For use in preparing

Publication 525

Taxable and

Nontaxable

Income

For use in preparing

2025 Returns

Contents

Future Developments

What’s New

............ 1

.................. 1

Reminders . . . . . . . . . . . . . . . . . . . 1

Introduction . . . . . . . . . . . . . . . . . . 2

Employee Compensation . . . . . . . . . . 2

Special Rules for Certain

Employees . . . . . . . . . . . . . . . 14

Business and Investment Income . . . . 16

Sickness and Injury Benefits . . . . . . . 17

Miscellaneous Income . . . . . . . . . . . 20

Repayments . . . . . . . . . . . . . . . . . 36

How To Get Tax Help . . . . . . . . . . . . 37

Index

. . . . . . . . . . . . . . . . . . . . . 39

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

Overtime. If you received overtime compensation, you may be able to claim a deduction for

the pay that exceeds your regular rate of pay.

See Overtime, later.

Tips. If you received tips, you may be able to

claim a deduction for qualified tips on your tax

return. See Tips, later.

Deferred compensation contribution limit

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

403(b) plan, or the federal government’s Thrift

Savings Plan (TSP), the total annual amount

you can contribute is increased to:

• $23,500,

• $31,000 if age 50 or older, or

• $34,750 if age 60 through 63 at the end of

2025.

This also applies to most 457 plans.

Health flexible spending arrangements

(health FSAs) under cafeteria plans. For tax

years beginning in 2025, the dollar limitation under section 125(i) on voluntary employee salary

reductions for contributions to health FSAs is

$3,300.

Reminders

Get forms and other information faster and easier at:

• IRS.gov (English)

• IRS.gov/Spanish (Español)

• IRS.gov/Chinese (中文)

Feb 25, 2026

• IRS.gov/Korean (한국어)

• IRS.gov/Russian (Pусский)

• IRS.gov/Vietnamese (Tiếng Việt)

Qualified wildfire relief payments are not

taxable. If you received a qualified wildfire relief payment, those payments may be nontaxable. See Disaster relief payments from wildfires,

later.

Publication 525 (2025) Catalog Number 15047D

Department of the Treasury Internal Revenue Service www.irs.gov

Certain relief payments made to individuals

affected by the East Palestine train derailment are not taxable. If you received relief

payments from a government agency, Norfolk

Southern Railway, or its subsidiary, insurer,

agent, or a related person due to being affected

by the February 3, 2023, East Palestine, Ohio,

train derailment, these payments may be nontaxable. See Disaster relief payments from the

East Palestine train derailment, later.

Rollovers from qualified tuition programs to

Roth IRAs. For distributions made after December 2023, amounts may be rolled over in a

direct trustee-to-trustee transfer from a

long-term qualified tuition program to a Roth

IRA, subject to certain restrictions.

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.

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.

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.

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).

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

1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

You can receive income in the form of money,

property, or services. This publication discusses

many kinds of income and explains whether

they are taxable (included in income) or nontaxable (excluded from income). 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

2

proceeds, and welfare and other public assistance benefits.

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’re a

cash-method taxpayer, you’re 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.

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

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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

334 Tax Guide for Small Business

334

463 Travel, Gift, and Car Expenses

463

523 Selling Your Home

523

527 Residential Rental Property

527

541 Partnerships

541

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

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.

544 Sales and Other Dispositions of

Assets

544

550 Investment Income and Expenses

550

554 Tax Guide for Seniors

554

559 Survivors, Executors, and

Administrators

559

575 Pension and Annuity Income

575

907 Tax Highlights for Persons With

Disabilities

907

908 Bankruptcy Tax Guide

908

915 Social Security and Equivalent

Railroad Retirement Benefits

915

970 Tax Benefits for Education

970

4681 Canceled Debts, Foreclosures,

Repossessions, and Abandonments

4681

Form (and Instructions)

1040 U.S. Individual Income Tax Return

1040

1040-NR U.S. Nonresident Alien Income

Tax Return

1040-NR

1040-SR U.S. Tax Return for Seniors

1040-SR

1099-R Distributions From Pensions,

Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance

Contracts, etc.

1099-R

W-2 Wage and Tax Statement

W-2

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

Publication 525 (2025)

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,

Uncollected Social Security and Medicare Tax

on Wages, 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 a 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

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

Publication 525 (2025)

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.

For

additional information on bankruptcy, see Pub.

908.

Miscellaneous

Compensation

This section discusses many types of employee

compensation.

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, 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

(cash, goods, services, etc.) 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 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 Federal Insurance Contribution Act (FICA)

or Federal Unemployment Tax Act (FUTA) tax.

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 box 12 of Form W-2, 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 box 1 of Form

W-2. It’s also shown in box 12 of Form W-2, 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:

3

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 under Special Rules

for Various Types of Services and Payments in

section 15 of Pub. 15, 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.

4

• 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,

FICA tax, and 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, go to 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 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.

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 box 1 of Form W-2 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

(defined below), 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

box 1 of Form W-2.

Archer MSA contributions. Contributions by

your employer to your Archer MSA generally

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

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

Publication 525 (2025)

You must report this amount on Form 8853,

Archer MSAs and Long-Term Care Insurance

Contracts. File the form with your return.

the taxable and nontaxable amounts, you must

complete Part III of Form 8839. File the form

with your return.

To claim the exclusion, you must complete

Part III of Form 2441. See the Instructions for

Form 2441 for more information.

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 2025, health FSAs are subject to a

$3,300 limit on salary reduction contributions.

Athletic Facilities

Educational Assistance

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.

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

of qualified employer-provided educational assistance. For more information, see Pub. 970.

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 box 12 of Form W-2, 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

Publication 525 (2025)

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,

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 box 10 of Form W-2. Any amount over

your employer’s plan limit is also included in

box 1. See Form 2441.

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.

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

box 1 of Form W-2. 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

5

• 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

box 1 of Form W-2. 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 Form 1040.

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 box 12 of Form W-2,

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

Worksheet 1. Figuring the Cost of

Group-Term Life Insurance To

Include in Income (Keep for Your

Records)

1.

2.

Enter the total amount of

your insurance coverage

from your

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

Limit on exclusion for

employer-provided

group-term life insurance

coverage . . . . . . . . . . . . .

1.

2.

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.

50,000

Table 1. Cost of $1,000 of

Group-Term Life Insurance for 1

Month

Age

Cost

Under 25 . . . . . . . . . . . . . . . . . $ 0.05

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

0.06

30 through 34

35 through 39

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

40 through 44

45 through 49

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

50 through 54

55 through 59

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

60 through 64

65 through 69

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

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

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

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

0.08

0.09

0.10

0.15

0.23

0.43

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

0.66

1.27

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

2.06

Example 3. You’re 51 years old and work

for two employers, Green Company and Maple

Company. Both employers provide group-term

life insurance coverage for you for the entire

year. Your coverage is $35,000 with Green

Company and $45,000 with Maple Company.

You pay premiums of $4.15 a month under the

Maple Company group plan. You figure the

amount to include in your income as follows.

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.

Publication 525 (2025)

Worksheet 1. Figuring the Cost of

Group-Term Life Insurance To

Include in Income—Illustrated

1. Enter the total amount of

your insurance coverage

from your

employer(s) . . . . . . . . . . . . 1. 80,000

2. Limit on exclusion for

employer-provided

group-term life insurance

coverage . . . . . . . . . . . . . . 2. 50,000

3. Subtract line 2 from

line 1 . . . . . . . . . . . . . . . . . 3. 30,000

4. Divide line 3 by $1,000.

Figure to the nearest

30.0

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

0.23

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

6. Multiply line 4 by

6.90

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

7. Enter the number of full

months of coverage at this

12

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

8. Multiply line 6 by

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

9. Enter the

premiums you paid

per month . . . . . 9. 4.15

10. Enter the number

of months you paid

the

12

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.

49.80

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.

(You aren’t entitled to a deduction for a

charitable contribution for naming a chariPublication 525 (2025)

table organization as the beneficiary of

your policy.)

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

a. You retired before January 2, 1984,

and were covered by the plan when

you retired; or

b. You reached age 55 before January 2,

1984, and were employed by the 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,

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’re 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

b. Furnished for the convenience of your

employer, and

Reimbursements for certain moving expenses

are no longer excluded from the gross income

of nonmilitary taxpayers.

c. A condition of your employment. (You

must accept it in order to be able to

properly perform your duties.)

No-Additional-Cost Services

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 (defined later).

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.

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.

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

7

Retirement Planning Services

Tuition Reduction

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.

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 their 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.

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 $325 a month.

The exclusion for the qualified parking fringe

benefit can’t be more than $325 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.

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 rule, the value

of an employer-provided vehicle is the amount

8

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

Publication 525 (2025)

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.

Tip: 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.

Publication 525 (2025)

Overall limit on deferrals. For 2025, you

shouldn’t have deferred more than a total of

$23,500 of contributions to the plans listed in

(1) through (3), earlier, unless you are age 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 2025, the catch-up limit for

section 401(k) and 403(b) plans, the TSP, SARSEP plans, and governmental section 457 plans

is $7,500. The catch-up limit is $11,250 if you

are age 60, 61, 62, or 63 in 2025. For SIMPLE

plans, it’s generally $3,500.

A higher catch-up limit may apply to participants in certain SIMPLE plans. You should contact your plan administrator for more information.

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

$16,500 in 2025. Amounts you defer under a

SIMPLE plan count toward the overall limit

($23,500 for 2025) and may affect the amount

you can defer under other elective deferral

plans.

A higher limit may apply to participants in

certain SIMPLE plans. You should contact your

plan administrator for more information.

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 2025 is generally $23,500. 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

$26,500 for 2025.

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 ($23,500 in

2025) 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 $23,500 in 2025. 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.

9

• Your wages as reported in box 1 of Form

W-2.

• 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 ($47,000 for 2025),

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 $23,500, 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 a Roth contribution was made to the account isn’t a qualified distribution.

Reporting by employer. Your employer generally shouldn’t include elective deferrals in your

wages in box 1 of Form W-2. 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 box 1 of Form W-2 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

10

included in your wages in box 1 of Form W-2.

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 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

2025.

• If the distribution was for a 2025 excess

deferral, your Form 1099-R should have

code 8 in box 7. Add the excess deferral

amount to your wages on your 2025 tax return.

• If the distribution was for a 2025 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 2025 return.

• If the distribution was for a 2024 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 2024 tax return, you must file an

amended return on Form 1040-X. If you

didn’t receive the distribution by April 15,

2025, you must also add it to your wages

on your 2025 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

2025 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.”

Tip: 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.

Tip: 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 2025 to a defined

contribution plan is generally limited to the

lesser of 100% of your compensation or

$70,000. Under certain circumstances, contributions that exceed these limits (excess annual

additions) may be corrected by a distribution of

Publication 525 (2025)

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

contributions.

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.

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.

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.

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

separate Form 1099-R for the year of the payment with code E in box 7. Report the total payment shown in box 1 of Form 1099-R on Form

1040 or 1040-SR, line 5a. Report the taxable

amount shown in box 2a of Form 1099-R on

Form 1040 or 1040-SR, line 5b.

Tip: 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

Publication 525 (2025)

Caution: 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 of the Internal Revenue

Code.

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 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 box 12 of

Form W-2, 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

11

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.

Caution: It’s your responsibility to make any

appropriate adjustments to the basis information reported on Form 1099-B by completing

Form 8949.

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, 2024, to buy 100

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

at the time. You exercised the option on January

7, 2025, when the stock was selling on the open

market for $14 a share. On January 27, 2025,

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

12

value when your rights first became transferable

minus $900 option price) as an adjustment on

Form 6251, line 2i.

Tip: If you exercise an ISO during 2025, you

should receive Form 3921, or a statement, from

the corporation for each transfer made during

2025. The corporation must send or provide you

with the form by January 31, 2026. Keep this information for your records.

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 box 1 of

Form W-2, 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.

Caution: 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

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

box 1 of Form W-2, 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, 2023, to

buy 100 shares of Oak Corporation stock at $10

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

option on January 7, 2024, when the stock was

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

January 27, 2025, 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 2025,

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) . . . . . . . . .

Purchase price ($10 × 100 shares) . . . . . . .

$ 1,500

− 1,000

Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount reported as wages

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

$ 500

− 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

Publication 525 (2025)

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) . . . . . . . . .

Purchase price (option price)

($20 × 100 shares) . . . . . . . . . . . . . . . . . .

Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount reported as wages

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

Amount reported as capital gain

. . . . .

$ 3,000

− 2,000

$ 1,000

− 200

$ 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

Publication 525 (2025)

didn’t satisfy the holding period requirement, so

you must report $300 as wages and $700 as

capital gain, figured as follows.

Selling price ($30 × 100 shares) . . . . . . . . .

Purchase price (option price)

($20 × 100 shares) . . . . . . . . . . . . . . . . . .

Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount reported as wages

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

Amount reported as capital gain

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

$3,000

− 2,000

$1,000

− 300

$700

Tip: If you sold stock in 2025 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, 2026. Keep

this information for your records.

Qualified Equity Grants

Pub. 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 under section 83(i) is available for stock

attributable to options exercised or RSUs settled after 2017. The corporation must have a

written plan providing an RSU or option to at

least 80% of U.S. employees. The recipients

must have the same rights and privileges under

an RSU or option plan.

The term “qualified employee” doesn’t include:

• 1% owner of corporation (current or any

point during the 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 the 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

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.

Caution: You can’t use Form 15620, Section 83(b) Election, to make an election under

section 83(i). For an election under section

83(i), follow instructions detailed in IRS Notice

2018-97 instead.

If an employee elects to defer income inclusion under the provision, the income must be included in the employee’s income for the year

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 their

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

is nontransferable or subject to a substantial

risk of forfeiture, you don’t include the value of

the property in your income until it becomes

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 becomes 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.

• An option or RSU was granted by the cor-

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.

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

section 83(i) election is made in a manner similar to the election under section 83(b) 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

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 may have to return it to your employer) 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 ×

• Stock is received in settlement of an RSU,

and

poration.

13

($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 no longer may be required to return 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.

statement to the address listed for your state

under “Are requesting a refund or are not enclosing a check or money order...” given in

Where Do You File? in the Instructions for Form

1040. 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

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.

Example 13. The Redwood Corporation

sells 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.

Caution: You can’t make this choice for a

nonstatutory stock option.

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.

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.

Caution: 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.

Caution: You can’t make this choice for a

statutory or nonstatutory stock option.

How to make the choice. You can make

the choice by filing a written statement or Form

15620, 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

14

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.

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.

Example 14. In 2022, you paid your employer $50 for a share of stock that had an FMV

of $100 and was subject to forfeiture until 2025.

In 2024, 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

2025, when the stock had an FMV of $120, it

became substantially vested. For 2024, you

must report additional compensation of $60, figured as follows.

FMV of stock at time of substantial

vesting . . . . . . . . . . . . . . . . . . . . . .

Minus: Amount paid for stock . . . . . . .

Minus: Compensation previously

included in income from sale to

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

Additional income . . . . . . . . . .

$50

10

$120

− 60

$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.

Publication 525 (2025)

Housing

Special rules for housing apply to members of

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

in your income the fair 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 fair rental value of the

home or the housing allowance as earnings

from self-employment on Schedule SE (Form

1040) if you’re subject to 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.

Publication 525 (2025)

Example 16. You’re 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’re 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’re an employee of the school,

you’re performing services for the school rather

than as an agent of the order. The wages you

earn working for the school are included in your

income.

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

has 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 employ-

ees 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

15

(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’re 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

16

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

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’re 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.

Caution: 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

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.

Name, Image, Likeness (NIL). NIL is a term

that describes the means through which student-athletes are allowed to receive financial

compensation. NIL refers to the use of a student-athlete’s name, image, or likeness for commercial purposes through marketing and promotional endeavors. This can include such

things as autograph signings, product endorsements, licensing and merchandising agreements, participating in advertising campaigns,

social media posts, teaching camps or lessons,

and more.

Oil, gas, and minerals. Royalty income from

oil, gas, and mineral properties is the amount

Publication 525 (2025)

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.

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).

You report your share of partnership ordinary income on Schedule E (Form 1040).

Tip: In many cases, Schedule K-1 (Form

1065) will tell you where to report an item of income on your individual return.

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.

Qualified joint venture (QJV). 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 QJV 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.

Partnership Income

S Corporation 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.

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.

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

Publication 525 (2025)

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.

Tip: 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.

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.

Tip: 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

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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.

Tip: 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.

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.

Terrorist attacks or military action. Don’t include in your income disability payments you receive for injuries incurred as a direct result of

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.

Service-connected disability. You may be

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

Tip: 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.

c. Takes place under conditions simulating war, including training exercises

such as maneuvers; or

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.

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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;

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 was filed for tax year

2022. The table shows the Amount Withheld effective December 2021 is $320.00. To calculate

the amount for the tax reduction, multiply the

2022 Effective Months by the Amount Withheld.

In this case, January–December (2022) is 12

months x $320.00 (Amount Withheld) =

$3,840.00; this amount should be the amount

claimed as a reduction in column B of the 2022

Form 1040-X, line 1, Adjusted gross income.

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 2019 and receive a pension based on your years of service.

On August 3, 2025, you receive a determination

of service-connected disability retroactive to

2019. Generally, you could claim a refund for

the taxes paid on your pension for 2022, 2023,

and 2024. However, under the special limitation

period, you can also file a claim for 2021 as long

as you file the claim by August 3, 2026. You

can’t file a claim for 2019 and 2020 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 only payable to retirees of

the uniformed services. If you’re 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.

Publication 525 (2025)

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

Publication 525 (2025)

• 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.

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 2025).

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.

Caution: 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 Insurance 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.

Caution: 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.

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• 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.

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

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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,

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, 2026. It should show the

value of cash, property, services, credits, or

scrip you received from exchanges during 2025.

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).

Tip: 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.

Form 1099-C. If a federal government agency,

financial institution, or credit union cancels or

forgives a debt you owe, you may receive a

Form 1099-C. Box 2 of Form 1099-C 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.

Tip: 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.

Publication 525 (2025)

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

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’re 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 2025 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.

Caution: 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.

Publication 525 (2025)

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.

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’re 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.

Tip: 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 instit

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