J k lassers your income tax 2017 for preparing your 2016 tax return

Table of Contents33.16 Local Transportation and Travel Away 34.4 Election for Lump-Sum Social Security Benefi t Payment 600 34.6 How Tax on Social Security Reduces Your Earnings 60134.7

Staff for This Book J.K Lasser Editorial

Elliott Eiss, Member of the New York Bar, Contributing Editor

Barbara Weltman, Member of the New York Bar, Contributing EditorAngelo C Jack, Senior Production Editor

William Hamill, Copyediting and ProofreadingIndex by WordCo Indexing Services

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ISBN 978-1-119-13392-6 ISBN 978-0-13-443745-3

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

Seventy-Ninth Edition

John Wiley & Sons, Inc

How To Use Your Income Tax 2016

Tax alert symbols Th roughout the text of Your Income Tax, these special symbols alert

you to advisory tips about filing your federal tax return and tax planning opportunities:

A Filing Tip or Filing Instruction helps you prepare your 2015 return.

A Planning Reminder highlights year-end tax strategies for 2015 or planning opportunities

for 2016 and later years

A Caution points out potential pitfalls to avoid and areas where IRS opposition

may be expected

A Law Alert indicates recent changes in the tax law and pending legislation before Congress.

A Court Decision highlights key rulings from the Tax Court and other federal courts.

An IRS Alert highlights key rulings and announcements from the IRS.

guided millions of taxpayers through this complex law Every eff ort has been made to provide a direct and easy-to-understand explanation that shows how to comply with the law and at the same time take advantage of tax-saving options and plans

Th e 2016 edition of Your Income Tax—our 79th edition—continues this tradition

To make maximum use of this tax guide, we suggest that you use these aids:

Contents Chapter by Chapter Th e contents, on pages v–xxiv, lists the chapters

in Your Income Tax References direct you to sections within a particular chapter Th us

a reference to 21.1 directs you to Chapter 21 and then to section 1 within that chapter Section and page references are provided in the index at the back of the book

What’s New for 2015 Pages xxv–xxviii alert you to tax developments that may

aff ect your 2015 tax return

Key Tax Numbers for 2015 Pages xxix–xxx.

Tax-Saving Opportunities Page xxxi.

Filing tax basics Pages 1–8 alert you to fi ling requirements, fi ling addresses for

IRS Service Centers, and a calendar with 2016 fi ling deadlines

Visit www.jklasser.com

for FREE download

of e-Supplement

You can download a free e-Supplement

to Your Income Tax 2016 at www.

jklasser.com The e-Supplement will

provide an update on tax developments

from the IRS and Congress, including

a look ahead to 2016

On the homepage at jklasser.com,

you will fi nd free tax news, tax tips

and tax planning articles, and you can

sign up for a free e-newsletter

Contents Chapter by Chapter

1.11 Qualifying Widow/Widower Status If Your Spouse Died

Table of Contents

3.1 Tax-Free Health and Accident Coverage

3.3 Reimbursements and Other Tax-Free Payments

3.17 Company Services Provided at No Additional Cost 73

4.1 Reporting Dividends and Mutual-Fund Distributions 754.2 Qualifi ed Corporate Dividends Taxed

4.3 Dividends From a Partnership, S Corporation,

Table of Contents

4.11 Distribution Not Out of Earnings: Return of Capital 80

4.16 Forfeiture of Interest on Premature Withdrawals 83

4.19 Reporting Original Issue Discount on Your Return 86

5.6 Losses May Be Disallowed on Sales to Related Persons 1075.7 Deferring or Excluding Gain on Small Business

5.8 Reporting Capital Asset Sales on Form 8949

5.12 Holding Period: Gifts, Inheritances, and Other Property 119

5.17 Basis of Property You Inherited or Received as a Gift 1235.18 Joint Tenancy Basis Rules for Surviving Tenants 126

5.22 Figuring the Taxable Part of Installment Payments 130

Table of Contents

5.23 Electing Not To Report on the Installment Method 1335.24 Restriction on Installment Sales to Relatives 134

5.29 Repossession of Personal Property Sold on Installment 1385.30 Boot in Like-Kind Exchange Payable in Installments 1395.31 “Interest” Tax if Sales Price Exceeds $150,000

6.2 Personal Property Held for Business or Investment 146

6.4 Time Limits and Security Arrangements

6.5 Qualifi ed Exchange Accommodation Arrangements

6.7 Property Transfers Between Spouses and Ex-Spouses 1536.8 Tax-Free Exchanges of Stock in Same Corporation 156

7.3 Lump-Sum Options If You Were Born

7.5 Capital Gain Treatment for Pre-1974 Participation 166

7.10 Distribution of Employer Stock or Other Securities 171

7.12 Court Distributions to Former Spouse Under a QDRO 173

Table of Contents

7.20 Designated Roth Contributions to 401(k) Plans 1817.21 Annuities for Employees of Tax-Exempts

7.22 Government and Exempt Organization Deferred Pay Plans 1837.23 Figuring the Taxable Part of Commercial Annuities 184

7.27 Simplifi ed Method for Calculating

7.29 Withdrawals From Employer’s Qualifi ed Retirement Plan

IRAs 193

8.2 Traditional IRA Contributions Must Be Based on Earnings 1958.3 Contributions to a Traditional IRA If You Are Married 1968.4 IRA Deduction Restrictions for Active Participants

8.6 Nondeductible Contributions to Traditional IRAs 2028.7 Penalty for Excess Contributions to Traditional IRAs 203

8.9 Partially Tax-Free Traditional IRA Distributions Allocable

8.10 Tax-Free Direct Transfer or Rollover From

8.11 Transfer of Traditional IRA to Spouse at Divorce 2108.12 Penalty for Traditional IRA Withdrawals Before Age 59½ 2108.13 Mandatory Distributions From a Traditional IRA

8.22 Recharacterizing a Conversion and Reconversions 228

8.25 MyRA pilot program off ers new type of mini-Roth IRA 233

Table of Contents

9.1 Reporting Rental Real Estate Income and Expenses 235

9.3 Distinguishing Between a Repair and an Improvement 237

9.5 Depreciation on Converting a Home to Rental Property 240

9.7 Personal Use and Rental of a Residence During the Year 2429.8 Counting Personal-Use Days and Rental Days for a Residence 2439.9 Allocating Expenses of a Residence to Rental Days 2449.10 IRS May Challenge Loss Claimed

9.12 Production Costs of Books and Creative Properties 248

10.2 Rental Real Estate Loss Allowance of up to $25,000 254

10.4 Participation May Avoid Passive Loss Restrictions 25910.5 Classifying Business Activities as One or Several 259

10.8 Determining Passive or Nonpassive Income and Loss 26310.9 Passive Income Recharacterized as Nonpassive Income 265

10.13 Suspended Losses Allowed on Disposition of Your Interest 270

10.15 Personal Service and Closely Held Corporations 27210.16 Sales of Property and of Passive Activity Interests 273

10.22 Recapture of Losses Where At Risk Is Less Th an Zero 278

Table of Contents

11.5 Refunds of State and Local Income Tax Deductions 283

11.10 How Partners Report Partnership Profi t and Loss 293

11.14 Stockholder Reporting of S Corp Income and Loss 29511.15 How Benefi ciaries Report Estate or Trust Income 29611.16 Reporting Income in Respect of a Decedent (IRD) 29611.17 Deduction for Estate Tax Attributable to IRD 29711.18 How Life Insurance Proceeds Are Taxed to a Benefi ciary 297

11.20 Selling or Surrendering Life Insurance Policy 299

12.6 Th e 78-Week Test for the Self-Employed and Partners 310

13.7 Itemized Deductions Reduced for Higher-Income Taxpayers 318

Table of Contents

14.3 Contributions Th at Provide You With Benefi ts 323

14.7 Cars, Clothing, and Other Property Valued Below Cost 330

14.14 Records Needed To Substantiate Your Contributions 33714.15 Form 8283 and Written Appraisal Requirements

14.16 Penalty for Substantial Overvaluation of Property 340

14.19 Election To Reduce Fair Market Value by Appreciation 343

15.6 Mortgage Insurance Premiums and Other Payment Rules 351

15.12 Earmarking Use of Loan Proceeds

16.3 State and Local Income Taxes or General Sales Taxes 362

Table of Contents

16.7 Allocating Taxes When You Sell or Buy Realty 364

17.1 Medical and Dental Expenses Must

17.10 Schooling for the Mentally or Physically Disabled 379

17.16 Life Insurance Used by Chronically ill

18.17 Excess Living Costs Paid by Insurance Are Not Taxable 40218.18 Do Your Casualty or Th eft Losses Exceed Your Income? 403

18.20 Involuntary Conversions Qualifying for Tax Deferral 404

Table of Contents

18.22 Time Period for Buying Replacement Property 405

18.24 Cost of Replacement Property Determines

19.1 2% of AGI Floor Reduces Most Miscellaneous Expenses 41119.2 Eff ect of 2% of AGI Floor on Miscellaneous Deductions 41219.3 Checklist of Job Expenses Subject to the 2% of AGI Floor 41219.4 Job Expenses Not Subject to the 2% of AGI Floor 413

19.11 Cell Phones, Calculators, Copiers and Fax Machines 418

20.1 Deduction Guide for Travel and Transportation Expenses 425

20.3 Overnight-Sleep Test Limits Deduction of Meal Costs 426

20.8 Fixing a Tax Home If You Work in Diff erent Locations 43120.9 Tax Home of Married Couple Working in Diff erent Cities 43220.10 Deducting Living Costs on Temporary Assignment 43220.11 Business-Vacation Trips Within the United States 43420.12 Business-Vacation Trips Outside the United States 434

20.14 Travel Expenses of a Spouse, Dependent,

20.15 Restrictions on Foreign Conventions and Cruises 437

20.17 Th e Restrictive Tests for Meals and Entertainment 438

Table of Contents

20.24 Restrictive Test Exception for Reimbursements 44020.25 50% Cost Limitation on Meals and Entertainment 440

20.29 Reporting T&E Expenses If You Are Self-Employed 44420.30 Employee Reporting of Unreimbursed T&E Expenses 445

20.33 Per Diem Travel Allowance Under Accountable Plans 447

21.5 Meeting the Support Test for a Qualifying Relative 456

21.7 Special Rule for Divorced or Separated Parents 46021.8 Th e Dependent Must Meet a Citizen or Resident Test 461

21.10 Spouses’ Names and Social Security Numbers

21.11 Reporting Social Security Numbers of Dependents 462

22.1 Taxable Income and Regular Income Tax Liability 468

22.4 Tax Calculation If You Have Net Capital Gain

22.8 Additional Medicare Tax and Net Investment Income Tax 470

Table of Contents

23.1 Computing Alternative Minimum Tax on Form 6251 473

24.4 Parent’s Election To Report Child’s Dividends and Interest 483

25.4 Qualifying for the Child and Dependent Care Credit 488

25.16 Credits for Plug-in Electric Vehicles and Fuel Cell Vehicles 50325.17 Repayment of the First-Time Homebuyer Credit 503

26.9 Withholding on Distributions from Retirement Plans

Table of Contents

27.1 Do You Owe an Estimated Tax Penalty for 2015? 512

27.3 Dates for Paying Estimated Tax Installments for 2016 514

28.1 Higher-Income Taxpayers May be Subject

28.3 Additional 3.8% Medicare Tax

29.9 Loss on Residence Converted to Rental Property 53729.10 Loss on Residence Acquired by Gift or Inheritance 538

Table of Contents

31.2 Sales of Subdivided Land—Dealer or Investor? 558

31.12 Seller’s Repossession After Buyer’s Default on Mortgage 56631.13 Foreclosure on Mortgages Other Th an Purchase Money 567

32.1 Timing of Your Investment Can Aff ect Your Taxes 570

32.3 Mutual-Fund Distributions Reported on Form 1099-DIV 570

32.11 Mutual Funds Compared to Exchange-Traded Funds 577

33.5 Contributing to a Qualifi ed Tuition Program

33.6 Distributions From Qualifi ed Tuition Programs

33.10 Contributing to a Coverdell Education

Table of Contents

33.16 Local Transportation and Travel Away

34.4 Election for Lump-Sum Social Security Benefi t Payment 600

34.6 How Tax on Social Security Reduces Your Earnings 60134.7 Eligibility for the Credit for the Elderly or the Disabled 60134.8 Figuring the Credit for the Elderly or Disabled 60234.9 Tax Eff ects of Moving to a Continuing Care Facility 60334.10 Medicare Part B and Part D Premiums for 2016 604

35.5 Tax Deadlines Extended for Combat Zone

35.6 Tax Forgiveness for Combat Zone or Terrorist

35.7 Extension To Pay Your Tax When Entering the Service 612

36.3 Qualifying for the Foreign Earned Income Exclusion 617

36.5 Meeting the Foreign Residence or Physical Presence Test 619

36.7 Exclusion Not Established When Your Return Is Due 62136.8 Tax-Free Meals and Lodging for Workers in Camps 62236.9 U S Virgin Islands, Samoa, Guam, and Northern Marianas 622

Table of Contents

37.7 3rd Year Recapture If Alimony Drops by

38.2 Social Security and Medicare (FICA) Taxes f

38.3 Filing Schedule H To Report Household

38.4 Federal Unemployment Taxes (FUTA)

38.6 Exemption from Individual Responsibility Payment 638

39.8 Take Inventory and Estimate the Value

40.3 Accounting Methods for Reporting Business Income 654

40.5 Reporting Certain Payments and Receipts to the IRS 656

40.9 How Authors and Artists May Write Off Expenses 663

Table of Contents

40.10 Deducting Expenses of a Sideline Business or Hobby 66340.11 Deducting Expenses of Looking for a New Business 664

40.13 Write-Off Methods for Home Offi ce Expenses 668

40.15 Business Income May Limit Home Offi ce Deductions 669

40.17 Depreciation of Offi ce in Cooperative Apartment 672

40.23 Overview of the Domestic Production Activities Deduction 675

41.8 How Qualifi ed Retirement Plan Distributions Are Taxed 685

42.7 Last Quarter Placements—Mid-Quarter Convention 696

Table of Contents

42.12 MACRS for Real Estate Placed in Service After 1986 700

42.15 Depreciating Real Estate Placed in Service

42.17 Amortizing Goodwill and Other Intangibles (Section 197) 703

42.19 Amortizing Research and Experimentation Costs 705

43.3 Depreciation Restrictions on Cars, Trucks, and Vans 709

43.10 Recapture of Deductions on Business Car, Truck, or Van 718

43.12 Leased Business Vehicles: Deductions and Income 719

44.1 Depreciation Recaptured as Ordinary Income

44.2 Depreciation Recaptured as Ordinary Income

44.4 Gifts and Inheritances of Depreciable Property 72244.5 Involuntary Conversions and Tax-Free Exchanges 723

Table of Contents

45.5 Optional Method If 2015 Was a Low-Income or Loss Year 73245.6 Self-Employment Tax Rules for Certain Positions 733

46.9 Tax Penalties for Late Filing and Late Payment 743

48.7 Penalties for Not Reporting Foreign Financial Accounts 760

What’s New for 2015

For an update on tax developments and a free download

of the e-Supplement to this book, visit us online at www.jklasser.com.

Tax News for 2015

Qualifi ed dividends (4.2) and long-term capital gains (5.3) may escape tax entirely under the 0% rate, or be subject to capital gain rates of 15% or 20% depending on

fi ling status, taxable income, and how much of the taxable income consists of qualifi ed dividends and eligible long-term gains The 20% capital gain rate has the same taxable income thresholds as the 39.6% ordinary income rate shown above, that is, either

$464,850, $439,000, $413,200, or $232,425, depending on fi ling status The 0%, 15%, and 20% rates do not apply to long-term gains subject to the 28% rate (collectibles and taxed portion of small business stock) or the 25% rate for unrecaptured real estate depreciation (5.3).

Individual health

care mandate and

premium tax credit

You are required to have minimum essential health coverage through an employer plan, a government program, or other plan, or pay a penalty (38.5), unless you are exempt from this requirement (38.6) The penalty amount for 2015 is the higher of (1) 2% of household income above your fi ling threshold, or (2) $325 per person in your household ($162.50 per dependent child under age 18), up to a maximum of $975.

To help those of modest means pay premiums for coverage obtained from a government exchange (Marketplace), there’s a premium tax credit (25.12) Eligibility for this advanceable, refundable tax credit depends on your household income and other factors.

If you claimed the credit in advance when you obtained coverage, you have to oncile what you already applied toward your premiums with what you are actually entitled to; the difference is reported on your tax return (25.12) If you did not receive the credit in advance but are eligible for a credit, you can claim it on your return.

If you do not claim the premium tax credit and qualify for Trade Adjustment Assistance (TAA), you may qualify for the health coverage tax credit of 72.5% of premiums (25.13) Phaseout of personal

exemptions and

itemized deductions

Personal exemptions and itemized deductions are subject to a phaseout Each $4,000 personal exemption for 2015 is subject to a phaseout if adjusted gross income (AGI) exceeds $309,900 if married fi ling jointly or qualifying widow/widower, $284,050 if head

of household, $258,250 if single, and $154,950 if married fi ling separately Phaseout details are at 21.12.

The above AGI phaseout thresholds for exemptions also apply to the phaseout of itemized deductions claimed on Schedule A (Form 1040), but there is no phaseout

of deductions for medical expenses, investment interest, casualty/theft losses, and gambling losses Other itemized deductions are reduced by 3% of AGI exceeding the applicable threshold, but the total reduction cannot exceed 80% of the deductions (13.7) Standard deductions The standard deduction for 2015 (13.1) is $12,600 for married persons fi ling jointly

and qualifying widows/widowers, $9.250 for heads of households, or $6,300 for single taxpayers or married persons fi ling separately The additional standard deduction

(13.3) for being 65 or older or blind is $1,550 if single or head of household ($3,100 if

65 and blind) If married fi ling jointly, the additional standard deduction is $1,250 if one spouse is 65 or older or blind, $2,500 if both spouses are at least 65 (or one is 65 and blind, or both are blind and under age 65).

Tax News for 2015

Mortgage interest limit

for unmarried co-owners An appeals court held that if unmarried individuals co-own a residence, each co-owner can deduct interest on acquisition debt of up to $1 million and home equity debt up to

$100,000 This decision disagreed with the Tax Court and IRS view that the $1.1 million debt limit must be divided among the co-owners (15.2)

Basis of property

reported on estate

tax return

Executors fi ling estate tax returns after July 31, 2015 must report the date-of-death value

of property included in the gross estate to the IRS and to the heirs The heirs will be subject to a penalty if on a later sale of the property, they claim a basis for the property that exceeds the amount that had been reported to the IRS by the executor (5.17) Self-employment

tax and deduction

for portion of

self-employment tax; Social

Security wage base

For 2015, the tax rate on the employee portion of Social Security is 6.2% on wages up

to $118,500, so Social Security tax withholdings should not exceed $7,347 Medicare tax of 1.45% is withheld from all wages regardless of amount.

On Schedule SE for 2015, self-employment tax of 15.3% applies to earnings of up to

$118,500 after the earnings are reduced by 7.65% The 15.3% rate equals 12.4% for Social Security (6.2% employee share and 6.2% employer share) plus 2.9% for Medicare If net earnings exceed $118,500, the 2.9% Medicare rate applies to the entire amount

(45.3–45.4) One half of the self-employment tax may be claimed as an above-the-line deduction on Form 1040 (45.3–45.4)

IRA and Roth IRA

$193,000 for a spouse who is not an active plan participant and who fi les jointly with

a spouse who is an active plan participant.

The 2015 Roth IRA contribution limit is phased out (8.20) for a single person or head

of household with MAGI between $116,000 and $131,000, and for married persons fi ling jointly and qualifying widows/widowers with MAGI between $183,000 and $193,000 You can make only one IRA rollover (60-day rollover) every 12 months (8.10) There

is no restriction on the number of direct transfers you can make each year.

First-year expensing For qualifying property placed in service in 2015, fi rst-year expensing (42.3) is allowed

up to a limit of $25,000, and the limit begins to phase out if the total cost of qualifying property exceeds $200,000 (42.3) However, the more favorable limits that had applied

in 2014 could be retroactively reinstated for 2015 See the e-Supplement at jklasser com for an update.

IRS mileage allowance The IRS standard business mileage rate for 2015 is 57.5 cents a mile (43.1).

The rate for medical expense (17.9) and moving expense (12.3) deductions is 23 cents a mile

For charitable volunteers (14.4), the mileage rate is unchanged at 14 cents a mile Vehicle depreciation

limit For a car placed in service in 2015, the fi rst-year depreciation limit is $3,160 a light truck or van, the fi rst-year depreciation limit is $3,460 (43.5) However, if bonus (43.5) For

depreciation, which expired at the end of 2014, is restored for 2015, these fi rst-year limits would be increased by $8,000 for vehicles purchased new and used over 50%

for business in 2015 See the e-Supplement at jklasser.com for an update The limits are reduced for personal use

Health savings

accounts (HSAs) The defi nition of a high-deductible health plan, which is a prerequisite to funding an HSA, means a policy with a minimum deductible for 2015 of $1,300 for self-only

coverage and a maximum out-of-pocket cap on co-payments and other amounts of

$6,450 These limits are doubled for family coverage ($2,600/$12,900) (41.10) The contribution for 2015 is capped at $3,350 for self-only coverage and $6,650 for family coverage (41.11).

Tax News for 2015

Adoption expenses For 2015, the limit on the adoption credit as well as the exclusion for employer-paid

adoption assistance is $13,400 The benefi t phaseout range is modifi ed adjusted gross income between $201,010 to $241,010 (25.8).

Earned income tax credit For 2015, the maximum credit amount is $3,359 for one qualifying child, $5,548 for

two qualifying children, $6,242 for three or more qualifying children, and $503 for taxpayers who have no qualifying child (25.6) The phaseout ranges for the credit have been adjusted for infl ation (25.7).

Alternative minimum

tax (AMT) exemption

and tax brackets

The AMT exemptions, exemption phaseout thresholds, and the dividing line between the 26% and 28% AMT brackets are adjusted for infl ation The 2015 AMT exemptions (prior to any phaseout) are $83,400 for married couples fi ling jointly and qualifying widows/widowers, $53,600 for single persons and heads of households, and $41,700

for married persons fi ling separately See 23.1 for exemption phaseout rules and AMT calculation details

All nonrefundable personal credits for may be claimed against the AMT as well as the regular tax (23.3).

Eligibility for

saver’s credit The adjusted gross income brackets for the 10%, 20%, and 50% credits are increased for 2015 No credit is allowed when AGI reaches $30,500 for single taxpayers, $45,750

for heads of households, and $61,000 for married persons fi ling jointly (25.11) Deduction limits

for long-term care

premiums

The maximum amount of age-based long-term care premiums that can be included

as deductible medical expenses for 2015 (subject to the 7.5% or 10% of AGI fl oor; see

17.1) is $380 if you are age 40 or younger at the end of 2015; $710 for those age 41 through 50; $1,430 for those age 51 through 60; $3,800 for those age 61 through 70; and $4,750 for those over age 70 (17.15).

Foreign earned income

and housing exclusions The maximum foreign earned income exclusion for 2015 is $100,800 on housing expenses that may be taken into account in fi guring the housing exclusion (36.1) The limit

is generally $30,240, but the limit is increased by the IRS for high cost localities (36.4) Annual gift tax

exclusion; Gift tax and

estate tax exemption

The annual gift tax exclusion stays at $14,000 per donee for 2015 gifts of cash or present interests (39.2) The basic exemption amount for 2015 gift tax and estate tax purposes is $5,430,000 (39.4, 39.9) The top tax rate remains at 40% (39.9)

Tax breaks that expired at

the end of 2014 but could

• The above-the-line deductions for tuition/fees (33.12).

• The above-the-line deduction for educator expenses (12.2).

• The exclusion for qualifi ed charitable distributions (QCDs) from a traditional IRA, allowing a tax-free direct transfer from

an IRA to a charity by those age 70½ or older (8.8).

• The itemized deduction for mortgage insurance premiums (15.6).

• Parity for the monthly exclusion for transit passes/van pooling fringe benefi ts with the exclusion parking benefi ts (3.8).

• The exclusion for cancelled principal residence indebtedness (11.8).

• The tax credit for home insulation, storm windows, and other energy improvements (25.15).

• Higher expensing limits at the favorable 2014 dollar amounts (42.3).

• Bonus depreciation (42.20, 43.5) for most assets, and the

• 15-year recovery for leasehold, restaurant, and retail improvements (42.14).

See the e-Supplement at jklasser.com for a legislation update.

Key Tax Numbers for 2015

Additional deduction if age 65 or older, or blind (13.4)

Married-per spouse, fi ling jointly or separately $ 1,250 ($2,500 for age and blindness)

Long-term Care Premiums (17.15)

Limit on premium allowed as medical expense

IRA Contributions

Additional contribution if age 50 or older but under 70½ $ 1,000

Deduction phaseout for active plan participant (8.4)

Married fi ling jointly, two participants $ 98,000 – $ 118,000

Married fi ling jointly, one participant

Married fi ling separately, live together, either participates $ 0 – $ 10,000

Married fi ling separately, live apart all year

Additional contribution if age 50 or older but under 70½ $ 1,000

Contribution limit phaseout range

Married fi ling separately, live apart all year $ 116,000 – $ 131,000

Married fi ling jointly, or qualifying widow/widower $ 183,000 – $ 193,000

Married fi ling separately, live together at any time $ 0 – $ 10,000

Elective deferral limits

Elective deferral limits (continued)

Additional contribution if age 50 or older (“catch-up” contributions)

401(k), 403(b), governmental 457 and SEP plans (7.18, 8.16) $ 6,000

Education

American Opportunity credit limit-per student (33.8) $2,500

Phaseout of American Opportunity credit (33.8)

Single, head of household, or qualifying widow/widower $80,000–$ 90,000

Phaseout of Lifetime Learning credit (33.9)

Single, head of household, or qualifying widow/widower $ 55,000–$ 65,000

Phaseout of deduction limit

Single, head of household, or qualifying widow/widower $65,000–$80,000

Phaseout of limit

Tuition and fees deduction (33.12) (if extended to 2015 by Congress)

Income cut-off

• Single, head of household, or qualifying widow/widower $65,000

Income cut-off

• Single, head of household, or qualifying widow/widower $80,000

Capital gain rates-assets held over one year (5.3)

If otherwise subject to regular rates over 15% but below 39.6% 15%

Unrecaptured Section 1250 gain on depreciated

Qualifi ed dividends tax rate (4.2)

If otherwise subject to regular rates over 15% but below 39.6% 15%

IRS mileage rates

Exclusion for employer provided transportation (3.8)

Transit passes and commuter

Vehicle transport (unless Congress allows same rate as for parking) $130/month

Tax-Saving Opportunities

Realizing long-term capital gains Long-term capital gains are taxed at lower rates than short-term gains and regular

income See Chapter 5 for basic capital gain rules See Chapters 30 and 31 for discussions of special investment situations.

Earning qualifying dividends Qualifi ed dividends (4.2) are subject to the reduced tax rates for long-term capital gains

Earning tax-free income You can earn tax-free income by—

1 Investing in tax-exempt securities However, before you invest, determine whether the tax-free return will exceed the after-tax return of taxed income (30.12)

2 Taking a position in a company that pays tax-free fringe benefi ts, such as health and life insurance protection For a complete discussion of tax-free fringe ben-

efi ts, see Chapter 3

3 Seeking tax-free education benefi ts with scholarship arrangements, qualifi ed

tuition programs and Coverdell ESAs; see Chapter 33

4 Taking a position overseas to earn excludable foreign earned income; see ter 36

5 Investing in Roth IRAs; see Chapter 8

Deferring income You can defer income to years when you will pay less tax through—

1 Deferred pay plans, which are discussed in Chapter 2

2 Qualifi ed retirement plans such as 401(k) plans (Chapter 7), self-employed plans

(Chapter 41), and traditional IRA and Roth IRA plans (Chapter 8)

3 Transacting installment sales when you sell property; see 5.21

4 Investing in U.S Savings EE bonds or I-bonds (4.28 – 4.29 , 30.14 – 30.15)

Income splitting Through income splitting you divide your income among several persons or taxpaying

entities that will pay an aggregate tax lower than the tax that you would pay if you reported all of the income Although the tax law limits income-splitting opportunities, certain business and family income planning through the use of trusts and custodian

accounts can provide tax savings; see Chapters 24 and 39

Tax-free exchanges You can defer tax on appreciated property by transacting tax-free exchanges (6.1, 31.3).

Buying a personal residence Homeowners are favored by the tax law.

1 If you buy a home, condominium, or cooperative apartment, you may deduct

mortgage interest (15.2) and taxes (16.4) When you sell your principal residence, you may be able to avoid tax on gains of up to $250,000 if single and up to

$500,000 if married fi ling jointly; see Chapter 29

2 Homeowners can borrow on their home equity and deduct interest expenses within limits (15.3)

Take advantage of special personal

tax breaks for education The tax law provides several breaks for education expenses; see discusses scholarships, grants, tuition plans, savings bond tuition plans, education Chapter 33, which

credits, Coverdell Education Savings Accounts, and student loan interest deduction.

Take advantage of special tax breaks

for health care expenses The tax law provides several breaks for health care expenses Employer-provided health and accident plans, including fl exible spending arrangements, are discussed

in Chapter 3 Health savings accounts (HSAs) can be used to save for health care expenses on a tax-free basis (3.2, 41.10) Newly-authorized ABLE accounts can be set up for individuals who become disabled before age 26 persons and be used

to build up a fund from which tax-free distributions for qualifi ed expenses can be made(34.12) You may be able to qualify for the premium tax credit to help offset the cost of premiums for coverage obtained through the government Marketplace (25.12)

Take advantage of personal tax

credits Seecredit, dependent care credit, saver’s credit and adoption credit that can reduce Chapter 25 for personal tax credits such as the premium tax credit, child tax

your tax liability

P ART 1

In this part, you will learn these income tax

basics:

• Whether you must fi le a return

• When and where to fi le your return

• Which tax form to fi le

• What fi ling status you qualify for

• When fi ling separately is an advantage for

married persons

• How to qualify as head of household

• How fi ling rules for resident aliens and

nonresident aliens diff er

• How to claim personal exemption

deduc-tions for yourself, your spouse, and your

dependents.

1.1 – 1.20

Filing Basics

Do You Have to File a 2015 Tax Return? • Part 1

Do You Have to File a 2015 Tax Return?

If you are— You must fi le if gross income is at least

Single

Married and living together at the end of 2015

Married and living apart at the end of 2015

Head of a household maintained for a child or other relative (1.12)

Widowed in 2013 or 2014 and have a dependent child (1.11)

Marital status For 2015 returns, marital status is generally determined as of December 31, 2015

Th us, if you were divorced or legally separated during 2015, you are not considered married for 2015

tax purposes, and you must use the fi ling threshold for single persons unless you qualify as a head

of household (1.12), or you remarried in 2015 and are fi ling a joint return with your new spouse

If your spouse died in 2015 and you were living together on the date of death, use the fi ling

threshold shown for married persons living together at the end of 2015 If you were not living

together on the date of death, the $4,000 fi ling threshold applies, unless you remarried during

2015 and are fi ling jointly with your new spouse

Same-sex marriages Lawfully married same-sex couples are treated as married for all federal

tax purposes Th e IRS recognizes your marriage to a same-sex spouse if the marriage was legally

entered into in one of the 50 States, the District of Columbia, Puerto Rico, U.S territory or

pos-session, or foreign country If your marriage was authorized by the laws of the State (or other U.S

or foreign jurisdiction) in which the marriage took place, it is recognized for federal tax purposes

even if same-sex marriage is not recognized by the State (or other jurisdiction) in which you and

your spouse now live (1.1)

Age 65 Whether you are age 65 or older is generally determined as of the end of the year, but

if your 65th birthday is on January 1, 2016, you are treated as being age 65 at the end of 2015

Gross income Gross income is generally all the income that you received in 2015, except for

items specifi cally exempt from tax

Include wages and tips (Chapter 2), self-employment income (Chapter 45), taxable scholarships

(Chapter 33), taxable interest and dividends (Chapter 4), capital gains (Chapter 5), taxable

pen-sions and annuities (Chapter 7), rents (Chapter 9), and trust distributions (Chapter 11) Home

sale proceeds that are tax free (Chapter 29) and tax-free foreign earned income (Chapter 36) are

considered gross income for purposes of the fi ling test

Exclude tax-exempt interest (Chapter 4), tax-free fringe benefi ts (Chapter 3), qualifying

scholar-ships (Chapter 33), and life insurance (Chapter 11) Also exclude Social Security benefi ts unless (1)

you are married fi ling separately and you lived with your spouse at any time during 2015, or (2)

50% of net Social Security benefi ts plus other gross income and any tax-exempt interest exceeds

$25,000 ($32,000 if married fi ling jointly) If 1 or 2 applies, the taxable part of Social Security

benefi ts as determined in (34.3) is included in your gross income

Part 1 • Filing Tests for Dependents

Other situations when you must fi le Even if you are not required to fi le under the gross

income tests, you must fi le a 2015 return if:

• You are employed and you owe employment tax because your net employment earnings for 2015 are $400 or more (Chapter 45) , or

self-• You (or your spouse if fi ling jointly) received HSA or Archer MSA distributions (Chapter 41) , or

• You are entitled to a refund of taxes withheld from your wages (Chapter 26) or a refund based on any of these credits: the premium tax credit, the earned income credit for working families,the additional child tax credit (Chapter 25) , or the American Opportunity credit (Chapter 38) , or

• You owe any special tax such as alternative minimum tax (Chapter 23), the Additional Medicare Tax or the Net Investment Income Tax (Chapter 28), IRA penalties (Chapter 8), household employment taxes (Chapter 38), and FICA on tips (Chapter 26) , or

• You must repay excess advance premiums (25.12), or you owe the individual responsibility penalty (38.5)

Filing Tests for Dependents: 2015 Returns

Th e income threshold for fi ling a tax return is generally lower for an individual who may be claimed

as a dependent than for a nondependent You are a “dependent” if you are the qualifying child or qualifying relative of another taxpayer, and the other tests for dependents at (21.1) are met If you are the parent of a dependent child who had only investment income subject to the “kiddie tax”

(24.3), you may elect to report the child’s income on your own return for 2015 instead of fi ling a

separate return for the child; see (24.4) for the election rules

If, under the tests at (21.1), you may be claimed as a dependent by someone else, use the chart below to determine if you must fi le a 2015 return Include as unearned income taxable interest and dividends, capital gains, pensions, annuities, unemployment compensation, taxable Social Secu-rity benefi ts, and distributions of unearned income from a trust Earned income includes wages, tips, self-employment income, and taxable scholarships or fellowships (Chapter 33) Gross income

is the total of unearned and earned income

For married dependents, the fi ling requirements in the chart assume that the dependent is fi ling

a separate return and not a joint return (Chapter 1) Generally, a married person who fi les a joint return may not be claimed as a dependent by a third party who provides support

For purposes of the following chart, a person is treated as being age 65 (or older) if his or her 65th birthday is on or before January 1, 2016 Blindness is determined as of December 31, 2015

Filing Instruction

File for Refund of Withholdings

Even if you are not required to fi le a return under

the income tests on this page, you should fi le

to obtain a refund of federal tax withholdings.

File a Return for 2015 If You Are a—

Single dependent. Were you either age 65 or older or blind?

❏ No You must fi le a return if any of the following apply.

• Your unearned income was over $1,050

• Your earned income was over $6,300

• Your gross income was more than the larger of—

• Your earned income (up to $5,950) plus $350

❏ Yes You must fi le a return if any of the following apply.

• Your unearned income was over $2,600 ($4,150 if 65 or older and blind).

• Your earned income was over $7,850 ($9,400 if 65 or older and blind).

• Your gross income was more than the larger of—

• $2,600 ($4,150 if 65 or older and blind), or

• Your earned income (up to $5,950) plus $1,900 ($3,450 if 65 or older and blind).

Married dependent. Were you either age 65 or older or blind?

❏ No You must fi le a return if any of the following apply.

• Your unearned income was over $1,050

• Your earned income was over $6,300

• Your gross income was at least $5 and your spouse fi les a separate return and itemizes deductions

• Your gross income was more than the larger of—

• Your earned income (up to $5,950) plus $350

❏ Yes You must fi le a return if any of the following apply.

• Your unearned income was over $2,300 ($3,550 if 65 or older and blind).

• Your earned income was over $7,550 ($8,800 if 65 or older and blind).

• Your gross income was at least $5 and your spouse fi les a separate return and itemizes deductions

• Your gross income was more than the larger of—

• $2,300 ($3,550 if 65 or older and blind), or

• Your earned income (up to $5,950) plus $1,600 ($2,850 if 65 or older and blind).

Where to File • Part 1

Where to File Your 2015 Return

If you fi led a paper federal tax return for 2014 and also are fi ling a paper federal return for 2015,

check your 2015 tax form instructions to see if the IRS fi ling address for your residence has changed

Th e table below may not refl ect late IRS changes Changes to the table will be in the e-Supplement

at jklasser.com

When you fi le, include your complete return address and if you are enclosing numerous

attach-ments with your return, make sure that you include enough postage

W HERE D O Y OU F ILE F ORM 1040?

If you fi le Form 1040A or Form 1040EZ, see the note below the table.

Filing Form 1040A or 1040EZ? If you live in any of the 50 states or the District of Columbia, and are not enclosing a

payment with your Form 1040A or 1040EZ, you can use the address shown above for Form 1040 (middle column) except

you must change the last four digits of the zip code Th e last four digits of the zip code for Form 1040A are 0015 and for Form

1040EZ they are 0014, instead of 0002 for Form 1040.

If you are enclosing a check or money order with your Form 1040A or 1040EZ, then, regardless of where you live, use the

same IRS address and zip code as shown above for Form 1040 in the right column of the table.

Also use the same address and zip code shown for Form 1040, whether or not you are enclosing a payment, if you live in

a foreign country, U.S possession or territory, use an APO or FPO address, fi le Form 2555, 2555-EZ, or 4563, or you are a

dual-status alien.

Part 1 • Filing Deadlines

Filing Deadlines (on or before)

January 15, 2016 — Pay the balance of your 2015 estimated tax If you do not meet this date,

you may avoid an estimated tax penalty for the last quarter by fi ling your 2015 return and paying the balance due by February 1, 2016

Farmers and fi shermen: File your single 2015 estimated tax payment by this date If you do not,

you may still avoid an estimated tax penalty by fi ling a fi nal tax return and paying the full tax by March 1, 2016

February 1, 2016 — Make sure you have received a Form W-2 from each employer for whom

you worked in 2015

April 18, 2016 (April 19 for residents of Massachusetts and Maine) — Because

Emancipation Day falls on Saturday, April 16, 2016, the holiday will be celebrated in the District

of Columbia on Friday April 15, and as a result, you have until April 18, 2016, to fi le your 2015 return and pay the balance of your 2015 tax liability Residents of Massachusetts and Maine have

an additional day, until April 19, because Patriots’ Day (a state holiday) falls on April 18

If you canot meet the April 18 (or April 19) deadline for your 2015 return, you may obtain

an automatic six-month fi ling extension to October 17 by fi ling Form 4868 (electronically or on paper) However, even if you get an extension, interest will still be charged for taxes not paid by the original deadline (April 18 or 19) and late payment penalties will be imposed unless at least 90%

of your tax liability is paid by the original deadline or you otherwise show reasonable cause If you cannot pay the full amount of tax you owe when you fi le your return, you can fi le Form 9465 to request an installment payment arrangement

If on the April 18 or 19 deadline you are a U.S citizen or resident living and working outside the U.S or Puerto Rico, or in military service outside the U.S or Puerto Rico, you have an automatic two-month fi ling extension until June 15, 2016

Pay the fi rst installment of your 2016 estimated tax on or before April 18, 2016 If you are a resident of Massachusetts or Maine, the April 18 deadline applies; the extension to April 19 for Patriots’ Day applies only to your 2015 income tax return and not to the fi rst estimated tax install-ment for 2016

June 15, 2016 — Pay the second installment of your 2016 estimated tax You may amend your

estimate at this time

If on April 18 (or 19) you were a U.S citizen or resident living and working outside the U.S

or Puerto Rico, or in military service outside the U.S or Puerto Rico, fi le your 2015 return and pay the balance due by June 15, 2016 You may obtain an additional four-month fi ling extension until October 17, 2016, by fi ling Form 4868

If you are a nonresident alien who did not have tax withheld from your wages, fi le Form 1040NR

by this date and pay the balance due

September 15, 2016 — Pay the third installment of your 2016 estimated tax You may amend

your estimate at this time

October 17, 2016 — File your 2015 return if you received an automatic six-month fi ling extension

using Form 4868 Also fi le your 2015 return and pay the balance due if on April 18 (or 19) you were a U.S citizen or resident living and working outside the U.S or Puerto Rico, or in military service outside the U.S or Puerto Rico, and by June 15 you qualifi ed for an additional four-month extension by fi ling Form 4868

December 31, 2016 — If self-employed, this is the last day to set up a qualifi ed retirement

plan for 2016

January 17, 2017 — Pay the balance of your 2016 estimated tax.

April 18, 2017 — File your 2016 return and pay the balance of your tax Pay the fi rst installment

of your 2017 estimated tax by this date

15th day of the 4th month after the fi scal year ends — File your fi scal year return and

pay the balance of the tax due If you cannot meet the fi ling deadline, apply for an automatic month fi ling extension on Form 4868