Special Rules for
Certain Employees
This section 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 are 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 is not
taxable to you.
If you are a member of a religious organization and you give your outside earnings to
the organization, you still must include the earnings in your income. However, you may be
entitled to a charitable contribution deduction for the amount paid to the organization.
See chapter 26.
Housing. Special rules for housing apply to members of the clergy.
Under these rules, you do not include in your income the rental value of a home (including
utilities) or a housing allowance provided to you as part of your pay. The home or
allowance must be provided as compensation for your duties as an ordained, licensed, or
commissioned minister. However, you must include the rental value of the home or the
housing allowance as earnings from self-employment on Schedule SE (Form 1040) if you are
subject to the self-employment tax. For more information, see Publication 517, Social
Security and Other Information for Members of the Clergy and Religious Workers.
Pension. A pension or retirement pay for a member of the
clergy is usually treated the same as any other pension or annuity. It must be reported on
lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.
Members of Religious Orders
If you are 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 are performing the services
as an agent of the order in the exercise of duties required by the order, do not 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 are 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 are not included in your income.
Example. You are 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 are 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 are considered to be an agent of the
order and any wages you earn at the hospital that you turn over to your order are not
included in your income.
Services performed outside the order. If you are directed to work
outside the order, your services are not an exercise of duties required by the order
unless they meet both of the following requirements.
- They are the kind of services that are ordinarily the duties of members of the order.
- They are part of the duties that you must exercise for, or on behalf of, the religious
order as its agent.
If you are an employee of a third party, the services you perform for the third party
will not be considered directed or required of you by the order. Amounts you receive for
these services are included in your income, even if you have taken a vow of poverty.
Example. Mark Brown is a member of a religious order and has
taken a vow of poverty. He renounces all claims to his earnings and turns over his
earnings to the order.
Mark is a school teacher. He was instructed by the superiors of the order to get a job
with a private tax-exempt school. Mark became an employee of the school, and, at his
request, the school made the salary payments directly to the order.
Because Mark is an employee of the school, he is performing services for the school
rather than as an agent of the order. The wages Mark earns working for the school are
included in his income.
Foreign Employer
Special rules apply if you work for a foreign employer.
U.S. citizen. If you are 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 are exempt from
social security and Medicare taxes if you are 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 are not
self-employed. This rule also applies if you are an employee of a qualifying wholly-owned
instrumentality of a foreign government.
Non-U.S. citizen. If you are not a U.S. citizen, or if you are a
U.S. citizen but also a citizen of the Philippines, and you work for an international
organization in the United States, your salary from that source is exempt from tax. If you
work for a foreign government in the United States, your salary from that source is exempt
from tax if your work is like the work done by employees of the United States in that
foreign country and the foreign government gives an equal exemption to employees of the
United States in that country.
Waiver of alien status. If you are 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, different
rules may apply. See Foreign Employer in Publication 525.
Employment abroad. For
information on income earned abroad, get Publication 54.
Military
Payments you receive as a member of a military service generally are taxed as wages
except for retirement pay, which is taxed as a pension. Allowances generally are not
taxed. For more information on the tax treatment of military allowances and benefits, get
Publication 3, Armed Forces' Tax Guide.
Military retirement pay. If
your retirement pay is based on age or length of service, it is taxable and must be
included in your income as a pension on lines 16a and 16b of Form 1040, or on lines
12a and 12b of Form 1040A. Do not 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 more information on survivor annuities, see chapter 11.
Disability. If you are retired on disability, see Military
and Government Disability Pensions under Sickness and Injury Benefits, later.
Veterans' benefits. Do not
include in your income any veterans' benefits paid under any law, regulation, or
administrative practice administered by the Department of Veterans Affairs (VA).
The following amounts paid to veterans or their families are not 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 you leave on deposit with the VA.
Rehabilitative program payments. VA payments to hospital
patients and resident veterans for their services under the VA's therapeutic or
rehabilitative programs are not treated as nontaxable veterans' benefits. Report these
payments as income on line 21 of Form 1040.
Volunteers
The tax treatment of amounts you receive as a volunteer worker for the Peace Corps or
similar agency 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 are 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. Gary Carpenter, a Peace Corps volunteer, gets $175 a
month as a readjustment allowance during his period of service, to be paid to him in a
lump sum at the end of his tour of duty. Although the allowance is not available to him
until the end of his service, Gary must include it in his income on a monthly basis as it
is credited to his account.
Volunteers in Service to America (VISTA). If you are a VISTA volunteer, you must include meal and lodging allowances
paid to you in your income as wages.
National Senior Services Corps programs. Do not 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, do not
include these amounts in income.
Volunteer tax counseling. Do not 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.
Sickness and Injury Benefits
This section discusses many types of sickness and injury benefits including disability
benefits and military and government disability pensions.
Disability Income
Generally, if you retire on disability, you must report your pension
or annuity as income. There is a tax credit for people who are permanently and
totally disabled. For information on this credit and the definition of permanent and total
disability, see chapter 34.
Disability pensions. Generally, 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. Your employer should be able to give you
specific details about your pension plan and tell you the amount you paid for your
disability pension. In addition to disability pensions and annuities, you may be receiving
other payments for sickness and injury.
Cost paid by you. If you pay the entire cost of a health or accident
insurance plan, do not 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 Reimbursement in a later year in chapter 23.
Cafeteria plans. Generally, if you are covered by an
accident or health insurance plan through a cafeteria plan, and the amount of the
insurance premiums was not included in your income, you are not 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 are considered to have paid the premiums,
and any benefits you receive are not taxable.
Accrued leave payment. If you retire on disability, any lump-sum
payment you receive for accrued annual leave is a salary payment. The payment is not a
disability payment. Include it in your income in the tax year you receive it.
Retirement and profit-sharing plans. If you receive payments from a
retirement or profit-sharing plan that does not provide for disability retirement, do not
treat the payments as a disability pension. The payments must be reported as a pension or
annuity. For more information on pensions, see chapter 11.
How to report. If you retired on disability, you must include in
income any disability pension you receive under a plan that is paid for by your employer.
You must report your taxable disability payments as wages on line 7 of Form 1040 or Form
1040A, until you reach minimum retirement age. Minimum retirement age generally is the age
at which you can first receive a pension or annuity if you are not disabled.
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 16a and 16b of Form 1040, or
on lines 12a and 12b of Form 1040A. The rules for reporting pensions are explained in How
To Report in chapter 11.
Military and Government
Disability Pensions
Certain military and government disability pensions are not taxable.
You may be able to exclude from income amounts you receive as a pension, 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.
Conditions for exclusion. Do not include the disability payments in
your income if any of the following conditions apply.
- You were entitled to receive a disability payment before September 25, 1975.
- 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.
- You receive the disability payments for a combat-related injury. This is a personal
injury or sickness that:
- Results directly from armed conflict,
- Takes place while you are engaged in extra-hazardous service,
- Takes place under conditions simulating war, including training exercises such as
maneuvers, or
- Is caused by an instrumentality of war.
- You would be entitled to receive disability compensation from the Department of Veterans
Affairs (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, you generally must include it in your income. But if it
is a result of active service in one of the listed government services and one of the
listed conditions applies, do not 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.
Terrorist attack. Do not include in your income disability payments
you receive for injuries resulting directly from a violent attack that occurs while you
are a U.S. government employee performing official duties. For your disability payments to
be tax exempt, the Secretary of State must determine the attack was a terrorist attack.
VA disability benefits. Disability benefits you receive from the VA
are not included in your income. If you are a military retiree and you receive disability
benefits from other than the VA, do not include in your income the amount of disability
benefits equal to the VA benefits to which you are entitled.
Retroactive VA determination. If you retire from the armed
services 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 1040X for each previous year
during the retroactive period.
If you receive a lump-sum disability severance payment and are later awarded VA
disability benefits, do not include in your income the portion of the severance payment
equal to the VA benefit you would have been entitled to receive in that same year.
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 are later given a
retroactive disability rating by the VA.
Long-Term Care
Insurance Contracts
Long-term care insurance contracts are generally treated as accident
and health insurance contracts. Amounts you receive from them (other than
policyholder dividends or premium refunds) generally are excludable 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
- Generally 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, and
rehabilitative services, and maintenance and personal care services, and
- Required by a chronically ill individual and provided pursuant to a plan
of care as 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 professional 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 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. You can generally exclude from gross income up
to $210 a day for 2002. This limit is indexed for inflation. See Limit on exclusion, under
Long-Term Care Insurance Contracts, under Sickness and Injury Benefits in
Publication 525 for more information.
Workers' Compensation
Amounts you receive as workers' compensation for an occupational
sickness or injury are fully exempt from tax if they are 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, does not apply to retirement plan
benefits you receive based on your age, length of service, or prior contributions to the
plan, even if you retired because of an occupational sickness or injury.
 If part of
your workers' compensation reduces your social security or equivalent railroad retirement
benefits received, that part is considered social security (or equivalent railroad
retirement) benefits and may be taxable. For more information, see Publication 915, Social
Security and Equivalent Railroad Retirement Benefits.
Return to work. If you return to work after qualifying for workers'
compensation, payments you continue to receive while assigned to light duties are taxable.
Report these payments as wages on line 7 of Form 1040 or Form 1040A, or on line 1 of Form
1040EZ.
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