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 Savings 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 under 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. Taxpayers may continue to deduct 50% of the cost 

of business meals if the taxpayer (or an employee of the taxpayer) is present and the food 

or beverages aren’t considered lavish or extravagant.

Contributions to simplified employee pension 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 contributions. 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’ income.

Reminders

Paycheck Protection Program loan forgiveness. Gross income doesn’t include any 

amount arising from the forgiveness of a Paycheck 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, effective December 27, 2020. (See P.L. 116-260.) 

When a taxpayer who does not factually satisfy 

the conditions for a qualifying forgiveness causes 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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Jan 16, 2024
inaccurately representing that the taxpayer satisfies 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 firefighters 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 Volunteer firefighters and emergency medical responders.

Repeal of deduction for alimony payments 

and corresponding inclusion in gross income. 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 separation instrument executed before 2019 and 

modified after 2018, if the modification expressly 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 available. 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 beginning after 2017, certain qualified employees can 

make a new election to defer income taxation 

for up to 5 years for the qualified stocks received. See Qualified Equity Grants under Employee Compensation, later.

Suspension of qualified bicycle commuting 

reimbursement exclusion. For tax years beginning 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 employment must be included in your gross income.

Unemployment compensation. If you received unemployment compensation but did not 

receive Form 1099-G, Certain Government Payments, through the mail, you may need to access your information through your state’s website 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 beneficiary's qualified disability expenses. See Pub. 

907 for more information.

Certain amounts received by wrongfully incarcerated individuals. Certain amounts you 

receive due to a wrongful incarceration may be 

excluded from gross income. See IRS.gov/

Newsroom/IRS-Updates-Frequently-AskedQuestions-Related-to-Wrongful-Incarceration 

for more information.

Foreign income. If you're a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) 

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

This is true whether you reside inside or outside 

the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or 

Form 1099 from the foreign payer. This applies 

to earned income (such as wages and tips) as 

well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).

If you reside outside the United States, you 

may be able to exclude part or all of your foreign 

source earned income. For details, see 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 Schedule 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 income survivor benefits received from a governmental section 401(a) plan attributable to the officer'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 received from the federal Bureau of Justice Assistance or death benefits paid by a state program. 

See section 104(a)(6).

Qualified Medicaid waiver payments. Certain payments you receive for providing care to 

an eligible individual in your home under a 

state's Medicaid waiver program may be excluded 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, including an IRA. Contributions to eligible retirement 

plans, other than a Roth IRA or a designated 

Roth contribution, reduce the qualified settlement 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 employer identification number (EIN).

Terrorist attacks. You can exclude from income certain disaster assistance, disability, and 

death payments received as a result of a terrorist or military action. For more information, see 

Sickness and Injury Benefits, later; Pub. 3920, 

Tax Relief for Victims of Terrorist Attacks; and 

Pub. 907, Tax Highlights for Persons With Disabilities.

Photographs of missing children. The Internal 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 recognize a child.

Introduction

You can receive income in the form of money, 

property, or services. This publication discusses 

many kinds of income and explains whether 

they are taxable or nontaxable. It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S 

corporations, and royalties. It also includes information on disability pensions, life insurance 

proceeds, and welfare and other public assistance benefits. Check the index for the location 

of a specific subject.

In most cases, an amount included in your 

income is taxable unless it is specifically exempted by law. Income that is taxable must be 

reported on your return and is subject to tax. Income that is nontaxable may have to be shown 

on your tax return but 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 received 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 receives it.

Advance payments. Generally, you report an 

advance payment for goods, services, or other 

items as income in the year you receive the payment. However, if you use an accrual method of 

accounting and are otherwise eligible, you can 

2 Publication 525 (2023)
elect to postpone including the advance payment in income until the next year. See Pub. 

538 for more information.

Comments and suggestions. We welcome 

your comments about this publication and suggestions 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, instructions, and publications. Don’t send tax questions, tax returns, or payments to the above address.

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 Interactive 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 publications. 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 order current forms, instructions, and publications; 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 already sent us. You can get forms and publications faster online.

Useful Items

You may want to see:

Publication

Tax Guide for Small Business

Selling Your Home

Residential Rental Property

41 Partnerships

44 Sales and Other Dispositions of 

Assets

0 Investment Income and Expenses

4 Tax Guide for Seniors

9 Survivors, Executors, and 

Administrators

7 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)

U.S. Individual Income Tax Return

U.S. Nonresident Alien Income 

Tax Return

U.S. Tax Return for Seniors

Distributions From Pensions, 

Annuities, Retirement or 

Profit-Sharing Plans, IRAs, Insurance 

Contracts, etc.

age and Tax Statement

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

Employee Compensation

In most cases, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, 

commissions, fees, and tips, this includes other 

forms of compensation such as fringe benefits 

and stock options.

You should receive a Form W-2 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 knowledge 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 unless 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 income 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 return, you report the wages and withheld income 

tax for the period before you filed for bankruptcy. Your bankruptcy estate reports the wages and withheld income tax for the period after 

you filed for bankruptcy. If you receive other information 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 figuring your self-employment tax if you're self-employed. For that purpose, you must take into account 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 bankruptcy case. The statement must show the allocation 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 alphabetical order.

Advance commissions and other earnings. 

If you receive advance commissions or other 

amounts for services to be performed in the future 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, reduce the amount of unearned commissions included in your income by the repayment. If you 

repay them in a later tax year, you can deduct 

the repayment as an itemized deduction on your 

Schedule A (Form 1040), Other Itemized Deductions, line 16, or you may be able to take a 

credit for that year. See Repayments, later.

Allowances and reimbursements. If you receive 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 

Publication 525 (2023) 3
some future time, it isn’t taxable until you receive it or it’s made available to you.

Employee achievement award. If you receive tangible personal property (other than 

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

an award for length of service or safety achievement, you must generally exclude its value from 

your income. However, the amount you can exclude 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 conditions and circumstances that don’t create a significant 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 received 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 during the year. 

Example 2. You received three employee 

achievement awards during the year: a nonqualified plan award of a watch valued at $250, and 

two qualified plan awards of a stereo valued at 

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

Assuming that the requirements for qualified 

plan awards are otherwise satisfied, each award 

by itself would be excluded from income. However, because the $1,750 total value of the 

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

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

Differential wage payments. This is any payment 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 represents 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 reported as wages on Form W-2.

Government cost-of-living allowances. 

Most payments received by U.S. Government 

civilian employees for working abroad are taxable. 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 deferred 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, using 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 nonqualified entity is one of the following.

1. A foreign corporation, unless substantially 

all of its income is:

a. Effectively connected with the conduct of a trade or business in the United 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 foreign 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 compensation 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 employment contract.

Severance payments are subject to social 

security and Medicare taxes, income tax 

withholding, and FUTA tax. Severance payments 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 reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. You can reduce 

gross wages by the amount you repaid in the 

same tax year in which you received it. Attach to 

your tax return a copy of the receipt or statement given to you by the agency you repaid to 

explain the difference between the wages on 

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

Outplacement services. If you choose to 

accept a reduced amount of severance pay so 

that you can receive outplacement services 

(such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income.

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 accident or health insurance policy, the benefits you 

receive under the policy aren’t taxable. For 

more information, see Other Sickness and Injury Benefits under Sickness and Injury Benefits, 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 employer 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 corporation'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 digital assets (such as Bitcoin) as payment for your 

services, you must include the FMV of the digital assets as of the date(s) of receipt in your income. 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 purposes and is available at IRS.gov/irb/

2014-16_IRB#NOT-2014-21. For further information, 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 services (for example, under a covenant not to 

4 Publication 525 (2023)
compete) is treated as the performance of services for purposes of these rules.

See Valuation of Fringe Benefits, later in this 

discussion, for information on how to determine 

the amount to include in income.

Recipient of fringe benefit. You're the recipient of a fringe benefit if you perform the services 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 provider 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 employer has the option to report taxable noncash 

fringe benefits by using either of the following 

rules.

• The general rule: benefits are reported for 

a full calendar year (January 1–December 

31).

• The special accounting period rule: benefits provided during the last 2 months of the 

calendar year (or any shorter period) are 

treated as paid during the following calendar year. For example, each year your employer reports the value of benefits provided during the last 2 months of the prior 

year and the first 10 months of the current 

year.

Your employer doesn’t have to use the same accounting period for each fringe benefit, but must 

use the same period for all employees who receive a particular benefit.

You must use the same accounting period 

that you use to report the benefit to claim an 

employee business deduction (for example, use 

of a car).

Form W-2. Your employer must include all taxable fringe benefits in Form W-2, box 1, as wages, tips, and other compensation, and, if applicable, 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 separately 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 explained 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 income. 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 Contracts. 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 reduction, 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 included in your income.

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

eligible individual, you and any other person, including your employer or a family member, can 

make contributions to your HSA. Contributions, 

other than employer contributions, are deductible on your return whether or not you itemize 

deductions. Contributions made by your employer aren’t included in your income. Distributions from your HSA that are used to pay qualified 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 employer. The contributions are treated as a distribution of money and aren’t included in the partner's gross income. Contributions by a 

partnership to a partner's HSA for services rendered are treated as guaranteed payments that 

are includible in the partner's gross income. In 

both situations, the partner can deduct the contribution 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-employee's gross income. The shareholder-employee 

can deduct the contribution made to the shareholder-employee's HSA.

Qualified HSA funding distribution. You 

can make a one-time distribution from your individual retirement arrangement (IRA) to an HSA 

and you generally won’t include any of the distribution 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 employer for qualified adoption expenses in connection with your adoption of an eligible child. 

See the Instructions for Form 8839 for more information.

Adoption benefits are reported by your employer in Form W-2, box 12, with code T. They 

are also included as social security and Medicare 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 athletic 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 discounts 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 turkey, 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 involved.

Dependent Care Benefits

If your employer provides dependent care benefits under a dependent care assistance plan, 

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 either you or your care provider for the care 

of your qualifying person while you work,

• The FMV of care in a daycare facility provided 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 benefits you received during the year,

• The total amount of qualified expenses you 

incurred during the year,

• Your earned income,

• Your spouse's earned income, or

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

Your employer must show the total amount 

of dependent care benefits provided to you during the year under a 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 assistance. 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 investment (such as stocks or bonds).

The exclusion is limited to the price charged 

nonemployee customers multiplied by the following percentage.

• For a discount on property, your employer's 

gross profit percentage (gross profit divided by gross sales) on all property sold 

during the employer's previous tax year. 

(Ask your employer for this percentage.)

• For a discount on services, 20% (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 investment counseling are miscellaneous itemized 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 Retirement 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 include in income the cost of employer-provided 

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

of coverage reduced by any amount you pay toward the purchase of the insurance.

For exceptions to this rule, see Entire cost 

excluded and Entire cost taxed, later.

If your employer provided more than 

$50,000 of coverage, the amount included in 

your income is reported as part of your wages in 

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

you must include in your income, as wages, the 

cost of the permanent benefits minus the 

amount you pay for them. Your employer should 

be able to tell you the amount to include in your 

income.

Accidental death benefits. Insurance that 

provides accidental or other death benefits but 

doesn't provide general death benefits (for example, travel insurance) isn’t group-term life insurance.

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 Medicare taxes on the excess coverage, with codes 

M and N. You must pay these taxes with your income 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 reported 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 insurance, 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.

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 employer 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. 12

8. Multiply line 6 by 

line 7 ................. 8. 82.80

9. Enter the 

premiums you paid 

per month ..... 9. 4.15

10. Enter the number 

of months you paid 

the 

premiums ..... 10. 12

11. Multiply line 9 by 

line 10 ................ 11. 49.80

12. Subtract line 11 from line 8. 

Include this amount in 

your income as 

wages ............... 12. 33.00

The total amount to include in income for the 

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

Neither employer provided over $50,000 insurance coverage, so the wages shown on your 

Forms W-2 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 following circumstances apply.

1. You’re permanently and totally disabled 

and have ended your employment.

2. Your employer is the beneficiary of the policy for the entire period the insurance is in 

force during the tax year.

3. A charitable organization to which contributions are deductible is the only beneficiary of the policy for the entire period the 

insurance is in force during the tax year. 

Publication 525 (2023) 7
(You aren’t entitled to a deduction for a 

charitable contribution for naming a charitable organization as the beneficiary of 

your policy.)

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

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 employer 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 employer through a qualified employees' trust, 

such as a pension trust or a qualified annuity plan.

• You’re a key employee and your employer's 

plan discriminates in favor of key employees.

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 following 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 (Minimal) 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 organization that meets the following conditions.

• Its principal purpose or function is to provide medical or hospital care or medical 

education or research.

• It receives payments for graduate medical 

education under the Social Security Act.

• One of its principal purposes or functions is 

to provide and teach basic and clinical 

medical science and research using its 

own faculty.

Qualified campus lodging. Qualified campus lodging is lodging furnished to you, your 

spouse, or any of your dependents by, or on behalf of, the institution or center for use as a 

home. The lodging must be located on or near a 

campus of the educational institution or academic health center.

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, 

or

• The average of rentals paid by individuals 

(other than employees or students) for 

comparable lodging held for rent by the educational institution.

If the amount you pay is less than the lesser of 

these amounts, you must include the difference 

in your income.

The lodging must be appraised by an independent appraiser and the appraisal must be 

reviewed on an annual basis.

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, reimbursements for certain moving expenses are no longer excluded from the gross income of nonmilitary taxpayers.

No-Additional-Cost Services

The value of services you receive from your employer 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 customers 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 attendant for a company that owns both an airline 

and a hotel chain. Your employer allows you to 

take personal flights (if there is an unoccupied 

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

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

value of the personal flight 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 services include retirement planning advice, information about your employer's retirement plan, 

and information about how the plan may fit into 

your overall individual retirement income plan. 

You can't exclude the value of any tax preparation, 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 qualified transportation fringe benefit is:

• Transportation in a commuter highway vehicle (such as a van) between your home 

and work place,

• A transit pass, or

• Qualified parking.

Cash reimbursement by your employer for 

these expenses under a bona fide reimbursement arrangement is also excludable. However, 

cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be 

exchanged only for a transit pass 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 highway vehicle that seats at least six adults (not including the driver). At least 80% of the vehicle's 

mileage must reasonably be expected to be:

• For transporting employees between their 

homes and workplace, and

• On trips during which employees occupy at 

least half of the vehicle's adult seating capacity (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 highway vehicle operated by a person in the business 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 commuter highway vehicle, or by car pool. It doesn't 

include parking at or near the employee's home.

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) furnished by an educational institution to an 

employee, former employee who retired or 

became disabled, or his or her spouse and 

dependent children;

• For education furnished to a graduate student at an educational institution if the 

graduate student is engaged in teaching or 

research activities for that institution; or

• Representing payment for teaching, research, or other services if you receive the 

amount under the National Health Service 

Corps Scholarship Program or the Armed 

Forces Health Professions Scholarship 

and Financial Assistance program. 

For more information, see Pub. 970.

Working Condition Benefits

If your employer provides you with a product or 

service and the cost of it would have been allowable as a business or depreciation deduction if you paid for it yourself, the cost isn't included 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 determined under the general valuation rule or under 

the special valuation rules. For an exception, 

see Employer-Provided Group-Term Life Insurance, 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 benefit, 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 circumstances. 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 employer provides a car (or other highway motor 

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

usually a taxable noncash fringe benefit.

Under the general valuation rules, the value 

of an employer-provided vehicle is the amount 

you would have to pay a third party to lease the 

same or a similar vehicle on the same or comparable terms in the same geographic area 

where you use the vehicle. An example of a 

comparable lease term is the amount of time 

the vehicle is available for your use, such as a 

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

multiplying a cents-per-mile rate times the number of miles driven unless you prove the vehicle 

could have been leased on a cents-per-mile basis. See Notice 2021-7 for more information on 

temporary relief for employers and employees 

using the automobile lease valuation rule to determine the value of an employer-provided vehicle 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 primarily personal and you control the use of the 

aircraft for the flight, the value is the amount it 

would cost to charter the flight from a third party.

If there is more than one employee on the 

flight, the cost to charter the aircraft must be 

divided among those employees. The division 

must be based on all the facts, including which 

employee or employees control the use of the 

aircraft.

Special valuation rules. Generally, you can 

use a special valuation rule for a fringe benefit 

only if your employer uses the rule. If your employer uses a special valuation rule, you 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 circumstances, even if your employer uses a special 

rule.

If you and your employer use a special valuation rule, you must include in your income the 

amount your employer determines under the 

special rule minus the sum of:

1. Any amount you repaid your employer, 

plus

2. Any amount specifically excluded from income by law.

The special valuation rules are the following.

• The automobile lease rule.

• The vehicle cents-per-mile rule.

• The commuting rule.

• The unsafe conditions commuting rule.

• The employer-operated eating-facility rule. 

For more information on these rules, see 

Pub. 15-B.

For information on the noncommercial flight 

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

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 contributed. (Your employer can tell you whether 

your retirement plan is qualified.) However, the 

cost of life insurance coverage included in the 

plan may have to be included.

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 transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at 

the time of the contribution, you don't have to include 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 retirement plans, see Pub. 575 (or Pub. 

721 if you’re a federal employee or retiree).

Elective Deferrals

If you’re covered by certain kinds of retirement 

plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. 

The amount you set aside (called an “elective 

deferral”) is treated as an employer contribution 

to a qualified plan. 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 included in wages subject to social security and 

Medicare taxes.

Elective deferrals include elective contributions to the following retirement plans.

1. Cash or deferred arrangements (section 

401(k) plans).

2. The TSP for federal employees.

3. Salary reduction simplified employee pension plans (SARSEP plans).

4. Savings incentive match plans for employees (SIMPLE plans).

5. Tax-sheltered annuity plans (section 

403(b) plans).

6. Section 501(c)(18)(D) plans. (But see Reporting by employer, later.)

7. Section 457 plans.

Qualified automatic contribution arrangements. Under a qualified automatic contribution arrangement, your employer can treat you 

as having elected to have a part of your compensation 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 explain:

• Your rights to elect not to have elective 

contributions made, or to have contributions 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.

TIP

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 deferrals) 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, SARSEP plans, and governmental section 457 plans 

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

For more information about catch-up contributions to:

• Section 401(k) plans, see Elective Deferrals in chapter 4 of Pub. 560;

• SARSEPs, see Salary Reduction Simplified Employee Pensions in chapter 2 of 

Pub. 560;

• SIMPLE plans, see SIMPLE Plans in chapter 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 generally 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 (section 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 service agency, a health and welfare service 

agency, a church, or a convention or association 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 deferrals 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 total elective deferrals made by your employer on your behalf for earlier years.

If you qualify for the 15-year rule, your elective 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 organizations), 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 allowed 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 payments.

1. Wages and salaries.

2. Fees for professional services.

3. The value of any employer-provided qualified transportation fringe benefit (defined 

under Transportation, earlier) that isn't included in your income.

4. Other amounts received (cash or noncash) for personal services you performed, 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 included 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 withholding purposes.

• Your wages as reported in Form W-2, 

box 1.

• Your wages that are subject to social security withholding (including elective deferrals).

Increased limit. During any, or all, of the 

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

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

or

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 generally 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 limits 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 retirement age and your plan provides the increased 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 deferrals 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 recordkeeping 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 beginning 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 generally shouldn't include elective deferrals in your 

wages in Form W-2, box 1. Instead, your employer should mark the Retirement plan checkbox in box 13 and show the total amount deferred 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 deferred 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 included in your wages in Form W-2, box 1. Designated 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 governmental section 457 plan are reported using code EE 

in box 12.

Designated Roth nonelective contributions and designated Roth matching 

10 Publication 525 (2023)
contributions. These contributions are reported 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 required by the plan. If the plan permits, the excess 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 permit 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 excess, 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 included 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 contribution).

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 excess 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 corrective 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 return.

• 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 wages 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 excess 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. Include the loss as a negative amount on Schedule 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 additional 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 SARSEP plan may be limited by the average deferrals, as a percentage of pay, made by all eligible 

non-highly compensated employees.

If you contributed more to the plan than allowed, the excess contributions may be distributed 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 excess contributions (and allocable income), it's 

included in your income in the year of the distribution. 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 allocable to the excess contributions. You should receive a Form 1099-R for the year the excess 

contributions are distributed to you. Add the distribution 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, contributions that exceed these limits (excess annual 

additions) may be corrected by a distribution of 

your elective deferrals or a return of your after-tax contributions and earnings from these 

contributions.

A corrective payment of excess annual additions consisting of elective deferrals or earnings 

from your after-tax contributions is fully taxable 

in the year paid. A corrective payment consisting of your after-tax contributions isn't taxable.

If you received a corrective payment of excess annual additions, you should receive a 

separate Form 1099-R for the year of the 

TIP 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 taxable 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 Central Ltd. v. United States, 138 S. Ct. 2067, the 

U.S. Supreme Court ruled that “money remuneration” is “currency issued by a recognized 

authority as a medium of exchange,” and that 

employee stock options aren’t “money remuneration” subject to the Railroad Retirement Tax 

Act (RRTA). Tier 1 and Tier 2 taxes aren’t withheld when employees covered by the RRTA exercise 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 option (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 option or property acquired through exercise of the 

option. The timing, type, and amount of income 

inclusion depend on whether you receive a nonstatutory stock option or a statutory stock option. Your employer can tell you which kind of 

option you hold.

Nonstatutory Stock Options

Grant of option. If you're granted a nonstatutory 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 readily determined if it’s actively traded on an established 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 restriction (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 exercise 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. 

TIP

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 nonstatutory options and other stock-based compensation from that corporation. For more information 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 Restricted Property, later, for rules on how much 

income to include and when to include it. However, 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 determinable at the time it's granted to you (even if 

it's determined later), you don't have income until you exercise or transfer the option.

Exercise or transfer of option. When you exercise 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 include any amount in income.

Option without readily determinable 

value. When you exercise a nonstatutory 

stock option that didn't have a readily determinable value at the time the option was granted, 

the restricted property rules apply to the property received. The amount to include in your income is the difference between the amount you 

pay for the property and its FMV when it becomes substantially vested. If it isn't substantially vested at the time you exercise this nonstatutory 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 difference in income when the option becomes substantially vested. For more information on restricted 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 include in your income the money or other property 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 without 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 income, 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 included in income at the time you transferred the 

option. At the time of the exercise, the transferee 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 transaction. See Regulations section 1.83-7 for the definition of a related person.

Recourse note in satisfaction of the exercise price of an option. If you're an employee, 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 security 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 exercise 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 income rules for the sale of stock acquired 

through the exercise of a nonstatutory stock option. Report the sale as explained in the Instructions for Schedule D (Form 1040) for the year of 

the sale. You may receive a Form 1099-B reporting 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 determinable value, or as of the date you exercised 

or transferred the option if it had no readily determinable 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 included 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 appropriate adjustments to the basis information 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 employee 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 nontransferable except at death.

If you don't meet the employment requirements, 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 income 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 applied. 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 exercising the ISO by the amount of the adjustment. 

However, no adjustment is required if you dispose of the stock in the same year you exercise 

the option.

See Restricted Property, later, for more information.

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 became 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 statement, from the corporation for each 

transfer made during 2023. The corporation 

must send or provide you with the form by January 31, 2024. Keep this information for your records.

RECORDS

TIP

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 income 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 Instructions 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 requirement.

• You satisfy the conditions described under 

Option granted at a discount under Employee 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 included 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 appropriate adjustments to the basis information 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 holding period requirement if you sold the stock to 

comply with conflict-of-interest requirements.

Your holding period for the property you acquire 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 satisfied. If you sell stock acquired by exercising an 

ISO, don't satisfy the holding period requirement, 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 exceeded 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 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. 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 explained in the Instructions for Schedule D (Form 

1040). In determining capital gain or loss, your 

basis is the amount you paid when you exercised the option plus the amount reported as 

wages.

Example 8. Your employer, Oak Corporation, 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 option 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 follows.

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 requirement, determine your ordinary income as follows.

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 deductions don't affect your basis.

Example 9. Pine Company has an employee stock purchase plan. The option price is 

the lower of the stock price at the time the option is granted or at the time the option is exercised. 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 receives 12 shares of Pine Company’s stock 

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

shares begins the day after the option is exercised, 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 requirement, or you die while owning the share, 

you must include in your income as compensation 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 granted, 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 Corporation, granted you an option under its employee 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 satisfied. If you don't satisfy the holding period requirement, your ordinary income is the amount 

by which the stock's FMV when you exercised 

the option exceeded the option price. This ordinary 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.

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 acquired 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 allows a new election for “qualified employees” of 

private corporations to elect to defer income 

taxation for up to 5 years from the date of vesting 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 options exercised or RSUs settled after 2017. The 

corporation must have a written plan providing 

RSU or option to at least 80% of U.S. employees. The recipients must have the same rights 

and privileges under RSU or option plan.

The term “qualified employee” doesn’t include:

• 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, 

or

• One of the four highest compensated officers (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 employee 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 corporation.

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 employee may receive cash instead of stock. The 

election is made in a manner similar to the election described under Choosing to include in income 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 transferable or aren’t subject to a substantial risk of 

forfeiture, whichever occurs earlier. See Restricted Property, later, for how to make the choice.

If an employee elects to defer income inclusion under the provision, the income must be included 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 employee”), (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 provide notification of rights to employees covered 

under a qualified program or face penalties. 

There will be withholding at the highest marginal rate.

Restricted Property

In most cases, if you receive property for your 

services, you must include its FMV in your income in the year you receive the property. However, 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 income 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 substantially 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 additional 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 begins when the property becomes substantially 

vested.

Example 12. Your employer, the Holly Corporation, 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 forfeiture (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 include 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 include $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 compensation during the period the stock can be forfeited.

Substantially vested. Property is substantially 

vested when:

• It’s transferable, or

• It isn't subject to a substantial risk of forfeiture. (You don't have a good chance of losing it.)

Transferable property. Property is transferable if you can sell, assign, or pledge your interest 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 perform 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 forfeiture.

Choosing to include in income for year of 

transfer. You can choose to include the value 

of restricted property at the time of transfer (minus 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 appreciation in value isn't included in your compensation 

when the property becomes substantially vested. 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 revoke 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 included 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 nonstatutory stock option.

How to make the choice. You make the 

choice by filing a written statement with the Internal 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 refund or aren’t enclosing a check or money order...” given in Where Do You File in the Instructions 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 someone 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

!

CAUTION

!

14 Publication 525 (2023)
83(b) of the Internal Revenue Code. The statement must contain all of the following information.

• 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 property.

• 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 nonstatutory stock option.

Dividends received on restricted stock. Dividends you receive on restricted stock are treated as compensation and not as dividend income. Your employer should include these 

payments on your Form W-2. If they are also reported on a Form 1099-DIV, you should list 

them on Schedule B (Form 1040), with a statement that you have included them as wages. 

Don’t include them in the total dividends received.

Stock you chose to include in your income. 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 include the dividends in your wages on your return. Report them as dividends.

Sale of property not substantially vested. 

These rules apply to the sale or other disposition 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 property 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 property 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 exchanged property.

The sale or other disposition of a nonstatutory stock option to a related person isn't considered an arm's-length transaction. See Regulations 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 income when the original property becomes substantially 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 employer $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, figured 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 income in respect of a decedent and is taxed according to the rules for restricted property received 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 orders, people working for foreign employers, military personnel, and volunteers.

Clergy

If you’re a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, 

masses, etc., in addition to your salary. If the offering is made to the religious institution, it isn't 

taxable to you.

If you’re a member of a religious organization 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 (including utilities) or a designated housing allowance provided to you as part of your pay. However, the exclusion can't be more than the 

reasonable pay for your service. If you pay for 

the utilities, you can exclude any allowance designated 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 depends 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 order that you turn over to the order aren't included in your income.

Example 15. You're a member of a church 

order and have taken a vow of poverty. You renounce 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 associated 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 hospital that you turn over to your order aren't included 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 ordinarily the duties of members of the order.

• They're part of the duties that you must exercise for, or on behalf of, the religious order as its agent.

If you're an employee of a third party, the services 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 religious 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 instructed 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 request, the school made the salary payments directly 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 

Publication 525 (2023) 15
earn working for the school are included in your 

income.

Example 17. You are a member of a religious order who, as a condition of membership, 

have taken vows of poverty and obedience. All 

claims to your earnings are renounced. You received permission from the order to establish a 

private practice as a psychologist and counsel 

members of religious orders as well as nonmembers. 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 order. The psychological services you provide 

aren't the type of services that are provided by 

the order. The income you earn as a psychologist 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 employer.

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 embassy, or any foreign employer, you must include your salary in your income.

Social security and Medicare taxes. 

You're exempt from social security and Medicare 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 government.

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 income 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 employees of the United States in foreign countries.

• The foreign government gives an equal exemption 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 international organization and you file a waiver under 

section 247(b) of the Immigration and Nationality 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 information 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. Allowances generally aren't taxed. For more information on the tax treatment of military allowances 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 services are treated as compensation. These wages 

are subject to income tax withholding and are 

reported on Form W-2. See the discussion under 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 pension 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 retainer pay to provide a survivor annuity for your 

spouse or children under the Retired Serviceman'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 under 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 income any veterans' benefits paid under any law, 

regulation, or administrative practice administered by the Department of Veterans Affairs 

(VA). The following amounts paid to veterans or 

their families aren't taxable.

• Education, training, and subsistence allowances.

• Disability compensation and pension payments for disabilities paid either to veterans 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 dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death.

• Interest on insurance dividends left on deposit with the VA.

• Benefits under a dependent-care assistance 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 subdivision 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 separate form for each tax year involved. In most cases, 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 discussions.

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 allowances must be included in your income and reported 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 Director of the Peace Corps as basic compensation. These are allowances for personal 

items such as domestic help, laundry and 

clothing maintenance, entertainment and 

recreation, transportation, and other miscellaneous 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 volunteer 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 include 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 income as wages.

National Senior Service Corps programs. 

Don’t include in your income amounts you receive for supportive services or reimbursements 

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 supportive services or reimbursements for 

out-of-pocket expenses from SCORE, don't include 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 assistance (VITA) program.

Volunteer firefighters and emergency medical responders. If you are a volunteer firefighter 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 income taxes you receive because of services you performed as a volunteer firefighter 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 treatment of income from certain rents and royalties, 

and from interests in partnerships and S corporations.

Note. You may be subject to the Net Investment 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, including online auctions, may be business 

income. For more information, see Pub. 

334.

Rents From Personal 

Property

If you rent out personal property, such as equipment or vehicles, how you report your income 

and expenses is in most cases determined by:

• Whether or not the rental activity is a business, and

• Whether or not the rental activity is conducted for profit.

In most cases, if your primary purpose is income 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 property, 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 copyrights on literary, musical, or artistic works, and 

similar property, or from patents on inventions, 

are amounts paid to you for the right to use your 

work over a specified period of time. Royalties 

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 extracted from your property. The royalties are generally 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 economic interest in mineral deposits or oil and gas 

wells, you can recover your investment through 

the depletion allowance.

Coal and iron ore. Under certain circumstances, you can treat amounts you receive 

from the disposal of coal and iron ore as payments from the sale of a capital asset, rather 

than as royalty income. For information about 

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

see 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 explained 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 allowance.

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 production 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 distributive share of these items. For more information, 

see Pub. 541.

Partner's distributive share. Your distributive 

share of partnership income, gains, losses, deductions, 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 basis 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 stated in the agreement doesn't have substantial 

economic effect, your distributive share is figured according to your interest in the partnership.

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 partnership 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 partnership return. That is, if the partnership had a capital gain, you report your share as explained in 

the Instructions for Schedule D (Form 1040). 

Publication 525 (2023) 17
You report your share of partnership ordinary income 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 return.

Qualified joint venture. If you and your 

spouse each materially participate as the only 

members of a jointly owned and operated business, and you file a joint return for the tax year, 

you can make a joint election to be 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 attributable to the business between you and your 

spouse in accordance with your respective interests in the venture. For further information on 

how to make the election and which schedule(s) to file, see the instructions for your individual tax return.

S Corporation Income

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

on its income. Instead, the income, losses, deductions, and credits of the corporation are 

passed through to the shareholders based on 

each shareholder's pro rata share. You must report 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 results of the corporation's operations for its tax 

year and the items of income, losses, deductions, or credits that affect the shareholders' individual 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 shareholder. 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 separately on your Form 1040 or 1040-SR. The 

character of these items is generally the same 

as if you had realized or incurred them personally.

In many cases, Schedule K-1 (Form 

1120-S) will tell you where to report an 

item of income on your individual return.

Distributions. In most cases, S corporation distributions are a nontaxable return of your 

basis in the corporation stock. However, in certain cases, part of the distributions may be taxable as a dividend, or as a long-term or 

short-term capital gain, or as both. The corporation's distributions may be in the form of cash or 

property.

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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 sickness 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 payments may not be taxable to you. For information on nontaxable payments, see Military and 

Government Disability Pensions and Other 

Sickness and Injury Benefits, later in this discussion.

Don’t report as income any amounts 

paid to reimburse you for medical expenses 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 expenses you deducted in an earlier year, you may 

have to include some, or all, of the reimbursement in your income. See Recoveries under 

Miscellaneous Income, later.

Cafeteria plans. In most cases, if you're covered by an accident or health insurance plan 

through a cafeteria plan, and the amount of the 

insurance premiums wasn't included in your income, 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 disabled.

You may be entitled to a tax credit if 

you were permanently and totally disabled when you retired. For information 

on this credit, see Pub. 524.

Beginning on the day after you reach minimum retirement age, payments you receive are 

taxable as a pension or annuity. Report the payments 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 include in your income disability payments you receive for injuries incurred as a direct result of 

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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 Compensation 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 terrorist attack 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. 

See Pub. 907.

A terrorist action is one that is directed 

against the United States or any of its allies (including 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 result of actual or threatened violence or aggression against the United States or any of its allies, but doesn't include training exercises.

Contact the company or agency making these payments if it incorrectly reports 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 payments reported on Form 1099-R.

Disability payments you receive for injuries 

not incurred as a direct result of a terrorist attack or military action or for illnesses or diseases not resulting from an injury incurred as a direct result of a terrorist attack or military action 

can't be excluded from your income under this 

provision but may be excludable for other reasons. See Pub. 907.

Retirement and profit-sharing plans. If you 

receive payments from a retirement or 

profit-sharing plan that doesn't provide for disability retirement, don't treat the payments as a 

disability pension. The payments must be reported as a pension or annuity.

Accrued leave payment. If you retire on disability, any lump-sum payment you receive for accrued 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 pensions aren't taxable.

Service-connected disability. You may be 

able to exclude from income amounts you receive as a pension, annuity, or similar allowance 

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18 Publication 525 (2023)
for personal injury or sickness resulting from active 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 become 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 simulating 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 disability (discussed earlier), don't include in income 

the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest 

of your pension in your income.

Retroactive VA determination. If you retire from the U.S. Armed Forces based on years 

of service and are later given a retroactive service-connected disability rating by the VA, your 

retirement pay for the retroactive period is excluded from income up to the amount of VA disability 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 determination 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 effective 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 severance payment and are later awarded VA disability benefits, exclude 100% of the severance 

benefit from your income. However, you must 

include in your income any lump-sum readjustment 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 cases, 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 receive 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 receive 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 described 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 special compensation from your income. Other portions of your military or disability retirement pay 

may still be included in your income.

Terrorist attack or military action. Don’t include in your income disability payments you receive for injuries resulting directly from a terrorist or military action. In the case of the 

September 11 attacks, injuries eligible for coverage by the September 11 Victim Compensation 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 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 illnesses or diseases not resulting from an injury 

incurred as a direct result of a terrorist or military 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 (including 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 result of actual or threatened violence or aggression against the United States or any of its allies, but doesn't include training exercises.

Long-Term Care

Insurance Contracts

In most cases, long-term care insurance contracts are treated as accident and health insurance contracts. Amounts you receive from them 

(other than policyholder dividends or premium 

refunds) are excludable in most cases from income as amounts received for personal injury 

or sickness. To claim an exclusion for payments 

made on a per diem or other periodic basis under a long-term care insurance contract, you 

must file Form 8853 with your return.

A long-term care insurance contract is an insurance contract that only provides coverage 

for qualified long-term care services. The contract 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 surrender 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 expenses incurred for services or items that 

would be reimbursed under Medicare, except where Medicare is a secondary payer 

or the contract makes per diem or other 

periodic payments without regard to expenses.

Qualified long-term care services. Qualified 

long-term care services are:

• Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services; and

• Required by a chronically ill individual and 

provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Chronically ill individual. A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 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. Activities of daily living are eating, toileting, 

transferring, bathing, dressing, and continence.

• An individual who requires substantial supervision to be protected from threats to 

health and safety due to severe cognitive 

impairment.

Publication 525 (2023) 19
Limit on exclusion. The exclusion for payments made on a per diem or other periodic basis 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 information on accelerated death benefits, see Life Insurance Proceeds under Miscellaneous Income, later.)

Under this limit, the excludable amount for 

any period is figured by subtracting any reimbursement received (through insurance or otherwise) 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 services 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, however, doesn't apply to retirement plan benefits 

you receive based on your age, length of service, 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 equivalent railroad retirement benefits received, 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 Retirement 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 disabilities, 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 continuation 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 InCAUTION

!

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 payments 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 under FECA reduces your social security 

or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits 

and may be taxable. See Pub. 554 for more information.

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 include any health service or benefits provided by 

the Indian Health Service, amounts to reimburse medical care expenses provided by an Indian tribe, coverage under accident or health insurance, and any other medical care provided 

by an Indian tribe.

Other compensation. Many other amounts 

you receive as compensation for sickness or injury 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 damages 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 income or earning capacity as a result of injuries 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 disfigurement. 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 provides these benefits.

Reimbursement for medical care. A reimbursement for medical care is generally not taxable. However, it may reduce your medical expense deduction. If you receive reimbursement 

for an expense you deducted in an earlier year, 

see Recoveries, later.

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If you receive an advance reimbursement or 

loan for future medical expenses from your employer without regard to whether you suffered a 

personal injury or sickness or incurred medical 

expenses, that amount is included in your income, whether or not you incur uninsured medical expenses during the year.

Reimbursements received under your employer's plan for expenses incurred before the 

plan was established are included in income.

Amounts you receive under a reimbursement plan that provides for the payment of unused reimbursement amounts in cash or other 

benefits are included in your income. For details, 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 services. You must include in your income, at the 

time received, the FMV of property or services 

you receive in bartering. If you exchange services with another person and you both have 

agreed ahead of time on the value of the services, that value will be accepted as FMV unless 

the value can be shown to be otherwise.

Generally, you report this income on Schedule C (Form 1040). However, if the barter involves 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 attorney who performs legal services for a client, a 

small corporation. The corporation gives you 

shares of its stock as payment for your services. 

You must include the 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 accountant. 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 services 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 purchase goods or services offered by other members of the barter club. The club subtracts credit 

units from your account when you receive 

goods or services from other members. You 

must include in your income the value of the 

credit units that are added to your account, 

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 artwork, 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 barter exchange, Form 1099-B or a similar statement 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 income you receive from bartering isn't subject to 

regular income tax withholding. However, 

backup withholding will apply in certain circumstances to ensure that income tax is collected 

on this income.

Under backup withholding, the barter exchange 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 correct and that you aren't subject to backup withholding. 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 income, 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 income. You have no income from the canceled 

debt if it's intended as a gift to you. A debt includes 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 income 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 interest will also be shown in box 3. Whether or not 

you must include the interest portion of the canceled debt in your income depends on whether 

the interest would be deductible if you paid it. 

See Deductible debt under Exceptions, later.

If the interest would not be deductible (such 

as interest on a personal loan), include in your 

income the amount from 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 payment of your mortgage loan, the amount of the 

discount is canceled debt. You must include the 

canceled amount in your income.

Mortgage relief upon sale or other disposition. If you're personally liable for a mortgage 

(recourse debt), and you're relieved of the mortgage 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 qualifies for exclusion under Excluded debt, later. 

Report any income from discharge of indebtedness 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 residence. 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 included in the amount you realize. You may have a 

taxable gain if the amount you realize exceeds 

your adjusted basis in the property. Report any 

gain on nonbusiness property as a capital gain.

See Pub. 4681 for more information.

Stockholder debt. If you're a stockholder in a 

corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution that is generally dividend 

income to you. For more information, see Pub. 

542.

If you're a stockholder in a corporation and 

you cancel a debt owed to you by the corporation, 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 included a canceled amount in your income and 

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

claim for refund for the year the amount was included in income. You can file a claim on Form 

1040-X if the statute of limitations for filing a 

claim is still open. The statute of limitations generally 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 responsible 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 purposes. However, in certain circumstances, you 

may be able to exclude amounts from gross income as a result of the cancellation or repayment of certain student loans. These exclusions 

are for:

• Student loan cancellation due to meeting 

certain work requirements;

• Cancellation of certain loans after December 31, 2020, and before January 1, 2026 

(see Special rule for student loan discharges 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 requirements, you may not have to include the canceled 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 performed for either organization. See Exception, 

later.

Educational organization described in 

section 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.

Qualified lenders. These include the following.

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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-exempt 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 organization; or

b. Under a program of the educational 

organization that is designed to encourage its students to serve in occupations with unmet needs or in areas 

with unmet needs where services provided by the students (or former students) 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 student loan forgiveness for discharges in 2021 

through 2025. Generally, if you are responsible 

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 purposes. However, in certain circumstances you may 

be able to exclude this amount from gross income if the loan was one of the following.

• A loan for postsecondary educational expenses.

• 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 student loan.

See Pubs. 4681 and 970 for further details.

Loan for postsecondary educational expenses. This is any loan provided expressly for 

postsecondary education, regardless of 

whether provided through the educational organization 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 eligible educational organization is generally any 

accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, 

vocational school, or other postsecondary educational 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 includes certain educational organizations located outside the United States that are eligible to 

participate in a student aid program administered by the U.S. Department of Education.

The educational organization should 

be able to tell you if it is an eligible educational 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 educational expenses to a borrower, regardless of whether the loan is provided 

through the educational organization that 

the student attends or directly to the borrower 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 transaction, or any other loan that is secured by 

real property or a dwelling.

Private educational lender. A private educational 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 canceled because of services you performed for the private educational lender that 

made the loan or other organization that provided the funds.

Loan from an educational organization described 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 described earlier under which the funds to 

make the loan were provided to the educational organization; or

• Under a program of the educational organization that is designed to encourage its 

students to serve in occupations with unmet needs or in areas with unmet needs 

where the services provided by the students (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 section 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 performed 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 animals.

Exception. In most cases, the cancellation 

of a student loan made by an educational organization because of services you performed 

for that organization or another organization that 

provided the funds for the loan must be included in gross income on your tax return.

Refinanced loan. If you refinanced a student loan with another loan from an eligible educational organization or a tax-exempt organization, 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 organization that is designed to encourage students 

to serve in occupations with unmet needs or in 

areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Student loan repayment assistance. Student 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 forgiveness program that is intended to provide for the increased availability of health 

services in underserved or health professional shortage areas (as determined by 

such state).

You can’t deduct the interest you paid 

on a student loan to the extent payments were made through your participation 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 applies only if you use the cash method of accounting. For more information, see chapter 5 of 

Pub. 334.

CAUTION

!

CAUTION

!

22 Publication 525 (2023)
Price reduced after purchase. In most cases, 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 insolvent. 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 canceled 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 indebtedness, discussed next.

Qualified principal residence indebtedness (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 residence is the home where you ordinarily live 

most of the time. You can have only one principal residence at any one time.

Amount eligible for exclusion. The exclusion applies only to debt discharged after 

2006 and in most cases before 2026. The maximum amount you can treat as QPRI is $750,000 

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

exclude debt canceled because of services performed 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 condition.

Limitation. If only part of a loan is QPRI, 

the exclusion applies only to the extent the canceled 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 residence is sold for $600,000 and $300,000 of 

debt is canceled. Only $100,000 of the canceled debt may be excluded from income (the 

$300,000 that was discharged minus the 

$200,000 of nonqualified debt).

Forgiveness of Paycheck Protection Program (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 information related to your PPP loan.

Rev. Proc. 2021-48, 2021-49 I.R.B. 835, permits taxpayers to treat tax-exempt income resulting from the forgiveness of a PPP loan as received 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 applying—either section 3.01(1), (2), or (3). Any 

statement should include the following information for each PPP loan.

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

2. A statement that you are applying or applied 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 attached 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 income at its FMV.

Your out-of-pocket party expenses are subject to the 50% limit for meal expenses. For tax 

years beginning after 2017, no deduction is allowed for any expenses related to activities generally considered entertainment, amusement, or 

recreation. Taxpayers may continue to deduct 

50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is 

present and the food or beverages aren’t considered 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 considered 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 policy or an endowment contract issued on or before December 31, 1984. However, interest income 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 income only the benefits that are more than the 

amount payable to you at the time of the insured 

person's death. If the benefit payable at death 

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 (generally, the total lump sum payable at the death of 

the insured person) by the number of installments to be paid. Include anything over this excluded part in your income as interest.

Example 25. The face amount of the policy 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 before October 23, 1986, and insurance proceeds 

paid to you because of the death of your spouse 

are received in installments, you can exclude up 

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

installments. If you remarry, you can continue to 

take the exclusion.

Employer-owned life insurance contract. If 

you're the policyholder of an employer-owned 

life insurance contract, you must include in income 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 apply.

1. Before the policy is issued, you provide 

written notice about the insurance to the 

employee and the employee provides written 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 compensated employee; or

b. The amount is paid to the family or 

designated beneficiary of the employee.

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 interest exclusion for a surviving spouse doesn't apply. 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 receive the installments.

Surrender of policy for cash. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more 

than the cost of the life insurance policy. In 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 Accelerated Death Benefits, later.

Split-dollar life insurance. In most cases, a 

split-dollar life insurance arrangement is an arrangement 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 contract. 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 treated as providing current life insurance protection and other taxable economic benefits 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 policy. 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 designated beneficiary. Endowment proceeds paid in a 

lump sum to you at maturity are taxable only if 

the proceeds are more than the cost (investment in the contract) of the policy. To determine 

your cost, subtract any amount that you previously received under the contract and excluded 

from your income from the total premiums (or 

other consideration) paid for the contract. Include the part of the lump payment that is more 

than your cost in your income.

TIP

Endowment proceeds that you choose to receive in installments instead of a lump sum payment 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 receive the proceeds in installments before receiving 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 viatical settlement before the insured's death are excluded from income if the insured is terminally 

or chronically ill.

Viatical settlement. This is the sale or assignment of any part of the death benefit under a life 

insurance contract to a viatical settlement provider. A viatical settlement provider is a person 

who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are 

terminally or chronically ill and who meets the 

requirements of section 101(g)(2)(B) of the Internal Revenue Code.

Exclusion for terminal illness. Accelerated 

death benefits are fully excludable if the insured 

is a terminally ill individual. This is a person who 

has been certified by a physician as having an 

illness or physical condition that can reasonably 

be expected to result in death within 24 months 

from the date of the certification.

Exclusion for chronic illness. If the insured is 

a chronically ill individual who isn't terminally ill, 

accelerated death benefits paid on the basis of 

costs incurred for qualified long-term care services are fully excludable. Accelerated death 

benefits paid on a per diem or other periodic basis are excludable up to a limit. For 2023, this 

limit is $420. It applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance 

contracts. For information on the limit and the 

definitions of chronically ill individual, qualified 

long-term care services, and long-term care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury Benefits, earlier.

Exception. The exclusion doesn't apply to any 

amount paid to a person (other than the insured) who has an insurable interest in the life 

of the insured because the insured:

• Is a director, officer, or employee of the 

person; or

• Has a financial interest in the person's 

business.

Form 8853. To claim an exclusion for accelerated death benefits made on a per diem or 

other periodic basis, you must file Form 8853 

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

most common recoveries are refunds, reimbursements, and rebates of itemized deductions. You may also have recoveries of nonitemized deductions (such as payments on 

previously deducted bad debts) and recoveries 

of items for which you previously claimed a tax 

credit.

Tax benefit rule. You must include a recovery 

in your income in the year you receive it up to 

the amount by which the deduction or credit you 

took for the recovered amount reduced your tax 

in the earlier year. For this purpose, any increase to an amount carried over to the current 

year that resulted from the deduction or credit is 

considered to have reduced your tax in the earlier year.

Federal income tax refund. Refunds of federal income taxes aren't included in your income because they're never allowed as a deduction from income.

State tax refund. If you received a state or local income tax refund (or credit or offset) in 

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 January 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 Instructions 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 include 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 receive 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 general 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.

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 discussions.

Interest on recovery. Interest on any of the 

amounts you recover must be reported as interest income in the year received. For example, 

report any interest you received on state or local 

income tax refunds on Form 1040, 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 deduction 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 allowable deduction for this item for the current year.

Example 28. You paid 2022 estimated 

state income tax of $4,000 in four equal payments. You made your fourth payment in January 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 return. 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 calculation showing why that amount is less than the 

amount shown on the Form 1099-G you received 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 local income taxes paid during 2023, you'll reduce 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 allocated 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 income.

Registered domestic partners (RDPs) domiciled 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 itemize deductions for the year for which you received the recovery of an expense that was deductible only if you itemized, don't include any 

of the recovery amount in your income.

Example 29. You claimed the standard deduction 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 deductions for 2022.

Itemized Deduction Recoveries

The following discussion explains how to determine 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 nonresident alien (discussed later) or any of the following 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 income 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 dividends in certain situations. See Capital 

gains, later.

5. Your 2022 state and local income tax refund is more than your 2022 state and local 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 estimated 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 deducted as a nonitemized deduction, figure the amount of that recovery to include 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 receive it. However, if you had no taxable income 

in that earlier year (see Negative taxable income, later), you should complete Worksheet 2 

to determine the amount you must include in income. If any other statement under Total recovery included in income isn't true, see the discussion 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 Capital Gain Tax Worksheet, and you receive a refund 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 included 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 earlier year.

Total recovery included in income. If you recover 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 deductions 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 income, 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 credits, 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 previous five items, you must include in your income 

the full amount of a refund of state or local income tax or general sales tax if the excess of 

the tax you deducted over the tax you didn't deduct is more than the refund of the tax deducted.

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 return 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 between the state and local income tax you deducted 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 exceeded the standard deduction ($27,400 − 

$25,900 = $1,500), so you must include your total 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 balance 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 discussion 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 include 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 between 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 recoveries 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 report 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 Schedule 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 itemized deductions that are more than your standard deduction are subject to the recovery rule 

(unless you're required to itemize your deductions). 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 deductions 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 status 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 recovered $2,100 of your 2022 itemized deductions. 

None of the recoveries were more than the actual deductions for 2022. Include $250 of the recoveries 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 income 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 include $50 in your 2023 income, rather than 

$250.

Recovery limited to deduction. You don't include in your income any amount of your recovery that is more than the amount you deducted 

in the earlier year. The amount you include in 

your income is limited to the smaller of:

• The amount deducted, or

• The amount recovered.

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

medical expenses. Because of the limit on deducting medical expenses, you deducted only 

$200 as an itemized deduction. In 2023, you received a $500 reimbursement from your medical 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 deductions based on your AGI.

To determine the part of the recovery you 

must include in income, follow the two steps below.

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 using only the net amount of the recovery 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 allowed in the earlier year after applying the 

limit on itemized deductions.

The result of step 2 is the amount of the recovery to include in your income for the year you receive 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 Cumulative Bulletin 1993-2.

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) ...................... 1.

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 .............................................. 6.

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.

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 credit1a................................................. 1a.

1b. State/local real estate and personal property taxes1a...................................... 1b.

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

(excluding the amounts you entered on lines 1a and 1b)2................................... 2.

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

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 ....................................... 6.

7. Standard deduction for the prior year.3 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 ..................................................... 9.

10. Taxable income for prior year4 (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)5............................. ............................. 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.

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

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

B. 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.

C. 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.

1a 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. 

2

 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.

3

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

4

 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.

5

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

Unused tax credits. If you recover an item deducted in an earlier year in which you had unused 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 recovery in your income up to the amount of the 

deduction that reduced the tax in the earlier 

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

2023, you recovered $1,000 of your itemized 

deductions. You reduce your 2022 itemized deductions 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 reducing your deductions by the recovery. You 

didn't have a tax benefit from the recovered deduction 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 recovery in your income. However, if your total tax 

increases by any amount, you received a tax 

benefit from the deduction and you must include 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 recover 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 recovered 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 deduction that reduced your tax in the year of the 

deduction. (See Tax benefit rule, earlier.)

Negative taxable income. If your taxable income for the prior year 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.

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 deducted in an earlier year in which you had unused 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 recovery 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 Capital Gain Tax Worksheet, and you receive a refund 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 included 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 earlier 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 opposed to a permanent job. For example, you 

drive for a ride-sharing service, or work as a fitness 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 employer 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 separately for tax purposes. The tax treatment of 

these lump-sum payments depends on the type 

of payment.

Salary or wages. Salary or wages received after the death of the employee are usually ordinary income to you.

Qualified employee retirement plans. 

Lump-sum distributions from qualified employee retirement plans are subject to special 

tax treatment. For information on these distributions, 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 officer 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 officer” includes law enforcement officers, firefighters, chaplains, and rescue squad and ambulance 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 unemployment compensation paid to you. In most 

cases, you enter unemployment compensation 

on Schedule 1 (Form 1040), line 7.

If you received unemployment compensation but didn't receive Form 

1099-G, Certain Government Payments, through the mail, you may need to access your information through your state’s website to get your electronic Form 1099-G.

Types of unemployment compensation. 

Unemployment compensation generally 

CAUTION

!

Publication 525 (2023) 29
includes any amount received under an unemployment compensation law of the United 

States or of a state. It includes the following 

benefits.

• Benefits paid by a state or the District of 

Columbia from the Federal Unemployment 

Trust Fund.

• State unemployment insurance benefits.

• Railroad unemployment compensation 

benefits.

• Disability payments from a government 

program paid as a substitute for unemployment compensation. (Amounts received as 

workers' compensation for injuries or illness aren't unemployment compensation. 

See Workers' Compensation under Sickness and Injury Benefits, earlier.) 

• Trade readjustment allowances under the 

Trade Act of 1974.

• Unemployment assistance under the Disaster Relief and Emergency Assistance 

Act of 1974.

• Unemployment assistance under the Airline Deregulation Act of 1978 Program.

Governmental program. If you contribute 

to a governmental unemployment compensation program and your contributions aren't deductible, amounts you receive under the program aren't included as unemployment 

compensation until you recover your contributions. If you deducted all of your contributions to 

the program, the entire amount you receive under the program is included in your income.

Repayment of unemployment compensation. If you repaid in 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 unemployment compensation. To make this choice, 

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

office. Tax will be withheld at 10% of your payment.

If you don't choose to have tax withheld 

from your unemployment compensation, 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 information, see Supplemental Unemployment Benefits 

CAUTION

!

in section 5 of Pub. 15-A. Report these payments on line 1a of Form 1040 or 1040-SR.

Repayment of benefits. You may have to 

repay some of your supplemental unemployment benefits to qualify for trade readjustment 

allowances under the Trade Act of 1974. If you 

repay supplemental unemployment benefits in 

the same year you receive them, reduce the total benefits by the amount you repay. If you repay the benefits in a later year, you must include 

the full amount of the benefits 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 unemployment 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 receive from your employer during periods of unemployment, under a union agreement that 

guarantees you full pay during the year, are taxable as wages. Include them on line 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 compensation law. Although the payments are fully taxable, don't report them as unemployment compensation. Report these payments on Schedule 

1 (Form 1040), line 8z.

Welfare and Other

Public Assistance Benefits

Don’t include in your income governmental benefit payments from a public welfare fund based 

upon need, such as payments due to blindness. 

Payments from a state fund for the victims of 

crime shouldn't be included in the victims' incomes if they're in the nature of welfare payments. 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 receive from a state welfare agency for taking part 

in a work-training program aren't included in 

your income, as long as the payments (exclusive of extra allowances for transportation or 

other costs) don't total more than the public welfare benefits you would have received otherwise. If the payments are more than the welfare 

benefits you would have received, the entire 

amount must be included in your income as wages.

Reemployment Trade Adjustment Assistance (RTAA) payments. Payments you receive 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 disability, 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 return for your services, but for your training and 

rehabilitation because you have a disability. Excludable amounts include payments for transportation and attendant care, such as interpreter services for the deaf, reader services for 

the blind, and services to help individuals with 

an intellectual disability do their work.

Disaster relief grants. Don’t include post-disaster grants received under the Disaster Relief 

and Emergency Assistance Act in your income 

if the grant payments are made to help you 

meet necessary expenses or serious needs for 

medical, dental, housing, personal property, 

transportation, or funeral expenses. Don’t deduct casualty losses or medical expenses that 

are specifically reimbursed by these disaster relief grants. If you have deducted a casualty loss 

for the loss of your personal residence and you 

later receive a disaster relief grant for the loss of 

the same residence, you may have to include 

part or all of the grant in your taxable income. 

See Recoveries, earlier. Unemployment assistance payments under the Act are taxable unemployment compensation. See Unemployment compensation under Unemployment 

Benefits, earlier.

Disaster relief payments. You can exclude 

from income any amount you receive that is a 

qualified disaster relief payment. A qualified disaster relief payment is an amount paid to you:

1. To reimburse or pay reasonable and necessary personal, family, living, or funeral 

expenses that result from a qualified disaster;

2. To reimburse or pay reasonable and necessary expenses incurred for the repair or 

rehabilitation of your home or repair or replacement of its contents to the extent it’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 

30 Publication 525 (2023)
with a qualified disaster in order to promote the general welfare.

You can exclude this amount only to the extent 

any expense it pays for isn't paid for by insurance or otherwise. The exclusion doesn't apply 

if you were a participant or conspirator in a terrorist 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 involving a common carrier, or from any 

other event, which is determined to be 

catastrophic by the Secretary of the Treasury or his or her delegate.

For amounts paid under item 4, a disaster is 

qualified if it's determined by an applicable federal, state, or local authority to warrant assistance from the federal, state, or local government, agency, or instrumentality.

Disaster mitigation payments. You can 

also exclude from income any amount you receive that is a qualified disaster mitigation payment. Qualified disaster mitigation payments 

are commonly paid to you in the period immediately following damage to property as a result of 

a natural disaster. However, disaster mitigation 

payments are used to mitigate (reduce the severity of) potential damage from future natural 

disasters. They're paid to you through state and 

local governments based on the provisions of 

the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act.

You can't increase the basis or adjusted basis of your property for improvements made with 

nontaxable disaster mitigation payments.

Home Affordable Modification Program 

(HAMP). If you benefit from Pay-for-Performance Success Payments under HAMP, the payments aren't taxable.

Hardest Hit Fund and Emergency Homeowners' Loan Program. If you receive or benefit 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 Program (EHLP) administered by the Department 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 eligible homeowners for purposes of paying 

certain expenses related to their principal 

residence to prevent mortgage delinquencies, defaults, foreclosures, loss of utilities 

or home energy services, and also displacements 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-andTribal-Governments/Homeowner-AssistanceFund.

If you are a tribal member and wish more details about the HAF program, go to IRS.gov/

Newsroom/FAQs-for-Payments-by-Indian-TribalGovernments-and-Alaska-Native-Corporationsto-Individuals-Under-Covid-Relief-Legislation.

Mortgage assistance payments under section 235 of the National Housing Act. Payments made under section 235 of the National 

Housing Act for mortgage assistance aren't included in the homeowner's income. Interest 

paid for the homeowner under the mortgage assistance program can't be deducted.

Replacement housing payments. Replacement housing payments made under the Uniform Relocation Assistance and Real Property 

Acquisition Policies Act for Federal and Federally Assisted Programs aren't includible in gross 

income, but are includible in the basis of the 

newly acquired property.

Relocation payments and home rehabilitation grants. A relocation payment under section 105(a)(11) of the Housing and Community 

Development Act made by a local jurisdiction to 

a displaced individual moving from a flood-damaged residence to another residence isn't includible 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 Indian-owned economic enterprises on or near 

reservations aren't includible in gross income.

Indian general welfare benefit. Gross income 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 Indian tribe or Alaska Native Corporation under 

an Indian tribal government program, but only if:

1. The program is administered under specified guidelines and doesn't discriminate in 

favor of members of the governing body of 

the Indian tribe or Alaska Native Corporation; 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 extravagant, 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 treated as compensation for services.

Note. The above exclusion was enacted by 

the Tribal General Welfare Exclusion Act of 

2014, September 26, 2014. The exclusion applies to tax years for which the period of limitation 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). Additionally, 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 details.

Medicare. Medicare benefits received under title XVIII of the Social Security Act aren't includible 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) provides benefits such as old-age benefits, benefits to disabled workers, and benefits to spouses 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 originally 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 payment 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 security benefits during the year, you'll receive 

Form SSA-1099, Social Security Benefit Statement. 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 figuring whether any of your combined benefits 

are taxable. Even if your spouse didn't receive 

any benefits, you must add your spouse's income to yours when figuring if any of your benefits are taxable.

Taxable amount. Use the worksheet in the 

Forms 1040 and 1040-SR instruction package 

to determine the amount of your benefits to include in your income. Pub. 915 also has worksheets you can use. However, you must use the 

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. savings bonds.

• You take the foreign earned income exclusion, the foreign housing exclusion or deduction, the exclusion of income from 

American Samoa, or the exclusion of income from Puerto Rico by bona fide residents of Puerto Rico.

Benefits may affect your IRA deduction. 

You must use the special worksheets in Appendix B of Pub. 590-A to figure your taxable benefits 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 retirement 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 instructions.

Nutrition Program for the Elderly. Food benefits 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 receive, even if you're also eligible for food benefits.

Payments to reduce cost of winter energy. 

Payments made by a state to qualified people to 

reduce their cost of winter energy use 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 operate 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 income you report and can be taken only if you 

itemize deductions on Schedule A (Form 1040).

Alaska Permanent Fund dividend. If you received 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 recipient a document that shows the amount of the 

payment with the check. The amount is also reported to the IRS.

Alimony. Include in your income on Schedule 

1 (Form 1040), line 2a, any taxable alimony payments you receive. Amounts you receive for 

child support aren't income to you. For complete information, see Pub. 504 and the Instructions for Forms 1040 and 1040-SR.

Don’t include alimony payments you receive under a divorce or separation instrument (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 applicable federal rate. If you make a below-market 

gift or demand loan, you must include the forgone interest (at the federal rate) as interest income on your return. These loans are considered 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 diverted 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 original sale, you have no income from the sale. If 

the contract is canceled and you return the buyer'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 transaction 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 arrangements into a profit-making business of transporting 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 reimbursements. You generally shouldn't report these reimbursements on your return unless you're figuring gain or loss from the casualty or theft. See 

Pub. 547.

Charitable gift annuities. If you're the beneficiary of a charitable gift annuity, you must include 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 ordinary income or capital gain depends on the nature of the underlying claim. Include the following 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:

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 distress received to satisfy a claim under title 

VII of the Civil Rights Act of 1964.

7. Attorney fees and costs (including contingent fees) where the underlying recovery 

is included in gross income.

8. Attorney fees and costs relating to whistleblower awards where the underlying recovery 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 installments).

Emotional distress. Emotional distress itself 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 sickness (for example, unlawful discrimination or injury to reputation), you must include the damages in your income, except for any damages 

you receive for medical care due to that emotional distress. Emotional distress includes 

physical symptoms that result from emotional 

distress, such as headaches, insomnia, and 

stomach disorders.

Deduction for costs involved in unlawful 

discrimination suits. You may be able to deduct attorney fees and court costs paid to recover a judgment or settlement for a claim of 

unlawful discrimination under various provisions 

of federal, state, and local law listed in section 

62(e), a claim against the U.S. Government, or 

a claim under section 1862(b)(3)(A) of the Social 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 effect (or issued on or before) September 13, 

1995, don't include in income any of those damages 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, illness, 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 assistance isn't included in your income. If the corporation qualifies as a tax-exempt charitable organization, the assistance is treated as a gift 

and is included in your basis of the house. If the 

corporation 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 exclude from gross income any subsidy provided, 

either directly or indirectly, by public utilities for 

the purchase or installation of an energy conservation measure for a dwelling unit.

Energy conservation measure. This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the 

management of energy demand.

Dwelling unit. This includes a house, 

apartment, condominium, mobile home, boat, 

or similar property. If a building or structure contains both dwelling and other units, any subsidy 

must be properly allocated.

Estate and trust income. An estate or trust, 

unlike a partnership, may have to pay federal income tax. If you're a beneficiary of an estate or 

trust, you may be taxed on your share of its income distributed or required to be distributed to 

you. However, there is never a double tax. Estates and trusts file their returns on Form 1041, 

and your share of the income is reported to you 

on Schedule K-1 (Form 1041).

Current income required to be distributed. If you're the beneficiary of an estate or 

trust that must distribute all of its current income, you must report your share of the distributable net income, whether or not you actually 

received it.

Current income not required to be distributed. If you're the beneficiary of an estate 

or trust and the fiduciary has the choice of 

whether to distribute all or part of the current income, you must report all income that is required to be distributed to you, whether or not 

it's actually distributed, plus all other amounts 

actually paid or credited to you, up to the 

amount of your share of distributable net income.

How to report. Treat each item of income 

the same way that the estate or trust would treat 

it. For example, if a trust's dividend income is 

distributed to you, you report the distribution as 

dividend income on your return. The same rule 

applies to distributions of tax-exempt interest 

and capital gains.

The fiduciary of the estate or trust must tell 

you the type of items making up your share of 

the estate or trust income and any credits you're 

allowed on your individual income tax return.

Losses. Losses of estates and trusts generally aren't deductible by the beneficiaries.

Grantor trust. Income earned by a grantor 

trust is taxable to the grantor, not the beneficiary, if the grantor keeps certain control over 

the trust. (The grantor is the one who transferred property to the trust.) This rule applies if the 

property (or income from the property) put into 

the trust will or may revert (be returned) to the 

grantor or the grantor's spouse.

Generally, a trust is a grantor trust if the 

grantor has a reversionary interest valued (at 

the date of transfer) at more than 5% of the 

value of the transferred property, 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 position 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 receive 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 retirement plans, other than a Roth IRA or a designated Roth account, reduce the qualified settlement 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-income 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 settlement income by these expenses.

Publication 525 (2023) 33
Statement. If you report on Schedule 1 

(Form 1040), line 8z, qualified settlement income that is less than the gross amount shown 

on Form 1099-MISC, you must attach a statement to your tax return. The statement must 

identify and show the gross amount of the qualified settlement income, the reductions for the 

amount contributed to an eligible retirement 

plan, and the net amount.

Income averaging. For purposes of the income averaging rules that apply to an individual 

engaged in a farming or fishing business, qualified 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 operated before declaring chapter 11 bankruptcy;

• 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 business 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 income fees paid to them from an estate. If you 

aren't in the trade or business of being an executor (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 includible in income if it's waived.

Manager of trade or business for bankruptcy estate. Include in your income all payments received from your bankruptcy estate for 

managing or operating a trade or business that 

you operated before you filed for bankruptcy. 

Report this income on 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 receive a Form W-2 showing payments for services 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 providers. If you operate a daycare service and receive 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 political 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 emotionally handicapped qualified foster individuals. 

A state must determine that the additional compensation is needed, and the care for which the 

payments are made must be provided in the 

foster care provider's home in which the qualified foster individual was placed.

Certain Medicaid waiver payments are treated as difficulty-of-care payments when received by an individual care provider for caring 

for an eligible individual (whether related or unrelated) living in the provider's home. See Notice 2014-7, available at IRS.gov/irb/

2014-4_IRB#NOT-2014-7, and related questions and answers, available at IRS.gov/

Individuals/Certain-Medicaid-Waiver-PaymentsMay-Be-Excludable-From-Income, for more information.

You must include in your income difficulty-of-care payments to the extent they're received 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 receive payments that you must include in your income and you're in business as a foster care 

provider, report the payments on Schedule C 

(Form 1040). See Pub. 587 to help you determine 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. Report the FMV of the tour on Schedule 1 (Form 

1040), line 8z, if you aren't in the trade or business 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 gambling losses and expenses are limited to the 

amount of your winnings.

Lotteries and raffles. Winnings from lotteries and raffles are gambling winnings. In addition to cash winnings, you must include in your 

income the 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 annual payments and any amounts you receive 

designated as interest on the unpaid installments. If you sell future lottery payments for a 

lump sum, you must report the amount you receive 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 gambling 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, property you receive as a gift, bequest, or inheritance isn't included in your income. However, if 

property you receive this way later produces income such as interest, dividends, or rents, that 

income is taxable to you. If property is given to a 

trust and the income from it is paid, credited, or 

distributed to you, that income is also taxable to 

you. If the gift, bequest, or inheritance is the income from the property, that income is taxable 

to you.

Inherited pension or IRA. If you inherited 

a pension or an 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 

34 Publication 525 (2023)
IRA? in Pubs. 590-A and 590-B if you inherited 

an IRA.

Expected inheritance. If you sell an interest in an expected inheritance from a living person, 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 received for lost wages, lost business income, or 

lost profits are taxable.

Property damage. Payments you received 

for property damage aren't taxable if the payments 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 damage 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 proceeds) 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 sickness aren't taxable. This includes payments for 

emotional distress that is attributable to personal physical injuries or physical sickness. 

Payments for emotional distress that aren't attributable to personal physical injuries or physical 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 deductible from other income. A hobby is an activity 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. Excludable 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 income to your AGI, such as the calculation to determine the taxable part of social security benefits. If the payments are made in property, your 

basis in the property is its FMV when you receive it.

Excludable restitution payments are payments 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 result of a legal action. They include compensation or reparation for property losses resulting 

from Nazi persecution, including proceeds under insurance policies issued before and during 

World War II by European insurance companies.

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 secured 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 December 7, 2009, aren't included in gross income. This amount won't be used to figure AGI 

or MAGI in applying any Internal Revenue Code 

provision that takes into account excludable income.

Interest on frozen deposits. In general, you 

exclude from your income the amount of interest earned on a frozen deposit. A deposit is frozen if, at the end of the calendar year, you can't 

withdraw any part of the deposit because:

• The financial institution is bankrupt or insolvent, 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 interest 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 deposit during that year, and

2. The amount that could have been withdrawn at the end of that tax year (not reduced by any penalty for premature withdrawals of a time deposit).

The excluded part of the interest is included in 

your income in the tax year it becomes withdrawable.

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 expenses are those you pay for tuition and required 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 chapter 10 of Pub. 970.

Interest on state and local government obligations. This interest is usually exempt from 

federal tax. However, you must show the 

amount of any tax-exempt interest on your federal income tax return. For more information, 

see State or Local Government Obligations in 

chapter 1 of Pub. 550.

Job interview expenses. If a prospective employer asks you to appear for an interview and 

either pays you an allowance or reimburses you 

for your transportation and other travel expenses, the amount you receive isn't taxable in 

most cases. You include in income only the 

amount you receive that is more than your actual 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 employer 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 arrange car insurance for buyers. Insurance brokers pay back part of their commissions to you 

for referring customers to them. You must include the kickbacks in your income.

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 salesperson. This is true whether you receive the payment directly from the manufacturer or through 

your employer.

Example 38. You sell cars for an automobile 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 cases, you don't include in income amounts you 

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 excluded from the gross income of nonmilitary taxpayers.

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 employer for good work or suggestions must generally be included in your income as wages. 

However, certain noncash employee achievement 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 merchandise that are awarded by a distributor or manufacturer to employees of dealers, you must include 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 accomplishments in religious, charitable, scientific, artistic, 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 following requirements.

1. You were selected without any action on 

your part to enter the contest or proceeding.

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 designated by you. The following conditions 

apply to the transfer.

a. You can't use the prize or award before 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 organization 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 presentation, 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 designated amounts were transferred.

These rules don't apply to scholarship or fellowship awards. See Scholarships and fellowships, later.

Qualified opportunity fund (QOF). Effective 

December 22, 2017, section 1400Z-2 provides 

a temporary deferral of inclusion in gross income for eligible gains invested in QOFs, and a 

stepped-up basis to fair market value of the investment in the QOF at time of sale or exchange, 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 invested in a QOF. See Form 8997, Initial and Annual Statement of Qualified Opportunity Fund 

(QOF) Investments, and its instructions for reporting information. For additional information, 

see Opportunity Zones Frequently Asked Questions, available at IRS.gov/Newsroom/

Opportunity-Zones-Frequently-AskedQuestions.

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 eligible educational institution. A program can be 

established and maintained by a state, an 

agency or instrumentality of a state, or an eligible educational institution.

The part of a distribution representing the 

amount paid or contributed to a QTP isn't included in income. This is a return of the investment 

in the program.

In most cases, the beneficiary doesn't include in income any earnings distributed from a 

QTP if the total distribution is less than or equal 

to adjusted qualified higher education expenses. See Pub. 970 for more information.

Railroad retirement annuities. The following 

types of payments are treated as pension or annuity income and are taxable under the rules 

explained in 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, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain. Report it as explained in the Instructions for 

Schedule D (Form 1040). You can't deduct a 

loss.

However, if you sold an item you held for investment, such as gold or silver bullion, coins, 

or gems, any gain is taxable as a capital gain 

and any loss is deductible as a capital loss.

Example 39. You sold a painting on an online auction website for $100. You bought the 

painting for $20 at a garage sale years ago. Report your $80 gain as a capital gain as explained in the Instructions for Schedule D (Form 

1040).

Scholarships and fellowships. A candidate 

for a degree can exclude amounts received as a 

qualified scholarship or fellowship. A qualified 

scholarship or fellowship is any amount you receive that is for:

• Tuition and fees required to enroll at or attend an eligible educational institution; or

• Course-related expenses, such as fees, 

books, and equipment that are required for 

courses at the eligible educational institution. 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 information 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 services required as a condition for receiving the 

scholarship. This applies even if all candidates 

for a degree must perform the services to receive 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 under:

• The National Health Services Corps Scholarship Program,

• The Armed Forces Health Professions 

Scholarship and Financial Assistance Program, or

• A comprehensive student work-learning-service program (as defined in section 

448(e) of the Higher Education Act of 

1965) operated by a work college (as defined 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 

36 Publication 525 (2023)
any law administered by the Department of Veterans Affairs, aren't included in your income. 

These allowances aren't considered scholarship 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 purposes.

Smallpox vaccine injuries. If you're an eligible individual who receives benefits under the 

Smallpox Emergency Personnel Protection Act 

of 2003 for a covered injury resulting from a 

covered countermeasure, you can exclude the 

payment from your income (to the extent it isn't 

allowed as a medical and dental expense deduction on Schedule A (Form 1040)). Eligible individuals include health care workers, emergency personnel, and first responders in a 

smallpox emergency who have received a 

smallpox vaccination.

State tax payments. Do not include payments 

on your tax return made by states under legislatively 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 compensation 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 provided for payments to be made in early 2023. For 

special tax refunds or payments that were excluded from federal income in 2022, the same 

tax treatment applies to the special tax refund or 

payments received in 2023. This means taxpayers who didn’t get a payment under the program 

during 2022 may exclude from federal income a 

state payment provided under the 2022 program even if they actually received the payment 

in 2023. See IRS News Release IR-2023-158 at 

IRS.gov/Newsroom/IRS-Issues-Guidance-onState-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 allowance 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 property, are usually included in your income as 

compensation. You can exclude these benefits 

from your income only when the facts clearly 

show that the union intended them as gifts to 

you.

Reimbursed union convention expenses. 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 international union to reimburse you for expenses of 

traveling away from home to attend the convention. 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 electric utility company and you participate in the 

utility's energy conservation program, you may 

receive on your monthly electric bill either:

• A reduction in the purchase price of electricity furnished to you (rate reduction), or

• A nonrefundable credit against the purchase price of the electricity.

The amount of the rate reduction or nonrefundable credit isn't included in your income.

Whistleblower's award. If you receive a whistleblower's award from the IRS, you must include 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 income for the year in which you repaid it. Or, if 

the amount you repaid is more than $3,000, you 

may be able to take a credit against your tax for 

the year in which you repaid it. In most cases, 

you can claim a deduction or credit only if the 

repayment qualifies as an expense or loss incurred in your trade or business or in a for-profit 

transaction.

Type of deduction. The type of deduction 

you're allowed in the year of repayment depends on the type of income you included in the 

earlier year. In most cases, you deduct the repayment on the same form or schedule on 

which you previously reported it as income. For 

example, if you reported it as self-employment 

income, deduct it as a business expense on 

Schedule C (Form 1040) or Schedule F (Form 

1040). If you reported it as a capital gain, deduct it as a capital loss as explained in the Instructions for Schedule D (Form 1040). If you 

reported it as wages, unemployment compensation, or other nonbusiness income, you may 

be able to deduct it as an other itemized deduction 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 deduct it from your income in the year you repaid 

it.

Repaid social security benefits. If you repaid social security or equivalent railroad retirement 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 included the income under a claim of right. This 

means that at the time you included the income, 

it appeared that you had an unrestricted right to 

it. 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, consider 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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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 compensation in an earlier year on which social security, Medicare, or tier 1 RRTA taxes were paid, 

ask your employer to refund the excess amount 

to you. If the employer refuses to refund the 

taxes, ask for a statement indicating the amount 

of the overcollection to support your claim. File 

a claim for refund using Form 843.

Repaid wages subject to Additional Medicare Tax. Employers can't make an adjustment or file a claim for refund for Additional 

Medicare Tax withholding when there is a repayment of wages received by an employee in a 

prior year because the employee determines liability for Additional Medicare Tax on the employee's income tax return for the prior year. If 

you had to repay an amount that you included in 

your wages or compensation in an earlier year, 

and on which Additional Medicare Tax was 

paid, you may be able to recover the Additional 

Medicare Tax paid on the amount. To recover 

Additional Medicare Tax on the repaid wages or 

compensation, you must file Form 1040-X for 

the prior year in which the wages or compensation were originally received. See the Instructions for Form 1040-X.

Repayment rules don’t apply. This discussion doesn't apply to:

• Deductions for bad debts;

• Deductions for theft losses due to criminal 

fraud or embezzlement in a transaction entered 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 download 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 statements (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 options 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 preparation may not be available through Free File. 

Go to IRS.gov/FreeFile to see if you qualify 

for free online federal tax preparation, e-filing, and direct deposit or payment options.

• VITA. The Volunteer Income Tax Assistance (VITA) program offers free tax help to 

people with low-to-moderate incomes, persons with disabilities, and limited-English-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 information on free tax return preparation.

• MilTax. Members of the U.S. Armed 

Forces and qualified veterans may use MilTax, a free tax service offered by the Department of Defense through Military OneSource. 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 return. 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 employer to withhold from your paycheck. 

This is tax withholding. See how your withholding affects your refund, take-home pay, 

or tax due.

• The First-Time Homebuyer Credit Account 

Look-up (IRS.gov/HomeBuyer) tool provides 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 questions. 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 interactive links to help you find answers to your 

questions.

• You may also be able to access tax information 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 accountants (CPAs), accountants, and many others 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 substantive accuracy of your return,

• Required to sign the return, and

• Required to include their preparer tax identification number (PTIN).

Although the tax preparer always signs 

the return, you're ultimately responsible 

for providing all the information required 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 information 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 Administration (SSA) offers online service at SSA.gov/

CAUTION

!

38 Publication 525 (2023)
employer for fast, free, and secure W-2 filing options 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 social security number (SSN) or other confidential 

information on social media sites. Always protect your identity when using any social networking 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 presentations 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 language.

Free Over-the-Phone Interpreter (OPI) Service. The IRS is committed to serving taxpayers 

with limited-English proficiency (LEP) by offering 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 languages.

Accessibility Helpline available for taxpayers with disabilities. Taxpayers who need information 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 Helpline does not have access to your IRS account. 

For help with tax law, refunds, or account-related issues, go to IRS.gov/LetUsHelp.

Note. Form 9000, Alternative Media Preference, 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 review 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 Instructions 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 tested on other dedicated eBook readers, and 

eBook functionality may not operate as intended.

Access your online account (individual taxpayers only). Go to IRS.gov/Account to securely access information about your federal tax 

account.

• View the amount you owe and a breakdown by tax year.

• See payment plan details or apply for a 

new payment plan.

• Make a payment or view 5 years of payment history and any pending or scheduled 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 online account, you can access a variety of information to help you during the filing season. You 

can get a transcript, review your most recently 

filed tax return, and get your adjusted gross income. Create or access your online account at 

IRS.gov/Account.

Tax Pro Account. This tool lets your tax professional submit an authorization request to access your individual taxpayer IRS online account. 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 electronically 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 receive their refunds. If you don’t have a bank account, go to IRS.gov/DirectDeposit for more information 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 affected if your SSN is used to file a fraudulent return or to claim a refund or credit.

• The IRS doesn’t initiate contact with taxpayers by email, text messages (including 

shortened links), telephone calls, or social 

media channels to request or verify personal or financial information. This includes 

requests for personal identification numbers (PINs), passwords, or similar information for credit cards, banks, or other financial accounts.

• Go to IRS.gov/IdentityTheft, the IRS Identity Theft Central webpage, for information 

on identity theft and data security protection 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 taxpayers to help prevent the misuse of their 

SSNs on fraudulent federal income tax returns. When you have an IP PIN, it prevents 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 payment 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 using 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 instructions.

• 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 institution. Contact your financial institution for 

availability, cost, and time frames.

Note. The IRS uses the latest encryption 

technology to ensure that the electronic payments 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 order.

CAUTION

!

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 immediate notification of whether your agreement 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 Compromise 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 return. 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 notices 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 Preference, 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, including 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 issue 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. Before 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 “Local 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 understand 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 everything 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 immediate 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 advocate’s number:

• Go to TaxpayerAdvocate.IRS.gov/ContactUs;

• Download Pub. 1546, The Taxpayer Advocate Service Is Your Voice at the IRS, available 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 taxpayer 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 addition, LITCs can provide information about taxpayer rights and responsibilities in different languages 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

A

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

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)

B

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

C

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, employerprovided)

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

D

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, 

8

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

E

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

F

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

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

G

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

H

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)

I

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

J

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

K

Kickbacks 35

L

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

M

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

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

N

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

O

Oil:

Royalties from 17

Options, stock 11, 13

Outplacement services 4

Overseas work 2

P

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

Q

Qualified tuition program 

(QTP) 36

R

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, 

8

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

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

T

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

U

Unemployment 

compensation 29

Unions (See Labor unions)

Unlawful discrimination suits:

Deduction for costs 33

V

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

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

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

44 Publication 525 (2023)