Awards (See Damages from

lawsuits)

Babysitting 3

Back pay, award for 3

Backup withholding:

Barter exchange transactions 21

Bankruptcy 3

Canceled debt not deemed to be

income 23

Barter income 20

Below-market loans 32

Bequest for services 35

Bitcoin 4

Black lung benefit payments 20

Bonuses 3, 36

Breach of contract:

Damages as income 33

Bribes 32

Business expenses:

Reimbursements 3

Business income 17, 18

Cafeteria plans 18

Campaign contributions 32

Campus lodging 8

Cancellation of debt 21

Cancellation of sales

contracts 32

Capital gains:

Recoveries 25, 29

Capital gains or losses:

Employee stock option plans

(ESOPs) 13

ISOs (ISOs) 13

Sale of personal property 36

Car (See Vehicle, employer-

provided)

Carpools 32

Cash or deferred arrangements

(CODAs) 9

Cash rebates 32

Casualty insurance:

Reimbursements from 32

Catch-up contributions 10

Charitable gift annuities 32

Child and Adult Care Food

Program:

Payments to daycare

providers 34

Child support payments 32

Childcare providers 3, 34

Chronic illness 19

Accelerated death benefits paid

to 24

Citizens outside U.S.:

Exclusion of foreign income 2

Civil Rights Act of 1964, Title VII:

Back pay and damages for

emotional distress under 32

Clergy 15

Coal 17

Colleges and universities:

Faculty lodging 8

Scholarships and fellowships 36

Commissions:

Advance 3

Commuter highway vehicles 8

Compensation:

Employee 3

Miscellaneous 3

Unemployment 29

Workers' 20

Compensatory damages 20, 33

Constructive receipt of income 2

Copyrights:

Infringement damages 33

Royalties 17

Corporate directors 34

Cost-of-living allowances 4

Court awards 32

(See also Damages from lawsuits)

Credit card Insurance 33

Credits:

Recoveries, refiguring of unused

credits 28, 29

Currency transactions,

foreign 34

Damages from lawsuits 32

Back pay awards 3

Breach of contract 33

Compensatory damages 20, 33

Emotional distress under Title

VII, Civil Rights Act of

1964 32

Punitive damages 32

Daycare providers 3

(See also Childcare providers)

Food program payments to 34

De minimis (minimal) benefits 5,

Death benefits 23

(See also Life insurance)

Accelerated 24

Debts:

Canceled 21

Excluded debt 23

Nonrecourse debts 21

Recourse 21

Stockholder's 21

Deduction:

Costs of discrimination suits 33

Deferred compensation:

Nonqualified plans 4

Dependent care benefits 5

Depletion allowance 17

Differential wage payments 4

Armed forces 16

Digital Assets 4

Directors' fees 34

Disability:

Military 16

Pensions 18

Workers' compensation 20

Person with 30

Unemployment compensation,

paid as substitute for 30

Disaster relief:

Disaster mitigation payments 31

Disaster Relief and Emergency

Assistance Act:

Grants 30

Unemployment benefits 29

Payments 30

Discounts:

Employee discounts 6

Employee stock purchase

plans 13

Mortgage loan for early

payment 21

Dividends:

Restricted stock 15

Divorced taxpayers:

Stock options exercised incident

to divorce 12

Down payment assistance 33

Educational assistance:

Employer-provided 6

Scholarships and fellowships 36

Educational institutions:

Faculty lodging 8

Elderly persons:

Nutrition Program for the

Elderly 32

Tax Counseling for the

Elderly 17

Election precinct officials 34

Elective deferrals 9

Catch-up contributions 10

Excess annual additions 11

Excess contributions 11

Excess deferrals 11

Increased limit for last 3 years

prior to retirement age 10

Limit on 9

Reporting by employer 10

Emergency Homeowners' Loan

Program 31

Emotional distress damages 33

Employee achievement awards 4

Employee awards or bonuses 36

Employee compensation 3-15

Fringe benefits 4-9

Restricted property 14, 15

Retirement plan contributions 9

Stock options 11-13

Employee discounts 6

Employee stock purchase

plans 12, 13

Employer-owned life

insurance 23

Employer-provided:

Educational assistance 6

Vehicles 9

Employer, foreign 16

Employment:

Abroad 16

Agency fees 33

Contracts:

Severance pay for

cancellation of 4

Endowment proceeds 24

Energy:

Assistance 32

Conservation:

Subsidies 33

Utility rebates 37

Estate income 33

Estimated tax:

Unemployment

compensation 30

Excess:

Annual additions 11

Contributions 11

Deferrals 11

Expected inheritance 35

Expenses paid by another 33

Exxon Valdez settlement 33

Eligible retirement plan 33

Income averaging 34

Legal expenses 33

Reporting

requirement-statement 34

Faculty lodging 8

Fair Market Value (FMV) 3

Farming:

Qualified farm debt, cancellation

of 23

Federal employees:

Accrued leave payment 4

Compensation Act (FECA)

payments 20

Cost-of-living allowances 4

Disability pensions 18

Thrift Savings Plan for 9

Federal income tax:

Refunds 24

Fees for services 34

Financial counseling fees 6

Fellowships 36

FICA withholding:

Foreign employers, U.S. citizens

working for in U.S. 16

Paid by employer 4

Fiduciaries:

Fees for services 34

Financial counseling fees 6

(See also Retirement planning

services)

Fitness programs:

Employer-provided 5

Flights:

Employer-provided aircraft 9

No-additional-cost services 8

Food benefits:

Daycare providers, food program

payments to 34

Nutrition Program for the

Elderly 32

Foreign:

Currency transactions 34

Employment 16

Governments, employees of 16

Income 2

Service 19

Form 1040:

Excess contributions to elective

deferrals 11

Recoveries 26

Unemployment

compensation 29

Wages from Form W-2 3

Form 1040, Schedule A:

Repayment of commissions paid

in advance 3

Form 1040, Schedule B:

Restricted stock dividends 15

Form 1040, Schedule C:

Bartering 20

Childcare providers to use 3

Personal property rental,

reporting income from 17

Royalties 17

Form 1040, Schedule D:

Stock options 13

Stock options reported on 12

Form 1040, Schedule E:

Partner's return 17

Royalties 17

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Publication 525 (2023) 41

Form 1041:

Estates and trusts 33

Form 1041, Schedule K-1:

Beneficiary's share of income,

deductions, credits, etc. 33

Form 1065:

Partnership return 17

Form 1065, Schedule K-1:

Partner's share of income 17, 18

Form 1098:

Mortgage interest statement 25

Form 1099-B:

Barter exchange transactions 21

Form 1099-C:

Cancellation of debt 21

Form 1099-DIV:

Restricted stock dividends 15

Form 1099-G:

State tax refunds 24

Unemployment

compensation 29

Form 1099-K:

Sharing/Gig economy 29

Form 1099-MISC:

Services totaling $600 or

more 34

Stock options exercised incident

to divorce 12

Form 1099-R:

Charitable gift annuities 32

Excess annual additions 11

Excess deferral amounts 11

Surrender of life insurance policy

for cash 24

Form 1120-POL:

Political organizations 32

Form 1120-S:

S corporation return 18

Form 1120-S, Schedule K-1:

Shareholder's share of income,

credits, deductions, etc. 18

Form 2441:

Child and dependent care

expenses 6

Form 4255:

Recapture of investment

credit 29

Form 6251:

Alternative minimum tax 12

Form 8839:

Adoption assistance 5

Form 8853:

Accelerated death benefits 24

Archer MSAs and long-term care

insurance contracts 5

Form 8919:

Uncollected social security and

Medicare tax on wages 3

Form RRB-1099:

Railroad retirement board

payments 31

Form SSA-1099:

Social security benefit

statement 31

Form W-2:

501(c)(18)(D) contributions 10

Accrued leave payment at time of

retirement or resignation 4

Back pay awards 3

Bonuses or awards 3

Elective deferrals, reporting by

employer 10

Failure to receive from

employer 3

Fringe benefits reported on 5

Stock options from

employers 12

Wage and tax statement 3

Form W-2G:

Gambling winnings 34

Form W-4V:

Unemployment compensation,

voluntary withholding

request 30

Form W-9:

Request for taxpayer

identification number 21

Foster care 34

Foster Grandparent Program 17

Found property 34

Fringe benefit FMV 9

Fringe benefits 4

Accident and health insurance 5

Adoption, employer

assistance 5

Athletic facilities 5

Commuter highway vehicles 8

De minimis benefits 5, 8

Dependent care benefits 5

Educational assistance 6

Employee discounts 6

Faculty lodging 8

Financial counseling fees 6

Holiday gifts 5

Meals and lodging 8

Moving expenses (See Moving

expenses)

No-additional-cost services 8

Retirement planning

(See Retirement planning

services)

Transit pass 8

Tuition reduction 9

Valuation of 9

Vehicle 9

Working condition benefits 9

Frozen deposits:

Interest on 35

Gambling winnings and

losses 34

Gas:

Royalties from 17

Gifts 34

Holiday gifts from employer 5

Government employees

(See Federal employees; State

employees)

Grantor trusts 33

Group-term life insurance:

Worksheets 6, 7

Gulf oil spill 35

HAMP:

Home affordable modification

program:

Pay-for-performance success

payments 31

Hardest Hit Fund Program 31

Health:

Flexible spending

arrangement 5

Insurance 5

Reimbursement arrangement 5

Savings account 5

Highly compensated employees:

Excess contributions to elective

deferrals 11

Historic preservation grants 35

Hobby losses 35

Holding period requirement 13

Holiday gifts 5

Holocaust victims restitution 35

Home, sale of 36

Host 23

Hotels:

No-additional-cost services 8

Housing (See Lodging)

Illegal activities 35

Income:

Assigned 2

Business and investment 17, 18

Constructive receipt of 2

Estate and trust 33

Foreign employers 16

Illegal 35

Miscellaneous 20

Other 32

Partnership 17

Prepaid 2

S corporation 18

Indian fishing rights 35

Indian money account 35

Individual retirement

arrangements (IRAs):

Deduction 32

Inherited IRA 34

Inheritance 34

IRA 34

Property not substantially

vested 15

Injury benefits 18-20

Insurance

Credit card 33

Health 5

Life (See Life insurance)

Long-term care (See Long-term

care insurance)

Interest:

Canceled debt including 21

Frozen deposits 35

Mortgage refunds 25

Option on insurance 24

Recovery amounts 25

Savings bond 35

State and local government

obligations 35

Interference with business

operations:

Damages as income 33

International organizations,

employees of 16

Interview expenses 35

Investment counseling fees 6

(See also Retirement planning

services)

Investment income 17, 18

IRAs (See Individual retirement

arrangements (IRAs))

Iron ore 17

ISOs (ISOs) 12, 13

Itemized deductions:

Recoveries 24, 25

Job interview expenses 35

Joint returns:

Social security benefits or

railroad retirement

payments 31

Joint state/local tax return:

Recoveries 25

Jury duty pay 35

Kickbacks 35

Labor unions:

Convention expenses,

reimbursed 37

Dues 37

Strike and lockout benefits 37

Unemployment benefits paid

from 30

Last day of tax year, income

received on 2

Leave (See Accrued leave

payment)

Length-of-service awards 4

Life insurance:

Employer-owned 23

Proceeds 23

Surrender of policy for cash 24

Loans 21

(See also Mortgage)

Below-market 32

Paycheck Protection

Program 23

Student 21

Lockout benefits 37

Lodging:

Campus lodging 8

Clergy 15

Employer-paid or reimbursed 8

Faculty lodging 8

Replacement housing

payments 31

Long-term care insurance 5, 19

Lotteries and raffles 34

Lump-sum distributions:

Survivor benefits 29

Manufacturer incentive

payments 35

Meals:

Employer-paid or reimbursed 8

Nutrition Program for the

Elderly 32

Medicaid waiver payments 2, 34

Medical:

Care reimbursements 20

Savings accounts 35

Medicare:

Advantage MSAs 35

Benefits 31

Tax paid by employer 4

Medicare tax (See Social security

and Medicare taxes)

Military (See Armed forces)

Minerals:

Royalties from 17

Miscellaneous:

Compensation 3

Income 20

Missing children, photographs

of 2

Mortgage:

Assistance payment (under sec.

235 of National Housing

Act) 31

Discounted loan 21

Interest refund 25

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42 Publication 525 (2023)

Qualified principal residence

indebtedness 23

Relief 21

Motor vehicle,

employer-provided 9

Moving expenses:

Reimbursements 3, 36

MSAs (Medical savings

accounts) 35

National Health Service Corps

Scholarship Program 9

National Oceanic and

Atmospheric

Administration 19

National Senior Service

Corps 16, 17

No-additional-cost services 8

No-fault car insurance:

Disability benefits under 20

Nobel prize 36

Nonrecourse debt 21

Nonstatutory stock options 11

Nontaxable income 2

Not-for-profit activities 32

Notary fees 34

Notes received for services 4

Nutrition Program for the

Elderly 32

Oil:

Royalties from 17

Options, stock 11, 13

Outplacement services 4

Overseas work 2

Parking fees:

Employer-paid or reimbursed 8

Partner and partnership

income 17

Patents:

Infringement damages 33

Royalties 17

Paycheck Protection Program

loans 23

Peace Corps 16

Pensions:

Clergy 15

Disability pensions 18

Inherited pensions 34

Military 16

Personal property:

Rental income and expense 17

Sale of 36

Personal representatives

(See Fiduciaries)

Prepaid income 2

Price reduced after purchase 23

Prizes and awards 3, 36

Achievement awards 4

Employee awards or

bonuses 36

Length-of-service awards 4

Pulitzer, Nobel, and similar

prizes 36

Safety achievement 4

Scholarship prizes 37

Profit-sharing plan 18

Public assistance benefits 30

Public Health Service 19

Public safety officers killed in

line of duty 29

Public transportation passes,

employer-provided 8

Publications (See Tax help)

Pulitzer prize 36

Punitive damages 32

Qualified tuition program

(QTP) 36

Raffles 34

Railroad:

Retirement annuities 36

Sick pay 20

Unemployment compensation

benefits 30

Real estate:

Qualified real property business

debt, cancellation of 23

Rebates:

Cash 32

Utility 37

Recovery of amounts previously

deducted 24, 26

Itemized deductions 24, 25

Non-itemized deductions 29

Unused tax credits, refiguring

of 28, 29

Worksheet of itemized

deductions (Worksheet

2) 27, 28

Refunds:

Federal income tax 24

Mortgage interest 25

State tax 24

Rehabilitative program

payments 16

Reimbursements:

Business expenses 3

Casualty losses 32

Meals and lodging 8

Medical expenses 20

Moving expenses 3, 36

Related party transactions:

Stock option transfer 12

Religious order members 15

Rental income and expenses:

Personal property rental 17

Reporting of 17

Repayments 37, 38

Repossession 32

Restricted property 14, 15

Retired Senior Volunteer

Program (RSVP) 17

Retirement:

Settlement 2

Retirement planning services 6,

Retirement plans 16

(See also Pensions)

Automatic contribution

arrangements 9

Contributions 9, 11, 12

Elective deferrals (See Elective

deferrals)

Rewards 36

Roth contributions 10

Royalties 17

S corporations 18

Safety achievement awards 4

Salary reduction simplified

employee pension plans

(See SARSEPs)

Sale of home 36

Sales contracts:

Cancellation of 32

SARSEPs 9

Excess contributions 11

Savings bonds 35

Savings incentive match plans

for employees (See SIMPLE

plans)

Scholarships and fellowships 36

Self-employed persons:

U.S. citizens working for foreign

employers in U.S. treated

as 16

Senior Companion Program 17

Service Corps of Retired

Executives (SCORE) 17

Severance pay 4

Outplacement services 4

Sick pay 4

Sickness and injury benefits 20

SIMPLE plans 9

Limit for deferrals under 10

Smallpox vaccine injuries 37

Social security and Medicare

taxes:

Foreign employers, U.S. citizens

working for in U.S. 16

Paid by employer 4

Standard deduction:

Recoveries 26

State employees:

Unemployment benefits paid

to 30

State or local governments:

Interest on obligations of 35

State or local taxes:

Refunds 24

State tax payments 37

Statutory stock option holding

period 13

Stock appreciation rights 4

Stock options 11, 13

Stock options, nonstatutory:

Exercise or transfer 12

Grant 11

Sale 12

Stock options, statutory:

Exercise 12

Grant 12

Sale 13

Stockholder debts 21

Stolen property 37

Strike benefits 37

Student loans:

Cancellation of debt 21

Substantial risk of forfeiture 14

Substantially vested property 14

Supplemental unemployment

benefits 30

Surviving spouse:

Life insurance proceeds paid

to 23

Survivor benefits 29

Tables and figures:

Group-term life insurance

(Table 1) 7

Tax benefit rule 24

Tax Counseling for the

Elderly 17

Tax help 38

Tax-sheltered annuity plans

(403(b) plans) 9

Limit for 10

Terminal illness 24

Terrorist attacks:

Disability payments for injuries

from 19

Tax relief for victims 2, 18

Thrift Savings Plan 9

Title VII, Civil Rights Act of 1964:

Back pay and damages for

emotional distress under 32

Tour guides, free tours for 34

Trade Act of 1974:

Trade readjustment allowances

under 30

Transferable property 14

Transit passes 8

Travel agencies:

Free tour to organizer of group of

tourists 34

Travel and transportation

expenses:

Free tours from travel

agencies 34

Fringe benefits 8

Reimbursements 3

School children, transporting

of 37

Trusts:

Grantor trusts 33

Income 33

Tuition program, qualified

(QTP) 36

Tuition reduction 9

Unemployment

compensation 29

Unions (See Labor unions)

Unlawful discrimination suits:

Deduction for costs 33

VA payments 36

Valuation:

Fringe benefits 9

Stock options 11

Vehicle:

Commuter highway 8

Employer-provided 9

Veterans benefits 16

Disability compensation 19

Retroactive VA determination 19

Special statute of limitations 19

Viatical settlements 24

Volunteer work 16

Tax counseling (Volunteer

Income Tax Assistance

Program) 17

Volunteers in Service to America

(VISTA) 16

W-2 form (See Form W-2)

Welfare benefits 30

Whistleblower 37

Winter energy payments 32

Withholding:

Barter exchange transactions 21

Unemployment

compensation 30

Work-training programs 30

Workers' compensation 20

Working condition benefits 9

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Publication 525 (2023) 43

Worksheets:

Computations for Worksheet 2,

lines 1a and 1b (Worksheet

2a) 27

Group-term life insurance

(Worksheet 1) 6, 7

Recoveries of itemized

deductions (Worksheet

2) 27, 28

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44 Publication 525 (2023)