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

J.K.L
ASSER’S
Your
Income
2016
Tax

™

Prepared by the

J.K. LASSER INSTITUTE™


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 Editor
Angelo C. Jack, Senior Production Editor
William Hamill, Copyediting and Proofreading
Index by WordCo Indexing Services

John Wiley & Sons, Inc.

John Wiley & Sons, Inc.
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Copyright © 2016 by John Wiley & Sons, Inc.

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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

How To Use Your Income Tax 2016

Tax alert symbols. Throughout the text of Your Income Tax, these special symbols alert
you to advisory tips about filing your federal tax return and tax planning opportunities:

Filing Tip or Filing Instruction

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

Planning Reminder

A Planning Reminder highlights year-end tax strategies for 2015 or planning opportunities
for 2016 and later years.

Caution

A Caution points out potential pitfalls to avoid and areas where IRS opposition
may be expected.

Law Alert

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

Court Decision

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

IRS Alert

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

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The federal income tax law, despite efforts at simplification, remains a maze of statutes,
regulations, rulings, and court decisions written in technical language covering thousands
and thousands of pages. For over 75 years, J.K. Lasser’s™ Your Income Tax has aided and
guided millions of taxpayers through this complex law. Every effort 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.
The 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. The contents, on pages v–xxiv, lists the chapters
in Your Income Tax. References direct you to sections within a particular chapter. Thus
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

affect 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 filing requirements, filing addresses for
IRS Service Centers, and a calendar with 2016 filing deadlines.

J.K. Lasser’s Your Income Tax 2016 | iii



Contents Chapter by Chapter
What’s New for 2015
Key Tax Numbers for 2015

FILING BASICS

xxv
xxix

1
Do You Have to File a 2015 Tax Return?
Filing Tests for Dependents: 2015 Returns
Where to File Your 2015 Return
Filing Deadlines (on or before)
Which Tax Form Should You File?

Filing Status

3
4

5
6
8

9
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
1.12
1.13
1.14
1.15
1.16
1.17
1.18
1.19
1.20

Which Filing Status Should You Use?
Tax Rates Based on Filing Status
Filing Separately Instead of Jointly
Filing a Joint Return

Nonresident Alien Spouse
Community Property Rules
Innocent Spouse Rules
Separate Liability Relief for Former Spouses
Equitable Relief
Death of Your Spouse in 2015
Qualifying Widow/Widower Status If Your Spouse Died
in 2014 or 2013
Qualifying as Head of Household
Filing for Your Child
Return for Deceased
Return for an Incompetent Person
How a Nonresident Alien Is Taxed
How a Resident Alien Is Taxed
Who Is a Resident Alien?
When an Alien Leaves the United States
Expatriation Tax

10
11
12
14
15
15
17
18
21
22
23
24

25
26
28
28
28
29
31
31

REPORTING YOUR INCOME

33

Wages, Salary, and Other Compensation

35

2.1
2.2
2.3
2.4
2.5
2.6

Salary and Wage Income
Constructive Receipt of Year-End Paychecks
Pay Received in Property Is Taxed
Commissions Taxable When Credited
Unemployment Benefits
Strike Pay Benefits and Penalties

38
39
39
40
40
41

J.K. Lasser’s Your Income Tax 2016 | v


Table of Contents
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.15
2.16
2.17

Nonqualified Deferred Compensation
Did You Return Wages Received in a Prior Year?
Waiver of Executor’s and Trustee’s Commissions
Life Insurance Benefits
Educational Benefits for Employees’ Children
Sick Pay Is Taxable

Workers’ Compensation Is Tax Free
Disability Pensions
Stock Appreciation Rights (SARs)
Stock Options
Restricted Stock

Fringe Benefits

52
3.1 Tax-Free Health and Accident Coverage
Under Employer Plans
3.2 Health Savings Accounts (HSAs) and Archer MSAs
3.3 Reimbursements and Other Tax-Free Payments
From Employer Health and Accident Plans
3.4 Group-Term Life Insurance Premiums
3.5 Dependent Care Assistance
3.6 Adoption Benefits
3.7 Education Assistance Plans
3.8 Company Cars, Parking, and Transit Passes
3.9 Working Condition Fringe Benefits
3.10 De Minimis Fringe Benefits
3.11 Employer-Provided Retirement Advice
3.12 Employee Achievement Awards
3.13 Employer-Furnished Meals or Lodging
3.14 Minister’s Housing or Housing Allowance
3.15 Cafeteria Plans Provide Choice of Benefits
3.16 Flexible Spending Arrangements
3.17 Company Services Provided at No Additional Cost
3.18 Discounts on Company Products or Services

Dividend and Interest Income

54
54
56
59
61
61
62
62
64
65
66
66
66
69
70
70
73
73

74
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8

4.9
4.10

vi | J.K. Lasser’s Your Income Tax 2016

41
43
43
43
44
45
45
46
47
48
50

Reporting Dividends and Mutual-Fund Distributions
Qualified Corporate Dividends Taxed
at Favorable Capital Gain Rates
Dividends From a Partnership, S Corporation,
Estate, or Trust
Real Estate Investment Trust (REIT) Dividends
Taxable Dividends of Earnings and Profits
Stock Dividends on Common Stock
Dividends Paid in Property
Taxable Stock Dividends
Who Reports the Dividends
Year Dividends Are Reported

75
76
77
77
77
78
78
79
79
80


Table of Contents
4.11 Distribution Not Out of Earnings: Return of Capital
4.12 Reporting Interest on Your Tax Return
4.13 Interest on Frozen Accounts Not Taxed
4.14 Interest Income on Debts Owed to You
4.15 Reporting Interest on Bonds Bought or Sold
4.16 Forfeiture of Interest on Premature Withdrawals
4.17 Amortization of Bond Premium
4.18 Discount on Bonds
4.19 Reporting Original Issue Discount on Your Return
4.20 Reporting Income on Market Discount Bonds
4.21 Discount on Short-Term Obligations
4.22 Stripped Coupon Bonds and Stock
4.23 Sale or Retirement of Bonds and Notes
4.24 State and City Interest Generally Tax Exempt
4.25 Taxable State and City Interest
4.26 Tax-Exempt Bonds Bought at a Discount
4.27 Treasury Bills, Notes, and Bonds

4.28 Interest on United States Savings Bonds
4.29 Deferring United States Savings Bond Interest
4.30 Minimum Interest Rules
4.31 Interest-Free or Below-Market-Interest Loans
4.32 Minimum Interest on Seller-Financed Sales

Reporting Property Sales

80
81
82
82
82
83
84
85
86
87
88
89
90
90
91
91
92
93
94
95
95
97

100
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.13
5.14
5.15
5.16
5.17
5.18
5.19
5.20
5.21
5.22

General Tax Rules for Property Sales
How Property Sales Are Classified and Taxed
Capital Gains Rates and Holding Periods
Capital Losses and Carryovers
Capital Losses of Married Couples

Losses May Be Disallowed on Sales to Related Persons
Deferring or Excluding Gain on Small Business
Stock Investment
Reporting Capital Asset Sales on Form 8949
and on Schedule D
Counting the Months in Your Holding Period
Holding Period for Securities
Holding Period for Real Estate
Holding Period: Gifts, Inheritances, and Other Property
Calculating Gain or Loss
Amount Realized Is the Total Selling Price
Finding Your Cost
Unadjusted Basis of Your Property
Basis of Property You Inherited or Received as a Gift
Joint Tenancy Basis Rules for Surviving Tenants
Allocating Cost Among Several Assets
How To Find Adjusted Basis
Tax Advantage of Installment Sales
Figuring the Taxable Part of Installment Payments

101
101
103
106
106
107
108
110
118
118

119
119
120
121
121
121
123
126
128
128
129
130

J.K. Lasser’s Your Income Tax 2016 | vii


Table of Contents
5.23
5.24
5.25
5.26
5.27
5.28
5.29
5.30
5.31
5.32
5.33
5.34
5.35

Electing Not To Report on the Installment Method
Restriction on Installment Sales to Relatives
Contingent Payment Sales
Using Escrow and Other Security Arrangements
Minimum Interest on Deferred Payment Sales
Dispositions of Installment Notes
Repossession of Personal Property Sold on Installment
Boot in Like-Kind Exchange Payable in Installments
“Interest” Tax if Sales Price Exceeds $150,000
With Over $5 Million Debt
Worthless Securities
Tax Consequences of Bad Debts
Four Rules To Prove a Bad Debt Deduction
Family Bad Debts

Tax-Free Exchanges of Property

139
139
141
142
143

144
6.1 Trades of Like-Kind Property
6.2 Personal Property Held for Business or Investment
6.3 Receipt of Cash and Other Property—“Boot”
6.4 Time Limits and Security Arrangements
for Deferred Exchanges

6.5 Qualified Exchange Accommodation Arrangements
(QEAAs) for Reverse Exchanges
6.6 Exchanges Between Related Parties
6.7 Property Transfers Between Spouses and Ex-Spouses
6.8 Tax-Free Exchanges of Stock in Same Corporation
6.9 Joint Ownership Interests
6.10 Setting up Closely Held Corporations
6.11 Exchanges of Coins and Bullion
6.12 Tax-Free Exchanges of Insurance Policies

Retirement and Annuity Income

145
146
147
150
152
153
153
156
156
156
157
157

159
7.1
7.2
7.3
7.4

7.5
7.6
7.7
7.8
7.9
7.10
7.11
7.12
7.13
7.14
7.15

viii | J.K. Lasser’s Your Income Tax 2016

133
134
135
136
137
137
138
139

Retirement Distributions on Form 1099-R
Lump-Sum Distributions
Lump-Sum Options If You Were Born
Before January 2, 1936
Averaging on Form 4972
Capital Gain Treatment for Pre-1974 Participation
Lump-Sum Payments Received by Beneficiary

Tax-Free Rollovers From Qualified Plans
Direct Rollover or Personal Rollover
Rollover of Proceeds From Sale of Property
Distribution of Employer Stock or Other Securities
Survivor Annuity for Spouse
Court Distributions to Former Spouse Under a QDRO
When Retirement Benefits Must Begin
Payouts to Beneficiaries
Penalty for Distributions Before Age 59½

161
163
163
164
166
166
167
168
171
171
173
173
174
174
175


Table of Contents
7.16 Restrictions on Loans From Company Plans
7.17 Tax Benefits of 401(k) Plans

7.18 Limit on Salary-Reduction Deferrals
7.19 Withdrawals From 401(k) Plans Restricted
7.20 Designated Roth Contributions to 401(k) Plans
7.21 Annuities for Employees of Tax-Exempts
and Schools (403(b) Plans)
7.22 Government and Exempt Organization Deferred Pay Plans
7.23 Figuring the Taxable Part of Commercial Annuities
7.24 Life Expectancy Tables
7.25 When You Convert Your Endowment Policy
7.26 Reporting Employee Annuities
7.27 Simplified Method for Calculating
Taxable Employee Annuity
7.28 Employee’s Cost in Annuity
7.29 Withdrawals From Employer’s Qualified Retirement Plan
Before Annuity Starting Date

177
178
179
180
181

8.1 Starting a Traditional IRA
8.2 Traditional IRA Contributions Must Be Based on Earnings
8.3 Contributions to a Traditional IRA If You Are Married
8.4 IRA Deduction Restrictions for Active Participants
in Employer Plan
8.5 Active Participation in Employer Plan
8.6 Nondeductible Contributions to Traditional IRAs
8.7 Penalty for Excess Contributions to Traditional IRAs

8.8 Taxable Distributions From Traditional IRAs
8.9 Partially Tax-Free Traditional IRA Distributions Allocable
to Nondeductible Contributions
8.10 Tax-Free Direct Transfer or Rollover From
One Traditional IRA to Another
8.11 Transfer of Traditional IRA to Spouse at Divorce
8.12 Penalty for Traditional IRA Withdrawals Before Age 59½
8.13 Mandatory Distributions From a Traditional IRA
After Age 70½
8.14 Inherited Traditional IRAs
8.15 SEP Basics
8.16 Salary-Reduction SEP Set Up Before 1997
8.17 Who Is Eligible for a SIMPLE IRA?
8.18 SIMPLE IRA Contributions and Distributions
8.19 Roth IRA Advantages
8.20 Annual Contributions to a Roth IRA
8.21 Converting a Traditional IRA to a Roth IRA
8.22 Recharacterizing a Conversion and Reconversions
8.23 Distributions From a Roth IRA
8.24 Distributions to Roth IRA Beneficiaries
8.25 MyRA pilot program offers new type of mini-Roth IRA

194
195
196

182
183
184
188

189
190
190
192
192

IRAs 193

198
201
202
203
204
205
207
210
210
214
217
223
223
224
224
225
226
228
228
230
232
233

J.K. Lasser’s Your Income Tax 2016 | ix


Table of Contents

Income From Real Estate Rentals and Royalties
9.1

Reporting Rental Real Estate Income and Expenses

235

9.2

Checklist of Rental Deductions

236

9.3

Distinguishing Between a Repair and an Improvement

237

9.4

Reporting Rents From a Multi-Unit Residence

239

9.5

Depreciation on Converting a Home to Rental Property

240

9.6

Renting a Residence to a Relative

241

9.7

Personal Use and Rental of a Residence During the Year

242

9.8

Counting Personal-Use Days and Rental Days for a Residence

243

9.9

Allocating Expenses of a Residence to Rental Days

244

9.10

IRS May Challenge Loss Claimed
on Temporary Rental Before Sale

246

9.11

Reporting Royalty Income

247

9.12

Production Costs of Books and Creative Properties

248

9.13

Deducting the Cost of Patents or Copyrights

248

9.14

Intangible Drilling Costs

248

9.15

Depletion Deduction

249

9.16

Oil and Gas Percentage Depletion

249

Loss Restrictions: Passive Activities and At-Risk Limits

x | J.K. Lasser’s Your Income Tax 2016

234

251

10.1

Rental Activities

252

10.2

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

254

10.3

Real Estate Professionals

256

10.4

Participation May Avoid Passive Loss Restrictions

259

10.5

Classifying Business Activities as One or Several

259

10.6

Material Participation Tests for Business

261

10.7 Tax Credits of Passive Activities Limited

263

10.8

Determining Passive or Nonpassive Income and Loss

263

10.9

Passive Income Recharacterized as Nonpassive Income

265

10.10 Working Interests in Oil and Gas Wells

267

10.11

Partners and Members of LLCs and LLPs

268

10.12

Form 8582

269

10.13

Suspended Losses Allowed on Disposition of Your Interest

270

10.14

Suspended Tax Credits

272

10.15

Personal Service and Closely Held Corporations

272

10.16

Sales of Property and of Passive Activity Interests

273

10.17

At-Risk Limits

274

10.18 What Is At Risk?

275

10.19

Amounts Not At Risk

276

10.20

At-Risk Investment in Several Activities

277

10.21

Carryover of Disallowed Losses

278

10.22

Recapture of Losses Where At Risk Is Less Than Zero

278


Table of Contents

Other Income

279
11.1

Prizes and Awards

280

11.2

Lottery and Sweepstake Winnings

280

11.3

Gambling Winnings and Losses

280

11.4

Gifts and Inheritances

283

11.5

Refunds of State and Local Income Tax Deductions

283

11.6

Other Recovered Deductions

286

11.7

How Legal Damages Are Taxed

287

11.8

Cancellation of Debts You Owe

289

11.9

Schedule K-1

293

11.10

How Partners Report Partnership Profit and Loss

293

11.11 When a Partner Reports Income or Loss

294

11.12

Partnership Loss Limitations

294

11.13

Unified Tax Audits of Partnerships

295

11.14

Stockholder Reporting of S Corp. Income and Loss

295

11.15

How Beneficiaries Report Estate or Trust Income

296

11.16

Reporting Income in Respect of a Decedent (IRD)

296

11.17

Deduction for Estate Tax Attributable to IRD

297

11.18

How Life Insurance Proceeds Are Taxed to a Beneficiary

297

11.19

A Policy With a Family Income Rider

298

11.20

Selling or Surrendering Life Insurance Policy

299

11.21

Jury Duty Fees

299

11.22

Foster Care Payments

300

CLAIMING DEDUCTIONS

301

Deductions Allowed in Figuring Adjusted Gross Income

303

12.1

Figuring Adjusted Gross Income (AGI)

304

12.2

Claiming Deductions From Gross Income

304

12.3 What Moving Costs Are Deductible?

307

12.4

The Distance Test

309

12.5

The 39-Week Test for Employees

309

12.6

The 78-Week Test for the Self-Employed and Partners

310

12.7

Claiming Deductible Moving Expenses

310

12.8

Reimbursements of Moving Expenses

311

Claiming the Standard Deduction or Itemized Deductions
13.1

312

Claiming the Standard Deduction

314

13.2 When To Itemize

315

13.3

Spouses Filing Separate Returns

315

13.4

Standard Deduction If 65 or Older or Blind

316

13.5

Standard Deduction for Dependents

317

13.6

Prepaying or Postponing Itemized Expenses

318

13.7

Itemized Deductions Reduced for Higher-Income Taxpayers

318

J.K. Lasser’s Your Income Tax 2016 | xi


Table of Contents

Charitable Contribution Deductions

320
14.1

14.2
14.3
14.4
14.5
14.6
14.7
14.8
14.9
14.10
14.11
14.12
14.13
14.14
14.15
14.16
14.17
14.18
14.19

Deductible Contributions
Nondeductible Contributions
Contributions That Provide You With Benefits
Unreimbursed Expenses of Volunteer Workers
Support of a Student in Your Home
What Kind of Property Are You Donating?
Cars, Clothing, and Other Property Valued Below Cost
Bargain Sales of Appreciated Property
Art Objects
Interests in Real Estate
Life Insurance

Business Inventory
Donations Through Trusts
Records Needed To Substantiate Your Contributions
Form 8283 and Written Appraisal Requirements
for Property Donations
Penalty for Substantial Overvaluation of Property
Ceiling on Charitable Contributions
Carryover for Excess Donations
Election To Reduce Fair Market Value by Appreciation

Itemized Deduction for Interest Expenses
15.1
15.2
15.3
15.4
15.5
15.6
15.7
15.8
15.9
15.10
15.11
15.12

Home Mortgage Interest
Home Acquisition Loans
Home Equity Loans
Home Construction Loans
Home Improvement Loans
Mortgage Insurance Premiums and Other Payment Rules

Interest on Refinanced Loans
“Points”
Cooperative and Condominium Apartments
Investment Interest Limitations
Debts To Carry Tax-Exempt Obligations
Earmarking Use of Loan Proceeds
For Investment or Business
15.13 Year To Claim an Interest Deduction
15.14 Prepaid Interest

Deductions for Taxes

338
340
340
343
343

344
345
346
348
349
350
351
352
353
354
354
356

357
358
359

360
16.1 Deductible Taxes
16.2 Nondeductible Taxes
16.3 State and Local Income Taxes or General Sales Taxes
16.4 Deducting Real Estate Taxes
16.5 Assessments
16.6 Tenants’ Payment of Taxes

xii | J.K. Lasser’s Your Income Tax 2016

321
322
323
325
326
326
330
331
332
334
336
336
336
337

361

362
362
363
364
364


Table of Contents
16.7 Allocating Taxes When You Sell or Buy Realty
16.8 Automobile License Fees
16.9 Taxes Deductible as Business Expenses
16.10 Foreign Taxes

Medical and Dental Expense Deductions
17.1
17.2
17.3
17.4
17.5
17.6
17.7
17.8
17.9
17.10
17.11
17.12
17.13
17.14
17.15
17.16

367
Medical and Dental Expenses Must
Exceed AGI Threshold
Allowable Medical and Dental Care Costs
Nondeductible Medical Expenses
Reimbursements Reduce Deductible Expenses
Expenses of Your Spouse
Expenses of Your Dependents
Decedent’s Medical Expenses
Premiums for Health Insurance
Travel Costs May Be Medical Deductions
Schooling for the Mentally or Physically Disabled
Nursing Homes
Nurses’ Wages
Home Improvements as Medical Expenses
Costs Deductible as Business Expenses
Long-Term Care Premiums and Services
Life Insurance Used by Chronically ill
or Terminally ill Persons

Casualty and Theft Losses and Involuntary Conversions
18.1
18.2
18.3
18.4
18.5
18.6
18.7
18.8

18.9
18.10
18.11
18.12
18.13
18.14
18.15
18.16
18.17
18.18
18.19
18.20
18.21

364
365
366
366

368
369
372
372
374
375
376
377
378
379
380

381
381
383
383
384

385

Sudden Event Test for Casualty Losses
When To Deduct a Casualty Loss
Disaster Losses
Who May Deduct a Casualty Loss
Bank Deposit Losses
Damage to Trees and Shrubs
Deducting Damage to Your Car
Proving a Casualty Loss
Theft Losses
Proving a Theft Loss
Nondeductible Casualty and Theft Losses
Floors for Personal-Use Property Losses
Figuring Your Loss on Form 4684
Personal and Business Use of Property
Repairs May Be a “Measure of Loss”
Insurance Reimbursements
Excess Living Costs Paid by Insurance Are Not Taxable
Do Your Casualty or Theft Losses Exceed Your Income?
Defer Gain by Replacing Property
Involuntary Conversions Qualifying for Tax Deferral
How To Elect To Defer Tax

386
388
389
391
391
392
393
394
395
397
397
398
398
401
401
402
402
403
403
404
405

J.K. Lasser’s Your Income Tax 2016 | xiii


Table of Contents
18.22 Time Period for Buying Replacement Property
18.23 Types of Qualifying Replacement Property
18.24 Cost of Replacement Property Determines
Postponed Gain

18.25 Special Assessments and Severance Damages
18.26 Reporting Gains From Casualties

Deducting Job Costs and Other Miscellaneous Expenses
19.1
19.2
19.3
19.4
19.5
19.6
19.7
19.8
19.9
19.10
19.11
19.12
19.13
19.14
19.15
19.16
19.17
19.18

2% of AGI Floor Reduces Most Miscellaneous Expenses
Effect of 2% of AGI Floor on Miscellaneous Deductions
Checklist of Job Expenses Subject to the 2% of AGI Floor
Job Expenses Not Subject to the 2% of AGI Floor
Dues and Subscriptions
Uniforms and Work Clothes
Expenses of Looking for a New Job

Local Transportation Costs
Unusual Job Expenses
Computer Bought for Job
Cell Phones, Calculators, Copiers and Fax Machines
Small Tools
Employee Home Office Deductions
Telephone Costs
Checklist of Deductible Investment Expenses
Costs of Tax Return Preparation and Audits
Deducting Legal Costs
Contingent Fees Paid Out of Taxable Awards

Travel and Entertainment Expense Deductions
20.1
20.2
20.3
20.4
20.5
20.6
20.7
20.8
20.9
20.10
20.11
20.12
20.13
20.14
20.15
20.16
20.17

20.18

xiv | J.K. Lasser’s Your Income Tax 2016

Deduction Guide for Travel and Transportation Expenses
Commuting Expenses
Overnight-Sleep Test Limits Deduction of Meal Costs
IRS Meal Allowance
Business Trip Deductions
Local Lodging Costs
When Are You Away From Home?
Fixing a Tax Home If You Work in Different Locations
Tax Home of Married Couple Working in Different Cities
Deducting Living Costs on Temporary Assignment
Business-Vacation Trips Within the United States
Business-Vacation Trips Outside the United States
Deducting Expenses of Business Conventions
Travel Expenses of a Spouse, Dependent,
or Business Associate
Restrictions on Foreign Conventions and Cruises
50% Deduction Limit
The Restrictive Tests for Meals and Entertainment
Directly Related Dining and Entertainment

405
407
407
408
409

410
411
412
412
413
413
414
415
416
416
417
418
418
418
418
419
420
421
423

424
425
425
426
428
429
430
430
431
432

432
434
434
436
437
437
438
438
438


Table of Contents
20.19

Goodwill Entertainment

439

20.20

Home Entertaining

439

20.21 Your Personal Share of Entertainment Costs

439

20.22

Entertainment Costs of Spouses

440

20.23

Entertainment Facilities and Club Dues

440

20.24

Restrictive Test Exception for Reimbursements

440

20.25

50% Cost Limitation on Meals and Entertainment

440

20.26

Business Gift Deductions Are Limited

442

20.27

Recordkeeping Requirements

443

20.28

Proving Travel and Entertainment Expenses

443

20.29

Reporting T&E Expenses If You Are Self-Employed

444

20.30

Employee Reporting of Unreimbursed T&E Expenses

445

20.31 Tax Treatment of Reimbursements

445

20.32 What Is an Accountable Plan?

446

20.33

Per Diem Travel Allowance Under Accountable Plans

447

20.34

Automobile Mileage Allowance

448

20.35

Reimbursements Under Non-Accountable Plans

449

Personal Exemptions

450
21.1

How Many Exemptions May You Claim?

451

21.2 Your Spouse as an Exemption

452

21.3

Qualifying Children

452

21.4

Qualifying Relatives

454

21.5

Meeting the Support Test for a Qualifying Relative

456

21.6

Multiple Support Agreements

459

21.7

Special Rule for Divorced or Separated Parents

460

21.8

The Dependent Must Meet a Citizen or Resident Test

461

21.9

The Dependent Does Not File a Joint Return

461

21.10

Spouses’ Names and Social Security Numbers
on Joint Return

461

21.11

Reporting Social Security Numbers of Dependents

462

21.12

Phaseout of Personal Exemptions

462

PERSONAL TAX COMPUTATIONS

465

Figuring Your Regular Income Tax Liability

467

22.1 Taxable Income and Regular Income Tax Liability

468

22.2

468

Using the Tax Table

22.3 Tax Computation Worksheet

469

22.4 Tax Calculation If You Have Net Capital Gain
or Qualified Dividends

469

22.5

Foreign Earned Income Tax Worksheet

470

22.6

Income Averaging for Farmers and Fishermen

470

22.7 Tax Credits

470

22.8

470

Additional Medicare Tax and Net Investment Income Tax

J.K. Lasser’s Your Income Tax 2016 | xv


Table of Contents

Alternative Minimum Tax (AMT)

471
23.1 Computing Alternative Minimum Tax on Form 6251

23.2 Adjustments and Preferences for AMT
23.3 Tax Credits Allowed Against AMT
23.4 AMT Tax Credit From Regular Tax
23.5 Avoiding AMT

Computing the “Kiddie Tax” on Your Child’s Investment Income
24.1
24.2
24.3
24.4

Filing Your Child’s Return
Children Subject to “Kiddie Tax” for 2015
Computing “Kiddie Tax” on Child’s Return
Parent’s Election To Report Child’s Dividends and Interest

Personal Tax Credits Reduce Your Tax Liability
25.1
25.2
25.3
25.4
25.5
25.6
25.7
25.8
25.9
25.10
25.11
25.12
25.13

25.14
25.15
25.16
25.17

Overview of Personal Tax Credits
Child Tax Credit for Children Under Age 17
Figuring the Child Tax Credit
Qualifying for the Child and Dependent Care Credit
Figuring the Dependent Care Credit
Qualifying Tests for EIC
Income Tests for Earned Income Credit (EIC)
Qualifying for the Adoption Credit
Claiming the Adoption Credit on Form 8839
Eligibility for the Saver’s Credit
Figuring the Saver’s Credit
Premium Tax Credit
Health Coverage Credit
Mortgage Interest Credit
Residential Energy Credits
Credits for Plug-in Electric Vehicles and Fuel Cell Vehicles
Repayment of the First-Time Homebuyer Credit

Tax Withholdings

479
480
481
482
483

485
486
486
487
488
489
492
494
495
495
497
497
498
501
502
502
503
503

504
26.1
26.2
26.3
26.4
26.5
26.6
26.7
26.8
26.9

Withholdings Should Cover Estimated Tax
Income Taxes Withheld on Wages
Low Earners May Be Exempt From Withholding
Are You Withholding the Right Amount?
Voluntary Withholding on Government Payments
When Tips Are Subject to Withholding
Withholding on Gambling Winnings
FICA Withholdings
Withholding on Distributions from Retirement Plans
and Commercial Annuities
26.10 Backup Withholding

xvi | J.K. Lasser’s Your Income Tax 2016

473
474
477
478
478

505
505
506
506
507
507
508
509
509

510


Table of Contents

Estimated Tax Payments

511
27.1

Do You Owe an Estimated Tax Penalty for 2015?

512

27.2

Planning Estimated Tax Payments for 2016

513

27.3

Dates for Paying Estimated Tax Installments for 2016

514

27.4

Estimates by Married Taxpayers

515

27.5

Adjusting Your Payments During the Year

516

Additional Medicare Tax and Net Investment Income Tax
28.1

517

Higher-Income Taxpayers May be Subject
to Additional Taxes

518

28.2

Additional 0.9% Medicare Tax on Earnings

518

28.3

Additional 3.8% Medicare Tax
on Net Investment Income

519

TAX PLANNING

523

Tax Savings for Residence Sales

525
29.1

Avoiding Tax on Sale of Principal Residence

526

29.2

Meeting the Ownership and Use Tests

527

29.3

Home Sales by Married Persons

530

29.4

Reduced Maximum Exclusion

531

29.5

Figuring Gain or Loss

534

29.6

Figuring Adjusted Basis

535

29.7

Personal and Business Use of a Home

536

29.8

No Loss Allowed on Personal Residence

537

29.9

Loss on Residence Converted to Rental Property

537

29.10

Loss on Residence Acquired by Gift or Inheritance

Tax Rules for Investors in Securities

538

540
30.1

Planning Year-End Securities Transactions

541

30.2

Earmarking Stock Lots

541

30.3

Sale of Stock Dividends

542

30.4

Stock Rights

542

30.5

Short Sales of Stock

543

30.6 Wash Sales

545

30.7

Convertible Stocks and Bonds

547

30.8

Stock Options

547

30.9

Sophisticated Financial Transactions

548

30.10

Investing in Tax-Exempts

549

30.11

Ordinary Loss for Small Business Stock (Section 1244)

550

30.12

Series EE Bonds

551

30.13

I Bonds

552

30.14 Trader, Dealer, or Investor?

552

30.15

553

Mark-to-Market Election for Traders

J.K. Lasser’s Your Income Tax 2016 | xvii


Table of Contents

Tax Savings for Investors in Real Estate

556
31.1 Real Estate Ventures
31.2 Sales of Subdivided Land—Dealer or Investor?
31.3 Exchanging Real Estate Without Tax
31.4 Timing Your Real Property Sales
31.5 Cancellation of a Lease
31.6 Sale of an Option
31.7 Granting of an Easement
31.8 Special Tax Credits for Real Estate Investments
31.9 Foreclosures, Repossessions, Short Sales,
and Voluntary Conveyances to Creditors
31.10 Restructuring Mortgage Debt
31.11 Abandonments
31.12 Seller’s Repossession After Buyer’s Default on Mortgage
31.13 Foreclosure on Mortgages Other Than Purchase Money
31.14 Foreclosure Sale to Third Party

31.15 Transferring Mortgaged Realty

Tax Rules for Investors in Mutual Funds

557
558
559
560
560
561
561
562
563
564
565
566
567
568
568

569
32.1
32.2
32.3
32.4
32.5
32.6
32.7
32.8
32.9

32.10
32.11

Timing of Your Investment Can Affect Your Taxes
Reinvestment Plans
Mutual-Fund Distributions Reported on Form 1099-DIV
Tax-Exempt Bond Funds
Fund Expenses
Tax Credits From Mutual Funds
How To Report Mutual Fund Distributions
Redemptions and Exchanges of Fund Shares
Basis of Redeemed Shares
Comparison of Basis Methods
Mutual Funds Compared to Exchange-Traded Funds

Educational Tax Benefits

570
570
570
571
571
571
573
573
573
575
577

578

33.1 Scholarships and Grants
33.2 Tuition Reductions for College Employees
33.3 How Fulbright Awards Are Taxed
33.4 United States Savings Bond Tuition Plans
33.5 Contributing to a Qualified Tuition Program
(Section 529 Plan)
33.6 Distributions From Qualified Tuition Programs
(Section 529 Plans)
33.7 Education Tax Credits
33.8 American Opportunity Credit
33.9 Lifetime Learning Credit
33.10 Contributing to a Coverdell Education
Savings Account (ESA)
33.11 Distributions From Coverdell ESAs

xviii | J.K. Lasser’s Your Income Tax 2016

579
579
579
579
581
581
583
584
586
587
587

Table of Contents
33.12 Tuition and Fees Deduction
33.13 Student Loan Interest Deduction
33.14 Types of Deductible Work-Related Costs
33.15 Work-Related Tests for Education Costs
33.16 Local Transportation and Travel Away
From Home To Take Courses

Special Tax Rules for Senior Citizens and the Disabled
34.1
34.2
34.3
34.4
34.5
34.6
34.7
34.8
34.9
34.10
34.11
34.12

589
590
592
593
594

596

Senior Citizens Get Certain Filing Breaks
Social Security Benefits Subject to Tax
Computing Taxable Social Security Benefits
Election for Lump-Sum Social Security Benefit Payment
Retiring on Social Security Benefits
How Tax on Social Security Reduces Your Earnings
Eligibility for the Credit for the Elderly or the Disabled
Figuring the Credit for the Elderly or Disabled
Tax Effects of Moving to a Continuing Care Facility
Medicare Part B and Part D Premiums for 2016
Special Tax Rules for the Disabled
ABLE Accounts

Members of the Armed Forces

597
597
598
600
600
601
601
602
603
604
604
605

607
35.1

35.2
35.3
35.4
35.5

Taxable Armed Forces Pay and Benefits
Tax Breaks for Armed Forces Members
Deductions for Armed Forces Personnel
Tax-Free Pay for Service in Combat Zone
Tax Deadlines Extended for Combat Zone
or Contingency Operation Service
35.6 Tax Forgiveness for Combat Zone or Terrorist
or Military Action Deaths
35.7 Extension To Pay Your Tax When Entering the Service
35.8 Tax Information for Reservists

How To Treat Foreign Earned Income

608
608
610
610
611
612
612
613

614
36.1
36.2

36.3
36.4
36.5
36.6
36.7
36.8
36.9
36.10
36.11
36.12
36.13

Claiming the Foreign Earned Income Exclusion
What Is Foreign Earned Income?
Qualifying for the Foreign Earned Income Exclusion
How To Treat Housing Costs
Meeting the Foreign Residence or Physical Presence Test
Claiming Deductions
Exclusion Not Established When Your Return Is Due
Tax-Free Meals and Lodging for Workers in Camps
U. S. Virgin Islands, Samoa, Guam, and Northern Marianas
Earnings in Puerto Rico
Tax Treaties With Foreign Countries
Exchange Rates and Blocked Currency
Foreign Tax Credit or Deduction

615
615
617
618

619
621
621
622
622
622
623
623
623

J.K. Lasser’s Your Income Tax 2016 | xix


Table of Contents

Planning Alimony and Marital Settlements

625

37.1
37.2
37.3
37.4
37.5
37.6
37.7

626
626
628

628
629
630

Planning Alimony Agreements
Decree or Agreement Required
Cash Payments Required
Payments Must Stop at Death
Child Support Payments Are Not Alimony
No Minimum Payment Period for Alimony
3rd Year Recapture If Alimony Drops by
More Than $15,000
37.8 Legal Fees of Marital Settlements

Other Taxes

630
631

632
38.1
38.2
38.3
38.4
38.5
38.6

Overview of Household Employment Taxes
Social Security and Medicare (FICA) Taxes f
or Household Employees

Filing Schedule H To Report Household
Employment Taxes
Federal Unemployment Taxes (FUTA)
for Household Employees
Individual Responsibility Penalty
Exemption from Individual Responsibility Payment

Gift and Estate Tax Planning Basics

633
634
635
637
637
638

640
39.1 Gifts of Appreciated Property
39.2 Gift Tax Basics
39.3 Filing a Gift Tax Return
39.4 Gift Tax Credit
39.5 Custodial Accounts for Minors
39.6 Trusts in Family Planning
39.7 What is the Estate Tax?
39.8 Take Inventory and Estimate the Value
of Your Potential Estate
39.9 Estate Tax for 2015
39.10 Planning for a Potential Estate Tax

641

641
642
642
642
643
644
644
645
646

BUSINESS TAX PLANNING

649

Income or Loss From Your Business or Profession

651

40.1 Forms of Doing Business
40.2 Reporting Self-Employed Income
40.3 Accounting Methods for Reporting Business Income
40.4 Tax Reporting Year for Self-Employed
40.5 Reporting Certain Payments and Receipts to the IRS
40.6 Filing Schedule C
40.7 Deductions for Professionals
40.8 Nondeductible Expense Items
40.9 How Authors and Artists May Write Off Expenses

xx | J.K. Lasser’s Your Income Tax 2016

652
652
654
656
656
657
661
662
663


Table of Contents
40.10 Deducting Expenses of a Sideline Business or Hobby
40.11 Deducting Expenses of Looking for a New Business
40.12 Home Office Deduction
40.13 Write-Off Methods for Home Office Expenses
40.14 Allocating Expenses to Business Use
40.15 Business Income May Limit Home Office Deductions
40.16 Home Office for Sideline Business
40.17 Depreciation of Office in Cooperative Apartment
40.18 Net Operating Losses (NOLs)
40.19 Your Net Operating Loss
40.20 How To Report a Net Operating Loss
40.21 How To Carry Back Your Net Operating Loss
40.22 Election To Carry Forward Losses
40.23 Overview of the Domestic Production Activities Deduction
40.24 Qualified Production Activities
40.25 Figuring the Deduction
40.26 Business Credits
40.27 Filing Schedule F

40.28 Farming Expenses

Retirement and Medical Plans for Self-Employed
41.1
41.2
41.3
41.4
41.5
41.6
41.7
41.8
41.9
41.10
41.11
41.12
41.13
41.14

663
664
665
668
669
669
670
672
672
673
673
674

675
675
675
675
676
677
678

679

Overview of Retirement and Medical Plans
Choosing a Qualified Retirement Plan
Choosing a SEP
Deductible Contributions
How To Claim the Deduction for Contributions
How To Qualify a Retirement Plan or SEP Plan
Annual Qualified Retirement Plan Reporting
How Qualified Retirement Plan Distributions Are Taxed
SIMPLE IRA Plans
Health Savings Account (HSA) Basics
Limits on Deductible HSA Contributions
Distributions From HSAs
Archer MSAs
Small Employer Health Insurance Credit

Claiming Depreciation Deductions

680
680
681

681
684
684
684
685
685
685
686
686
687
688

689
42.1
42.2
42.3
42.4
42.5
42.6
42.7
42.8
42.9
42.10

What Property May Be Depreciated?
Claiming Depreciation on Your Tax Return
First-Year Expensing Deduction
MACRS Recovery Periods
MACRS Rates
Half-Year Convention for MACRS

Last Quarter Placements—Mid-Quarter Convention
150% Rate Election
Straight-Line Depreciation
Computers and Other Listed Property

690
691
691
693
694
696
696
697
697
698

J.K. Lasser’s Your Income Tax 2016 | xxi


Table of Contents
42.11
42.12
42.13
42.14
42.15
42.16
42.17
42.18
42.19
42.20

Assets in Service Before 1987
MACRS for Real Estate Placed in Service After 1986
Demolishing a Building
Leasehold Improvements
Depreciating Real Estate Placed in Service
After 1980 and Before 1987
When MACRS Is Not Allowed
Amortizing Goodwill and Other Intangibles (Section 197)
Deducting the Cost of Computer Software
Amortizing Research and Experimentation Costs
Bonus Depreciation

Deducting Car and Truck Expenses

700
700
702
702
702
703
703
704
705
705

706
43.1
43.2
43.3

43.4
43.5
43.6
43.7
43.8
43.9
43.10
43.11
43.12

Standard Mileage Rate
Expense Allocations
Depreciation Restrictions on Cars, Trucks, and Vans
Annual Ceilings on Depreciation
MACRS Rates for Cars, Trucks, and Vans
Straight-Line Method
Depreciation for Year Vehicle Is Disposed Of
Depreciation After Recovery Period Ends
Trade-in of Business Vehicle
Recapture of Deductions on Business Car, Truck, or Van
Keeping Records of Business Use
Leased Business Vehicles: Deductions and Income

Sales of Business Property

707
708
709
710
711

715
716
717
717
718
719
719

720
44.1

Depreciation Recaptured as Ordinary Income
on Sale of Personal Property
44.2 Depreciation Recaptured as Ordinary Income
on Sale of Real Estate
44.3 Recapture of First-Year Expensing
44.4 Gifts and Inheritances of Depreciable Property
44.5 Involuntary Conversions and Tax-Free Exchanges
44.6 Installment Sale of Depreciable Property
44.7 Sale of a Proprietorship
44.8 Property Used in a Business (Section 1231 Assets)
44.9 Sale of Property Used for Business and Personal Purposes
44.10 Should You Trade in Business Equipment?
44.11 Corporate Liquidation
44.12 Additional Taxes on Higher-Income Taxpayers

Figuring Self-Employment Tax

721
722

722
723
723
723
723
724
725
725
726

727
45.1 What Is Self-Employment Income?
45.2 Partners Pay Self-Employment Tax
45.3 Schedule SE

xxii | J.K. Lasser’s Your Income Tax 2016

721

728
729
730


Table of Contents
45.4
45.5
45.6

How Wages Affect Self-Employment Tax

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

731
732
733

FILING YOUR RETURN AND WHAT HAPPENS AFTER YOU FILE

735

Filing Your Return

737
46.1 Keeping Tax Records
46.2 Getting Ready To File Your Return
46.3 Applying for an Extension
46.4 Getting Your Refund
46.5 Paying Taxes Due
46.6 Electronic Filing
46.7 Notify the IRS of Address Changes
46.8 Interest on Tax Underpayments
46.9 Tax Penalties for Late Filing and Late Payment

Filing Refund Claims, and Amended Returns

738
738
739
740

741
742
742
743
743

749

47.1 Filing An Amended Return
47.2 When To File a Refund Claim
47.3 Stating the Reasons for Refund Claim
47.4 Quick Refund Claims
47.5 Interest Paid on Refund Claims
47.6 Refunds Withheld To Cover Debts
47.7 Amended Returns Showing Additional Tax
47.8 Penalty for Filing Excessive Refund Claim

If the IRS Examines Your Return

750
750
751
751
751
752
752
752

753
48.1

48.2
48.3
48.4
48.5
48.6
48.7
48.8
48.9
48.10
48.11
48.12

Odds of Being Audited
When the IRS Can Assess Additional Taxes
Audit Overview
Preparing for the Audit
Handling the Audit
Tax Penalties for Inaccurate Returns
Penalties for Not Reporting Foreign Financial Accounts
Agreeing to the Audit Changes
Disputing the Audit Changes
Offer in Compromise
Recovering Costs of a Tax Dispute
Suing the IRS for Unauthorized Collection

2015 TAX TABLE AND TAX COMPUTATION WORKSHEET

754
755
756

757
757
758
760
761
761
762
763
764

765

2015 Tax Table
2015 Tax Computation Worksheet

766
778

J.K. Lasser’s Your Income Tax 2016 | xxiii