Department
of the
Treasury
Internal
Revenue
ServiceTAX GUIDE
2016
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Your Federal
Income Tax
For Individuals
Publication 17
Catalog Number 10311G
For use in preparing
2016 Returns
Dec 27, 2016
Your Federal
Income Tax
For Individuals
Contents
What's New . . . . . . . . . . . . . . . . . . . . . . . 1
Reminders . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . 2
Part One. The Income Tax Return . . . . . . . . . 4
1 Filing Information . . . . . . . . . . . . . . . . 4
2 Filing Status . . . . . . . . . . . . . . . . . . . 20
3 Personal Exemptions and Dependents . . . 25
4 Tax Withholding and Estimated Tax . . . . . 37
Part Two. Income . . . . . . . . . . . . . . . . . . . 46
5 Wages, Salaries, and Other Earnings . . . . 46
6 Tip Income . . . . . . . . . . . . . . . . . . . 54
7 Interest Income . . . . . . . . . . . . . . . . . 56
8 Dividends and Other Distributions . . . . . . 64
9 Rental Income and Expenses . . . . . . . . . 68
10 Retirement Plans, Pensions, and
Annuities . . . . . . . . . . . . . . . . . . . . 76
11 Social Security and Equivalent Railroad
Retirement Benefits . . . . . . . . . . . . . . 83
12 Other Income . . . . . . . . . . . . . . . . . . 88
Part Three. Gains and Losses . . . . . . . . . . . 98
13 Basis of Property . . . . . . . . . . . . . . . . 98
14 Sale of Property . . . . . . . . . . . . . . . 102
15 Selling Your Home . . . . . . . . . . . . . . 109
16 Reporting Gains and Losses . . . . . . . . 115
Part Four. Adjustments to Income . . . . . . . . 119
17 Individual Retirement Arrangements
(IRAs) . . . . . . . . . . . . . . . . . . . . 120
18 Alimony . . . . . . . . . . . . . . . . . . . . 132
19 Education-Related Adjustments . . . . . . 135
Part Five. Standard Deduction and Itemized
Deductions . . . . . . . . . . . . . . . . . . . . 142
20 Standard Deduction . . . . . . . . . . . . . 142
21 Medical and Dental Expenses . . . . . . . 146
22 Taxes . . . . . . . . . . . . . . . . . . . . . 151
23 Interest Expense . . . . . . . . . . . . . . . 156
24 Contributions . . . . . . . . . . . . . . . . . 164
25 Nonbusiness Casualty and Theft
Losses . . . . . . . . . . . . . . . . . . . . 172
26 Car Expenses and Other Employee Business
Expenses . . . . . . . . . . . . . . . . . . 178
27 Tax Benefits for Work-Related
Education . . . . . . . . . . . . . . . . . . 195
28 Miscellaneous Deductions . . . . . . . . . 199
29 Limit on Itemized Deductions . . . . . . . . 205
Part Six. Figuring Your Taxes and Credits . . . 206
30 How To Figure Your Tax . . . . . . . . . . . 206
31 Tax on Unearned Income of Certain
Children . . . . . . . . . . . . . . . . . . . 209
32 Child and Dependent Care Credit . . . . . 214
33 Credit for the Elderly or the Disabled . . . . 221
34 Child Tax Credit . . . . . . . . . . . . . . . 224
35 Education Credits . . . . . . . . . . . . . . 225
36 Earned Income Credit (EIC) . . . . . . . . . 231
37 Premium Tax Credit (PTC) . . . . . . . . . 246
38 Other Credits . . . . . . . . . . . . . . . . . 248
2016 Tax Table . . . . . . . . . . . . . . . . . . . . 254
2016 Tax Computation Worksheet . . . . . . . . 266
2016 Tax Rate Schedules . . . . . . . . . . . . . . 267
Your Rights as a Taxpayer . . . . . . . . . . . . . 268
How To Get Tax Help . . . . . . . . . . . . . . . . 270
Index . . . . . . . . . . . . . . . . . . . . . . . . . . 271
Where To File . . . . . . . . . . . . . . . . . . . . . 290
The explanations and examples in this publication
reflect the interpretation by the Internal Revenue Service
(IRS) of:
Tax laws enacted by Congress,
Treasury regulations, and
Court decisions.
However, the information given does not cover every
situation and is not intended to replace the law or change
its meaning.
All material in this
publication may be
reprinted freely. A
citation to Your Federal
Income Tax (2016)
would be appropriate.
This publication covers some subjects on which a
court may have made a decision more favorable to
taxpayers than the interpretation by the IRS. Until these
differing interpretations are resolved by higher court
decisions or in some other way, this publication will
continue to present the interpretations by the IRS.
All taxpayers have important rights when working with
the IRS. These rights are described in Your Rights as a
Taxpayer in the back of this publication.
Department
of the
Treasury
Internal
Revenue
Service
What's New
This section summarizes important
tax changes that took effect in
2016. Most of these changes are
discussed in more detail
throughout this publication.
Future developments. For the
latest information about the tax law
topics covered in this publication,
such as legislation enacted after it
was published, go to IRS.gov/
pub17.
Due date of return. File your tax
return by April 18, 2017. The due
date is April 18, instead of April 15,
because of the Emancipation Day
holiday in the District of Colum-
bia—even if you do not live in the
District of Columbia. See chap-
ter 1.
Service at local IRS offices by
appointment. Many issues can
be resolved conveniently on
IRS.gov with no waiting. However,
if you need help from an IRS Tax-
payer Assistance Center (TAC),
you need to call to schedule an ap-
pointment. Go to IRS.gov/
taclocator to find the location and
telephone number of your local
TAC.
Delayed refunds for returns
claiming certain credits. Due to
changes in the law, the IRS can't
issue refunds before February 15,
2017, for returns that claim the
earned income credit or the addi-
tional child tax credit. This delay
applies to the entire refund, not just
the portion associated with these
credits. Although the IRS will begin
releasing refunds for returns that
claim these credits on February 15,
because of the time it generally
takes banking or financial systems
to process deposits, it is unlikely
that your refund will arrive in your
bank account or on a debit card
before the week of February 27
(assuming your return has no pro-
cessing issues and you elect direct
deposit).
If you filed your return before
February 15, you can check
Where's My Refund on IRS.gov
(IRS.gov/refunds) a few days after
February 15 for your projected de-
posit date. Where's My Refund and
the IRS2Go phone app remain the
best ways to check the status of
any refund.
Delivery services. Eight delivery
services have been added to the
list of designated private delivery
services. For the complete list, see
chapter 1.
Cash payment option. There is a
new option for taxpayers who want
to pay their taxes in cash. For de-
tails, see chapter 1.
Educator expenses. You may be
able to deduct certain expenses for
professional development courses
you have taken related to the cur-
riculum you teach or to the stu-
dents you teach. See chapter 19.
Olympic and Paralympic medals
and USOC prize money. If you
receive Olympic and Paralympic
medals and United States Olympic
Committee prize money, the value
of the medals and the amount of
the prize money may be nontaxa-
ble. See the instructions for Form
1040, line 21, for more information.
Child tax credit and additional
child tax credit may be disal
lowed. If you take the child tax
credit or the additional child tax
credit even though you aren’t eligi-
ble, you may not be able to take
these credits for up to 10 years.
For more information, see chap-
ter 34.
American opportunity credit
may be disallowed. If you take
the American opportunity credit
even though you aren’t eligible,
you may not be able to take this
credit for up to 10 years. For more
information, see chapter 35.
Health coverage tax credit
(HCTC). The HCTC is a tax credit
that pays a percentage of health in-
surance premiums for certain eligi-
ble taxpayers and their qualifying
family members. The HCTC is a
separate tax credit with different el-
igibility rules than the premium tax
credit. You may have received
monthly advance payments of the
HCTC beginning in July 2016. For
information on how to report these
payments or on the HCTC gener-
ally, see the Instructions for Form
8885.
Get Transcript Online. The Get
Transcript Online tool on IRS.gov
is available again to get a copy of
your tax transcripts and similar
documents. To guard against
fraud, you will now need to go
through a two-step authentication
process in order to use the online
tool. For more information, go to
IRS.gov/transcripts.
Electronic Filing PIN. Electronic
Filing PIN, an IRS-generated PIN
used to verify your signature on
your self-prepared, electronic tax
return, is no longer available. To
validate your signature, you must
use your prior-year adjusted gross
income or prior-year self-select
PIN. See chapter 1.
Individual taxpayer identifica
tion number (ITIN) renewal. If
you were assigned an ITIN before
January 1, 2013, or if you have an
ITIN that you haven't included on a
tax return in the last 3 consecutive
years, you may need to renew it.
For more information, see chap-
ter 1 and the Instructions for Form
W-7.
Personal exemption amount in
creased for certain taxpayers.
Your personal exemption is in-
creased to $4,050. But the amount
is reduced if your adjusted gross
income is more than:
$155,650 if married filing sep-
arately,
$259,400 if single,
$285,350 if head of house-
hold, or
$311,300 if married filing
jointly or qualifying widow(er).
See chapter 3.
Limit on itemized deductions.
You may not be able to deduct all
of your itemized deductions if your
adjusted gross income is more
than:
$155,650 if married filing sep-
arately,
$259,400 if single,
$285,350 if head of house-
hold, or
$311,300 if married filing
jointly or qualifying widow(er).
See chapter 29.
Standard mileage rates. The
2016 rate for business use of your
vehicle is 54 cents a mile. The
2016 rate for use of your vehicle to
get medical care or to move is 19
cents a mile.
Adoption credit. The adoption
credit and the exclusion for em-
ployer-provided adoption benefits
have both increased to $13,460
per eligible child in 2016. The
amount begins to phase out if you
have modified adjusted gross in-
come (MAGI) in excess of
$201,920 and is completely
phased out if your MAGI is
$241,920 or more.
Exemption amount for alterna
tive minimum tax (AMT). The
exemption amount for the AMT has
increased to $53,900 ($83,800 if
married filing jointly or qualifying
widow(er); $41,900 if married filing
separately).
Standard deduction for head of
household filing status. For
2016, the standard deduction for
head of household filing status has
increased to $9,300. The other
standard deduction amounts are
unchanged.
Secure access. To combat iden-
tity fraud, the IRS has upgraded its
identity verification process for cer-
tain self-help tools on IRS.gov. To
find out what types of information
new users will need, go to IRS.gov/
secureaccess.
Reminders
Listed below are important
reminders and other items that
may help you file your 2016 tax
return. Many of these items are
explained in more detail later in this
publication.
Enter your social security num
ber (SSN). Enter your SSN in the
space provided on your tax form. If
you filed a joint return for 2015 and
are filing a joint return for 2016 with
the same spouse, enter your
names and SSNs in the same or-
der as on your 2015 return. See
chapter 1.
Secure your tax records from
identity theft. Identity theft occurs
when someone uses your personal
information, such as your name,
SSN, or other identifying informa-
tion, without your permission, to
commit fraud or other crimes. An
identity thief may use your SSN to
get a job or may file a tax return us-
ing your SSN to receive a refund.
For more information about identity
theft and how to reduce your risk
from it, see Identity Theft in chap-
ter 1.
Taxpayer identification num
bers. You must provide the tax-
payer identification number for
each person for whom you claim
certain tax benefits. This applies
even if the person was born in
2016. Generally, this number is the
person's social security number
(SSN). See chapter 1.
Foreign source income. If you
are a U.S. citizen with income from
sources outside the United States
(foreign income), you must report
all such income on your tax return
unless it is exempt by law or a tax
treaty. This is true whether you live
inside or outside the United States
and whether or not you receive a
Form W-2 or Form 1099 from the
foreign payer. This applies to
earned income (such as wages
and tips) as well as unearned
Publication 17 (2016) Page 1
income (such as interest, divi-
dends, capital gains, pensions,
rents, and royalties).
If you live outside the United
States, you may be able to exclude
part or all of your foreign earned in-
come. For details, see Pub. 54,
Tax Guide for U.S. Citizens and
Resident Aliens Abroad.
Foreign financial assets. If you
had foreign financial assets in
2016, you may have to file Form
8938 with your return. Check Form
8938 and its instructions or
IRS.gov/form8938 for details.
Automatic 6month extension to
file tax return. You can get an au-
tomatic 6-month extension of time
to file your tax return. See chap-
ter 1.
Include your phone number on
your return. To promptly resolve
any questions we have in process-
ing your tax return, we would like to
be able to call you. Please enter
your daytime telephone number on
your tax form next to your signature
and occupation. If you are filing a
joint return, you can enter either
your or your spouse's daytime
phone number.
Payment of taxes. You can pay
your taxes online, by phone, or by
check or money order. You can
make a direct transfer from your
bank account or use a credit or
debit card. See chapter 1.
Faster ways to file your return.
The IRS offers fast, accurate ways
to file your tax return information
without filing a paper tax return.
You can use IRS e-file (electronic
filing). See chapter 1.
Free electronic filing. You may
be able to file your 2016 taxes on-
line for free. See chapter 1.
Change of address. If you
change your address, notify the
IRS. See Change of Address in
chapter 1.
Refund on a late filed return. If
you were due a refund but you did
not file a return, you generally must
file your return within 3 years from
the date the return was due (in-
cluding extensions) to get that re-
fund. See chapter 1.
Frivolous tax returns. The IRS
has published a list of positions
that are identified as frivolous. The
penalty for filing a frivolous tax re-
turn is $5,000. See chapter 1.
Filing erroneous claim for re
fund or credit. You may have to
pay a penalty if you file an errone-
ous claim for refund or credit. See
chapter 1.
Privacy Act and paperwork re
duction information. The IRS
Restructuring and Reform Act of
1998, the Privacy Act of 1974, and
the Paperwork Reduction Act of
1980 require that when we ask you
for information we must first tell you
what our legal right is to ask for the
information, why we are asking for
it, how it will be used, what could
happen if we do not receive it, and
whether your response is volun-
tary, required to obtain a benefit, or
mandatory under the law. A com-
plete statement on this subject can
be found in your tax form instruc-
tions.
Preparer e-file mandate. Most
paid preparers must e-file returns
they prepare and file. Your pre-
parer may make you aware of this
requirement and the options avail-
able to you.
Treasury Inspector General for
Tax Administration. If you want
to confidentially report misconduct,
waste, fraud, or abuse by an IRS
employee, you can call
1-800-366-4484 (call
1-800-877-8339 if you are deaf,
hard of hearing, or have a speech
disability, and are using TTY/TDD
equipment). You can remain anon-
ymous.
Photographs of missing chil
dren. The Internal Revenue Serv-
ice is a proud partner with the
National Center for Missing &
Exploited Children® (NCMEC).
Photographs of missing children
selected by the Center may appear
in this publication on pages that
would otherwise be blank. You can
help bring these children home by
looking at the photographs and
calling 1-800-THE-LOST
(1-800-843-5678) if you recognize
a child.
Introduction
This publication covers the general
rules for filing a federal income tax
return. It supplements the informa-
tion contained in your tax form in-
structions. It explains the tax law to
make sure you pay only the tax you
owe and no more.
How this publication is ar
ranged. This publication closely
follows Form 1040, U.S. Individual
Income Tax Return. It is divided
into six parts which cover different
sections of Form 1040. Each part
is further divided into chapters
which generally discuss one line of
the form. Do not worry if you file
Form 1040A or Form 1040EZ. Any-
thing included on a line of either of
these forms is also included on
Form 1040.
The table of contents inside the
front cover and the index in the
back of the publication are useful
tools to help you find the informa-
tion you need.
What is in this publication. The
publication begins with the rules for
filing a tax return. It explains:
1. Who must file a return,
2. Which tax form to use,
3. When the return is due,
4. How to e-file your return, and
5. Other general information.
It will help you identify which filing
status you qualify for, whether you
can claim any dependents, and
whether the income you receive is
taxable. The publication goes on to
explain the standard deduction, the
kinds of expenses you may be able
to deduct, and the various kinds of
credits you may be able to take to
reduce your tax.
Throughout the publication are
examples showing how the tax law
applies in typical situations. Also
throughout the publication are flow-
charts and tables that present tax
information in an easy-to-under-
stand manner.
Many of the subjects discussed
in this publication are discussed in
greater detail in other IRS publica-
tions. References to those other
publications are provided for your
information.
Icons. Small graphic symbols,
or icons, are used to draw your at-
tention to special information. See
Table 1 for an explanation of each
icon used in this publication.
What is not covered in this pub
lication. Some material that you
may find helpful is not included in
this publication but can be found in
your tax form instruction booklet.
This includes lists of:
Where to report certain items
shown on information docu-
ments, and
Tax Topics you can read at
IRS.gov/taxtopics.
If you operate your own busi-
ness or have other self-employ-
ment income, such as from baby-
sitting or selling crafts, see the
following publications for more in-
formation.
Pub. 334, Tax Guide for Small
Business (For Individuals
Who Use Schedule C or
C-EZ).
Pub. 535, Business Expen-
ses.
Pub. 587, Business Use of
Your Home (Including Use by
Daycare Providers).
Help from the IRS. There are
many ways you can get help from
the IRS. These are explained un-
der How To Get Tax Help in the
back of this publication.
Comments and suggestions.
We welcome your comments
about this publication and your
suggestions for future editions.
You can send us comments
from IRS.gov/forms. Click on “More
Information” and then on “Give us
feedback.”
Or you can write to:
Internal Revenue Service
Tax Forms and Publications
1111 Constitution Ave. NW,
IR-6526
Washington, DC 20224
We respond to many letters by
telephone. Therefore, it would be
helpful if you would include your
daytime phone number, including
the area code, in your correspond-
ence.
Although we cannot respond in-
dividually to each comment re-
ceived, we do appreciate your
feedback and will consider your
comments as we revise our tax
products.
Ordering forms and publica-
tions. Visit IRS.gov/forms to
download forms and publications.
Otherwise, you can go to IRS.gov/
orderforms to order current and
prior-year forms and instructions.
Your order should arrive within 10
business days.
Tax questions. If you have a
tax question not answered by this
publication, check IRS.gov and
How To Get Tax Help at the end of
this publication.
IRS mission. Provide America's
taxpayers top-quality service by
helping them understand and meet
their tax responsibilities and en-
force the law with integrity and fair-
ness to all.
Page 2 Publication 17 (2016)
Table 1. Legend of Icons
Icon ExplanationCAUTION
!
Items that may cause you particular problems, or an alert about pending legislation that may be enacted after
this publication goes to print.
An Internet site or an email address.
An address you may need.RECORDS
Items you should keep in your personal records.
Items you may need to figure or a worksheet you may need to complete and keep for your records.
An important phone number.TIP
Helpful information you may need.
Publication 17 (2016) Page 3
Part One.
The Income Tax
Return
The four chapters in this part provide basic information on the tax system.
They take you through the first steps of filling out a tax return—such as
deciding what your filing status is, how many exemptions you can take, and
what form to file. They also discuss recordkeeping requirements, IRS e-file
(electronic filing), certain penalties, and the two methods used to pay tax
during the year: withholding and estimated tax.
1.
Filing
Information
What's New
Due date of return. The due date to file your
tax return is April 18, 2017. The due date is
April 18, instead of April 15, because of the
Emancipation Day holiday in the District of Co-
lumbia—even if you do not live in the District of
Columbia.
Cash payment option. There is a new option
for taxpayers whose only option is to pay their
taxes in cash. For details see Pay by cash un-
der How To Pay.
Get transcript online. The Get Transcript On-
line tool on IRS.gov is available again to get a
copy of your tax transcript and similar docu-
ments. To guard against fraud, you will now
need to go through a two-step authentication
process in order to use the online tool. For more
information, go to IRS.gov/transcript.
Electronic Filing PIN request. Electronic Fil-
ing PIN request, an IRS-generated PIN used to
verify your signature on your self-prepared,
electronic tax return, is no longer available. To
validate your signature, you must use your
prior-year adjusted gross income or prior-year
self-select PIN.
Individual taxpayer identification number
(ITIN) renewal. If you were assigned an ITIN
before January 1, 2013, or if you have an ITIN
that you haven’t included on a tax return in the
last three consecutive years, you may need to
renew it. For more information, see the instruc-
tions for Form W-7.
Delivery services. Eight delivery services
have been added to the list of designated pri-
vate delivery services. For the complete list,
see Private delivery services, later, under When
Do I Have To File.
Who must file. Generally, the amount of in-
come you can receive before you must file a re-
turn has been increased. See Table 1-1, Ta-
ble 1-2, and Table 1-3 for the specific amounts.
Reminders
File online. Rather than filing a return on pa-
per, you may be able to file electronically using
IRS e-file. For more information, see Why
Should I File Electronically, later.
Change of address. If you change your ad-
dress, you should notify the IRS. You can use
Form 8822 to notify the IRS of the change. See
Change of Address, later, under What Happens
After I File.
Enter your social security number. You
must enter your social security number (SSN) in
the spaces provided on your tax return. If you
file a joint return, enter the SSNs in the same or-
der as the names.
Direct deposit of refund. Instead of getting a
paper check, you may be able to have your re-
fund deposited directly into your account at a
bank or other financial institution. See Direct
Deposit under Refunds, later. If you choose di-
rect deposit of your refund, you may be able to
split the refund among two or three accounts.
Pay online or by phone. If you owe additional
tax, you may be able to pay online or by phone.
See How To Pay, later.
Installment agreement. If you can’t pay the
full amount due with your return, you may ask to
make monthly installment payments. See In-
stallment Agreement, later, under Amount You
Owe. You may be able to apply online for a pay-
ment agreement if you owe federal tax, interest,
and penalties.
Automatic 6month extension. You can get
an automatic 6-month extension to file your tax
return if, no later than the date your return is
due, you file Form 4868, Application for Auto-
matic Extension of Time To File U.S. Individual
Income Tax Return. See Automatic Extension,
later.
Service in combat zone. You are allowed ex-
tra time to take care of your tax matters if you
are a member of the Armed Forces who served
in a combat zone, or if you served in the combat
zone in support of the Armed Forces. See Indi-
viduals Serving in Combat Zone, later, under
When Do I Have To File.
Adoption taxpayer identification number. If
a child has been placed in your home for purpo-
ses of legal adoption and you won't be able to
get a social security number for the child in time
to file your return, you may be able to get an
adoption taxpayer identification number (ATIN).
For more information, see Social Security Num-
ber (SSN), later.
Taxpayer identification number for aliens.
If you or your dependent is a nonresident or res-
ident alien who doesn't have and isn't eligible to
get a social security number, file Form W-7, Ap-
plication for IRS Individual Taxpayer Identifica-
tion Number, with the IRS. For more informa-
tion, see Social Security Number (SSN), later.
Frivolous tax submissions. The IRS has
published a list of positions that are identified as
frivolous. The penalty for filing a frivolous tax re-
turn is $5,000. Also, the $5,000 penalty will ap-
ply to other specified frivolous submissions. For
more information, see Civil Penalties, later.
Introduction
This chapter discusses the following topics.
Whether you have to file a return.
Which form to use.
How to file electronically.
How to file for free.
When, how, and where to file your return.
What happens if you pay too little or too
much tax.
What records you should keep and how
long you should keep them.
How you can change a return you have al-
ready filed.
Do I Have To
File a Return?
You must file a federal income tax return if you
are a citizen or resident of the United States or
a resident of Puerto Rico and you meet the filing
requirements for any of the following categories
that apply to you.
1. Individuals in general. (There are special
rules for surviving spouses, executors, ad-
ministrators, legal representatives, U.S.
citizens and residents living outside the
United States, residents of Puerto Rico,
and individuals with income from U.S. pos-
sessions.)
2. Dependents.
3. Certain children under age 19 or full-time
students.
Page 4 Chapter 1 Filing Information
4. Self-employed persons.
5. Aliens.
The filing requirements for each category are
explained in this chapter.
The filing requirements apply even if you
don't owe tax.
Even if you don't have to file a return, it
may be to your advantage to do so.
See Who Should File, later.
File only one federal income tax return
for the year regardless of how many
jobs you had, how many Forms W-2
you received, or how many states you lived in
during the year. Don't file more than one original
return for the same year, even if you have not
gotten your refund or have not heard from the
IRS since you filed.
Individuals—In General
If you are a U.S. citizen or resident, whether you
must file a return depends on three factors.
1. Your gross income.
2. Your filing status.
3. Your age.
To find out whether you must file, see Ta-
ble 1-1, Table 1-2, and Table 1-3. Even if no ta-
ble shows that you must file, you may need to
file to get money back. See Who Should File,
later.
Gross income. This includes all income you
receive in the form of money, goods, property,
and services that isn't exempt from tax. It also
includes income from sources outside the Uni-
ted States or from the sale of your main home
(even if you can exclude all or part of it). Include
part of your social security benefits if:
1. You were married, filing a separate return,
and you lived with your spouse at any time
during 2016; or
2. Half of your social security benefits plus
your other gross income and any tax-ex-
empt interest is more than $25,000
($32,000 if married filing jointly).
If either (1) or (2) applies, see the instructions
for Form 1040 or 1040A, or Pub. 915, Social
Security and Equivalent Railroad Retirement
Benefits, to figure the social security benefits
you must include in gross income.
Common types of income are discussed in
Part Two of this publication.
Community income. If you are married and
your permanent home is in a community prop-
erty state, half of any income described by state
law as community income may be considered
yours. This affects your federal taxes, including
whether you must file if you don't file a joint re-
turn with your spouse. See Pub. 555 for more
information.
Nevada, Washington, and California do-
mestic partners. A registered domestic part-
ner in Nevada, Washington, or California gener-
ally must report half the combined community
income of the individual and his or her domestic
partner. See Pub. 555.TIPCAUTION
!
Self-employed individuals. If you are
self-employed, your gross income includes the
amount on line 7 of Schedule C (Form 1040),
Profit or Loss From Business; line 1 of Sched-
ule C-EZ (Form 1040), Net Profit From Busi-
ness; and line 9 of Schedule F (Form 1040),
Profit or Loss From Farming. See Self-Em-
ployed Persons, later, for more information
about your filing requirements.
If you don't report all of your self-em-
ployment income, your social security
benefits may be lower when you retire.
Filing status. Your filing status depends on
whether you are single or married and on your
family situation. Your filing status is determined
on the last day of your tax year, which is De-
cember 31 for most taxpayers. See chapter 2
for an explanation of each filing status.
Age. If you are 65 or older at the end of the
year, you generally can have a higher amount
of gross income than other taxpayers before
you must file. See Table 1-1. You are consid-
ered 65 on the day before your 65th birthday.
For example, if your 65th birthday is on January
1, 2017, you are considered 65 for 2016.CAUTION
!
Surviving Spouses,
Executors, Administrators,
and Legal Representatives
You must file a final return for a decedent (a
person who died) if both of the following are
true.
You are the surviving spouse, executor,
administrator, or legal representative.
The decedent met the filing requirements
at the date of death.
For more information on rules for filing a de-
cedent's final return, see Pub. 559.
U.S. Citizens and Resident Aliens
Living Abroad
To determine whether you must file a return, in-
clude in your gross income any income you re-
ceived abroad, including any income you can
exclude under the foreign earned income exclu-
sion. For information on special tax rules that
may apply to you, see Pub. 54. It is available
online and at most U.S. embassies and consu-
lates. See How To Get Tax Help in the back of
this publication.
Residents of Puerto Rico
If you are a U.S. citizen and also a bona fide
resident of Puerto Rico, you generally must file
a U.S. income tax return for any year in which
you meet the income requirements. This is in
Table 1-1. 2016 Filing Requirements for Most Taxpayers
IF your filing status is...
AND at the end of 2016 you
were...*
THEN file a return if
your gross income
was at least...**
single under 65 $10,350
65 or older $11,900
married filing jointly*** under 65 (both spouses) $20,700
65 or older (one spouse) $21,950
65 or older (both spouses) $23,200
married filing separately any age $ 4,050
head of household under 65 $13,350
65 or older $14,900
qualifying widow(er) with
dependent child
under 65 $16,650
65 or older $17,900
* If you were born on January 1, 1952, you are considered to be age 65 at the end of 2016. (If your spouse
died in 2016 or if you are preparing a return for someone who died in 2016, see Pub. 501.)
** Gross income means all income you received in the form of money, goods, property, and services that
isn't exempt from tax, including any income from sources outside the United States or from the sale of
your main home (even if you can exclude part or all of it). Don't include any social security benefits unless
(a) you are married filing a separate return and you lived with your spouse at any time during 2016 or (b)
one-half of your social security benefits plus your other gross income and any tax-exempt interest is more
than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the instructions for Form 1040 or
1040A or Pub. 915 to figure the taxable part of social security benefits you must include in gross income.
Gross income includes gains, but not losses, reported on Form 8949 or Schedule D. Gross income from
a business means, for example, the amount on Schedule C, line 7, or Schedule F, line 9. But, in figuring
gross income, don't reduce your income by any losses, including any loss on Schedule C, line 7, or
Schedule F, line 9.
*** If you didn't live with your spouse at the end of 2016 (or on the date your spouse died) and your gross
income was at least $4,050, you must file a return regardless of your age.
Chapter 1 Filing Information Page 5
addition to any legal requirement you may have
to file an income tax return with Puerto Rico.
If you are a bona fide resident of Puerto Rico
for the entire year, your U.S. gross income
doesn't include income from sources within Pu-
erto Rico. It does, however, include any income
you received for your services as an employee
of the United States or a U.S. agency. If you re-
ceive income from Puerto Rican sources that
isn't subject to U.S. tax, you must reduce your
standard deduction. As a result, the amount of
income you must have before you are required
to file a U.S. income tax return is lower than the
applicable amount in Table 1-1 or Table 1-2.
For more information, see Pub. 570.
Individuals With Income From
U.S. Possessions
If you had income from Guam, the Common-
wealth of the Northern Mariana Islands, Ameri-
can Samoa, or the U.S. Virgin Islands, special
rules may apply when determining whether you
must file a U.S. federal income tax return. In ad-
dition, you may have to file a return with the in-
dividual island government. See Pub. 570 for
more information.
Dependents
If you are a dependent (one who meets the de-
pendency tests in chapter 3), see Table 1-2 to
find out whether you must file a return. You also
must file if your situation is described in Ta-
ble 1-3.
Responsibility of parent. Generally, a child is
responsible for filing his or her own tax return
and for paying any tax on the return. If a de-
pendent child must file an income tax return but
can’t file due to age or any other reason, then a
parent, guardian, or other legally responsible
person must file it for the child. If the child can’t
sign the return, the parent or guardian must sign
the child's name followed by the words “By
(your signature), parent for minor child.”
Child's earnings. Amounts a child earns by
performing services are included in his or her
gross income and not the gross income of the
parent. This is true even if under local law the
child's parent has the right to the earnings and
may actually have received them. But if the
child doesn't pay the tax due on this income,
the parent is liable for the tax.
Certain Children Under
Age 19 or FullTime
Students
If a child's only income is interest and dividends
(including capital gain distributions and Alaska
Permanent Fund dividends), the child was un-
der age 19 at the end of 2016 or was a full-time
student under age 24 at the end of 2016, and
certain other conditions are met, a parent can
elect to include the child's income on the pa-
rent's return. If this election is made, the child
doesn't have to file a return. See Parent's Elec-
tion To Report Child's Interest and Dividends in
chapter 31.
SelfEmployed Persons
You are self-employed if you:
Carry on a trade or business as a sole pro-
prietor,
Are an independent contractor,
Are a member of a partnership, or
Are in business for yourself in any other
way.
Self-employment can include work in addi-
tion to your regular full-time business activities,
such as certain part-time work you do at home
or in addition to your regular job.
You must file a return if your gross income is
at least as much as the filing requirement
amount for your filing status and age (shown in
Table 1-1). Also, you must file Form 1040 and
Schedule SE (Form 1040), Self-Employment
Tax, if:
1. Your net earnings from self-employment
(excluding church employee income) were
$400 or more, or
2. You had church employee income of
$108.28 or more. (See Table 1-3.)
Use Schedule SE (Form 1040) to figure your
self-employment tax. Self-employment tax is
comparable to the social security and Medicare
tax withheld from an employee's wages. For
more information about this tax, see Pub. 334,
Tax Guide for Small Business.
Employees of foreign governments or in-
ternational organizations. If you are a U.S.
citizen who works in the United States for an in-
ternational organization, a foreign government,
or a wholly owned instrumentality of a foreign
government, and your employer isn't required to
withhold social security and Medicare taxes
from your wages, you must include your earn-
ings from services performed in the United
States when figuring your net earnings from
self-employment.
Ministers. You must include income from
services you performed as a minister when fig-
uring your net earnings from self-employment,
unless you have an exemption from self-em-
ployment tax. This also applies to Christian Sci-
ence practitioners and members of a religious
order who have not taken a vow of poverty. For
more information, see Pub. 517, Social Security
and Other Information for Members of the
Clergy and Religious Workers.
Aliens
Your status as an alien (resident, nonresident,
or dual-status) determines whether and how
you must file an income tax return.
The rules used to determine your alien sta-
tus are discussed in Pub. 519, U.S. Tax Guide
for Aliens.
Resident alien. If you are a resident alien for
the entire year, you must file a tax return follow-
ing the same rules that apply to U.S. citizens.
Use the forms discussed in this publication.
Nonresident alien. If you are a nonresident
alien, the rules and tax forms that apply to you
are different from those that apply to U.S. citi-
zens and resident aliens. See Pub. 519 to find
out if U.S. income tax laws apply to you and
which forms you should file.
Dualstatus taxpayer. If you are a resident
alien for part of the tax year and a nonresident
alien for the rest of the year, you are a dual-sta-
tus taxpayer. Different rules apply for each part
of the year. For information on dual-status tax-
payers, see Pub. 519.
Who Should File
Even if you don't have to file, you should file a
federal income tax return to get money back if
any of the following conditions apply.
1. You had federal income tax withheld or
made estimated tax payments.
2. You qualify for the earned income credit.
See chapter 36 for more information.
3. You qualify for the additional child tax
credit. See chapter 34 for more informa-
tion.
4. You qualify for the premium tax credit. See
chapter 37 for more information.
5. You qualify for the health coverage tax
credit. See chapter 38 for more informa-
tion.
6. You qualify for the American opportunity
credit. See chapter 35 for more informa-
tion.
7. You qualify for the credit for federal tax on
fuels. See chapter 38 for more informa-
tion.
Which Form
Should I Use?
You must use one of three forms to file your re-
turn: Form 1040EZ, Form 1040A, or Form 1040.
(But also see Why Should I File Electronically,
later.)
See the discussion under Form 1040
for when you must use that form.
Form 1040EZ
Form 1040EZ is the simplest form to use.
You can use Form 1040EZ if all of the fol
lowing apply.
1. Your filing status is single or married filing
jointly. If you were a nonresident alien at
any time in 2016, your filing status must be
married filing jointly.
2. You (and your spouse if married filing a
joint return) were under age 65 and not
blind at the end of 2016. If you were born
on January 1, 1952, you are considered to
be age 65 at the end of 2016.
3. You don't claim any dependents.
4. Your taxable income is less than
$100,000.
5. Your income is only from wages, salaries,
tips, unemployment compensation, AlaskaTIP
Page 6 Chapter 1 Filing Information
Permanent Fund dividends, taxable schol-
arship and fellowship grants, and taxable
interest of $1,500 or less.
6. You don't claim any adjustments to in-
come, such as a deduction for IRA contri-
butions or student loan interest.
7. You don't claim any credits other than the
earned income credit.
8. You don't owe any household employment
taxes on wages you paid to a household
employee.
9. If you earned tips, they are included in
boxes 5 and 7 of your Form W-2.
10. You are not a debtor in a chapter 11 bank-
ruptcy case filed after October 16, 2005.
You must meet all of these requirements to
use Form 1040EZ. If you don't, you must use
Form 1040A or Form 1040.
Figuring tax. On Form 1040EZ, you can use
only the tax table to figure your income tax. You
can find the tax table in the Instructions for
Form 1040EZ. You can’t use Form 1040EZ to
report any other tax.
Form 1040A
If you don't qualify to use Form 1040EZ, you
may be able to use Form 1040A.
You can use Form 1040A if all of the follow
ing apply.
1. Your income is only from:
a. Wages, salaries, and tips,
b. Interest,
c. Ordinary dividends (including Alaska
Permanent Fund dividends),
d. Capital gain distributions,
e. IRA distributions,
f. Pensions and annuities,
g. Unemployment compensation,
h. Taxable social security and railroad
retirement benefits, and
i. Taxable scholarship and fellowship
grants.
If you receive a capital gain distribution
that includes unrecaptured section 1250
gain, section 1202 gain, or collectibles
(28%) gain, you can’t use Form 1040A.
You must use Form 1040.
2. Your taxable income is less than
$100,000.
3. Your adjustments to income are for only
the following items.
a. Educator expenses.
b. IRA deduction.
c. Student loan interest deduction.
d. Tuition and fees.
4. You don't itemize your deductions.
5. You claim only the following tax credits.
a. The credit for child and dependent
care expenses. (See chapter 32.)
b. The credit for the elderly or the disa-
bled. (See chapter 33.)
c. The education credits. (See chap-
ter 35.)
d. The retirement savings contributions
credit. (See chapter 38.)
e. The child tax credit. (See chapter 34.)
f. The earned income credit. (See chap-
ter 36.)
g. The additional child tax credit. (See
chapter 34.)
h. The premium tax credit. (See chap-
ter 37.)
6. You didn't have an alternative minimum
tax adjustment on stock you acquired from
the exercise of an incentive stock option.
(See Pub. 525.)
You can also use Form 1040A if you re-
ceived employer-provided dependent care ben-
efits or if you owe tax from the recapture of an
education credit or the alternative minimum tax.
You must meet all these requirements to
use Form 1040A. If you don't, you must use
Form 1040.
Form 1040
If you can’t use Form 1040EZ or Form 1040A,
you must use Form 1040. You can use Form
1040 to report all types of income, deductions,
and credits.
You may pay less tax by filing Form 1040
because you can take itemized deductions,
some adjustments to income, and credits you
can’t take on Form 1040A or Form 1040EZ.
You must use Form 1040 if any of the fol
lowing apply.
1. Your taxable income is $100,000 or more.
2. You itemize your deductions on Sched-
ule A.
3. You had income that can’t be reported on
Form 1040EZ or Form 1040A, including
tax-exempt interest from private activity
bonds issued after August 7, 1986.
4. You claim any adjustments to gross in-
come other than the adjustments listed
earlier under Form 1040A.
2016 Filing Requirements for Dependents
See chapter 3 to find out if someone can claim you as a dependent.
If your parents (or someone else) can claim you as a dependent, use this table to see if you
must file a return. (See Table 1-3 for other situations when you must file.)
In this table, unearned income includes taxable interest, ordinary dividends, and capital gain
distributions. It also includes unemployment compensation, taxable social security benefits,
pensions, annuities, and distributions of unearned income from a trust. Earned income includes
salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. (See
Scholarships and fellowships in chapter 12.) Gross income is the total of your earned and
unearned income.CAUTION
!
If your gross income was $4,050 or more, you usually can’t be claimed as a
dependent unless you are a qualifying child. For details, see Exemptions for Dependents, in
chapter 3.
Single dependents—Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
• Your unearned income was more than $1,050.
• Your earned income was more than $6,300.
• Your gross income was more than the larger of:
• $1,050, or
• Your earned income (up to $5,950) plus $350.
Yes. You must file a return if any of the following apply.
• Your unearned income was more than $2,600 ($4,150 if 65 or older and blind).
• Your earned income was more than $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 dependents—Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
• Your unearned income was more than $1,050.
• Your earned income was more than $6,300.
• Your gross income was at least $5 and your spouse files a separate return and
itemizes deductions.
• Your gross income was more than the larger of:
• $1,050, or
• Your earned income (up to $5,950) plus $350.
Yes. You must file a return if any of the following apply.
• Your unearned income was more than $2,300 ($3,550 if 65 or older and blind).
• Your earned income was more than $7,550 ($8,800 if 65 or older and blind).
• Your gross income was at least $5 and your spouse files 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).
Table 1-2.
Chapter 1 Filing Information Page 7
5. Your Form W-2, box 12, shows uncollec-
ted employee tax (social security and
Medicare tax) on tips (see chapter 6) or
group-term life insurance (see chapter 5).
6. You received $20 or more in tips in any 1
month and didn't report all of them to your
employer. (See chapter 6.)
7. You were a bona fide resident of Puerto
Rico and exclude income from sources in
Puerto Rico.
8. You claim any credits other than the cred-
its listed earlier under Form 1040A.
9. You owe the excise tax on insider stock
compensation from an expatriated corpo-
ration.
10. Your Form W-2 shows an amount in
box 12 with a code Z.
11. You had a qualified health savings ac-
count funding distribution from your IRA.
12. You are an employee and your employer
didn't withhold social security and Medi-
care tax.
13. You have to file other forms with your re-
turn to report certain exclusions, taxes, or
transactions, such as Form 8959 or Form
8960.
14. You are a debtor in a bankruptcy case
filed after October 16, 2005.
15. You must repay the first-time homebuyer
credit.
16. You have adjusted gross income of more
than $155,650 and must reduce the dollar
amount of your exemptions.
17. You received a Form W-2 that incorrectly
includes in box 1 amounts that are pay-
ments under a Medicaid waiver program,
and you can’t get a corrected Form W-2.
Why Should I File
Electronically?
Electronic Filing
If your adjusted gross income (AGI) is less than
a certain amount, you are eligible for Free File,
a free tax software service offered by IRS part-
ners, to prepare and e-file your return for free. If
your income is over the amount, you are still eli-
gible for Free File Fillable Forms, an electronic
version of IRS paper forms. Table 1-4 lists the
free ways to electronically file your return.
IRS e-file uses automa-
tion to replace most of the
manual steps needed to process paper returns.
As a result, the processing of e-file returns is
faster and more accurate than the processing of
paper returns. However, as with a paper return,
you are responsible for making sure your return
contains accurate information and is filed on
time.
If your return is filed with IRS e-file, you will re-
ceive an acknowledgment that your return was
received and accepted. If you owe tax, you can
e-file and pay electronically. The IRS has pro-
cessed more than one billion e-filed returns
safely and securely. Using e-file doesn't affect
your chances of an IRS examination of your re-
turn.
Electronic return signatures. To file your re-
turn electronically, you must sign the return
electronically using a personal identification
number (PIN). If you are filing online, you must
use a Self-Select PIN. If you are filing electroni-
cally using a tax practitioner, you can use a
Self-Select PIN or a Practitioner PIN.
SelfSelect PIN. The Self-Select PIN method
allows you to create your own PIN. If you are
married filing jointly, you and your spouse will
each need to create a PIN and enter these PINs
as your electronic signatures.
A PIN is any combination of five digits you
choose except five zeros. If you use a PIN,
there is nothing to sign and nothing to mail—not
even your Forms W-2.
To verify your identity, you will be prompted
to enter your adjusted gross income (AGI) from
your originally filed 2015 federal income tax re-
turn, if applicable. Don't use your AGI from an
amended return (Form 1040X) or a math error
correction made by the IRS. AGI is the amount
shown on your 2015 Form 1040, line 38; Form
1040A, line 22; or Form 1040EZ, line 4. If you
don't have your 2015 income tax return, you
can request a transcript by using our automated
self-service tool. Go to IRS.gov/transcript. (If
you filed electronically last year, you may use
your prior year PIN to verify your identity instead
of your prior year AGI. The prior year PIN is the
five-digit PIN you used to electronically sign
your 2015 return.) You will also be prompted to
enter your date of birth.
You can’t use the Self-Select PIN
method if you are a first-time filer under
age 16 at the end of 2016.
Practitioner PIN. The Practitioner PIN method
allows you to authorize your tax practitioner to
enter or generate your PIN. The practitioner can
provide you with details.
Form 8453. You must send in a paper Form
8453 if you have to attach certain forms or other
documents that can’t be electronically filed. For
details, see Form 8453.
For more details, visit IRS.gov/efile.
Identity Protection PIN. If the IRS gave you
an identity protection personal identificationCAUTION
!
Table 1-3. Other Situations When You Must File a 2016 Return
You must file a return if any of the five conditions below apply for 2016.
1. You owe any special taxes, including any of the following.
a. Alternative minimum tax.
b. Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. But if
you are filing a return only because you owe this tax, you can file Form 5329 by itself.
c. Household employment taxes. But if you are filing a return only because you owe this tax, you can file Schedule H by itself.
d. Social security and Medicare tax on tips you didn't report to your employer or on wages you received from an employer who
didn't withhold these taxes.
e. Recapture of first-time homebuyer credit.
f. Write-in taxes, including uncollected social security and Medicare or RRTA tax on tips you reported to your employer or on
group-term life insurance and additional taxes on health savings accounts.
g. Recapture taxes.
2. You (or your spouse, if filing jointly) received health savings account, Archer MSA, or Medicare Advantage MSA distributions.
3. You had net earnings from self-employment of at least $400.
4. You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer
social security and Medicare taxes.
5. Advance payments of the premium tax credit were made for you, your spouse, or a dependent who enrolled in coverage
through the Marketplace. You or whoever enrolled you should have received Form(s) 1095-A showing the amount of the
advance payments.
Page 8 Chapter 1 Filing Information
number (IP PIN) because you were a victim of
identity theft, enter it in the spaces provided on
your tax form. If the IRS hasn’t given you this
type of number, leave these spaces blank. For
more information, see the instructions for Form
1040A or Form 1040.
Power of attorney. If an agent is signing your
return for you, a power of attorney (POA) must
be filed. Attach the POA to Form 8453 and file it
using that form's instructions. See Signatures,
later, for more information on POAs.
State returns. In most states, you can file an
electronic state return simultaneously with your
federal return. For more information, check with
your local IRS office, state tax agency, tax pro-
fessional, or the IRS website at
IRS.gov/efile.
Refunds. You can have a refund check mailed
to you, or you can have your refund deposited
directly to your checking or savings account or
split among two or three accounts. With e-file,
your refund will be issued faster than if you filed
on paper.
As with a paper return, you may not get all of
your refund if you owe certain past-due
amounts, such as federal tax, state income tax,
state unemployment compensation debts, child
support, spousal support, or certain other fed-
eral nontax debts, such as student loans. See
Offset against debts under Refunds, later.
Refund inquiries. Information about your re-
turn will generally be available within 24 hours
after the IRS receives your e-filed return. See
Refund Information, later.
Amount you owe. To avoid late-payment pen-
alties and interest, pay your taxes in full by April
18, 2017. The due date is April 18, instead of
April 15, because of the Emancipation Day holi-
day in the District of Columbia—even if you
don't live in the District of Columbia. See How
To Pay, later, for information on how to pay the
amount you owe.
Using Your Personal Computer
You can file your tax return in a fast,
easy, and convenient way using your
personal computer. A computer with In-
ternet access and tax preparation software are
all you need. Best of all, you can e-file from the
comfort of your home 24 hours a day, 7 days a
week.
IRS approved tax preparation software is avail-
able for online use on the Internet, for download
from the Internet, and in retail stores.
For information, visit IRS.gov/efile.
Through Employers and Financial
Institutions
Some businesses offer free e-file to their em-
ployees, members, or customers. Others offer it
for a fee. Ask your employer or financial institu-
tion if they offer IRS e-file as an employee,
member, or customer benefit.
Free Help With Your Return
Free help in preparing your return is available
nationwide from IRS-trained volunteers. The
Volunteer Income Tax Assistance (VITA) pro-
gram is designed to help low-to-moderate in-
come taxpayers and the Tax Counseling for the
Elderly (TCE) program is designed to assist tax-
payers age 60 or older with their tax returns.
Many VITA sites offer free electronic filing and
all volunteers will let you know about the credits
and deductions you may be entitled to claim. To
find a site near you, call 1-800-906-9887. Or to
find the nearest AARP TaxAide site, visit
AARP's website at www.aarp.org/taxaide or call
1-888-227-7669. For more information on these
programs, go to IRS.gov and enter keyword
“VITA” in the search box.
Using a Tax Professional
Many tax professionals electronically file tax re-
turns for their clients. You may personally enter
your PIN or complete Form 8879, IRS e-file Sig-
nature Authorization, to authorize the tax pro-
fessional to enter your PIN on your return.
Note. Tax professionals may charge a fee
for IRS e-file. Fees can vary depending on the
professional and the specific services rendered.
When Do I
Have To File?
April 18, 2017, is the due date for filing your
2016 income tax return if you use the calendar
year. For a quick view of due dates for filing a
return with or without an extension of time to file
(discussed later), see Table 1-5.
If you use a fiscal year (a year ending on the
last day of any month except December, or a
52-53-week year), your income tax return is due
by the 15th day of the 4th month after the close
of your fiscal year.
When the due date for doing any act for tax
purposes—filing a return, paying taxes,
etc.—falls on a Saturday, Sunday, or legal
holiday, the due date is delayed until the next
business day.
Filing paper returns on time. Your paper re-
turn is filed on time if it is mailed in an envelope
that is properly addressed, has enough post-
age, and is postmarked by the due date. If you
send your return by registered mail, the date of
the registration is the postmark date. The regis-
tration is evidence that the return was delivered.
If you send a return by certified mail and have
your receipt postmarked by a postal employee,
the date on the receipt is the postmark date.
The postmarked certified mail receipt is evi-
dence that the return was delivered.
Private delivery services. If you use a pri-
vate delivery service designated by the IRS to
send your return, the postmark date generally is
the date the private delivery service records in
its database or marks on the mailing label. The
private delivery service can tell you how to get
written proof of this date.
The following are designated private deliv-
ery services.
DHL Express 9:00, DHL Express 10:30,
DHL Express 12:00, DHL Express World-
wide, DHL Express Envelope, DHL Import
Express 10:30, DHL Import Express 12:00,
and DHL Import Express Worldwide.
United Parcel Service (UPS): UPS Next
Day Air Early AM, UPS Next Day Air, UPS
Next Day Air Saver, UPS 2nd Day Air, UPS
2nd Day Air A.M., UPS Worldwide Express
Plus, and UPS Worldwide Express.
Federal Express (FedEx): FedEx First
Overnight, FedEx Priority Overnight, Fe-
dEx Standard Overnight, FedEx 2 Day, Fe-
dEx International Next Flight Out, FedEx
International Priority, FedEx International
First, and FedEx International Economy.
For more information, go to IRS.gov and en-
ter “private delivery service” in the search box.
The search results will direct you to the IRS
Table 1-4. Free Ways To e-file
Use Free File for free tax software and free e-file.
• IRS partners offer name-brand products for free.
• Many taxpayers are eligible for Free File software.
• Everyone is eligible for Free File Fillable Forms, electronic version of IRS paper forms.
• Free File software and Free File Fillable Forms are available only at IRS.gov/freefile.
Use VITA/TCE for free tax help from volunteers and free e-file.
• Volunteers prepare your return and e-file it for free.
• Some sites also offer do-it-yourself software.
• You are eligible based either on your income or age.
• Sites are located nationwide. Find one near you by visiting IRS.gov/vita.
When To File Your 2016 Return
For U.S. citizens and residents who file returns on a calendar year.
For Most Taxpayers
For Certain Taxpayers
Outside the U.S.
No extension requested April 18, 2017 June 15, 2017
Automatic extension October 16, 2017 October 16, 2017
Table 1-5.
Chapter 1 Filing Information Page 9
mailing address to use if you are using a private
delivery service. You will also find any updates
to the list of designated private delivery serv-
ices.
The private delivery service can tell you how
to get written proof of the mailing date.
Filing electronic returns on time. If you use
IRS e-file, your return is considered filed on
time if the authorized electronic return transmit-
ter postmarks the transmission by the due date.
An authorized electronic return transmitter is a
participant in the IRS e-file program that trans-
mits electronic tax return information directly to
the IRS.
The electronic postmark is a record of when
the authorized electronic return transmitter re-
ceived the transmission of your electronically
filed return on its host system. The date and
time in your time zone controls whether your
electronically filed return is timely.
Filing late. If you don't file your return by the
due date, you may have to pay a failure-to-file
penalty and interest. For more information, see
Penalties, later. Also see Interest under Amount
You Owe.
If you were due a refund but you didn't file a
return, you generally must file within 3 years
from the date the return was due (including ex-
tensions) to get that refund.
Nonresident alien. If you are a nonresident
alien and earn wages subject to U.S. income
tax withholding, your 2016 U.S. income tax re-
turn (Form 1040NR or Form 1040NR-EZ) is due
by:
April 18, 2017, if you use a calendar year,
or
The 15th day of the 4th month after the
end of your fiscal year if you use a fiscal
year.
If you don't earn wages subject to U.S. in-
come tax withholding, your return is due by:
June 15, 2017, if you use a calendar year,
or
The 15th day of the 6th month after the
end of your fiscal year, if you use a fiscal
year.
See Pub. 519 for more filing information.
Filing for a decedent. If you must file a final
income tax return for a taxpayer who died dur-
ing the year (a decedent), the return is due by
the 15th day of the 4th month after the end of
the decedent's normal tax year. See Pub. 559.
Extensions of Time To File
You may be able to get an extension of time to
file your return. There are three types of situa-
tions where you may qualify for an extension:
Automatic extensions,
You are outside the United States, or
You are serving in a combat zone.
Automatic Extension
If you can’t file your 2016 return by the due
date, you may be able to get an automatic
6-month extension of time to file.
Example. If your return is due on April 18,
2017, you will have until October 16, 2017, to
file.
If you don't pay the tax due by the regu-
lar due date (generally, April 15), you
will owe interest. You may also be
charged penalties, discussed later.
How to get the automatic extension. You
can get the automatic extension by:
1. Using IRS e-file (electronic filing), or
2. Filing a paper form.
E-file options. There are two ways you can
use e-file to get an extension of time to file.
Complete Form 4868, to use as a worksheet. If
you think you may owe tax when you file your
return, use Part II of the form to estimate your
balance due. If you e-file Form 4868 to the IRS,
don't also send a paper Form 4868.
E-file using your personal computer or a
tax professional. You can use a tax software
package with your personal computer or a tax
professional to file Form 4868 electronically.
Free File and Free File Fillable Forms, both
available at IRS.gov, allows you to prepare and
e-file Form 4868 for free. You will need to pro-
vide certain information from your 2015 tax re-
turn. If you wish to make a payment by direct
transfer from your bank account, see Pay on-
line, under How To Pay, later in this chapter.
E-file and pay by credit or debit card or
by direct transfer from your bank account.
You can get an extension by paying part or all of
your estimate of tax due by using a credit or
debit card or by direct transfer from your bank
account. You can do this by phone or over the
Internet. You don't file Form 4868. See Pay on-
line, under How To Pay, later in this chapter.
Filing a paper Form 4868. You can get an ex-
tension of time to file by filing a paper Form
4868. Mail it to the address shown in the form
instructions.
If you want to make a payment with the
form, make your check or money order payable
to “United States Treasury.” Write your SSN,
daytime phone number, and “2016 Form 4868”
on your check or money order.
When to file. You must request the automatic
extension by the due date for your return. You
can file your return any time before the 6-month
extension period ends.
When you file your return. Enter any pay-
ment you made related to the extension of time
to file on Form 1040, line 70. If you file Form
1040EZ or Form 1040A, include that payment in
your total payments on Form 1040EZ, line 9, or
Form 1040A, line 46. Also enter “Form 4868”
and the amount paid in the space to the left of
line 9 or line 46.
Individuals Outside the
United States
You are allowed an automatic 2-month exten-
sion, without filing Form 4868 (until June 15,
2017, if you use the calendar year), to file your
2016 return and pay any federal income tax due
if:CAUTION
!
1. You are a U.S. citizen or resident, and
2. On the due date of your return:
a. You are living outside the United
States and Puerto Rico, and your
main place of business or post of duty
is outside the United States and Pu-
erto Rico, or
b. You are in military or naval service on
duty outside the United States and
Puerto Rico.
However, if you pay the tax due after the
regular due date (generally, April 15), interest
will be charged from that date until the date the
tax is paid.
If you served in a combat zone or qualified
hazardous duty area, you may be eligible for a
longer extension of time to file. See Individuals
Serving in Combat Zone, later, for special rules
that apply to you.
Married taxpayers. If you file a joint return,
only one spouse has to qualify for this auto-
matic extension. If you and your spouse file
separate returns, this automatic extension ap-
plies only to the spouse who qualifies.
How to get the extension. To use this auto-
matic extension, you must attach a statement to
your return explaining what situation qualified
you for the extension. (See the situations listed
under (2), earlier.)
Extensions beyond 2 months. If you can’t file
your return within the automatic 2-month exten-
sion period, you may be able to get an addi-
tional 4-month extension, for a total of 6
months. File Form 4868 and check the box on
line 8.
No further extension. An extension of more
than 6 months will generally not be granted.
However, if you are outside the United States
and meet certain tests, you may be granted a
longer extension. For more information, see
When To File and Pay in Pub. 54.
Individuals Serving in
Combat Zone
The deadline for filing your tax return, paying
any tax you may owe, and filing a claim for re-
fund is automatically extended if you serve in a
combat zone. This applies to members of the
Armed Forces, as well as merchant marines
serving aboard vessels under the operational
control of the Department of Defense, Red
Cross personnel, accredited correspondents,
and civilians under the direction of the Armed
Forces in support of the Armed Forces.
Combat zone. For purposes of the automatic
extension, the term “combat zone” includes the
following areas.
1. The Arabian peninsula area, effective Jan-
uary 17, 1991.
2. The Kosovo area, effective March 24,
1999.
3. Afghanistan area, effective September 19,
2001.
See Pub. 3 for more detailed information on
the locations comprising each combat zone.
The publication also has information about
Page 10 Chapter 1 Filing Information
other tax benefits available to military personnel
serving in a combat zone.
Extension period. The deadline for filing your
return, paying any tax due, and filing a claim for
refund is extended for at least 180 days after
the later of:
1. The last day you are in a combat zone or
the last day the area qualifies as a combat
zone, or
2. The last day of any continuous qualified
hospitalization for injury from service in the
combat zone.
In addition to the 180 days, your deadline is
also extended by the number of days you had
left to take action with the IRS when you en-
tered the combat zone. For example, you have
31 2 months (January 1 – April 15) to file your tax
return. Any days left in this period when you en-
tered the combat zone (or the entire 31 2 months
if you entered it before the beginning of the
year) are added to the 180 days. See Extension
of Deadlines in Pub. 3 for more information.
The rules on the extension for filing your re-
turn also apply when you are deployed outside
the United States (away from your permanent
duty station) while participating in a designated
contingency operation.
How Do I Prepare
My Return?
This section explains how to get ready to fill in
your tax return and when to report your income
and expenses. It also explains how to complete
certain sections of the form. You may find Ta-
ble 1-6 helpful when you prepare your paper re-
turn.
Six Steps for Preparing
Your Paper Return
1 — Get your records together for income
and expenses.
2 — Get the forms, schedules, and
publications you need.
3 — Fill in your return.
4 — Check your return to make sure it is
correct.
5 — Sign and date your return.
6 — Attach all required forms and
schedules.
Electronic returns. For information you may
find useful in preparing an electronic return, see
Why Should I File Electronically, earlier.
Substitute tax forms. You can’t use your own
version of a tax form unless it meets the re-
quirements explained in Pub. 1167.
Form W2. If you were an employee, you
should receive Form W-2 from your employer.
You will need the information from this form to
prepare your return. See Form W-2 under
Credit for Withholding and Estimated Tax in
chapter 4.
Table 1-6.
Your employer is required to provide or send
Form W-2 to you no later than January 31,
2017. If it is mailed, you should allow adequate
time to receive it before contacting your em-
ployer. If you still don't get the form by February
15, the IRS can help you by requesting the form
from your employer. When you request IRS
help, be prepared to provide the following infor-
mation.
Your name, address (including ZIP code),
and phone number.
Your SSN.
Your dates of employment.
Your employer's name, address (including
ZIP code), and phone number.
Form 1099. If you received certain types of in-
come, you may receive a Form 1099. For exam-
ple, if you received taxable interest of $10 or
more, the payer is required to provide or send
Form 1099 to you no later than January 31,
2017 (or by February 15, 2017, if furnished by a
broker). If it is mailed, you should allow ade-
quate time to receive it before contacting the
payer. If you still don't get the form by February
15 (or by March 1, 2017, if furnished by a
broker), call the IRS for help.
When Do I Report My
Income and Expenses?
You must figure your taxable income on the ba-
sis of a tax year. A “tax year” is an annual ac-
counting period used for keeping records and
reporting income and expenses. You must ac-
count for your income and expenses in a way
that clearly shows your taxable income. The
way you do this is called an accounting method.
This section explains which accounting periods
and methods you can use.
Accounting Periods
Most individual tax returns cover a calendar
year—the 12 months from January 1 through
December 31. If you don't use a calendar year,
your accounting period is a fiscal year. A regu-
lar fiscal year is a 12-month period that ends on
the last day of any month except December. A
52-53-week fiscal year varies from 52 to 53
weeks and always ends on the same day of the
week.
You choose your accounting period (tax
year) when you file your first income tax return.
It can’t be longer than 12 months.
More information. For more information on
accounting periods, including how to change
your accounting period, see Pub. 538.
Accounting Methods
Your accounting method is the way you account
for your income and expenses. Most taxpayers
use either the cash method or an accrual
method. You choose a method when you file
your first income tax return. If you want to
change your accounting method after that, you
generally must get IRS approval. Use Form
3115 to request an accounting method change.
Cash method. If you use this method, report
all items of income in the year in which you ac-
tually or constructively receive them. Generally,
you deduct all expenses in the year you actually
pay them. This is the method most individual
taxpayers use.
Constructive receipt. Generally, you con-
structively receive income when it is credited to
your account or set apart in any way that makes
it available to you. You don't need to have phys-
ical possession of it. For example, interest
credited to your bank account on December 31,
2016, is taxable income to you in 2016 if you
could have withdrawn it in 2016 (even if the
amount isn't entered in your records or with-
drawn until 2017).
Garnisheed wages. If your employer uses
your wages to pay your debts, or if your wages
are attached or garnisheed, the full amount is
constructively received by you. You must in-
clude these wages in income for the year you
would have received them.
Debts paid for you. If another person can-
cels or pays your debts (but not as a gift or
loan), you have constructively received the
amount and generally must include it in your
gross income for the year. See Canceled Debts
in chapter 12 for more information.
Payment to third party. If a third party is
paid income from property you own, you have
constructively received the income. It is the
same as if you had actually received the income
and paid it to the third party.
Payment to an agent. Income an agent re-
ceives for you is income you constructively re-
ceived in the year the agent receives it. If you
indicate in a contract that your income is to be
paid to another person, you must include the
amount in your gross income when the other
person receives it.
Check received or available. A valid check
that was made available to you before the end
of the tax year is constructively received by you
in that year. A check that was “made available
to you” includes a check you have already re-
ceived, but not cashed or deposited. It also in-
cludes, for example, your last paycheck of the
year that your employer made available for you
to pick up at the office before the end of the
year. It is constructively received by you in that
year whether or not you pick it up before the
end of the year or wait to receive it by mail after
the end of the year.
No constructive receipt. There may be
facts to show that you didn't constructively re-
ceive income.
Example. Alice Johnson, a teacher, agreed
to her school board's condition that, in her ab-
sence, she would receive only the difference
between her regular salary and the salary of a
substitute teacher hired by the school board.
Therefore, Alice didn't constructively receive
the amount by which her salary was reduced to
pay the substitute teacher.
Accrual method. If you use an accrual
method, you generally report income when you
earn it, rather than when you receive it. You
Chapter 1 Filing Information Page 11
generally deduct your expenses when you incur
them, rather than when you pay them.
Income paid in advance. An advance pay-
ment of income is generally included in gross
income in the year you receive it. Your method
of accounting doesn't matter as long as the in-
come is available to you. An advance payment
may include rent or interest you receive in ad-
vance and pay for services you will perform
later.
A limited deferral until the next tax year may
be allowed for certain advance payments. See
Pub. 538 for specific information.
Additional information. For more information
on accounting methods, including how to
change your accounting method, see Pub. 538.
Social Security Number
(SSN)
You must enter your SSN on your return. If you
are married, enter the SSNs for both you and
your spouse, whether you file jointly or sepa-
rately.
If you are filing a joint return, include the
SSNs in the same order as the names. Use this
same order in submitting other forms and docu-
ments to the IRS.
Check that both the name and SSN on your
Form 1040, W-2, and 1099 agree with your so-
cial security card. If they don't, certain deduc-
tions and credits on your Form 1040 may be re-
duced or disallowed and you may not receive
credit for your social security earnings. If your
Form W-2 shows an incorrect SSN or name,
notify your employer or the form-issuing agent
as soon as possible to make sure your earnings
are credited to your social security record. If the
name or SSN on your social security card is in-
correct, call the SSA at 1-800-772-1213.
Name change. If you changed your name be-
cause of marriage, divorce, etc., be sure to re-
port the change to your local Social Security
Administration (SSA) office before filing your re-
turn. This prevents delays in processing your
return and issuing refunds. It also safeguards
your future social security benefits.
Dependent's SSN. You must provide the SSN
of each dependent you claim, regardless of the
dependent's age. This requirement applies to
all dependents (not just your children) claimed
on your tax return.
Exception. If your child was born and died
in 2016 and didn't have an SSN, enter “DIED” in
column (2) of line 6c (Form 1040 or 1040A) and
include a copy of the child's birth certificate,
death certificate, or hospital records. The docu-
ment must show that the child was born alive.
No SSN. File Form SS-5, Application for a So-
cial Security Card, with your local SSA office to
get an SSN for yourself or your dependent. It
usually takes about 2 weeks to get an SSN. If
you or your dependent isn't eligible for an SSN,
see Individual taxpayer identification number
(ITIN), later.
If you are a U.S. citizen or resident alien, you
must show proof of age, identity, and citizen-
ship or alien status with your Form SS-5. If you
are 12 or older and have never been assigned
an SSN, you must appear in person with this
proof at an SSA office.
Form SS-5 is available at any SSA office, on
the Internet at www.socialsecurity.gov, or by
calling 1-800-772-1213. If you have any ques-
tions about which documents you can use as
proof of age, identity, or citizenship, contact
your SSA office.
If your dependent doesn't have an SSN by
the time your return is due, you may want to ask
for an extension of time to file, as explained ear-
lier under When Do I Have To File.
If you don't provide a required SSN or if you
provide an incorrect SSN, your tax may be in-
creased and any refund may be reduced.
Adoption taxpayer identification number
(ATIN). If you are in the process of adopting a
child who is a U.S. citizen or resident and can’t
get an SSN for the child until the adoption is fi-
nal, you can apply for an ATIN to use instead of
an SSN.
File Form W-7A, Application for Taxpayer
Identification Number for Pending U.S. Adop-
tions, with the IRS to get an ATIN if all of the fol-
lowing are true.
You have a child living with you who was
placed in your home for legal adoption.
You can’t get the child's existing SSN even
though you have made a reasonable at-
tempt to get it from the birth parents, the
placement agency, and other persons.
You can’t get an SSN for the child from the
SSA because, for example, the adoption
isn't final.
You are eligible to claim the child as a de-
pendent on your tax return.
After the adoption is final, you must apply for an
SSN for the child. You can’t continue using the
ATIN.
See Form W-7A for more information.
Nonresident alien spouse. If your spouse is a
nonresident alien, your spouse must have either
an SSN or an ITIN if:
You file a joint return,
You file a separate return and claim an ex-
emption for your spouse, or
Your spouse is filing a separate return.
If your spouse isn't eligible for an SSN, see the
following discussion on ITINs.
Individual taxpayer identification number
(ITIN). The IRS will issue you an ITIN if you are
a nonresident or resident alien and you don't
have and aren’t eligible to get an SSN. This also
applies to an alien spouse or dependent. To ap-
ply for an ITIN, file Form W-7 with the IRS. It
usually takes about 7 weeks to get an ITIN. En-
ter the ITIN on your tax return wherever an SSN
is requested.
Make sure your ITIN has not expired. ITINs
that have not been included on a U.S. federal
tax return at least once in the last three consec-
utive years will expire. In addition, ITINs that
were assigned before 2013 will expire accord-
ing to an annual schedule, regardless of use.
Expired ITINs must be renewed in order to
avoid delays in processing your return.
If you are applying for an ITIN for your-
self, your spouse, or a dependent in or-
der to file your tax return, attach your
completed tax return to your Form W-7. See the
Form W-7 instructions for how and where to file.
You can’t e-file a return using an ITIN in
the calendar year the ITIN is issued;
however, you can e-file returns in the
following years.
ITIN for tax use only. An ITIN is for federal
tax use only. It doesn't entitle you to social se-
curity benefits or change your employment or
immigration status under U.S. law.
Penalty for not providing social security
number. If you don't include your SSN or the
SSN of your spouse or dependent as required,
you may have to pay a penalty. See the discus-
sion on Penalties, later, for more information.
SSN on correspondence. If you write to the
IRS about your tax account, be sure to include
your SSN (and the name and SSN of your
spouse, if you filed a joint return) in your corre-
spondence. Because your SSN is used to iden-
tify your account, this helps the IRS respond to
your correspondence promptly.
Presidential Election
Campaign Fund
This fund helps pay for Presidential election
campaigns. The fund also helps pay for pedia-
tric medical research. If you want $3 to go to
this fund, check the box. If you are filing a joint
return, your spouse can also have $3 go to the
fund. If you check a box, your tax or refund
won't change.
Computations
The following information may be useful in mak-
ing the return easier to complete.
Rounding off dollars. You can round off cents
to whole dollars on your return and schedules. If
you do round to whole dollars, you must round
all amounts. To round, drop amounts under 50
cents and increase amounts from 50 to 99
cents to the next dollar. For example, $1.39 be-
comes $1 and $2.50 becomes $3.
If you have to add two or more amounts to
figure the amount to enter on a line, include
cents when adding the amounts and round off
only the total.
Equal amounts. If you are asked to enter the
smaller or larger of two equal amounts, enter
that amount.
Negative amounts. If you file a paper return
and you need to enter a negative amount, put
the amount in parentheses rather than using a
minus sign. To combine positive and negative
amounts, add all the positive amounts together
and then subtract the negative amounts.TIPCAUTION
!
Page 12 Chapter 1 Filing Information
Attachments
Depending on the form you file and the items
reported on your return, you may have to com-
plete additional schedules and forms and attach
them to your paper return.
You may be able to file a paperless re-
turn using IRS e-file. There's nothing to
attach or mail, not even your Forms
W-2. See Why Should I File Electronically, ear-
lier.
Form W2. Form W-2 is a statement from your
employer of wages and other compensation
paid to you and taxes withheld from your pay.
You should have a Form W-2 from each em-
ployer. If you file a paper return, be sure to at-
tach a copy of Form W-2 in the place indicated
on the front page of your return. Attach it to the
front page of your paper return, not to any at-
tachments. For more information, see Form
W-2 in chapter 4.
Form 1099R. If you received a Form 1099-R,
showing federal income tax withheld, and you
file a paper return, attach a copy of that form in
the place indicated on the front page of your re-
turn.
Form 1040EZ. There are no additional sched-
ules to file with Form 1040EZ.
Form 1040A. If you file a paper return, attach
any forms and schedules behind Form 1040A in
order of the “Attachment Sequence Number”
shown in the upper right corner of the form or
schedule. Then arrange all other statements or
attachments in the same order as the forms and
schedules they relate to and attach them last.
Don't attach items unless required to do so.
Form 1040. If you file a paper return, attach
any forms and schedules behind Form 1040 in
order of the “Attachment Sequence Number”
shown in the upper right corner of the form or
schedule. Then arrange all other statements or
attachments in the same order as the forms and
schedules they relate to and attach them last.
Don't attach items unless required to do so.
Third Party Designee
You can authorize the IRS to discuss your re-
turn with your preparer, a friend, family mem-
ber, or any other person you choose. If you
check the “Yes” box in the Third party designee
area of your 2016 tax return and provide the in-
formation required, you are authorizing:
1. The IRS to call the designee to answer
any questions that arise during the pro-
cessing of your return, and
2. The designee to:
a. Give information that is missing from
your return to the IRS,
b. Call the IRS for information about the
processing of your return or the status
of your refund or payments,
c. Receive copies of notices or tran-
scripts related to your return, upon re-
quest, andTIP
d. Respond to certain IRS notices about
math errors, offsets (see Refunds,
later), and return preparation.
The authorization will automatically end no
later than the due date (without any extensions)
for filing your 2017 tax return. This is April 17,
2018, for most people.
See your form instructions for more informa-
tion.
Signatures
You must sign and date your return. If you file a
joint return, both you and your spouse must
sign the return, even if only one of you had in-
come.
If you file a joint return, both spouses
are generally liable for the tax, and the
entire tax liability may be assessed
against either spouse. See chapter 2.
If you electronically file your return, you
can use an electronic signature to sign
your return. See Why Should I File
Electronically, earlier.
If you are due a refund, it can’t be issued un-
less you have signed your return.
Enter your occupation. If you file a joint re-
turn, enter both your occupation and your spou-
se's occupation. Entering your daytime phone
number may help speed the processing of your
return.
When someone can sign for you. You can
appoint an agent to sign your return if you are:
1. Unable to sign the return because of dis-
ease or injury,
2. Absent from the United States for a contin-
uous period of at least 60 days before the
due date for filing your return, or
3. Given permission to do so by the IRS of-
fice in your area.
Power of attorney. A return signed by an
agent in any of these cases must have a power
of attorney (POA) attached that authorizes the
agent to sign for you. You can use a POA that
states that the agent is granted authority to sign
the return, or you can use Form 2848. Part I of
Form 2848 must state that the agent is granted
authority to sign the return.
Courtappointed, conservator, or other fidu
ciary. If you are a court-appointed conservator,
guardian, or other fiduciary for a mentally or
physically incompetent individual who has to file
a tax return, sign your name for the individual.
File Form 56.
Unable to sign. If the taxpayer is mentally
competent but physically unable to sign the re-
turn or POA, a valid “signature” is defined under
state law. It can be anything that clearly indi-
cates the taxpayer's intent to sign. For example,
the taxpayer's “X” with the signatures of two wit-
nesses might be considered a valid signature
under a state's law.
Spouse unable to sign. If your spouse is un-
able to sign for any reason, see Signing a joint
return in chapter 2.CAUTION
!TIP
Child's return. If a child has to file a tax return
but can’t sign the return, the child's parent,
guardian, or another legally responsible person
must sign the child's name, followed by the
words “By (your signature), parent for minor
child.”
Paid Preparer
Generally, anyone you pay to prepare, assist in
preparing, or review your tax return must sign it
and fill in the other blanks, including their Pre-
parer Tax Identification Number (PTIN), in the
paid preparer's area of your return.
Many preparers are required to e-file the tax
returns they prepare. They sign these e-filed re-
turns using their tax preparation software. How-
ever, you can choose to have your return com-
pleted on paper if you prefer. In that case, the
paid preparer can sign the paper return man-
ually or use a rubber stamp or mechanical de-
vice. The preparer is personally responsible for
affixing his or her signature to the return.
If the preparer is self-employed (that is, not
employed by any person or business to prepare
the return), he or she should check the self-em-
ployed box in the Paid Preparer Use Only
space on the return.
The preparer must give you a copy of your
return in addition to the copy filed with the IRS.
If you prepare your own return, leave this
area blank. If another person prepares your re-
turn and doesn't charge you, that person
shouldn't sign your return.
If you have questions about whether a pre-
parer must sign your return, contact any IRS of-
fice.
Refunds
When you complete your return, you will deter-
mine if you paid more income tax than you
owed. If so, you can get a refund of the amount
you overpaid or, if you file Form 1040 or Form
1040A, you can choose to apply all or part of
the overpayment to your next year's (2017) esti-
mated tax. You can’t have your overpayment
applied to your 2017 estimated tax if you file
Form 1040EZ.
If you choose to have a 2016 overpay-
ment applied to your 2017 estimated
tax, you can’t change your mind and
have any of it refunded to you after the due date
(without extensions) of your 2016 return.
Follow the form instructions to complete the
entries to claim your refund and/or to apply your
overpayment to your 2017 estimated tax.
If your refund for 2016 is large, you
may want to decrease the amount of
income tax withheld from your pay in
2017. See chapter 4 for more information.
Instead of getting a pa-
per check, you may be
able to have your refund deposited directly into
your checking or savings account, including an
individual retirement arrangement. Follow the
form instructions to request direct deposit. If the
direct deposit can’t be done, the IRS will send a
check instead.CAUTION
!TIPSimple. Safe. Secure.
DIRECT DEPOSIT
Chapter 1 Filing Information Page 13
Don't request a deposit of any part of your
refund to an account that isn't in your name.
Don't allow your tax preparer to deposit any part
of your refund into his or her account. The num-
ber of direct deposits to a single account or pre-
paid debit card is limited to three refunds a
year. After this limit is exceeded, paper checks
will be sent instead. Learn more at IRS.gov/
Individuals/Direct-Deposit-Limits.
myRA®. If you already have a myRA® ac-
count, you can request a deposit of your refund
(or part of it) to your myRA account. A myRA is
a starter retirement account offered by the De-
partment of the Treasury. For more information
on myRA and to open a myRA account online,
visit www.myRA.gov.
IRA. You can have your refund (or part of it) di-
rectly deposited to a traditional IRA, Roth IRA
(including a myRA), or SEP-IRA, but not a SIM-
PLE IRA. You must establish the IRA at a bank
or financial institution before you request direct
deposit.
TreasuryDirect®. You can request a deposit
of your refund to a TreasuryDirect® online ac-
count to buy U.S. Treasury marketable securi-
ties and savings bonds. For more information,
go to www.treasurydirect.gov.
Split refunds. If you choose direct deposit,
you may be able to split the refund and have it
deposited among two or three accounts or buy
up to $5,000 in paper series I savings bonds.
Complete Form 8888 and attach it to your re-
turn.
Overpayment less than one dollar. If your
overpayment is less than one dollar, you won't
get a refund unless you ask for it in writing.
Cashing your refund check. Cash your tax
refund check soon after you receive it. Checks
expire the last business day of the 12th month
of issue.
If your check has expired, you can apply to
the IRS to have it reissued.
Refund more or less than expected. If you
receive a check for a refund you aren’t entitled
to, or for an overpayment that should have been
credited to estimated tax, don't cash the check.
Call the IRS.
If you receive a check for more than the re-
fund you claimed, don't cash the check until you
receive a notice explaining the difference.
If your refund check is for less than you
claimed, it should be accompanied by a notice
explaining the difference. Cashing the check
doesn't stop you from claiming an additional
amount of refund.
If you didn't receive a notice and you have
any questions about the amount of your refund,
you should wait 2 weeks. If you still haven’t re-
ceived a notice, call the IRS.
Offset against debts. If you are due a refund
but haven’t paid certain amounts you owe, all or
part of your refund may be used to pay all or
part of the past-due amount. This includes
past-due federal income tax, other federal
debts (such as student loans), state income tax,
child and spousal support payments, and state
unemployment compensation debt. You will be
notified if the refund you claimed has been off-
set against your debts.
Joint return and injured spouse. When a
joint return is filed and only one spouse owes a
past-due amount, the other spouse can be con-
sidered an injured spouse. An injured spouse
should file Form 8379, Injured Spouse Alloca-
tion, if both of the following apply and the
spouse wants a refund of his or her share of the
overpayment shown on the joint return.
1. You aren’t legally obligated to pay the
past-due amount.
2. You made and reported tax payments
(such as federal income tax withheld from
your wages or estimated tax payments), or
claimed a refundable tax credit (see the
credits listed under Who Should File, ear-
lier).
Note. If the injured spouse's residence was
in a community property state at any time dur-
ing the tax year, special rules may apply. See
the Instructions for Form 8379.
If you haven’t filed your joint return and you
know that your joint refund will be offset, file
Form 8379 with your return. You should receive
your refund within 14 weeks from the date the
paper return is filed or within 11 weeks from the
date the return is filed electronically.
If you filed your joint return and your joint re-
fund was offset, file Form 8379 by itself. When
filed after offset, it can take up to 8 weeks to re-
ceive your refund. Don't attach the previously
filed tax return, but do include copies of all
Forms W-2 and W-2G for both spouses and
any Forms 1099 that show income tax withheld.
The processing of Form 8379 may be delayed if
these forms aren’t attached, or if the form is in-
complete when filed.
A separate Form 8379 must be filed for each
tax year to be considered.
An injured spouse claim is different
from an innocent spouse relief request.
An injured spouse uses Form 8379 to
request the division of the tax overpayment at-
tributed to each spouse. An innocent spouse
uses Form 8857, Request for Innocent Spouse
Relief, to request relief from joint liability for tax,
interest, and penalties on a joint return for items
of the other spouse (or former spouse) that
were incorrectly reported on the joint return. For
information on innocent spouses, see Relief
from joint responsibility under Filing a Joint Re-
turn in chapter 2.
Amount You Owe
When you complete your return, you will deter-
mine if you have paid the full amount of tax that
you owe. If you owe additional tax, you should
pay it with your return.
You don't have to pay if the amount
you owe is under $1.
If the IRS figures your tax for you, you will re-
ceive a bill for any tax that is due. You should
pay this bill within 30 days (or by the due date of
your return, if later). See Tax Figured by IRS in
chapter 30.CAUTION
!TIP
If you don't pay your tax when due, you
may have to pay a failure-to-pay pen-
alty. See Penalties, later. For more in-
formation about your balance due, see Pub.
594.
If the amount you owe for 2016 is large,
you may want to increase the amount
of income tax withheld from your pay or
make estimated tax payments for 2017. See
chapter 4 for more information.
How To Pay
You can pay online, by phone, by mobile de-
vice, in cash, or by check or money order. Don't
include any estimated tax payment for 2017 in
this payment. Instead, make the estimated tax
payment separately.
Bad check or payment. The penalty for writ-
ing a bad check to the IRS is $25 or 2% of the
check, whichever is more. This penalty also ap-
plies to other forms of payment if the IRS
doesn't receive the funds.
Pay online. Paying online is convenient and
secure and helps make sure we get your pay-
ments on time.
You can pay online with a direct transfer
from your bank account using IRS Direct Pay,
the Electronic Federal Tax Payment System, or
by debit or credit card.
To pay your taxes online or for more infor-
mation, go to IRS.gov/payments.
Pay by phone. Paying by phone is another
safe and secure method of paying electroni-
cally. Use one of the following methods.
Electronic Federal Tax Payment System
(EFTPS).
Debit or credit card.
To use EFTPS, you must be enrolled either
online or have an enrollment form mailed to
you. To make a payment using EFTPS call
1-800-555-4477 (English) or 1-800-244-4829
(Español). People who are deaf, hard of hear-
ing, or have a speech disability and have ac-
cess to TTY/TDD equipment can call
1-800-733-4829. For more information about
EFTPS, go to IRS.gov/payments or
www.eftps.gov.
To pay using a debit or credit card, you can
call one of the following service providers.
There is a convenience fee charged by these
providers that varies by provider, card type, and
payment amount.
Link2Gov Corporation
1-888-PAY-1040TM (1-888-729-1040)
www.PAY1040.com
WorldPay US, Inc.
1-844-PAY-TAX-8TM (1-844-729-8298)
www.payUSAtax.com
Official Payments
1-888-UPAY-TAXTM (1-888-872-9829)
www.officialpayments.com
For the latest details on how to pay by
phone, go to IRS.gov/payments.CAUTION
!TIP
Page 14 Chapter 1 Filing Information
Pay by mobile device. To pay through your
mobile device, download the IRS2Go app.
Pay by cash. Cash is a new in-person pay-
ment option for individuals provided through re-
tail partners with a maximum of $1,000 per day
per transaction. To make a cash payment you
must first be registered online at
www.officialpayments.com.
Pay by check or money order. Make your
check or money order payable to “United States
Treasury” for the full amount due. Don't send
cash. Don't attach the payment to your return.
Show your correct name, address, SSN, day-
time phone number, and the tax year and form
number on the front of your check or money or-
der. If you are filing a joint return, enter the SSN
shown first on your tax return.
Estimated tax payments. Don't include any
2017 estimated tax payment in the payment for
your 2016 income tax return. See chapter 4 for
information on how to pay estimated tax.
Interest
Interest is charged on tax you don't pay by the
due date of your return. Interest is charged even
if you get an extension of time for filing.
If the IRS figures your tax for you, to
avoid interest for late payment, you
must pay the bill within 30 days of the
date of the bill or by the due date of your return,
whichever is later. For information, see Tax Fig-
ured by IRS in chapter 30.
Interest on penalties. Interest is charged on
the failure-to-file penalty, the accuracy-related
penalty, and the fraud penalty from the due date
of the return (including extensions) to the date
of payment. Interest on other penalties starts on
the date of notice and demand, but isn't
charged on penalties paid within 21 calendar
days from the date of the notice (or within 10
business days if the notice is for $100,000 or
more).
Interest due to IRS error or delay. All or part
of any interest you were charged can be for-
given if the interest is due to an unreasonable
error or delay by an officer or employee of the
IRS in performing a ministerial or managerial
act.
A ministerial act is a procedural or mechani-
cal act that occurs during the processing of your
case. A managerial act includes personnel
transfers and extended personnel training. A
decision concerning the proper application of
federal tax law isn't a ministerial or managerial
act.
The interest can be forgiven only if you
aren’t responsible in any important way for the
error or delay and the IRS has notified you in
writing of the deficiency or payment. For more
information, see Pub. 556.
Interest and certain penalties may also be
suspended for a limited period if you filed your
return by the due date (including extensions)
and the IRS doesn't provide you with a notice
specifically stating your liability and the basis for
it before the close of the 36-month period be-
ginning on the later of:
The date the return is filed, orTIP
The due date of the return without regard
to extensions.
For more information, see Pub. 556.
Installment Agreement
If you can’t pay the full amount due with your re-
turn, you can ask to make monthly installment
payments for the full or a partial amount. How-
ever, you will be charged interest and may be
charged a late payment penalty on the tax not
paid by the date your return is due, even if your
request to pay in installments is granted. If your
request is granted, you must also pay a fee. To
limit the interest and penalty charges, pay as
much of the tax as possible with your return. But
before requesting an installment agreement,
you should consider other less costly alterna-
tives, such as a bank loan or credit card pay-
ment.
To apply for an installment agreement on-
line, go to IRS.gov/opa. You can also use Form
9465.
In addition to paying by check or money or-
der, you can use a credit or debit card or direct
payment from your bank account to make in-
stallment agreement payments. See How To
Pay, earlier.
Gift To Reduce Debt
Held by the Public
You can make a contribution (gift) to
reduce debt held by the public. If you
wish to do so, make a separate check
payable to “Bureau of the Fiscal Service.”
Send your check to:
Bureau of the Fiscal Service
ATTN: Department G
P.O. Box 2188
Parkersburg, WV 26106-2188
Or, enclose your separate check in the enve-
lope with your income tax return. Don't add this
gift to any tax you owe.
For information on making this type of gift on-
line, go to www.treasurydirect.gov and click on
“How To Make a Contribution to Reduce the
Debt.”
You may be able to deduct this gift as a
charitable contribution on next year's tax return
if you itemize your deductions on Schedule A
(Form 1040).
Name and Address
After you have completed your return, fill in your
name and address in the appropriate area of
Form 1040, Form 1040A, or Form 1040EZ.
You must include your SSN in the cor-
rect place on your tax return.
P.O. box. If your post office doesn't deliver
mail to your street address and you have a P.O.
box, enter your P.O. box number on the line for
your present home address instead of your
street address.CAUTION
!
Foreign address. If your address is outside
the United States or its possessions or territo-
ries, enter the city name on the appropriate line
of your return. Don't enter any other information
on that line, but also complete the line listing:
1. Foreign country name,
2. Foreign province/state/county, and
3. Foreign postal code.
Follow the country's practice for entering the
postal code and the name of the province,
county, or state.
Where Do I File?
After you complete your return, you must send it
to the IRS. You can mail it or you may be able to
file it electronically. See Why Should I File Elec-
tronically, earlier.
Mailing your paper return. Mail your paper
return to the address shown in your tax return
instructions.
What Happens After
I File?
After you send your return to the IRS, you may
have some questions. This section discusses
concerns you may have about recordkeeping,
your refund, and what to do if you move.
What Records Should
I Keep?
This part discusses why you should keep re-
cords, what kinds of records you should keep,
and how long you should keep them.
You must keep records so that you can
prepare a complete and accurate in-
come tax return. The law doesn't re-
quire any special form of records. However, you
should keep all receipts, canceled checks or
other proof of payment, and any other records
to support any deductions or credits you claim.
If you file a claim for refund, you must be
able to prove by your records that you have
overpaid your tax.
This part doesn't discuss the records you
should keep when operating a business. For in-
formation on business records, see Pub. 583,
Starting a Business and Keeping Records.
Why Keep Records?
Good records help you:
Identify sources of income. Your re-
cords can identify the sources of your in-
come to help you separate business from
nonbusiness income and taxable from
nontaxable income.
Keep track of expenses. You can use
your records to identify expenses for which
you can claim a deduction. This helps you
determine if you can itemize deductions on
your tax return.
Keep track of the basis of property.
You need to keep records that show theRECORDS
Chapter 1 Filing Information Page 15
basis of your property. This includes the
original cost or other basis of the property
and any improvements you made.
Prepare tax returns. You need records to
prepare your tax return.
Support items reported on tax returns.
The IRS may question an item on your re-
turn. Your records will help you explain any
item and arrive at the correct tax. If you
can’t produce the correct documents, you
may have to pay additional tax and be sub-
ject to penalties.
Kinds of Records to Keep
The IRS doesn't require you to keep your re-
cords in a particular way. Keep them in a man-
ner that allows you and the IRS to determine
your correct tax.
You can use your checkbook to keep a re-
cord of your income and expenses. You also
need to keep documents, such as receipts and
sales slips, that can help prove a deduction.
In this section you will find guidance about
basic records that everyone should keep. The
section also provides guidance about specific
records you should keep for certain items.
Electronic records. All requirements that ap-
ply to hard copy books and records also apply
to electronic storage systems that maintain tax
books and records. When you replace hard
copy books and records, you must maintain the
electronic storage systems for as long as they
are material to the administration of tax law.
For details on electronic storage system re-
quirements, see Revenue Procedure 97-22,
which is on page 9 of Internal Revenue Bulletin
1997-13 at IRS.gov/pub/irs-irbs/irb97-13.pdf.
Copies of tax returns. You should keep cop-
ies of your tax returns as part of your tax re-
cords. They can help you prepare future tax re-
turns, and you will need them if you file an
amended return or are audited. Copies of your
returns and other records can be helpful to your
survivor or the executor or administrator of your
estate.
If necessary, you can request a copy of a re-
turn and all attachments (including Form W-2)
from the IRS by using Form 4506. There is a
charge for a copy of a return. For information on
the cost and where to file, see the Instructions
for Form 4506.
If you just need information from your return,
you can order a transcript in one of the following
ways.
Go to IRS.gov/transcript.
Call 1-800-908-9946.
Use Form 4506-T or Form 4506T-EZ.
There is no fee for a transcript. For more infor-
mation, see Form 4506-T.
Basic Records
Basic records are documents that everybody
should keep. These are the records that prove
your income and expenses. If you own a home
or investments, your basic records should con-
tain documents related to those items.
Income. Your basic records prove the
amounts you report as income on your tax re-
turn. Your income may include wages, divi-
dends, interest, and partnership or S corpora-
tion distributions. Your records also can prove
that certain amounts aren’t taxable, such as
tax-exempt interest.
Note. If you receive a Form W-2, keep
Copy C until you begin receiving social security
benefits. This will help protect your benefits in
case there is a question about your work record
or earnings in a particular year.
Expenses. Your basic records prove the ex-
penses for which you claim a deduction (or
credit) on your tax return. Your deductions may
include alimony, charitable contributions, mort-
gage interest, and real estate taxes. You also
may have child care expenses for which you
can claim a credit.
Home. Your basic records should enable you
to determine the basis or adjusted basis of your
home. You need this information to determine if
you have a gain or loss when you sell your
home or to figure depreciation if you use part of
your home for business purposes or for rent.
Your records should show the purchase price,
settlement or closing costs, and the cost of any
improvements. They also may show any casu-
alty losses deducted and insurance reimburse-
ments for casualty losses.
For detailed information on basis, including
which settlement or closing costs are included
in the basis of your home, see chapter 13.
When you sell your home, your records
should show the sales price and any selling ex-
penses, such as commissions. For information
on selling your home, see chapter 15.
Investments. Your basic records should ena-
ble you to determine your basis in an invest-
ment and whether you have a gain or loss when
you sell it. Investments include stocks, bonds,
and mutual funds. Your records should show
the purchase price, sales price, and commis-
sions. They may also show any reinvested divi-
dends, stock splits and dividends, load
charges, and original issue discount (OID).
For information on stocks, bonds, and mu-
tual funds, see chapters 8, 13, 14, and 16.
Proof of Payment
One of your basic records is proof of payment.
You should keep these records to support cer-
tain amounts shown on your tax return. Proof of
payment alone isn't proof that the item claimed
on your return is allowable. You also should
keep other documents that will help prove that
the item is allowable.
Generally, you prove payment with a cash
receipt, financial account statement, credit card
statement, canceled check, or substitute check.
If you make payments in cash, you should get a
dated and signed receipt showing the amount
and the reason for the payment.
If you make payments using your bank ac-
count, you may be able to prove payment with
an account statement.
Account statements. You may be able to
prove payment with a legible financial account
statement prepared by your bank or other finan-
cial institution.
Pay statements. You may have deductible ex-
penses withheld from your paycheck, such as
union dues or medical insurance premiums.
You should keep your year-end or final pay
statements as proof of payment of these expen-
ses.
How Long to Keep
Records
You must keep your records as long as they
may be needed for the administration of any
provision of the Internal Revenue Code. Gener-
ally, this means you must keep records that
support items shown on your return until the pe-
riod of limitations for that return runs out.
The period of limitations is the period of time
in which you can amend your return to claim a
credit or refund or the IRS can assess addi-
tional tax. Table 1-7 contains the periods of limi-
tations that apply to income tax returns. Unless
otherwise stated, the years refer to the period
beginning after the return was filed. Returns
filed before the due date are treated as being
filed on the due date.
Period of LimitationsTable 1-7.
IF you... THEN the
period is...
1 File a return and (2),
(3), and (4) don't apply
to you
3 years
2 Don't report income
that you should and it is
more than 25% of the
gross income shown on
your return
6 years
3 File a fraudulent return No limit
4 Don't file a return No limit
5 File a claim for credit or
refund after you filed
your return
The later of 3
years or 2
years after tax
was paid
6 File a claim for a loss
from worthless
securities or bad debt
deduction
7 years
Property. Keep records relating to property
until the period of limitations expires for the year
in which you dispose of the property in a taxa-
ble disposition. You must keep these records to
figure your basis for computing gain or loss
when you sell or otherwise dispose of the prop-
erty.
Generally, if you received property in a non-
taxable exchange, your basis in that property is
the same as the basis of the property you gave
up. You must keep the records on the old prop-
erty, as well as the new property, until the pe-
riod of limitations expires for the year in which
you dispose of the new property in a taxable
disposition.
Page 16 Chapter 1 Filing Information
Refund Information
You can go online to check the status of your
2016 refund 24 hours after the IRS receives
your e-filed return, or 4 weeks after you mail a
paper return. If you filed Form 8379 with your
return, allow 14 weeks (11 weeks if you filed
electronically) before checking your refund sta-
tus. Be sure to have a copy of your 2016 tax re-
turn handy because you will need to know the
filing status, the first SSN shown on the return,
and the exact whole-dollar amount of the re-
fund. To check on your refund, do one of the
following.
Go to IRS.gov/refunds.
Download the free IRS2Go app to your
smart phone and use it to check your re-
fund status.
Call the automated refund hotline at
1-800-829-1954.
Interest on Refunds
If you are due a refund, you may get interest on
it. The interest rates are adjusted quarterly.
If the refund is made within 45 days after the
due date of your return, no interest will be paid.
If you file your return after the due date (includ-
ing extensions), no interest will be paid if the re-
fund is made within 45 days after the date you
filed. If the refund isn't made within this 45-day
period, interest will be paid from the due date of
the return or from the date you filed, whichever
is later.
Accepting a refund check doesn't change
your right to claim an additional refund and in-
terest. File your claim within the period of time
that applies. See Amended Returns and Claims
for Refund, later. If you don't accept a refund
check, no more interest will be paid on the over-
payment included in the check.
Interest on erroneous refund. All or part of
any interest you were charged on an erroneous
refund generally will be forgiven. Any interest
charged for the period before demand for re-
payment was made will be forgiven unless:
1. You, or a person related to you, caused
the erroneous refund in any way, or
2. The refund is more than $50,000.
For example, if you claimed a refund of $100
on your return, but the IRS made an error and
sent you $1,000, you wouldn't be charged inter-
est for the time you held the $900 difference.
You must, however, repay the $900 when the
IRS asks.
Change of Address
If you have moved, file your return using your
new address.
If you move after you filed your return, you
should give the IRS clear and concise notifica-
tion of your change of address. The notification
may be written, electronic, or oral. Send written
notification to the Internal Revenue Service
Center serving your old address. You can use
Form 8822, Change of Address. If you are ex-
pecting a refund, also notify the post office serv-
ing your old address. This will help in forwarding
your check to your new address (unless you
chose direct deposit of your refund). For more
information, see Revenue Procedure 2010-16,
2010-19 I.R.B. 664, available at IRS.gov/irb/
2010-19_IRB/ar07.html.
Be sure to include your SSN (and the name
and SSN of your spouse, if you filed a joint re-
turn) in any correspondence with the IRS.
What If I Made
a Mistake?
Errors may delay your refund or result in notices
being sent to you. If you discover an error, you
can file an amended return or claim for refund.
Amended Returns and
Claims for Refund
You should correct your return if, after you have
filed it, you find that:
1. You didn't report some income,
2. You claimed deductions or credits you
shouldn't have claimed,
3. You didn't claim deductions or credits you
could have claimed, or
4. You should have claimed a different filing
status. (Once you file a joint return, you
can’t choose to file separate returns for
that year after the due date of the return.
However, an executor may be able to
make this change for a deceased spouse.)
If you need a copy of your return, see Copies of
tax returns under Kinds of Records to Keep,
earlier in this chapter.
Form 1040X. Use Form 1040X to correct a re-
turn you have already filed. An amended tax re-
turn can’t be filed electronically.
Completing Form 1040X. On Form 1040X,
enter your income, deductions, and credits as
you originally reported them on your return, the
changes you are making, and the corrected
amounts. Then figure the tax on the corrected
amount of taxable income and the amount you
owe or your refund.
If you owe tax, pay the full amount with Form
1040X. The tax owed won't be subtracted from
any amount you had credited to your estimated
tax.
If you can’t pay the full amount due with your
return, you can ask to make monthly installment
payments. See Installment Agreement, earlier.
If you overpaid tax, you can have all or part
of the overpayment refunded to you, or you can
apply all or part of it to your estimated tax. If you
choose to get a refund, it will be sent separately
from any refund shown on your original return.
Filing Form 1040X. When completing Form
1040X, don't forget to show the year of your
original return and explain all changes you
made. Be sure to attach any forms or schedules
needed to explain your changes. Mail your
Form 1040X to the Internal Revenue Service
Center serving the area where you now live (as
shown in the instructions to the form). However,
if you are filing Form 1040X in response to a no-
tice you received from the IRS, mail it to the ad-
dress shown on the notice.
File a separate form for each tax year in-
volved.
Time for filing a claim for refund. Generally,
you must file your claim for a credit or refund
within 3 years after the date you filed your origi-
nal return or within 2 years after the date you
paid the tax, whichever is later. Returns filed
before the due date (without regard to exten-
sions) are considered filed on the due date
(even if the due date was a Saturday, Sunday,
or legal holiday). These time periods are sus-
pended while you are financially disabled, dis-
cussed later.
If the last day for claiming a credit or refund
is a Saturday, Sunday, or legal holiday, you can
file the claim on the next business day.
If you don't file a claim within this period, you
may not be entitled to a credit or a refund.
Protective claim for refund. Generally, a pro-
tective claim is a formal claim or amended re-
turn for credit or refund normally based on cur-
rent litigation or expected changes in tax law or
other legislation. You file a protective claim
when your right to a refund is contingent on fu-
ture events and may not be determinable until
after the statute of limitations expires. A valid
protective claim doesn't have to list a particular
dollar amount or demand an immediate refund.
However, a valid protective claim must:
Be in writing and signed,
Include your name, address, SSN or ITIN,
and other contact information,
Identify and describe the contingencies af-
fecting the claim,
Clearly alert the IRS to the essential nature
of the claim, and
Identify the specific year(s) for which a re-
fund is sought.
Mail your protective claim for refund to the ad-
dress listed in the instructions for Form 1040X,
under Where To File.
Generally, the IRS will delay action on the
protective claim until the contingency is re-
solved.
Limit on amount of refund. If you file your
claim within 3 years after the date you filed your
return, the credit or refund can’t be more than
the part of the tax paid within the 3-year period
(plus any extension of time for filing your return)
immediately before you filed the claim. This
time period is suspended while you are finan-
cially disabled, discussed later.
Tax paid. Payments, including estimated
tax payments, made before the due date (with-
out regard to extensions) of the original return
are considered paid on the due date. For exam-
ple, income tax withheld during the year is con-
sidered paid on the due date of the return, April
15 for most taxpayers.
Example 1. You made estimated tax pay-
ments of $500 and got an automatic extension
of time to October 15, 2013, to file your 2012 in-
come tax return. When you filed your return on
that date, you paid an additional $200 tax. On
October 15, 2016, you filed an amended return
and claimed a refund of $700. Because you
filed your claim within 3 years after you filed
your original return, you can get a refund of up
Chapter 1 Filing Information Page 17
to $700, the tax paid within the 3 years plus the
6-month extension period immediately before
you filed the claim.
Example 2. The situation is the same as in
Example 1, except you filed your return on Oc-
tober 30, 2013, 2 weeks after the extension pe-
riod ended. You paid an additional $200 on that
date. On October 31, 2016, you filed an amen-
ded return and claimed a refund of $700. Al-
though you filed your claim within 3 years from
the date you filed your original return, the refund
was limited to $200, the tax paid within the 3
years plus the 6-month extension period imme-
diately before you filed the claim. The estimated
tax of $500 paid before that period can’t be re-
funded or credited.
If you file a claim more than 3 years after you
file your return, the credit or refund can’t be
more than the tax you paid within the 2 years
immediately before you file the claim.
Example. You filed your 2012 tax return on
April 15, 2013. You paid taxes of $500. On No-
vember 5, 2014, after an examination of your
2012 return, you had to pay an additional tax of
$200. On May 12, 2016, you file a claim for a re-
fund of $300. However, because you filed your
claim more than 3 years after you filed your re-
turn, your refund will be limited to the $200 you
paid during the 2 years immediately before you
filed your claim.
Financially disabled. The time periods for
claiming a refund are suspended for the period
in which you are financially disabled. For a joint
income tax return, only one spouse has to be fi-
nancially disabled for the time period to be sus-
pended. You are financially disabled if you are
unable to manage your financial affairs because
of a medically determinable physical or mental
impairment which can be expected to result in
death or which has lasted or can be expected to
last for a continuous period of not less than 12
months. However, you aren’t treated as finan-
cially disabled during any period your spouse or
any other person is authorized to act on your
behalf in financial matters.
To claim that you are financially disabled,
you must send in the following written state-
ments with your claim for refund.
1. A statement from your qualified physician
that includes:
a. The name and a description of your
physical or mental impairment,
b. The physician's medical opinion that
the impairment prevented you from
managing your financial affairs,
c. The physician's medical opinion that
the impairment was or can be expec-
ted to result in death, or that its dura-
tion has lasted, or can be expected to
last, at least 12 months,
d. The specific time period (to the best of
the physician's knowledge), and
e. The following certification signed by
the physician: “I hereby certify that, to
the best of my knowledge and belief,
the above representations are true,
correct, and complete.”
2. A statement made by the person signing
the claim for credit or refund that no per-
son, including your spouse, was author-
ized to act on your behalf in financial mat-
ters during the period of disability (or the
exact dates that a person was authorized
to act for you).
Exceptions for special types of refunds. If
you file a claim for one of the items in the follow-
ing list, the dates and limits discussed earlier
may not apply. These items, and where to get
more information, are as follows.
Bad debt. See Nonbusiness Bad Debts in
chapter 14.
Worthless security. See Worthless securi-
ties in chapter 14.
Foreign tax paid or accrued. See Pub. 514.
Net operating loss carryback. See Pub.
536.
Carryback of certain business tax credits.
See Form 3800.
Claim based on an agreement with the IRS
extending the period for assessment of
tax.
Processing claims for refund. Claims are
usually processed 8–12 weeks after they are
filed. Your claim may be accepted as filed, dis-
allowed, or subject to examination. If a claim is
examined, the procedures are the same as in
the examination of a tax return.
If your claim is disallowed, you will receive
an explanation of why it was disallowed.
Taking your claim to court. You can sue for a
refund in court, but you must first file a timely
claim with the IRS. If the IRS disallows your
claim or doesn't act on your claim within 6
months after you file it, you can then take your
claim to court. For information on the burden of
proof in a court proceeding, see Pub. 556.
The IRS provides a direct method to move
your claim to court if:
You are filing a claim for a credit or refund
based solely on contested income tax or
on estate tax or gift tax issues considered
in your previously examined returns, and
You want to take your case to court instead
of appealing it within the IRS.
When you file your claim with the IRS, you
get the direct method by requesting in writing
that your claim be immediately rejected. A no-
tice of claim disallowance will be sent to you.
You have 2 years from the date of mailing of
the notice of claim disallowance to file a refund
suit in the United States District Court having ju-
risdiction or in the United States Court of Fed-
eral Claims.
Interest on refund. If you receive a refund be-
cause of your amended return, interest will be
paid on it from the due date of your original re-
turn or the date you filed your original return,
whichever is later, to the date you filed the
amended return. However, if the refund isn't
made within 45 days after you file the amended
return, interest will be paid up to the date the re-
fund is paid.
Reduced refund. Your refund may be reduced
by an additional tax liability that has been as-
sessed against you.
Also, your refund may be reduced by
amounts you owe for past-due federal tax, state
income tax, state unemployment compensation
debts, child support, spousal support, or certain
other federal nontax debts, such as student
loans. If your spouse owes these debts, see
Offset against debts, under Refunds, earlier, for
the correct refund procedures to follow.
Effect on state tax liability. If your return is
changed for any reason, it may affect your state
income tax liability. This includes changes
made as a result of an examination of your re-
turn by the IRS. Contact your state tax agency
for more information.
Penalties
The law provides penalties for failure to file re-
turns or pay taxes as required.
Civil Penalties
If you don't file your return and pay your tax by
the due date, you may have to pay a penalty.
You may also have to pay a penalty if you sub-
stantially understate your tax, understate a re-
portable transaction, file an erroneous claim for
refund or credit, file a frivolous tax submission,
or fail to supply your SSN or individual taxpayer
identification number. If you provide fraudulent
information on your return, you may have to pay
a civil fraud penalty.
Filing late. If you don't file your return by the
due date (including extensions), you may have
to pay a failure-to-file penalty. The penalty is
usually 5% for each month or part of a month
that a return is late, but not more than 25%. The
penalty is based on the tax not paid by the due
date (without regard to extensions).
Fraud. If your failure to file is due to fraud,
the penalty is 15% for each month or part of a
month that your return is late, up to a maximum
of 75%.
Return over 60 days late. If you file your
return more than 60 days after the due date or
extended due date, the minimum penalty is the
smaller of $205 (adjusted for inflation) or 100%
of the unpaid tax.
Exception. You won't have to pay the pen-
alty if you show that you failed to file on time be-
cause of reasonable cause and not because of
willful neglect.
Paying tax late. You will have to pay a fail-
ure-to-pay penalty of 1 2 of 1% (0.50%) of your
unpaid taxes for each month, or part of a month,
after the due date that the tax isn't paid. This
penalty doesn't apply during the automatic
6-month extension of time to file period if you
paid at least 90% of your actual tax liability on
or before the due date of your return and pay
the balance when you file the return.
The monthly rate of the failure-to-pay pen-
alty is half the usual rate (0.25% instead of
0.50%) if an installment agreement is in effect
for that month. You must have filed your return
by the due date (including extensions) to qualify
for this reduced penalty.
Page 18 Chapter 1 Filing Information
If a notice of intent to levy is issued, the rate
will increase to 1% at the start of the first month
beginning at least 10 days after the day that the
notice is issued. If a notice and demand for im-
mediate payment is issued, the rate will in-
crease to 1% at the start of the first month be-
ginning after the day that the notice and
demand is issued.
This penalty can’t be more than 25% of your
unpaid tax. You won't have to pay the penalty if
you can show that you had a good reason for
not paying your tax on time.
Combined penalties. If both the failure-to-file
penalty and the failure-to-pay penalty (dis-
cussed earlier) apply in any month, the 5% (or
15%) failure-to-file penalty is reduced by the
failure-to-pay penalty. However, if you file your
return more than 60 days after the due date or
extended due date, the minimum penalty is the
smaller of $205 (adjusted for inflation) or 100%
of the unpaid tax.
Accuracyrelated penalty. You may have to
pay an accuracy-related penalty if you under-
pay your tax because:
1. You show negligence or disregard of the
rules or regulations,
2. You substantially understate your income
tax,
3. You claim tax benefits for a transaction
that lacks economic substance, or
4. You fail to disclose a foreign financial as-
set.
The penalty is equal to 20% of the underpay-
ment. The penalty is 40% of any portion of the
underpayment that is attributable to an undis-
closed noneconomic substance transaction or
an undisclosed foreign financial asset transac-
tion. The penalty won't be figured on any part of
an underpayment on which the fraud penalty
(discussed later) is charged.
Negligence or disregard. The term “negli-
gence” includes a failure to make a reasonable
attempt to comply with the tax law or to exercise
ordinary and reasonable care in preparing a re-
turn. Negligence also includes failure to keep
adequate books and records. You won't have to
pay a negligence penalty if you have a reasona-
ble basis for a position you took.
The term “disregard” includes any careless,
reckless, or intentional disregard.
Adequate disclosure. You can avoid the
penalty for disregard of rules or regulations if
you adequately disclose on your return a posi-
tion that has at least a reasonable basis. See
Disclosure statement, later.
This exception won't apply to an item that is
attributable to a tax shelter. In addition, it won't
apply if you fail to keep adequate books and re-
cords, or substantiate items properly.
Substantial understatement of income
tax. You understate your tax if the tax shown
on your return is less than the correct tax. The
understatement is substantial if it is more than
the larger of 10% of the correct tax or $5,000.
However, the amount of the understatement
may be reduced to the extent the understate-
ment is due to:
1. Substantial authority, or
2. Adequate disclosure and a reasonable ba-
sis.
If an item on your return is attributable to a tax
shelter, there is no reduction for an adequate
disclosure. However, there is a reduction for a
position with substantial authority, but only if
you reasonably believed that your tax treatment
was more likely than not the proper treatment.
Substantial authority. Whether there is or
was substantial authority for the tax treatment of
an item depends on the facts and circumstan-
ces. Some of the items that may be considered
are court opinions, Treasury regulations, reve-
nue rulings, revenue procedures, and notices
and announcements issued by the IRS and
published in the Internal Revenue Bulletin that
involve the same or similar circumstances as
yours.
Disclosure statement. To adequately dis-
close the relevant facts about your tax treat-
ment of an item, use Form 8275. You must also
have a reasonable basis for treating the item
the way you did.
In cases of substantial understatement only,
items that meet the requirements of Revenue
Procedure 2016-13 (or later update) are consid-
ered adequately disclosed on your return with-
out filing Form 8275.
Use Form 8275-R to disclose items or posi-
tions contrary to regulations.
Transaction lacking economic sub-
stance. For more information on economic
substance, see section 7701(o).
Foreign financial asset. For more informa-
tion on undisclosed foreign financial assets, see
section 6662(j).
Reasonable cause. You won't have to pay
a penalty if you show a good reason (reasona-
ble cause) for the way you treated an item. You
must also show that you acted in good faith.
This doesn't apply to a transaction that lacks
economic substance.
Filing erroneous claim for refund or credit.
You may have to pay a penalty if you file an er-
roneous claim for refund or credit. The penalty
is equal to 20% of the disallowed amount of the
claim, unless you can show a reasonable basis
for the way you treated an item. However, any
disallowed amount due to a transaction that
lacks economic substance won't be treated as
having a reasonable basis. The penalty won't
be figured on any part of the disallowed amount
of the claim that relates to the earned income
credit or on which the accuracy-related or fraud
penalties are charged.
Frivolous tax submission. You may have to
pay a penalty of $5,000 if you file a frivolous tax
return or other frivolous submissions. A frivo-
lous tax return is one that doesn't include
enough information to figure the correct tax or
that contains information clearly showing that
the tax you reported is substantially incorrect.
For more information on frivolous returns, frivo-
lous submissions, and a list of positions that are
identified as frivolous, see Notice 2010-33,
2010-17 I.R.B. 609, available at IRS.gov/irb/
2010-17_IRB/ar13.html.
You will have to pay the penalty if you filed
this kind of return or submission based on a friv-
olous position or a desire to delay or interfere
with the administration of federal tax laws. This
includes altering or striking out the preprinted
language above the space provided for your
signature.
This penalty is added to any other penalty
provided by law.
Fraud. If there is any underpayment of tax on
your return due to fraud, a penalty of 75% of the
underpayment due to fraud will be added to
your tax.
Joint return. The fraud penalty on a joint re-
turn doesn't apply to a spouse unless some part
of the underpayment is due to the fraud of that
spouse.
Failure to supply SSN. If you don't include
your SSN or the SSN of another person where
required on a return, statement, or other docu-
ment, you will be subject to a penalty of $50 for
each failure. You will also be subject to a pen-
alty of $50 if you don't give your SSN to another
person when it is required on a return, state-
ment, or other document.
For example, if you have a bank account
that earns interest, you must give your SSN to
the bank. The number must be shown on the
Form 1099-INT or other statement the bank
sends you. If you don't give the bank your SSN,
you will be subject to the $50 penalty. (You also
may be subject to “backup” withholding of in-
come tax. See chapter 4.)
You won't have to pay the penalty if you are
able to show that the failure was due to reason-
able cause and not willful neglect.
Criminal Penalties
You may be subject to criminal prosecution
(brought to trial) for actions such as:
1. Tax evasion,
2. Willful failure to file a return, supply infor-
mation, or pay any tax due,
3. Fraud and false statements,
4. Preparing and filing a fraudulent return, or
5. Identity theft.
Identity Theft
Identity theft occurs when someone uses your
personal information such as your name, SSN,
or other identifying information, without your
permission, to commit fraud or other crimes. An
identity thief may use your SSN to get a job or
may file a tax return using your SSN to receive
a refund.
To reduce your risk:
Protect your SSN,
Ensure your employer is protecting your
SSN, and
Be careful when choosing a tax preparer.
If your tax records are affected by identity
theft and you receive a notice from the IRS, re-
spond right away to the name and phone num-
ber printed on the IRS notice or letter.
Chapter 1 Filing Information Page 19
If your SSN has been lost or stolen or you
suspect you are a victim of tax-related identity
theft, visit IRS.gov/identitytheft to learn what
steps you should take.
For more information, see Pub. 5027.
Victims of identity theft who are experienc-
ing economic harm or a systemic problem, or
are seeking help in resolving tax problems that
have not been resolved through normal chan-
nels, may be eligible for Taxpayer Advocate
Service (TAS) assistance. You can reach TAS
by calling the National Taxpayer Advocate help-
line at 1-877-777-4778 or TTY/TDD at
1-800-829-4059. Deaf or hard-of-hearing indi-
viduals can also contact the IRS through relay
services such as the Federal Relay Service
available at www.gsa.gov/fedrelay.
Protect yourself from suspicious emails
or phishing schemes. Phishing is the crea-
tion and use of email and websites designed to
mimic legitimate business emails and websites.
The most common form is the act of sending an
email to a user falsely claiming to be an estab-
lished legitimate enterprise in an attempt to
scam the user into surrendering private informa-
tion that will be used for identity theft.
The IRS doesn't initiate contacts with tax-
payers via emails. Also, the IRS doesn't request
detailed personal information through email or
ask taxpayers for the PIN numbers, passwords,
or similar secret access information for their
credit card, bank, or other financial accounts.
If you receive an unsolicited email claiming
to be from the IRS, forward the message to
phishing@irs.gov. You may also report misuse
of the IRS name, logo, forms or other IRS prop-
erty to the Treasury Inspector General for Tax
Administration toll-free at 1-800-366-4484. You
can forward suspicious emails to the Federal
Trade Commission at spam@uce.gov or con-
tact them at www.ftc.gov/idtheft or 1-877-ID-
THEFT (1-877-438-4338).
Go to IRS.gov/idprotection to learn more
about identity theft and how to reduce your risk.
2.
Filing Status
Introduction
This chapter helps you determine which filing
status to use. There are five filing statuses.
Single.
Married Filing Jointly.
Married Filing Separately.
Head of Household.
Qualifying Widow(er) With Dependent
Child.
If more than one filing status applies to
you, choose the one that will give you
the lowest tax.TIP
You must determine your filing status before
you can determine whether you must file a tax
return (chapter 1), your standard deduction
(chapter 20), and your tax (chapter 30). You
also use your filing status to determine whether
you are eligible to claim certain deductions and
credits.
Useful Items
You may want to see:
Publication
Exemptions, Standard Deduction,
and Filing Information
U.S. Tax Guide for Aliens
Community Property
Marital Status
In general, your filing status depends on
whether you are considered unmarried or mar-
ried.
Unmarried persons. You are considered un-
married for the whole year if, on the last day of
your tax year, you are either:
Unmarried, or
Legally separated from your spouse under
a divorce or separate maintenance decree.
State law governs whether you are married
or legally separated under a divorce or
separate maintenance decree.
Divorced persons. If you are divorced un-
der a final decree by the last day of the year,
you are considered unmarried for the whole
year.
Divorce and remarriage. If you obtain a di-
vorce for the sole purpose of filing tax returns as
unmarried individuals, and at the time of divorce
you intend to and do, in fact, remarry each other
in the next tax year, you and your spouse must
file as married individuals in both years.
Annulled marriages. If you obtain a court
decree of annulment, which holds that no valid
marriage ever existed, you are considered un-
married even if you filed joint returns for earlier
years. You must file Form 1040X, Amended
U.S. Individual Income Tax Return, claiming
single or head of household status for all tax
years that are affected by the annulment and
not closed by the statute of limitations for filing a
tax return. Generally, for a credit or refund, you
must file Form 1040X within 3 years (including
extensions) after the date you filed your original
return or within 2 years after the date you paid
the tax, whichever is later. If you filed your origi-
nal return early (for example, March 1) your re-
turn is considered filed on the due date (gener-
ally April 15). However, if you had an extension
to file (for example, until October 15) but you
filed earlier and we received it on July 1, your
return is considered filed on July 1.
Head of household or qualifying
widow(er) with dependent child. If you are
considered unmarried, you may be able to file
as a head of household or as a qualifying
widow(er) with a dependent child. See Head of
Household and Qualifying Widow(er) With
Dependent Child to see if you qualify.
Married persons. If you are considered mar-
ried, you and your spouse can file a joint return
or separate returns.
Considered married. You are considered
married for the whole year if, on the last day of
your tax year, you and your spouse meet any
one of the following tests.
1. You are married and living together.
2. You are living together in a common law
marriage recognized in the state where
you now live or in the state where the com-
mon law marriage began.
3. You are married and living apart, but not
legally separated under a decree of di-
vorce or separate maintenance.
4. You are separated under an interlocutory
(not final) decree of divorce.
Same-sex marriage. For federal tax purpo-
ses, the marriage of a same-sex couple is
treated the same as the marriage of a man to a
woman. The term “spouse” in this chapter in-
cludes an individual married to a person of the
same sex. However, individuals who have en-
tered into a registered domestic partnership,
civil union, or other similar relationship that isn’t
considered a marriage under state law aren’t
considered married for federal tax purposes.
For more details, see Pub. 501.
Spouse died during the year. If your
spouse died during the year, you are consid-
ered married for the whole year for filing status
purposes.
If you didn't remarry before the end of the
tax year, you can file a joint return for yourself
and your deceased spouse. For the next 2
years, you may be entitled to the special bene-
fits described later under Qualifying Widow(er)
With Dependent Child.
If you remarried before the end of the tax
year, you can file a joint return with your new
spouse. Your deceased spouse's filing status is
married filing separately for that year.
Married persons living apart. If you live
apart from your spouse and meet certain tests,
you may be able to file as head of household
even if you aren't divorced or legally separated.
If you qualify to file as head of household in-
stead of married filing separately, your standard
deduction will be higher. Also, your tax may be
lower, and you may be able to claim the earned
income credit. See Head of Household, later.
Single
Your filing status is single if you are considered
unmarried and you don’t qualify for another fil-
ing status. To determine your marital status,
see Marital Status, earlier.
Widow(er). Your filing status may be single if
you were widowed before January 1, 2016, and
didn't remarry before the end of 2016. You may,
however, be able to use another filing status
that will give you a lower tax. See Head of
Household and Qualifying Widow(er) With De-
pendent Child, later, to see if you qualify.
How to file. You can file Form 1040. If you
have taxable income of less than $100,000, you
may be able to file Form 1040A. If, in addition,
Page 20 Chapter 2 Filing Status
you have no dependents, and are under 65 and
not blind, and meet other requirements, you can
file Form 1040EZ. If you file Form 1040A or
Form 1040, show your filing status as single by
checking the box on line 1. Use the Single col-
umn of the Tax Table or Section A of the Tax
Computation Worksheet to figure your tax.
Married Filing Jointly
You can choose married filing jointly as your fil-
ing status if you are considered married and
both you and your spouse agree to file a joint
return. On a joint return, you and your spouse
report your combined income and deduct your
combined allowable expenses. You can file a
joint return even if one of you had no income or
deductions.
If you and your spouse decide to file a joint
return, your tax may be lower than your com-
bined tax for the other filing statuses. Also, your
standard deduction (if you don’t itemize deduc-
tions) may be higher, and you may qualify for
tax benefits that don’t apply to other filing sta-
tuses.
If you and your spouse each have in-
come, you may want to figure your tax
both on a joint return and on separate
returns (using the filing status of married filing
separately). You can choose the method that
gives the two of you the lower combined tax.
How to file. If you file as married filing jointly,
you can use Form 1040. If you and your spouse
have taxable income of less than $100,000, you
may be able to file Form 1040A. If, in addition,
you and your spouse have no dependents, are
both under 65 and not blind, and meet other re-
quirements, you can file Form 1040EZ. If you
file Form 1040 or Form 1040A, show this filing
status by checking the box on line 2. Use the
Married filing jointly column of the Tax Table or
Section B of the Tax Computation Worksheet to
figure your tax.
Spouse died. If your spouse died during the
year, you are considered married for the whole
year and can choose married filing jointly as
your filing status. See Spouse died during the
year under Marital Status, earlier, for more infor-
mation.
If your spouse died in 2017 before filing a
2016 return, you can choose married filing
jointly as your filing status on your 2016 return.
Divorced persons. If you are divorced under a
final decree by the last day of the year, you are
considered unmarried for the whole year and
you can’t choose married filing jointly as your fil-
ing status.
Filing a Joint Return
Both you and your spouse must include all of
your income, exemptions, and deductions on
your joint return.
Accounting period. Both of you must use the
same accounting period, but you can use differ-
ent accounting methods. See Accounting Peri-
ods and Accounting Methods in chapter 1.
Joint responsibility. Both of you may be held
responsible, jointly and individually, for the taxTIP
and any interest or penalty due on your joint re-
turn. This means that if one spouse doesn't pay
the tax due, the other may have to. Or, if one
spouse doesn't report the correct tax, both
spouses may be responsible for any additional
taxes assessed by the IRS. One spouse may
be held responsible for all the tax due even if all
the income was earned by the other spouse.
You may want to file separately if:
You believe your spouse isn't reporting all
of his or her income, or
You don’t want to be responsible for any
taxes due if your spouse doesn't have
enough tax withheld or doesn't pay enough
estimated tax.
Divorced taxpayer. You may be held jointly
and individually responsible for any tax, inter-
est, and penalties due on a joint return filed be-
fore your divorce. This responsibility may apply
even if your divorce decree states that your for-
mer spouse will be responsible for any amounts
due on previously filed joint returns.
Relief from joint responsibility. In some
cases, one spouse may be relieved of joint re-
sponsibility for tax, interest, and penalties on a
joint return for items of the other spouse that
were incorrectly reported on the joint return.
You can ask for relief no matter how small the
liability.
There are three types of relief available.
1. Innocent spouse relief.
2. Separation of liability (available only to
joint filers who are divorced, widowed, le-
gally separated, or haven't lived together
for the 12 months ending on the date the
election for this relief is filed).
3. Equitable relief.
You must file Form 8857, Request for Inno-
cent Spouse Relief, to request relief from joint
responsibility. Pub. 971, Innocent Spouse Re-
lief, explains these kinds of relief and who may
qualify for them.
Signing a joint return. For a return to be con-
sidered a joint return, both spouses generally
must sign the return.
Spouse died before signing. If your
spouse died before signing the return, the exec-
utor or administrator must sign the return for
your spouse. If neither you nor anyone else has
yet been appointed as executor or administra-
tor, you can sign the return for your spouse and
enter “Filing as surviving spouse” in the area
where you sign the return.
Spouse away from home. If your spouse is
away from home, you should prepare the re-
turn, sign it, and send it to your spouse to sign
so that it can be filed on time.
Injury or disease prevents signing. If your
spouse can’t sign because of disease or injury
and tells you to sign for him or her, you can sign
your spouse's name in the proper space on the
return followed by the words “By (your name),
Husband (or Wife).” Be sure to also sign in the
space provided for your signature. Attach a
dated statement, signed by you, to the return.
The statement should include the form number
of the return you are filing, the tax year, and the
reason your spouse can’t sign, and should state
that your spouse has agreed to your signing for
him or her.
Signing as guardian of spouse. If you are
the guardian of your spouse who is mentally in-
competent, you can sign the return for your
spouse as guardian.
Spouse in combat zone. You can sign a
joint return for your spouse if your spouse can’t
sign because he or she is serving in a combat
zone (such as the Persian Gulf Area, Serbia,
Montenegro, Albania, or Afghanistan), even if
you don’t have a power of attorney or other
statement. Attach a signed statement to your
return explaining that your spouse is serving in
a combat zone. For more information on special
tax rules for persons who are serving in a com-
bat zone, or who are in missing status as a re-
sult of serving in a combat zone, see Pub. 3,
Armed Forces' Tax Guide.
Other reasons spouse can’t sign. If your
spouse can’t sign the joint return for any other
reason, you can sign for your spouse only if you
are given a valid power of attorney (a legal
document giving you permission to act for your
spouse). Attach the power of attorney (or a
copy of it) to your tax return. You can use Form
2848, Power of Attorney and Declaration of
Representative.
Nonresident alien or dualstatus alien. Gen-
erally, a married couple can’t file a joint return if
either one is a nonresident alien at any time
during the tax year. However, if one spouse
was a nonresident alien or dual-status alien
who was married to a U.S. citizen or resident
alien at the end of the year, the spouses can
choose to file a joint return. If you do file a joint
return, you and your spouse are both treated as
U.S. residents for the entire tax year. See chap-
ter 1 of Pub. 519.
Married Filing
Separately
You can choose married filing separately as
your filing status if you are married. This filing
status may benefit you if you want to be respon-
sible only for your own tax or if it results in less
tax than filing a joint return.
If you and your spouse don’t agree to file a
joint return, you must use this filing status un-
less you qualify for head of household status,
discussed later.
You may be able to choose head of house-
hold filing status if you are considered unmar-
ried because you live apart from your spouse
and meet certain tests (explained later, under
Head of Household). This can apply to you
even if you aren't divorced or legally separated.
If you qualify to file as head of household, in-
stead of as married filing separately, your tax
may be lower, you may be able to claim the
earned income credit and certain other credits,
and your standard deduction will be higher. The
head of household filing status allows you to
choose the standard deduction even if your
spouse chooses to itemize deductions. See
Head of Household, later, for more information.
Chapter 2 Filing Status Page 21
You will generally pay more combined
tax on separate returns than you would
on a joint return for the reasons listed
under Special Rules, later. However, unless
you are required to file separately, you should
figure your tax both ways (on a joint return and
on separate returns). This way you can make
sure you are using the filing status that results in
the lowest combined tax. When figuring the
combined tax of a married couple, you may
want to consider state taxes as well as federal
taxes.
How to file. If you file a separate return, you
generally report only your own income, exemp-
tions, credits, and deductions. You can claim an
exemption for your spouse only if your spouse
had no gross income, isn't filing a return, and
wasn't the dependent of another person.
You can file Form 1040. If your taxable in-
come is less than $100,000, you may be able to
file Form 1040A. Select this filing status by
checking the box on line 3 of either form. Enter
your spouse's full name and SSN or ITIN in the
spaces provided. If your spouse doesn't have
and isn't required to have an SSN or ITIN, enter
“NRA” in the space for your spouse's SSN. Use
the Married filing separately column of the Tax
Table or Section C of the Tax Computation
Worksheet to figure your tax.
Special Rules
If you choose married filing separately as your
filing status, the following special rules apply.
Because of these special rules, you usually pay
more tax on a separate return than if you use
another filing status you qualify for.
1. Your tax rate generally is higher than on a
joint return.
2. Your exemption amount for figuring the al-
ternative minimum tax is half that allowed
on a joint return.
3. You can’t take the credit for child and de-
pendent care expenses in most cases,
and the amount you can exclude from in-
come under an employer's dependent
care assistance program is limited to
$2,500 (instead of $5,000). However, if
you are legally separated or living apart
from your spouse, you may be able to file
a separate return and still take the credit.
For more information about these expen-
ses, the credit, and the exclusion, see
chapter 32.
4. You can’t take the earned income credit.
5. You can’t take the exclusion or credit for
adoption expenses in most cases.
6. You can’t take the education credits (the
American opportunity credit and lifetime
learning credit), the deduction for student
loan interest, or the tuition and fees de-
duction.
7. You can’t exclude any interest income
from qualified U.S. savings bonds you
used for higher education expenses.
8. If you lived with your spouse at any time
during the tax year:TIP
a. You can’t claim the credit for the eld-
erly or the disabled, and
b. You must include in income a greater
percentage (up to 85%) of any social
security or equivalent railroad retire-
ment benefits you received.
9. The following credits and deductions are
reduced at income levels half those for a
joint return:
a. The child tax credit,
b. The retirement savings contributions
credit,
c. The deduction for personal exemp-
tions, and
d. Itemized deductions.
10. Your capital loss deduction limit is $1,500
(instead of $3,000 on a joint return).
11. If your spouse itemizes deductions, you
can’t claim the standard deduction. If you
can claim the standard deduction, your
basic standard deduction is half the
amount allowed on a joint return.
Adjusted gross income (AGI) limits. If your
AGI on a separate return is lower than it would
have been on a joint return, you may be able to
deduct a larger amount for certain deductions
that are limited by AGI, such as medical expen-
ses.
Individual retirement arrangements (IRAs).
You may not be able to deduct all or part of your
contributions to a traditional IRA if you or your
spouse were covered by an employee retire-
ment plan at work during the year. Your deduc-
tion is reduced or eliminated if your income is
more than a certain amount. This amount is
much lower for married individuals who file sep-
arately and lived together at any time during the
year. For more information, see How Much Can
You Deduct in chapter 17.
Rental activity losses. If you actively partici-
pated in a passive rental real estate activity that
produced a loss, you generally can deduct the
loss from your nonpassive income, up to
$25,000. This is called a special allowance.
However, married persons filing separate re-
turns who lived together at any time during the
year can’t claim this special allowance. Married
persons filing separate returns who lived apart
at all times during the year are each allowed a
$12,500 maximum special allowance for losses
from passive real estate activities. See Limits
on Rental Losses in chapter 9.
Community property states. If you live in Ari-
zona, California, Idaho, Louisiana, Nevada,
New Mexico, Texas, Washington, or Wisconsin
and file separately, your income may be consid-
ered separate income or community income for
income tax purposes. See Pub. 555.
Joint Return After
Separate Returns
You can change your filing status from a sepa-
rate return to a joint return by filing an amended
return using Form 1040X.
You generally can change to a joint return
any time within 3 years from the due date of the
separate return or returns. This doesn't include
any extensions. A separate return includes a re-
turn filed by you or your spouse claiming mar-
ried filing separately, single, or head of house-
hold filing status.
Separate Returns After
Joint Return
Once you file a joint return, you can’t choose to
file separate returns for that year after the due
date of the return.
Exception. A personal representative for a de-
cedent can change from a joint return elected
by the surviving spouse to a separate return for
the decedent. The personal representative has
1 year from the due date of the return (including
extensions) to make the change. See Pub. 559,
Survivors, Executors, and Administrators, for
more information on filing a return for a dece-
dent.
Head of Household
You may be able to file as head of household if
you meet all the following requirements.
1. You are unmarried or “considered unmar-
ried” on the last day of the year. See Mari-
tal Status, earlier, and Considered Unmar-
ried, later.
2. You paid more than half the cost of keep-
ing up a home for the year.
3. A qualifying person lived with you in the
home for more than half the year (except
for temporary absences, such as school).
However, if the qualifying person is your
dependent parent, he or she doesn't have
to live with you. See Special rule for pa-
rent, later, under Qualifying Person.
If you qualify to file as head of house-
hold, your tax rate usually will be lower
than the rates for single or married fil-
ing separately. You will also receive a higher
standard deduction than if you file as single or
married filing separately.
Kidnapped child. You may be eligible to file
as head of household even if the child who is
your qualifying person has been kidnapped. For
more information, see Pub. 501.
How to file. If you file as head of household,
you can use Form 1040. If your taxable income
is less than $100,000, you may be able to file
Form 1040A. Indicate your choice of this filing
status by checking the box on line 4 of either
form. Use the Head of a household column of
the Tax Table or Section D of the Tax Computa-
tion Worksheet to figure your tax.
Considered Unmarried
To qualify for head of household status, you
must be either unmarried or considered unmar-
ried on the last day of the year. You are consid-
ered unmarried on the last day of the tax year if
you meet all the following tests.TIP
Page 22 Chapter 2 Filing Status
1. You file a separate return. A separate re-
turn includes a return claiming married fil-
ing separately, single, or head of house-
hold filing status.
2. You paid more than half the cost of keep-
ing up your home for the tax year.
3. Your spouse didn't live in your home dur-
ing the last 6 months of the tax year. Your
spouse is considered to live in your home
even if he or she is temporarily absent due
to special circumstances. See Temporary
absences, under Qualifying Person, later.
4. Your home was the main home of your
child, stepchild, or foster child for more
than half the year. (See Home of qualifying
person, under Qualifying Person, later, for
rules applying to a child's birth, death, or
temporary absence during the year.)
5. You must be able to claim an exemption
for the child. However, you meet this test if
you can’t claim the exemption only be-
cause the noncustodial parent can claim
the child using the rules described in Chil-
dren of divorced or separated parents (or
parents who live apart) under Qualifying
Child in chapter 3, or referred to in Support
Test for Children of Divorced or Separated
Parents (or Parents Who Live Apart) under
Qualifying Relative in chapter 3. The gen-
eral rules for claiming an exemption for a
dependent are explained under Exemp-
tions for Dependents in chapter 3.
If you were considered married for part
of the year and lived in a community
property state (listed earlier under Mar-
ried Filing Separately), special rules may apply
in determining your income and expenses. See
Pub. 555 for more information.
Nonresident alien spouse. You are consid-
ered unmarried for head of household purposes
if your spouse was a nonresident alien at any
time during the year and you don’t choose to
treat your nonresident spouse as a resident
alien. However, your spouse isn't a qualifyingCAUTION
!
person for head of household purposes. You
must have another qualifying person and meet
the other tests to be eligible to file as a head of
household.
Choice to treat spouse as resident. You
are considered married if you choose to treat
your spouse as a resident alien. See Pub. 519.
Keeping Up a Home
To qualify for head of household status, you
must pay more than half of the cost of keeping
up a home for the year. You can determine
whether you paid more than half of the cost of
keeping up a home by using Worksheet 2–1.
Costs you include. Include in the cost of
keeping up a home expenses such as rent,
mortgage interest, real estate taxes, insurance
on the home, repairs, utilities, and food eaten in
the home.
If you used payments you received under
Temporary Assistance for Needy Families
(TANF) or other public assistance programs to
pay part of the cost of keeping up your home,
you can’t count them as money you paid. How-
ever, you must include them in the total cost of
keeping up your home to figure if you paid over
half the cost.
Costs you don’t include. Don’t include the
costs of clothing, education, medical treatment,
vacations, life insurance, or transportation.
Also, don’t include the rental value of a home
you own or the value of your services or those
of a member of your household.
Qualifying Person
See Table 2-1 to see who is a qualifying person.
Any person not described in Table 2-1 isn't a
qualifying person.
Example 1—child. Your unmarried son
lived with you all year and was 18 years old at
the end of the year. He didn't provide more than
half of his own support and doesn't meet the
tests to be a qualifying child of anyone else. As
a result, he is your qualifying child (see Qualify-
ing Child in chapter 3) and, because he is sin-
gle, your qualifying person for you to claim head
of household filing status.
Example 2—child who isn't qualifying
person. The facts are the same as in Exam-
ple 1 except your son was 25 years old at the
end of the year and his gross income was
$5,000. Because he doesn't meet the age test
(explained under Qualifying Child in chapter 3),
your son isn't your qualifying child. Because he
doesn't meet the gross income test (explained
later under Qualifying Relative in chapter 3), he
isn't your qualifying relative. As a result, he isn't
your qualifying person for head of household
purposes.
Example 3—girlfriend. Your girlfriend
lived with you all year. Even though she may be
your qualifying relative if the gross income and
support tests (explained in chapter 3) are met,
she isn't your qualifying person for head of
household purposes because she isn't related
to you in one of the ways listed under Relatives
who don’t have to live with you in chapter 3.
See Table 2-1.
Example 4—girlfriend's child. The facts
are the same as in Example 3 except your girl-
friend's 10-year-old son also lived with you all
year. He isn't your qualifying child and, because
he is your girlfriend's qualifying child, he isn't
your qualifying relative (see Not a Qualifying
Child Test in chapter 3). As a result, he isn't
your qualifying person for head of household
purposes.
Home of qualifying person. Generally, the
qualifying person must live with you for more
than half of the year.
Special rule for parent. If your qualifying
person is your father or mother, you may be eli-
gible to file as head of household even if your
father or mother doesn't live with you. However,
you must be able to claim an exemption for your
father or mother. Also, you must pay more than
half the cost of keeping up a home that was the
main home for the entire year for your father or
mother.
If you pay more than half the cost of keeping
your parent in a rest home or home for the eld-
erly, that counts as paying more than half the
cost of keeping up your parent's main home.
Death or birth. You may be eligible to file as
head of household even if the individual who
qualifies you for this filing status is born or dies
during the year. If the individual is your qualify-
ing child, the child must have lived with you for
more than half the part of the year he or she
was alive. If the individual is anyone else, see
Pub. 501.
Temporary absences. You and your quali-
fying person are considered to live together
even if one or both of you are temporarily ab-
sent from your home due to special circumstan-
ces such as illness, education, business, vaca-
tion, military service, or detention in a juvenile
facility. It must be reasonable to assume the ab-
sent person will return to the home after the
temporary absence. You must continue to keep
up the home during the absence.
Worksheet 2-1. Cost of Keeping
Up a Home Keep for Your Records
Amount
You Paid Total Cost
Property taxes $ $
Mortgage interest expense
Rent
Utility charges
Repairs/maintenance
Property insurance
Food eaten in the home
Other household expenses
Totals $ $
Minus total amount you paid ( )
Amount others paid $
If the total amount you paid is more than the amount others paid, you meet the
requirement of paying more than half the cost of keeping up the home.
Chapter 2 Filing Status Page 23
Qualifying Widow(er)
With Dependent Child
If your spouse died in 2016, you can use mar-
ried filing jointly as your filing status for 2016 if
you otherwise qualify to use that status. The
year of death is the last year for which you can
file jointly with your deceased spouse. See Mar-
ried Filing Jointly, earlier.
You may be eligible to use qualifying
widow(er) with dependent child as your filing
status for 2 years following the year your
spouse died. For example, if your spouse died
in 2015, and you haven't remarried, you may be
able to use this filing status for 2016 and 2017.
This filing status entitles you to use joint re-
turn tax rates and the highest standard deduc-
tion amount (if you don’t itemize deductions). It
doesn't entitle you to file a joint return.
How to file. If you file as qualifying widow(er)
with dependent child, you can use Form 1040. If
you also have taxable income of less than
$100,000 and meet certain other conditions,
you may be able to file Form 1040A. Check the
box on line 5 of either form. Use the Married fil-
ing jointly column of the Tax Table or Section B
of the Tax Computation Worksheet to figure
your tax.
Eligibility rules. You are eligible to file your
2016 return as a qualifying widow(er) with de-
pendent child if you meet all of the following
tests.
You were entitled to file a joint return with
your spouse for the year your spouse died.
It doesn't matter whether you actually filed
a joint return.
Your spouse died in 2014 or 2015 and you
didn't remarry before the end of 2016.
You have a child or stepchild for whom you
can claim an exemption. This doesn't in-
clude a foster child.
This child lived in your home all year, ex-
cept for temporary absences. See Tempo-
rary absences, earlier, under Head of
Household. There are also exceptions, de-
scribed later, for a child who was born or
died during the year and for a kidnapped
child.
You paid more than half the cost of keep-
ing up a home for the year. See Keeping
Up a Home, earlier, under Head of House-
hold.
Example. John's wife died in 2014. John
hasn't remarried. During 2015 and 2016, he
continued to keep up a home for himself and his
child, who lives with him and for whom he can
claim an exemption. For 2014 he was entitled to
file a joint return for himself and his deceased
wife. For 2015 and 2016, he can file as qualify-
ing widower with a dependent child. After 2016
he can file as head of household if he qualifies.
Death or birth. You may be eligible to file as a
qualifying widow(er) with dependent child if the
child who qualifies you for this filing status is
born or dies during the year. You must have
Who Is a Qualifying Person Qualifying You To File as Head of Household?1
Caution. See the text of this chapter for the other requirements you must meet to claim head of household
filing status.
IF the person is your . . . AND . . . THEN that person is . . .
qualifying child (such as a son,
daughter, or grandchild who lived with
you more than half the year and meets
certain other tests)2
he or she is single a qualifying person, whether or
not you can claim an exemption
for the person.
he or she is married and you can claim an
exemption for him or her
a qualifying person.
he or she is married and you can’t claim an
exemption for him or her
not a qualifying person.3
qualifying relative4 who is your father or
mother
you can claim an exemption for him or her5 a qualifying person.6
you can’t claim an exemption for him or her not a qualifying person.
qualifying relative4 other than your father
or mother (such as a grandparent,
brother, or sister who meets certain
tests)
he or she lived with you more than half the
year, and he or she is related to you in one
of the ways listed under Relatives who don’t
have to live with you in chapter 3 and you
can claim an exemption for him or her5
a qualifying person.
he or she didn't live with you more than half
the year
not a qualifying person.
he or she isn't related to you in one of the
ways listed under Relatives who don’t have
to live with you in chapter 3 and is your
qualifying relative only because he or she
lived with you all year as a member of your
household
not a qualifying person.
you can’t claim an exemption for him or her not a qualifying person.
1A person can’t qualify more than one taxpayer to use the head of household filing status for the year.
2The term “qualifying child” is defined in chapter 3. Note. If you are a noncustodial parent, the term “qualifying child” for head of household filing status doesn't include a child who is your
qualifying child for exemption purposes only because of the rules described under Children of divorced or separated parents (or parents who live apart) under Qualifying Child in
chapter 3. If you are the custodial parent and those rules apply, the child generally is your qualifying child for head of household filing status even though the child isn't a qualifying child
for whom you can claim an exemption.
3This person is a qualifying person if the only reason you can’t claim the exemption is that you can be claimed as a dependent on someone else's return.
4The term “qualifying relative” is defined in chapter 3.
5If you can claim an exemption for a person only because of a multiple support agreement, that person isn't a qualifying person. See Multiple Support Agreement in chapter 3.
6See Special rule for parent.
Table 2-1.
Page 24 Chapter 2 Filing Status
provided more than half of the cost of keeping
up a home that was the child's main home dur-
ing the entire part of the year he or she was
alive.
Kidnapped child. You may be eligible to file
as a qualifying widow(er) with dependent child
even if the child who qualifies you for this filing
status has been kidnapped. See Pub. 501.
As mentioned earlier, this filing status
is available for only 2 years following
the year your spouse died.
3.
Personal
Exemptions and
Dependents
What's New
Exemption amount. The amount you can de-
duct for each exemption has increased. It was
$4,000 for 2015. It is $4,050 for 2016.
Exemption phaseout. You lose at least part of
the benefit of your exemptions if your adjusted
gross income is more than a certain amount.
For 2016, this amount is $155,650 for a married
individual filing a separate return; $259,400 for
a single individual; $285,350 for a head of
household; and $311,300 for married individu-
als filing jointly or a qualifying widow(er). See
Phaseout of Exemptions, later.
Introduction
This chapter discusses the following topics.
Personal exemptions — You generally can
take one for yourself and, if you are mar-
ried, one for your spouse.
Exemptions for dependents — You gener-
ally can take an exemption for each of your
dependents. A dependent is your qualify-
ing child or qualifying relative. If you are
entitled to claim an exemption for a de-
pendent, that dependent can’t claim a per-
sonal exemption on his or her own tax re-
turn.
Phaseout of exemptions — Your deduction
is reduced if your adjusted gross income is
more than a certain amount.
Social security number (SSN) requirement
for dependents — You must list the SSN of
any dependent for whom you claim an ex-
emption.
Deduction. Exemptions reduce your taxable
income. You can deduct $4,050 for each ex-
emption you claim in 2016. But you may lose atCAUTION
!
least part of the dollar amount of your exemp-
tions if your adjusted gross income is more than
a certain amount. See Phaseout of Exemptions,
later.
How to claim exemptions. How you claim an
exemption on your tax return depends on which
form you file.
If you file Form 1040EZ, the exemption
amount is combined with the standard deduc-
tion amount and entered on line 5.
If you file Form 1040A, complete lines 6a
through 6d. The total number of exemptions
you can claim is the total in the box on line 6d.
Also complete line 26.
If you file Form 1040, complete lines 6a
through 6d. The total number of exemptions
you can claim is the total in the box on line 6d.
Also complete line 42.
Useful Items
You may want to see:
Publication
Exemptions, Standard Deduction,
and Filing Information
Form (and Instructions)
Multiple Support Declaration
Release/Revocation of Release of
Claim to Exemption for Child by
Custodial Parent
Exemptions
There are two types of exemptions you may be
able to take:
Personal exemptions for yourself and your
spouse, and
Exemptions for dependents (dependency
exemptions).
While each is worth the same amount ($4,050
for 2016), different rules apply to each type.
Personal Exemptions
You are generally allowed one exemption for
yourself. If you are married, you may be allowed
one exemption for your spouse. These are
called personal exemptions.
Your Own Exemption
You can take one exemption for yourself unless
you can be claimed as a dependent by another
taxpayer. If another taxpayer is entitled to claim
you as a dependent, you can’t take an exemp-
tion for yourself even if the other taxpayer
doesn't actually claim you as a dependent.
Your Spouse's Exemption
Your spouse is never considered your depend-
ent.
Joint return. On a joint return you can claim
one exemption for yourself and one for your
spouse.
2120
8332
Separate return. If you file a separate return,
you can claim an exemption for your spouse
only if your spouse:
Had no gross income,
Isn't filing a return, and
Wasn't the dependent of another taxpayer.
This is true even if the other taxpayer doesn't
actually claim your spouse as a dependent.
You can claim an exemption for your spouse
even if he or she is a nonresident alien. In that
case, your spouse:
Must have no gross income for U.S. tax
purposes,
Must not be filing a return, and
Must not be the dependent of another tax-
payer.
Death of spouse. If your spouse died during
the year and you file a joint return for yourself
and your deceased spouse, you generally can
claim your spouse's exemption under the rules
just explained in Joint return. If you file a sepa-
rate return for the year, you may be able to
claim your spouse's exemption under the rules
just described in Separate return.
If you remarried during the year, you can’t
take an exemption for your deceased spouse.
If you are a surviving spouse without gross
income and you remarry in the year your
spouse died, you can be claimed as an exemp-
tion on both the final separate return of your de-
ceased spouse and the separate return of your
new spouse for that year. If you file a joint return
with your new spouse, you can be claimed as
an exemption only on that return.
Divorced or separated spouse. If you ob-
tained a final decree of divorce or separate
maintenance during the year, you can’t take
your former spouse's exemption. This rule ap-
plies even if you provided all of your former
spouse's support.
Exemptions for
Dependents
You are allowed one exemption for each person
you can claim as a dependent. You can claim
an exemption for a dependent even if your de-
pendent files a return. However, see Joint Re-
turn Test, later.
The term “dependent” means:
A qualifying child, or
A qualifying relative.
The terms “qualifying child” and “qualifying
relative” are defined later.
All the requirements for claiming an exemp-
tion for a dependent are summarized in Ta-
ble 3-1.
Dependent not allowed a personal
exemption. If you can claim an ex-
emption for your dependent, the de-
pendent can’t claim his or her own personal ex-
emption on his or her own tax return. This is
true even if you don’t claim the dependent's ex-
emption on your return. It is also true if the de-
pendent's exemption on your return is reducedCAUTION
!
Chapter 3 Personal Exemptions and Dependents Page 25
or eliminated under the phaseout rule described
under Phaseout of Exemptions, later.
Housekeepers, maids, or servants. If these
people work for you, you can’t claim exemp-
tions for them.
Child tax credit. You may be entitled to a child
tax credit for each qualifying child who was un-
der age 17 at the end of the year if you claimed
an exemption for that child. For more informa-
tion, see chapter 34.
Exceptions
Even if you have a qualifying child or qualifying
relative, you can claim an exemption for that
person only if these three tests are met.
1. Dependent taxpayer test.
2. Joint return test.
3. Citizen or resident test.
These three tests are explained in detail
here.
Dependent Taxpayer Test
If you can be claimed as a dependent by an-
other person, you can’t claim anyone else as a
dependent. Even if you have a qualifying child
or qualifying relative, you can’t claim that per-
son as a dependent.
If you are filing a joint return and your
spouse can be claimed as a dependent by
someone else, you and your spouse can’t claim
any dependents on your joint return.
Overview of the Rules for Claiming an Exemption for a Dependent
Caution. This table is only an overview of the rules. For details, see the rest of this chapter.
You can’t claim any dependents if you (or your spouse, if filing jointly) could be claimed as a dependent by another taxpayer.
You can’t claim a married person who files a joint return as a dependent unless that joint return is filed only to claim a refund of
withheld income tax or estimated tax paid.
You can’t claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of
Canada or Mexico.1
You can’t claim a person as a dependent unless that person is your qualifying child or qualifying relative.
Tests To Be a Qualifying Child Tests To Be a Qualifying Relative
1. The child must be your son, daughter, stepchild, foster child,
brother, sister, half brother, half sister, stepbrother, stepsister,
or a descendant of any of them.
2. The child must be (a) under age 19 at the end of the year and
younger than you (or your spouse, if filing jointly), (b) under age
24 at the end of the year, a student, and younger than you (or
your spouse, if filing jointly), or (c) any age if permanently and
totally disabled.
3. The child must have lived with you for more than half of the
year.2
4. The child must not have provided more than half of his or her
own support for the year.
5. The child must not be filing a joint return for the year (unless
that return is filed only to get a refund of income tax withheld or
estimated tax paid).
If the child meets the rules to be a qualifying child of more than one
person, only one person can actually treat the child as a qualifying
child. See Qualifying Child of More Than One Person to find out
which person is the person entitled to claim the child as a qualifying
child.
1. The person can’t be your qualifying child or the
qualifying child of any other taxpayer.
2. The person either (a) must be related to you in one of
the ways listed under Relatives who don’t have to live
with you, or (b) must live with you all year as a member
of your household2 (and your relationship must not
violate local law).
3. The person's gross income for the year must be less
than $4,050.3
4. You must provide more than half of the person's total
support for the year.4
1There is an exception for certain adopted children.
2There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or
parents who live apart), and kidnapped children.
3There is an exception if the person is disabled and has income from a sheltered workshop.
4There are exceptions for multiple support agreements, children of divorced or separated parents (or parents who live apart), and kidnapped
children.
Table 3-1.
Page 26 Chapter 3 Personal Exemptions and Dependents
Joint Return Test
You generally cannot claim a married person as
a dependent if he or she files a joint return.
Exception. You can claim an exemption for a
person who files a joint return if that person and
his or her spouse file the joint return only to
claim a refund of income tax withheld or estima-
ted tax paid.
Example 1—child files joint return. You
supported your 18-year-old daughter, and she
lived with you all year while her husband was in
the Armed Forces. He earned $25,000 for the
year. The couple files a joint return. You can’t
take an exemption for your daughter.
Example 2—child files joint return only
as claim for refund of withheld tax. Your
18-year-old son and his 17-year-old wife had
$800 of wages from part-time jobs and no other
income. They lived with you all year. Neither is
required to file a tax return. They don’t have a
child. Taxes were taken out of their pay so they
filed a joint return only to get a refund of the
withheld taxes. The exception to the joint return
test applies, so you aren't disqualified from
claiming an exemption for each of them just be-
cause they file a joint return. You can claim ex-
emptions for each of them if all the other tests to
do so are met.
Example 3—child files joint return to
claim American opportunity credit. The
facts are the same as in Example 2 except no
taxes were taken out of your son's pay or his
wife's pay. However, they file a joint return to
claim an American opportunity credit of $124
and get a refund of that amount. Because
claiming the American opportunity credit is their
reason for filing the return, they aren't filing it
only to get a refund of income tax withheld or
estimated tax paid. The exception to the joint
return test doesn't apply, so you can’t claim an
exemption for either of them.
Citizen or Resident Test
You generally can’t claim a person as a de-
pendent unless that person is a U.S. citizen,
U.S. resident alien, U.S. national, or a resident
of Canada or Mexico. However, there is an ex-
ception for certain adopted children, as ex-
plained next.
Exception for adopted child. If you are a
U.S. citizen or U.S. national who has legally
adopted a child who isn't a U.S. citizen, U.S.
resident alien, or U.S. national, this test is met if
the child lived with you as a member of your
household all year. This exception also applies
if the child was lawfully placed with you for legal
adoption.
Child's place of residence. Children usually
are citizens or residents of the country of their
parents.
If you were a U.S. citizen when your child
was born, the child may be a U.S. citizen and
meet this test even if the other parent was a
nonresident alien and the child was born in a
foreign country.
Foreign students' place of residence. For-
eign students brought to this country under a
qualified international education exchange pro-
gram and placed in American homes for a tem-
porary period generally aren't U.S. residents
and don’t meet this test. You can’t claim an ex-
emption for them. However, if you provided a
home for a foreign student, you may be able to
take a charitable contribution deduction. See
Expenses Paid for Student Living With You in
chapter 24.
U.S. national. A U.S. national is an individual
who, although not a U.S. citizen, owes his or
her allegiance to the United States. U.S. nation-
als include American Samoans and Northern
Mariana Islanders who chose to become U.S.
nationals instead of U.S. citizens.
Qualifying Child
Five tests must be met for a child to be your
qualifying child. The five tests are:
1. Relationship,
2. Age,
3. Residency,
4. Support, and
5. Joint return.
These tests are explained next.
If a child meets the five tests to be the
qualifying child of more than one per-
son, there are rules you must use to
determine which person can actually treat the
child as a qualifying child. See Qualifying Child
of More Than One Person, later.
Relationship Test
To meet this test, a child must be:
Your son, daughter, stepchild, foster child,
or a descendant (for example, your grand-
child) of any of them, or
Your brother, sister, half brother, half sis-
ter, stepbrother, stepsister, or a descend-
ant (for example, your niece or nephew) of
any of them.
Adopted child. An adopted child is always
treated as your own child. The term “adopted
child” includes a child who was lawfully placed
with you for legal adoption.
Foster child. A foster child is an individual who
is placed with you by an authorized placement
agency or by judgment, decree, or other order
of any court of competent jurisdiction.
Age Test
To meet this test, a child must be:
Under age 19 at the end of the year and
younger than you (or your spouse, if filing
jointly),
A student under age 24 at the end of the
year and younger than you (or your
spouse, if filing jointly), or
Permanently and totally disabled at any
time during the year, regardless of age.
Example. Your son turned 19 on Decem-
ber 10. Unless he was permanently and totallyCAUTION
!
disabled or a student, he doesn't meet the age
test because, at the end of the year, he wasn't
under age 19.
Child must be younger than you or spouse.
To be your qualifying child, a child who isn't per-
manently and totally disabled must be younger
than you. However, if you are married filing
jointly, the child must be younger than you or
your spouse but doesn't have to be younger
than both of you.
Example 1—child not younger than you
or spouse. Your 23-year-old brother, who is a
student and unmarried, lives with you and your
spouse, who provide more than half of his sup-
port. He isn't disabled. Both you and your
spouse are 21 years old, and you file a joint re-
turn. Your brother isn't your qualifying child be-
cause he isn't younger than you or your spouse.
Example 2—child younger than your
spouse but not younger than you. The facts
are the same as in Example 1 except your
spouse is 25 years old. Because your brother is
younger than your spouse, and you and your
spouse are filing a joint return, your brother is
your qualifying child, even though he isn't
younger than you.
Student defined. To qualify as a student, your
child must be, during some part of each of any 5
calendar months of the year:
1. A full-time student at a school that has a
regular teaching staff, course of study, and
a regularly enrolled student body at the
school, or
2. A student taking a full-time, on-farm train-
ing course given by a school described in
(1), or by a state, county, or local govern-
ment agency.
The 5 calendar months don’t have to be con-
secutive.
Full-time student. A full-time student is a
student who is enrolled for the number of hours
or courses the school considers to be full-time
attendance.
School defined. A school can be an ele-
mentary school, junior or senior high school,
college, university, or technical, trade, or me-
chanical school. However, an on-the-job train-
ing course, correspondence school, or school
offering courses only through the Internet
doesn’t count as a school.
Vocational high school students. Stu-
dents who work on “co-op” jobs in private indus-
try as a part of a school's regular course of
classroom and practical training are considered
full-time students.
Permanently and totally disabled. Your child
is permanently and totally disabled if both of the
following apply.
He or she can’t engage in any substantial
gainful activity because of a physical or
mental condition.
A doctor determines the condition has las-
ted or can be expected to last continuously
for at least a year or can lead to death.
Chapter 3 Personal Exemptions and Dependents Page 27
Residency Test
To meet this test, your child must have lived
with you for more than half the year. There are
exceptions for temporary absences, children
who were born or died during the year, kidnap-
ped children, and children of divorced or sepa-
rated parents.
Temporary absences. Your child is consid-
ered to have lived with you during periods of
time when one of you, or both, are temporarily
absent due to special circumstances such as:
Illness,
Education,
Business,
Vacation,
Military service, or
Detention in a juvenile facility.
Death or birth of child. A child who was born
or died during the year is treated as having lived
with you more than half of the year if your home
was the child's home more than half of the time
he or she was alive during the year. The same
is true if the child lived with you more than half
the year except for any required hospital stay
following birth.
Child born alive. You may be able to claim
an exemption for a child born alive during the
year, even if the child lived only for a moment.
State or local law must treat the child as having
been born alive. There must be proof of a live
birth shown by an official document, such as a
birth certificate. The child must be your qualify-
ing child or qualifying relative, and all the other
tests to claim an exemption for a dependent
must be met.
Stillborn child. You can’t claim an exemp-
tion for a stillborn child.
Kidnapped child. You may be able to treat
your child as meeting the residency test even if
the child has been kidnapped. See Pub. 501 for
details.
Children of divorced or separated parents
(or parents who live apart). In most cases,
because of the residency test, a child of di-
vorced or separated parents is the qualifying
child of the custodial parent. However, the child
will be treated as the qualifying child of the non-
custodial parent if all four of the following state-
ments are true.
1. The parents:
a. Are divorced or legally separated un-
der a decree of divorce or separate
maintenance,
b. Are separated under a written separa-
tion agreement, or
c. Lived apart at all times during the last
6 months of the year, whether or not
they are or were married.
2. The child received over half of his or her
support for the year from the parents.
3. The child is in the custody of one or both
parents for more than half of the year.
4. Either of the following statements is true.
a. The custodial parent signs a written
declaration, discussed later, that he or
she won't claim the child as a depend-
ent for the year, and the noncustodial
parent attaches this written declara-
tion to his or her return. (If the decree
or agreement went into effect after
1984 and before 2009, see Post-1984
and pre-2009 divorce decree or sepa-
ration agreement, later. If the decree
or agreement went into effect after
2008, see Post-2008 divorce decree
or separation agreement, later.)
b. A pre-1985 decree of divorce or sepa-
rate maintenance or written separa-
tion agreement that applies to 2016
states that the noncustodial parent
can claim the child as a dependent,
the decree or agreement wasn't
changed after 1984 to say the non-
custodial parent can’t claim the child
as a dependent, and the noncustodial
parent provides at least $600 for the
child's support during the year.
If statements (1) through (4) are all true, only
the noncustodial parent can:
Claim the child as a dependent, and
Claim the child as a qualifying child for the
child tax credit.
However, this doesn’t allow the noncustodial
parent to claim head of household filing status,
the credit for child and dependent care expen-
ses, the exclusion for dependent care benefits,
the earned income credit, or the health cover-
age tax credit. See Applying the tiebreaker rules
to divorced or separated parents (or parents
who live apart), later.
Example—earned income credit. Even if
statements (1) through (4) are all true and the
custodial parent signs Form 8332 or a substan-
tially similar statement that he or she will not
claim the child as a dependent for 2016, this
does not allow the noncustodial parent to claim
the child as a qualifying child for the earned in-
come credit. The custodial parent or another
taxpayer, if eligible, can claim the child for the
earned income credit.
Custodial parent and noncustodial pa-
rent. The custodial parent is the parent with
whom the child lived for the greater number of
nights during the year. The other parent is the
noncustodial parent.
If the parents divorced or separated during
the year and the child lived with both parents
before the separation, the custodial parent is
the one with whom the child lived for the greater
number of nights during the rest of the year.
A child is treated as living with a parent for a
night if the child sleeps:
At that parent's home, whether or not the
parent is present, or
In the company of the parent, when the
child doesn't sleep at a parent's home (for
example, the parent and child are on vaca-
tion together).
Equal number of nights. If the child lived
with each parent for an equal number of nights
during the year, the custodial parent is the pa-
rent with the higher adjusted gross income
(AGI).
December 31. The night of December 31 is
treated as part of the year in which it begins. For
example, the night of December 31, 2016, is
treated as part of 2016.
Emancipated child. If a child is emancipa-
ted under state law, the child is treated as not
living with either parent. See Examples 5 and 6.
Absences. If a child wasn't with either pa-
rent on a particular night (because, for example,
the child was staying at a friend's house), the
child is treated as living with the parent with
whom the child normally would have lived for
that night, except for the absence. But if it can’t
be determined with which parent the child nor-
mally would have lived or if the child would not
have lived with either parent that night, the child
is treated as not living with either parent that
night.
Parent works at night. If, due to a parent's
nighttime work schedule, a child lives for a
greater number of days, but not nights, with the
parent who works at night, that parent is treated
as the custodial parent. On a school day, the
child is treated as living at the primary resi-
dence registered with the school.
Example 1—child lived with one parent
for a greater number of nights. You and your
child’s other parent are divorced. In 2016, your
child lived with you 210 nights and with the
other parent 156 nights. You are the custodial
parent.
Example 2—child is away at camp. In
2016, your daughter lives with each parent for
alternate weeks. In the summer, she spends 6
weeks at summer camp. During the time she is
at camp, she is treated as living with you for 3
weeks and with her other parent, your
ex-spouse, for 3 weeks because this is how
long she would have lived with each parent if
she had not attended summer camp.
Example 3—child lived same number of
nights with each parent. Your son lived with
you 180 nights during the year and lived the
same number of nights with his other parent,
your ex-spouse. Your AGI is $40,000. Your
ex-spouse's AGI is $25,000. You are treated as
your son's custodial parent because you have
the higher AGI.
Example 4—child is at parent’s home
but with other parent. Your son normally lives
with you during the week and with his other pa-
rent, your ex-spouse, every other weekend.
You become ill and are hospitalized. The other
parent lives in your home with your son for 10
consecutive days while you are in the hospital.
Your son is treated as living with you during this
10-day period because he was living in your
home.
Example 5—child emancipated in May.
When your son turned age 18 in May 2016, he
became emancipated under the law of the state
where he lives. As a result, he isn't considered
in the custody of his parents for more than half
Page 28 Chapter 3 Personal Exemptions and Dependents
of the year. The special rule for children of di-
vorced or separated parents doesn't apply.
Example 6—child emancipated in Au-
gust. Your daughter lives with you from Janu-
ary 1, 2016, until May 31, 2016, and lives with
her other parent, your ex-spouse, from June 1,
2016, through the end of the year. She turns 18
and is emancipated under state law on August
1, 2016. Because she is treated as not living
with either parent beginning on August 1, she is
treated as living with you the greater number of
nights in 2016. You are the custodial parent.
Written declaration. The custodial parent
must use either Form 8332 or a similar state-
ment (containing the same information required
by the form) to make the written declaration to
release the exemption to the noncustodial pa-
rent. The noncustodial parent must attach a
copy of the form or statement to his or her tax
return.
The exemption can be released for 1 year,
for a number of specified years (for example, al-
ternate years), or for all future years, as speci-
fied in the declaration.
Post-1984 and pre-2009 divorce decree
or separation agreement. If the divorce de-
cree or separation agreement went into effect
after 1984 and before 2009, the noncustodial
parent may be able to attach certain pages from
the decree or agreement instead of Form 8332.
The decree or agreement must state all three of
the following.
1. The noncustodial parent can claim the
child as a dependent without regard to any
condition, such as payment of support.
2. The custodial parent won't claim the child
as a dependent for the year.
3. The years for which the noncustodial pa-
rent, rather than the custodial parent, can
claim the child as a dependent.
The noncustodial parent must attach all of
the following pages of the decree or agreement
to his or her tax return.
The cover page (write the other parent's
social security number on this page).
The pages that include all of the informa-
tion identified in items (1) through (3)
above.
The signature page with the other parent's
signature and the date of the agreement.
Post-2008 divorce decree or separation
agreement. The noncustodial parent can’t at-
tach pages from the decree or agreement in-
stead of Form 8332 if the decree or agreement
went into effect after 2008. The custodial parent
must sign either Form 8332 or a similar state-
ment whose only purpose is to release the cus-
todial parent's claim to an exemption for a child,
and the noncustodial parent must attach a copy
to his or her return. The form or statement must
release the custodial parent's claim to the child
without any conditions. For example, the re-
lease must not depend on the noncustodial pa-
rent paying support.
The noncustodial parent must attach
the required information even if it was
filed with a return in an earlier year.CAUTION
!
Revocation of release of claim to an ex-
emption. The custodial parent can revoke a
release of claim to exemption. For the revoca-
tion to be effective for 2016, the custodial pa-
rent must have given (or made reasonable ef-
forts to give) written notice of the revocation to
the noncustodial parent in 2015 or earlier. The
custodial parent can use Part III of Form 8332
for this purpose and must attach a copy of the
revocation to his or her return for each tax year
he or she claims the child as a dependent as a
result of the revocation.
Remarried parent. If you remarry, the sup-
port provided by your new spouse is treated as
provided by you.
Parents who never married. This special
rule for divorced or separated parents also ap-
plies to parents who never married, and who
lived apart at all times during the last 6 months
of the year.
Support Test (To Be a Qualifying
Child)
To meet this test, the child can’t have provided
more than half of his or her own support for the
year.
This test is different from the support test to
be a qualifying relative, which is described later.
However, to see what is or isn't support, see
Support Test (To Be a Qualifying Relative),
later. If you aren't sure whether a child provided
more than half of his or her own support, you
may find Worksheet 3-1 helpful.
Example. You provided $4,000 toward
your 16-year-old son's support for the year. He
has a part-time job and provided $6,000 to his
own support. He provided more than half of his
own support for the year. He isn't your qualify-
ing child.
Foster care payments and expenses. Pay-
ments you receive for the support of a foster
child from a child placement agency are consid-
ered support provided by the agency. Similarly,
payments you receive for the support of a foster
child from a state or county are considered sup-
port provided by the state or county.
If you aren't in the trade or business of pro-
viding foster care and your unreimbursed
out-of-pocket expenses in caring for a foster
child were mainly to benefit an organization
qualified to receive deductible charitable contri-
butions, the expenses are deductible as chari-
table contributions but aren't considered sup-
port you provided. For more information about
the deduction for charitable contributions, see
chapter 24. If your unreimbursed expenses
aren't deductible as charitable contributions,
they may qualify as support you provided.
If you are in the trade or business of provid-
ing foster care, your unreimbursed expenses
aren't considered support provided by you.
Example 1. Lauren, a foster child, lived
with Mr. and Mrs. Smith for the last 3 months of
the year. The Smiths cared for Lauren because
they wanted to adopt her (although she had not
been placed with them for adoption). They
didn't care for her as a trade or business or to
benefit the agency that placed her in their
home. The Smiths' unreimbursed expenses
aren't deductible as charitable contributions but
are considered support they provided for Lau-
ren.
Example 2. You provided $3,000 toward
your 10-year-old foster child's support for the
year. The state government provided $4,000,
which is considered support provided by the
state, not by the child. See Support provided by
the state (welfare, food stamps, housing, etc.),
later. Your foster child didn't provide more than
half of her own support for the year.
Scholarships. A scholarship received by a
child who is a student isn't taken into account in
determining whether the child provided more
than half of his or her own support.
Joint Return Test (To Be a
Qualifying Child)
To meet this test, the child can’t file a joint re-
turn for the year.
Exception. An exception to the joint return test
applies if your child and his or her spouse file a
joint return only to claim a refund of income tax
withheld or estimated tax paid.
Example 1—child files joint return. You
supported your 18-year-old daughter, and she
lived with you all year while her husband was in
the Armed Forces. He earned $25,000 for the
year. The couple files a joint return. Because
your daughter and her husband file a joint re-
turn, she isn't your qualifying child.
Example 2—child files joint return only
as a claim for refund of withheld tax. Your
18-year-old son and his 17-year-old wife had
$800 of wages from part-time jobs and no other
income. They lived with you all year. Neither is
required to file a tax return. They don’t have a
child. Taxes were taken out of their pay so they
filed a joint return only to get a refund of the
withheld taxes. The exception to the joint return
test applies, so your son may be your qualifying
child if all the other tests are met.
Example 3—child files joint return to
claim American opportunity credit. The
facts are the same as in Example 2 except no
taxes were taken out of your son's pay or his
wife's pay. However, they file a joint return to
claim an American opportunity credit of $124
and get a refund of that amount. Because
claiming the American opportunity credit is their
reason for filing the return, they aren't filing it
only to get a refund of income tax withheld or
estimated tax paid. The exception to the joint
return test doesn't apply, so your son isn't your
qualifying child.
Qualifying Child of More Than One
Person
If your qualifying child isn't a qualifying
child of anyone else, this topic doesn't
apply to you and you don’t need to
read about it. This is also true if your qualifying
child isn't a qualifying child of anyone else ex-
cept your spouse with whom you plan to file a
joint return.TIP
Chapter 3 Personal Exemptions and Dependents Page 29
Worksheet for Determining SupportWorksheet 3-1. Keep for Your Records
Funds Belonging to the Person You Supported
1. Enter the total funds belonging to the person you supported, including income received (taxable
and nontaxable) and amounts borrowed during the year, plus the amount in savings and other
accounts at the beginning of the year. Don’t include funds provided by the state; include those
amounts on line 23 instead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
2. Enter the amount on line 1 that was used for the person's support . . . . . . . . . . . . . . . . . . . . . . . . 2.
3. Enter the amount on line 1 that was used for other purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Enter the total amount in the person's savings and other accounts at the end of the year . . . . . . 4.
5. Add lines 2 through 4. (This amount should equal line 1.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
Expenses for Entire Household (where the person you supported lived)
6. Lodging (complete line 6a or 6b):
a. Enter the total rent paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6a.
b. Enter the fair rental value of the home. If the person you supported owned the home,
also include this amount in line 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6b.
7. Enter the total food expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
8. Enter the total amount of utilities (heat, light, water, etc. not included in line 6a or 6b) . . . . . . . . . 8.
9. Enter the total amount of repairs (not included in line 6a or 6b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.
10. Enter the total of other expenses. Don’t include expenses of maintaining the home, such as
mortgage interest, real estate taxes, and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.
11. Add lines 6a through 10. These are the total household expenses . . . . . . . . . . . . . . . . . . . . . . . . 11.
12. Enter total number of persons who lived in the household . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.
Expenses for the Person You Supported
13. Divide line 11 by line 12. This is the person's share of the household expenses . . . . . . . . . . . . . 13.
14. Enter the person's total clothing expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.
15. Enter the person's total education expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.
16. Enter the person's total medical and dental expenses not paid for or reimbursed by
insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.
17. Enter the person's total travel and recreation expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.
18. Enter the total of the person's other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.
19. Add lines 13 through 18. This is the total cost of the person's support for the year . . . . . . . . . . . 19.
Did the Person Provide More Than Half of His or Her Own Support?
20. Multiply line 19 by 50% (0.50) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.
21. Enter the amount from line 2, plus the amount from line 6b if the person you supported owned
the home. This is the amount the person provided for his or her own support . . . . . . . . . . . . . . . 21.
22. Is line 21 more than line 20?
No. You meet the support test for this person to be your qualifying child. If this person also meets the other tests to be
a qualifying child, stop here; don’t complete lines 23–26. Otherwise, go to line 23 and fill out the rest of the worksheet to
determine if this person is your qualifying relative.
Yes. You don’t meet the support test for this person to be either your qualifying child or your qualifying relative. Stop
here.
Did You Provide More Than Half?
23. Enter the amount others provided for the person's support. Include amounts provided by state,
local, and other welfare societies or agencies. Don’t include any amounts included on
line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.
24. Add lines 21 and 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.
25. Subtract line 24 from line 19. This is the amount you provided for the person's support . . . . . . . 25.
26. Is line 25 more than line 20?
Yes. You meet the support test for this person to be your qualifying relative.
No. You don’t meet the support test for this person to be your qualifying relative. You can’t claim an exemption for this
person unless you can do so under a multiple support agreement, the support test for children of divorced or separated
parents, or the special rule for kidnapped children. See Multiple Support Agreement or Support Test for Children of
Divorced or Separated Parents (or Parents Who Live Apart), or Kidnapped child under Qualifying Relative.
Page 30 Chapter 3 Personal Exemptions and Dependents
If a child is treated as the qualifying
child of the noncustodial parent under
the rules for children of divorced or
separated parents (or parents who live apart)
described earlier, see Applying the tiebreaker
rules to divorced or separated parents (or pa-
rents who live apart), later.
Sometimes, a child meets the relationship, age,
residency, support, and joint return tests to be a
qualifying child of more than one person. Al-
though the child is a qualifying child of each of
these persons, only one person can actually
treat the child as a qualifying child to take all of
the following tax benefits (provided the person
is eligible for each benefit).
1. The exemption for the child.
2. The child tax credit.
3. Head of household filing status.
4. The credit for child and dependent care
expenses.
5. The exclusion from income for dependent
care benefits.
6. The earned income credit.
The other person can’t take any of these
benefits based on this qualifying child. In other
words, you and the other person can’t agree to
divide these benefits between you. The other
person can’t take any of these tax benefits for a
child unless he or she has a different qualifying
child.
Tiebreaker rules. To determine which person
can treat the child as a qualifying child to claim
these six tax benefits, the following tiebreaker
rules apply.
If only one of the persons is the child's pa-
rent, the child is treated as the qualifying
child of the parent.
If the parents file a joint return together and
can claim the child as a qualifying child,
the child is treated as the qualifying child of
the parents.
If the parents don’t file a joint return to-
gether but both parents claim the child as a
qualifying child, the IRS will treat the child
as the qualifying child of the parent with
whom the child lived for the longer period
of time during the year. If the child lived
with each parent for the same amount of
time, the IRS will treat the child as the qual-
ifying child of the parent who had the
higher adjusted gross income (AGI) for the
year.
If no parent can claim the child as a quali-
fying child, the child is treated as the quali-
fying child of the person who had the high-
est AGI for the year.
If a parent can claim the child as a qualify-
ing child but no parent does so claim the
child, the child is treated as the qualifying
child of the person who had the highest
AGI for the year, but only if that person's
AGI is higher than the highest AGI of any of
the child's parents who can claim the child.
If the child's parents file a joint return with
each other, this rule can be applied by di-CAUTION
!
viding the parents' combined AGI equally
between the parents. See Example 6.
Subject to these tiebreaker rules, you and
the other person may be able to choose which
of you claims the child as a qualifying child.
Example 1—child lived with parent and
grandparent. You and your 3-year-old daugh-
ter Jane lived with your mother all year. You are
25 years old, unmarried, and your AGI is
$9,000. Your mother's AGI is $15,000. Jane's
father didn't live with you or your daughter. You
haven't signed Form 8332 (or a similar state-
ment) to release the child's exemption to the
noncustodial parent.
Jane is a qualifying child of both you and
your mother because she meets the relation-
ship, age, residency, support, and joint return
tests for both you and your mother. However,
only one of you can claim her. Jane isn't a quali-
fying child of anyone else, including her father.
You agree to let your mother claim Jane. This
means your mother can claim Jane as a qualify-
ing child for all of the six tax benefits listed ear-
lier, if she qualifies for each of those benefits
(and if you don’t claim Jane as a qualifying child
for any of those tax benefits).
Example 2—parent has higher AGI than
grandparent. The facts are the same as in Ex-
ample 1 except your AGI is $18,000. Because
your mother's AGI isn't higher than yours, she
can’t claim Jane. Only you can claim Jane.
Example 3—two persons claim same
child. The facts are the same as in Example 1
except that you and your mother both claim
Jane as a qualifying child. In this case, you, as
the child's parent, will be the only one allowed
to claim Jane as a qualifying child. The IRS will
disallow your mother's claim to the six tax bene-
fits listed earlier unless she has another qualify-
ing child.
Example 4—qualifying children split be-
tween two persons. The facts are the same
as in Example 1 except you also have two other
young children who are qualifying children of
both you and your mother. Only one of you can
claim each child. However, if your mother's AGI
is higher than yours, you can allow your mother
to claim one or more of the children. For exam-
ple, if you claim one child, your mother can
claim the other two.
Example 5—taxpayer who is a qualifying
child. The facts are the same as in Example 1
except you are only 18 years old and didn't pro-
vide more than half of your own support for the
year. This means you are your mother's qualify-
ing child. If she can claim you as a dependent,
then you can’t claim your daughter as a de-
pendent because of the Dependent Taxpayer
Test explained earlier.
Example 6—child lived with both pa-
rents and grandparent. The facts are the
same as in Example 1 except you are married
to your daughter's father. The two of you live to-
gether with your daughter and your mother, and
have an AGI of $20,000 on a joint return. If you
and your husband don’t claim your daughter as
a qualifying child, your mother can claim her in-
stead. Even though the AGI on your joint return,
$20,000, is more than your mother's AGI of
$15,000, for this purpose each parent's AGI can
be treated as $10,000, so your mother's
$15,000 AGI is treated as higher than the high-
est AGI of any of the child's parents who can
claim the child.
Example 7—separated parents. You,
your husband, and your 10-year-old son lived
together until August 1, 2016, when your hus-
band moved out of the household. In August
and September, your son lived with you. For the
rest of the year, your son lived with your hus-
band, the boy's father. Your son is a qualifying
child of both you and your husband because
your son lived with each of you for more than
half the year and because he met the relation-
ship, age, support, and joint return tests for both
of you. At the end of the year, you and your hus-
band still weren't divorced, legally separated, or
separated under a written separation agree-
ment, so the rule for children of divorced or sep-
arated parents (or parents who live apart)
doesn't apply.
You and your husband will file separate re-
turns. Your husband agrees to let you treat your
son as a qualifying child. This means, if your
husband doesn't claim your son as a qualifying
child, you can claim your son as a qualifying
child for the dependency exemption, child tax
credit, and exclusion for dependent care bene-
fits (if you qualify for each of those tax benefits).
However, you can’t claim head of household fil-
ing status because you and your husband didn't
live apart for the last 6 months of the year. As a
result, your filing status is married filing sepa-
rately, so you can’t claim the earned income
credit or the credit for child and dependent care
expenses.
Example 8—separated parents claim
same child. The facts are the same as in Ex-
ample 7 except that you and your husband both
claim your son as a qualifying child. In this case,
only your husband will be allowed to treat your
son as a qualifying child. This is because, dur-
ing 2016, the boy lived with him longer than with
you. If you claimed an exemption or the child
tax credit for your son, the IRS will disallow your
claim to both these tax benefits. If you don’t
have another qualifying child or dependent, the
IRS will also disallow your claim to the exclu-
sion for dependent care benefits. In addition,
because you and your husband didn't live apart
for the last 6 months of the year, your husband
can’t claim head of household filing status. As a
result, his filing status is married filing sepa-
rately, so he can’t claim the earned income
credit or the credit for child and dependent care
expenses.
Example 9—unmarried parents. You,
your 5-year-old son, and your son's father lived
together all year. You and your son's father
aren't married. Your son is a qualifying child of
both you and his father because he meets the
relationship, age, residency, support, and joint
return tests for both you and his father. Your
AGI is $12,000 and your son's father's AGI is
$14,000. Your son's father agrees to let you
claim the child as a qualifying child. This means
you can claim him as a qualifying child for the
dependency exemption, child tax credit, head
of household filing status, credit for child and
Chapter 3 Personal Exemptions and Dependents Page 31
dependent care expenses, exclusion for de-
pendent care benefits, and the earned income
credit, if you qualify for each of those tax bene-
fits (and if your son's father doesn't claim your
son as a qualifying child for any of those tax
benefits).
Example 10—unmarried parents claim
same child. The facts are the same as in Ex-
ample 9 except that you and your son's father
both claim your son as a qualifying child. In this
case, only your son's father will be allowed to
treat your son as a qualifying child. This is be-
cause his AGI, $14,000, is more than your AGI,
$12,000. If you claimed an exemption or the
child tax credit for your son, the IRS will disal-
low your claim to both these tax benefits. If you
don’t have another qualifying child or depend-
ent, the IRS will also disallow your claim to the
earned income credit, head of household filing
status, the credit for child and dependent care
expenses, and the exclusion for dependent
care benefits.
Example 11—child didn't live with a pa-
rent. You and your 7-year-old niece, your si-
ster's child, lived with your mother all year. You
are 25 years old, and your AGI is $9,300. Your
mother's AGI is $15,000. Your niece's parents
file jointly, have an AGI of less than $9,000, and
don’t live with you or their child. Your niece is a
qualifying child of both you and your mother be-
cause she meets the relationship, age, resi-
dency, support, and joint return tests for both
you and your mother. However, only your
mother can treat her as a qualifying child. This
is because your mother's AGI, $15,000, is more
than your AGI, $9,300.
Applying the tiebreaker rules to divorced or
separated parents (or parents who live
apart). If a child is treated as the qualifying
child of the noncustodial parent under the rules
described earlier for children of divorced or sep-
arated parents (or parents who live apart), only
the noncustodial parent can claim an exemption
and the child tax credit for the child. However,
only the custodial parent can claim the credit for
child and dependent care expenses or the ex-
clusion for dependent care benefits for the
child, and only the custodial parent can treat the
child as a dependent for the health coverage
tax credit. Also, the noncustodial parent can't
claim the child as a qualifying child for head of
household filing status or the earned income
credit. Instead, the custodial parent, if eligible,
or other eligible person can claim the child as a
qualifying child for those two benefits. If the
child is the qualifying child of more than one
person for these benefits, then the tiebreaker
rules just explained determine whether the cus-
todial parent or another eligible person can treat
the child as a qualifying child.
Example 1. You and your 5-year-old son
lived all year with your mother, who paid the en-
tire cost of keeping up the home. Your AGI is
$10,000. Your mother's AGI is $25,000. Your
son's father didn't live with you or your son.
Under the rules explained earlier for children
of divorced or separated parents (or parents
who live apart), your son is treated as the quali-
fying child of his father, who can claim an ex-
emption and the child tax credit for him.
Because of this, you can’t claim an exemption
or the child tax credit for your son. However,
those rules don't allow your son's father to claim
your son as a qualifying child for head of house-
hold filing status, the credit for child and de-
pendent care expenses, the exclusion for de-
pendent care benefits, the earned income
credit, or the health coverage tax credit.
You and your mother didn't have any child
care expenses or dependent care benefits, so
neither of you can claim the credit for child and
dependent care expenses or the exclusion for
dependent care benefits. Also, neither of you
qualifies for the health coverage tax credit. But
the boy is a qualifying child of both you and your
mother for head of household filing status and
the earned income credit because he meets the
relationship, age, residency, support, and joint
return tests for both you and your mother.
(Note: The support test doesn't apply for the
earned income credit.) However, you agree to
let your mother claim your son. This means she
can claim him for head of household filing sta-
tus and the earned income credit if she qualifies
for each and if you don’t claim him as a qualify-
ing child for the earned income credit. (You
can’t claim head of household filing status be-
cause your mother paid the entire cost of keep-
ing up the home.)
Example 2. The facts are the same as in
Example 1 except your AGI is $25,000 and your
mother's AGI is $21,000. Your mother can’t
claim your son as a qualifying child for any pur-
pose because her AGI isn't higher than yours.
Example 3. The facts are the same as in
Example 1 except you and your mother both
claim your son as a qualifying child for the
earned income credit. Your mother also claims
him as a qualifying child for head of household
filing status. You, as the child's parent, will be
the only one allowed to claim your son as a
qualifying child for the earned income credit.
The IRS will disallow your mother's claim to the
earned income credit and head of household fil-
ing status unless she has another qualifying
child.
Qualifying Relative
Four tests must be met for a person to be your
qualifying relative. The four tests are:
1. Not a qualifying child test,
2. Member of household or relationship test,
3. Gross income test, and
4. Support test.
Age. Unlike a qualifying child, a qualifying rela-
tive can be any age. There is no age test for a
qualifying relative.
Kidnapped child. You may be able to treat a
child as your qualifying relative even if the child
has been kidnapped. See Pub. 501 for details.
Not a Qualifying Child Test
A child isn't your qualifying relative if the child is
your qualifying child or the qualifying child of
any other taxpayer.
Example 1. Your 22-year-old daughter,
who is a student, lives with you and meets all
the tests to be your qualifying child. She isn't
your qualifying relative.
Example 2. Your 2-year-old son lives with
your parents and meets all the tests to be their
qualifying child. He isn't your qualifying relative.
Example 3. Your son lives with you but isn't
your qualifying child because he is 30 years old
and doesn't meet the age test. He may be your
qualifying relative if the gross income test and
the support test are met.
Example 4. Your 13-year-old grandson
lived with his mother for 3 months, with his un-
cle for 4 months, and with you for 5 months dur-
ing the year. He isn't your qualifying child be-
cause he doesn't meet the residency test. He
may be your qualifying relative if the gross in-
come test and the support test are met.
Child of person not required to file a return.
A child isn't the qualifying child of any other tax-
payer and so may qualify as your qualifying rel-
ative if the child's parent (or other person for
whom the child is defined as a qualifying child)
isn't required to file an income tax return and ei-
ther:
Doesn't file an income tax return, or
Files a return only to get a refund of in-
come tax withheld or estimated tax paid.
Example 1—return not required. You
support an unrelated friend and her 3-year-old
child, who lived with you all year in your home.
Your friend has no gross income, isn't required
to file a 2016 tax return, and doesn't file a 2016
tax return. Both your friend and her child are
your qualifying relatives if the support test is
met.
Example 2—return filed to claim refund.
The facts are the same as in Example 1 except
your friend had wages of $1,500 during the year
and had income tax withheld from her wages.
She files a return only to get a refund of the in-
come tax withheld and doesn't claim the earned
income credit or any other tax credits or deduc-
tions. Both your friend and her child are your
qualifying relatives if the support test is met.
Example 3—earned income credit
claimed. The facts are the same as in Exam-
ple 2 except your friend had wages of $8,000
during the year and claimed the earned income
credit on her return. Your friend's child is the
qualifying child of another taxpayer (your
friend), so you can’t claim your friend's child as
your qualifying relative. Also, you can’t claim
your friend as your qualifying relative because
of the gross income test explained later.
Child in Canada or Mexico. You may be able
to claim your child as a dependent even if the
child lives in Canada or Mexico. If the child
doesn't live with you, the child doesn't meet the
residency test to be your qualifying child. How-
ever, the child may still be your qualifying rela-
tive. If the persons the child does live with aren't
U.S. citizens and have no U.S. gross income,
those persons aren't “taxpayers,” so the child
isn't the qualifying child of any other taxpayer. If
Page 32 Chapter 3 Personal Exemptions and Dependents
the child isn't the qualifying child of any other
taxpayer, the child is your qualifying relative as
long as the gross income test and the support
test are met.
You can’t claim as a dependent a child who
lives in a foreign country other than Canada or
Mexico, unless the child is a U.S. citizen, U.S.
resident alien, or U.S. national. There is an ex-
ception for certain adopted children who lived
with you all year. See Citizen or Resident Test,
earlier.
Example. You provide all the support of
your children, ages 6, 8, and 12, who live in
Mexico with your mother and have no income.
You are single and live in the United States.
Your mother isn't a U.S. citizen and has no U.S.
income, so she isn't a “taxpayer.” Your children
aren't your qualifying children because they
don’t meet the residency test. But since they
aren't the qualifying children of any other tax-
payer, they are your qualifying relatives and you
can claim them as dependents. You may also
be able to claim your mother as a dependent if
the gross income and support tests are met.
Member of Household or
Relationship Test
To meet this test, a person must either:
1. Live with you all year as a member of your
household, or
2. Be related to you in one of the ways listed
under Relatives who don’t have to live with
you.
If at any time during the year the person was
your spouse, that person can’t be your qualify-
ing relative. However, see Personal Exemp-
tions, earlier.
Relatives who don’t have to live with you. A
person related to you in any of the following
ways doesn't have to live with you all year as a
member of your household to meet this test.
Your child, stepchild, foster child, or a de-
scendant of any of them (for example, your
grandchild). (A legally adopted child is
considered your child.)
Your brother, sister, half brother, half sis-
ter, stepbrother, or stepsister.
Your father, mother, grandparent, or other
direct ancestor, but not foster parent.
Your stepfather or stepmother.
A son or daughter of your brother or sister.
A son or daughter of your half brother or
half sister.
A brother or sister of your father or mother.
Your son-in-law, daughter-in-law, fa-
ther-in-law, mother-in-law, brother-in-law,
or sister-in-law.
Any of these relationships that were established
by marriage aren't ended by death or divorce.
Example. You and your wife began sup-
porting your wife's father, a widower, in 2010.
Your wife died in 2015. Despite your wife's
death, your father-in-law continues to meet this
test, even if he doesn't live with you. You can
claim him as a dependent if all other tests are
met, including the gross income test and sup-
port test.
Foster child. A foster child is an individual
who is placed with you by an authorized place-
ment agency or by judgment, decree, or other
order of any court of competent jurisdiction.
Joint return. If you file a joint return, the per-
son can be related to either you or your spouse.
Also, the person doesn't need to be related to
the spouse who provides support.
For example, your spouse's uncle who re-
ceives more than half of his support from you
may be your qualifying relative, even though he
doesn't live with you. However, if you and your
spouse file separate returns, your spouse's un-
cle can be your qualifying relative only if he lives
with you all year as a member of your house-
hold.
Temporary absences. A person is considered
to live with you as a member of your household
during periods of time when one of you, or both,
are temporarily absent due to special circum-
stances such as:
Illness,
Education,
Business,
Vacation,
Military service, or
Detention in a juvenile facility.
If the person is placed in a nursing home for
an indefinite period of time to receive constant
medical care, the absence may be considered
temporary.
Death or birth. A person who died during the
year, but lived with you as a member of your
household until death, will meet this test. The
same is true for a child who was born during the
year and lived with you as a member of your
household for the rest of the year. The test is
also met if a child lived with you as a member of
your household except for any required hospital
stay following birth.
If your dependent died during the year and
you otherwise qualify to claim an exemption for
the dependent, you can still claim the exemp-
tion.
Example. Your dependent mother died on
January 15. She met the tests to be your quali-
fying relative. The other tests to claim an ex-
emption for a dependent were also met. You
can claim an exemption for her on your return.
Local law violated. A person doesn't meet
this test if at any time during the year the rela-
tionship between you and that person violates
local law.
Example. Your girlfriend lived with you as a
member of your household all year. However,
your relationship with her violated the laws of
the state where you live, because she was mar-
ried to someone else. Therefore, she doesn't
meet this test and you can’t claim her as a de-
pendent.
Adopted child. An adopted child is always
treated as your own child. The term “adopted
child” includes a child who was lawfully placed
with you for legal adoption.
Cousin. Your cousin meets this test only if he
or she lives with you all year as a member of
your household. A cousin is a descendant of a
brother or sister of your father or mother.
Gross Income Test
To meet this test, a person's gross income for
the year must be less than $4,050.
Gross income defined. Gross income is all
income in the form of money, property, and
services that isn't exempt from tax.
In a manufacturing, merchandising, or min-
ing business, gross income is the total net sales
minus the cost of goods sold, plus any miscella-
neous income from the business.
Gross receipts from rental property are
gross income. Don’t deduct taxes, repairs, or
other expenses to determine the gross income
from rental property.
Gross income includes a partner's share of
the gross (not a share of the net) partnership in-
come.
Gross income also includes all taxable un-
employment compensation and certain scholar-
ship and fellowship grants. Scholarships re-
ceived by degree candidates and used for
tuition, fees, supplies, books, and equipment
required for particular courses generally aren't
included in gross income. For more information
about scholarships, see chapter 12.
Tax-exempt income, such as certain social
security benefits, isn't included in gross income.
Disabled dependent working at sheltered
workshop. For purposes of the gross income
test, the gross income of an individual who is
permanently and totally disabled at any time
during the year doesn't include income for serv-
ices the individual performs at a sheltered work-
shop. The availability of medical care at the
workshop must be the main reason for the indi-
vidual's presence there. Also, the income must
come solely from activities at the workshop that
are incident to this medical care.
A “sheltered workshop” is a school that:
Provides special instruction or training de-
signed to alleviate the disability of the indi-
vidual, and
Is operated by certain tax-exempt organi-
zations, or by a state, a U.S. possession, a
political subdivision of a state or posses-
sion, the United States, or the District of
Columbia.
“Permanently and totally disabled” has the
same meaning here as under Qualifying Child,
earlier.
Support Test (To Be a Qualifying
Relative)
To meet this test, you generally must provide
more than half of a person's total support during
the calendar year.
However, if two or more persons provide
support, but no one person provides more than
half of a person's total support, see Multiple
Support Agreement, later.
How to determine if support test is met.
You figure whether you have provided more
than half of a person's total support by
Chapter 3 Personal Exemptions and Dependents Page 33
comparing the amount you contributed to that
person's support with the entire amount of sup-
port that person received from all sources. This
includes support the person provided from his
or her own funds.
You may find Worksheet 3-1 helpful in figur-
ing whether you provided more than half of a
person's support.
Person's own funds not used for support.
A person's own funds aren't support unless they
are actually spent for support.
Example. Your mother received $2,400 in
social security benefits and $300 in interest.
She paid $2,000 for lodging and $400 for recre-
ation. She put $300 in a savings account.
Even though your mother received a total of
$2,700 ($2,400 + $300), she spent only $2,400
($2,000 + $400) for her own support. If you
spent more than $2,400 for her support and no
other support was received, you have provided
more than half of her support.
Child's wages used for own support. You
can’t include in your contribution to your child's
support any support paid for by the child with
the child's own wages, even if you paid the wa-
ges.
Year support is provided. The year you pro-
vide the support is the year you pay for it, even
if you do so with borrowed money that you re-
pay in a later year.
If you use a fiscal year to report your in-
come, you must provide more than half of the
dependent's support for the calendar year in
which your fiscal year begins.
Armed Forces dependency allotments. The
part of the allotment contributed by the govern-
ment and the part taken out of your military pay
are both considered provided by you in figuring
whether you provide more than half of the sup-
port. If your allotment is used to support per-
sons other than those you name, you can take
the exemptions for them if they otherwise qual-
ify.
Example. You are in the Armed Forces.
You authorize an allotment for your widowed
mother that she uses to support herself and her
sister. If the allotment provides more than half of
each person's support, you can take an exemp-
tion for each of them, if they otherwise qualify,
even though you authorize the allotment only
for your mother.
Tax-exempt military quarters allowances.
These allowances are treated the same way as
dependency allotments in figuring support. The
allotment of pay and the tax-exempt basic al-
lowance for quarters are both considered as
provided by you for support.
Taxexempt income. In figuring a person's to-
tal support, include tax-exempt income, sav-
ings, and borrowed amounts used to support
that person. Tax-exempt income includes cer-
tain social security benefits, welfare benefits,
nontaxable life insurance proceeds, Armed
Forces family allotments, nontaxable pensions,
and tax-exempt interest.
Example 1. You provide $4,000 toward
your mother's support during the year. She has
earned income of $600, nontaxable social se-
curity benefits of $4,800, and tax-exempt inter-
est of $200. She uses all these for her support.
You can’t claim an exemption for your mother
because the $4,000 you provide isn't more than
half of her total support of $9,600 ($4,000 +
$600 + $4,800 + $200).
Example 2. Your niece takes out a student
loan of $2,500 and uses it to pay her college tui-
tion. She is personally responsible for the loan.
You provide $2,000 toward her total support.
You can’t claim an exemption for her because
you provide less than half of her support.
Social security benefits. If a married cou-
ple receives benefits that are paid by one check
made out to both of them, half of the total paid
is considered to be for the support of each
spouse, unless they can show otherwise.
If a child receives social security benefits
and uses them toward his or her own support,
the benefits are considered as provided by the
child.
Support provided by the state (welfare,
food stamps, housing, etc.). Benefits provi-
ded by the state to a needy person generally
are considered support provided by the state.
However, payments based on the needs of the
recipient won't be considered as used entirely
for that person's support if it is shown that part
of the payments weren't used for that purpose.
Foster care. Payments you receive for the
support of a foster child from a child placement
agency are considered support provided by the
agency. See Foster care payments and expen-
ses, earlier.
Home for the aged. If you make a lump-sum
advance payment to a home for the aged to
take care of your relative for life and the pay-
ment is based on that person's life expectancy,
the amount of support you provide each year is
the lump-sum payment divided by the relative's
life expectancy. The amount of support you pro-
vide also includes any other amounts you provi-
ded during the year.
Total Support
To figure if you provided more than half of a
person's support, you must first determine the
total support provided for that person. Total
support includes amounts spent to provide
food, lodging, clothing, education, medical and
dental care, recreation, transportation, and sim-
ilar necessities.
Generally, the amount of an item of support
is the amount of the expense incurred in provid-
ing that item. For lodging, the amount of support
is the fair rental value of the lodging.
Expenses not directly related to any one
member of a household, such as the cost of
food for the household, must be divided among
the members of the household.
Example 1. Grace Brown, mother of Mary
Miller, lives with Frank and Mary Miller and their
two children. Grace gets social security benefits
of $2,400, which she spends for clothing, trans-
portation, and recreation. Grace has no other
income. Frank and Mary's total food expense
for the household is $5,200. They pay Grace's
medical and drug expenses of $1,200. The fair
rental value of the lodging provided for Grace is
$1,800 a year, based on the cost of similar
rooming facilities. Figure Grace's total support
as follows:
Fair rental value of lodging . . . . . . . . $ 1,800
Clothing, transportation, and
recreation . . . . . . . . . . . . . . . . . 2,400
Medical expenses . . . . . . . . . . . . . 1,200
Share of food (1/5 of $5,200) . . . . . . . 1,040
Total support . . . . . . . . . . . . . . . $6,440
The support Frank and Mary provide,
$4,040 ($1,800 lodging + $1,200 medical ex-
penses + $1,040 food), is more than half of
Grace's $6,440 total support.
Example 2. Your parents live with you, your
spouse, and your two children in a house you
own. The fair rental value of your parents' share
of the lodging is $2,000 a year ($1,000 each),
which includes furnishings and utilities. Your fa-
ther receives a nontaxable pension of $4,200,
which he spends equally between your mother
and himself for items of support such as cloth-
ing, transportation, and recreation. Your total
food expense for the household is $6,000. Your
heat and utility bills amount to $1,200. Your
mother has hospital and medical expenses of
$600, which you pay during the year. Figure
your parents' total support as follows:
Support provided Father Mother
Fair rental value of lodging . . . $1,000 $1,000
Pension spent for their
support . . . . . . . . . . . . . 2,100 2,100
Share of food (1/6 of
$6,000) . . . . . . . . . . . . 1,000 1,000
Medical expenses for
mother . . . . . . . . . . . . . 600
Parents' total support . . . . $4,100 $4,700
You must apply the support test separately
to each parent. You provide $2,000 ($1,000
lodging + $1,000 food) of your father's total sup-
port of $4,100 — less than half. You provide
$2,600 to your mother ($1,000 lodging + $1,000
food + $600 medical) — more than half of her
total support of $4,700. You meet the support
test for your mother, but not your father. Heat
and utility costs are included in the fair rental
value of the lodging, so these aren't considered
separately.
Lodging. If you provide a person with lodging,
you are considered to provide support equal to
the fair rental value of the room, apartment,
house, or other shelter in which the person
lives. Fair rental value includes a reasonable al-
lowance for the use of furniture and appliances,
and for heat and other utilities that are provided.
Fair rental value defined. Fair rental value
is the amount you could reasonably expect to
receive from a stranger for the same kind of
lodging. It is used instead of actual expenses
such as taxes, interest, depreciation, paint, in-
surance, utilities, and the cost of furniture and
appliances. In some cases, fair rental value
may be equal to the rent paid.
Page 34 Chapter 3 Personal Exemptions and Dependents
If you provide the total lodging, the amount
of support you provide is the fair rental value of
the room the person uses, or a share of the fair
rental value of the entire dwelling if the person
has use of your entire home. If you don’t pro-
vide the total lodging, the total fair rental value
must be divided depending on how much of the
total lodging you provide. If you provide only a
part and the person supplies the rest, the fair
rental value must be divided between both of
you according to the amount each provides.
Example. Your parents live rent free in a
house you own. It has a fair rental value of
$5,400 a year furnished, which includes a fair
rental value of $3,600 for the house and $1,800
for the furniture. This doesn't include heat and
utilities. The house is completely furnished with
furniture belonging to your parents. You pay
$600 for their utility bills. Utilities aren't usually
included in rent for houses in the area where
your parents live. Therefore, you consider the
total fair rental value of the lodging to be $6,000
($3,600 fair rental value of the unfurnished
house + $1,800 allowance for the furnishings
provided by your parents + $600 cost of utilities)
of which you are considered to provide $4,200
($3,600 + $600).
Person living in his or her own home.
The total fair rental value of a person's home
that he or she owns is considered support con-
tributed by that person.
Living with someone rent free. If you live
with a person rent free in his or her home, you
must reduce the amount you provide for sup-
port of that person by the fair rental value of
lodging he or she provides you.
Property. Property provided as support is
measured by its fair market value. Fair market
value is the price that property would sell for on
the open market. It is the price that would be
agreed upon between a willing buyer and a will-
ing seller, with neither being required to act, and
both having reasonable knowledge of the rele-
vant facts.
Capital expenses. Capital items, such as
furniture, appliances, and cars, bought for a
person during the year can be included in total
support under certain circumstances.
The following examples show when a capi-
tal item is or isn't support.
Example 1. You buy a $200 power lawn
mower for your 13-year-old child. The child is
given the duty of keeping the lawn trimmed. Be-
cause the lawn mower benefits all members of
the household, don’t include the cost of the
lawn mower in the support of your child.
Example 2. You buy a $150 television set
as a birthday present for your 12-year-old child.
The television set is placed in your child's bed-
room. You can include the cost of the television
set in the support of your child.
Example 3. You pay $5,000 for a car and
register it in your name. You and your
17-year-old daughter use the car equally. Be-
cause you own the car and don’t give it to your
daughter but merely let her use it, don’t include
the cost of the car in your daughter's total sup-
port. However, you can include in your
daughter's support your out-of-pocket expen-
ses of operating the car for her benefit.
Example 4. Your 17-year-old son, using
personal funds, buys a car for $4,500. You pro-
vide the rest of your son's support, $4,000. Be-
cause the car is bought and owned by your son,
the car's fair market value ($4,500) must be in-
cluded in his support. Your son has provided
more than half of his own total support of
$8,500 ($4,500 + $4,000), so he isn't your quali-
fying child. You didn't provide more than half of
his total support, so he isn't your qualifying rela-
tive. You can’t claim an exemption for your son.
Medical insurance premiums. Medical insur-
ance premiums you pay, including premiums for
supplementary Medicare coverage, are inclu-
ded in the support you provide.
Medical insurance benefits. Medical in-
surance benefits, including basic and supple-
mentary Medicare benefits, aren't part of sup-
port.
Tuition payments and allowances under the
GI Bill. Amounts veterans receive under the GI
Bill for tuition payments and allowances while
they attend school are included in total support.
Example. During the year, your son re-
ceives $2,200 from the government under the
GI Bill. He uses this amount for his education.
You provide the rest of his support, $2,000. Be-
cause GI benefits are included in total support,
your son's total support is $4,200 ($2,200 +
$2,000). You haven't provided more than half of
his support.
Child care expenses. If you pay someone to
provide child or dependent care, you can in-
clude these payments in the amount you provi-
ded for the support of your child or disabled de-
pendent, even if you claim a credit for the
payments. For information on the credit, see
chapter 32.
Other support items. Other items may be
considered as support depending on the facts
in each case.
Don’t Include
in Total Support
The following items aren't included in total sup-
port.
1. Federal, state, and local income taxes
paid by persons from their own income.
2. Social security and Medicare taxes paid
by persons from their own income.
3. Life insurance premiums.
4. Funeral expenses.
5. Scholarships received by your child if your
child is a student.
6. Survivors' and Dependents' Educational
Assistance payments used for the support
of the child who receives them.
Multiple Support Agreement
Sometimes no one provides more than half of
the support of a person. Instead, two or more
persons, each of whom would be able to take
the exemption but for the support test, together
provide more than half of the person's support.
When this happens, you can agree that any
one of you who individually provides more than
10% of the person's support, but only one, can
claim an exemption for that person as a qualify-
ing relative. Each of the others must sign a
statement agreeing not to claim the exemption
for that year. The person who claims the ex-
emption must keep these signed statements for
his or her records. A multiple support declara-
tion identifying each of the others who agreed
not to claim the exemption must be attached to
the return of the person claiming the exemption.
Form 2120 can be used for this purpose.
You can claim an exemption under a multi-
ple support agreement for someone related to
you or for someone who lived with you all year
as a member of your household.
Example 1. You, your sister, and your two
brothers provide the entire support of your
mother for the year. You provide 45%, your sis-
ter 35%, and your two brothers each provide
10%. Either you or your sister can claim an ex-
emption for your mother. The other must sign a
statement agreeing not to take an exemption for
your mother. The one who claims the exemp-
tion must attach Form 2120, or a similar decla-
ration, to his or her return and must keep the
statement signed by the other for his or her re-
cords. Because neither brother provides more
than 10% of the support, neither can take the
exemption and neither has to sign a statement.
Example 2. You and your brother each pro-
vide 20% of your mother's support for the year.
The remaining 60% of her support is provided
equally by two persons who aren't related to
her. She doesn't live with them. Because more
than half of her support is provided by persons
who can’t claim an exemption for her, no one
can take the exemption.
Example 3. Your father lives with you and
receives 25% of his support from social secur-
ity, 40% from you, 24% from his brother (your
uncle), and 11% from a friend. Either you or
your uncle can take the exemption for your fa-
ther if the other signs a statement agreeing not
to. The one who takes the exemption must at-
tach Form 2120, or a similar declaration, to his
return and must keep for his records the signed
statement from the one agreeing not to take the
exemption.
Support Test for Children of
Divorced or Separated Parents (or
Parents Who Live Apart)
In most cases, a child of divorced or separated
parents (or parents who live apart) will be a
qualifying child of one of the parents. See Chil-
dren of divorced or separated parents (or pa-
rents who live apart) under Qualifying Child,
earlier. However, if the child doesn't meet the
requirements to be a qualifying child of either
parent, the child may be a qualifying relative of
one of the parents. If you think this might apply
to you, see Pub. 501.
Chapter 3 Personal Exemptions and Dependents Page 35
Phaseout of
Exemptions
You lose at least part of the benefit of your ex-
emptions if your adjusted gross income (AGI) is
above a certain amount. For 2016, the phase-
out begins at the following amounts.
Filing Status
AGI Level That Reduces
Exemption Amount
Married filing separately . . . . . . . . . $155,650
Single . . . . . . . . . . . . . . . . . . 259,400
Head of household . . . . . . . . . . . . 285,350
Married filing jointly . . . . . . . . . . . . 311,300
Qualifying widow(er) . . . . . . . . . . . 311,300
You must reduce the dollar amount of your
exemptions by 2% for each $2,500, or part of
$2,500 ($1,250 if you are married filing sepa-
rately), that your AGI exceeds the amount
shown above for your filing status. If your AGI
exceeds the amount shown above by more
than $122,500 ($61,250 if married filing sepa-
rately), the amount of your deduction for ex-
emptions is reduced to zero.
If your AGI exceeds the level for your filing
status, use Worksheet 3-2 to figure the amount
of your deduction for exemptions.
Social Security
Numbers for
Dependents
You must show the social security number
(SSN) of any dependent for whom you claim an
exemption in column (2) of line 6c of your Form
1040 or Form 1040A.
If you don’t show the dependent's SSN
when required or if you show an incor-
rect SSN, the exemption may be disal-
lowed.
No SSN. If a person for whom you expect to
claim an exemption on your return doesn't have
an SSN, either you or that person should apply
for an SSN as soon as possible by filing Form
SS-5, Application for a Social Security Card,
with the Social Security Administration (SSA).
You can get Form SS-5 online at
www.socialsecurity.gov or at your local SSA of-
fice.
It usually takes about 2 weeks to get an SSN
once the SSA has all the information it needs. If
you don’t have a required SSN by the filing due
date, you can file Form 4868 for an extension of
time to file.
Born and died in 2016. If your child was
born and died in 2016, and you don’t have an
SSN for the child, you may attach a copy of the
child's birth certificate, death certificate, or hos-
pital records instead. The document must showCAUTION
!
the child was born alive. If you do this, enter
“DIED” in column (2) of line 6c of your Form
1040 or Form 1040A.
Alien or adoptee with no SSN. If your de-
pendent doesn't have and can’t get an SSN,
you must list the individual taxpayer identifica-
tion number (ITIN) or adoption taxpayer identifi-
cation number (ATIN) instead of an SSN.
Taxpayer identification numbers for ali-
ens. If your dependent is a resident or nonresi-
dent alien who doesn't have and isn't eligible to
get an SSN, your dependent must apply for an
individual taxpayer identification number (ITIN).
For details on how to apply, see Form W-7, Ap-
plication for IRS Individual Taxpayer Identifica-
tion Number.
Taxpayer identification numbers for
adoptees. If you have a child who was placed
with you by an authorized placement agency,
you may be able to claim an exemption for the
child. However, if you can’t get an SSN or an
ITIN for the child, you must get an adoption tax-
payer identification number (ATIN) for the child
from the IRS. See Form W-7A, Application for
Taxpayer Identification Number for Pending
U.S. Adoptions, for details.
Worksheet for Determining the Deduction for ExemptionsWorksheet 3-2. Keep for Your Records
1. Is the amount on Form 1040, line 38, more than the amount on line 4 below for your filing status?
No. Stop. Multiply $4,050 by the total number of exemptions claimed on line 6d of Form 1040
and enter the result on Form 1040, line 42.
Yes. Continue.
2. Multiply $4,050 by the total number of exemptions claimed on line 6d of Form 1040 . . . . . . . . . . . 2.
3. Enter the amount from Form 1040, line 38 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Enter the amount shown below for your filing
status:
Married filing separately—$155,650
Single—$259,400
Head of household—$285,350
Married filing jointly or Qualifying
widow(er)—$311,300
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
5. Subtract line 4 from line 3. If the result is more than $122,500 ($61,250 if
married filing separately), stop here. You can’t take a deduction for
exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
6. Divide line 5 by $2,500 ($1,250 if married filing separately). If the result isn't a
whole number, round it up to the next higher whole number (for example,
increase .00004 to 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
7. Multiply line 6 by 2% (0.02) and enter the result as a decimal (rounded to at
least three places) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
8. Multiply line 2 by line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.
9. Deduction for exemptions. Subtract line 8 from line 2. Enter the result here
and on Form 1040, line 42 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.
Page 36 Chapter 3 Personal Exemptions and Dependents
4.
Tax Withholding
and Estimated
Tax
What's New for 2017
Tax law changes for 2017. When you figure
how much income tax you want withheld from
your pay and when you figure your estimated
tax, consider tax law changes effective in 2017.
For more information, see Pub. 505, Tax With-
holding and Estimated Tax.
Reminders
Estimated tax safe harbor for higher in
come taxpayers. If your 2016 adjusted gross
income was more than $150,000 ($75,000 if
you are married filing a separate return), you
must pay the smaller of 90% of your expected
tax for 2017 or 110% of the tax shown on your
2016 return to avoid an estimated tax penalty.
Introduction
This chapter discusses how to pay your tax as
you earn or receive income during the year. In
general, the federal income tax is a
pay-as-you-go tax. There are two ways to pay
as you go.
Withholding. If you are an employee, your
employer probably withholds income tax
from your pay. Tax also may be withheld
from certain other income, such as pen-
sions, bonuses, commissions, and gam-
bling winnings. The amount withheld is
paid to the IRS in your name.
Estimated tax. If you don't pay your tax
through withholding, or don't pay enough
tax that way, you may have to pay estima-
ted tax. People who are in business for
themselves generally will have to pay their
tax this way. Also, you may have to pay es-
timated tax if you receive income such as
dividends, interest, capital gains, rent, and
royalties. Estimated tax is used to pay not
only income tax, but self-employment tax
and alternative minimum tax as well.
This chapter explains these methods. In ad-
dition, it also explains the following.
Credit for withholding and estimated
tax. When you file your 2016 income tax
return, take credit for all the income tax
withheld from your salary, wages, pen-
sions, etc., and for the estimated tax you
paid for 2016. Also take credit for any ex-
cess social security or railroad retirement
tax withheld (discussed in chapter 38).
Underpayment penalty. If you didn't pay
enough tax during the year, either through
withholding or by making estimated tax
payments, you may have to pay a penalty.
In most cases, the IRS can figure this pen-
alty for you. See Underpayment Penalty for
2016 at the end of this chapter.
Useful Items
You may want to see:
Publication
Tax Withholding and Estimated Tax
Form (and Instructions)
Employee's Withholding Allowance
Certificate
Withholding Certificate for Pension
or Annuity Payments
Request for Federal Income Tax
Withholding From Sick Pay
Voluntary Withholding Request
Estimated Tax for Individuals
Underpayment of Estimated Tax by
Individuals, Estates, and Trusts
Underpayment of Estimated Tax
by Farmers and Fishermen
Tax Withholding
for 2017
This section discusses income tax withholding
on:
Salaries and wages,
Tips,
Taxable fringe benefits,
Sick pay,
Pensions and annuities,
Gambling winnings,
Unemployment compensation, and
Certain federal payments.
This section explains the rules for withholding
tax from each of these types of income.
This section also covers backup withholding
on interest, dividends, and other payments.
Salaries and Wages
Income tax is withheld from the pay of most em-
ployees. Your pay includes your regular pay,
bonuses, commissions, and vacation allowan-
ces. It also includes reimbursements and other
expense allowances paid under a nonaccounta-
ble plan. See Supplemental Wages, later, for
more information about reimbursements and al-
lowances paid under a nonaccountable plan.
If your income is low enough that you won't
have to pay income tax for the year, you may be
exempt from withholding. This is explained un-
der Exemption From Withholding, later.
You can ask your employer to withhold in-
come tax from noncash wages and other wages
not subject to withholding. If your employer
W4
W4P
W4S
W4V
1040ES
2210
2210F
doesn't agree to withhold tax, or if not enough is
withheld, you may have to pay estimated tax, as
discussed later under Estimated Tax for 2017.
Military retirees. Military retirement pay is
treated in the same manner as regular pay for
income tax withholding purposes, even though
it is treated as a pension or annuity for other tax
purposes.
Household workers. If you are a household
worker, you can ask your employer to withhold
income tax from your pay. A household worker
is an employee who performs household work
in a private home, local college club, or local
fraternity or sorority chapter.
Tax is withheld only if you want it withheld
and your employer agrees to withhold it. If you
don't have enough income tax withheld, you
may have to pay estimated tax, as discussed
later under Estimated Tax for 2017.
Farmworkers. Generally, income tax is with-
held from your cash wages for work on a farm
unless your employer does both of these:
Pays you cash wages of less than $150
during the year, and
Has expenditures for agricultural labor to-
taling less than $2,500 during the year.
Differential wage payments. When employ-
ees are on leave from employment for military
duty, some employers make up the difference
between the military pay and civilian pay. Pay-
ments to an employee who is on active duty for
a period of more than 30 days will be subject to
income tax withholding, but not subject to social
security, Medicare, or federal unemployment
(FUTA) tax withholding. The wages and with-
holding will be reported on Form W-2, Wage
and Tax Statement.
Determining Amount of Tax
Withheld Using Form W4
The amount of income tax your employer with-
holds from your regular pay depends on two
things.
The amount you earn in each payroll pe-
riod.
The information you give your employer on
Form W-4.
Form W-4 includes four types of information
that your employer will use to figure your with-
holding.
Whether to withhold at the single rate or at
the lower married rate.
How many withholding allowances you
claim (each allowance reduces the amount
withheld).
Whether you want an additional amount
withheld.
Whether you are claiming an exemption
from withholding in 2017. See Exemption
From Withholding, later.
Note. You must specify a filing status and a
number of withholding allowances on Form
W-4. You can’t specify only a dollar amount of
withholding.
Chapter 4 Tax Withholding and Estimated Tax Page 37
New Job
When you start a new job, you must fill out Form
W-4 and give it to your employer. Your em-
ployer should have copies of the form. If you
need to change the information later, you must
fill out a new form.
If you work only part of the year (for exam-
ple, you start working after the beginning of the
year), too much tax may be withheld. You may
be able to avoid overwithholding if your em-
ployer agrees to use the part-year method. See
Part-Year Method in chapter 1 of Pub. 505 for
more information.
Employee also receiving pension income.
If you receive pension or annuity income and
begin a new job, you will need to file Form W-4
with your new employer. However, you can
choose to split your withholding allowances be-
tween your pension and job in any manner.
Changing Your Withholding
During the year changes may occur to your
marital status, exemptions, adjustments, de-
ductions, or credits you expect to claim on your
tax return. When this happens, you may need to
give your employer a new Form W-4 to change
your withholding status or your number of allow-
ances.
If the changes reduce the number of allow-
ances you are claiming or changes your marital
status from married to single, you must give
your employer a new Form W-4 within 10 days.
Generally, you can submit a new Form W-4
whenever you wish to change the number of
your withholding allowances for any other rea-
son.
Changing your withholding for 2018. If
events in 2017 will decrease the number of your
withholding allowances for 2018, you must give
your employer a new Form W-4 by December
1, 2017. If the event occurs in December 2017,
submit a new Form W-4 within 10 days.
Checking Your Withholding
After you have given your employer a Form
W-4, you can check to see whether the amount
of tax withheld from your pay is too little or too
much. If too much or too little tax is being with-
held, you should give your employer a new
Form W-4 to change your withholding. You
should try to have your withholding match your
actual tax liability. If not enough tax is withheld,
you will owe tax at the end of the year and may
have to pay interest and a penalty. If too much
tax is withheld, you will lose the use of that
money until you get your refund. Always check
your withholding if there are personal or finan-
cial changes in your life or changes in the law
that might change your tax liability.
Note. You can’t give your employer a pay-
ment to cover withholding on salaries and wa-
ges for past pay periods or a payment for esti-
mated tax.
Completing Form W4 and
Worksheets
Form W-4 has worksheets to help you figure
how many withholding allowances you can
claim. The worksheets are for your own re-
cords. Don't give them to your employer.
Multiple jobs. If you have income from more
than one job at the same time, complete only
one set of Form W-4 worksheets. Then split
your allowances between the Forms W-4 for
each job. You can’t claim the same allowances
with more than one employer at the same time.
You can claim all your allowances with one em-
ployer and none with the other(s), or divide
them any other way.
Married individuals. If both you and your
spouse are employed and expect to file a joint
return, figure your withholding allowances using
your combined income, adjustments, deduc-
tions, exemptions, and credits. Use only one set
of worksheets. You can divide your total allow-
ances any way, but you can’t claim an allow-
ance that your spouse also claims.
If you and your spouse expect to file sepa-
rate returns, figure your allowances using sepa-
rate worksheets based on your own individual
income, adjustments, deductions, exemptions,
and credits.
Alternative method of figuring withholding
allowances. You don't have to use the Form
W-4 worksheets if you use a more accurate
method of figuring the number of withholding al-
lowances. For more information, see Alternative
method of figuring withholding allowances un-
der Completing Form W-4 and Worksheets in
Pub. 505, chapter 1.
Personal Allowances Worksheet. Use the
Personal Allowances Worksheet on Form W-4
to figure your withholding allowances based on
exemptions and any special allowances that
apply.
Deduction and Adjustments Worksheet.
Use the Deduction and Adjustments Worksheet
on Form W-4 if you plan to itemize your deduc-
tions, claim certain credits, or claim adjust-
ments to the income on your 2017 tax return
and you want to reduce your withholding. Also,
complete this worksheet when you have
changes to these items to see if you need to
change your withholding.
TwoEarners/Multiple Jobs Worksheet. You
may need to complete the Two-Earners/Multi-
ple Jobs Worksheet on Form W-4 if you have
more than one job, a working spouse, or are
also receiving a pension. Also, on this work-
sheet you can add any additional withholding
necessary to cover any amount you expect to
owe other than income tax, such as self-em-
ployment tax.
Getting the Right Amount of Tax
Withheld
In most situations, the tax withheld from your
pay will be close to the tax you figure on your
return if you follow these two rules.
You accurately complete all the Form W-4
worksheets that apply to you.
You give your employer a new Form W-4
when changes occur.
But because the worksheets and withhold-
ing methods don't account for all possible situa-
tions, you may not be getting the right amount
withheld. This is most likely to happen in the fol-
lowing situations.
You are married and both you and your
spouse work.
You have more than one job at a time.
You have nonwage income, such as inter-
est, dividends, alimony, unemployment
compensation, or self-employment in-
come.
You will owe additional amounts with your
return, such as self-employment tax.
Your withholding is based on obsolete
Form W-4 information for a substantial part
of the year.
Your earnings are more than the amount
shown under Check your withholding in the
instructions at the top of page 1 of Form
W-4.
You work only part of the year.
You change the number of your withhold-
ing allowances during the year.
Cumulative wage method. If you change the
number of your withholding allowances during
the year, too much or too little tax may have
been withheld for the period before you made
the change. You may be able to compensate for
this if your employer agrees to use the cumula-
tive wage withholding method for the rest of the
year. You must ask your employer in writing to
use this method.
To be eligible, you must have been paid for
the same kind of payroll period (weekly, bi-
weekly, etc.) since the beginning of the year.
Publication 505
To make sure you are getting the right amount
of tax withheld, get Pub. 505. It will help you
compare the total tax to be withheld during the
year with the tax you can expect to figure on
your return. It also will help you determine how
much, if any, additional withholding is needed
each payday to avoid owing tax when you file
your return. If you don't have enough tax with-
held, you may have to pay estimated tax, as ex-
plained under Estimated Tax for 2017, later.
You can use the IRS Withholding Cal-
culator at IRS.gov/w4app, instead of
Pub. 505 or the worksheets included
with Form W-4, to determine whether you need
to have your withholding increased or de-
creased.
Rules Your Employer Must Follow
It may be helpful for you to know some of the
withholding rules your employer must follow.
These rules can affect how to fill out your Form
W-4 and how to handle problems that may
arise.
New Form W4. When you start a new job,
your employer should have you complete a
Form W-4. Beginning with your first payday,TIP
Page 38 Chapter 4 Tax Withholding and Estimated Tax
your employer will use the information you give
on the form to figure your withholding.
If you later fill out a new Form W-4, your em-
ployer can put it into effect as soon as possible.
The deadline for putting it into effect is the start
of the first payroll period ending 30 or more
days after you turn it in.
No Form W4. If you don't give your employer
a completed Form W-4, your employer must
withhold at the highest rate, as if you were sin-
gle and claimed no withholding allowances.
Repaying withheld tax. If you find you are
having too much tax withheld because you
didn't claim all the withholding allowances you
are entitled to, you should give your employer a
new Form W-4. Your employer can’t repay any
of the tax previously withheld. Instead, claim the
full amount withheld when you file your tax re-
turn.
However, if your employer has withheld
more than the correct amount of tax for the
Form W-4 you have in effect, you don't have to
fill out a new Form W-4 to have your withholding
lowered to the correct amount. Your employer
can repay the amount that was withheld incor-
rectly. If you aren’t repaid, your Form W-2 will
reflect the full amount actually withheld, which
you would claim when you file your tax return.
Exemption From Withholding
If you claim exemption from withholding, your
employer won't withhold federal income tax
from your wages. The exemption applies only to
income tax, not to social security, Medicare, or
FUTA tax withholding.
You can claim exemption from withholding
for 2017 only if both of the following situations
apply.
For 2016 you had a right to a refund of all
federal income tax withheld because you
had no tax liability.
For 2017 you expect a refund of all federal
income tax withheld because you expect to
have no tax liability.
Students. If you are a student, you aren’t auto-
matically exempt. See chapter 1 to find out if
you must file a return. If you work only part time
or only during the summer, you may qualify for
exemption from withholding.
Age 65 or older or blind. If you are 65 or
older or blind, use Worksheet 1-3 or 1-4 in
chapter 1 of Pub. 505, to help you decide if you
qualify for exemption from withholding. Don't
use either worksheet if you will itemize deduc-
tions, claim exemptions for dependents, or
claim tax credits on your 2017 return. Instead,
see Itemizing deductions or claiming exemp-
tions or credits in chapter 1 of Pub. 505.
Claiming exemption from withholding. To
claim exemption, you must give your employer
a Form W-4. Don't complete lines 5 and 6. En-
ter “Exempt” on line 7.
If you claim exemption, but later your situa-
tion changes so that you will have to pay in-
come tax after all, you must file a new Form
W-4 within 10 days after the change. If you
claim exemption in 2017, but you expect to owe
income tax for 2018, you must file a new Form
W-4 by December 1, 2017.
Your claim of exempt status may be re-
viewed by the IRS.
An exemption is good for only 1 year.
You must give your employer a new Form W-4
by February 15 each year to continue your ex-
emption.
Supplemental Wages
Supplemental wages include bonuses, commis-
sions, overtime pay, vacation allowances, cer-
tain sick pay, and expense allowances under
certain plans. The payer can figure withholding
on supplemental wages using the same method
used for your regular wages. However, if these
payments are identified separately from your
regular wages, your employer or other payer of
supplemental wages can withhold income tax
from these wages at a flat rate.
Expense allowances. Reimbursements or
other expense allowances paid by your em-
ployer under a nonaccountable plan are treated
as supplemental wages.
Reimbursements or other expense allowan-
ces paid under an accountable plan that are
more than your proven expenses are treated as
paid under a nonaccountable plan if you don't
return the excess payments within a reasonable
period of time.
For more information about accountable and
nonaccountable expense allowance plans, see
Reimbursements in chapter 26.
Penalties
You may have to pay a penalty of $500 if both
of the following apply.
You make statements or claim withholding
allowances on your Form W-4 that reduce
the amount of tax withheld.
You have no reasonable basis for those
statements or allowances at the time you
prepare your Form W-4.
There is also a criminal penalty for willfully
supplying false or fraudulent information on
your Form W-4 or for willfully failing to supply in-
formation that would increase the amount with-
held. The penalty upon conviction can be either
a fine of up to $1,000 or imprisonment for up to
1 year, or both.
These penalties will apply if you deliberately
and knowingly falsify your Form W-4 in an at-
tempt to reduce or eliminate the proper with-
holding of taxes. A simple error or an honest
mistake won't result in one of these penalties.
For example, a person who has tried to figure
the number of withholding allowances correctly,
but claims seven when the proper number is
six, won't be charged a W-4 penalty.
Tips
The tips you receive while working on your job
are considered part of your pay. You must in-
clude your tips on your tax return on the same
line as your regular pay. However, tax isn't with-
held directly from tip income, as it is from your
regular pay. Nevertheless, your employer will
take into account the tips you report when figur-
ing how much to withhold from your regular pay.
See chapter 6 for information on reporting
your tips to your employer. For more informa-
tion on the withholding rules for tip income, see
Pub. 531, Reporting Tip Income.
How employer figures amount to withhold.
The tips you report to your employer are coun-
ted as part of your income for the month you re-
port them. Your employer can figure your with-
holding in either of two ways.
By withholding at the regular rate on the
sum of your pay plus your reported tips.
By withholding at the regular rate on your
pay plus a percentage of your reported
tips.
Not enough pay to cover taxes. If your regu-
lar pay isn't enough for your employer to with-
hold all the tax (including income tax and social
security and Medicare taxes (or the equivalent
railroad retirement tax)) due on your pay plus
your tips, you can give your employer money to
cover the shortage. See Giving your employer
money for taxes in chapter 6.
Allocated tips. Your employer shouldn't with-
hold income tax, Medicare tax, social security
tax, or railroad retirement tax on any allocated
tips. Withholding is based only on your pay plus
your reported tips. Your employer should refund
to you any incorrectly withheld tax. See Alloca-
ted Tips in chapter 6 for more information.
Taxable Fringe Benefits
The value of certain noncash fringe benefits you
receive from your employer is considered part
of your pay. Your employer generally must with-
hold income tax on these benefits from your
regular pay.
For information on fringe benefits, see
Fringe Benefits under Employee Compensation
in chapter 5.
Although the value of your personal use of
an employer-provided car, truck, or other high-
way motor vehicle is taxable, your employer can
choose not to withhold income tax on that
amount. Your employer must notify you if this
choice is made.
For more information on withholding on tax-
able fringe benefits, see chapter 1 of Pub. 505.
Sick Pay
Sick pay is a payment to you to replace your
regular wages while you are temporarily absent
from work due to sickness or personal injury. To
qualify as sick pay, it must be paid under a plan
to which your employer is a party.
If you receive sick pay from your employer
or an agent of your employer, income tax must
be withheld. An agent who doesn't pay regular
wages to you may choose to withhold income
tax at a flat rate.
However, if you receive sick pay from a third
party who isn't acting as an agent of your em-
ployer, income tax will be withheld only if you
choose to have it withheld. See Form W-4S,
later.
If you receive payments under a plan in
which your employer doesn't participate (such
as an accident or health plan where you paid all
Chapter 4 Tax Withholding and Estimated Tax Page 39
the premiums), the payments aren’t sick pay
and usually aren’t taxable.
Union agreements. If you receive sick pay un-
der a collective bargaining agreement between
your union and your employer, the agreement
may determine the amount of income tax with-
holding. See your union representative or your
employer for more information.
Form W4S. If you choose to have income tax
withheld from sick pay paid by a third party,
such as an insurance company, you must fill out
Form W-4S. Its instructions contain a worksheet
you can use to figure the amount you want with-
held. They also explain restrictions that may ap-
ply.
Give the completed form to the payer of your
sick pay. The payer must withhold according to
your directions on the form.
Estimated tax. If you don't request withholding
on Form W-4S, or if you don't have enough tax
withheld, you may have to make estimated tax
payments. If you don't pay enough tax, either
through estimated tax or withholding, or a com-
bination of both, you may have to pay a penalty.
See Underpayment Penalty for 2016 at the end
of this chapter.
Pensions and Annuities
Income tax usually will be withheld from your
pension or annuity distributions unless you
choose not to have it withheld. This rule applies
to distributions from:
A traditional individual retirement arrange-
ment (IRA);
A life insurance company under an endow-
ment, annuity, or life insurance contract;
A pension, annuity, or profit-sharing plan;
A stock bonus plan; and
Any other plan that defers the time you re-
ceive compensation.
The amount withheld depends on whether
you receive payments spread out over more
than 1 year (periodic payments), within 1 year
(nonperiodic payments), or as an eligible roll-
over distribution (ERD). Income tax withholding
from an ERD is mandatory.
More information. For more information on
taxation of annuities and distributions (including
ERDs) from qualified retirement plans, see
chapter 10. For information on IRAs, see chap-
ter 17. For more information on withholding on
pensions and annuities, including a discussion
of Form W-4P, see Pensions and Annuities in
chapter 1 of Pub. 505.
Gambling Winnings
Income tax is withheld at a flat 25% rate from
certain kinds of gambling winnings.
Gambling winnings of more than $5,000
from the following sources are subject to in-
come tax withholding.
Any sweepstakes; wagering pool, includ-
ing payments made to winners of poker
tournaments; or lottery.
Any other wager, if the proceeds are at
least 300 times the amount of the bet.
It doesn't matter whether your winnings are paid
in cash, in property, or as an annuity. Winnings
not paid in cash are taken into account at their
fair market value.
Exception. Gambling winnings from bingo,
keno, and slot machines generally aren’t sub-
ject to income tax withholding. However, you
may need to provide the payer with a social se-
curity number to avoid withholding. See Backup
withholding on gambling winnings in chapter 1
of Pub. 505. If you receive gambling winnings
not subject to withholding, you may need to pay
estimated tax. See Estimated Tax for 2017,
later.
If you don't pay enough tax, either through
withholding or estimated tax, or a combination
of both, you may have to pay a penalty. See Un-
derpayment Penalty for 2016 at the end of this
chapter.
Form W2G. If a payer withholds income tax
from your gambling winnings, you should re-
ceive a Form W-2G, Certain Gambling Win-
nings, showing the amount you won and the
amount withheld. Report the tax withheld on
line 64 of Form 1040.
Unemployment
Compensation
You can choose to have income tax withheld
from unemployment compensation. To make
this choice, fill out Form W-4V (or a similar form
provided by the payer) and give it to the payer.
All unemployment compensation is taxable.
If you don't have income tax withheld, you may
have to pay estimated tax. See Estimated Tax
for 2017, later.
If you don't pay enough tax, either through
withholding or estimated tax, or a combination
of both, you may have to pay a penalty. For in-
formation, see Underpayment Penalty for 2016
at the end of this chapter.
Federal Payments
You can choose to have income tax withheld
from certain federal payments you receive.
These payments are:
1. Social security benefits,
2. Tier 1 railroad retirement benefits,
3. Commodity credit corporation loans you
choose to include in your gross income,
4. Payments under the Agricultural Act of
1949 (7 U.S.C. 1421 et. seq.), as amen-
ded, or title II of the Disaster Assistance
Act of 1988, that are treated as insurance
proceeds and that you receive because:
a. Your crops were destroyed or dam-
aged by drought, flood, or any other
natural disaster, or
b. You were unable to plant crops be-
cause of a natural disaster described
in (a), and
5. Any other payment under federal law as
determined by the Secretary.
To make this choice, fill out Form W-4V (or a
similar form provided by the payer) and give it
to the payer.
If you don't choose to have income tax with-
held, you may have to pay estimated tax. See
Estimated Tax for 2017, later.
If you don't pay enough tax, either through
withholding or estimated tax, or a combination
of both, you may have to pay a penalty. For in-
formation, see Underpayment Penalty for 2016
at the end of this chapter.
More information. For more information about
the tax treatment of social security and railroad
retirement benefits, see chapter 11. Get Pub.
225, Farmer's Tax Guide, for information about
the tax treatment of commodity credit corpora-
tion loans or crop disaster payments.
Backup Withholding
Banks or other businesses that pay you certain
kinds of income must file an information return
(Form 1099) with the IRS. The information re-
turn shows how much you were paid during the
year. It also includes your name and taxpayer
identification number (TIN). TINs are explained
in chapter 1 under Social Security Number
(SSN).
These payments generally aren’t subject to
withholding. However, “backup” withholding is
required in certain situations. Backup withhold-
ing can apply to most kinds of payments that
are reported on Form 1099.
The payer must withhold at a flat 28% rate in
the following situations.
You don't give the payer your TIN in the re-
quired manner.
The IRS notifies the payer that the TIN you
gave is incorrect.
You are required, but fail, to certify that you
aren’t subject to backup withholding.
The IRS notifies the payer to start withhold-
ing on interest or dividends because you
have underreported interest or dividends
on your income tax return. The IRS will do
this only after it has mailed you four notices
over at least a 210-day period.
See Backup Withholding in chapter 1 of
Pub. 505 for more information.
Penalties. There are civil and criminal penal-
ties for giving false information to avoid backup
withholding. The civil penalty is $500. The crimi-
nal penalty, upon conviction, is a fine of up to
$1,000 or imprisonment of up to 1 year, or both.
Estimated Tax for 2017
Estimated tax is the method used to pay tax on
income that isn't subject to withholding. This in-
cludes income from self-employment, interest,
dividends, alimony, rent, gains from the sale of
assets, prizes, and awards. You also may have
to pay estimated tax if the amount of income tax
being withheld from your salary, pension, or
other income isn't enough.
Estimated tax is used to pay both income
tax and self-employment tax, as well as other
taxes and amounts reported on your tax return.
If you don't pay enough tax, either through
Page 40 Chapter 4 Tax Withholding and Estimated Tax
withholding or estimated tax, or a combination
of both, you may have to pay a penalty. If you
don't pay enough by the due date of each pay-
ment period (see When To Pay Estimated Tax,
later), you may be charged a penalty even if you
are due a refund when you file your tax return.
For information on when the penalty applies,
see Underpayment Penalty for 2016 at the end
of this chapter.
Who Doesn't Have To Pay
Estimated Tax
If you receive salaries or wages, you can avoid
having to pay estimated tax by asking your em-
ployer to take more tax out of your earnings. To
do this, give a new Form W-4 to your employer.
See chapter 1 of Pub. 505.
Estimated tax not required. You don't have
to pay estimated tax for 2017 if you meet all
three of the following conditions.
You had no tax liability for 2016.
You were a U.S. citizen or resident alien for
the whole year.
Your 2016 tax year covered a 12-month
period.
You had no tax liability for 2016 if your total
tax was zero or you didn't have to file an income
tax return. For the definition of “total tax” for
2016, see Pub. 505, chapter 2.
Who Must Pay Estimated
Tax
If you owe additional tax for 2016, you may
have to pay estimated tax for 2017.
You can use the following general rule as a
guide during the year to see if you will have
enough withholding, or if you should increase
your withholding or make estimated tax pay-
ments.
General rule. In most cases, you must pay es-
timated tax for 2017 if both of the following ap-
ply.
1. You expect to owe at least $1,000 in tax
for 2017, after subtracting your withholding
and refundable credits.
2. You expect your withholding plus your re-
fundable credits to be less than the
smaller of:
a. 90% of the tax to be shown on your
2017 tax return, or
b. 100% of the tax shown on your 2016
tax return (but see Special rules for
farmers, fishermen, and higher in-
come taxpayers, later). Your 2016 tax
return must cover all 12 months.
If the result from using the general rule
above suggests that you won't have
enough withholding, complete the
2017 Estimated Tax Worksheet in Pub. 505 for
a more accurate calculation.
Special rules for farmers, fishermen, and
higher income taxpayers. If at least
two-thirds of your gross income for tax yearCAUTION
!
2016 or 2017 is from farming or fishing, substi-
tute 662 3% for 90% in (2a) under the General
rule, earlier. If your AGI for 2016 was more than
$150,000 ($75,000 if your filing status for 2017
is married filing a separate return), substitute
110% for 100% in (2b) under General rule, ear-
lier. See Figure 4-A and Pub. 505, chapter 2 for
more information.
Aliens. Resident and nonresident aliens also
may have to pay estimated tax. Resident aliens
should follow the rules in this chapter unless no-
ted otherwise. Nonresident aliens should get
Form 1040-ES (NR), U.S. Estimated Tax for
Nonresident Alien Individuals.
You are an alien if you aren’t a citizen or na-
tional of the United States. You are a resident
alien if you either have a green card or meet the
substantial presence test. For more information
about the substantial presence test, see Pub.
519, U.S. Tax Guide for Aliens.
Married taxpayers. If you qualify to make joint
estimated tax payments, apply the rules dis-
cussed here to your joint estimated income.
You and your spouse can make joint estima-
ted tax payments even if you aren’t living to-
gether.
However, you and your spouse can’t make
joint estimated tax payments if:
You are legally separated under a decree
of divorce or separate maintenance,
You and your spouse have different tax
years, or
Either spouse is a nonresident alien (un-
less that spouse elected to be treated as a
resident alien for tax purposes (see chap-
ter 1 of Pub. 519)).
Figure 4-A. Do You Have To Pay Estimated Tax?Start Here
No
Yes
Yes
NoNo
Yes
Will you owe $1,000 or more
for 2017 after subtracting
income tax withholding and
refundable credits* from your
total tax? (Don’t subtract any
estimated tax payments.)
Will your income tax
withholding and refundable
credits* be at least 90%
(662/3% for farmers and
fishermen) of the tax shown on
your 2017 tax return?
Will your income tax
withholding and refundable
credits* be at least 100%** of
the tax shown on your 2016
tax return?
Note: Your 2016 return must
have covered a 12-month
period.
You are NOT required to pay
estimated tax.
*Use the refundable credits shown on the 2017 Estimated Tax Worksheet.
**110% if less than two-thirds of your gross income for 2016 and 2017 is from farming or fishing and your 2016
adjusted gross income was more than $150,000 ($75,000 if your filing status for 2017 is married filing a separate return).
You MUST make estimated
tax payment(s) by the
required due date(s).
See When To Pay
Estimated Tax.
Chapter 4 Tax Withholding and Estimated Tax Page 41
If you don't qualify to make joint estimated
tax payments, apply these rules to your sepa-
rate estimated income. Making joint or separate
estimated tax payments won't affect your
choice of filing a joint tax return or separate re-
turns for 2017.
2016 separate returns and 2017 joint re-
turn. If you plan to file a joint return with your
spouse for 2017, but you filed separate returns
for 2016, your 2016 tax is the total of the tax
shown on your separate returns. You filed a
separate return if you filed as single, head of
household, or married filing separately.
2016 joint return and 2017 separate re-
turns. If you plan to file a separate return for
2017 but you filed a joint return for 2016, your
2016 tax is your share of the tax on the joint re-
turn. You file a separate return if you file as sin-
gle, head of household, or married filing sepa-
rately.
To figure your share of the tax on the joint
return, first figure the tax both you and your
spouse would have paid had you filed separate
returns for 2016 using the same filing status as
for 2017. Then multiply the tax on the joint re-
turn by the following fraction.
The tax you would have paid had
you filed a separate return
The total tax you and your
spouse would have paid had
you filed separate returns
Example. Joe and Heather filed a joint re-
turn for 2016 showing taxable income of
$48,500 and a tax of $6,351. Of the $48,500
taxable income, $40,100 was Joe's and the rest
was Heather's. For 2017, they plan to file mar-
ried filing separately. Joe figures his share of
the tax on the 2016 joint return as follows.
Tax on $40,100 based on a
separate return . . . . . . . $5,803
Tax on $8,400 based on a
separate return . . . . . . . 843
Total . . . . . . . . . . . . . . . $6,646
Joe's percentage of total
($5,803 ÷ $6,646) . . . . . . 87.3%
Joe's share of tax on joint
return
($6,351 × 87.3%) . . . . . . $5,544
How To Figure
Estimated Tax
To figure your estimated tax, you must figure
your expected adjusted gross income (AGI),
taxable income, taxes, deductions, and credits
for the year.
When figuring your 2017 estimated tax, it
may be helpful to use your income, deductions,
and credits for 2016 as a starting point. Use
your 2016 federal tax return as a guide. You
can use Form 1040-ES and Pub. 505 to figure
your estimated tax. Nonresident aliens use
Form 1040-ES (NR) and Pub. 505 to figure esti-
mated tax (see chapter 8 of Pub. 519 for more
information).
You must make adjustments both for
changes in your own situation and for recent
changes in the tax law. For a discussion of
these changes, visit IRS.gov.
For more complete information on how to
figure your estimated tax for 2017, see chap-
ter 2 of Pub. 505.
When To Pay Estimated
Tax
For estimated tax purposes, the tax year is divi-
ded into four payment periods. Each period has
a specific payment due date. If you don't pay
enough tax by the due date of each payment
period, you may be charged a penalty even if
you are due a refund when you file your income
tax return. The payment periods and due dates
for estimated tax payments are shown next.
For the period: Due date:*
Jan. 1 – March 31 . . . . . April 18
April 1 – May 31 . . . . . . June 15
June 1 – August 31 . . . . Sept. 15
Sept. 1– Dec. 31 . . . . . . Jan. 16, next year .
*See Saturday, Sunday, holiday rule and
January payment.
Saturday, Sunday, holiday rule. If the due
date for an estimated tax payment falls on a
Saturday, Sunday, or legal holiday, the pay-
ment will be on time if you make it on the next
day that isn't a Saturday, Sunday, or legal holi-
day.
January payment. If you file your 2017 Form
1040 or Form 1040A by January 31, 2018, and
pay the rest of the tax you owe, you don't need
to make the payment due on January 16, 2018.
Fiscal year taxpayers. If your tax year doesn't
start on January 1, see the Form 1040-ES in-
structions for your payment due dates.
When To Start
You don't have to make estimated tax pay-
ments until you have income on which you will
owe income tax. If you have income subject to
estimated tax during the first payment period,
you must make your first payment by the due
date for the first payment period. You can pay
all your estimated tax at that time, or you can
pay it in installments. If you choose to pay in in-
stallments, make your first payment by the due
date for the first payment period. Make your re-
maining installment payments by the due dates
for the later periods.
No income subject to estimated tax during
first period. If you don't have income subject
to estimated tax until a later payment period,
you must make your first payment by the due
date for that period. You can pay your entire es-
timated tax by the due date for that period or
you can pay it in installments by the due date
for that period and the due dates for the remain-
ing periods. The following chart shows when to
make installment payments.
If you first have
income on
which you must
pay estimated
tax:
Make a
payment
by:*
Make later
installments
by:*
Before April 1 April 18 June 15
Sept. 15
Jan. 16, next year
April 1–May 31 June 15 Sept. 15
Jan. 16, next year
June 1–Aug. 31 Sept. 15 Jan. 16, next year
After Aug. 31 Jan. 16,
next year
(None)
*See Saturday, Sunday, holiday rule and January
payment.
How much to pay to avoid a penalty. To de-
termine how much you should pay by each pay-
ment due date, see How To Figure Each Pay-
ment, next.
How To Figure
Each Payment
You should pay enough estimated tax by the
due date of each payment period to avoid a
penalty for that period. You can figure your re-
quired payment for each period by using either
the regular installment method or the annual-
ized income installment method. These meth-
ods are described in chapter 2 of Pub. 505. If
you don't pay enough during each payment pe-
riod, you may be charged a penalty even if you
are due a refund when you file your tax return.
If the earlier discussion of No income sub-
ject to estimated tax during first period or the
later discussion of Change in estimated tax ap-
plies to you, you may benefit from reading An-
nualized Income Installment Method in chap-
ter 2 of Pub. 505 for information on how to avoid
a penalty.
Underpayment penalty. Under the regular in-
stallment method, if your estimated tax payment
for any period is less than one-fourth of your es-
timated tax, you may be charged a penalty for
underpayment of estimated tax for that period
when you file your tax return. Under the annual-
ized income installment method, your estimated
tax payments vary with your income, but the
amount required must be paid each period. See
chapter 4 of Pub. 505 for more information.
Change in estimated tax. After you make an
estimated tax payment, changes in your in-
come, adjustments, deductions, credits, or ex-
emptions may make it necessary for you to re-
figure your estimated tax. Pay the unpaid
balance of your amended estimated tax by the
next payment due date after the change or in in-
stallments by that date and the due dates for
the remaining payment periods.
Estimated Tax Payments
Not Required
You don't have to pay estimated tax if your with-
holding in each payment period is at least as
much as:
One-fourth of your required annual pay-
ment, or
Page 42 Chapter 4 Tax Withholding and Estimated Tax
Your required annualized income install-
ment for that period.
You also don't have to pay estimated tax if you
will pay enough through withholding to keep the
amount you owe with your return under $1,000.
How To Pay Estimated Tax
There are several ways to pay estimated tax.
Credit an overpayment on your 2016 return
to your 2017 estimated tax.
Pay by direct transfer from your bank ac-
count, or pay by debit or credit card using
a pay-by-phone system or the Internet.
Send in your payment (check or money or-
der) with a payment voucher from Form
1040-ES.
Credit an Overpayment
If you show an overpayment of tax after com-
pleting your Form 1040 or Form 1040A for
2016, you can apply part or all of it to your esti-
mated tax for 2017. On line 77 of Form 1040, or
line 49 of Form 1040A, enter the amount you
want credited to your estimated tax rather than
refunded. Take the amount you have credited
into account when figuring your estimated tax
payments.
You can’t have any of the amount you credi-
ted to your estimated tax refunded to you until
you file your tax return for the following year.
You also can’t use that overpayment in any
other way.
Pay Online
The IRS offers an electronic payment option
that is right for you. Paying online is convenient,
secure, and helps make sure we get your pay-
ments on time. To pay your taxes online or for
more information, go to IRS.gov/payments. You
can pay using any of the following methods.
IRS Direct Pay for online transfers directly
from your checking or savings account at
no cost to you. Go to IRS.gov/payments.
Pay by Card to pay by debit or credit card.
Go to IRS.gov/payments. A convenience
fee is charged by these service providers.
Electronic Funds Withdrawal(EFW) is
an integrated e-file/e-pay option offered
when filing your federal taxes electronically
using tax preparation software, through a
tax professional, or the IRS at IRS.gov/
payments.
Online Payment Agreement if you can’t
pay in full by the due date of your tax re-
turn. You can apply for an online monthly
installment agreement at IRS.gov/
payments. Once you complete the online
process, you will receive immediate notifi-
cation of whether your agreement has
been approved. A convenience fee is
charged.
IRS2GO is the mobile application of the
IRS. You can access Direct Pay or Pay By
Card by downloading the application.
Pay by Phone
Paying by phone is another safe and secure
method of paying electronically. Use one of the
following methods (1) call one of the debit or
credit card providers or (2) use the Electronic
Federal Tax Payment System (EFTPS).
1. Debit or credit card. Call one of our serv-
ice providers. Each charges a fee that var-
ies by provider, card type, and payment
amount.
Link2Gov Corporation
1-888-PAY-1040TM
(1-888-729-1040)
www.PAY1040.com
WorldPay US, Inc.
1-844-PAY-TAX-8TM
(1-844-729-8298)
www.payUSAtax.com
Official Payments Corporation
1-888-UPAY-TAXTM
(1-888-872-9829)
www.officialpayments.com
2. EFTPS. To use EFTPS, you must be en-
rolled either online or have an enrollment
form mailed to you. To make a payment
using EFTPS, call 1-800-555-4477 (Eng-
lish) or 1-800-244-4829 (Español). People
who are deaf, hard of hearing, or have a
speech disability and who have access to
TTY/TDD equipment can call
1-800-733-4829. For more information
about EFTPS, go to IRS.gov/payments or
www.eftps.gov.
For the latest details on how to pay by
phone, go to IRS.gov/Payments.
Pay by Mobile Device
To pay through your mobile device, download
the IRS2Go application.
Pay With Cash
Paying with cash is a new in-person payment
option for individuals. This service is provided
through retail partners and is limited $1,000 per
day per transaction. To make a cash payment,
you must first be registered online at
www.officialpayments.com, our Official Pay-
ment provider.
Pay by Check or Money Order
Using the Estimated Tax
Payment Voucher
Before submitting a payment through the mail
using the estimated tax payment voucher,
please consider alternative methods. One of
our safe, quick, and easy electronic payment
options might be right for you.
If you choose to mail in your payment, each
payment of estimated tax by check or money
order must be accompanied by a payment
voucher from Form 1040-ES.
During 2016, if you:
made at least one estimated tax payment
but not by electronic means,
didn't use software or a paid preparer to
prepare or file your return,
then you should receive a copy of the 2017
Form 1040-ES/V.
The enclosed payment vouchers will be pre-
printed with your name, address, and social se-
curity number. Using the preprinted vouchers
will speed processing, reduce the chance of er-
ror, and help save processing costs.
Use the window envelopes that came with
your Form 1040-ES package. If you use your
own envelopes, make sure you mail your pay-
ment vouchers to the address shown in the
Form 1040-ES instructions for the place where
you live.
Note. These criteria can change without no-
tice. If you don't receive a Form 1040-ES/V
package and you are required to make an esti-
mated tax payment, you should go to IRS.gov/
form1040es and print a copy of Form 1040-ES
which includes four blank payment vouchers.
Complete one of these and make your payment
timely to avoid penalties for paying late.
Don't use the address shown in the
Form 1040 or Form 1040A instructions
for your estimated tax payments.
If you didn't pay estimated tax last year, you
can order Form 1040-ES from the IRS (see in-
side back cover of this publication) or download
it from IRS.gov. Follow the instructions to make
sure you use the vouchers correctly.
Joint estimated tax payments. If you file a
joint return and are making joint estimated tax
payments, enter the names and social security
numbers on the payment voucher in the same
order as they will appear on the joint return.
Change of address. You must notify the IRS if
you are making estimated tax payments and
you changed your address during the year.
Complete Form 8822, Change of Address, and
mail it to the address shown in the instructions
for that form.
Credit for Withholding
and Estimated Tax
for 2016
When you file your 2016 income tax return, take
credit for all the income tax and excess social
security or railroad retirement tax withheld from
your salary, wages, pensions, etc. Also take
credit for the estimated tax you paid for 2016.
These credits are subtracted from your total tax.
Because these credits are refundable, you
should file a return and claim these credits,
even if you don't owe tax.
Two or more employers. If you had two or
more employers in 2016 and were paid wages
of more than $118,500, too much social secur-
ity or tier 1 railroad retirement tax may have
been withheld from your pay. You may be able
to claim the excess as a credit against your in-
come tax when you file your return. See Credit
for Excess Social Security Tax or Railroad Re-
tirement Tax Withheld in chapter 38.CAUTION
!
Chapter 4 Tax Withholding and Estimated Tax Page 43
Withholding
If you had income tax withheld during 2016, you
should be sent a statement by January 31,
2017, showing your income and the tax with-
held. Depending on the source of your income,
you should receive:
Form W-2, Wage and Tax Statement,
Form W-2G, Certain Gambling Winnings,
or
A form in the 1099 series.
Forms W2 and W2G. If you file a paper re-
turn, always file Form W-2 with your income tax
return. File Form W-2G with your return only if it
shows any federal income tax withheld from
your winnings.
You should get at least two copies of each
form. If you file a paper return, attach one copy
to the front of your federal income tax return.
Keep one copy for your records. You also
should receive copies to file with your state and
local returns.
Form W2
Your employer is required to provide or send
Form W-2 to you no later than January 31,
2017. You should receive a separate Form W-2
from each employer you worked for.
If you stopped working before the end of
2016, your employer could have given you your
Form W-2 at any time after you stopped work-
ing. However, your employer must provide or
send it to you by January 31, 2017.
If you ask for the form, your employer must
send it to you within 30 days after receiving your
written request or within 30 days after your final
wage payment, whichever is later.
If you haven't received your Form W-2 by
January 31, you should ask your employer for it.
If you don't receive it by February 15, call the
IRS.
Form W-2 shows your total pay and other
compensation and the income tax, social secur-
ity tax, and Medicare tax that was withheld dur-
ing the year. Include the federal income tax
withheld (as shown in box 2 of Form W-2) on:
Line 64 if you file Form 1040,
Line 40 if you file Form 1040A, or
Line 7 if you file Form 1040EZ.
In addition, Form W-2 is used to report any tax-
able sick pay you received and any income tax
withheld from your sick pay.
Form W2G
If you had gambling winnings in 2016, the payer
may have withheld income tax. If tax was with-
held, the payer will give you a Form W-2G
showing the amount you won and the amount of
tax withheld.
Report the amounts you won on line 21 of
Form 1040. Take credit for the tax withheld on
line 64 of Form 1040. If you had gambling win-
nings, you must use Form 1040; you can’t use
Form 1040A or Form 1040EZ.
The 1099 Series
Most forms in the 1099 series aren’t filed with
your return. These forms should be furnished to
you by January 31, 2017 (or, for Forms 1099-B,
1099-S, and certain Forms 1099-MISC, by Feb-
ruary 15, 2017). Unless instructed to file any of
these forms with your return, keep them for your
records. There are several different forms in this
series, including:
Form 1099-B, Proceeds From Broker and
Barter Exchange Transactions;
Form 1099-DIV, Dividends and Distribu-
tions;
Form 1099-G, Certain Government Pay-
ments;
Form 1099-INT, Interest Income;
Form 1099-K, Payment Card and Third
Party Network Transactions;
Form 1099-MISC, Miscellaneous Income;
Form 1099-OID, Original Issue Discount;
Form 1099-PATR, Taxable Distributions
Received From Cooperatives;
Form 1099-Q, Payments From Qualified
Education Programs;
Form 1099-R, Distributions From Pen-
sions, Annuities, Retirement or Profit-Shar-
ing Plans, IRAs, Insurance Contracts, etc.;
Form 1099-S, Proceeds From Real Estate
Transactions;
Form RRB-1099, Payments by the Rail-
road Retirement Board.
If you received the types of income reported
on some forms in the 1099 series, you may not
be able to use Form 1040A or Form 1040EZ.
See the instructions to these forms for details.
Form 1099R. Attach Form 1099-R to your pa-
per return if box 4 shows federal income tax
withheld. Include the amount withheld in the to-
tal on line 64 of Form 1040 or line 40 of Form
1040A. You can’t use Form 1040EZ if you re-
ceived payments reported on Form 1099-R.
Backup withholding. If you were subject to
backup withholding on income you received
during 2016, include the amount withheld, as
shown on your Form 1099, in the total on line 64
of Form 1040, line 40 of Form 1040A, or line 7
of Form 1040EZ.
Form Not Correct
If you receive a form with incorrect information
on it, you should ask the payer for a corrected
form. Call the telephone number or write to the
address given for the payer on the form. The
corrected Form W-2G or Form 1099 you re-
ceive will have an “X” in the “CORRECTED” box
at the top of the form. A special form, Form
W-2c, Corrected Wage and Tax Statement, is
used to correct a Form W-2.
In certain situations, you will receive two
forms in place of the original incorrect form.
This will happen when your taxpayer identifica-
tion number is wrong or missing, your name
and address are wrong, or you received the
wrong type of form (for example, a Form
1099-DIV instead of a Form 1099-INT). One
new form you receive will be the same incorrect
form or have the same incorrect information, but
all money amounts will be zero. This form will
have an “X” in the “CORRECTED” box at the
top of the form. The second new form should
have all the correct information, prepared as
though it is the original (the “CORRECTED” box
won't be checked).
Form Received After Filing
If you file your return and you later receive a
form for income that you didn't include on your
return, you should report the income and take
credit for any income tax withheld by filing Form
1040X, Amended U.S. Individual Income Tax
Return.
Separate Returns
If you are married but file a separate return, you
can take credit only for the tax withheld from
your own income. Don't include any amount
withheld from your spouse's income. However,
different rules may apply if you live in a com-
munity property state.
Community property states are listed in
chapter 2. For more information on these rules,
and some exceptions, see Pub. 555, Commun-
ity Property.
Fiscal Years
If you file your tax return on the basis of a fiscal
year (a 12-month period ending on the last day
of any month except December), you must fol-
low special rules to determine your credit for
federal income tax withholding. For a discus-
sion of how to take credit for withholding on a
fiscal year return, see Fiscal Years (FY) in chap-
ter 3 of Pub. 505.
Estimated Tax
Take credit for all your estimated tax payments
for 2016 on line 65 of Form 1040 or line 41 of
Form 1040A. Include any overpayment from
2015 that you had credited to your 2016 estima-
ted tax. You must use Form 1040 or Form
1040A if you paid estimated tax. You can’t use
Form 1040EZ.
Name changed. If you changed your name,
and you made estimated tax payments using
your old name, attach a brief statement to the
front of your paper tax return indicating:
When you made the payments,
The amount of each payment,
Your name when you made the payments,
and
Your social security number.
The statement should cover payments you
made jointly with your spouse as well as any
you made separately.
Be sure to report the change to the Social
Security Administration. This prevents delays in
processing your return and issuing any refunds.
Separate Returns
If you and your spouse made separate estima-
ted tax payments for 2016 and you file separate
Page 44 Chapter 4 Tax Withholding and Estimated Tax
returns, you can take credit only for your own
payments.
If you made joint estimated tax payments,
you must decide how to divide the payments
between your returns. One of you can claim all
of the estimated tax paid and the other none, or
you can divide it in any other way you agree on.
If you can’t agree, you must divide the pay-
ments in proportion to each spouse's individual
tax as shown on your separate returns for 2016.
Divorced Taxpayers
If you made joint estimated tax payments for
2016, and you were divorced during the year,
either you or your former spouse can claim all of
the joint payments, or you each can claim part
of them. If you can’t agree on how to divide the
payments, you must divide them in proportion
to each spouse's individual tax as shown on
your separate returns for 2016.
If you claim any of the joint payments on
your tax return, enter your former spouse's so-
cial security number (SSN) in the space provi-
ded on the front of Form 1040 or Form 1040A. If
you divorced and remarried in 2016, enter your
present spouse's SSN in that space and write
your former spouse's SSN, followed by “DIV,” to
the left of Form 1040, line 65, or Form 1040A,
line 41.
Underpayment Penalty
for 2016
If you didn't pay enough tax, either through with-
holding or by making timely estimated tax pay-
ments, you will have an underpayment of esti-
mated tax and you may have to pay a penalty.
Generally, you won't have to pay a penalty
for 2016 if any of the following apply.
The total of your withholding and estimated
tax payments was at least as much as your
2015 tax (or 110% of your 2015 tax if your
AGI was more than $150,000, $75,000 if
your 2016 filing status is married filing sep-
arately) and you paid all required estima-
ted tax payments on time;
The tax balance due on your 2016 return is
no more than 10% of your total 2016 tax,
and you paid all required estimated tax
payments on time;
Your total 2016 tax minus your withholding
and refundable credits is less than $1,000;
You didn't have a tax liability for 2015 and
your 2015 tax year was 12 months; or
You didn't have any withholding taxes and
your current year tax less any household
employment taxes is less than $1,000.
See Pub. 505, chapter 4, for a definition of “total
tax” for 2015 and 2016.
Farmers and fishermen. Special rules apply if
you are a farmer or fisherman. See Farmers
and Fishermen in chapter 4 of Pub. 505 for
more information.
IRS can figure the penalty for you. If you
think you owe the penalty but you don't want to
figure it yourself when you file your tax return,
you may not have to. Generally, the IRS will fig-
ure the penalty for you and send you a bill.
However, if you think you are able to lower or
eliminate your penalty, you must complete
Form 2210 or Form 2210-F and attach it to your
paper return. See chapter 4 of Pub. 505.
Chapter 4 Tax Withholding and Estimated Tax Page 45
Part Two.
Income The eight chapters in this part discuss many kinds of income. They explain
which income is and is not taxed. See Part Three for information on gains
and losses you report on Form 8949 and Schedule D (Form 1040) and for
information on selling your home.
5.
Wages, Salaries,
and Other
Earnings
Reminder
Foreign income. If you’re a U.S. citizen or res-
ident alien, you must report income from sour-
ces outside the United States (foreign income)
on your tax return unless it’s exempt by U.S.
law. This is true whether you reside inside or
outside the United States and whether or not
you receive a Form W-2, Wage and Tax State-
ment, or Form 1099 from the foreign payer. This
applies to earned income (such as wages and
tips) as well as unearned income (such as inter-
est, dividends, capital gains, pensions, rents,
and royalties).
If you reside outside the United States, you
may be able to exclude part or all of your for-
eign source earned income. For details, see
Pub. 54, Tax Guide for U.S. Citizens and Resi-
dent Aliens Abroad.
Introduction
This chapter discusses compensation received
for services as an employee, such as wages,
salaries, and fringe benefits. The following top-
ics are included.
Bonuses and awards.
Special rules for certain employees.
Sickness and injury benefits.
The chapter explains what income is inclu-
ded and isn’t included in the employee's gross
income and what’s not included.
Useful Items
You may want to see:
Publication
Travel, Entertainment, Gift, and Car
Expenses
Taxable and Nontaxable Income
Tax Guide for Seniors
Household Employer's Tax Guide
Tax Relief for Victims of Terrorist
Attacks
Employee
Compensation
This section discusses various types of em-
ployee compensation including fringe benefits,
retirement plan contributions, stock options,
and restricted property.
Form W2. If you’re an employee, you should
receive a Form W-2 from your employer show-
ing the pay you received for your services. In-
clude your pay on line 7 of Form 1040 or Form
1040A, or on line 1 of Form 1040EZ, even if you
don’t receive a Form W-2.
In some instances your employer isn’t re-
quired to give you a Form W-2. Your employer
isn’t required to give you a Form W-2 if you per-
form household work in your employer's home
for less than $2,000 in cash wages during the
calendar year and you have no federal income
taxes withheld from your wages. Household
work is work done in or around an employer's
home. Some examples of workers who do
household work are:
Babysitters,
Caretakers,
House cleaning workers,
Domestic workers,
Drivers,
Health aides,
Housekeepers,
Maids,
Nannies,
Private nurses, and
Yard workers.
See Schedule H (Form 1040), Household
Employment Taxes, and its instructions, and
Pub. 926, Household Employer's Tax Guide, for
more information.
If you performed services, other than as an
independent contractor, and your employer
didn’t withhold social security and Medicare
taxes from your pay, you must file Form 8919,
Uncollected Social Security and Medicare Tax
on Wages, with your Form 1040. See Form
8919 and its instructions for more information
on how to calculate unreported wages and
taxes and how to include them on your income
tax return.
Childcare providers. If you provide childcare,
either in the child's home or in your home or
3920
other place of business, the pay you receive
must be included in your income. If you aren’t
an employee, you’re probably self-employed
and must include payments for your services on
Schedule C (Form 1040), Profit or Loss From
Business, or Schedule C-EZ (Form 1040), Net
Profit From Business. You generally aren’t an
employee unless you’re subject to the will and
control of the person who employs you as to
what you’re to do and how you’re to do it.
Babysitting. If you’re paid to babysit, even
for relatives or neighborhood children, whether
on a regular basis or only periodically, the rules
for childcare providers apply to you.
Employment tax. Whether you're an em-
ployee or self-employed person, your income
could be subject to self-employment tax. See
the instructions for Schedule C and SE (Form
1040) if you're self-employed. Also see Pub.
926, Household Employer's Tax Guide for more
information.
Miscellaneous
Compensation
This section discusses different types of em-
ployee compensation.
Advance commissions and other earnings.
If you receive advance commissions or other
amounts for services to be performed in the fu-
ture and you’re a cash-method taxpayer, you
must include these amounts in your income in
the year you receive them.
If you repay unearned commissions or other
amounts in the same year you receive them, re-
duce the amount included in your income by the
repayment. If you repay them in a later tax year,
you can deduct the repayment as an itemized
deduction on your Schedule A (Form 1040), or
you may be able to take a credit for that year.
See Repayments in chapter 12.
Allowances and reimbursements. If you re-
ceive travel, transportation, or other business
expense allowances or reimbursements from
your employer, see Pub. 463. If you’re reim-
bursed for moving expenses, see Pub. 521,
Moving Expenses.
Back pay awards. If you receive an amount in
payment of a settlement or judgment for back
pay, you must include the amount of the pay-
ment in your income. This includes payments
made to you for damages, unpaid life insurance
premiums, and unpaid health insurance premi-
ums. They should be reported to you by your
employer on Form W-2.
Page 46 Chapter 5 Wages, Salaries, and Other Earnings
Bonuses and awards. If you receive a bonus
or award (cash, goods, services) from your em-
ployer, you must include its value in your in-
come. However, if your employer merely prom-
ises to pay you a bonus or award at some future
time, it isn’t taxable until you receive it or it’s
made available to you.
Employee achievement award. If you re-
ceive tangible personal property (other than
cash, a gift certificate, or an equivalent item) as
an award for length of service or safety achieve-
ment, you generally can exclude its value from
your income. The amount you can exclude is
limited to your employer's cost and can’t be
more than $1,600 for qualified plan awards or
$400 for nonqualified plan awards for all such
awards you receive during the year. Your em-
ployer can tell you whether your award is a
qualified plan award. Your employer must make
the award as part of a meaningful presentation,
under conditions and circumstances that don’t
create a significant likelihood of it being dis-
guised pay.
However, the exclusion doesn’t apply to the
following awards.
A length-of-service award if you received it
for less than 5 years of service or if you re-
ceived another length-of-service award
during the year or the previous 4 years.
A safety achievement award if you’re a
manager, administrator, clerical employee,
or other professional employee or if more
than 10% of eligible employees previously
received safety achievement awards dur-
ing the year.
Example. Ben Green received three em-
ployee achievement awards during the year: a
nonqualified plan award of a watch valued at
$250, two qualified plan awards of a stereo val-
ued at $1,000, and a set of golf clubs valued at
$500. Assuming that the requirements for quali-
fied plan awards are otherwise satisfied, each
award by itself would be excluded from income.
However, because the $1,750 total value of the
awards is more than $1,600, Ben must include
$150 ($1,750 – $1,600) in his income.
Differential wage payments. This is any pay-
ment made to you by an employer for any pe-
riod during which you’re, for a period of more
than 30 days, an active duty member of the uni-
formed services and represents all or a portion
of the wages you would have received from the
employer during that period. These payments
are treated as wages and are subject to income
tax withholding, but not FICA or FUTA taxes.
The payments are reported as wages on Form
W-2.
Government costofliving allowances.
Most payments received by U.S. Government
civilian employees for working abroad are taxa-
ble. However, certain cost-of-living allowances
are tax free. Pub. 516, U.S. Government Civil-
ian Employees Stationed Abroad, explains the
tax treatment of allowances, differentials, and
other special pay you receive for employment
abroad.
Nonqualified deferred compensation plans.
Your employer may report to you the total
amount of deferrals for the year under a non-
qualified deferred compensation plan on Form
W-2, box 12, using code Y. This amount isn’t in-
cluded in your income.
However, if at any time during the tax year,
the plan fails to meet certain requirements, or
isn’t operated under those requirements, all
amounts deferred under the plan for the tax
year and all preceding tax years to the extent
vested and not previously included in income
are included in your income for the current year.
This amount is included in your wages shown
on Form W-2, box 1. It’s also shown on Form
W-2, box 12, using code Z.
Note received for services. If your employer
gives you a secured note as payment for your
services, you must include the fair market value
(usually the discount value) of the note in your
income for the year you receive it. When you
later receive payments on the note, a propor-
tionate part of each payment is the recovery of
the fair market value that you previously inclu-
ded in your income. Don’t include that part
again in your income. Include the rest of the
payment in your income in the year of payment.
If your employer gives you a nonnegotiable
unsecured note as payment for your services,
payments on the note that are credited toward
the principal amount of the note are compensa-
tion income when you receive them.
Severance pay. If you receive a severance
payment when your employment with your em-
ployer ends or is terminated, you must include
this amount in your income.
Accrued leave payment. If you’re a federal
employee and receive a lump-sum payment for
accrued annual leave when you retire or resign,
this amount will be included as wages on your
Form W-2.
If you resign from one agency and are reem-
ployed by another agency, you may have to re-
pay part of your lump-sum annual leave pay-
ment to the second agency. You can reduce
gross wages by the amount you repaid in the
same tax year in which you received it. Attach
to your tax return a copy of the receipt or state-
ment given to you by the agency you repaid to
explain the difference between the wages on
the return and the wages on your Forms W-2.
Outplacement services. If you choose to
accept a reduced amount of severance pay so
that you can receive outplacement services
(such as training in résumé writing and inter-
view techniques), you must include the unre-
duced amount of the severance pay in income.
However, you can deduct the value of these
outplacement services (up to the difference be-
tween the severance pay included in income
and the amount actually received) as a miscel-
laneous deduction (subject to the 2%-of-adjus-
ted-gross-income (AGI) limit) on Schedule A
(Form 1040).
Sick pay. Pay you receive from your employer
while you’re sick or injured is part of your salary
or wages. In addition, you must include in your
income sick pay benefits received from any of
the following payers.
A welfare fund.
A state sickness or disability fund.
An association of employers or employees.
An insurance company, if your employer
paid for the plan.
However, if you paid the premiums on an acci-
dent or health insurance policy yourself, the
benefits you receive under the policy aren’t tax-
able. For more information, see Pub. 525.
Social security and Medicare taxes paid by
employer. If you and your employer have an
agreement that your employer pays your social
security and Medicare taxes without deducting
them from your gross wages, you must report
the amount of tax paid for you as taxable wages
on your tax return. The payment also is treated
as wages for figuring your social security and
Medicare taxes and your social security and
Medicare benefits. However, these payments
aren’t treated as social security and Medicare
wages if you’re a household worker or a farm
worker.
Stock appreciation rights. Don’t include a
stock appreciation right granted by your em-
ployer in income until you exercise (use) the
right. When you use the right, you’re generally
entitled to a cash payment equal to the fair mar-
ket value of the corporation's stock on the date
of use minus the fair market value on the date
the right was granted. You include the cash
payment in your income in the year you use the
right.
Fringe Benefits
Fringe benefits received in connection with the
performance of your services are included in
your income as compensation unless you pay
fair market value for them or they’re specifically
excluded by law. Abstaining from the perform-
ance of services (for example, under a cove-
nant not to compete) is treated as the perform-
ance of services for purposes of these rules.
Accounting period. You must use the same
accounting period your employer uses to report
your taxable noncash fringe benefits. Your em-
ployer has the option to report taxable noncash
fringe benefits by using either of the following
rules.
The general rule: benefits are reported for
a full calendar year (January 1–December
31).
The special accounting period rule: bene-
fits provided during the last 2 months of the
calendar year (or any shorter period) are
treated as paid during the following calen-
dar year. For example, each year your em-
ployer reports the value of benefits provi-
ded during the last 2 months of the prior
year and the first 10 months of the current
year.
Your employer doesn’t have to use the same
accounting period for each fringe benefit, but
must use the same period for all employees
who receive a particular benefit.
You must use the same accounting period
that you use to report the benefit to claim an
employee business deduction (for use of a car,
for example).
Chapter 5 Wages, Salaries, and Other Earnings Page 47
Form W2. Your employer must include all tax-
able fringe benefits in box 1 of Form W-2 as wa-
ges, tips, and other compensation and, if appli-
cable, in boxes 3 and 5 as social security and
Medicare wages. Although not required, your
employer may include the total value of fringe
benefits in box 14 (or on a separate statement).
However, if your employer provided you with a
vehicle and included 100% of its annual lease
value in your income, the employer must sepa-
rately report this value to you in box 14 (or on a
separate statement).
Accident or Health Plan
In most cases, the value of accident or health
plan coverage provided to you by your em-
ployer isn’t included in your income. Benefits
you receive from the plan may be taxable, as
explained later under Sickness and Injury Bene-
fits.
For information on the items covered in this
section, other than Long-term care coverage,
see Pub. 969, Health Savings Accounts and
Other Tax-Favored Health Plans.
Longterm care coverage. Contributions by
your employer to provide coverage for
long-term care services generally aren’t inclu-
ded in your income. However, contributions
made through a flexible spending or similar ar-
rangement offered by your employer must be
included in your income. This amount will be re-
ported as wages in box 1 of your Form W-2.
Contributions you make to the plan are dis-
cussed in Pub. 502, Medical and Dental Expen-
ses.
Archer MSA contributions. Contributions by
your employer to your Archer MSA generally
aren’t included in your income. Their total will
be reported in box 12 of Form W-2 with code R.
You must report this amount on Form 8853,
Archer MSAs and Long-Term Care Insurance
Contracts. File the form with your return.
Health flexible spending arrangement
(health FSA). If your employer provides a
health FSA that qualifies as an accident or
health plan, the amount of your salary reduc-
tion, and reimbursements of your medical care
expenses, in most cases, aren’t included in
your income.
Note. Health FSAs are subject to a $2,500
limit on salary reduction contributions for plan
years beginning after 2012. The $2,500 limit is
subject to an inflation adjustment for plan years
beginning after 2013. For more information, see
Notice 2012-40, 2012-26 I.R.B. 1046, available
at IRS.gov/irb/2012-26 IRB/ar09.html.
For tax year 2016, the dollar limitation under
section 125(i) on voluntary employee salary re-
ductions for contributions to health flexible
spending arrangements is $2,550.
Health reimbursement arrangement (HRA).
If your employer provides an HRA that qualifies
as an accident or health plan, coverage and re-
imbursements of your medical care expenses
generally aren’t included in your income.
Health savings account (HSA). If you’re an
eligible individual, you and any other person, in-
cluding your employer or a family member, can
make contributions to your HSA. Contributions,
other than employer contributions, are deducti-
ble on your return whether or not you itemize
deductions. Contributions made by your em-
ployer aren’t included in your income. Distribu-
tions from your HSA that are used to pay quali-
fied medical expenses aren’t included in your
income. Distributions not used for qualified
medical expenses are included in your income.
See Pub. 969 for the requirements of an HSA.
Contributions by a partnership to a bona fide
partner's HSA aren’t contributions by an em-
ployer. The contributions are treated as a distri-
bution of money and aren’t included in the part-
ner's gross income. Contributions by a
partnership to a partner's HSA for services ren-
dered are treated as guaranteed payments that
are includible in the partner's gross income. In
both situations, the partner can deduct the con-
tribution made to the partner's HSA.
Contributions by an S corporation to a 2%
shareholder-employee's HSA for services ren-
dered are treated as guaranteed payments and
are includible in the shareholder-employee's
gross income. The shareholder-employee can
deduct the contribution made to the share-
holder-employee's HSA.
Qualified HSA funding distribution. You
can make a one-time distribution from your indi-
vidual retirement account (IRA) to an HSA and
you generally won’t include any of the distribu-
tion in your income.
Adoption Assistance
You may be able to exclude from your income
amounts paid or expenses incurred by your em-
ployer for qualified adoption expenses in con-
nection with your adoption of an eligible child.
See the Instructions for Form 8839, Qualified
Adoption Expenses, for more information.
Adoption benefits are reported by your em-
ployer in box 12 of Form W-2 with code T. They
also are included as social security and Medi-
care wages in boxes 3 and 5. However, they
aren’t included as wages in box 1. To determine
the taxable and nontaxable amounts, you must
complete Part III of Form 8839. File the form
with your return.
De Minimis (Minimal) Benefits
If your employer provides you with a product or
service and the cost of it is so small that it would
be unreasonable for the employer to account
for it, you generally don’t include its value in
your income. In most cases, don’t include in
your income the value of discounts at company
cafeterias, cab fares home when working over-
time, and company picnics.
Holiday gifts. If your employer gives you a tur-
key, ham, or other item of nominal value at
Christmas or other holidays, don’t include the
value of the gift in your income. However, if your
employer gives you cash or a cash equivalent,
you must include it in your income.
Educational Assistance
You can exclude from your income up to $5,250
of qualified employer-provided educational as-
sistance. For more information, see Pub. 970,
Tax Benefits for Education.
GroupTerm Life Insurance
In most cases, the cost of up to $50,000 of
group-term life insurance coverage provided to
you by your employer (or former employer) isn’t
included in your income. However, you must in-
clude in income the cost of employer-provided
insurance that is more than the cost of $50,000
of coverage reduced by any amount you pay to-
ward the purchase of the insurance.
For exceptions, see Entire cost excluded,
and Entire cost taxed, later.
If your employer provided more than
$50,000 of coverage, the amount included in
your income is reported as part of your wages in
box 1 of your Form W-2. Also, it’s shown sepa-
rately in box 12 with code C.
Groupterm life insurance. This insurance is
term life insurance protection (insurance for a
fixed period of time) that:
Provides a general death benefit,
Is provided to a group of employees,
Is provided under a policy carried by the
employer, and
Provides an amount of insurance to each
employee based on a formula that pre-
vents individual selection.
Permanent benefits. If your group-term life
insurance policy includes permanent benefits,
such as a paid-up or cash surrender value, you
must include in your income, as wages, the cost
of the permanent benefits minus the amount
you pay for them. Your employer should be able
to tell you the amount to include in your income.
Accidental death benefits. Insurance that
provides accidental or other death benefits but
doesn’t provide general death benefits (travel
insurance, for example) isn’t group-term life in-
surance.
Former employer. If your former employer
provided more than $50,000 of group-term life
insurance coverage during the year, the amount
included in your income is reported as wages in
box 1 of Form W-2. Also, it’s shown separately
in box 12 with code C. Box 12 also will show the
amount of uncollected social security and Medi-
care taxes on the excess coverage, with codes
M and N. You must pay these taxes with your
income tax return. Include them on Form 1040,
line 62, and follow the instructions there.
Two or more employers. Your exclusion for
employer-provided group-term life insurance
coverage can’t exceed the cost of $50,000 of
coverage, whether the insurance is provided by
a single employer or multiple employers. If two
or more employers provide insurance coverage
that totals more than $50,000, the amounts re-
ported as wages on your Forms W-2 won’t be
correct. You must figure how much to include in
your income. Reduce the amount you figure by
any amount reported with code C in box 12 of
your Forms W-2, add the result to the wages re-
ported in box 1, and report the total on your re-
turn.
Figuring the taxable cost. Use Worksheet
5-1 to figure the amount to include in your in-
come.
Page 48 Chapter 5 Wages, Salaries, and Other Earnings
Worksheet 5-1. Figuring the
Cost of GroupTerm Life
Insurance To Include in
Income
Keep for Your Records
1. Enter the total amount of
your insurance coverage
from your
employer(s) . . . . . . . . . . . . 1.
2. Limit on exclusion for
employer-provided
group-term life insurance
coverage . . . . . . . . . . . . . . 2. 50,000
3. Subtract line 2 from
line 1 . . . . . . . . . . . . . . . . . 3.
4. Divide line 3 by $1,000.
Figure to the nearest
tenth . . . . . . . . . . . . . . . . . 4.
5. Go to Table 5-1. Using your
age on the last day of the tax
year, find your age group in
the left column, and enter the
cost from the column on the
right for your age
group . . . . . . . . . . . . . . . . 5.
6. Multiply line 4 by
line 5 . . . . . . . . . . . . . . . . . 6.
7. Enter the number of full
months of coverage at this
cost . . . . . . . . . . . . . . . . . . 7.
8. Multiply line 6 by
line 7 . . . . . . . . . . . . . . . . . 8.
9. Enter the
premiums you paid
per month . . . . . 9.
10. Enter the number
of months you paid
the
premiums . . . . . 10.
11. Multiply line 9 by
line 10 . . . . . . . . . . . . . . . . 11.
12. Subtract line 11 from line 8.
Include this amount in
your income as
wages . . . . . . . . . . . . . . . 12.
Table 5-1. Cost of $1,000 of
GroupTerm Life Insurance for
One Month
Age Cost
Under 25 . . . . . . . . . . . . . . . . . $ 0.05
25 through 29 . . . . . . . . . . . . . . 0.06
30 through 34 . . . . . . . . . . . . . . 0.08
35 through 39 . . . . . . . . . . . . . . 0.09
40 through 44 . . . . . . . . . . . . . . 0.10
45 through 49 . . . . . . . . . . . . . . 0.15
50 through 54 . . . . . . . . . . . . . . 0.23
55 through 59 . . . . . . . . . . . . . . 0.43
60 through 64 . . . . . . . . . . . . . . 0.66
65 through 69 . . . . . . . . . . . . . . 1.27
70 and above . . . . . . . . . . . . . . 2.06
Example. You are 51 years old and work
for employers A and B. Both employers provide
group-term life insurance coverage for you for
the entire year. Your coverage is $35,000 with
employer A and $45,000 with employer B. You
pay premiums of $4.15 a month under the em-
ployer B group plan. You figure the amount to
include in your income as shown in Worksheet
5-1. Figuring the Cost of Group-Term Life
Insurance to Include in Income—Illustrated
next.
Worksheet 5-1. Figuring the
Cost of GroupTerm Life
Insurance to Include in
Income—Illustrated
Keep for Your Records
1. Enter the total amount of
your insurance coverage
from your
employer(s) . . . . . . . . . . . . 1. 80,000
2. Limit on exclusion for
employer-provided
group-term life insurance
coverage . . . . . . . . . . . . . . 2. 50,000
3. Subtract line 2 from
line 1 . . . . . . . . . . . . . . . . . 3. 30,000
4. Divide line 3 by $1,000.
Figure to the nearest
tenth . . . . . . . . . . . . . . . . . 4. 30.0
5. Go to Table 5-1. Using your
age on the last day of the tax
year, find your age group in
the left column, and enter the
cost from the column on the
right for your age
group . . . . . . . . . . . . . . . . 5. 0.23
6. Multiply line 4 by
line 5 . . . . . . . . . . . . . . . . . 6. 6.90
7. Enter the number of full
months of coverage at this
cost . . . . . . . . . . . . . . . . . . 7. 12
8. Multiply line 6 by
line 7 . . . . . . . . . . . . . . . . . 8. 82.80
9. Enter the
premiums you paid
per month . . . . . 9. 4.15
10. Enter the number
of months you paid
the
premiums . . . . . 10. 12
11. Multiply line 9 by
line 10 . . . . . . . . . . . . . . . . 11. 49.80
12. Subtract line 11 from line 8.
Include this amount in
your income as
wages . . . . . . . . . . . . . . . 12. 33.00
Entire cost excluded. You aren’t taxed on the
cost of group-term life insurance if any of the
following circumstances apply.
1. You’re permanently and totally disabled
and have ended your employment.
2. Your employer is the beneficiary of the
policy for the entire period the insurance is
in force during the tax year.
3. A charitable organization (defined in chap-
ter 24) to which contributions are deducti-
ble is the only beneficiary of the policy for
the entire period the insurance is in force
during the tax year. (You aren’t entitled to
a deduction for a charitable contribution
for naming a charitable organization as the
beneficiary of your policy.)
4. The plan existed on January 1, 1984, and
a. You retired before January 2, 1984,
and were covered by the plan when
you retired, or
b. You reached age 55 before January
2, 1984, and were employed by the
employer or its predecessor in 1983.
Entire cost taxed. You’re taxed on the entire
cost of group-term life insurance if either of the
following circumstances apply.
The insurance is provided by your em-
ployer through a qualified employees' trust,
such as a pension trust or a qualified annu-
ity plan.
You‘re a key employee and your employ-
er's plan discriminates in favor of key em-
ployees.
Retirement Planning Services
Generally, don’t include the value of qualified
retirement planning services provided to you
and your spouse by your employer's qualified
retirement plan. Qualified services include re-
tirement planning advice, information about
your employer's retirement plan, and informa-
tion about how the plan may fit into your overall
individual retirement income plan. You can’t ex-
clude the value of any tax preparation, account-
ing, legal, or brokerage services provided by
your employer.
Transportation
If your employer provides you with a qualified
transportation fringe benefit, it can be excluded
from your income, up to certain limits. A quali-
fied transportation fringe benefit is:
Transportation in a commuter highway ve-
hicle (such as a van) between your home
and work place,
A transit pass,
Qualified parking, or
Qualified bicycle commuting reimburse-
ment.
Cash reimbursement by your employer for
these expenses under a bona fide reimburse-
ment arrangement is also excludable. However,
cash reimbursement for a transit pass is exclud-
able only if a voucher or similar item that can be
exchanged only for a transit pass isn’t readily
available for direct distribution to you.
Exclusion limit. The exclusion for commuter
vehicle transportation and transit pass fringe
benefits can’t be more than $255 a month.
The exclusion for the qualified parking fringe
benefit can’t be more than $255 a month.
The exclusion for qualified bicycle commut-
ing in a calendar year is $20 multiplied by the
number of qualified bicycle commuting months
that year. You can’t exclude from your income
any qualified bicycle commuting reimbursement
if you can choose between reimbursement and
compensation that is otherwise includible in
your income.
If the benefits have a value that is more than
these limits, the excess must be included in
your income.
Commuter highway vehicle. This is a high-
way vehicle that seats at least six adults (not in-
cluding the driver). At least 80% of the vehicle's
mileage must reasonably be expected to be:
For transporting employees between their
homes and workplace, and
Chapter 5 Wages, Salaries, and Other Earnings Page 49
On trips during which employees occupy at
least half of the vehicle's adult seating ca-
pacity (not including the driver).
Transit pass. This is any pass, token, fare-
card, voucher, or similar item entitling a person
to ride mass transit (whether public or private)
free or at a reduced rate or to ride in a com-
muter highway vehicle operated by a person in
the business of transporting persons for com-
pensation.
Qualified parking. This is parking provided to
an employee at or near the employer's place of
business. It also includes parking provided on
or near a location from which the employee
commutes to work by mass transit, in a com-
muter highway vehicle, or by carpool. It doesn’t
include parking at or near the employee's
home.
Qualified bicycle commuting. This is reim-
bursement based on the number of qualified bi-
cycle commuting months for the year. A quali-
fied bicycle commuting month is any month you
use the bicycle regularly for a substantial por-
tion of the travel between your home and place
of employment and you don’t receive any of the
other qualified transportation fringe benefits.
The reimbursement can be for expenses you in-
curred during the year for the purchase of a bi-
cycle and bicycle improvements, repair, and
storage.
Retirement Plan
Contributions
Your employer's contributions to a qualified re-
tirement plan for you aren’t included in income
at the time contributed. (Your employer can tell
you whether your retirement plan is qualified.)
However, the cost of life insurance coverage in-
cluded in the plan may have to be included. See
Group-Term Life Insurance, earlier, under
Fringe Benefits.
If your employer pays into a nonqualified
plan for you, you generally must include the
contributions in your income as wages for the
tax year in which the contributions are made.
However, if your interest in the plan isn’t trans-
ferable or is subject to a substantial risk of for-
feiture (you have a good chance of losing it) at
the time of the contribution, you don’t have to in-
clude the value of your interest in your income
until it’s transferable or is no longer subject to a
substantial risk of forfeiture.
For information on distributions from
retirement plans, see Pub. 575, Pen-
sion and Annuity Income (or Pub. 721,
Tax Guide to U.S. Civil Service Retirement Ben-
efits, if you’re a federal employee or retiree).
Elective deferrals. If you’re covered by certain
kinds of retirement plans, you can choose to
have part of your compensation contributed by
your employer to a retirement fund, rather than
have it paid to you. The amount you set aside
(called an elective deferral) is treated as an em-
ployer contribution to a qualified plan. An elec-
tive deferral, other than a designated Roth con-
tribution (discussed later), isn’t included in
wages subject to income tax at the time contrib-
uted. Rather it’s subject to income tax when dis-TIP
tributed from the plan. However, it’s included in
wages subject to social security and Medicare
taxes at the time contributed.
Elective deferrals include elective contribu-
tions to the following retirement plans.
1. Cash or deferred arrangements (section
401(k) plans).
2. The Thrift Savings Plan for federal em-
ployees.
3. Salary reduction simplified employee pen-
sion plans (SARSEP).
4. Savings incentive match plans for employ-
ees (SIMPLE plans).
5. Tax-sheltered annuity plans (section
403(b) plans).
6. Section 501(c)(18)(D) plans.
7. Section 457 plans.
Qualified automatic contribution arrange-
ments. Under a qualified automatic contribu-
tion arrangement, your employer can treat you
as having elected to have a part of your com-
pensation contributed to a section 401(k) plan.
You’re to receive written notice of your rights
and obligations under the qualified automatic
contribution arrangement. The notice must ex-
plain:
Your rights to elect not to have elective
contributions made, or to have contribu-
tions made at a different percentage, and
How contributions made will be invested in
the absence of any investment decision by
you.
You must be given a reasonable period of
time after receipt of the notice and before the
first elective contribution is made to make an
election with respect to the contributions.
Overall limit on deferrals. For 2016, in
most cases, you shouldn’t have deferred more
than a total of $18,000 of contributions to the
plans listed in (1) through (3) and (5) above.
The limit for SIMPLE plans is $12,500. The limit
for section 501(c)(18)(D) plans is the lesser of
$7,000 or 25% of your compensation. The limit
for section 457 plans is the lesser of your in-
cludible compensation or $18,000. Amounts
deferred under specific plan limits are part of
the overall limit on deferrals.
Designated Roth contributions. Employ-
ers with section 401(k) and section 403(b)
plans can create qualified Roth contribution
programs so that you may elect to have part or
all of your elective deferrals to the plan designa-
ted as after-tax Roth contributions. Designated
Roth contributions are treated as elective defer-
rals, except that they’re included in income at
the time contributed.
Excess deferrals. Your employer or plan
administrator should apply the proper annual
limit when figuring your plan contributions. How-
ever, you’re responsible for monitoring the total
you defer to ensure that the deferrals aren’t
more than the overall limit.
If you set aside more than the limit, the ex-
cess generally must be included in your income
for that year, unless you have an excess defer-
ral of a designated Roth contribution. See Pub.
525 for a discussion of the tax treatment of ex-
cess deferrals.
Catch-up contributions. You may be al-
lowed catch-up contributions (additional elec-
tive deferral) if you’re age 50 or older by the end
of the tax year.
Stock Options
If you receive a nonstatutory option to buy or
sell stock or other property as payment for your
services, you usually will have income when
you receive the option, when you exercise the
option (use it to buy or sell the stock or other
property), or when you sell or otherwise dispose
of the option. However, if your option is a statu-
tory stock option, you won’t have any income
until you sell or exchange your stock. Your em-
ployer can tell you which kind of option you
hold. For more information, see Pub. 525.
Restricted Property
In most cases, if you receive property for your
services, you must include its fair market value
in your income in the year you receive the prop-
erty. However, if you receive stock or other
property that has certain restrictions that affect
its value, you don’t include the value of the
property in your income until it has substantially
vested. (Although you can elect to include the
value of the property in your income in the year
it‘s transferred to you.) For more information,
see Restricted Property in Pub. 525.
Dividends received on restricted stock.
Dividends you receive on restricted stock are
treated as compensation and not as dividend
income. Your employer should include these
payments on your Form W-2.
Stock you elected to include in income.
Dividends you receive on restricted stock you
elected to include in your income in the year
transferred are treated the same as any other
dividends. Report them on your return as divi-
dends. For a discussion of dividends, see chap-
ter 8.
For information on how to treat dividends re-
ported on both your Form W-2 and Form
1099-DIV, see Dividends received on restricted
stock in Pub. 525.
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 person-
nel, and volunteers.
Clergy
Generally, if you’re a member of the clergy, you
must include in your income offerings and fees
you receive for marriages, baptisms, funerals,
masses, etc., in addition to your salary. If the of-
fering is made to the religious institution, it isn’t
taxable to you.
If you’re a member of a religious organiza-
tion and you give your outside earnings to the
Page 50 Chapter 5 Wages, Salaries, and Other Earnings
religious 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 24.
Pension. A pension or retirement pay for a
member of the clergy usually is treated 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.
Housing. Special rules for housing apply to
members of the clergy. Under these rules, you
don’t include in your income the rental value of
a home (including utilities) or a designated
housing allowance provided to you as part of
your pay. However, the exclusion can’t be more
than the lesser of the following amounts: 1) the
amount actually used to provide or rent a home;
2) the fair market rental value of the home (in-
cluding furnishings, utilities, garage, etc.); 3) the
amount officially designated (in advance of pay-
ment) as a rental or housing allowance; or 4) an
amount that represents reasonable pay for your
services. If you pay for the utilities, you can ex-
clude any allowance designated for utility cost,
up to your actual cost. The home or allowance
must be provided as compensation for your
services as an ordained, licensed, or commis-
sioned minister. However, you must include the
rental value of the home or the housing allow-
ance as earnings from self-employment on
Schedule SE (Form 1040) if you’re subject to
the self-employment tax. For more information,
see Pub. 517, Social Security and Other Infor-
mation for Members of the Clergy and Religious
Workers.
Members of Religious
Orders
If you’re a member of a religious order who has
taken a vow of poverty, how you treat earnings
that you renounce and turn over to the order de-
pends on whether your services are performed
for the order.
Services performed for the order. If you’re
performing the services as an agent of the order
in the exercise of duties required by the order,
don’t include in your income the amounts
turned over to the order.
If your order directs you to perform services
for another agency of the supervising church or
an associated institution, you’re considered to
be performing the services as an agent of the
order. Any wages you earn as an agent of an
order that you turn over to the order aren’t inclu-
ded in your income.
Example. You’re a member of a church or-
der and have taken a vow of poverty. You re-
nounce any claims to your earnings and turn
over to the order any salaries or wages you
earn. You’re a registered nurse, so your order
assigns you to work in a hospital that is an as-
sociated institution of the church. However, you
remain under the general direction and control
of the order. You’re considered to be an agent
of the order and any wages you earn at the hos-
pital that you turn over to your order aren’t inclu-
ded in your income.
Services performed outside the order. If
you’re directed to work outside the order, your
services aren’t an exercise of duties required by
the order unless they meet both of the following
requirements.
They’re the kind of services that are ordi-
narily the duties of members of the order.
They‘re part of the duties that you must ex-
ercise for, or on behalf of, the religious or-
der as its agent.
If you’re an employee of a third party, the serv-
ices you perform for the third party won’t be
considered directed or required of you by the
order. Amounts you receive for these services
are included in your income, even if you have
taken a vow of poverty.
Example. Mark Brown is a member of a re-
ligious 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 schoolteacher. 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 em-
ployer.
U.S. citizen. If you’re a U.S. citizen who works
in the United States for a foreign government,
an international organization, a foreign em-
bassy, or any foreign employer, you must in-
clude your salary in your income.
Social security and Medicare taxes.
You’re exempt from social security and Medi-
care employee taxes if you’re employed in the
United States by an international organization
or a foreign government. However, you must
pay self-employment tax on your earnings from
services performed in the United States, even
though you aren’t self-employed. This rule also
applies if you’re an employee of a qualifying
wholly owned instrumentality of a foreign gov-
ernment.
Employees of international organizations or
foreign governments. Your compensation for
official services to an international organization
is exempt from federal income tax if you aren’t a
citizen of the United States or you’re a citizen of
the Philippines (whether or not you‘re a citizen
of the United States).
Your compensation for official services to a
foreign government is exempt from federal in-
come tax if all of the following are true.
You aren’t a citizen of the United States or
you’re a citizen of the Philippines (whether
or not you’re a citizen of the United States).
Your work is like the work done by employ-
ees of the United States in foreign coun-
tries.
The foreign government gives an equal ex-
emption to employees of the United States
in its country.
Waiver of alien status. If you’re an alien
who works for a foreign government or interna-
tional organization and you file a waiver under
section 247(b) of the Immigration and National-
ity Act to keep your immigrant status, different
rules may apply. See Foreign Employer in Pub.
525.
Employment abroad. For information on the
tax treatment of income earned abroad, see
Pub. 54.
Military
Payments you receive as a member of a military
service generally are taxed as wages except for
retirement pay, which is taxed as a pension. Al-
lowances generally aren’t taxed. For more infor-
mation on the tax treatment of military allowan-
ces and benefits, see Pub. 3, Armed Forces'
Tax Guide.
Differential wage payments. Any payments
made to you by an employer during the time
you’re performing service in the uniformed serv-
ices are treated as compensation. These wages
are subject to income tax withholding and are
reported on a Form W-2. See the discussion
under Miscellaneous Compensation, earlier.
Military retirement pay. If your retirement pay
is based on age or length of service, it’s taxable
and must be included in your income as a pen-
sion on lines 16a and 16b of Form 1040 or on
lines 12a and 12b of Form 1040A. Don’t include
in your income the amount of any reduction in
retirement or retainer pay to provide a survivor
annuity for your spouse or children under the
Retired Serviceman's Family Protection Plan or
the Survivor Benefit Plan.
For more detailed discussion of survivor an-
nuities, see chapter 10.
Disability. If you’re retired on disability, see
Military and Government Disability Pensions
under Sickness and Injury Benefits, later.
Veterans' benefits. Don’t include in your in-
come any veterans' benefits paid under any
law, regulation, or administrative practice ad-
ministered by the Department of Veterans Af-
fairs (VA). The following amounts paid to veter-
ans or their families aren’t taxable.
Education, training, and subsistence allow-
ances.
Disability compensation and pension pay-
ments for disabilities paid either to veter-
ans 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 divi-
dends paid either to veterans or their bene-
ficiaries, including the proceeds of a veter-
an's endowment policy paid before death.
Interest on insurance dividends you leave
on deposit with the VA.
Chapter 5 Wages, Salaries, and Other Earnings Page 51
Benefits under a dependent-care assis-
tance program.
The death gratuity paid to a survivor of a
member of the Armed Forces who died af-
ter September 10, 2001.
Payments made under the compensated
work therapy program.
Any bonus payment by a state or political
subdivision because of service in a combat
zone.
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 generally exempt from tax.
Taxable allowances. The following allow-
ances, however, must be included in your in-
come and reported as wages.
Allowances paid to your spouse and minor
children while you’re a volunteer leader
training in the United States.
Living allowances designated by the Direc-
tor of the Peace Corps as basic compen-
sation. These are allowances for personal
items such as domestic help, laundry and
clothing maintenance, entertainment and
recreation, transportation, and other mis-
cellaneous 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 isn’t available
to him until the end of his service, Gary must in-
clude it in his income on a monthly basis as it’s
credited to his account.
Volunteers in Service to America (VISTA). If
you’re a VISTA volunteer, you must include
meal and lodging allowances paid to you in
your income as wages.
National Senior Services Corps programs.
Don’t include in your income amounts you re-
ceive for supportive services or reimburse-
ments for out-of-pocket expenses from the fol-
lowing programs.
Retired Senior Volunteer Program (RSVP).
Foster Grandparent Program.
Senior Companion Program.
Service Corps of Retired Executives
(SCORE). If you receive amounts for suppor-
tive services or reimbursements for
out-of-pocket expenses from SCORE, don’t in-
clude these amounts in gross income.
Volunteer tax counseling. Don’t include in
your income any reimbursements you receive
for transportation, meals, and other expenses
you have in training for, or actually providing,
volunteer federal income tax counseling for the
elderly (TCE).
You can deduct as a charitable contribution
your unreimbursed out-of-pocket expenses in
taking part in the volunteer income tax assis-
tance (VITA) program. See chapter 24.
Sickness and Injury
Benefits
This section discusses sickness and injury ben-
efits including disability pensions, long-term
care insurance contracts, workers' compensa-
tion, and other benefits.
In most cases, you must report as income
any amount you receive for personal injury or
sickness through an accident or health plan that
is paid for by your employer. If both you and
your employer pay for the plan, only the amount
you receive that is due to your employer's pay-
ments is reported as income. However, certain
payments may not be taxable to you. Your em-
ployer should be able to give you specific de-
tails 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 sick-
ness and injury.
Don’t report as income any amounts
paid to reimburse you for medical ex-
penses you incurred after the plan was
established.
Cost paid by you. If you pay the entire cost of
a health or accident insurance plan, don’t in-
clude 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 Reim-
bursement in a later year in chapter 21.
Cafeteria plans. In most cases, if you’re cov-
ered by an accident or health insurance plan
through a cafeteria plan, and the amount of the
insurance premiums wasn’t included in your in-
come, you aren’t considered to have paid the
premiums and you must include any benefits
you receive in your income. If the amount of the
premiums was included in your income, you’re
considered to have paid the premiums, and any
benefits you receive aren’t taxable.
Disability Pensions
If you retired on disability, you must include in
income any disability pension you receive under
a plan that is paid for by your employer. You
must report your taxable disability payments as
wages on line 7 of Form 1040 or Form 1040A,
until you reach minimum retirement age. Mini-
mum retirement age generally is the age at
which you can first receive a pension or annuity
if you’re not disabled.
You may be entitled to a tax credit if
you were permanently and totally disa-
bled when you retired. For information
on this credit and the definition of permanent
and total disability, see chapter 33.TIPTIP
Beginning on the day after you reach mini-
mum retirement age, payments you receive are
taxable as a pension or annuity. Report the pay-
ments 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 Re-
port in chapter 10.
For information on disability payments from
a governmental program provided as a substi-
tute for unemployment compensation, see
chapter 12.
Retirement and profitsharing plans. If you
receive payments from a retirement or
profit-sharing plan that doesn’t provide for disa-
bility retirement, don’t treat the payments as a
disability pension. The payments must be re-
ported as a pension or annuity. For more infor-
mation on pensions, see chapter 10.
Accrued leave payment. If you retire on disa-
bility, 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.
Military and Government
Disability Pensions
Certain military and government disability pen-
sions aren’t taxable.
Serviceconnected disability. You may be
able to exclude from income amounts you re-
ceive as a pension, annuity, or similar allow-
ance for personal injury or sickness resulting
from active service in one of the following gov-
ernment services.
The armed forces of any country.
The National Oceanic and Atmospheric
Administration.
The Public Health Service.
The Foreign Service.
Conditions for exclusion. Don’t include
the disability payments in your income if any of
the following conditions apply.
1. You were entitled to receive a disability
payment before September 25, 1975.
2. You were a member of a listed govern-
ment service or its reserve component, or
were under a binding written commitment
to become a member, on September 24,
1975.
3. You receive the disability payments for a
combat-related injury. This is a personal
injury or sickness that:
a. Results directly from armed conflict,
b. Takes place while you’re engaged in
extra-hazardous service,
c. Takes place under conditions simulat-
ing war, including training exercises
such as maneuvers, or
d. Is caused by an instrumentality of war.
4. You would be entitled to receive disability
compensation from the Department of Vet-
erans Affairs (VA) if you filed an applica-
tion for it. Your exclusion under this condi-
tion is equal to the amount you would be
entitled to receive from the VA.
Page 52 Chapter 5 Wages, Salaries, and Other Earnings
Pension based on years of service. If you
receive a disability pension based on years of
service, in most cases you must include it in
your income. However, if the pension qualifies
for the exclusion for a Service-connected disa-
bility (discussed earlier), don’t include in income
the part of your pension that you would have re-
ceived if the pension had been based on a per-
centage of disability. You must include the rest
of your pension in your income.
Retroactive VA determination. If you retire
from the armed services based on years of
service and are later given a retroactive serv-
ice-connected disability rating by the VA, your
retirement pay for the retroactive period is ex-
cluded from income up to the amount of VA dis-
ability benefits you would have been entitled to
receive. You can claim a refund of any tax paid
on the excludable amount (subject to the stat-
ute of limitations) by filing an amended return
on Form 1040X for each previous year during
the retroactive period. You must include with
each Form 1040X a copy of the official VA De-
termination letter granting the retroactive bene-
fit. The letter must show the amount withheld
and the effective date of the benefit.
If you receive a lump-sum disability sever-
ance payment and are later awarded VA disa-
bility benefits, exclude 100% of the severance
benefit from your income. However, you must
include in your income any lump-sum readjust-
ment or other nondisability severance payment
you received on release from active duty, even
if you’re later given a retroactive disability rating
by the VA.
Special period of limitation. In most ca-
ses, under the period of limitation, a claim for
credit or refund must be filed within 3 years
from the time a return was filed or 2 years from
the time the tax was paid. However, if you re-
ceive a retroactive service-connected disability
rating determination, the period of limitation is
extended by a 1-year period beginning on the
date of the determination. This 1-year extended
period applies to claims for credit or refund filed
after June 17, 2008, and doesn’t apply to any
tax year that began more than 5 years before
the date of the determination.
Terrorist attack or military action. Don’t in-
clude in your income disability payments you
receive for injuries incurred as a direct result of
a terrorist attack directed against the United
States (or its allies), whether outside or within
the United States or from military action. See
Pub. 3920, Tax Relief for Victims of Terrorist At-
tacks, for more information.
LongTerm Care
Insurance Contracts
Long-term care insurance contracts in most ca-
ses are treated as accident and health insur-
ance contracts. Amounts you receive from them
(other than policyholder dividends or premium
refunds) in most cases are excludable from in-
come as amounts received for personal injury
or sickness. To claim an exclusion for payments
made on a per diem or other periodic basis un-
der a long-term care insurance contract, you
must file Form 8853 with your return.
A long-term care insurance contract is an in-
surance contract that only provides coverage
for qualified long-term care services. The con-
tract 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 sur-
render or cancellation of the contract, and
dividends under the contract, may only be
used to reduce future premiums or in-
crease future benefits; and
In most cases, not pay or reimburse ex-
penses incurred for services or items that
would be reimbursed under Medicare, ex-
cept where Medicare is a secondary payer
or the contract makes per diem or other
periodic payments without regard to ex-
penses.
Qualified longterm care services. Qualified
long-term care services are:
Necessary diagnostic, preventive, thera-
peutic, curing, treating, mitigating, and re-
habilitative services, and maintenance and
personal care services; and
Required by a chronically ill individual and
provided pursuant to a plan of care prescri-
bed by a licensed health care practitioner.
Chronically ill individual. A chronically ill indi-
vidual is one who has been certified by a li-
censed health care practitioner within the previ-
ous 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, transfer-
ring, bathing, dressing, and continence.
An individual who requires substantial su-
pervision to be protected from threats to
health and safety due to severe cognitive
impairment.
Limit on exclusion. You generally can ex-
clude from gross income up to $340 a day for
2016. See Limit on exclusion, under Long-Term
Care Insurance Contracts, under Sickness and
Injury Benefits in Pub. 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’re paid under a workers'
compensation act or a statute in the nature of a
workers' compensation act. The exemption also
applies to your survivors. The exemption, how-
ever, doesn’t apply to retirement plan benefits
you receive based on your age, length of serv-
ice, 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 equiva-
lent railroad retirement benefits re-
ceived, that part is considered social security
(or equivalent railroad retirement) benefits and
may be taxable. For more information, see Pub.
915, Social Security and Equivalent Railroad
Retirement Benefits.
Return to work. If you return to work after
qualifying for workers' compensation, salary
payments you receive for performing light du-
ties are taxable as wages.
Other Sickness and Injury
Benefits
In addition to disability pensions and annuities,
you may receive other payments for sickness or
injury.
Railroad sick pay. Payments you receive as
sick pay under the Railroad Unemployment In-
surance Act are taxable and you must include
them in your income. However, don’t include
them in your income if they’re for an on-the-job
injury.
If you received income because of a disabil-
ity, see Disability Pensions, earlier.
Federal Employees' Compensation Act
(FECA). Payments received under this Act for
personal injury or sickness, including payments
to beneficiaries in case of death, aren’t taxable.
However, you’re taxed on amounts you receive
under this Act as continuation of pay for up to
45 days while a claim is being decided. Report
this income as wages. Also, pay for sick leave
while a claim is being processed is taxable and
must be included in your income as wages.
If part of the payments you receive un-
der FECA reduces your social security
or equivalent railroad retirement bene-
fits received, that part is considered social se-
curity (or equivalent railroad retirement) benefits
and may be taxable. See Pub. 554 for more in-
formation.
You can deduct the amount you spend to
buy back sick leave for an earlier year to be eli-
gible for nontaxable FECA benefits for that pe-
riod. It’s a miscellaneous deduction subject to
the 2%-of-AGI limit on Schedule A (Form 1040).
If you buy back sick leave in the same year you
used it, the amount reduces your taxable sick
leave pay. Don’t deduct it separately.
Other compensation. Many other amounts
you receive as compensation for sickness or in-
jury aren’t taxable. These include the following
amounts.
Compensatory damages you receive for
physical injury or physical sickness,
whether paid in a lump sum or in periodic
payments.
Benefits you receive under an accident or
health insurance policy on which either you
paid the premiums or your employer paid
the premiums but you had to include them
in your income.
Disability benefits you receive for loss of
income or earning capacity as a result ofCAUTION
!CAUTION
!
Chapter 5 Wages, Salaries, and Other Earnings Page 53
injuries under a no-fault car insurance pol-
icy.
Compensation you receive for permanent
loss or loss of use of a part or function of
your body, or for your permanent disfigure-
ment. This compensation must be based
only on the injury and not on the period of
your absence from work. These benefits
aren’t taxable even if your employer pays
for the accident and health plan that pro-
vides these benefits.
Reimbursement for medical care. A reim-
bursement for medical care is generally not tax-
able. However, it may reduce your medical ex-
pense deduction. For more information, see
chapter 21.
6.
Tip Income
Introduction
This chapter is for employees who receive tips.
All tips you receive are income and are sub-
ject to federal income tax. You must include in
gross income all tips you receive directly,
charged tips paid to you by your employer, and
your share of any tips you receive under a
tip-splitting or tip-pooling arrangement.
The value of noncash tips, such as tickets,
passes, or other items of value, is also income
and subject to tax.
Reporting your tip income correctly isn't diffi-
cult. You must do three things.
1. Keep a daily tip record.
2. Report tips to your employer.
3. Report all your tips on your income tax re-
turn.
This chapter will explain these three things and
show you what to do on your tax return if you
haven't done the first two. This chapter will also
show you how to treat allocated tips.
For information on special tip programs and
agreements, see Pub. 531.
Useful Items
You may want to see:
Publication
Reporting Tip Income
Employee's Daily Record of Tips
and Report to Employer
Form (and Instructions)
Social Security and Medicare Tax
on Unreported Tip Income
Employee's Report of Tips to
Employer
1244
4137
4070
Keeping a Daily Tip
Record
Why keep a daily tip record. You must keep
a daily tip record so you can:
Report your tips accurately to your em-
ployer,
Report your tips accurately on your tax re-
turn, and
Prove your tip income if your return is ever
questioned.
How to keep a daily tip record. There are
two ways to keep a daily tip record. You can ei-
ther:
Write information about your tips in a tip di-
ary; or
Keep copies of documents that show your
tips, such as restaurant bills and credit or
debit card charge slips.
You should keep your daily tip record with your
tax or other personal records. You must keep
your records for as long as they're important for
administration of the federal tax law. For infor-
mation on how long to keep records, see How
long to keep records in chapter 1.
If you keep a tip diary, you can use Form
4070A, Employee's Daily Record of Tips. To
get Form 4070A, ask your employer for Pub.
1244 or go online to IRS.gov/pub/irs-pdf/
p1244.pdf for a copy of Pub. 1244. Pub. 1244
includes a 1-year supply of Form 4070A. Each
day, write in the information asked for on the
form.
In addition to the information asked for on
Form 4070A, you also need to keep a record of
the date and value of any noncash tips you get,
such as tickets, passes, or other items of value.
Although you don't report these tips to your em-
ployer, you must report them on your tax return.
If you don't use Form 4070A, start your re-
cords by writing your name, your employer's
name, and the name of the business (if it's dif-
ferent from your employer's name). Then, each
workday, write the date and the following infor-
mation.
Cash tips you get directly from customers
or from other employees.
Tips from credit and debit card charge cus-
tomers that your employer pays you.
The value of any noncash tips you get,
such as tickets, passes, or other items of
value.
The amount of tips you paid out to other
employees through tip pools or tip splitting,
or other arrangements, and the names of
the employees to whom you paid the tips.
Electronic tip record. You can use an elec-
tronic system provided by your employer to re-
cord your daily tips. If you do, you must receive
and keep a paper copy of this record.
Service charges. Don't write in your tip diary
the amount of any service charge that your em-
ployer adds to a customer's bill and then pays
to you and treats as wages. This is part of your
wages, not a tip. See examples below.
Example 1. Good Food Restaurant adds
an 18% charge to the bill for parties of 6 or more
customers. Jane’s bill for food and beverages
for her party of 8 includes an amount on the tip
line equal to 18% of the charges for food and
beverages, and the total includes this amount.
Because Jane didn't have an unrestricted right
to determine the amount on the “tip line,” the
18% charge is considered a service charge.
Don't include the 18% charge in your tip diary.
Service charges that are paid to you are consid-
ered wages, not tips.
Example 2. Good Food Restaurant also in-
cludes sample calculations of tip amounts at the
bottom of its bills for food and beverages provi-
ded to customers. David’s bill includes a blank
“tip line,” with sample tip calculations of 15%,
18%, and 20% of his charges for food and bev-
erages at the bottom of the bill beneath the sig-
nature line. Because David is free to enter any
amount on the “tip line” or leave it blank, any
amount he includes is considered a tip. Be sure
to include this amount in your tip diary.
Reporting Tips to Your
Employer
Why report tips to your employer. You must
report tips to your employer so that:
Your employer can withhold federal in-
come tax and social security, Medicare,
Additional Medicare, or railroad retirement
taxes;
Your employer can report the correct
amount of your earnings to the Social Se-
curity Administration or Railroad Retire-
ment Board (which affects your benefits
when you retire or if you become disabled,
or your family's benefits if you die); and
You can avoid the penalty for not reporting
tips to your employer (explained later).
What tips to report. Report to your employer
only cash, check, and debit and credit card tips
you receive.
If your total tips for any 1 month from any
one job are less than $20, don't report the tips
for that month to that employer.
If you participate in a tip-splitting or tip-pool-
ing arrangement, report only the tips you re-
ceive and retain. Don't report to your employer
any portion of the tips you receive that you pass
on to other employees. However, you must re-
port tips you receive from other employees.
Don't report the value of any noncash tips,
such as tickets or passes, to your employer.
You don't pay social security, Medicare, Addi-
tional Medicare, or railroad retirement taxes on
these tips.
How to report. If your employer doesn't give
you any other way to report tips, you can use
Form 4070. Fill in the information asked for on
the form, sign and date the form, and give it to
your employer. To get a 1-year supply of the
form, ask your employer for Pub. 1244 or go on-
line to IRS.gov/pub/irs-pdf/p1244.pdf for a copy
of Pub. 1244.
Page 54 Chapter 6 Tip Income
If you don't use Form 4070, give your em-
ployer a statement with the following informa-
tion.
Your name, address, and social security
number.
Your employer's name, address, and busi-
ness name (if it is different from your em-
ployer's name).
The month (or the dates of any shorter pe-
riod) in which you received tips.
The total tips required to be reported for
that period.
You must sign and date the statement. Be sure
to keep a copy with your tax or other personal
records.
Your employer may require you to report
your tips more than once a month. However,
the statement cannot cover a period of more
than 1 calendar month.
Electronic tip statement. Your employer
can have you furnish your tip statements elec-
tronically.
When to report. Give your report for each
month to your employer by the 10th of the next
month. If the 10th falls on a Saturday, Sunday,
or legal holiday, give your employer the report
by the next day that isn't a Saturday, Sunday, or
legal holiday.
Example. You must report your tips re-
ceived in September 2017 by October 10,
2017.
Final report. If your employment ends dur-
ing the month, you can report your tips when
your employment ends.
Penalty for not reporting tips. If you don't re-
port tips to your employer as required, you may
be subject to a penalty equal to 50% of the so-
cial security, Medicare, and Additional Medi-
care taxes or railroad retirement tax you owe on
the unreported tips. For information about these
taxes, see Reporting social security, Medicare,
Additional Medicare, or railroad retirement
taxes on tips not reported to your employer un-
der Reporting Tips on Your Tax Return, later.
The penalty amount is in addition to the taxes
you owe.
You can avoid this penalty if you can show
reasonable cause for not reporting the tips to
your employer. To do so, attach a statement to
your return explaining why you didn't report
them.
Giving your employer money for taxes.
Your regular pay may not be enough for your
employer to withhold all the taxes you owe on
your regular pay plus your reported tips. If this
happens, you can give your employer money
until the close of the calendar year to pay the
rest of the taxes.
If you don't give your employer enough
money, your employer will apply your regular
pay and any money you give in the following or-
der.
1. All taxes on your regular pay.
2. Social security, Medicare, and Additional
Medicare taxes or railroad retirement
taxes on your reported tips.
3. Federal, state, and local income taxes on
your reported tips.
Any taxes that remain unpaid can be collec-
ted by your employer from your next paycheck.
If withholding taxes remain uncollected at the
end of the year, you may be subject to a penalty
for underpayment of estimated taxes. See Pub.
505, Tax Withholding and Estimated Tax, for
more information.
Uncollected taxes. You must report
on your tax return any social security
and Medicare taxes or railroad retire-
ment tax that remained uncollected at the end
of 2016. These uncollected taxes will be shown
on your 2016 Form W-2. See Reporting uncol-
lected social security, Medicare, or railroad re-
tirement taxes on tips reported to your employer
under Reporting Tips on Your Tax Return, later.
Reporting Tips on Your
Tax Return
How to report tips. Report your tips with your
wages on Form 1040, line 7; Form 1040A,
line 7; or Form 1040EZ, line 1.
What tips to report. You must report all tips
you received in 2016 on your tax return, includ-
ing both cash tips and noncash tips. Any tips
you reported to your employer for 2016 are in-
cluded in the wages shown on your Form W-2,
box 1. Add to the amount in box 1 only the tips
you did not report to your employer.
If you received $20 or more in cash and
charge tips in a month and didn't report
all of those tips to your employer, see
Reporting social security, Medicare, Additional
Medicare, or railroad retirement taxes on tips
not reported to your employer, later.
If you didn't keep a daily tip record as
required and an amount is shown on
your Form W-2, box 8, see Allocated
Tips, later.
If you kept a daily tip record and reported
tips to your employer as required under the
rules explained earlier, add the following tips to
the amount on your Form W-2, box 1.
Cash and charge tips you received that to-
taled less than $20 for any month.
The value of noncash tips, such as tickets,
passes, or other items of value.
Example. Ben Smith began working at the
Blue Ocean Restaurant (his only employer in
2016) on June 30 and received $10,000 in wa-
ges during the year. Ben kept a daily tip record
showing that his tips for June were $18 and his
tips for the rest of the year totaled $7,000. He
wasn't required to report his June tips to his em-
ployer, but he reported all of the rest of his tips
to his employer as required.
Ben's Form W-2 from Blue Ocean Restau-
rant shows $17,000 ($10,000 wages plus
$7,000 reported tips) in box 1. He adds the $18
unreported tips to that amount and reports
$17,018 as wages on his tax return.
Reporting social security, Medicare, Addi
tional Medicare, or railroad retirement taxesCAUTION
!CAUTION
!CAUTION
!
on tips not reported to your employer. If
you received $20 or more in cash and charge
tips in a month from any one job and didn't re-
port all of those tips to your employer, you must
report the social security, Medicare, and Addi-
tional Medicare taxes on the unreported tips as
additional tax on your return. To report these
taxes, you must file Form 1040, Form 1040,
1040NR, 1040-PR, or 1040-SS (not Form
1040EZ or Form 1040A) even if you wouldn't
otherwise have to file.
Use Form 4137 to figure social security and
Medicare taxes and/or Form 8959 to figure Ad-
ditional Medicare Tax. Enter the taxes on your
return as instructed, and attach the completed
Form 4137 and/or Form 8959 to your return.
If you're subject to the Railroad Retire-
ment Tax Act, you cannot use Form
4137 to pay railroad retirement tax on
unreported tips. To get railroad retirement
credit, you must report tips to your employer.
Reporting uncollected social security, Med
icare, or railroad retirement taxes on tips
reported to your employer. You may have
uncollected taxes if your regular pay wasn't
enough for your employer to withhold all the
taxes you owe and you didn't give your em-
ployer enough money to pay the rest of the
taxes. For more information, see Giving your
employer money for taxes under Reporting Tips
to Your Employer, earlier.
If your employer couldn't collect all the social
security and Medicare taxes or railroad retire-
ment tax you owe on tips reported for 2016, the
uncollected taxes will be shown on your Form
W-2, box 12 (codes A and B). You must report
these amounts as additional tax on your return.
Unlike the uncollected portion of the regular
(1.45%) Medicare tax, the uncollected Addi-
tional Medicare Tax isn't reported on your Form
W-2.
To report these uncollected taxes, you must
file Form 1040, 1040NR, 1040-PR, or 1040-SS
(not Form 1040EZ or Form 1040A) even if you
wouldn't otherwise have to file. You must report
these taxes on Form 1040, line 62, or the corre-
sponding line of Form 1040NR, 1040-PR, or
1040-SS (not Form 1040EZ or Form 1040A).
See the instructions for these forms for exact
reporting information.
Allocated Tips
If your employer allocated tips to you, they're
shown separately on your Form W-2, box 8.
They aren't included in box 1 with your wages
and reported tips. If box 8 is blank, this discus-
sion doesn't apply to you.
What are allocated tips. These are tips that
your employer assigned to you in addition to the
tips you reported to your employer for the year.
Your employer will have done this only if:
You worked in an establishment (restau-
rant, cocktail lounge, or similar business)
that must allocate tips to employees, and
The tips you reported to your employer
were less than your share of 8% of food
and drink sales.CAUTION
!
Chapter 6 Tip Income Page 55
No income, social security, Medicare, Addi-
tional Medicare, or railroad retirement taxes are
withheld on allocated tips.
How were your allocated tips figured. The
tips allocated to you are your share of an
amount figured by subtracting the reported tips
of all employees from 8% (or an approved lower
rate) of food and drink sales (other than carry-
out sales and sales with a service charge of
10% or more). Your share of that amount was
figured using either a method provided by an
employer-employee agreement or a method
provided by IRS regulations based on employ-
ees' sales or hours worked. For information
about the exact allocation method used, ask
your employer.
Must you report your allocated tips on your
tax return. You must report all tips you re-
ceived in 2016 on your tax return, including both
cash tips and noncash tips. Any tips you repor-
ted to your employer for 2016 are included in
the wages shown on your Form W-2, box 1.
Add to the amount in box 1 only the tips you
didn't report to your employer. This should in-
clude any allocated tips shown on your Form(s)
W-2, box 8, unless you have adequate records
to show that you received less tips in the year
than the allocated figures.
See What tips to report under Reporting
Tips on Your Tax Return, and Keeping a Daily
Tip Record, earlier.
How to report allocated tips. Report the
amounts shown on your Form(s) W-2, box 1
(wages and tips) and box 8 (allocated tips), as
wages on Form 1040, line 7; Form 1040NR,
line 8; or Form 1040NR-EZ, line 3. You cannot
file Form 1040A or Form 1040EZ when you
have allocated tips.
Because social security, Medicare, and Ad-
ditional Medicare taxes weren't withheld from
the allocated tips, you must report those taxes
as additional tax on your return. Complete Form
4137, and include the allocated tips on line 1 of
the form. See Reporting social security, Medi-
care, Additional Medicare, or railroad retirement
taxes on tips not reported to your employer un-
der Reporting Tips on Your Tax Return, earlier.
7.
Interest Income
Reminder
Foreignsource income. If you are a U.S. citi-
zen with interest income from sources outside
the United States (foreign income), you must re-
port that income on your tax return unless it is
exempt by U.S. law. This is true whether you re-
side inside or outside the United States and
whether or not you receive a Form 1099 from
the foreign payer.
Introduction
This chapter discusses the following topics.
Different types of interest income.
What interest is taxable and what interest
is nontaxable.
When to report interest income.
How to report interest income on your tax
return.
In general, any interest you receive or that is
credited to your account and can be withdrawn
is taxable income. Exceptions to this rule are
discussed later in this chapter.
You may be able to deduct expenses you
have in earning this income on Schedule A
(Form 1040) if you itemize your deductions. See
Money borrowed to invest in certificate of de-
posit, later, and chapter 28.
Useful Items
You may want to see:
Publication
Installment Sales
Investment Income and Expenses
Guide to Original Issue Discount
(OID) Instruments
Form (and Instructions)
Itemized
Deductions
Interest and Ordinary Dividends
Tax for Certain Children Who Have
Unearned Income
Parents' Election To Report Child's
Interest and Dividends
Exclusion of Interest From Series
EE and I U.S. Savings Bonds Issued
After 1989
Optional Form To Record
Redemption of Series EE and I U.S.
Savings Bonds Issued After 1989
General Information
A few items of general interest are covered
here.
Recordkeeping. You should keep a
list showing sources and interest
amounts received during the year.
Also, keep the forms you receive showing your
interest income (Forms 1099-INT, for example)
as an important part of your records.
Tax on unearned income of certain chil
dren. Part of a child's 2016 unearned income
may be taxed at the parent's tax rate. If so,
Form 8615, Tax for Certain Children Who Have
Unearned Income, must be completed and at-
tached to the child's tax return. If not, Form
8615 is not required and the child's income is
taxed at his or her own tax rate.
1212
Schedule A (Form 1040)
Schedule B (Form 1040A or 1040)
8615
8814
8815
8818RECORDS
Some parents can choose to include the
child's interest and dividends on the parent's re-
turn. If you can, use Form 8814, Parents' Elec-
tion To Report Child's Interest and Dividends,
for this purpose.
For more information about the tax on un-
earned income of children and the parents'
election, see chapter 31.
Beneficiary of an estate or trust. Interest
you receive as a beneficiary of an estate or trust
is generally taxable income. You should receive
a Schedule K-1 (Form 1041), Beneficiary's
Share of Income, Deductions, Credits, etc.,
from the fiduciary. Your copy of Schedule K-1
(Form 1041) and its instructions will tell you
where to report the income on your Form 1040.
Social security number (SSN). You must
give your name and SSN or individual taxpayer
identification number (ITIN) to any person re-
quired by federal tax law to make a return,
statement, or other document that relates to
you. This includes payers of interest. If you do
not give your SSN or ITIN to the payer of inter-
est, you may have to pay a penalty.
SSN for joint account. If the funds in a joint
account belong to one person, list that person's
name first on the account and give that person's
SSN to the payer. (For information on who
owns the funds in a joint account, see Joint ac-
counts, later.) If the joint account contains com-
bined funds, give the SSN of the person whose
name is listed first on the account. This is be-
cause only one name and SSN can be shown
on Form 1099.
These rules apply both to joint ownership by
a married couple and to joint ownership by
other individuals. For example, if you open a
joint savings account with your child using
funds belonging to the child, list the child's
name first on the account and give the child's
SSN.
Custodian account for your child. If your
child is the actual owner of an account that is
recorded in your name as custodian for the
child, give the child's SSN to the payer. For ex-
ample, you must give your child's SSN to the
payer of interest on an account owned by your
child, even though the interest is paid to you as
custodian.
Penalty for failure to supply SSN. If you
do not give your SSN to the payer of interest,
you may have to pay a penalty. See Failure to
supply SSN under Penalties in chapter 1.
Backup withholding also may apply.
Backup withholding. Your interest income is
generally not subject to regular withholding.
However, it may be subject to backup withhold-
ing to ensure that income tax is collected on the
income. Under backup withholding, the payer of
interest must withhold, as income tax, on the
amount you are paid, applying the appropriate
withholding rate.
Backup withholding may also be required if
the IRS has determined that you underreported
your interest or dividend income. For more in-
formation, see Backup Withholding in chap-
ter 4.
Reporting backup withholding. If backup
withholding is deducted from your interest in-
come, the payer must give you a Form
Page 56 Chapter 7 Interest Income
1099-INT for the year indicating the amount
withheld. The Form 1099-INT will show any
backup withholding as “Federal income tax
withheld.”
Joint accounts. If two or more persons hold
property (such as a savings account or bond)
as joint tenants, tenants by the entirety, or ten-
ants in common, each person's share of any in-
terest from the property is determined by local
law.
Income from property given to a child.
Property you give as a parent to your child un-
der the Model Gifts of Securities to Minors Act,
the Uniform Gifts to Minors Act, or any similar
law becomes the child's property.
Income from the property is taxable to the
child, except that any part used to satisfy a legal
obligation to support the child is taxable to the
parent or guardian having that legal obligation.
Savings account with parent as trustee.
Interest income from a savings account opened
for a minor child, but placed in the name and
subject to the order of the parents as trustees,
is taxable to the child if, under the law of the
state in which the child resides, both of the fol-
lowing are true.
The savings account legally belongs to the
child.
The parents are not legally permitted to
use any of the funds to support the child.
Form 1099INT. Interest income is generally
reported to you on Form 1099-INT, or a similar
statement, by banks, savings and loans, and
other payers of interest. This form shows you
the interest you received during the year. Keep
this form for your records. You do not have to
attach it to your tax return.
Report on your tax return the total interest
income you receive for the tax year. See the in-
structions to Form 1099-INT to see whether you
need to adjust any of the amounts reported to
you.
Interest not reported on Form 1099-INT.
Even if you do not receive Form 1099-INT, you
must still report all of your interest income. For
example, you may receive distributive shares of
interest from partnerships or S corporations.
This interest is reported to you on Schedule K-1
(Form 1065), Partner's Share of Income, De-
duction, Credits, etc., or Schedule K-1 (Form
1120S), Shareholder's Share of Income, De-
ductions, Credits, etc.
Nominees. Generally, if someone receives
interest as a nominee for you, that person must
give you a Form 1099-INT showing the interest
received on your behalf.
If you receive a Form 1099-INT that includes
amounts belonging to another person, see the
discussion on nominee distributions under How
To Report Interest Income in chapter 1 of Pub.
550, or Schedule B (Form 1040A or 1040) in-
structions.
Incorrect amount. If you receive a Form
1099-INT that shows an incorrect amount (or
other incorrect information), you should ask the
issuer for a corrected form. The new Form
1099-INT you receive will be marked “Correc-
ted.”
Form 1099OID. Reportable interest income
also may be shown on Form 1099-OID, Original
Issue Discount. For more information about
amounts shown on this form, see Original Issue
Discount (OID), later in this chapter.
Exemptinterest dividends. Exempt-interest
dividends you receive from a mutual fund or
other regulated investment company, including
those received from a qualified fund of funds in
any tax year beginning after December 22,
2010, are not included in your taxable income.
(However, see Information reporting require-
ment, next.) Exempt-interest dividends should
be shown in box 10 of Form 1099-DIV. You do
not reduce your basis for distributions that are
exempt-interest dividends.
Information reporting requirement. Al-
though exempt-interest dividends are not taxa-
ble, you must show them on your tax return if
you have to file. This is an information reporting
requirement and does not change the ex-
empt-interest dividends into taxable income.
Note. Exempt-interest dividends paid from
specified private activity bonds may be subject
to the alternative minimum tax. See Alternative
Minimum Tax (AMT) in chapter 30 for more in-
formation. Chapter 1 of Pub. 550 contains a dis-
cussion on private activity bonds under State or
Local Government Obligations.
Interest on VA dividends. Interest on insur-
ance dividends left on deposit with the Depart-
ment of Veterans Affairs (VA) is not taxable.
This includes interest paid on dividends on con-
verted United States Government Life Insur-
ance and on National Service Life Insurance
policies.
Individual retirement arrangements (IRAs).
Interest on a Roth IRA generally is not taxable.
Interest on a traditional IRA is tax deferred. You
generally do not include it in your income until
you make withdrawals from the IRA. See chap-
ter 17.
Taxable Interest
Taxable interest includes interest you receive
from bank accounts, loans you make to others,
and other sources. The following are some
sources of taxable interest.
Dividends that are actually interest. Certain
distributions commonly called dividends are ac-
tually interest. You must report as interest
so-called “dividends” on deposits or on share
accounts in:
Cooperative banks,
Credit unions,
Domestic building and loan associations,
Domestic savings and loan associations,
Federal savings and loan associations,
and
Mutual savings banks.
The “dividends” will be shown as interest in-
come on Form 1099-INT.
Money market funds. Money market funds
pay dividends and are offered by nonbank fi-
nancial institutions, such as mutual funds and
stock brokerage houses. Generally, amounts
you receive from money market funds should
be reported as dividends, not as interest.
Certificates of deposit and other deferred
interest accounts. If you open any of these
accounts, interest may be paid at fixed intervals
of 1 year or less during the term of the account.
You generally must include this interest in your
income when you actually receive it or are enti-
tled to receive it without paying a substantial
penalty. The same is true for accounts that ma-
ture in 1 year or less and pay interest in a single
payment at maturity. If interest is deferred for
more than 1 year, see Original Issue Discount
(OID), later.
Interest subject to penalty for early with-
drawal. If you withdraw funds from a deferred
interest account before maturity, you may have
to pay a penalty. You must report the total
amount of interest paid or credited to your ac-
count during the year, without subtracting the
penalty. See Penalty on early withdrawal of sav-
ings in chapter 1 of Pub. 550 for more informa-
tion on how to report the interest and deduct the
penalty.
Money borrowed to invest in certificate
of deposit. The interest you pay on money
borrowed from a bank or savings institution to
meet the minimum deposit required for a certifi-
cate of deposit from the institution and the inter-
est you earn on the certificate are two separate
items. You must report the total interest you
earn on the certificate in your income. If you
itemize deductions, you can deduct the interest
you pay as investment interest, up to the
amount of your net investment income. See In-
terest Expenses in chapter 3 of Pub. 550.
Example. You deposited $5,000 with a
bank and borrowed $5,000 from the bank to
make up the $10,000 minimum deposit required
to buy a 6-month certificate of deposit. The cer-
tificate earned $575 at maturity in 2016, but you
received only $265, which represented the
$575 you earned minus $310 interest charged
on your $5,000 loan. The bank gives you a
Form 1099-INT for 2016 showing the $575 in-
terest you earned. The bank also gives you a
statement showing that you paid $310 interest
for 2016. You must include the $575 in your in-
come. If you itemize your deductions on Sched-
ule A (Form 1040), you can deduct $310, sub-
ject to the net investment income limit.
Gift for opening account. If you receive non-
cash gifts or services for making deposits or for
opening an account in a savings institution, you
may have to report the value as interest.
For deposits of less than $5,000, gifts or
services valued at more than $10 must be re-
ported as interest. For deposits of $5,000 or
more, gifts or services valued at more than $20
must be reported as interest. The value is deter-
mined by the cost to the financial institution.
Example. You open a savings account at
your local bank and deposit $800. The account
earns $20 interest. You also receive a $15 cal-
culator. If no other interest is credited to your
account during the year, the Form 1099-INT
you receive will show $35 interest for the year.
You must report $35 interest income on your tax
return.
Chapter 7 Interest Income Page 57
Interest on insurance dividends. Interest on
insurance dividends left on deposit with an in-
surance company that can be withdrawn annu-
ally is taxable to you in the year it is credited to
your account. However, if you can withdraw it
only on the anniversary date of the policy (or
other specified date), the interest is taxable in
the year that date occurs.
Prepaid insurance premiums. Any increase
in the value of prepaid insurance premiums, ad-
vance premiums, or premium deposit funds is
interest if it is applied to the payment of premi-
ums due on insurance policies or made availa-
ble for you to withdraw.
U.S. obligations. Interest on U.S. obligations,
such as U.S. Treasury bills, notes, and bonds,
issued by any agency or instrumentality of the
United States is taxable for federal income tax
purposes.
Interest on tax refunds. Interest you receive
on tax refunds is taxable income.
Interest on condemnation award. If the con-
demning authority pays you interest to compen-
sate you for a delay in payment of an award, the
interest is taxable.
Installment sale payments. If a contract for
the sale or exchange of property provides for
deferred payments, it also usually provides for
interest payable with the deferred payments.
Generally, that interest is taxable when you re-
ceive it. If little or no interest is provided for in a
deferred payment contract, part of each pay-
ment may be treated as interest. See Unstated
Interest and Original Issue Discount in Pub.
537, Installment Sales.
Interest on annuity contract. Accumulated
interest on an annuity contract you sell before
its maturity date is taxable.
Usurious interest. Usurious interest is interest
charged at an illegal rate. This is taxable as in-
terest unless state law automatically changes it
to a payment on the principal.
Interest income on frozen deposits. Ex-
clude from your gross income interest on frozen
deposits. A deposit is frozen if, at the end of the
year, you cannot withdraw any part of the de-
posit because:
The financial institution is bankrupt or in-
solvent, or
The state where the institution is located
has placed limits on withdrawals because
other financial institutions in the state are
bankrupt or insolvent.
The amount of interest you must exclude is
the interest that was credited on the frozen de-
posits minus the sum of:
The net amount you withdrew from these
deposits during the year, and
The amount you could have withdrawn as
of the end of the year (not reduced by any
penalty for premature withdrawals of a time
deposit).
If you receive a Form 1099-INT for interest in-
come on deposits that were frozen at the end of
2016, see Frozen deposits under How To Re-
port Interest Income in chapter 1 of Pub. 550 for
information about reporting this interest income
exclusion on your tax return.
The interest you exclude is treated as credi-
ted to your account in the following year. You
must include it in income in the year you can
withdraw it.
Example. $100 of interest was credited on
your frozen deposit during the year. You with-
drew $80 but could not withdraw any more as of
the end of the year. You must include $80 in
your income and exclude $20 from your income
for the year. You must include the $20 in your
income for the year you can withdraw it.
Bonds traded flat. If you buy a bond at a dis-
count when interest has been defaulted or
when the interest has accrued but has not been
paid, the transaction is described as trading a
bond flat. The defaulted or unpaid interest is not
income and is not taxable as interest if paid
later. When you receive a payment of that inter-
est, it is a return of capital that reduces the re-
maining cost basis of your bond. Interest that
accrues after the date of purchase, however, is
taxable interest income for the year it is re-
ceived or accrued. See Bonds Sold Between
Interest Dates, later, for more information.
Belowmarket loans. In general, a below-mar-
ket loan is a loan on which no interest is
charged or on which interest is charged at a
rate below the applicable federal rate. See Be-
low-Market Loans in chapter 1 of Pub. 550 for
more information.
U.S. Savings Bonds
This section provides tax information on U.S.
savings bonds. It explains how to report the in-
terest income on these bonds and how to treat
transfers of these bonds.
For other information on U.S. savings
bonds, write to:
For series HH/H:
Series HH and Series H
Treasury Retail Securities Site
P.O. Box 2186
Minneapolis, MN 55480-2186
For series EE and I paper savings bonds:
Series EE and Series I
Treasury Retail Securities Site
P.O. Box 214
Minneapolis, MN 55480-0214
For series EE and I electronic bonds:
Series EE and Series I
Treasury Retail Securities Site
P.O. Box 7015
Minneapolis, MN 55480-7015
Or, on the Internet, visit
www.treasurydirect.gov/indiv/
indiv.htm.
Accrual method taxpayers. If you use an ac-
crual method of accounting, you must report in-
terest on U.S. savings bonds each year as it ac-
crues. You cannot postpone reporting interest
until you receive it or until the bonds mature.
Accrual methods of accounting are explained in
chapter 1 under Accounting Methods.
Cash method taxpayers. If you use the cash
method of accounting, as most individual tax-
payers do, you generally report the interest on
U.S. savings bonds when you receive it. The
cash method of accounting is explained in
chapter 1 under Accounting Methods. But see
Reporting options for cash method taxpayers,
later.
Series HH bonds. These bonds were issued
at face value. Interest is paid twice a year by di-
rect deposit to your bank account. If you are a
cash method taxpayer, you must report interest
on these bonds as income in the year you re-
ceive it.
Series HH bonds were first offered in 1980
and last offered in August 2004. Before 1980,
series H bonds were issued. Series H bonds
are treated the same as series HH bonds. If you
are a cash method taxpayer, you must report
the interest when you receive it.
Series H bonds have a maturity period of 30
years. Series HH bonds mature in 20 years.
The last series H bonds matured in 2009.
Series EE and series I bonds. Interest on
these bonds is payable when you redeem the
bonds. The difference between the purchase
price and the redemption value is taxable inter-
est.
Series EE bonds. Series EE bonds were
first offered in January 1980 and have a matur-
ity period of 30 years.
Before July 1980, series E bonds were is-
sued. The original 10-year maturity period of
series E bonds has been extended to 40 years
for bonds issued before December 1965 and 30
years for bonds issued after November 1965.
Paper series EE and series E bonds are issued
at a discount. The face value is payable to you
at maturity. Electronic series EE bonds are is-
sued at their face value. The face value plus ac-
crued interest is payable to you at maturity. As
of January 1, 2012, paper savings bonds were
no longer sold at financial institutions.
Owners of paper series EE bonds can con-
vert them to electronic bonds. These converted
bonds do not retain the denomination listed on
the paper certificate but are posted at their pur-
chase price (with accrued interest).
Series I bonds. Series I bonds were first of-
fered in 1998. These are inflation-indexed
bonds issued at their face amount with a matur-
ity period of 30 years. The face value plus all
accrued interest is payable to you at maturity.
Reporting options for cash method tax-
payers. If you use the cash method of report-
ing income, you can report the interest on ser-
ies EE, series E, and series I bonds in either of
the following ways.
1. Method 1. Postpone reporting the interest
until the earlier of the year you cash or dis-
pose of the bonds or the year they mature.
(However, see Savings bonds traded,
later.)
2. Method 2. Choose to report the increase
in redemption value as interest each year.
Page 58 Chapter 7 Interest Income
You must use the same method for all series
EE, series E, and series I bonds you own. If you
do not choose method 2 by reporting the in-
crease in redemption value as interest each
year, you must use method 1.
If you plan to cash your bonds in the
same year you will pay for higher edu-
cation expenses, you may want to use
method 1 because you may be able to exclude
the interest from your income. To learn how,
see Education Savings Bond Program, later.
Change from method 1. If you want to
change your method of reporting the interest
from method 1 to method 2, you can do so with-
out permission from the IRS. In the year of
change you must report all interest accrued to
date and not previously reported for all your
bonds.
Once you choose to report the interest each
year, you must continue to do so for all series
EE, series E, and series I bonds you own and
for any you get later, unless you request per-
mission to change, as explained next.
Change from method 2. To change from
method 2 to method 1, you must request per-
mission from the IRS. Permission for the
change is automatically granted if you send the
IRS a statement that meets all the following re-
quirements.
1. You have typed or printed the following
number at the top: “131.”
2. It includes your name and social security
number under “131.”
3. It includes the year of change (both the
beginning and ending dates).
4. It identifies the savings bonds for which
you are requesting this change.
5. It includes your agreement to:
a. Report all interest on any bonds ac-
quired during or after the year of
change when the interest is realized
upon disposition, redemption, or final
maturity, whichever is earliest; and
b. Report all interest on the bonds ac-
quired before the year of change
when the interest is realized upon dis-
position, redemption, or final maturity,
whichever is earliest, with the excep-
tion of the interest reported in prior tax
years.
You must attach this statement to your tax
return for the year of change, which you must
file by the due date (including extensions).
You can have an automatic extension of 6
months from the due date of your return for the
year of change (excluding extensions) to file theTIP
statement with an amended return. To get this
extension, you must have filed your original re-
turn for the year of the change by the due date
(including extensions).
By the date you file the original state-
ment with your return, you must also
send a signed copy to the address be-
low.
Internal Revenue Service
Attention: Automatic Change
P.O. Box 7604
Benjamin Franklin Station
Washington, DC 20044
If you use a private delivery service, send the
signed copy to the address below.
Internal Revenue Service
Attention: Automatic Change
1111 Constitution Avenue NW
Washington, DC 20224
Room 5336
Instead of filing this statement, you can re-
quest permission to change from method 2 to
method 1 by filing Form 3115, Application for
Change in Accounting Method. In that case, fol-
low the form instructions for an automatic
change. No user fee is required.
Coowners. If a U.S. savings bond is issued in
the names of co-owners, such as you and your
child or you and your spouse, interest on the
bond is generally taxable to the co-owner who
bought the bond.
One co-owner's funds used. If you used
your funds to buy the bond, you must pay the
tax on the interest. This is true even if you let
the other co-owner redeem the bond and keep
all the proceeds. Under these circumstances,
the co-owner who redeemed the bond will re-
ceive a Form 1099-INT at the time of redemp-
tion and must provide you with another Form
1099-INT showing the amount of interest from
the bond taxable to you. The co-owner who re-
deemed the bond is a “nominee.” See Nominee
distributions under How To Report Interest In-
come in chapter 1 of Pub. 550 for more informa-
tion about how a person who is a nominee re-
ports interest income belonging to another
person.
Both co-owners' funds used. If you and
the other co-owner each contribute part of the
bond's purchase price, the interest is generally
taxable to each of you, in proportion to the
amount each of you paid.
Community property. If you and your
spouse live in a community property state and
hold bonds as community property, one-half of
the interest is considered received by each of
you. If you file separate returns, each of you
generally must report one-half of the bond inter-
est. For more information about community
property, see Pub. 555.
Table 7-1. These rules are also shown in
Table 7-1.
Ownership transferred. If you bought series
E, series EE, or series I bonds entirely with your
own funds and had them reissued in your
co-owner's name or beneficiary's name alone,
you must include in your gross income for the
year of reissue all interest that you earned on
these bonds and have not previously reported.
But, if the bonds were reissued in your name
alone, you do not have to report the interest ac-
crued at that time.
This same rule applies when bonds (other
than bonds held as community property) are
transferred between spouses or incident to di-
vorce.
Purchased jointly. If you and a co-owner
each contributed funds to buy series E, series
EE, or series I bonds jointly and later have the
bonds reissued in the co-owner's name alone,
you must include in your gross income for the
year of reissue your share of all the interest
earned on the bonds that you have not previ-
ously reported. The former co-owner does not
have to include in gross income at the time of
reissue his or her share of the interest earned
that was not reported before the transfer. This
interest, however, as well as all interest earned
after the reissue, is income to the former
co-owner.
This income-reporting rule also applies
when the bonds are reissued in the name of
your former co-owner and a new co-owner. But
the new co-owner will report only his or her
share of the interest earned after the transfer.
If bonds that you and a co-owner bought
jointly are reissued to each of you separately in
the same proportion as your contribution to the
purchase price, neither you nor your co-owner
has to report at that time the interest earned be-
fore the bonds were reissued.
Example 1. You and your spouse each
spent an equal amount to buy a $1,000 series
EE savings bond. The bond was issued to you
and your spouse as co-owners. You both post-
pone reporting interest on the bond. You later
have the bond reissued as two $500 bonds,
one in your name and one in your spouse's
name. At that time, neither you nor your spouse
has to report the interest earned to the date of
reissue.
Example 2. You bought a $1,000 series EE
savings bond entirely with your own funds. The
bond was issued to you and your spouse as
co-owners. You both postpone reporting inter-
est on the bond. You later have the bond reis-
sued as two $500 bonds, one in your name and
one in your spouse's name. You must report
half the interest earned to the date of reissue.
Transfer to a trust. If you own series E, series
EE, or series I bonds and transfer them to a
trust, giving up all rights of ownership, you must
include in your income for that year the interest
earned to the date of transfer if you have not
Table 7-1. Who Pays the Tax on U.S. Savings Bond Interest
IF ... THEN the interest must be reported by ...
you buy a bond in your name and the name of another
person as co-owners, using only your own funds you.
you buy a bond in the name of another person, who is the
sole owner of the bond the person for whom you bought the bond.
you and another person buy a bond as co-owners, each
contributing part of the purchase price both you and the other co-owner, in proportion to the
amount each paid for the bond.
you and your spouse, who live in a community property
state, buy a bond that is community property you and your spouse. If you file separate returns, both you
and your spouse generally report one-half of the interest.
Chapter 7 Interest Income Page 59
already reported it. However, if you are consid-
ered the owner of the trust and if the increase in
value both before and after the transfer contin-
ues to be taxable to you, you can continue to
defer reporting the interest earned each year.
You must include the total interest in your in-
come in the year you cash or dispose of the
bonds or the year the bonds finally mature,
whichever is earlier.
The same rules apply to previously unrepor-
ted interest on series EE or series E bonds if the
transfer to a trust consisted of series HH or ser-
ies H bonds you acquired in a trade for the ser-
ies EE or series E bonds. See Savings bonds
traded, later.
Decedents. The manner of reporting interest
income on series E, series EE, or series I
bonds, after the death of the owner (decedent),
depends on the accounting and income-report-
ing methods previously used by the decedent.
This is explained in chapter 1 of Pub. 550.
Savings bonds traded. If you postponed re-
porting the interest on your series EE or series
E bonds, you did not recognize taxable income
when you traded the bonds for series HH or
series H bonds, unless you received cash in the
trade. (You cannot trade series I bonds for ser-
ies HH bonds. After August 31, 2004, you can-
not trade any other series of bonds for series
HH bonds.) Any cash you received is income
up to the amount of the interest earned on the
bonds traded. When your series HH or series H
bonds mature, or if you dispose of them before
maturity, you report as interest the difference
between their redemption value and your cost.
Your cost is the sum of the amount you paid for
the traded series EE or series E bonds plus any
amount you had to pay at the time of the trade.
Example. You traded series EE bonds (on
which you postponed reporting the interest) for
$2,500 in series HH bonds and $223 in cash.
You reported the $223 as taxable income on
your tax return. At the time of the trade, the ser-
ies EE bonds had accrued interest of $523 and
a redemption value of $2,723. You hold the ser-
ies HH bonds until maturity, when you receive
$2,500. You must report $300 as interest in-
come in the year of maturity. This is the differ-
ence between their redemption value, $2,500,
and your cost, $2,200 (the amount you paid for
the series EE bonds). (It is also the difference
between the accrued interest of $523 on the
series EE bonds and the $223 cash received on
the trade.)
Choice to report interest in year of trade.
You could have chosen to treat all of the previ-
ously unreported accrued interest on the series
EE or series E bonds traded for series HH
bonds as income in the year of the trade. If you
made this choice, it is treated as a change from
method 1. See Change from method 1, earlier.
Form 1099INT for U.S. savings bonds inter
est. When you cash a bond, the bank or other
payer that redeems it must give you a Form
1099-INT if the interest part of the payment you
receive is $10 or more. Box 3 of your Form
1099-INT should show the interest as the differ-
ence between the amount you received and the
amount paid for the bond. However, your Form
1099-INT may show more interest than you
have to include on your income tax return. For
example, this may happen if any of the following
are true.
You chose to report the increase in the re-
demption value of the bond each year. The
interest shown on your Form 1099-INT will
not be reduced by amounts previously in-
cluded in income.
You received the bond from a decedent.
The interest shown on your Form 1099-INT
will not be reduced by any interest repor-
ted by the decedent before death, or on
the decedent's final return, or by the estate
on the estate's income tax return.
Ownership of the bond was transferred.
The interest shown on your Form 1099-INT
will not be reduced by interest that accrued
before the transfer.
You were named as a co-owner, and the
other co-owner contributed funds to buy
the bond. The interest shown on your Form
1099-INT will not be reduced by the
amount you received as nominee for the
other co-owner. (See Co-owners, earlier in
this chapter, for more information about the
reporting requirements.)
You received the bond in a taxable distri-
bution from a retirement or profit-sharing
plan. The interest shown on your Form
1099-INT will not be reduced by the inter-
est portion of the amount taxable as a dis-
tribution from the plan and not taxable as
interest. (This amount is generally shown
on Form 1099-R, Distributions From Pen-
sions, Annuities, Retirement or Profit-Shar-
ing Plans, IRAs, Insurance Contracts, etc.,
for the year of distribution.)
For more information on including the cor-
rect amount of interest on your return, see How
To Report Interest Income, later. Pub. 550 in-
cludes examples showing how to report these
amounts.
Interest on U.S. savings bonds is ex-
empt from state and local taxes. The
Form 1099-INT you receive will indi-
cate the amount that is for U.S. savings bond in-
terest in box 3.
Education Savings
Bond Program
You may be able to exclude from income all or
part of the interest you receive on the redemp-
tion of qualified U.S. savings bonds during the
year if you pay qualified higher educational ex-
penses during the same year. This exclusion is
known as the Education Savings Bond Pro-
gram.
You do not qualify for this exclusion if your
filing status is married filing separately.
Form 8815. Use Form 8815 to figure your
exclusion. Attach the form to your Form 1040 or
Form 1040A.
Qualified U.S. savings bonds. A qualified
U.S. savings bond is a series EE bond issued
after 1989 or a series I bond. The bond must be
issued either in your name (sole owner) or in
your and your spouse's names (co-owners).TIP
You must be at least 24 years old before the
bond's issue date. For example, a bond bought
by a parent and issued in the name of his or her
child under age 24 does not qualify for the ex-
clusion by the parent or child.
The issue date of a bond may be ear-
lier than the date the bond is pur-
chased because the issue date as-
signed to a bond is the first day of the month in
which it is purchased.
Beneficiary. You can designate any individual
(including a child) as a beneficiary of the bond.
Verification by IRS. If you claim the exclu-
sion, the IRS will check it by using bond re-
demption information from the Department of
the Treasury.
Qualified expenses. Qualified higher edu-
cation expenses are tuition and fees required
for you, your spouse, or your dependent (for
whom you claim an exemption) to attend an eli-
gible educational institution.
Qualified expenses include any contribution
you make to a qualified tuition program or to a
Coverdell education savings account.
Qualified expenses do not include expenses
for room and board or for courses involving
sports, games, or hobbies that are not part of a
degree or certificate granting program.
Eligible educational institutions. These
institutions include most public, private, and
nonprofit universities, colleges, and vocational
schools that are accredited and eligible to par-
ticipate in student aid programs run by the U.S.
Department of Education.
Reduction for certain benefits. You must
reduce your qualified higher education expen-
ses by all of the following tax-free benefits.
1. Tax-free part of scholarships and fellow-
ships (see Scholarships and fellowships in
chapter 12).
2. Expenses used to figure the tax-free por-
tion of distributions from a Coverdell ESA.
3. Expenses used to figure the tax-free por-
tion of distributions from a qualified tuition
program.
4. Any tax-free payments (other than gifts or
inheritances) received for educational ex-
penses, such as:
a. Veterans' educational assistance ben-
efits,
b. Qualified tuition reductions, or
c. Employer-provided educational assis-
tance.
5. Any expense used in figuring the Ameri-
can opportunity and lifetime learning cred-
its.
Amount excludable. If the total proceeds
(interest and principal) from the qualified U.S.
savings bonds you redeem during the year are
not more than your adjusted qualified higher ed-
ucation expenses for the year, you may be able
to exclude all of the interest. If the proceeds are
more than the expenses, you may be able to
exclude only part of the interest.CAUTION
!
Page 60 Chapter 7 Interest Income
To determine the excludable amount, multi-
ply the interest part of the proceeds by a frac-
tion. The numerator of the fraction is the quali-
fied higher education expenses you paid during
the year. The denominator of the fraction is the
total proceeds you received during the year.
Example. In February 2016, Mark and
Joan, a married couple, cashed qualified series
EE U.S. savings bonds with a total denomina-
tion of $10,000 that they bought in April 2000
for $5,000. They received proceeds of $7,828,
representing principal of $5,000 and interest of
$2,828. In 2016, they paid $4,000 of their
daughter's college tuition. They are not claiming
an education credit for that amount, and their
daughter does not have any tax-free educa-
tional assistance. They can exclude $1,445
($2,828 × ($4,000 ÷ $7,828)) of interest in
2016. They must include the remaining $1,383
($2,828 − $1,445) interest in gross income.
Modified adjusted gross income limit.
The interest exclusion is limited if your modified
adjusted gross income (modified AGI) is:
$77,550 to $92,550 for taxpayers filing sin-
gle or head of household, and
$116,300 to $146,300 for married taxpay-
ers filing jointly or for a qualifying widow(er)
with dependent child.
You do not qualify for the interest exclusion if
your modified AGI is equal to or more than the
upper limit for your filing status.
Modified AGI, for purposes of this exclusion,
is adjusted gross income (Form 1040, line 37,
or Form 1040A, line 21) figured before the inter-
est exclusion, and modified by adding back
any:
1. Foreign earned income exclusion,
2. Foreign housing exclusion and deduction,
3. Exclusion of income for bona fide resi-
dents of American Samoa,
4. Exclusion for income from Puerto Rico,
5. Exclusion for adoption benefits received
under an employer's adoption assistance
program,
6. Deduction for tuition and fees,
7. Deduction for student loan interest, and
8. Deduction for domestic production activi-
ties.
Use the Line 9 Worksheet in the Form 8815
instructions to figure your modified AGI.
If you have investment interest expense in-
curred to earn royalties and other investment in-
come, see Education Savings Bond Program in
chapter 1 of Pub. 550.
Recordkeeping. If you claim the inter-
est exclusion, you must keep a written
record of the qualified U.S. savings
bonds you redeem. Your record must include
the serial number, issue date, face value, and
total redemption proceeds (principal and inter-
est) of each bond. You can use Form 8818 to
record this information. You should also keep
bills, receipts, canceled checks, or other docu-
mentation that shows you paid qualified higher
education expenses during the year.RECORDS
U.S. Treasury Bills,
Notes, and Bonds
Treasury bills, notes, and bonds are direct
debts (obligations) of the U.S. Government.
Taxation of interest. Interest income from
Treasury bills, notes, and bonds is subject to
federal income tax but is exempt from all state
and local income taxes. You should receive
Form 1099-INT showing the interest (in box 3)
paid to you for the year.
Payments of principal and interest generally
will be credited to your designated checking or
savings account by direct deposit through the
TreasuryDirect® system.
Treasury bills. These bills generally have a
4-week, 13-week, 26-week, or 52-week matur-
ity period. They are generally issued at a dis-
count in the amount of $100 and multiples of
$100. The difference between the discounted
price you pay for the bills and the face value
you receive at maturity is interest income. Gen-
erally, you report this interest income when the
bill is paid at maturity. If you paid a premium for
a bill (more than the face value), you generally
report the premium as a section 171 deduction
when the bill is paid at maturity.
Treasury notes and bonds. Treasury
notes have maturity periods of more than 1
year, ranging up to 10 years. Maturity periods
for Treasury bonds are longer than 10 years.
Both generally are issued in denominations of
$100 to $1 million and generally pay interest ev-
ery 6 months. Generally, you report this interest
for the year paid. For more information, see
U.S. Treasury Bills, Notes, and Bonds in chap-
ter 1 of Pub. 550.
For other information on Treasury
notes or bonds, write to:
Treasury Retail Securities Site
P.O. Box 7015
Minneapolis, MN 55480-7015
Or, on the Internet, visit
www.treasurydirect.gov/indiv/
indiv.htm.
For information on series EE, series I, and
series HH savings bonds, see U.S. Savings
Bonds, earlier.
Treasury inflation-protected securities
(TIPS). These securities pay interest twice a
year at a fixed rate, based on a principal
amount adjusted to take into account inflation
and deflation. For the tax treatment of these se-
curities, see Inflation-Indexed Debt Instruments
under Original Issue Discount (OID) in Pub.
550.
Bonds Sold Between
Interest Dates
If you sell a bond between interest payment
dates, part of the sales price represents interest
accrued to the date of sale. You must report
that part of the sales price as interest income for
the year of sale.
If you buy a bond between interest payment
dates, part of the purchase price represents in-
terest accrued before the date of purchase.
When that interest is paid to you, treat it as a
nontaxable return of your capital investment,
rather than as interest income. See Accrued in-
terest on bonds under How To Report Interest
Income in chapter 1 of Pub. 550 for information
on reporting the payment.
Insurance
Life insurance proceeds paid to you as benefi-
ciary of the insured person are usually not taxa-
ble. But if you receive the proceeds in install-
ments, you must usually report a part of each
installment payment as interest income.
For more information about insurance pro-
ceeds received in installments, see Pub. 525,
Taxable and Nontaxable Income.
Annuity. If you buy an annuity with life insur-
ance proceeds, the annuity payments you re-
ceive are taxed as pension and annuity income
from a nonqualified plan, not as interest in-
come. See chapter 10 for information on pen-
sion and annuity income from nonqualified
plans.
State or Local
Government Obligations
Interest on a bond used to finance government
operations generally is not taxable if the bond is
issued by a state, the District of Columbia, a
possession of the United States, or any of their
political subdivisions.
Bonds issued after 1982 (including tribal
economic development bonds issued after Feb-
ruary 17, 2009) by an Indian tribal government
are treated as issued by a state. Interest on
these bonds is generally tax exempt if the
bonds are part of an issue of which substantially
all proceeds are to be used in the exercise of
any essential government function.
For information on federally guaranteed
bonds, mortgage revenue bonds, arbitrage
bonds, private activity bonds, qualified tax
credit bonds, and Build America bonds, see
State or Local Government Obligations in chap-
ter 1 of Pub. 550.
Information reporting requirement. If you
must file a tax return, you are required to show
any tax-exempt interest you received on your
return. This is an information reporting require-
ment only. It does not change tax-exempt inter-
est to taxable interest.
Original Issue Discount
(OID)
Original issue discount (OID) is a form of inter-
est. You generally include OID in your income
as it accrues over the term of the debt instru-
ment, whether or not you receive any payments
from the issuer.
A debt instrument generally has OID when
the instrument is issued for a price that is less
than its stated redemption price at maturity. OID
is the difference between the stated redemption
price at maturity and the issue price.
Chapter 7 Interest Income Page 61
All debt instruments that pay no interest be-
fore maturity are presumed to be issued at a
discount. Zero coupon bonds are one example
of these instruments.
The OID accrual rules generally do not apply
to short-term obligations (those with a fixed ma-
turity date of 1 year or less from date of issue).
See Discount on Short-Term Obligations in
chapter 1 of Pub. 550.
De minimis OID. You can treat the discount as
zero if it is less than one-fourth of 1% (.0025) of
the stated redemption price at maturity multi-
plied by the number of full years from the date
of original issue to maturity. This small discount
is known as “de minimis” OID.
Example 1. You bought a 10-year bond
with a stated redemption price at maturity of
$1,000, issued at $980 with OID of $20.
One-fourth of 1% of $1,000 (stated redemption
price) times 10 (the number of full years from
the date of original issue to maturity) equals
$25. Because the $20 discount is less than $25,
the OID is treated as zero. (If you hold the bond
at maturity, you will recognize $20 ($1,000 −
$980) of capital gain.)
Example 2. The facts are the same as in
Example 1, except that the bond was issued at
$950. The OID is $50. Because the $50 dis-
count is more than the $25 figured in Exam-
ple 1, you must include the OID in income as it
accrues over the term of the bond.
Debt instrument bought after original is-
sue. If you buy a debt instrument with de mini-
mis OID at a premium, the discount is not in-
cludible in income. If you buy a debt instrument
with de minimis OID at a discount, the discount
is reported under the market discount rules.
See Market Discount Bonds in chapter 1 of
Pub. 550.
Exceptions to reporting OID as current in
come. The OID rules discussed in this chapter
do not apply to the following debt instruments.
1. Tax-exempt obligations. (However, see
Stripped tax-exempt obligations under
Stripped Bonds and Coupons in chapter 1
of Pub. 550).
2. U.S. savings bonds.
3. Short-term debt instruments (those with a
fixed maturity date of not more than 1 year
from the date of issue).
4. Obligations issued by an individual before
March 2, 1984.
5. Loans between individuals if all the follow-
ing are true.
a. The lender is not in the business of
lending money.
b. The amount of the loan, plus the
amount of any outstanding prior loans
between the same individuals, is
$10,000 or less.
c. Avoiding any federal tax is not one of
the principal purposes of the loan.
Form 1099OID. The issuer of the debt instru-
ment (or your broker if you held the instrument
through a broker) should give you Form
1099-OID, or a similar statement, if the total
OID for the calendar year is $10 or more. Form
1099-OID will show, in box 1, the amount of
OID for the part of the year that you held the
bond. It also will show, in box 2, the stated inter-
est you must include in your income. Box 8
shows OID on a U.S. Treasury obligation for the
part of the year you owned it and is not included
in box 1. A copy of Form 1099-OID will be sent
to the IRS. Do not file your copy with your re-
turn. Keep it for your records.
In most cases, you must report the entire
amount in boxes 1, 2, and 8 of Form 1099-OID
as interest income. But see Refiguring OID
shown on Form 1099-OID, later in this discus-
sion, for more information.
Form 1099OID not received. If you had OID
for the year but did not receive a Form
1099-OID, you may have to figure the correct
amount of OID to report on your return. See
Pub. 1212 for details on how to figure the cor-
rect OID.
Nominee. If someone else is the holder of
record (the registered owner) of an OID instru-
ment belonging to you and receives a Form
1099-OID on your behalf, that person must give
you a Form 1099-OID.
Refiguring OID shown on Form 1099OID.
You may need to refigure the OID shown in
box 1 or box 8 of Form 1099-OID if either of the
following apply.
You bought the debt instrument after its
original issue and paid a premium or an ac-
quisition premium.
The debt instrument is a stripped bond or a
stripped coupon (including certain zero
coupon instruments).
For information about figuring the correct
amount of OID to include in your income, see
Figuring OID on Long-Term Debt Instruments in
Pub. 1212 and the instructions for Form
1099-OID.
Refiguring periodic interest shown on Form
1099OID. If you disposed of a debt instrument
or acquired it from another holder during the
year, see Bonds Sold Between Interest Dates,
earlier, for information about the treatment of
periodic interest that may be shown in box 2 of
Form 1099-OID for that instrument.
Certificates of deposit (CDs). If you buy a
CD with a maturity of more than 1 year, you
must include in income each year a part of the
total interest due and report it in the same man-
ner as other OID.
This also applies to similar deposit arrange-
ments with banks, building and loan associa-
tions, etc., including:
Time deposits,
Bonus plans,
Savings certificates,
Deferred income certificates,
Bonus savings certificates, and
Growth savings certificates.
Bearer CDs. CDs issued after 1982 gener-
ally must be in registered form. Bearer CDs are
CDs not in registered form. They are not issued
in the depositor's name and are transferable
from one individual to another.
Banks must provide the IRS and the person
redeeming a bearer CD with a Form 1099-INT.
More information. See chapter 1 of Pub. 550
for more information about OID and related top-
ics, such as market discount bonds.
When To Report
Interest Income
When to report your interest income depends
on whether you use the cash method or an ac-
crual method to report income.
Cash method. Most individual taxpayers use
the cash method. If you use this method, you
generally report your interest income in the year
in which you actually or constructively receive it.
However, there are special rules for reporting
the discount on certain debt instruments. See
U.S. Savings Bonds and Original Issue Dis-
count (OID), earlier.
Example. On September 1, 2014, you
loaned another individual $2,000 at 12%, com-
pounded annually. You are not in the business
of lending money. The note stated that principal
and interest would be due on August 31, 2016.
In 2016, you received $2,508.80 ($2,000 princi-
pal and $508.80 interest). If you use the cash
method, you must include in income on your
2016 return the $508.80 interest you received in
that year.
Constructive receipt. You constructively
receive income when it is credited to your ac-
count or made available to you. You do not
need to have physical possession of it. For ex-
ample, you are considered to receive interest,
dividends, or other earnings on any deposit or
account in a bank, savings and loan, or similar
financial institution, or interest on life insurance
policy dividends left to accumulate, when they
are credited to your account and subject to your
withdrawal. This is true even if they are not yet
entered in your passbook.
You constructively receive income on the
deposit or account even if you must:
Make withdrawals in multiples of even
amounts,
Give a notice to withdraw before making
the withdrawal,
Withdraw all or part of the account to with-
draw the earnings, or
Pay a penalty on early withdrawals, unless
the interest you are to receive on an early
withdrawal or redemption is substantially
less than the interest payable at maturity.
Accrual method. If you use an accrual
method, you report your interest income when
you earn it, whether or not you have received it.
Interest is earned over the term of the debt in-
strument.
Example. If, in the previous example, you
use an accrual method, you must include the in-
terest in your income as you earn it. You would
report the interest as follows: 2014, $80; 2015,
$249.60; and 2016, $179.20.
Coupon bonds. Interest on bearer bonds with
detachable coupons is generally taxable in the
Page 62 Chapter 7 Interest Income
year the coupon becomes due and payable. It
does not matter when you mail the coupon for
payment.
How To Report
Interest Income
Generally, you report all your taxable interest in-
come on Form 1040, line 8a; Form 1040A,
line 8a; or Form 1040EZ, line 2.
You cannot use Form 1040EZ if your taxa-
ble interest income is more than $1,500. In-
stead, you must use Form 1040A or Form 1040.
Form 1040A. You must complete Schedule B
(Form 1040A or 1040), Part I, if you file Form
1040A and any of the following are true.
1. Your taxable interest income is more than
$1,500.
2. You are claiming the interest exclusion un-
der the Education Savings Bond Program
(discussed earlier).
3. You received interest from a seller-fi-
nanced mortgage, and the buyer used the
property as a home.
4. You received a Form 1099-INT for U.S.
savings bond interest that includes
amounts you reported in a previous tax
year.
5. You received, as a nominee, interest that
actually belongs to someone else.
6. You received a Form 1099-INT for interest
on frozen deposits.
7. You are reporting OID in an amount less
than the amount shown on Form
1099-OID.
8. You received a Form 1099-INT for interest
on a bond you bought between interest
payment dates.
9. You acquired taxable bonds after 1987
and choose to reduce interest income
from the bonds by any amortizable bond
premium (see Bond Premium Amortization
in chapter 3 of Pub. 550).
List each payer's name and the amount of inter-
est income received from each payer on line 1.
If you received a Form 1099-INT or Form
1099-OID from a brokerage firm, list the broker-
age firm as the payer.
You cannot use Form 1040A if you must use
Form 1040, as described next.
Form 1040. You must use Form 1040 instead
of Form 1040A or Form 1040EZ if:
1. You forfeited interest income because of
the early withdrawal of a time deposit;
2. You acquired taxable bonds after 1987,
you choose to reduce interest income from
the bonds by any amortizable bond pre-
mium, and you are deducting the excess
of bond premium amortization for the ac-
crual period over the qualified stated inter-
est for the period (see Bond Premium Am-
ortization in chapter 3 of Pub. 550); or
3. You received tax-exempt interest from pri-
vate activity bonds issued after August 7,
1986.
Schedule B (Form 1040A or 1040). You
must complete Schedule B (Form 1040A or
1040), Part I, if you file Form 1040 and any of
the following apply.
1. Your taxable interest income is more than
$1,500.
2. You are claiming the interest exclusion un-
der the Education Savings Bond Program
(discussed earlier).
3. You received interest from a seller-fi-
nanced mortgage, and the buyer used the
property as a home.
4. You received a Form 1099-INT for U.S.
savings bond interest that includes
amounts you reported in a previous tax
year.
5. You received, as a nominee, interest that
actually belongs to someone else.
6. You received a Form 1099-INT for interest
on frozen deposits.
7. You received a Form 1099-INT for interest
on a bond you bought between interest
payment dates.
8. You are reporting OID in an amount less
than the amount shown on Form
1099-OID.
9. Statement (2) in the preceding list under
Form 1040 is true.
In Part I, line 1, list each payer's name and the
amount received from each. If you received a
Form 1099-INT or Form 1099-OID from a bro-
kerage firm, list the brokerage firm as the payer.
Reporting tax-exempt interest. Total your
tax-exempt interest (such as interest or accrued
OID on certain state and municipal bonds, in-
cluding zero coupon municipal bonds) reported
on Form 1099-INT, box 8, and exempt-interest
dividends from a mutual fund or other regulated
investment company reported on Form
1099-DIV, box 10. Add these amounts to any
other tax-exempt interest you received. Report
the total on line 8b of Form 1040A or Form
1040.
If you file Form 1040EZ, enter “TEI” and the
amount in the space to the left of line 2. Do not
add tax-exempt interest in the total on Form
1040EZ, line 2.
Form 1099-INT, box 9, and Form 1099-DIV,
box 11, show the tax-exempt interest subject to
the alternative minimum tax on Form 6251.
These amounts are already included in the
amounts on Form 1099-INT, box 8, and Form
1099-DIV, box 10. Do not add the amounts in
Form 1099-INT, box 9, and Form 1099-DIV,
box 11, to, or subtract them from, the amounts
on Form 1099-INT, box 8, and Form 1099-DIV,
box 10.
Do not report interest from an individual
retirement account (IRA) as tax-exempt
interest.
Form 1099INT. Your taxable interest income,
except for interest from U.S. savings bonds and
Treasury obligations, is shown in box 1 of Form
1099-INT. Add this amount to any other taxable
interest income you received. See the instruc-
tions for Form 1099-INT if you have interest
from a security acquired at a premium. YouCAUTION
!
must report all of your taxable interest income
even if you do not receive a Form 1099-INT.
Contact your financial institution if you do not
receive a Form 1099-INT by February 15. Your
identifying number may be truncated on any pa-
per Form 1099-INT you receive.
If you forfeited interest income because of
the early withdrawal of a time deposit, the de-
ductible amount will be shown on Form
1099-INT in box 2. See Penalty on early with-
drawal of savings in chapter 1 of Pub. 550.
Box 3 of Form 1099-INT shows the interest
income you received from U.S. savings bonds,
Treasury bills, Treasury notes, and Treasury
bonds. Generally, add the amount shown in
box 3 to any other taxable interest income you
received. If part of the amount shown in box 3
was previously included in your interest income,
see U.S. savings bond interest previously re-
ported, later. If you acquired the security at a
premium, see the instructions for Form
1099-INT.
Box 4 of Form 1099-INT will contain an
amount if you were subject to backup withhold-
ing. Include the amount from box 4 on Form
1040EZ, line 7; Form 1040A, line 40; or Form
1040, line 64 (federal income tax withheld).
Box 5 of Form 1099-INT shows investment
expenses you may be able to deduct as an
itemized deduction. See chapter 28 for more in-
formation about investment expenses.
If there are entries in boxes 6 and 7 of Form
1099-INT, you must file Form 1040. You may be
able to take a credit for the amount shown in
box 6 unless you deduct this amount on line 8
of Schedule A (Form 1040). To take the credit,
you may have to file Form 1116, Foreign Tax
Credit. For more information, see Pub. 514,
Foreign Tax Credit for Individuals.
U.S. savings bond interest previously re-
ported. If you received a Form 1099-INT for
U.S. savings bond interest, the form may show
interest you do not have to report. See Form
1099-INT for U.S. savings bonds interest, ear-
lier.
On Schedule B (Form 1040A or 1040), Part
I, line 1, report all the interest shown on your
Form 1099-INT. Then follow these steps.
1. Several lines above line 2, enter a subtotal
of all interest listed on line 1.
2. Below the subtotal, enter “U.S. Savings
Bond Interest Previously Reported” and
enter amounts previously reported or inter-
est accrued before you received the bond.
3. Subtract these amounts from the subtotal
and enter the result on line 2.
More information. For more information about
how to report interest income, see chapter 1 of
Pub. 550 or the instructions for the form you
must file.
Chapter 7 Interest Income Page 63
8.
Dividends and
Other
Distributions
Reminder
Foreignsource income. If you are a U.S. citi-
zen with dividend income from sources outside
the United States (foreign-source income), you
must report that income on your tax return un-
less it is exempt by U.S. law. This is true
whether you reside inside or outside the United
States and whether or not you receive a Form
1099 from the foreign payer.
Introduction
This chapter discusses the tax treatment of:
Ordinary dividends,
Capital gain distributions,
Nondividend distributions, and
Other distributions you may receive from a
corporation or a mutual fund.
This chapter also explains how to report div-
idend income on your tax return.
Dividends are distributions of money, stock,
or other property paid to you by a corporation or
by a mutual fund. You also may receive divi-
dends through a partnership, an estate, a trust,
or an association that is taxed as a corporation.
However, some amounts you receive that are
called dividends are actually interest income.
(See Dividends that are actually interest in
chapter 7.)
Most distributions are paid in cash (or
check). However, distributions can consist of
more stock, stock rights, other property, or serv-
ices.
Useful Items
You may want to see:
Publication
Foreign Tax Credit for Individuals
Investment Income and Expenses
Form (and Instructions)
Interest and Ordinary Dividends
General Information
This section discusses general rules for divi-
dend income.
Tax on unearned income of certain chil
dren. Part of a child's 2016 unearned income
Schedule B (Form 1040A or 1040)
may be taxed at the parent's tax rate. If it is,
Form 8615, Tax for Certain Children Who Have
Unearned Income, must be completed and at-
tached to the child's tax return. If not, Form
8615 is not required and the child's income is
taxed at his or her own tax rate.
Some parents can choose to include the
child's interest and dividends on the parent's re-
turn if certain requirements are met. Use Form
8814, Parents' Election To Report Child's Inter-
est and Dividends, for this purpose.
For more information about the tax on un-
earned income of children and the parents'
election, see chapter 31.
Beneficiary of an estate or trust. Dividends
and other distributions you receive as a benefi-
ciary of an estate or trust are generally taxable
income. You should receive a Schedule K-1
(Form 1041), Beneficiary's Share of Income,
Deductions, Credits, etc., from the fiduciary.
Your copy of Schedule K-1 (Form 1041) and its
instructions will tell you where to report the in-
come on your Form 1040.
Social security number (SSN) or individual
taxpayer identification number (ITIN). You
must give your SSN or ITIN to any person re-
quired by federal tax law to make a return,
statement, or other document that relates to
you. This includes payers of dividends. If you
do not give your SSN or ITIN to the payer of div-
idends, you may have to pay a penalty.
For more information on SSNs and ITINs,
see Social Security Number (SSN) in chapter 1.
Backup withholding. Your dividend income is
generally not subject to regular withholding.
However, it may be subject to backup withhold-
ing to ensure that income tax is collected on the
income. Under backup withholding, the payer of
dividends must withhold, as income tax, on the
amount you are paid, applying the appropriate
withholding rate.
Backup withholding may also be required if
the IRS has determined that you underreported
your interest or dividend income. For more in-
formation, see Backup Withholding in chap-
ter 4.
Stock certificate in two or more names. If
two or more persons hold stock as joint tenants,
tenants by the entirety, or tenants in common,
each person's share of any dividends from the
stock is determined by local law.
Form 1099DIV. Most corporations and mutual
funds use Form 1099-DIV, Dividends and Distri-
butions, to show you the distributions you re-
ceived from them during the year. Keep this
form with your records. You do not have to at-
tach it to your tax return.
Dividends not reported on Form
1099-DIV. Even if you do not receive Form
1099-DIV, you must still report all your taxable
dividend income. For example, you may receive
distributive shares of dividends from partner-
ships or S corporations. These dividends are
reported to you on Schedule K-1 (Form 1065),
Partner's Share of Income, Deductions, Credits,
etc., and Schedule K-1 (Form 1120S), Share-
holder's Share of Income, Deductions, Credits,
etc.
Reporting tax withheld. If tax is withheld
from your dividend income, the payer must give
you a Form 1099-DIV that indicates the amount
withheld.
Nominees. If someone receives distribu-
tions as a nominee for you, that person should
give you a Form 1099-DIV, which will show dis-
tributions received on your behalf.
Form 1099MISC. Certain substitute pay-
ments in lieu of dividends or tax-exempt interest
received by a broker on your behalf must be re-
ported to you on Form 1099-MISC, Miscellane-
ous Income, or a similar statement. See Report-
ing Substitute Payments under Short Sales in
chapter 4 of Pub. 550 for more information
about reporting these payments.
Incorrect amount shown on a Form 1099. If
you receive a Form 1099 that shows an incor-
rect amount (or other incorrect information), you
should ask the issuer for a corrected form. The
new Form 1099 you receive will be marked
“Corrected.”
Dividends on stock sold. If stock is sold, ex-
changed, or otherwise disposed of after a divi-
dend is declared but before it is paid, the owner
of record (usually the payee shown on the divi-
dend check) must include the dividend in in-
come.
Dividends received in January. If a mutual
fund (or other regulated investment company)
or real estate investment trust (REIT) declares a
dividend (including any exempt-interest divi-
dend or capital gain distribution) in October,
November, or December, payable to sharehold-
ers of record on a date in one of those months
but actually pays the dividend during January of
the next calendar year, you are considered to
have received the dividend on December 31.
You report the dividend in the year it was de-
clared.
Ordinary Dividends
Ordinary (taxable) dividends are the most com-
mon type of distribution from a corporation or a
mutual fund. They are paid out of earnings and
profits and are ordinary income to you. This
means they are not capital gains. You can as-
sume that any dividend you receive on common
or preferred stock is an ordinary dividend un-
less the paying corporation or mutual fund tells
you otherwise. Ordinary dividends will be
shown in box 1a of the Form 1099-DIV you re-
ceive.
Qualified Dividends
Qualified dividends are the ordinary dividends
subject to the same 0%, 15%, or 20% maximum
tax rate that applies to net capital gain. They
should be shown in box 1b of the Form
1099-DIV you receive.
The maximum rate of tax on qualified divi-
dends is the following.
0% on any amount that otherwise would be
taxed at a 10% or 15% rate.
15% on any amount that otherwise would
be taxed at rates greater than 15% but less
than 39.6%.
Page 64 Chapter 8 Dividends and Other Distributions
20% on any amount that otherwise would
be taxed at a 39.6% rate.
To qualify for the maximum rate, all of the
following requirements must be met.
The dividends must have been paid by a
U.S. corporation or a qualified foreign cor-
poration. (See Qualified foreign corpora-
tion, later.)
The dividends are not of the type listed
later under Dividends that are not qualified
dividends.
You meet the holding period (discussed
next).
Holding period. You must have held the
stock for more than 60 days during the 121-day
period that begins 60 days before the ex-divi-
dend date. The ex-dividend date is the first date
following the declaration of a dividend on which
the buyer of a stock is not entitled to receive the
next dividend payment. Instead, the seller will
get the dividend.
When counting the number of days you held
the stock, include the day you disposed of the
stock, but not the day you acquired it. See the
examples later.
Exception for preferred stock. In the
case of preferred stock, you must have held the
stock more than 90 days during the 181-day pe-
riod that begins 90 days before the ex-dividend
date if the dividends are due to periods totaling
more than 366 days. If the preferred dividends
are due to periods totaling less than 367 days,
the holding period in the previous paragraph
applies.
Example 1. You bought 5,000 shares of
XYZ Corp. common stock on July 9, 2016. XYZ
Corp. paid a cash dividend of 10 cents per
share. The ex-dividend date was July 16, 2016.
Your Form 1099-DIV from XYZ Corp. shows
$500 in box 1a (ordinary dividends) and in
box 1b (qualified dividends). However, you sold
the 5,000 shares on August 12, 2016. You held
your shares of XYZ Corp. for only 34 days of
the 121-day period (from July 10, 2016, through
August 12, 2016). The 121-day period began
on May 17, 2016 (60 days before the ex-divi-
dend date), and ended on September 14, 2016.
You have no qualified dividends from XYZ
Corp. because you held the XYZ stock for less
than 61 days.
Example 2. Assume the same facts as in
Example 1 except that you bought the stock on
July 15, 2016 (the day before the ex-dividend
date), and you sold the stock on September 16,
2016. You held the stock for 63 days (from July
16, 2016, through September 16, 2016). The
$500 of qualified dividends shown in box 1b of
your Form 1099-DIV are all qualified dividends
because you held the stock for 61 days of the
121-day period (from July 16, 2016, through
September 14, 2016).
Example 3. You bought 10,000 shares of
ABC Mutual Fund common stock on July 9,
2016. ABC Mutual Fund paid a cash dividend of
10 cents a share. The ex-dividend date was
July 16, 2016. The ABC Mutual Fund advises
you that the portion of the dividend eligible to be
treated as qualified dividends equals 2 cents
per share. Your Form 1099-DIV from ABC Mu-
tual Fund shows total ordinary dividends of
$1,000 and qualified dividends of $200. How-
ever, you sold the 10,000 shares on August 12,
2016. You have no qualified dividends from
ABC Mutual Fund because you held the ABC
Mutual Fund stock for less than 61 days.
Holding period reduced where risk of
loss is diminished. When determining
whether you met the minimum holding period
discussed earlier, you cannot count any day
during which you meet any of the following con-
ditions.
1. You had an option to sell, were under a
contractual obligation to sell, or had made
(and not closed) a short sale of substan-
tially identical stock or securities.
2. You were grantor (writer) of an option to
buy substantially identical stock or securi-
ties.
3. Your risk of loss is diminished by holding
one or more other positions in substan-
tially similar or related property.
For information about how to apply condition
(3), see Regulations section 1.246-5.
Qualified foreign corporation. A foreign cor-
poration is a qualified foreign corporation if it
meets any of the following conditions.
1. The corporation is incorporated in a U.S.
possession.
2. The corporation is eligible for the benefits
of a comprehensive income tax treaty with
the United States that the Treasury De-
partment determines is satisfactory for this
purpose and that includes an exchange of
information program. For a list of those
treaties, see Table 8-1.
3. The corporation does not meet (1) or (2)
above, but the stock for which the divi-
dend is paid is readily tradable on an es-
tablished securities market in the United
States. See Readily tradable stock, later.
Exception. A corporation is not a qualified
foreign corporation if it is a passive foreign in-
vestment company during its tax year in which
the dividends are paid or during its previous tax
year.
Readily tradable stock. Any stock (such
as common, ordinary, or preferred) or an Ameri-
can depositary receipt in respect of that stock is
considered to satisfy requirement (3) under
Qualified foreign corporation, earlier, if it is lis-
ted on a national securities exchange that is
registered under section 6 of the Securities Ex-
change Act of 1934 or on the Nasdaq Stock
Market. For a list of the exchanges that meet
these requirements, see www.sec.gov/
divisions/marketreg/mrexchanges.shtml.
Dividends that are not qualified dividends.
The following dividends are not qualified divi-
dends. They are not qualified dividends even if
they are shown in box 1b of Form 1099-DIV.
Capital gain distributions.
Dividends paid on deposits with mutual
savings banks, cooperative banks, credit
unions, U.S. building and loan associa-
tions, U.S. savings and loan associations,
federal savings and loan associations, and
similar financial institutions. (Report these
amounts as interest income.)
Dividends from a corporation that is a
tax-exempt organization or farmer's coop-
erative during the corporation's tax year in
which the dividends were paid or during
the corporation's previous tax year.
Dividends paid by a corporation on em-
ployer securities held on the date of record
by an employee stock ownership plan
(ESOP) maintained by that corporation.
Dividends on any share of stock to the ex-
tent you are obligated (whether under a
short sale or otherwise) to make related
payments for positions in substantially sim-
ilar or related property.
Payments in lieu of dividends, but only if
you know or have reason to know the pay-
ments are not qualified dividends.
Payments shown in Form 1099-DIV,
box 1b, from a foreign corporation to the
extent you know or have reason to know
the payments are not qualified dividends.
Table 8-1. Income Tax Treaties
Income tax treaties the United States has
with the following countries satisfy
requirement (2) under Qualified foreign
corporation, earlier.
Australia Indonesia Romania
Austria Ireland Russian
Bangladesh Israel Federation
Barbados Italy Slovak
Belgium Jamaica Republic
Bulgaria Japan Slovenia
Canada Kazakhstan South Africa
China Korea,
Republic of
Spain
Cyprus Latvia Sri Lanka
Czech Lithuania Sweden
Republic Luxembourg Switzerland
Denmark Malta Thailand
Egypt Mexico Trinidad and
Estonia Morocco Tobago
Finland Netherlands Tunisia
France New Zealand Turkey
Germany Norway Ukraine
Greece Pakistan United
Hungary Philippines Kingdom
Iceland Poland Venezuela
India Portugal
Dividends Used To Buy
More Stock
The corporation in which you own stock may
have a dividend reinvestment plan. This plan
lets you choose to use your dividends to buy
(through an agent) more shares of stock in the
corporation instead of receiving the dividends in
cash. Most mutual funds also permit sharehold-
ers to automatically reinvest distributions in
more shares in the fund, instead of receiving
Chapter 8 Dividends and Other Distributions Page 65
cash. If you use your dividends to buy more
stock at a price equal to its fair market value,
you still must report the dividends as income.
If you are a member of a dividend reinvest-
ment plan that lets you buy more stock at a
price less than its fair market value, you must
report as dividend income the fair market value
of the additional stock on the dividend payment
date.
You also must report as dividend income
any service charge subtracted from your cash
dividends before the dividends are used to buy
the additional stock. But you may be able to de-
duct the service charge. See chapter 28 for
more information about deducting expenses of
producing income.
In some dividend reinvestment plans, you
can invest more cash to buy shares of stock at
a price less than fair market value. If you
choose to do this, you must report as dividend
income the difference between the cash you in-
vest and the fair market value of the stock you
buy. When figuring this amount, use the fair
market value of the stock on the dividend pay-
ment date.
Money Market Funds
Report amounts you receive from money mar-
ket funds as dividend income. Money market
funds are a type of mutual fund and should not
be confused with bank money market accounts
that pay interest.
Capital Gain
Distributions
Capital gain distributions (also called capital
gain dividends) are paid to you or credited to
your account by mutual funds (or other regula-
ted investment companies) and real estate in-
vestment trusts (REITs). They will be shown in
box 2a of the Form 1099-DIV you receive from
the mutual fund or REIT.
Report capital gain distributions as
long-term capital gains, regardless of how long
you owned your shares in the mutual fund or
REIT.
Undistributed capital gains of mutual funds
and REITs. Some mutual funds and REITs
keep their long-term capital gains and pay tax
on them. You must treat your share of these
gains as distributions, even though you did not
actually receive them. However, they are not in-
cluded on Form 1099-DIV. Instead, they are re-
ported to you in box 1a of Form 2439.
Report undistributed capital gains (box 1a of
Form 2439) as long-term capital gains on
Schedule D (Form 1040), line 11, column (h).
The tax paid on these gains by the mutual
fund or REIT is shown in box 2 of Form 2439.
You take credit for this tax by including it on
Form 1040, line 73, and following the instruc-
tions there.
Basis adjustment. Increase your basis in
your mutual fund, or your interest in a REIT, by
the difference between the gain you report and
the credit you claim for the tax paid.
Additional information. For more information
on the treatment of distributions from mutual
funds, see Pub. 550.
Nondividend
Distributions
A nondividend distribution is a distribution that
is not paid out of the earnings and profits of a
corporation or a mutual fund. You should re-
ceive a Form 1099-DIV or other statement
showing the nondividend distribution. On Form
1099-DIV, a nondividend distribution will be
shown in box 3. If you do not receive such a
statement, you report the distribution as an ordi-
nary dividend.
Basis adjustment. A nondividend distribution
reduces the basis of your stock. It is not taxed
until your basis in the stock is fully recovered.
This nontaxable portion is also called a return of
capital; it is a return of your investment in the
stock of the company. If you buy stock in a cor-
poration in different lots at different times, and
you cannot definitely identify the shares subject
to the nondividend distribution, reduce the basis
of your earliest purchases first.
When the basis of your stock has been re-
duced to zero, report any additional nondivi-
dend distribution you receive as a capital gain.
Whether you report it as a long-term or
short-term capital gain depends on how long
you have held the stock. See Holding Period in
chapter 14.
Example. You bought stock in 2003 for
$100. In 2006, you received a nondividend dis-
tribution of $80. You did not include this amount
in your income, but you reduced the basis of
your stock to $20. You received a nondividend
distribution of $30 in 2016. The first $20 of this
amount reduced your basis to zero. You report
the other $10 as a long-term capital gain for
2016. You must report as a long-term capital
gain any nondividend distribution you receive
on this stock in later years.
Liquidating Distributions
Liquidating distributions, sometimes called liqui-
dating dividends, are distributions you receive
during a partial or complete liquidation of a cor-
poration. These distributions are, at least in
part, one form of a return of capital. They may
be paid in one or more installments. You will re-
ceive Form 1099-DIV from the corporation
showing you the amount of the liquidating distri-
bution in box 8 or 9.
For more information on liquidating distribu-
tions, see chapter 1 of Pub. 550.
Distributions of Stock
and Stock Rights
Distributions by a corporation of its own stock
are commonly known as stock dividends. Stock
rights (also known as “stock options”) are distri-
butions by a corporation of rights to acquire the
corporation's stock. Generally, stock dividends
and stock rights are not taxable to you, and you
do not report them on your return.
Taxable stock dividends and stock rights.
Distributions of stock dividends and stock rights
are taxable to you if any of the following apply.
1. You or any other shareholder have the
choice to receive cash or other property
instead of stock or stock rights.
2. The distribution gives cash or other prop-
erty to some shareholders and an in-
crease in the percentage interest in the
corporation's assets or earnings and prof-
its to other shareholders.
3. The distribution is in convertible preferred
stock and has the same result as in (2).
4. The distribution gives preferred stock to
some common stock shareholders and
common stock to other common stock
shareholders.
5. The distribution is on preferred stock. (The
distribution, however, is not taxable if it is
an increase in the conversion ratio of con-
vertible preferred stock made solely to
take into account a stock dividend, stock
split, or similar event that would otherwise
result in reducing the conversion right.)
The term “stock” includes rights to acquire
stock, and the term “shareholder” includes a
holder of rights or of convertible securities.
If you receive taxable stock dividends or
stock rights, include their fair market value at
the time of distribution in your income.
Preferred stock redeemable at a pre-
mium. If you receive preferred stock having a
redemption price higher than its issue price, the
difference (the redemption premium) generally
is taxable as a constructive distribution of addi-
tional stock on the preferred stock. For more in-
formation, see chapter 1 of Pub. 550.
Basis. Your basis in stock or stock rights re-
ceived in a taxable distribution is their fair mar-
ket value when distributed. If you receive stock
or stock rights that are not taxable to you, see
Stocks and Bonds under Basis of Investment
Property in chapter 4 of Pub. 550 for information
on how to figure their basis.
Fractional shares. You may not own enough
stock in a corporation to receive a full share of
stock if the corporation declares a stock divi-
dend. However, with the approval of the share-
holders, the corporation may set up a plan in
which fractional shares are not issued but in-
stead are sold, and the cash proceeds are
given to the shareholders. Any cash you receive
for fractional shares under such a plan is
treated as an amount realized on the sale of the
fractional shares. Report this transaction on
Form 8949, Sales and Other Dispositions of
Capital Assets. Enter your gain or loss, the dif-
ference between the cash you receive and the
basis of the fractional shares sold, in column (h)
of Schedule D (Form 1040) in Part I or Part II,
whichever is appropriate.
Report these transactions on Form
8949 with the correct box checked.
For more information on Form 8949 and
Schedule D (Form 1040), see chapter 4 of Pub.
550. Also see the Instructions for Form 8949CAUTION
!
Page 66 Chapter 8 Dividends and Other Distributions
and the Instructions for Schedule D (Form
1040).
Example. You own one share of common
stock that you bought on January 3, 2007, for
$100. The corporation declared a common
stock dividend of 5% on June 30, 2016. The fair
market value of the stock at the time the stock
dividend was declared was $200. You were
paid $10 for the fractional-share stock dividend
under a plan described in the discussion above.
You figure your gain or loss as follows:
Fair market value of old stock . . . . . . . . $200.00
Fair market value of stock dividend (cash
received) . . . . . . . . . . . . . . . . . . +10.00
Fair market value of old stock and stock
dividend . . . . . . . . . . . . . . . . . . $210.00
Basis (cost) of old stock after the stock
dividend (($200 ÷ $210) × $100) . . . . . . . $95.24
Basis (cost) of stock dividend (($10 ÷ $210) ×
$100) . . . . . . . . . . . . . . . . . . . . + 4.76
Total . . . . . . . . . . . . . . . . . . . . $100.00
Cash received . . . . . . . . . . . . . . . . $10.00
Basis (cost) of stock dividend . . . . . . . . − 4.76
Gain $5.24
Because you had held the share of stock for
more than 1 year at the time the stock dividend
was declared, your gain on the stock dividend is
a long-term capital gain.
Scrip dividends. A corporation that de-
clares a stock dividend may issue you a scrip
certificate that entitles you to a fractional share.
The certificate is generally nontaxable when
you receive it. If you choose to have the corpo-
ration sell the certificate for you and give you
the proceeds, your gain or loss is the difference
between the proceeds and the portion of your
basis in the corporation's stock allocated to the
certificate.
However, if you receive a scrip certificate
that you can choose to redeem for cash instead
of stock, the certificate is taxable when you re-
ceive it. You must include its fair market value in
income on the date you receive it.
Other Distributions
You may receive any of the following distribu-
tions during the year.
Exemptinterest dividends. Exempt-interest
dividends you receive from a mutual fund or
other regulated investment company, including
those received from a qualified fund of funds in
any tax year beginning after December 22,
2010, are not included in your taxable income.
Exempt-interest dividends should be shown in
box 10 of Form 1099-DIV.
Information reporting requirement. Al-
though exempt-interest dividends are not taxa-
ble, you must show them on your tax return if
you have to file a return. This is an information
reporting requirement and does not change the
exempt-interest dividends to taxable income.
Alternative minimum tax treatment. Ex-
empt-interest dividends paid from specified pri-
vate activity bonds may be subject to the alter-
native minimum tax. See Alternative Minimum
Tax (AMT) in chapter 30 for more information.
Dividends on insurance policies. Insurance
policy dividends the insurer keeps and uses to
pay your premiums are not taxable. However,
you must report as taxable interest income the
interest that is paid or credited on dividends left
with the insurance company.
If dividends on an insurance contract (other
than a modified endowment contract) are dis-
tributed to you, they are a partial return of the
premiums you paid. Do not include them in your
gross income until they are more than the total
of all net premiums you paid for the contract.
Report any taxable distributions on insurance
policies on Form 1040, line 21.
Dividends on veterans' insurance. Divi-
dends you receive on veterans' insurance poli-
cies are not taxable. In addition, interest on divi-
dends left with the Department of Veterans
Affairs is not taxable.
Patronage dividends. Generally, patronage
dividends you receive in money from a cooper-
ative organization are included in your income.
Do not include in your income patronage
dividends you receive on:
Property bought for your personal use, or
Capital assets or depreciable property
bought for use in your business. But you
must reduce the basis (cost) of the items
bought. If the dividend is more than the ad-
justed basis of the assets, you must report
the excess as income.
These rules are the same whether the coop-
erative paying the dividend is a taxable or
tax-exempt cooperative.
Alaska Permanent Fund dividends. Do not
report these amounts as dividends. Instead, in-
clude these amounts on Form 1040, line 21;
Form 1040A, line 13; or Form 1040EZ, line 3.
How To Report
Dividend Income
Generally, you can use either Form 1040 or
Form 1040A to report your dividend income.
Report the total of your ordinary dividends on
line 9a of Form 1040 or Form 1040A. Report
qualified dividends on line 9b of Form 1040 or
Form 1040A.
If you receive capital gain distributions, you
may be able to use Form 1040A or you may
have to use Form 1040. See Exceptions to filing
Form 8949 and Schedule D (Form 1040) in
chapter 16. If you receive nondividend distribu-
tions required to be reported as capital gains,
you must use Form 1040. You cannot use Form
1040EZ if you receive any dividend income
other than Alaska Permanent Fund dividends.
Form 1099DIV. If you owned stock on which
you received $10 or more in dividends and
other distributions, you should receive a Form
1099-DIV. Even if you do not receive Form
1099-DIV, you must report all your dividend in-
come.
See Form 1099-DIV for more information on
how to report dividend income.
Form 1040A or 1040. You must complete
Schedule B (Form 1040A or 1040), Part II, and
attach it to your Form 1040A or 1040, if:
Your ordinary dividends (Form 1099-DIV,
box 1a) are more than $1,500; or
You received, as a nominee, dividends
that actually belong to someone else.
If your ordinary dividends are more than $1,500,
you must also complete Schedule B (Form
1040A or 1040), Part III.
List on Schedule B (Form 1040A or 1040),
Part II, line 5, each payer's name and the ordi-
nary dividends you received. If your securities
are held by a brokerage firm (in “street name”),
list the name of the brokerage firm shown on
Form 1099-DIV as the payer. If your stock is
held by a nominee who is the owner of record,
and the nominee credited or paid you dividends
on the stock, show the name of the nominee
and the dividends you received or for which you
were credited.
Enter on line 6 the total of the amounts listed
on line 5. Also enter this total on line 9a of Form
1040A or 1040.
Qualified dividends. Report qualified divi-
dends (Form 1099-DIV, box 1b) on line 9b of
Form 1040 or Form 1040A. The amount in
box 1b is already included in box 1a. Do not
add the amount in box 1b to, or subtract it from,
the amount in box 1a.
Do not include any of the following on
line 9b.
Qualified dividends you received as a
nominee. See Nominees under How To
Report Dividend Income in chapter 1 of
Pub. 550.
Dividends on stock for which you did not
meet the holding period. See Holding pe-
riod, earlier, under Qualified Dividends.
Dividends on any share of stock to the ex-
tent you are obligated (whether under a
short sale or otherwise) to make related
payments for positions in substantially sim-
ilar or related property.
Payments in lieu of dividends, but only if
you know or have reason to know the pay-
ments are not qualified dividends.
Payments shown in Form 1099-DIV,
box 1b, from a foreign corporation to the
extent you know or have reason to know
the payments are not qualified dividends.
If you have qualified dividends, you must fig-
ure your tax by completing the Qualified Divi-
dends and Capital Gain Tax Worksheet in the
Form 1040 or 1040A instructions or the Sched-
ule D Tax Worksheet in the Schedule D (Form
1040) instructions, whichever applies. Enter
qualified dividends on line 2 of the worksheet.
Investment interest deducted. If you
claim a deduction for investment interest, you
may have to reduce the amount of your quali-
fied dividends that are eligible for the 0%, 15%,
or 20% tax rate. Reduce it by the qualified divi-
dends you choose to include in investment in-
come when figuring the limit on your investment
interest deduction. This is done on the Qualified
Dividends and Capital Gain Tax Worksheet or
Chapter 8 Dividends and Other Distributions Page 67
the Schedule D Tax Worksheet. For more infor-
mation about the limit on investment interest,
see Investment expenses in chapter 23.
Expenses related to dividend income. You
may be able to deduct expenses related to divi-
dend income if you itemize your deductions on
Schedule A (Form 1040). See chapter 28 for
general information about deducting expenses
of producing income.
More information. For more information
about how to report dividend income, see chap-
ter 1 of Pub. 550 or the instructions for the form
you must file.
9.
Rental Income
and Expenses
Introduction
This chapter discusses rental income and ex-
penses. It also covers the following topics.
Personal use of dwelling unit (including va-
cation home).
Depreciation.
Limits on rental losses.
How to report your rental income and ex-
penses.
If you sell or otherwise dispose of your rental
property, see Pub. 544, Sales and Other Dispo-
sitions of Assets.
If you have a loss from damage to, or theft
of, rental property, see Pub. 547, Casualties,
Disasters, and Thefts.
If you rent a condominium or a cooperative
apartment, some special rules apply to you
even though you receive the same tax treat-
ment as other owners of rental property. See
Pub. 527, Residential Rental Property, for more
information.
Useful Items
You may want to see:
Publication
Residential Rental Property
Depreciating Property Placed in
Service Before 1987
Business Expenses
Passive Activity and At-Risk Rules
How To Depreciate Property
Form (and Instructions)
Depreciation and Amortization
Alternative Minimum
Tax—Individuals
4562
6251
Passive Activity Loss Limitations
Supplemental
Income and Loss
Rental Income
In most cases, you must include in your gross
income all amounts you receive as rent. Rental
income is any payment you receive for the use
or occupation of property. In addition to
amounts you receive as normal rent payments,
there are other amounts that may be rental in-
come.
When to report. If you are a cash-basis tax-
payer, you report rental income on your return
for the year you actually or constructively re-
ceive it. You are a cash-basis taxpayer if you re-
port income in the year you receive it, regard-
less of when it was earned. You constructively
receive income when it is made available to
you, for example, by being credited to your
bank account.
For more information about when you con-
structively receive income, see Accounting
Methods in chapter 1.
Advance rent. Advance rent is any amount
you receive before the period that it covers. In-
clude advance rent in your rental income in the
year you receive it regardless of the period cov-
ered or the method of accounting you use.
Example. You sign a 10-year lease to rent
your property. In the first year, you receive
$5,000 for the first year's rent and $5,000 as
rent for the last year of the lease. You must in-
clude $10,000 in your income in the first year.
Canceling a lease. If your tenant pays you to
cancel a lease, the amount you receive is rent.
Include the payment in your income in the year
you receive it regardless of your method of ac-
counting.
Expenses paid by tenant. If your tenant pays
any of your expenses, those payments are
rental income. Because you must include this
amount in income, you can deduct the expen-
ses if they are deductible rental expenses. See
Rental Expenses, later, for more information.
Property or services. If you receive property
or services, instead of money, as rent, include
the fair market value of the property or services
in your rental income.
If the services are provided at an agreed
upon or specified price, that price is the fair
market value unless there is evidence to the
contrary.
Security deposits. Do not include a security
deposit in your income when you receive it if
you plan to return it to your tenant at the end of
the lease. But if you keep part or all of the se-
curity deposit during any year because your
tenant does not live up to the terms of the lease,
include the amount you keep in your income in
that year.
If an amount called a security deposit is to
be used as a final payment of rent, it is advance
rent. Include it in your income when you receive
it.
8582
Schedule E (Form 1040)
Part interest. If you own a part interest in
rental property, you must report your part of the
rental income from the property.
Rental of property also used as your home.
If you rent property that you also use as your
home and you rent it less than 15 days during
the tax year, do not include the rent you receive
in your income and do not deduct rental expen-
ses. However, you can deduct on Schedule A
(Form 1040) the interest, taxes, and casualty
and theft losses that are allowed for nonrental
property. See Personal Use of Dwelling Unit (In-
cluding Vacation Home), later.
Rental Expenses
This part discusses expenses of renting prop-
erty that you ordinarily can deduct from your
rental income. It includes information on the ex-
penses you can deduct if you rent part of your
property, or if you change your property to
rental use. Depreciation, which you can also
deduct from your rental income, is discussed
later.
Personal use of rental property. If you
sometimes use your rental property for personal
purposes, you must divide your expenses be-
tween rental and personal use. Also, your rental
expense deductions may be limited. See Per-
sonal Use of Dwelling Unit (Including Vacation
Home), later.
Part interest. If you own a part interest in
rental property, you can deduct expenses that
you paid according to your percentage of own-
ership.
When to deduct. If you are a cash-basis tax-
payer, you generally deduct your rental expen-
ses in the year you pay them.
Depreciation. You can begin to depreciate
rental property when it is ready and available for
rent. See Placed in Service under When Does
Depreciation Begin and End in chapter 2 of
Pub. 527.
Prerental expenses. You can deduct your or-
dinary and necessary expenses for managing,
conserving, or maintaining rental property from
the time you make it available for rent.
Uncollected rent. If you are a cash-basis tax-
payer, do not deduct uncollected rent. Because
you have not included it in your income, it is not
deductible.
Vacant rental property. If you hold property
for rental purposes, you may be able to deduct
your ordinary and necessary expenses (includ-
ing depreciation) for managing, conserving, or
maintaining the property while the property is
vacant. However, you cannot deduct any loss of
rental income for the period the property is va-
cant.
Vacant while listed for sale. If you sell
property you held for rental purposes, you can
deduct the ordinary and necessary expenses
for managing, conserving, or maintaining the
property until it is sold. If the property is not held
out and available for rent while listed for sale,
the expenses are not deductible rental expen-
ses.
Page 68 Chapter 9 Rental Income and Expenses
Repairs and
Improvements
Generally, an expense for repairing or maintain-
ing your rental property may be deducted if you
are not required to capitalize the expense.
Improvements. You must capitalize any ex-
pense you pay to improve your rental property.
An expense is for an improvement if it results in
a betterment to your property, restores your
property, or adapts your property to a new or
different use.
Betterments. Expenses that may result in a
betterment to your property include expenses
for fixing a pre-existing defect or condition, en-
larging or expanding your property, or increas-
ing the capacity, strength, or quality of your
property.
Restoration. Expenses that may be for re-
storation include expenses for replacing a sub-
stantial structural part of your property, repairing
damage to your property after you properly ad-
justed the basis of your property as a result of a
casualty loss, or rebuilding your property to a
like-new condition.
Adaptation. Expenses that may be for
adaptation include expenses for altering your
property to a use that is not consistent with the
intended ordinary use of your property when
you began renting the property.
Separate the costs of repairs and im-
provements, and keep accurate re-
cords. You will need to know the cost
of improvements when you sell or depreciate
your property.
The expenses you capitalize for improving your
property can generally be depreciated as if the
improvement were separate property.
Other Expenses
Other expenses you can deduct from your
rental income include advertising, cleaning and
maintenance, utilities, fire and liability insur-
ance, taxes, interest, commissions for the col-
lection of rent, ordinary and necessary travel
and transportation, and other expenses, dis-
cussed next.
Insurance premiums paid in advance. If you
pay an insurance premium for more than one
year in advance, you cannot deduct the total
premium in the year you pay it. For each year of
coverage, you deduct only the part of the pre-
mium payment that applies to that year.
Legal and other professional fees. You can
deduct, as a rental expense, legal and other
professional expenses, such as tax return prep-
aration fees you paid to prepare Schedule E
(Form 1040), Part I. For example, on your 2016
Schedule E, you can deduct fees paid in 2016
to prepare your 2015 Schedule E, Part I. You
can also deduct, as a rental expense, any ex-
pense (other than federal taxes and penalties)
you paid to resolve a tax underpayment related
to your rental activities.
Local benefits. In most cases, you cannot de-
duct charges for local benefits that increase the
value of your property, such as charges for put-RECORDS
ting in streets, sidewalks, or water and sewer
systems. These charges are nondepreciable
capital expenditures, and must be added to the
basis of your property. However, you can de-
duct local benefit taxes that are for maintaining,
repairing, or paying interest charges for the
benefits.
Local transportation expenses. You may be
able to deduct your ordinary and necessary lo-
cal transportation expenses if you incur them to
collect rental income or to manage, conserve,
or maintain your rental property. However,
transportation expenses incurred to travel be-
tween your home and a rental property gener-
ally constitute nondeductible commuting costs
unless you use your home as your principal
place of business. See Pub. 587, Business Use
of Your Home, for information on determining if
your home office qualifies as a principal place of
business.
Generally, if you use your personal car,
pickup truck, or light van for rental activities, you
can deduct the expenses using one of two
methods: actual expenses or the standard mile-
age rate. For 2016, the standard mileage rate
for business use is 54 cents per mile. For more
information, see chapter 26.
To deduct car expenses under either
method, you must keep records that
follow the rules in chapter 26. In addi-
tion, you must complete Form 4562, Part V, and
attach it to your tax return.
Rental of equipment. You can deduct the rent
you pay for equipment that you use for rental
purposes. However, in some cases, lease con-
tracts are actually purchase contracts. If so, you
cannot deduct these payments. You can re-
cover the cost of purchased equipment through
depreciation.
Rental of property. You can deduct the rent
you pay for property that you use for rental pur-
poses. If you buy a leasehold for rental purpo-
ses, you can deduct an equal part of the cost
each year over the term of the lease.
Travel expenses. You can deduct the ordi-
nary and necessary expenses of traveling away
from home if the primary purpose of the trip is to
collect rental income or to manage, conserve,
or maintain your rental property. You must prop-
erly allocate your expenses between rental and
nonrental activities. You cannot deduct the cost
of traveling away from home if the primary pur-
pose of the trip was to improve your property.
You recover the cost of improvements by taking
depreciation. For information on travel expen-
ses, see chapter 26.
To deduct travel expenses, you must
keep records that follow the rules in
chapter 26.
See Rental Expenses in Pub. 527 for more
information.
Property Changed
to Rental Use
If you change your home or other property (or a
part of it) to rental use at any time other than the
beginning of your tax year, you must divideRECORDSRECORDS
yearly expenses, such as taxes and insurance,
between rental use and personal use.
You can deduct as rental expenses only the
part of the expense that is for the part of the
year the property was used or held for rental
purposes.
You cannot deduct depreciation or insur-
ance for the part of the year the property was
held for personal use. However, you can in-
clude the home mortgage interest, qualified
mortgage insurance premiums, and real estate
tax expenses for the part of the year the prop-
erty was held for personal use as an itemized
deduction on Schedule A (Form 1040).
Example. Your tax year is the calendar
year. You moved from your home in May and
started renting it out on June 1. You can deduct
as rental expenses seven-twelfths of your
yearly expenses, such as taxes and insurance.
Starting with June, you can deduct as rental
expenses the amounts you pay for items gener-
ally billed monthly, such as utilities.
Renting Part of
Property
If you rent part of your property, you must divide
certain expenses between the part of the prop-
erty used for rental purposes and the part of the
property used for personal purposes, as though
you actually had two separate pieces of prop-
erty.
You can deduct the expenses related to the
part of the property used for rental purposes,
such as home mortgage interest, qualified mort-
gage insurance premiums, and real estate
taxes, as rental expenses on Schedule E (Form
1040). You can also deduct as rental expenses
a portion of other expenses that normally are
nondeductible personal expenses, such as ex-
penses for electricity or painting the outside of
your house.
There is no change in the types of expenses
deductible for the personal-use part of your
property. Generally, these expenses may be
deducted only if you itemize your deductions on
Schedule A (Form 1040).
You cannot deduct any part of the cost of
the first phone line even if your tenants have un-
limited use of it.
You do not have to divide the expenses that
belong only to the rental part of your property.
For example, if you paint a room that you rent,
or if you pay premiums for liability insurance in
connection with renting a room in your home,
your entire cost is a rental expense. If you install
a second phone line strictly for your tenants'
use, all of the cost of the second line is deducti-
ble as a rental expense. You can deduct depre-
ciation, discussed later, on the part of the house
used for rental purposes as well as on the furni-
ture and equipment you use for rental purposes.
How to divide expenses. If an expense is for
both rental use and personal use, such as mort-
gage interest or heat for the entire house, you
must divide the expense between the rental use
and the personal use. You can use any
reasonable method for dividing the expense. It
Chapter 9 Rental Income and Expenses Page 69
may be reasonable to divide the cost of some
items (for example, water) based on the num-
ber of people using them. The two most com-
mon methods for dividing an expense are
based on (1) the number of rooms in your
home, and (2) the square footage of your home.
Not Rented for Profit
If you do not rent your property to make a profit,
you can deduct your rental expenses only up to
the amount of your rental income. You cannot
deduct a loss or carry forward to the next year
any rental expenses that are more than your
rental income for the year. For more information
about the rules for an activity not engaged in for
profit, see Not-for-Profit Activities in chapter 1 of
Pub. 535.
Where to report. Report your not-for-profit
rental income on Form 1040, line 21. For exam-
ple, you can include your mortgage interest and
any qualified mortgage insurance premiums (if
you use the property as your main home or sec-
ond home), real estate taxes, and casualty los-
ses on the appropriate lines of Schedule A
(Form 1040) if you itemize your deductions.
If you itemize your deductions, claim your
other rental expenses, subject to the rules ex-
plained in chapter 1 of Pub. 535, as miscellane-
ous itemized deductions on Schedule A (Form
1040). You can deduct these expenses only if
they, together with certain other miscellaneous
itemized deductions, total more than 2% of your
adjusted gross income.
Personal Use of
Dwelling Unit
(Including Vacation
Home)
If you have any personal use of a dwelling unit
(including a vacation home) that you rent, you
must divide your expenses between rental use
and personal use. In general, your rental expen-
ses will be no more than your total expenses
multiplied by a fraction; the denominator of
which is the total number of days the dwelling
unit is used and the numerator of which is the
total number of days actually rented at a fair
rental price. Only your rental expenses may be
deducted on Schedule E (Form 1040). Some of
your personal expenses may be deductible if
you itemize your deductions on Schedule A
(Form 1040).
You must also determine if the dwelling unit
is considered a home. The amount of rental ex-
penses that you can deduct may be limited if
the dwelling unit is considered a home.
Whether a dwelling unit is considered a home
depends on how many days during the year are
considered to be days of personal use. There is
a special rule if you used the dwelling unit as a
home and you rented it for less than 15 days
during the year.
Dwelling unit. A dwelling unit includes a
house, apartment, condominium, mobile home,
boat, vacation home, or similar property. It also
includes all structures or other property belong-
ing to the dwelling unit. A dwelling unit has ba-
sic living accommodations, such as sleeping
space, a toilet, and cooking facilities.
A dwelling unit does not include property
used solely as a hotel, motel, inn, or similar es-
tablishment. Property is used solely as a hotel,
motel, inn, or similar establishment if it is regu-
larly available for occupancy by paying custom-
ers and is not used by an owner as a home dur-
ing the year.
Example. You rent a room in your home that
is always available for short-term occupancy by
paying customers. You do not use the room
yourself, and you allow only paying customers
to use the room. The room is used solely as a
hotel, motel, inn, or similar establishment and is
not a dwelling unit.
Dividing Expenses
If you use a dwelling unit for both rental and per-
sonal purposes, divide your expenses between
the rental use and the personal use based on
the number of days used for each purpose.
When dividing your expenses, follow these
rules.
Any day that the unit is rented at a fair
rental price is a day of rental use even if
you used the unit for personal purposes
that day. (This rule does not apply when
determining whether you used the unit as a
home.)
Any day that the unit is available for rent
but not actually rented is not a day of rental
use.
Example. Your beach cottage was availa-
ble for rent from June 1 through August 31 (92
days). During that time, except for the first week
in August (7 days) when you were unable to find
a renter, you rented the cottage at a fair rental
price. The person who rented the cottage for
July allowed you to use it over the weekend (2
days) without any reduction in or refund of rent.
Your family also used the cottage during the
last 2 weeks of May (14 days). The cottage was
not used at all before May 17 or after August
31.
You figure the part of the cottage expenses
to treat as rental expenses as follows.
The cottage was used for rental a total of
85 days (92 − 7). The days it was available
for rent but not rented (7 days) are not
days of rental use. The July weekend (2
days) you used it is rental use because you
received a fair rental price for the week-
end.
You used the cottage for personal purpo-
ses for 14 days (the last 2 weeks in May).
The total use of the cottage was 99 days
(14 days personal use + 85 days rental
use).
Your rental expenses are 85/99 (86%) of
the cottage expenses.
Note. When determining whether you used
the cottage as a home, the July weekend (2
days) you used it is considered personal use
even though you received a fair rental price for
the weekend. Therefore, you had 16 days of
personal use and 83 days of rental use for this
purpose. Because you used the cottage for per-
sonal purposes more than 14 days and more
than 10% of the days of rental use (8 days), you
used it as a home. If you have a net loss, you
may not be able to deduct all of the rental ex-
penses. See Dwelling Unit Used as a Home
next.
Dwelling Unit Used as a
Home
If you use a dwelling unit for both rental and per-
sonal purposes, the tax treatment of the rental
expenses you figured earlier under Dividing Ex-
penses and rental income depends on whether
you are considered to be using the dwelling unit
as a home.
You use a dwelling unit as a home during
the tax year if you use it for personal purposes
more than the greater of:
1. 14 days, or
2. 10% of the total days it is rented to others
at a fair rental price.
See What is a day of personal use, later.
Fair rental price. A fair rental price for your
property generally is the amount of rent that a
person who is not related to you would be will-
ing to pay. The rent you charge is not a fair
rental price if it is substantially less than the
rents charged for other properties that are simi-
lar to your property in your area.
If a dwelling unit is used for personal purpo-
ses on a day it is rented at a fair rental price, do
not count that day as a day of rental use in ap-
plying (2) just described. Instead, count it as a
day of personal use in applying both (1) and (2)
just described.
What is a day of personal use? A day of per-
sonal use of a dwelling unit is any day that the
unit is used by any of the following persons.
1. You or any other person who has an inter-
est in the unit, unless you rent it to another
owner as his or her main home under a
shared equity financing agreement (de-
fined later). However, see Days used as a
main home before or after renting, later.
2. A member of your family or a member of
the family of any other person who owns
an interest in the unit, unless the family
member uses the dwelling unit as his or
her main home and pays a fair rental price.
Family includes only your spouse, broth-
ers and sisters, half-brothers and half-sis-
ters, ancestors (parents, grandparents,
etc.), and lineal descendants (children,
grandchildren, etc.).
3. Anyone under an arrangement that lets
you use some other dwelling unit.
4. Anyone at less than a fair rental price.
Main home. If the other person or member
of the family in (1) or (2) just described has
more than one home, his or her main home is
ordinarily the one he or she lived in most of the
time.
Shared equity financing agreement. This
is an agreement under which two or more per-
sons acquire undivided interests for more than
Page 70 Chapter 9 Rental Income and Expenses
50 years in an entire dwelling unit, including the
land, and one or more of the co-owners is enti-
tled to occupy the unit as his or her main home
upon payment of rent to the other co-owner or
owners.
Donation of use of property. You use a
dwelling unit for personal purposes if:
You donate the use of the unit to a charita-
ble organization,
The organization sells the use of the unit at
a fundraising event, and
The “purchaser” uses the unit.
Examples. The following examples show
how to determine days of personal use.
Example 1. You and your neighbor are
co-owners of a condominium at the beach. Last
year, you rented the unit to vacationers when-
ever possible. The unit was not used as a main
home by anyone. Your neighbor used the unit
for 2 weeks last year; you did not use it at all.
Because your neighbor has an interest in
the unit, both of you are considered to have
used the unit for personal purposes during
those 2 weeks.
Example 2. You and your neighbors are
co-owners of a house under a shared equity fi-
nancing agreement. Your neighbors live in the
house and pay you a fair rental price.
Even though your neighbors have an inter-
est in the house, the days your neighbors live
there are not counted as days of personal use
by you. This is because your neighbors rent the
house as their main home under a shared
equity financing agreement.
Example 3. You own a rental property that
you rent to your son. Your son does not own
any interest in this property. He uses it as his
main home and pays you a fair rental price.
Your son's use of the property is not per-
sonal use by you because your son is using it
as his main home, he owns no interest in the
property, and he is paying you a fair rental
price.
Example 4. You rent your beach house to
Joshua. Joshua rents his cabin in the moun-
tains to you. You each pay a fair rental price.
You are using your house for personal pur-
poses on the days that Joshua uses it because
your house is used by Joshua under an ar-
rangement that allows you to use his house.
Days used for repairs and maintenance.
Any day that you spend working substantially
full time repairing and maintaining (not improv-
ing) your property is not counted as a day of
personal use. Do not count such a day as a day
of personal use even if family members use the
property for recreational purposes on the same
day.
Days used as a main home before or af-
ter renting. For purposes of determining
whether a dwelling unit was used as a home,
you may not have to count days you used the
property as your main home before or after rent-
ing it or offering it for rent as days of personal
use. Do not count them as days of personal use
if:
You rented or tried to rent the property for
12 or more consecutive months.
You rented or tried to rent the property for
a period of less than 12 consecutive
months and the period ended because you
sold or exchanged the property.
However, this special rule does not apply when
dividing expenses between rental and personal
use.
Examples. The following examples show how
to determine whether you used your rental
property as a home.
Example 1. You converted the basement
of your home into an apartment with a bedroom,
a bathroom, and a small kitchen. You rented the
basement apartment at a fair rental price to col-
lege students during the regular school year.
You rented to them on a 9-month lease (273
days). You figured 10% of the total days rented
to others at a fair rental price is 27 days.
During June (30 days), your brothers stayed
with you and lived in the basement apartment
rent free.
Your basement apartment was used as a
home because you used it for personal purpo-
ses for 30 days. Rent-free use by your brothers
is considered personal use. Your personal use
(30 days) is more than the greater of 14 days or
10% of the total days it was rented (27 days).
Example 2. You rented the guest bedroom
in your home at a fair rental price during the lo-
cal college's homecoming, commencement,
and football weekends (a total of 27 days). Your
sister-in-law stayed in the room, rent free, for
the last 3 weeks (21 days) in July. You figured
10% of the total days rented to others at a fair
rental price is 3 days.
The room was used as a home because you
used it for personal purposes for 21 days. That
is more than the greater of 14 days or 10% of
the 27 days it was rented (3 days).
Example 3. You own a condominium apart-
ment in a resort area. You rented it at a fair
rental price for a total of 170 days during the
year. For 12 of those days, the tenant was not
able to use the apartment and allowed you to
use it even though you did not refund any of the
rent. Your family actually used the apartment for
10 of those days. Therefore, the apartment is
treated as having been rented for 160 (170 −
10) days. You figured 10% of the total days ren-
ted to others at a fair rental price is 16 days.
Your family also used the apartment for 7 other
days during the year.
You used the apartment as a home because
you used it for personal purposes for 17 days.
That is more than the greater of 14 days or 10%
of the 160 days it was rented (16 days).
Minimal rental use. If you use the dwelling
unit as a home and you rent it less than 15 days
during the year, that period is not treated as
rental activity. See Used as a home but rented
less than 15 days, later, for more information.
Limit on deductions. Renting a dwelling unit
that is considered a home is not a passive activ-
ity. Instead, if your rental expenses are more
than your rental income, some or all of the ex-
cess expenses cannot be used to offset income
from other sources. The excess expenses that
cannot be used to offset income from other
sources are carried forward to the next year and
treated as rental expenses for the same prop-
erty. Any expenses carried forward to the next
year will be subject to any limits that apply for
that year. This limitation will apply to expenses
carried forward to another year even if you do
not use the property as your home for that sub-
sequent year.
To figure your deductible rental expenses
for this year and any carryover to next year, use
Worksheet 9-1.
Reporting Income and
Deductions
Property not used for personal purposes. If
you do not use a dwelling unit for personal pur-
poses, see How To Report Rental Income and
Expenses, later, for how to report your rental in-
come and expenses.
Property used for personal purposes. If you
do use a dwelling unit for personal purposes,
then how you report your rental income and ex-
penses depends on whether you used the
dwelling unit as a home.
Not used as a home. If you use a dwelling
unit for personal purposes, but not as a home,
report all the rental income in your income.
Since you used the dwelling unit for personal
purposes, you must divide your expenses be-
tween the rental use and the personal use as
described earlier in Dividing Expenses. The ex-
penses for personal use are not deductible as
rental expenses.
Your deductible rental expenses can be
more than your gross rental income; however,
see Limits on Rental Losses, later.
Used as a home but rented less than 15
days. If you use a dwelling unit as a home and
you rent it less than 15 days during the year, its
primary function is not considered to be rental
and it should not be reported on Schedule E
(Form 1040). You are not required to report the
rental income and rental expenses from this ac-
tivity. The expenses, including qualified mort-
gage interest, property taxes, and any qualified
casualty loss will be reported as normally al-
lowed on Schedule A (Form 1040). See the In-
structions for Schedule A (Form 1040) for more
information on deducting these expenses.
Used as a home and rented 15 days or
more. If you use a dwelling unit as a home and
rent it 15 days or more during the year, include
all your rental income in your income. Since you
used the dwelling unit for personal purposes,
you must divide your expenses between the
rental use and the personal use as described
earlier in Dividing Expenses. The expenses for
personal use are not deductible as rental ex-
penses.
If you had a net profit from renting the dwell-
ing unit for the year (that is, if your rental income
is more than the total of your rental expenses,
including depreciation), deduct all of your rental
expenses. You do not need to use Worksheet
9-1.
Chapter 9 Rental Income and Expenses Page 71
However, if you had a net loss from renting
the dwelling unit for the year, your deduction for
certain rental expenses is limited. To figure your
deductible rental expenses and any carryover
to next year, use Worksheet 9-1.
Depreciation
You recover the cost of income-producing prop-
erty through yearly tax deductions. You do this
by depreciating the property; that is, by deduct-
ing some of the cost each year on your tax re-
turn.
Three factors determine how much depreci-
ation you can deduct each year: (1) your basis
in the property, (2) the recovery period for the
property, and (3) the depreciation method used.
You cannot simply deduct your mortgage or
principal payments, or the cost of furniture, fix-
tures, and equipment, as an expense.
You can deduct depreciation only on the
part of your property used for rental purposes.
Depreciation reduces your basis for figuring
gain or loss on a later sale or exchange.
You may have to use Form 4562 to figure
and report your depreciation. See How To Re-
port Rental Income and Expenses, later.
Alternative minimum tax (AMT). If you use
accelerated depreciation, you may be subject to
the AMT. Accelerated depreciation allows you
to deduct more depreciation earlier in the recov-
ery period than you could deduct using a
straight line method (same deduction each
year).
Claiming the correct amount of deprecia
tion. You should claim the correct amount of
depreciation each tax year. If you did not claim
all the depreciation you were entitled to deduct,
you must still reduce your basis in the property
by the full amount of depreciation that you could
have deducted.
If you deducted an incorrect amount of de-
preciation for property in any year, you may be
able to make a correction by filing Form 1040X,
Amended U.S Individual Income Tax Return. If
you are not allowed to make the correction on
an amended return, you can change your ac-
counting method to claim the correct amount of
depreciation. See Claiming the Correct Amount
of Depreciation in chapter 2 of Pub. 527 for
more information.
Changing your accounting method to de-
duct unclaimed depreciation. To change
your accounting method, you generally must file
Form 3115, Application for Change in Account-
ing Method, to get the consent of the IRS. In
some instances, that consent is automatic. For
more information, see chapter 1 of Pub. 946.
Land. You cannot depreciate the cost of land
because land generally does not wear out, be-
come obsolete, or get used up. The costs of
clearing, grading, planting, and landscaping are
usually all part of the cost of land and cannot be
depreciated.
More information. See Pub. 527 for more in-
formation about depreciating rental property
and see Pub. 946 for more information about
depreciation.
Limits on
Rental Losses
If you have a loss from your rental real estate
activity, two sets of rules may limit the amount
of loss you can deduct. You must consider
these rules in the order shown below.
1. At-risk rules. These rules are applied first if
there is investment in your rental real es-
tate activity for which you are not at risk.
This applies only if the real property was
placed in service after 1986.
2. Passive activity limits. Generally, rental
real estate activities are considered pas-
sive activities and losses are not deducti-
ble unless you have income from other
passive activities to offset them. However,
there are exceptions.
AtRisk Rules
You may be subject to the at-risk rules if you
have:
A loss from an activity carried on as a trade
or business or for the production of in-
come, and
Amounts invested in the activity for which
you are not fully at risk.
Losses from holding real property (other
than mineral property) placed in service before
1987 are not subject to the at-risk rules.
In most cases, any loss from an activity sub-
ject to the at-risk rules is allowed only to the ex-
tent of the total amount you have at risk in the
activity at the end of the tax year. You are con-
sidered at risk in an activity to the extent of cash
and the adjusted basis of other property you
contributed to the activity and certain amounts
borrowed for use in the activity. See Pub. 925
for more information.
Passive Activity Limits
In most cases, all rental real estate activities
(except those of certain real estate professio-
nals, discussed later) are passive activities. For
this purpose, a rental activity is an activity from
which you receive income mainly for the use of
tangible property, rather than for services.
Limits on passive activity deductions and
credits. Deductions or losses from passive ac-
tivities are limited. You generally cannot offset
income, other than passive income, with losses
from passive activities. Nor can you offset taxes
on income, other than passive income, with
credits resulting from passive activities. Any ex-
cess loss or credit is carried forward to the next
tax year.
For a detailed discussion of these rules, see
Pub. 925.
You may have to complete Form 8582 to fig-
ure the amount of any passive activity loss for
the current tax year for all activities and the
amount of the passive activity loss allowed on
your tax return.
Real estate professionals. Rental activities in
which you materially participated during the
year are not passive activities if, for that year,
you were a real estate professional. For a de-
tailed discussion of the requirements, see Pub.
527. For a detailed discussion of material par-
ticipation, see Pub. 925.
Exception for Personal Use of
Dwelling Unit
If you used the rental property as a home during
the year, any income, deductions, gain, or loss
allocable to such use shall not be taken into ac-
count for purposes of the passive activity loss
limitation. Instead, follow the rules explained in
Personal Use of Dwelling Unit (Including Vaca-
tion Home), earlier.
Exception for Rental Real Estate
Activities With Active Participation
If you or your spouse actively participated in a
passive rental real estate activity, you may be
able to deduct up to $25,000 of loss from the
activity from your nonpassive income. This spe-
cial allowance is an exception to the general
rule disallowing losses in excess of income
from passive activities. Similarly, you may be
able to offset credits from the activity against
the tax on up to $25,000 of nonpassive income
after taking into account any losses allowed un-
der this exception.
Active participation. You actively participated
in a rental real estate activity if you (and your
spouse) owned at least 10% of the rental prop-
erty and you made management decisions or
arranged for others to provide services (such as
repairs) in a significant and bona fide sense.
Management decisions that may count as ac-
tive participation include approving new ten-
ants, deciding on rental terms, approving ex-
penditures, and similar decisions.
Maximum special allowance. The maximum
special allowance is:
$25,000 for single individuals and married
individuals filing a joint return for the tax
year,
$12,500 for married individuals who file
separate returns for the tax year and lived
apart from their spouses at all times during
the tax year, and
$25,000 for a qualifying estate reduced by
the special allowance for which the surviv-
ing spouse qualified.
If your modified adjusted gross income
(MAGI) is $100,000 or less ($50,000 or less if
married filing separately), you can deduct your
loss up to the amount specified above. If your
MAGI is more than $100,000 (more than
$50,000 if married filing separately), your spe-
cial allowance is limited to 50% of the difference
between $150,000 ($75,000 if married filing
separately) and your MAGI.
Generally, if your MAGI is $150,000 or more
($75,000 or more if you are married filing sepa-
rately), there is no special allowance.
More information. See Pub. 925 for more in-
formation on the passive loss limits, including
information on the treatment of unused disal-
lowed passive losses and credits and the treat-
ment of gains and losses realized on the dispo-
sition of a passive activity.
Page 72 Chapter 9 Rental Income and Expenses
How To Report
Rental Income
and Expenses
The basic form for reporting residential rental in-
come and expenses is Schedule E (Form
1040). However, do not use that schedule to re-
port a not-for-profit activity. See Not Rented for
Profit, earlier.
Providing substantial services. If you pro-
vide substantial services that are primarily for
your tenant's convenience, such as regular
cleaning, changing linen, or maid service, report
your rental income and expenses on Sched-
ule C (Form 1040), Profit or Loss From Busi-
ness, or Schedule C-EZ (Form 1040), Net Profit
From Business (Sole Proprietorship). Substan-
tial services do not include the furnishing of
heat and light, cleaning of public areas, trash
collection, etc. For information, see Pub. 334,
Tax Guide for Small Business. You also may
have to pay self-employment tax on your rental
income using Schedule SE (Form 1040),
Self-Employment Tax.
Use Form 1065, U.S. Return of Partnership
Income, if your rental activity is a partnership
(including a partnership with your spouse un-
less it is a qualified joint venture).
Qualified joint venture. If you and your
spouse each materially participate as the only
members of a jointly owned and operated real
estate business, and you file a joint return for
the tax year, you can make a joint election to be
treated as a qualified joint venture instead of a
partnership. This election, in most cases, will
not increase the total tax owed on the joint re-
turn, but it does give each of you credit for so-
cial security earnings on which retirement bene-
fits are based and for Medicare coverage if your
rental income is subject to self-employment tax.
For more information, see Pub. 527.
Form 1098, Mortgage Interest Statement. If
you paid $600 or more of mortgage interest on
your rental property to any one person, you
should receive a Form 1098, or similar state-
ment showing the interest you paid for the year.
If you and at least one other person (other than
your spouse if you file a joint return) were liable
for, and paid interest on the mortgage, and the
other person received the Form 1098, report
your share of the interest on Schedule E (Form
1040), line 13. Attach a statement to your return
showing the name and address of the other per-
son. See the Instructions for Schedule E (Form
1040) for more information.
Schedule E (Form 1040)
If you rent buildings, rooms, or apartments, and
provide basic services such as heat and light,
trash collection, etc., you normally report your
rental income and expenses on Schedule E
(Form 1040), Part I.
Page 2 of Schedule E is used to report in-
come or loss from partnerships, S corporations,
estates, trusts, and real estate mortgage invest-
ment conduits. If you need to use page 2 of
Schedule E, be sure to use page 2 of the same
Schedule E you used to enter your rental
activity on page 1. See the Instructions for
Schedule E (Form 1040).
Chapter 9 Rental Income and Expenses Page 73
Worksheet for Figuring Rental Deductions for a Dwelling
Unit Used as a Home
Worksheet 9-1.
Keep for Your Records
Use this worksheet only if you answer “yes” to all of the following questions.
Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home.)
Did you rent the dwelling unit at a fair rental price 15 days or more this year?
Is the total of your rental expenses and depreciation more than your rental income?
PART I. Rental Use Percentage
A. Total days available for rent at fair rental price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A.
B. Total days available for rent (line A) but not rented . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B.
C. Total days of rental use. Subtract line B from line A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C.
D. Total days of personal use (including days rented at less than fair rental price) . . . . . . . . . D.
E. Total days of rental and personal use. Add lines C and D . . . . . . . . . . . . . . . . . . . . . . . . . E.
F. Percentage of expenses allowed for rental. Divide line C by line E . . . . . . . . . . . . . . . . . . F.
PART II. Allowable Rental Expenses
1. Enter rents received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
2a. Enter the rental portion of deductible home mortgage interest and qualified mortgage
insurance premiums (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2a.
b. Enter the rental portion of real estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b.
c. Enter the rental portion of deductible casualty and theft losses (see instructions) . . . . . . . . . . c.
d. Enter direct rental expenses (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d.
e. Fully deductible rental expenses. Add lines 2a–2d. Enter here and
on the appropriate lines on Schedule E (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2e.
3. Subtract line 2e from line 1. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4a. Enter the rental portion of expenses directly related to operating or maintaining
the dwelling unit (such as repairs, insurance, and utilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4a.
b. Enter the rental portion of excess mortgage interest and qualified mortgage insurance
premiums (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b.
c. Carryover of operating expenses from 2015 worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c.
d. Add lines 4a–4c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d.
e. Allowable expenses. Enter the smaller of line 3 or line 4d (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4e.
5. Subtract line 4e from line 3. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
6a. Enter the rental portion of excess casualty and theft losses (see instructions) . . . . . . . . . . . . 6a.
b. Enter the rental portion of depreciation of the dwelling unit . . . . . . . . . . . . . . . . . . . . . . . . . . . b.
c. Carryover of excess casualty and theft losses and depreciation from 2015 worksheet . . . . . . c.
d. Add lines 6a–6c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d.
e. Allowable excess casualty and theft losses and depreciation. Enter the smaller of
line 5 or line 6d (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6e.
PART III. Carryover of Unallowed Expenses to Next Year
7a. Operating expenses to be carried over to next year. Subtract line 4e from line 4d . . . . . . . . . . . . . . . . . . . . . . 7a.
b. Excess casualty and theft losses and depreciation to be carried over to next year.
Subtract line 6e from line 6d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b.
Page 74 Chapter 9 Rental Income and Expenses
Worksheet for Figuring Rental Deductions for a
Dwelling Unit Used as a Home
Worksheet 9-1 Instructions.
Keep for Your Records
Caution. Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of
Part II.
Line 2a. Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Do not
include interest on a loan that did not benefit the dwelling unit. For example, do not include interest on a home equity loan used
to pay off credit cards or other personal loans, buy a car, or pay college tuition. Include interest on a loan used to buy, build, or
improve the dwelling unit, or to refinance such a loan. Include the rental portion of this interest in the total you enter on line 2a of
the worksheet.
Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you
had not rented the unit. See the Instructions for Schedule A. However, figure your adjusted gross income (Form 1040, line 38)
without your rental income and expenses from the dwelling unit. Use line 4b of this worksheet to deduct the part of the qualified
mortgage insurance premiums not allowed because of the adjusted gross income limit. Include the rental portion of the amount
from Schedule A, line 13, in the total you enter on line 2a of the worksheet.
Note. Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Instead, figure the
personal portion on a separate Schedule A. If you have deducted mortgage interest or qualified mortgage insurance premiums
on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount.
Line 2c. Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the
dwelling unit. To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. If any
of the loss is due to a federally declared disaster, see the Instructions for Form 4684. On Form 4684, line 17, enter 10% of your
adjusted gross income figured without your rental income and expenses from the dwelling unit. Enter the rental portion of the
result from Form 4684, line 18, on line 2c of this worksheet.
Note. Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Instead, figure the personal portion on
a separate Form 4684.
Line 2d. Enter the total of your rental expenses that are directly related only to the rental activity. These include interest on loans used for
rental activities other than to buy, build, or improve the dwelling unit. Also include rental agency fees, advertising, office
supplies, and depreciation on office equipment used in your rental activity.
Line 2e. You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are
more than your rental income. Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E.
Line 4b. On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct
on Schedule A if you had not rented the dwelling unit. If you had additional mortgage interest and qualified mortgage insurance
premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the
rental portion of those excess amounts. Do not include interest on a loan that did not benefit the dwelling unit (as explained in
the line 2a instructions).
Line 4e. You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than
the amount on line 4e.*
Line 6a. To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet.
A. Enter the amount from Form 4684, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. Enter the rental portion of line A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Enter the amount from line 2c of this worksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Subtract line C from line B. Enter the result here and on line 6a of this worksheet . . . . . .
Line 6e. You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than
the amount on line 6e.*
*Allocating the limited deduction. If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish
among the expenses included on line 4d or 6d. Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I.
Chapter 9 Rental Income and Expenses Page 75
10.
Retirement
Plans, Pensions,
and Annuities
Reminders
Net Investment Income Tax. For purposes of
the Net Investment Income Tax (NIIT), net in-
vestment income doesn’t include distributions
from a qualified retirement plan (for example,
401(a), 403(a), 403(b), 408, 408A, or 457(b)
plans). However, these distributions are taken
into account when determining the modified ad-
justed gross income threshold. Distributions
from a nonqualified retirement plan are included
in net investment income. See Form 8960, Net
Investment Income Tax - Individuals, Estates,
and Trusts, and its instructions for more infor-
mation.
Inplan Roth rollovers. The American Tax-
payer Relief Act of 2012 expanded the rules for
in-plan Roth rollovers to include more taxpay-
ers. For more information, see Designated Roth
accounts discussed later.
Introduction
This chapter discusses the tax treatment of dis-
tributions you receive from:
An employee pension or annuity from a
qualified plan,
A disability retirement, and
A purchased commercial annuity.
What is not covered in this chapter. The fol-
lowing topics are not discussed in this chapter.
The General Rule. This is the method gen-
erally used to determine the tax treatment of
pension and annuity income from nonqualified
plans (including commercial annuities). For a
qualified plan, you generally can’t use the Gen-
eral Rule unless your annuity starting date is
before November 19, 1996. For more informa-
tion about the General Rule, see Pub. 939,
General Rule for Pensions and Annuities.
Individual retirement arrangements
(IRAs). Information on the tax treatment of
amounts you receive from an IRA is in chap-
ter 17.
Civil service retirement benefits. If you
are retired from the federal government (regu-
lar, phased, or disability retirement), see Pub.
721, Tax Guide to U.S. Civil Service Retirement
Benefits. Pub. 721 also covers the information
that you need if you are the survivor or
beneficiary of a federal employee or retiree who
died.
Useful Items
You may want to see:
Publication
Pension and Annuity Income
Tax Guide to U.S. Civil Service
Retirement Benefits
General Rule for Pensions and
Annuities
Form (and Instructions)
Withholding Certificate for Pension
or Annuity Payments
Distributions From Pensions,
Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance
Contracts, etc.
Tax on Lump-Sum Distributions
Additional Taxes on Qualified Plans
(Including IRAs) and Other
Tax-Favored Accounts
General Information
Designated Roth accounts. A designated
Roth account is a separate account created un-
der a qualified Roth contribution program to
which participants may elect to have part or all
of their elective deferrals to a 401(k), 403(b), or
457(b) plan designated as Roth contributions.
Elective deferrals that are designated as Roth
contributions are included in your income. How-
ever, qualified distributions aren’t included in
your income. See Pub. 575 for more informa-
tion.
In-plan rollovers to designated Roth ac-
counts. If you are a participant in a 401(k),
403(b), or 457(b) plan, your plan may permit
you to roll over amounts in those plans to a des-
ignated Roth account within the same plan. The
rollover of any untaxed amounts must be inclu-
ded in income in the year you receive the distri-
bution. See Pub. 575 for more information.
More than one program. If you receive bene-
fits from more than one program under a single
trust or plan of your employer, such as a pen-
sion plan and a profit-sharing plan, you may
have to figure the taxable part of each pension
or annuity contract separately. Your former em-
ployer or the plan administrator should be able
to tell you if you have more than one pension or
annuity contract.
Section 457 deferred compensation plans.
If you work for a state or local government or for
a tax-exempt organization, you may be able to
participate in a section 457 deferred compensa-
tion plan. If your plan is an eligible plan, you
aren’t taxed currently on pay that is deferred un-
der the plan or on any earnings from the plan's
investment of the deferred pay. You are gener-
ally taxed on amounts deferred in an eligible
state or local government plan only when they
are distributed from the plan. You are taxed on
amounts deferred in an eligible tax-exempt or-
W4P
1099R
4972
5329
ganization plan when they are distributed or
otherwise made available to you.
Your 457(b) plan may have a designated
Roth account option. If so, you may be able to
roll over amounts to the designated Roth ac-
count or make contributions. Elective deferrals
to a designated Roth account are included in
your income. Qualified distributions from a des-
ignated Roth account aren’t subject to tax.
This chapter covers the tax treatment of
benefits under eligible section 457 plans, but it
doesn’t cover the treatment of deferrals. For in-
formation on deferrals under section 457 plans,
see Retirement Plan Contributions under Em-
ployee Compensation in Pub. 525, Taxable and
Nontaxable Income.
For general information on these deferred
compensation plans, see Section 457 Deferred
Compensation Plans in Pub. 575.
Disability pensions. If you retired on disabil-
ity, you generally 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 retire-
ment age generally is the age at which you can
first receive a pension or annuity if you aren’t
disabled.
You may be entitled to a tax credit if
you were permanently and totally disa-
bled when you retired. For information
on the credit for the elderly or the disabled, see
chapter 33.
Beginning on the day after you reach mini-
mum retirement age, payments you receive are
taxable as a pension or annuity. Report the pay-
ments on Form 1040, lines 16a and 16b, or on
Form 1040A, lines 12a and 12b.
Disability payments for injuries incurred
as a direct result of a terrorist attack di-
rected against the United States (or its
allies) are not included in income. For more in-
formation about payments to survivors of terro-
rist attacks, see Pub. 3920, Tax Relief for Vic-
tims of Terrorist Attacks.
For more information on how to report disa-
bility pensions, including military and certain
government disability pensions, see chapter 5.
Retired public safety officers. An eligible re-
tired public safety officer can elect to exclude
from income distributions of up to $3,000 made
directly from a government retirement plan to
the provider of accident, health, or long-term
disability insurance. See Insurance Premiums
for Retired Public Safety Officers in Pub. 575 for
more information.
Railroad retirement benefits. Part of any rail-
road retirement benefits you receive is treated
for tax purposes as social security benefits, and
part is treated as an employee pension. For in-
formation about railroad retirement benefits
treated as social security benefits, see Pub.
915, Social Security and Equivalent Railroad
Retirement Benefits. For information about rail-
road retirement benefits treated as an em-
ployee pension, see Railroad Retirement Bene-
fits in Pub. 575.TIPTIP
Page 76 Chapter 10 Retirement Plans, Pensions, and Annuities
Withholding and estimated tax. The payer of
your pension, profit-sharing, stock bonus, annu-
ity, or deferred compensation plan will withhold
income tax on the taxable parts of amounts paid
to you. You can tell the payer how much to with-
hold, or not to withhold, by filing Form W-4P. If
you choose not to have tax withheld, or you
don’t have enough tax withheld, you may have
to pay estimated tax.
If you receive an eligible rollover distribution,
you can’t choose not to have tax withheld. Gen-
erally, 20% will be withheld, but no tax will be
withheld on a direct rollover of an eligible roll-
over distribution. See Direct rollover option un-
der Rollovers, later.
For more information, see Pensions and An-
nuities under Tax Withholding for 2017 in chap-
ter 4.
Qualified plans for selfemployed individu
als. Qualified plans set up by self-employed in-
dividuals are sometimes called Keogh or H.R.
10 plans. Qualified plans can be set up by sole
proprietors, partnerships (but not a partner),
and corporations. They can cover self-em-
ployed persons, such as the sole proprietor or
partners, as well as regular (common-law) em-
ployees.
Distributions from a qualified plan are usu-
ally fully taxable because most recipients have
no cost basis. If you have an investment (cost)
in the plan, however, your pension or annuity
payments from a qualified plan are taxed under
the Simplified Method. For more information
about qualified plans, see Pub. 560, Retirement
Plans for Small Business.
Purchased annuities. If you receive pension
or annuity payments from a privately purchased
annuity contract from a commercial organiza-
tion, such as an insurance company, you gener-
ally must use the General Rule to figure the
tax-free part of each annuity payment. For more
information about the General Rule, get Pub.
939. Also, see Variable Annuities in Pub. 575
for the special provisions that apply to these an-
nuity contracts.
Loans. If you borrow money from your retire-
ment plan, you must treat the loan as a nonperi-
odic distribution from the plan unless certain ex-
ceptions apply. This treatment also applies to
any loan under a contract purchased under
your retirement plan, and to the value of any
part of your interest in the plan or contract that
you pledge or assign. This means that you must
include in income all or part of the amount bor-
rowed. Even if you don’t have to treat the loan
as a nonperiodic distribution, you may not be
able to deduct the interest on the loan in some
situations. For details, see Loans Treated as
Distributions in Pub. 575. For information on the
deductibility of interest, see chapter 23.
Taxfree exchange. No gain or loss is recog-
nized on an exchange of an annuity contract for
another annuity contract if the insured or annui-
tant remains the same. However, if an annuity
contract is exchanged for a life insurance or en-
dowment contract, any gain due to interest ac-
cumulated on the contract is ordinary income.
See Transfers of Annuity Contracts in Pub. 575
for more information about exchanges of annu-
ity contracts.
How To Report
If you file Form 1040, report your total annuity
on line 16a and the taxable part on line 16b. If
your pension or annuity is fully taxable, enter it
on line 16b; don’t make an entry on line 16a.
If you file Form 1040A, report your total an-
nuity on line 12a and the taxable part on
line 12b. If your pension or annuity is fully taxa-
ble, enter it on line 12b; don’t make an entry on
line 12a.
More than one annuity. If you receive more
than one annuity and at least one of them is not
fully taxable, enter the total amount received
from all annuities on Form 1040, line 16a, or
Form 1040A, line 12a, and enter the taxable
part on Form 1040, line 16b, or Form 1040A,
line 12b. If all the annuities you receive are fully
taxable, enter the total of all of them on Form
1040, line 16b, or Form 1040A, line 12b.
Joint return. If you file a joint return and you
and your spouse each receive one or more pen-
sions or annuities, report the total of the pen-
sions and annuities on Form 1040, line 16a, or
Form 1040A, line 12a, and report the taxable
part on Form 1040, line 16b, or Form 1040A,
line 12b.
Cost (Investment in the
Contract)
Before you can figure how much, if any, of a
distribution from your pension or annuity plan is
taxable, you must determine your cost (your in-
vestment in the contract) in the pension or an-
nuity. Your total cost in the plan includes the to-
tal premiums, contributions, or other amounts
you paid. This includes the amounts your em-
ployer contributed that were taxable to you
when paid. Cost doesn’t include any amounts
you deducted or were excluded from your in-
come.
From this total cost, subtract any refunds of
premiums, rebates, dividends, unrepaid loans
that were not included in your income, or other
tax-free amounts that you received by the later
of the annuity starting date or the date on which
you received your first payment.
Your annuity starting date is the later of the
first day of the first period for which you re-
ceived a payment or the date the plan's obliga-
tions became fixed.
Designated Roth accounts. Your cost in
these accounts is your designated Roth contri-
butions that were included in your income as
wages subject to applicable withholding re-
quirements. Your cost will also include any
in-plan Roth rollovers you included in income.
Foreign employment contributions. If you
worked in a foreign country and contributions
were made to your retirement plan, special
rules apply in determining your cost. See For-
eign employment contributions under Cost (In-
vestment in the Contract) in Pub. 575.
Taxation of Periodic
Payments
Fully taxable payments. Generally, if you
didn’t pay any part of the cost of your employee
pension or annuity and your employer didn’t
withhold part of the cost from your pay while
you worked, the amounts you receive each year
are fully taxable. You must report them on your
income tax return.
Partly taxable payments. If you paid part of
the cost of your pension or annuity, you are not
taxed on the part of the pension or annuity you
receive that represents a return of your cost.
The rest of the amount you receive is generally
taxable. You figure the tax-free part of the pay-
ment using either the Simplified Method or the
General Rule. Your annuity starting date and
whether or not your plan is qualified determine
which method you must or may use.
If your annuity starting date is after Novem-
ber 18, 1996, and your payments are from a
qualified plan, you must use the Simplified
Method. Generally, you must use the General
Rule if your annuity is paid under a nonqualified
plan, and you can’t use this method if your an-
nuity is paid under a qualified plan.
If you had more than one partly taxable pen-
sion or annuity, figure the tax-free part and the
taxable part of each separately.
If your annuity is paid under a qualified plan
and your annuity starting date is after July 1,
1986, and before November 19, 1996, you
could have chosen to use either the General
Rule or the Simplified Method.
Exclusion limit. Your annuity starting date de-
termines the total amount of annuity payments
that you can exclude from your taxable income
over the years. Once your annuity starting date
is determined, it doesn’t change. If you calcu-
late the taxable portion of your annuity pay-
ments using the simplified method worksheet,
the annuity starting date determines the recov-
ery period for your cost. That recovery period
begins on your annuity starting date and isn’t af-
fected by the date you first complete the work-
sheet.
Exclusion limited to cost. If your annuity
starting date is after 1986, the total amount of
annuity income that you can exclude over the
years as a recovery of the cost can’t exceed
your total cost. Any unrecovered cost at your (or
the last annuitant's) death is allowed as a mis-
cellaneous itemized deduction on the final re-
turn of the decedent. This deduction isn’t sub-
ject to the 2%-of-adjusted-gross-income limit.
Exclusion not limited to cost. If your an-
nuity starting date is before 1987, you can con-
tinue to take your monthly exclusion for as long
as you receive your annuity. If you chose a joint
and survivor annuity, your survivor can continue
to take the survivor's exclusion figured as of the
annuity starting date. The total exclusion may
be more than your cost.
Chapter 10 Retirement Plans, Pensions, and Annuities Page 77
Simplified Method
Under the Simplified Method, you figure the
tax-free part of each annuity payment by divid-
ing your cost by the total number of anticipated
monthly payments. For an annuity that is paya-
ble for the lives of the annuitants, this number is
based on the annuitants' ages on the annuity
starting date and is determined from a table.
For any other annuity, this number is the num-
ber of monthly annuity payments under the con-
tract.
Who must use the Simplified Method. You
must use the Simplified Method if your annuity
starting date is after November 18, 1996, and
you both:
1. Receive pension or annuity payments
from a qualified employee plan, qualified
employee annuity, or a tax-sheltered an-
nuity (403(b)) plan, and
2. On your annuity starting date, you were ei-
ther under age 75, or entitled to less than
5 years of guaranteed payments.
Guaranteed payments. Your annuity contract
provides guaranteed payments if a minimum
number of payments or a minimum amount (for
example, the amount of your investment) is
payable even if you and any survivor annuitant
do not live to receive the minimum. If the mini-
mum amount is less than the total amount of the
payments you are to receive, barring death,
during the first 5 years after payments begin
(figured by ignoring any payment increases),
you are entitled to less than 5 years of guaran-
teed payments.
How to use the Simplified Method. Com-
plete the Simplified Method Worksheet in Pub.
575 to figure your taxable annuity for 2016.
Single-life annuity. If your annuity is paya-
ble for your life alone, use Table 1 at the bottom
of the worksheet to determine the total number
of expected monthly payments. Enter on line 3
the number shown for your age at the annuity
starting date.
Multiple-lives annuity. If your annuity is
payable for the lives of more than one annui-
tant, use Table 2 at the bottom of the worksheet
to determine the total number of expected
monthly payments. Enter on line 3 the number
shown for the combined ages of you and the
youngest survivor annuitant at the annuity start-
ing date.
However, if your annuity starting date is be-
fore 1998, don’t use Table 2 and don’t combine
the annuitants' ages. Instead you must use Ta-
ble 1 and enter on line 3 the number shown for
the primary annuitant's age on the annuity start-
ing date.
Be sure to keep a copy of the comple-
ted worksheet; it will help you figure
your taxable annuity next year.
Example. Bill Smith, age 65, began receiv-
ing retirement benefits in 2016, under a jointRECORDS
and survivor annuity. Bill's annuity starting date
is January 1, 2016. The benefits are to be paid
for the joint lives of Bill and his wife Kathy, age
65. Bill had contributed $31,000 to a qualified
plan and had received no distributions before
the annuity starting date. Bill is to receive a re-
tirement benefit of $1,200 a month, and Kathy is
to receive a monthly survivor benefit of $600
upon Bill's death.
Bill must use the Simplified Method to figure
his taxable annuity because his payments are
from a qualified plan and he is under age 75.
Because his annuity is payable over the lives of
more than one annuitant, he uses his and Ka-
thy's combined ages and Table 2 at the bottom
of the worksheet in completing line 3 of the
worksheet. His completed worksheet is shown
in Worksheet 10-A.
Bill's tax-free monthly amount is $100
($31,000 ÷ 310) as shown on line 4 of the work-
sheet. Upon Bill's death, if Bill hasn’t recovered
the full $31,000 investment, Kathy will also ex-
clude $100 from her $600 monthly payment.
The full amount of any annuity payments re-
ceived after 310 payments are paid must be in-
cluded in gross income.
If Bill and Kathy die before 310 payments
are made, a miscellaneous itemized deduction
will be allowed for the unrecovered cost on the
final income tax return of the last to die. This de-
duction isn’t subject to the 2%-of-adjusted-
gross-income limit.
Page 78 Chapter 10 Retirement Plans, Pensions, and Annuities
Who must use the General Rule. You must
use the General Rule if you receive pension or
annuity payments from:
A nonqualified plan (such as a private an-
nuity, a purchased commercial annuity, or
a nonqualified employee plan), or
A qualified plan if you are age 75 or older
on your annuity starting date and your an-
nuity payments are guaranteed for at least
5 years.
Annuity starting before November 19,
1996. If your annuity starting date is after July
1, 1986, and before November 19, 1996, you
had to use the General Rule for either circum-
stance just described. You also had to use it for
any fixed-period annuity. If you didn’t have to
use the General Rule, you could have chosen
to use it. If your annuity starting date is before
July 2, 1986, you had to use the General Rule
unless you could use the Three-Year Rule.
If you had to use the General Rule (or chose
to use it), you must continue to use it each year
that you recover your cost.
Who can’t use the General Rule. You can’t
use the General Rule if you receive your pen-
sion or annuity from a qualified plan and none of
the circumstances described in the preceding
discussions apply to you. See Who must use
the Simplified Method, earlier.
More information. For complete information
on using the General Rule, including the actua-
rial tables you need, see Pub. 939.
Taxation of
Nonperiodic Payments
Nonperiodic distributions are also known as
amounts not received as an annuity. They in-
clude all payments other than periodic pay-
ments and corrective distributions. Examples of
Worksheet 10-A. Simplified Method Worksheet for Bill Smith
Keep for Your Records
1. Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form
1040, line 16a, or Form 1040A, line 12a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 14,400
2. Enter your cost in the plan (contract) at the annuity starting date plus any
death benefit exclusion*. See Cost (Investment in the
Contract), earlier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 31,000
Note: If your annuity starting date was before this year and you
completed this worksheet last year, skip line 3 and enter the amount from
line 4 of last year's worksheet on line 4 below (even if the amount of your
pension or annuity has changed). Otherwise, go to line 3.
3. Enter the appropriate number from Table 1 below. But if your annuity
starting date was after 1997 and the payments are for your life and that of
your beneficiary, enter the appropriate number from Table 2 below . . . . . 3. 310
4. Divide line 2 by the number on line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. 100
5. Multiply line 4 by the number of months for which this year's payments
were made. If your annuity starting date was before 1987, enter this
amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to
line 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 1,200
6. Enter any amounts previously recovered tax free in years after 1986. This
is the amount shown on line 10 of your worksheet for last year . . . . . . . . . 6. -0-
7. Subtract line 6 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 31,000
8. Enter the smaller of line 5 or line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. 1,200
9. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add
this amount to the total for Form 1040, line 16b, or Form 1040A, line 12b . . . . . . . . . . . . . . . . . . . . . . . . . 9. 13,200
Note: If your Form 1099-R shows a larger taxable amount, use the amount figured on this line instead. If
you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers in Pub.
575 before entering an amount on your tax return.
10. Was your annuity starting date before 1987?
Yes. STOP. Don’t complete the rest of this worksheet.
No. Add lines 6 and 8. This is the amount you have recovered tax free through 2016. You will need
this number if you need to fill out this worksheet next year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 1,200
11. Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you won’t have to complete this
worksheet next year. The payments you receive next year will generally be fully taxable . . . . . . . . . . . . . 11. 29,800
TABLE 1 FOR LINE 3 ABOVE
AND your annuity starting date was—
IF the age at annuity
starting date was... before November 19,
1996, enter on line 3... after November 18,
1996, enter on line 3...
55 or under 300 360
56–60 260 310
61–65 240 260
66–70 170 210
71 or older 120 160
TABLE 2 FOR LINE 3 ABOVE
IF the combined ages
at annuity starting
date were... THEN enter
on line 3...
110 or under 410
111–120 360
121–130 310
131–140 260
141 or older 210
* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996.
Chapter 10 Retirement Plans, Pensions, and Annuities Page 79
nonperiodic payments are cash withdrawals,
distributions of current earnings, certain loans,
and the value of annuity contracts transferred
without full and adequate consideration.
Corrective distributions of excess plan con
tributions. Generally, if the contributions made
for you during the year to certain retirement
plans exceed certain limits, the excess is taxa-
ble to you. To correct an excess, your plan may
distribute it to you (along with any income
earned on the excess). For information on plan
contribution limits and how to report corrective
distributions of excess contributions, see Re-
tirement Plan Contributions under Employee
Compensation in Pub. 525.
Figuring the taxable amount of nonperiodic
payments. How you figure the taxable amount
of a nonperiodic distribution depends on
whether it is made before the annuity starting
date, or on or after the annuity starting date. If it
is made before the annuity starting date, its tax
treatment also depends on whether it is made
under a qualified or nonqualified plan. If it is
made under a nonqualified plan, its tax treat-
ment depends on whether it fully discharges the
contract, is received under certain life insurance
or endowment contracts, or is allocable to an in-
vestment you made before August 14, 1982.
Annuity starting date. The annuity starting
date is either the first day of the first period for
which you receive an annuity payment under
the contract or the date on which the obligation
under the contract becomes fixed, whichever is
later.
Distribution on or after annuity starting
date. If you receive a nonperiodic payment
from your annuity contract on or after the annu-
ity starting date, you generally must include all
of the payment in gross income.
Distribution before annuity starting date. If
you receive a nonperiodic distribution before
the annuity starting date from a qualified retire-
ment plan, you generally can allocate only part
of it to the cost of the contract. You exclude
from your gross income the part that you allo-
cate to the cost. You include the remainder in
your gross income.
If you receive a nonperiodic distribution be-
fore the annuity starting date from a plan other
than a qualified retirement plan (nonqualified
plan), it is allocated first to earnings (the taxable
part) and then to the cost of the contract (the
tax-free part). This allocation rule applies, for
example, to a commercial annuity contract you
bought directly from the issuer.
Distributions from nonqualified plans
are subject to the net investment in-
come tax. See the Instructions for Form
8960.
For more information, see Figuring the Tax-
able Amount under Taxation of Nonperiodic
Payments in Pub. 575.CAUTION
!
LumpSum Distributions
This section on lump-sum distributions
only applies if the plan participant was
born before January 2, 1936. If the plan
participant was born after January 1, 1936, the
taxable amount of this nonperiodic payment is
reported as discussed earlier.
A lump-sum distribution is the distribution or
payment in one tax year of a plan participant's
entire balance from all of the employer's quali-
fied plans of one kind (for example, pension,
profit-sharing, or stock bonus plans). A distribu-
tion from a nonqualified plan (such as a pri-
vately purchased commercial annuity or a sec-
tion 457 deferred compensation plan of a state
or local government or tax-exempt organization)
can’t qualify as a lump-sum distribution.
The participant's entire balance from a plan
doesn’t include certain forfeited amounts. It also
doesn’t include any deductible voluntary em-
ployee contributions allowed by the plan after
1981 and before 1987. For more information
about distributions that don’t qualify as
lump-sum distributions, see Distributions that
do not qualify under Lump-Sum Distributions in
Pub. 575.
If you receive a lump-sum distribution from a
qualified employee plan or qualified employee
annuity and the plan participant was born be-
fore January 2, 1936, you may be able to elect
optional methods of figuring the tax on the dis-
tribution. The part from active participation in
the plan before 1974 may qualify as capital gain
subject to a 20% tax rate. The part from partici-
pation after 1973 (and any part from participa-
tion before 1974 that you don’t report as capital
gain) is ordinary income. You may be able to
use the 10-year tax option, discussed later, to
figure tax on the ordinary income part.
Use Form 4972 to figure the separate tax on
a lump-sum distribution using the optional
methods. The tax figured on Form 4972 is
added to the regular tax figured on your other
income. This may result in a smaller tax than
you would pay by including the taxable amount
of the distribution as ordinary income in figuring
your regular tax.
How to treat the distribution. If you receive a
lump-sum distribution, you may have the follow-
ing options for how you treat the taxable part.
Report the part of the distribution from par-
ticipation before 1974 as a capital gain (if
you qualify) and the part from participation
after 1973 as ordinary income.
Report the part of the distribution from par-
ticipation before 1974 as a capital gain (if
you qualify) and use the 10-year tax option
to figure the tax on the part from participa-
tion after 1973 (if you qualify).
Use the 10-year tax option to figure the tax
on the total taxable amount (if you qualify).
Roll over all or part of the distribution. See
Rollovers, later. No tax is currently due on
the part rolled over. Report any part not rol-
led over as ordinary income.
Report the entire taxable part of the distri-
bution as ordinary income on your tax re-
turn.TIP
The first three options are explained in the
following discussions.
Electing optional lumpsum treatment. You
can choose to use the 10-year tax option or
capital gain treatment only once after 1986 for
any plan participant. If you make this choice,
you can’t use either of these optional treatments
for any future distributions for the participant.
Taxable and taxfree parts of the distribu
tion. The taxable part of a lump-sum distribu-
tion is the employer's contributions and income
earned on your account. You may recover your
cost in the lump sum and any net unrealized ap-
preciation (NUA) in employer securities tax free.
Cost. In general, your cost is the total of:
The plan participant's nondeductible con-
tributions to the plan,
The plan participant's taxable costs of any
life insurance contract distributed,
Any employer contributions that were taxa-
ble to the plan participant, and
Repayments of any loans that were taxa-
ble to the plan participant.
You must reduce this cost by amounts previ-
ously distributed tax free.
Net unrealized appreciation (NUA). The
NUA in employer securities (box 6 of Form
1099-R) received as part of a lump-sum distri-
bution is generally tax free until you sell or ex-
change the securities. (For more information,
see Distributions of employer securities under
Taxation of Nonperiodic Payments in Pub. 575.)
Capital Gain Treatment
Capital gain treatment applies only to the taxa-
ble part of a lump-sum distribution resulting
from participation in the plan before 1974. The
amount treated as capital gain is taxed at a 20%
rate. You can elect this treatment only once for
any plan participant, and only if the plan partici-
pant was born before January 2, 1936.
Complete Part II of Form 4972 to choose the
20% capital gain election. For more information,
see Capital Gain Treatment under Lump-Sum
Distributions in Pub. 575.
10Year Tax Option
The 10-year tax option is a special formula used
to figure a separate tax on the ordinary income
part of a lump-sum distribution. You pay the tax
only once, for the year in which you receive the
distribution, not over the next 10 years. You can
elect this treatment only once for any plan par-
ticipant, and only if the plan participant was
born before January 2, 1936.
The ordinary income part of the distribution
is the amount shown in box 2a of the Form
1099-R given to you by the payer, minus the
amount, if any, shown in box 3. You also can
treat the capital gain part of the distribution
(box 3 of Form 1099-R) as ordinary income for
the 10-year tax option if you don’t choose capi-
tal gain treatment for that part.
Complete Part III of Form 4972 to choose
the 10-year tax option. You must use the spe-
cial Tax Rate Schedule shown in the instruc-
tions for Part III to figure the tax. Pub. 575
Page 80 Chapter 10 Retirement Plans, Pensions, and Annuities
illustrates how to complete Form 4972 to figure
the separate tax.
Rollovers
If you withdraw cash or other assets from a
qualified retirement plan in an eligible rollover
distribution, you can defer tax on the distribution
by rolling it over to another qualified retirement
plan or a traditional IRA.
For this purpose, the following plans are
qualified retirement plans.
A qualified employee plan.
A qualified employee annuity.
A tax-sheltered annuity plan (403(b) plan).
An eligible state or local government sec-
tion 457 deferred compensation plan.
Eligible rollover distributions. Generally, an
eligible rollover distribution is any distribution of
all or any part of the balance to your credit in a
qualified retirement plan. For information about
exceptions to eligible rollover distributions, see
Pub. 575.
Rollover of nontaxable amounts. You may
be able to roll over the nontaxable part of a dis-
tribution (such as your after-tax contributions)
made to another qualified retirement plan that is
a qualified employee plan or a 403(b) plan, or to
a traditional or Roth IRA. The transfer must be
made either through a direct rollover to a quali-
fied plan or 403(b) plan that separately ac-
counts for the taxable and nontaxable parts of
the rollover or through a rollover to a traditional
or Roth IRA.
If you roll over only part of a distribution that
includes both taxable and nontaxable amounts,
the amount you roll over is treated as coming
first from the taxable part of the distribution.
Any after-tax contributions that you roll over
into your traditional IRA become part of your ba-
sis (cost) in your IRAs. To recover your basis
when you take distributions from your IRA, you
must complete Form 8606 for the year of the
distribution. For more information, see the Form
8606 instructions.
Direct rollover option. You can choose to
have any part or all of an eligible rollover distri-
bution paid directly to another qualified retire-
ment plan that accepts rollover distributions or
to a traditional or Roth IRA. If you choose the di-
rect rollover option, or have an automatic roll-
over, no tax will be withheld from any part of the
distribution that is directly paid to the trustee of
the other plan.
Payment to you option. If an eligible rollover
distribution is paid to you, 20% generally will be
withheld for income tax. However, the full
amount is treated as distributed to you even
though you actually receive only 80%. You gen-
erally must include in income any part (includ-
ing the part withheld) that you don’t roll over
within 60 days to another qualified retirement
plan or to a traditional or Roth IRA. (See Pen-
sions and Annuities under Tax Withholding for
2017 in chapter 4.)
Rolling over more than amount re-
ceived. If you decide to roll over an
amount equal to the distribution before
withholding, your contribution to the new plan or
IRA must include other money (for example,
from savings or amounts borrowed) to replace
the amount withheld.
Time for making rollover. You generally must
complete the rollover of an eligible rollover dis-
tribution paid to you by the 60th day following
the day on which you receive the distribution
from your employer's plan. (If an amount distrib-
uted to you becomes a frozen deposit in a fi-
nancial institution during the 60-day period after
you receive it, the rollover period is extended for
the period during which the distribution is in a
frozen deposit in a financial institution.)
The IRS may waive the 60-day requirement
where the failure to do so would be against
equity or good conscience, such as in the event
of a casualty, disaster, or other event beyond
your reasonable control.
The administrator of a qualified plan must
give you a written explanation of your distribu-
tion options within a reasonable period of time
before making an eligible rollover distribution.
Qualified domestic relations order (QDRO).
You may be able to roll over tax free all or part
of a distribution from a qualified retirement plan
that you receive under a QDRO. If you receive
the distribution as an employee's spouse or for-
mer spouse (not as a nonspousal beneficiary),
the rollover rules apply to you as if you were the
employee. You can roll over the distribution
from the plan into a traditional IRA or to another
eligible retirement plan. See Rollovers in Pub.
575 for more information on benefits received
under a QDRO.
Rollover by surviving spouse. You may be
able to roll over tax free all or part of a distribu-
tion from a qualified retirement plan you receive
as the surviving spouse of a deceased em-
ployee. The rollover rules apply to you as if you
were the employee. You can roll over a distribu-
tion into a qualified retirement plan or a tradi-
tional or Roth IRA. For a rollover to a Roth IRA,
see Rollovers to Roth IRAs, later.
A distribution paid to a beneficiary other
than the employee's surviving spouse is gener-
ally not an eligible rollover distribution. How-
ever, see Rollovers by nonspouse beneficiary
next.
Rollovers by nonspouse beneficiary. If you
are a designated beneficiary (other than a sur-
viving spouse) of a deceased employee, you
may be able to roll over tax free all or a portion
of a distribution you receive from an eligible re-
tirement plan of the employee. The distribution
must be a direct trustee-to-trustee transfer to
your traditional or Roth IRA that was set up to
receive the distribution. The transfer will be
treated as an eligible rollover distribution and
the receiving plan will be treated as an inherited
IRA. For information on inherited IRAs, see
What if You Inherit an IRA? in chapter 1 of Pub.
590–B, Individual Retirement Arrangements
(IRAs).
Retirement bonds. If you redeem retirement
bonds purchased under a qualified bond pur-
chase plan, you can roll over the proceeds thatCAUTION
!
exceed your basis tax free into an IRA (as dis-
cussed in Pub. 590–A) or a qualified employer
plan.
Designated Roth accounts. You can roll over
an eligible rollover distribution from a designa-
ted Roth account into another designated Roth
account or a Roth IRA. If you want to roll over
the part of the distribution that is not included in
income, you must make a direct rollover of the
entire distribution or you can roll over the entire
amount (or any portion) to a Roth IRA. For more
information on rollovers from designated Roth
accounts, see Rollovers in Pub. 575.
In-plan rollovers to designated Roth ac-
counts. If you are a plan participant in a
401(k), 403(b), or 457(b) plan, your plan may
permit you to roll over amounts in those plans to
a designated Roth account within the same
plan. The rollover of any untaxed amounts must
be included in income. See Designated Roth
accounts under Rollovers in Pub. 575 for more
information.
Rollovers to Roth IRAs. You can roll over dis-
tributions directly from a qualified retirement
plan (other than a designated Roth account) to
a Roth IRA.
You must include in your gross income dis-
tributions from a qualified retirement plan (other
than a designated Roth account) that you would
have had to include in income if you hadn’t rol-
led them over into a Roth IRA. You don’t include
in gross income any part of a distribution from a
qualified retirement plan that is a return of con-
tributions to the plan that were taxable to you
when paid. In addition, the 10% tax on early dis-
tributions doesn’t apply.
More information. For more information on
the rules for rolling over distributions, see Roll-
overs in Pub. 575.
Special Additional
Taxes
To discourage the use of pension funds for pur-
poses other than normal retirement, the law im-
poses additional taxes on early distributions of
those funds and on failures to withdraw the
funds timely. Ordinarily, you won’t be subject to
these taxes if you roll over all early distributions
you receive, as explained earlier, and begin
drawing out the funds at a normal retirement
age, in reasonable amounts over your life ex-
pectancy. These special additional taxes are
the taxes on:
Early distributions, and
Excess accumulation (not receiving mini-
mum distributions).
These taxes are discussed in the following sec-
tions.
If you must pay either of these taxes, report
them on Form 5329. However, you don’t have
to file Form 5329 if you owe only the tax on
early distributions and all your Forms 1099-R
correctly shows a “1” in box 7. Instead, enter
10% of the taxable part of the distribution on
Form 1040, line 59 and write “No” under the
heading “Other Taxes” to the left of line 59.
Chapter 10 Retirement Plans, Pensions, and Annuities Page 81
Even if you don’t owe any of these taxes,
you may have to complete Form 5329 and at-
tach it to your Form 1040. This applies if you
meet an exception to the tax on early distribu-
tions but box 7 of your Form 1099-R doesn’t in-
dicate an exception.
Tax on Early Distributions
Most distributions (both periodic and nonperi-
odic) from qualified retirement plans and non-
qualified annuity contracts made to you before
you reach age 591 2 are subject to an additional
tax of 10%. This tax applies to the part of the
distribution that you must include in gross in-
come.
For this purpose, a qualified retirement plan
is:
A qualified employee plan,
A qualified employee annuity plan,
A tax-sheltered annuity plan, or
An eligible state or local government sec-
tion 457 deferred compensation plan (to
the extent that any distribution is attributa-
ble to amounts the plan received in a direct
transfer or rollover from one of the other
plans listed here or an IRA).
5% rate on certain early distributions from
deferred annuity contracts. If an early with-
drawal from a deferred annuity is otherwise
subject to the 10% additional tax, a 5% rate
may apply instead. A 5% rate applies to distri-
butions under a written election providing a spe-
cific schedule for the distribution of your interest
in the contract if, as of March 1, 1986, you had
begun receiving payments under the election.
On line 4 of Form 5329, multiply the line 3
amount by 5% instead of 10%. Attach an ex-
planation to your return.
Distributions from Roth IRAs allocable to a
rollover from an eligible retirement plan
within the 5year period. If, within the 5-year
period starting with the first day of your tax year
in which you rolled over an amount from an eli-
gible retirement plan to a Roth IRA, you take a
distribution from the Roth IRA, you may have to
pay the additional 10% tax on early distribu-
tions. You generally must pay the 10% addi-
tional tax on any amount attributable to the part
of the rollover that you had to include in income.
The additional tax is figured on Form 5329. For
more information, see Form 5329 and its in-
structions. For information on qualified distribu-
tions from Roth IRAs, see Additional Tax on
Early Distributions in chapter 2 of Pub. 590–B.
Distributions from designated Roth ac
counts allocable to inplan Roth rollovers
within the 5year period. If, within the 5-year
period starting with the first day of your tax year
in which you rolled over an amount from a
401(k), 403(b), or 457(b) plan to a designated
Roth account, you take a distribution from the
designated Roth account, you may have to pay
the additional 10% tax on early distributions.
You generally must pay the 10% additional tax
on any amount attributable to the part of the
in-plan rollover that you had to include in in-
come. The additional tax is figured on Form
5329. For more information, see Form 5329 and
its instructions. For information on qualified dis-
tributions from designated Roth accounts, see
Designated Roth accounts under Taxation of
Periodic Payments in Pub. 575.
Exceptions to tax. Certain early distributions
are excepted from the early distribution tax. If
the payer knows that an exception applies to
your early distribution, distribution code “2,” “3,”
or “4” should be shown in box 7 of your Form
1099-R and you don’t have to report the distri-
bution on Form 5329. If an exception applies
but distribution code “1” (early distribution, no
known exception) is shown in box 7, you must
file Form 5329. Enter the taxable amount of the
distribution shown in box 2a of your Form
1099-R on line 1 of Form 5329. On line 2, enter
the amount that can be excluded and the ex-
ception number shown in the Form 5329 in-
structions.
If distribution code “1” is incorrectly
shown on your Form 1099-R for a dis-
tribution received when you were age
591 2 or older, include that distribution on Form
5329. Enter exception number “12” on line 2.
General exceptions. The tax doesn’t apply
to distributions that are:
Made as part of a series of substantially
equal periodic payments (made at least
annually) for your life (or life expectancy) or
the joint lives (or joint life expectancies) of
you and your designated beneficiary (if
from a qualified retirement plan, the pay-
ments must begin after your separation
from service),
Made because you are totally and perma-
nently disabled. See Exceptions to Tax un-
der Tax on Early Distributions in Pub. 575,
or
Made on or after the death of the plan par-
ticipant or contract holder.
Additional exceptions for qualified retire-
ment plans. The tax doesn’t apply to distribu-
tions that are:
From a qualified retirement plan (other
than an IRA) after your separation from
service in or after the year you reached
age 55 (age 50 for qualified public safety
employees),
From a qualified retirement plan (other
than an IRA) to an alternate payee under a
qualified domestic relations order,
From a qualified retirement plan to the ex-
tent you have deductible medical expen-
ses that exceed 10% (7.5% if you or your
spouse were born before January 2, 1952)
of your adjusted gross income, whether or
not you itemize your deductions for the
year,
From an employer plan under a written
election that provides a specific schedule
for distribution of your entire interest if, as
of March 1, 1986, you had separated from
service and had begun receiving payments
under the election,
From an employee stock ownership plan
for dividends on employer securities held
by the plan,
From a qualified retirement plan due to an
IRS levy of the plan,TIP
From elective deferral accounts under
401(k) or 403(b) plans or similar arrange-
ments that are qualified reservist distribu-
tions, or
Phased retirement annuity payments made
to federal employees. See Pub. 721 for
more information on the phased retirement
program.
Qualified public safety employees. If you
are a qualified public safety employee, distribu-
tions made from a governmental defined benefit
pension plan are not subject to the additional
tax on early distributions. You are a qualified
public safety employee if you provide police
protection, firefighting services, or emergency
medical services for a state or municipality, and
you separated from service in or after the year
you attained age 50.
Qualified reservist distributions. A quali-
fied reservist distribution is not subject to the
additional tax on early distributions. A qualified
reservist distribution is a distribution (a) from
elective deferrals under a section 401(k) or
403(b) plan, or a similar arrangement, (b) to an
individual ordered or called to active duty (be-
cause he or she is a member of a reserve com-
ponent) for a period of more than 179 days or
for an indefinite period, and (c) made during the
period beginning on the date of the order or call
and ending at the close of the active duty pe-
riod. You must have been ordered or called to
active duty after September 11, 2001. For more
information, see Qualified reservist distributions
under Special Additional Taxes in Pub. 575.
Additional exceptions for nonqualified
annuity contracts. The tax doesn’t apply to
distributions from:
A deferred annuity contract to the extent
allocable to investment in the contract be-
fore August 14, 1982,
A deferred annuity contract under a quali-
fied personal injury settlement,
A deferred annuity contract purchased by
your employer upon termination of a quali-
fied employee plan or qualified employee
annuity plan and held by your employer
until your separation from service, or
An immediate annuity contract (a single
premium contract providing substantially
equal annuity payments that start within 1
year from the date of purchase and are
paid at least annually).
Tax on Excess
Accumulation
To make sure that most of your retirement ben-
efits are paid to you during your lifetime, rather
than to your beneficiaries after your death, the
payments that you receive from qualified retire-
ment plans must begin no later than your re-
quired beginning date (defined later). The pay-
ments each year can’t be less than the required
minimum distribution.
Required distributions not made. If the
actual distributions to you in any year are less
than the minimum required distribution for that
year, you are subject to an additional tax. The
Page 82 Chapter 10 Retirement Plans, Pensions, and Annuities
tax equals 50% of the part of the required
minimum distribution that was not distributed.
For this purpose, a qualified retirement plan
includes:
A qualified employee plan,
A qualified employee annuity plan,
An eligible section 457 deferred compen-
sation plan, or
A tax-sheltered annuity plan (403(b) plan)
(for benefits accruing after 1986).
Waiver. The tax may be waived if you establish
that the shortfall in distributions was due to rea-
sonable error and that reasonable steps are be-
ing taken to remedy the shortfall. See the In-
structions for Form 5329 for the procedure to
follow if you believe you qualify for a waiver of
this tax.
State insurer delinquency proceedings.
You might not receive the minimum distribution
because assets are invested in a contract is-
sued by an insurance company in state insurer
delinquency proceedings. If your payments are
reduced below the minimum due to these pro-
ceedings, you should contact your plan admin-
istrator. Under certain conditions, you won’t
have to pay the 50% excise tax.
Required beginning date. Unless the rule for
5% owners applies, you generally must begin to
receive distributions from your qualified retire-
ment plan by April 1 of the year that follows the
later of:
The calendar year in which you reach age
701 2, or
The calendar year in which you retire from
employment with the employer maintaining
the plan.
However, your plan may require you to begin to
receive distributions by April 1 of the year that
follows the year in which you reach age 701 2,
even if you have not retired.
If you reached age 701 2 in 2016, you may be
required to receive your first distribution by April
1, 2017. Your required distribution then must be
made for 2017 by December 31, 2017.
5% owners. If you are a 5% owner, you
must begin to receive distributions by April 1 of
the year that follows the calendar year in which
you reach age 701 2.
You are a 5% owner if, for the plan year end-
ing in the calendar year in which you reach age
701 2, you own (or are considered to own under
section 318 of the Internal Revenue Code)
more than 5% of the outstanding stock (or more
than 5% of the total voting power of all stock) of
the employer, or more than 5% of the capital or
profits interest in the employer.
Age 701 2. You reach age 701 2 on the date that
is 6 calendar months after the date of your 70th
birthday.
For example, if you are retired and your 70th
birthday was on June 30, 2016, you were age
701 2 on December 30, 2016. If your 70th birth-
day was on July 1, 2016, you reached age 701 2
on January 1, 2017.
Required distributions. By the required be-
ginning date, as explained earlier, you must ei-
ther:
Receive your entire interest in the plan (for
a tax-sheltered annuity, your entire benefit
accruing after 1986), or
Begin receiving periodic distributions in an-
nual amounts calculated to distribute your
entire interest (for a tax-sheltered annuity,
your entire benefit accruing after 1986)
over your life or life expectancy or over the
joint lives or joint life expectancies of you
and a designated beneficiary (or over a
shorter period).
Additional information. For more informa-
tion on this rule, see Tax on Excess Accumula-
tion in Pub. 575.
Form 5329. You must file Form 5329 if you
owe tax because you didn’t receive a minimum
required distribution from your qualified retire-
ment plan.
Survivors and
Beneficiaries
Generally, a survivor or beneficiary reports pen-
sion or annuity income in the same way the plan
participant would have. However, some special
rules apply. See Pub. 575 for more information.
Survivors of employees. If you are entitled to
receive a survivor annuity on the death of an
employee who died, you can exclude part of
each annuity payment as a tax-free recovery of
the employee's investment in the contract. You
must figure the taxable and tax-free parts of
your annuity payments using the method that
applies as if you were the employee.
Survivors of retirees. If you receive benefits
as a survivor under a joint and survivor annuity,
include those benefits in income in the same
way the retiree would have included them in in-
come. If you receive a survivor annuity because
of the death of a retiree who had reported the
annuity under the Three-Year Rule and recov-
ered all of the cost tax free, your survivor pay-
ments are fully taxable.
If the retiree was reporting the annuity pay-
ments under the General Rule, you must apply
the same exclusion percentage to your initial
survivor annuity payment called for in the con-
tract. The resulting tax-free amount will then re-
main fixed. Any increases in the survivor annu-
ity are fully taxable.
If the retiree was reporting the annuity pay-
ments under the Simplified Method, the part of
each payment that is tax free is the same as the
tax-free amount figured by the retiree at the an-
nuity starting date. This amount remains fixed
even if the annuity payments are increased or
decreased. See Simplified Method, earlier.
In any case, if the annuity starting date is af-
ter 1986, the total exclusion over the years can’t
be more than the cost.
Estate tax deduction. If your annuity was a
joint and survivor annuity that was included in
the decedent's estate, an estate tax may have
been paid on it. You can deduct the part of the
total estate tax that was based on the annuity.
The deceased annuitant must have died after
the annuity starting date. (For details, see sec-
tion 1.691(d)-1 of the regulations.) Deduct it in
equal amounts over your remaining life expect-
ancy.
If the decedent died before the annuity start-
ing date of a deferred annuity contract and you
receive a death benefit under that contract, the
amount you receive (either in a lump sum or as
periodic payments) in excess of the decedent's
cost is included in your gross income as income
in respect of a decedent for which you may be
able to claim an estate tax deduction.
You can take the estate tax deduction as an
itemized deduction on Schedule A, Form 1040.
This deduction isn’t subject to the 2%-of-adjus-
ted-gross-income limit on miscellaneous de-
ductions. See Pub. 559, Survivors, Executors,
and Administrators, for more information on the
estate tax deduction.
11.
Social Security
and Equivalent
Railroad
Retirement
Benefits
Introduction
This chapter explains the federal income tax
rules for social security benefits and equivalent
tier 1 railroad retirement benefits. It explains the
following topics.
How to figure whether your benefits are
taxable.
How to use the social security benefits
worksheet (with examples).
How to report your taxable benefits.
How to treat repayments that are more
than the benefits you received during the
year.
Social security benefits include monthly re-
tirement, survivor, and disability benefits. They
don’t include Supplemental Security Income
(SSI) payments, which aren’t taxable.
Equivalent tier 1 railroad retirement benefits
are the part of tier 1 benefits that a railroad em-
ployee or beneficiary would have been entitled
to receive under the social security system.
They are commonly called the social security
equivalent benefit (SSEB) portion of tier 1 bene-
fits.
If you received these benefits during 2016,
you should have received a Form SSA-1099,
Social Security Benefit Statement; or Form
Chapter 11 Social Security and Equivalent Railroad Retirement Benefits Page 83
RRB-1099, Payments by the Railroad Retire-
ment Board. These forms show the amounts re-
ceived and repaid, and taxes withheld for the
year. You may receive more than one of these
forms for the same year. You should add the
amounts shown on all the Forms SSA-1099 and
Forms RRB-1099 you receive for the year to
determine the total amounts received and re-
paid, and taxes withheld for that year. See the
Appendix at the end of Pub. 915 for more infor-
mation.
Note. When the term “benefits” is used in
this chapter, it applies to both social security
benefits and the SSEB portion of tier 1 railroad
retirement benefits.
my Social Security account. Social Security
beneficiaries may quickly and easily obtain vari-
ous information from the SSA's website with a
my Social Security account to:
Keep track of your earnings and verify
them every year;
Get an estimate of your future benefits if
you are still working;
Get a letter with proof of your benefits if
you currently receive them;
Change your address;
Start or change your direct deposit;
Get a replacement Medicare card; and
Get a replacement Form SSA-1099 for the
tax season.
For more information and to set up an account,
go to www.ssa.gov/myaccount.
What isn’t covered in this chapter. This
chapter doesn’t cover the tax rules for the fol-
lowing railroad retirement benefits.
Non-social security equivalent benefit
(NSSEB) portion of tier 1 benefits.
Tier 2 benefits.
Vested dual benefits.
Supplemental annuity benefits.
For information on these benefits, see Pub.
575, Pension and Annuity Income.
This chapter doesn’t cover the tax rules for
social security benefits reported on Form
SSA-1042S, Social Security Benefit Statement;
or Form RRB-1042S, Statement for Nonresi-
dent Alien Recipients of: Payments by the Rail-
road Retirement Board. For information about
these benefits, see Pub. 519, U.S. Tax Guide
for Aliens; and Pub. 915, Social Security and
Equivalent Railroad Retirement Benefits.
This chapter also doesn’t cover the tax rules
for foreign social security benefits. These bene-
fits are taxable as annuities, unless they are ex-
empt from U.S. tax or treated as a U.S. social
security benefit under a tax treaty.
Useful Items
You may want to see:
Publication
Tax Withholding and Estimated Tax
Pension and Annuity Income
Contributions to Individual
Retirement Arrangements (IRAs)
590A
Social Security and Equivalent
Railroad Retirement Benefits
Forms (and Instructions)
Estimated Tax for Individuals
Social Security Benefit
Statement
Payments by the Railroad
Retirement Board
Voluntary Withholding Request
Are Any of Your
Benefits Taxable?
To find out whether any of your benefits may be
taxable, compare the base amount for your fil-
ing status with the total of:
1. One-half of your benefits; plus
2. All your other income, including tax-ex-
empt interest.
Exclusions. When making this comparison,
don’t reduce your other income by any exclu-
sions for:
Interest from qualified U.S. savings bonds,
Employer-provided adoption benefits,
Foreign earned income or foreign housing,
or
Income earned by bona fide residents of
American Samoa or Puerto Rico.
Children's benefits. The rules in this chapter
apply to benefits received by children. See Who
is taxed, later.
Figuring total income. To figure the total of
one-half of your benefits plus your other in-
come, use Worksheet 11-1 later in this discus-
sion. If the total is more than your base amount,
part of your benefits may be taxable.
If you are married and file a joint return for
2016, you and your spouse must combine your
incomes and your benefits to figure whether any
of your combined benefits are taxable. Even if
your spouse didn’t receive any benefits, you
must add your spouse's income to yours to fig-
ure whether any of your benefits are taxable.
If the only income you received during
2016 was your social security or the
SSEB portion of tier 1 railroad retire-
ment benefits, your benefits generally aren’t
taxable and you probably don’t have to file a re-
turn. If you have income in addition to your ben-
efits, you may have to file a return even if none
of your benefits are taxable.
Base amount. Your base amount is:
$25,000 if you are single, head of house-
hold, or qualifying widow(er);
$25,000 if you are married filing separately
and lived apart from your spouse for all of
2016;
$32,000 if you are married filing jointly; or
$-0- if you are married filing separately and
lived with your spouse at any time during
2016.
Worksheet 111. You can use Worksheet 11-1
to figure the amount of income to compare with
1040ES
SSA1099
RRB1099
W4VTIP
your base amount. This is a quick way to check
whether some of your benefits may be taxable.
Worksheet 11-1. A Quick Way To Check if
Your Benefits May Be Taxable
Note. If you plan to file a joint income tax return,
include your spouse's amounts, if any, on lines
A, C, and D.
A. Enter the amount from
box 5 of all your Forms
SSA-1099 and RRB-1099.
Include the full amount of
any lump-sum benefit
payments received in 2016,
for 2016 and earlier years.
(If you received more than
one form, combine the
amounts from box 5 and
enter the total.) . . . . . . . A.
Note. If the amount on line A is zero or less,
stop here; none of your benefits are taxable this
year.
B. Enter one-half of line A . . . B.
C. Enter your total income that
is taxable (excluding line A),
such as pensions, wages,
interest, ordinary dividends,
and capital gain
distributions. Don’t reduce
your income by any
deductions, exclusions
(listed earlier),
or exemptions . . . . . . . . C.
D. Enter any tax-exempt
interest income such as
interest on municipal
bonds . . . . . . . . . . . . . D.
E. Add lines B, C, and D . . . E.
Note. Compare the amount on line E to your
base amount for your filing status. If the
amount on line E equals or is less than the base
amount for your filing status, none of your
benefits are taxable this year. If the amount on
line E is more than your base amount, some of
your benefits may be taxable. You need to
complete Worksheet 1 in Pub. 915 (or the
Social Security Benefits Worksheet in your tax
form instructions). If none of your benefits are
taxable, but you otherwise must file a tax return,
see Benefits not taxable, later, under How To
Report Your Benefits.
Example. You and your spouse (both over
65) are filing a joint return for 2016 and you both
received social security benefits during the
year. In January 2017, you received a Form
SSA-1099 showing net benefits of $7,500 in
box 5. Your spouse received a Form SSA-1099
showing net benefits of $3,500 in box 5. You
also received a taxable pension of $22,800 and
interest income of $500. You didn’t have any
tax-exempt interest income. Your benefits aren’t
taxable for 2016 because your income, as fig-
ured in Worksheet 11-1, isn’t more than your
base amount ($32,000) for married filing jointly.
Even though none of your benefits are taxa-
ble, you must file a return for 2016 because
your taxable gross income ($23,300) exceeds
the minimum filing requirement amount for your
filing status.
Page 84 Chapter 11 Social Security and Equivalent Railroad Retirement Benefits
Filled-in Worksheet 11-1. A Quick Way To
Check if Your Benefits May Be Taxable
Note. If you plan to file a joint income tax return,
include your spouse's amounts, if any, on lines
A, C, or D.
A. Enter the amount from
box 5 of all your Forms
SSA-1099 and RRB-1099.
Include the full amount of
any lump-sum benefit
payments received in 2016,
for 2016 and earlier years.
(If you received more than
one form, combine the
amounts from box 5 and
enter the total.) . . . . . . . A. $11,000
Note. If the amount on line A is zero or less,
stop here; none of your benefits are taxable this
year.
B. Enter one-half of line A . . . B. 5,500
C. Enter your total income that
is taxable (excluding line
A), such as pensions,
wages, interest, ordinary
dividends, and capital gain
distributions. Don’t reduce
your income by any
deductions, exclusions
(listed earlier),
or exemptions . . . . . . . . C. 23,300
D. Enter any tax-exempt
interest income such as
interest on municipal
bonds . . . . . . . . . . . . D. -0-
E. Add lines B, C, and D . . . E. $28,800
Note. Compare the amount on line E to your
base amount for your filing status. If the
amount on line E equals or is less than the base
amount for your filing status, none of your
benefits are taxable this year. If the amount on
line E is more than your base amount, some of
your benefits may be taxable. You need to
complete Worksheet 1 in Pub. 915 (or the
Social Security Benefits Worksheet in your tax
form instructions). If none of your benefits are
taxable, but you otherwise must file a tax return,
see Benefits not taxable, later, under How To
Report Your Benefits.
Who is taxed. Benefits are included in the tax-
able income (to the extent they are taxable) of
the person who has the legal right to receive the
benefits. For example, if you and your child re-
ceive benefits, but the check for your child is
made out in your name, you must use only your
part of the benefits to see whether any benefits
are taxable to you. One-half of the part that be-
longs to your child must be added to your
child's other income to see whether any of
those benefits are taxable to your child.
Repayment of benefits. Any repayment of
benefits you made during 2016 must be sub-
tracted from the gross benefits you received in
2016. It doesn’t matter whether the repayment
was for a benefit you received in 2016 or in an
earlier year. If you repaid more than the gross
benefits you received in 2016, see Repayments
More Than Gross Benefits, later.
Your gross benefits are shown in box 3 of
Form SSA-1099 or RRB-1099. Your repay-
ments are shown in box 4. The amount in box 5
shows your net benefits for 2016 (box 3 minus
box 4). Use the amount in box 5 to figure
whether any of your benefits are taxable.
Tax withholding and estimated tax. You can
choose to have federal income tax withheld
from your social security benefits and/or the
SSEB portion of your tier 1 railroad retirement
benefits. If you choose to do this, you must
complete a Form W-4V.
If you don’t choose to have income tax with-
held, you may have to request additional with-
holding from other income or pay estimated tax
during the year. For details, see Pub. 505 or the
instructions for Form 1040-ES.
How To Report
Your Benefits
If part of your benefits are taxable, you must use
Form 1040 or Form 1040A. You can’t use Form
1040EZ.
Reporting on Form 1040. Report your net
benefits (the total amount from box 5 of all your
Forms SSA-1099 and Forms RRB-1099) on
line 20a and the taxable part on line 20b. If you
are married filing separately and you lived apart
from your spouse for all of 2016, also enter “D”
to the right of the word “benefits” on line 20a.
Reporting on Form 1040A. Report your net
benefits (the total amount from box 5 of all your
Forms SSA-1099 and Forms RRB-1099) on line
14a and the taxable part on line 14b. If you are
married filing separately and you lived apart
from your spouse for all of 2016, also enter “D”
to the right of the word “benefits” on line 14a.
Benefits not taxable. If you are filing Form
1040EZ, don’t report any benefits on your tax
return. If you are filing Form 1040 or Form
1040A, report your net benefits (the total
amount from box 5 of all your Forms SSA-1099
and Forms RRB-1099) on Form 1040, line 20a;
or Form 1040A, line 14a. Enter -0- on Form
1040, line 20b; or Form 1040A, line 14b. If you
are married filing separately and you lived apart
from your spouse for all of 2016, also enter “D”
to the right of the word “benefits” on Form 1040,
line 20a; or Form 1040A, line 14a.
How Much Is Taxable?
If part of your benefits are taxable, how much is
taxable depends on the total amount of your
benefits and other income. Generally, the
higher that total amount, the greater the taxable
part of your benefits.
Maximum taxable part. Generally, up to 50%
of your benefits will be taxable. However, up to
85% of your benefits can be taxable if either of
the following situations applies to you.
The total of one-half of your benefits and
all your other income is more than $34,000
($44,000 if you are married filing jointly).
You are married filing separately and lived
with your spouse at any time during 2016.
Which worksheet to use. A worksheet you
can use to figure your taxable benefits is in the
instructions for your Form 1040 or Form 1040A.
You can use either that worksheet or Work-
sheet 1 in Pub. 915, unless any of the following
situations applies to you.
1. You contributed to a traditional individual
retirement arrangement (IRA) and you or
your spouse is covered by a retirement
plan at work. In this situation, you must
use the special worksheets in Appendix B
of Pub. 590-A to figure both your IRA de-
duction and your taxable benefits.
2. Situation (1) doesn’t apply and you take an
exclusion for interest from qualified U.S.
savings bonds (Form 8815), for adoption
benefits (Form 8839), for foreign earned
income or housing (Form 2555 or Form
2555-EZ), or for income earned in Ameri-
can Samoa (Form 4563) or Puerto Rico by
bona fide residents. In this situation, you
must use Worksheet 1 in Pub. 915 to fig-
ure your taxable benefits.
3. You received a lump-sum payment for an
earlier year. In this situation, also complete
Worksheet 2 or 3 and Worksheet 4 in Pub.
915. See Lump-sum election next.
Lumpsum election. You must include the
taxable part of a lump-sum (retroactive) pay-
ment of benefits received in 2016 in your 2016
income, even if the payment includes benefits
for an earlier year.
This type of lump-sum benefit payment
shouldn’t be confused with the
lump-sum death benefit that both the
SSA and RRB pay to many of their beneficia-
ries. No part of the lump-sum death benefit is
subject to tax.
Generally, you use your 2016 income to fig-
ure the taxable part of the total benefits re-
ceived in 2016. However, you may be able to
figure the taxable part of a lump-sum payment
for an earlier year separately, using your in-
come for the earlier year. You can elect this
method if it lowers your taxable benefits.
Making the election. If you received a
lump-sum benefit payment in 2016 that includes
benefits for one or more earlier years, follow the
instructions in Pub. 915 under Lump-Sum Elec-
tion to see whether making the election will
lower your taxable benefits. That discussion
also explains how to make the election.
Because the earlier year's taxable ben-
efits are included in your 2016 income,
no adjustment is made to the earlier
year's return. Don’t file an amended return for
the earlier year.
Examples
The following are a few examples you can use
as a guide to figure the taxable part of your ben-
efits.
Example 1. George White is single and
files Form 1040 for 2016. He received the fol-
lowing income in 2016.TIPCAUTION
!
Chapter 11 Social Security and Equivalent Railroad Retirement Benefits Page 85
Fully taxable pension . . . . . . . . $18,600
Wages from part-time job . . . . . 9,400
Taxable interest income . . . . . . 990
Total . . . . . . . . . . . . . . . . . $28,990
George also received social security bene-
fits during 2016. The Form SSA-1099 he re-
ceived in January 2017 shows $5,980 in box 5.
To figure his taxable benefits, George com-
pletes the worksheet shown here.
Filled-in Worksheet 1.
Figuring Your Taxable Benefits
1. Enter the total amount from
box 5 of ALL your Forms
SSA-1099 and RRB-1099. Also
enter this amount on Form 1040,
line 20a; or Form 1040A,
line 14a . . . . . . . . . . . . . . $5,980
2. Enter one-half of line 1 . . . . . . . . . . 2,990
3. Combine the amounts from:
Form 1040: Lines 7, 8a, 9a, 10
through 14, 15b, 16b, 17 through 19,
and 21.
Form 1040A: Lines 7, 8a, 9a, 10,
11b, 12b, and 13 . . . . . . . . . . . . 28,990
4. Enter the amount, if any, from Form
1040 or 1040A, line 8b . . . . . . . . . . -0-
5. Enter the total of any exclusions/
adjustments for:
Adoption benefits (Form 8839,
line 28),
Foreign earned income or housing
(Form 2555, lines 45 and 50; or
Form 2555-EZ, line 18), and
Certain income of bona fide
residents of American Samoa
(Form 4563, line 15) or Puerto
Rico . . . . . . . . . . . . . . . . -0-
6. Combine lines 2, 3, 4, and 5 . . . . . . . 31,980
7. Form 1040 filers: Enter the amounts
from Form 1040, lines 23 through 32,
and any write-in adjustments you
entered on the dotted line next to line 36.
Form 1040A filers: Enter the amounts
from Form 1040A, lines 16 and 17 . . . -0-
8. Is the amount on line 7 less than the
amount on line 6?
No.STOP None of your social security
benefits are taxable. Enter -0- on Form
1040, line 20b; or Form 1040A, line 14b.
Yes. Subtract line 7 from line 6 . . . . 31,980
9. If you are:
Married filing jointly, enter $32,000
Single, head of household,
qualifying widow(er), or married
filing separately and you lived
apart from your spouse for all of
2016, enter $25,000 . . . . . . . . 25,000
Note. If you are married filing separately
and you lived with your spouse at any
time in 2016, skip lines 9 through 16;
multiply line 8 by 85% (0.85) and enter
the result on line 17. Then go to line 18.
10. Is the amount on line 9 less than the
amount on line 8?
No.STOP None of your benefits are
taxable. Enter -0- on Form 1040,
line 20b; or on Form 1040A, line 14b. If
you are married filing separately and
you lived apart from your spouse for all
of 2016, be sure you entered “D” to the
right of the word “benefits” on Form
1040, line 20a; or on Form 1040A,
line 14a.
Yes. Subtract line 9 from line 8 . . . . 6,980
11. Enter $12,000 if married filing jointly;
$9,000 if single, head of household,
qualifying widow(er), or married filing
separately and you lived apart from
your spouse for all of 2016 . . . . . . . . 9,000
12. Subtract line 11 from line 10. If zero or
less, enter -0- . . . . . . . . . . . . . . . -0-
13. Enter the smaller of line 10
or line 11 . . . . . . . . . . . . . . . . . 6,980
14. Enter one-half of line 13 . . . . . . . . . 3,490
15. Enter the smaller of line 2 or line 14 . . 2,990
16. Multiply line 12 by 85% (0.85). If line 12
is zero, enter -0- . . . . . . . . . . . . . -0-
17. Add lines 15 and 16 . . . . . . . . . . . 2,990
18. Multiply line 1 by 85% (0.85) . . . . . . . 5,083
19. Taxable benefits. Enter the smaller of
line 17 or line 18. Also enter this amount
on Form 1040, line 20b; or Form 1040A,
line 14b . . . . . . . . . . . . . . . . . . $2,990
The amount on line 19 of George's work-
sheet shows that $2,990 of his social security
benefits is taxable. On line 20a of his Form
1040, George enters his net benefits of $5,980.
On line 20b, he enters his taxable benefits of
$2,990.
Example 2. Ray and Alice Hopkins file a
joint return on Form 1040A for 2016. Ray is re-
tired and received a fully taxable pension of
$15,500. He also received social security bene-
fits, and his Form SSA-1099 for 2016 shows net
benefits of $5,600 in box 5. Alice worked during
the year and had wages of $14,000. She made
a deductible payment to her IRA account of
$1,000 and isn’t covered by a retirement plan at
work. Ray and Alice have two savings accounts
with a total of $250 in taxable interest income.
They complete Worksheet 1, entering $29,750
($15,500 + $14,000 + $250) on line 3. They find
none of Ray's social security benefits are taxa-
ble. On Form 1040A, they enter $5,600 on
line 14a and -0- on line 14b.
Filled-in Worksheet 1.
Figuring Your Taxable Benefits
1. Enter the total amount from
box 5 of ALL your Forms
SSA-1099 and RRB-1099. Also
enter this amount on Form 1040,
line 20a; or Form 1040A,
line 14a . . . . . . . . . . . . . . $5,600
2. Enter one-half of line 1 . . . . . . 2,800
3. Combine the amounts from:
Form 1040: Lines 7, 8a, 9a,
10 through 14, 15b, 16b, 17
through 19, and 21.
Form 1040A: Lines 7, 8a, 9a,
10, 11b, 12b, and 13 . . . . . 29,750
4. Enter the amount, if any, from
Form 1040 or 1040A, line 8b . . -0-
5. Enter the total of any exclusions/
adjustments for:
Adoption benefits (Form 8839,
line 28),
Foreign earned income or housing
(Form 2555, lines 45 and 50; or
Form 2555-EZ, line 18), and
Certain income of bona fide
residents of American Samoa
(Form 4563, line 15) or Puerto
Rico . . . . . . . . . . . . . . . . -0-
6. Combine lines 2, 3, 4, and 5 . . . 32,550
7. Form 1040 filers: Enter the amounts
from Form 1040, lines 23 through 32,
and any write-in adjustments you
entered on the dotted line next to line 36.
Form 1040A filers: Enter the
amounts from Form 1040A, lines
16 and 17 . . . . . . . . . . . . . 1,000
8. Is the amount on line 7 less than the
amount on line 6?
No.STOP None of your social security
benefits are taxable. Enter -0- on Form
1040, line 20b; or Form 1040A, line 14b.
Yes. Subtract line 7 from
line 6 . . . . . . . . . . . . . . . 31,550
9. If you are:
Married filing jointly, enter $32,000
Single, head of household,
qualifying widow(er), or married
filing separately and you lived
apart from your spouse for all of
2016, enter $25,000 . . . . . . . . 32,000
Note. If you are married filing separately
and you lived with your spouse at any
time in 2016, skip lines 9 through 16;
multiply line 8 by 85% (0.85) and enter
the result on line 17. Then go to line 18.
10. Is the amount on line 9 less than the
amount on line 8?
No.STOP None of your benefits are
taxable. Enter -0- on Form 1040,
line 20b; or on Form 1040A, line 14b. If
you are married filing separately and
you lived apart from your spouse for all
of 2016, be sure you entered “D” to the
right of the word “benefits” on Form
1040, line 20a; or on Form 1040A,
line 14a.
Yes. Subtract line 9 from line 8 . . . .
Page 86 Chapter 11 Social Security and Equivalent Railroad Retirement Benefits
11. Enter $12,000 if married filing jointly;
$9,000 if single, head of household,
qualifying widow(er), or married filing
separately and you lived apart from
your spouse for all of 2016 . . . . . . . .
12. Subtract line 11 from line 10. If zero or
less, enter -0- . . . . . . . . . . . . . . .
13. Enter the smaller of line 10
or line 11 . . . . . . . . . . . . . . . . .
14. Enter one-half of line 13 . . . . . . . . .
15. Enter the smaller of line 2 or line 14 . .
16. Multiply line 12 by 85% (0.85). If line 12
is zero, enter -0- . . . . . . . . . . . . .
17. Add lines 15 and 16 . . . . . . . . . . .
18. Multiply line 1 by 85% (0.85) . . . . . . .
19. Taxable benefits. Enter the smaller of
line 17 or line 18. Also enter this amount
on Form 1040, line 20b; or Form 1040A,
line 14b . . . . . . . . . . . . . . . . . .
Example 3. Joe and Betty Johnson file a
joint return on Form 1040 for 2016. Joe is a re-
tired railroad worker and in 2016 received the
social security equivalent benefit (SSEB) por-
tion of tier 1 railroad retirement benefits. Joe's
Form RRB-1099 shows $10,000 in box 5. Betty
is a retired government worker and received a
fully taxable pension of $38,000. They had
$2,300 in taxable interest income plus interest
of $200 on a qualified U.S. savings bond. The
savings bond interest qualified for the exclu-
sion. They figure their taxable benefits by com-
pleting Worksheet 1. Because they have quali-
fied U.S. savings bond interest, they follow the
note at the beginning of the worksheet and use
the amount from line 2 of their Schedule B
(Form 1040A or 1040) on line 3 of the work-
sheet instead of the amount from line 8a of their
Form 1040. On line 3 of the worksheet, they en-
ter $40,500 ($38,000 + $2,500).
Filled-in Worksheet 1.
Figuring Your Taxable Benefits
Before you begin:
• If you are married filing separately and you lived
apart from your spouse for all of 2016, enter “D”
to the right of the word “benefits” on Form 1040,
line 20a; or Form 1040A, line 14a.
• Don’t use this worksheet if you repaid benefits
in 2016 and your total repayments (box 4 of
Forms SSA-1099 and RRB-1099) were more
than your gross benefits for 2016 (box 3 of
Forms SSA-1099 and RRB-1099). None of your
benefits are taxable for 2016. For more
information, see Repayments More Than Gross
Benefits.
• If you are filing Form 8815, Exclusion of Interest
From Series EE and I U.S. Savings Bonds
Issued After 1989, don’t include the amount
from line 8a of Form 1040 or Form 1040A on
line 3 of this worksheet. Instead, include the
amount from Schedule B (Form 1040A or
1040), line 2.
1. Enter the total amount from
box 5 of ALL your Forms
SSA-1099 and RRB-1099. Also
enter this amount on Form 1040,
line 20a; or Form 1040A,
line 14a . . . . . . . . . . . . . .$10,000
2. Enter one-half of line 1 . . . . . . . . . . 5,000
3. Combine the amounts from:
Form 1040: Lines 7, 8a, 9a, 10
through 14, 15b, 16b, 17 through 19,
and 21.
Form 1040A: Lines 7, 8a, 9a, 10,
11b, 12b, and 13 . . . . . . . . . . . . 40,500
4. Enter the amount, if any, from Form
1040 or 1040A, line 8b . . . . . . . . . . -0-
5. Enter the total of any exclusions/
adjustments for:
Adoption benefits (Form 8839,
line 28),
Foreign earned income or housing
(Form 2555, lines 45 and 50; or
Form 2555-EZ, line 18), and
Certain income of bona fide
residents of American Samoa
(Form 4563, line 15) or Puerto
Rico . . . . . . . . . . . . . . . . -0-
6. Combine lines 2, 3, 4, and 5 . . . . . . . 45,500
7. Form 1040 filers: Enter the amounts
from Form 1040, lines 23 through 32,
and any write-in adjustments you
entered on the dotted line next to line 36.
Form 1040A filers: Enter the amounts
from Form 1040A, lines 16 and 17 . . . -0-
8. Is the amount on line 7 less than the
amount on line 6?
No.STOP None of your social security
benefits are taxable. Enter -0- on Form
1040, line 20b; or Form 1040A, line 14b.
Yes. Subtract line 7 from line 6 . . . . 45,500
9. If you are:
Married filing jointly, enter $32,000
Single, head of household,
qualifying widow(er), or married
filing separately and you lived
apart from your spouse for all of
2016, enter $25,000 . . . . . . . . 32,000
Note. If you are married filing separately
and you lived with your spouse at any
time in 2016, skip lines 9 through 16;
multiply line 8 by 85% (0.85) and enter
the result on line 17. Then go to line 18.
10. Is the amount on line 9 less than the
amount on line 8?
No.STOP None of your benefits are
taxable. Enter -0- on Form 1040,
line 20b; or on Form 1040A, line 14b. If
you are married filing separately and
you lived apart from your spouse for all
of 2016, be sure you entered “D” to the
right of the word “benefits” on Form
1040, line 20a; or on Form 1040A,
line 14a.
Yes. Subtract line 9 from line 8 . . . . 13,500
11. Enter $12,000 if married filing jointly;
$9,000 if single, head of household,
qualifying widow(er), or married filing
separately and you lived apart from
your spouse for all of 2016 . . . . . . . . 12,000
12. Subtract line 11 from line 10. If zero or
less, enter -0- . . . . . . . . . . . . . . . 1,500
13. Enter the smaller of line 10
or line 11 . . . . . . . . . . . . . . . . . 12,000
14. Enter one-half of line 13 . . . . . . . . . 6,000
15. Enter the smaller of line 2 or line 14 . . 5,000
16. Multiply line 12 by 85% (0.85). If line 12
is zero, enter -0- . . . . . . . . . . . . . 1,275
17. Add lines 15 and 16 . . . . . . . . . . . 6,275
18. Multiply line 1 by 85% (0.85) . . . . . . . 8,500
19. Taxable benefits. Enter the smaller of
line 17 or line 18. Also enter this amount
on Form 1040, line 20b; or Form 1040A,
line 14b . . . . . . . . . . . . . . . . . . $6,275
More than 50% of Joe's net benefits are tax-
able because the income on line 8 of the work-
sheet ($45,500) is more than $44,000. Joe and
Betty enter $10,000 on Form 1040, line 20a;
and $6,275 on Form 1040, line 20b.
Deductions Related to
Your Benefits
You may be entitled to deduct certain amounts
related to the benefits you receive.
Disability payments. You may have received
disability payments from your employer or an in-
surance company that you included as income
on your tax return in an earlier year. If you re-
ceived a lump-sum payment from SSA or RRB,
and you had to repay the employer or insurance
company for the disability payments, you can
take an itemized deduction for the part of the
payments you included in gross income in the
earlier year. If the amount you repay is more
than $3,000, you may be able to claim a tax
credit instead. Claim the deduction or credit in
the same way explained under Repayments
More Than Gross Benefits, later.
Legal expenses. You can usually deduct legal
expenses that you pay or incur to produce or
collect taxable income or in connection with the
determination, collection, or refund of any tax.
Legal expenses for collecting the taxable
part of your benefits are deductible as a miscel-
laneous itemized deduction on Schedule A
(Form 1040), line 23.
Chapter 11 Social Security and Equivalent Railroad Retirement Benefits Page 87
Repayments More Than
Gross Benefits
In some situations, your Form SSA-1099 or
Form RRB-1099 will show that the total benefits
you repaid (box 4) are more than the gross ben-
efits (box 3) you received. If this occurred, your
net benefits in box 5 will be a negative figure (a
figure in parentheses) and none of your benefits
will be taxable. Don’t use a worksheet in this
case. If you receive more than one form, a neg-
ative figure in box 5 of one form is used to offset
a positive figure in box 5 of another form for that
same year.
If you have any questions about this nega-
tive figure, contact your local SSA office or your
local RRB field office.
Joint return. If you and your spouse file a joint
return, and your Form SSA-1099 or RRB-1099
has a negative figure in box 5, but your spou-
se's doesn’t, subtract the amount in box 5 of
your form from the amount in box 5 of your
spouse's form. You do this to get your net bene-
fits when figuring if your combined benefits are
taxable.
Example. John and Mary file a joint return
for 2016. John received Form SSA-1099 show-
ing $3,000 in box 5. Mary also received Form
SSA-1099 and the amount in box 5 was ($500).
John and Mary will use $2,500 ($3,000 minus
$500) as the amount of their net benefits when
figuring if any of their combined benefits are
taxable.
Repayment of benefits received in an ear
lier year. If the total amount shown in box 5 of
all of your Forms SSA-1099 and RRB-1099 is a
negative figure, you can take an itemized de-
duction for the part of this negative figure that
represents benefits you included in gross in-
come in an earlier year.
Deduction $3,000 or less. If this deduction
is $3,000 or less, it is subject to the 2%-of-ad-
justed-gross-income limit that applies to certain
miscellaneous itemized deductions. Claim it on
Schedule A (Form 1040), line 23.
Deduction more than $3,000. If this de-
duction is more than $3,000, you should figure
your tax two ways.
1. Figure your tax for 2016 with the itemized
deduction included on Schedule A,
line 28.
2. Figure your tax for 2016 in the following
steps.
a. Figure the tax without the itemized de-
duction included on Schedule A,
line 28.
b. For each year after 1983 for which
part of the negative figure represents
a repayment of benefits, refigure your
taxable benefits as if your total bene-
fits for the year were reduced by that
part of the negative figure. Then refig-
ure the tax for that year.
c. Subtract the total of the refigured tax
amounts in (b) from the total of your
actual tax amounts.
d. Subtract the result in (c) from the re-
sult in (a).
Compare the tax figured in methods (1) and (2).
Your tax for 2016 is the smaller of the two
amounts. If method (1) results in less tax, take
the itemized deduction on Schedule A (Form
1040), line 28. If method (2) results in less tax,
claim a credit for the amount from step 2c
above on Form 1040, line 73. Check box d and
enter “I.R.C. 1341” in the space next to that box.
If both methods produce the same tax, deduct
the repayment on Schedule A (Form 1040),
line 28.
12.
Other Income
Introduction
You must include on your return all items of in-
come you receive in the form of money, prop-
erty, and services unless the tax law states that
you don’t include them. Some items, however,
are only partly excluded from income. This
chapter discusses many kinds of income and
explains whether they’re taxable or nontaxable.
Income that’s taxable must be reported on
your tax return and is subject to tax.
Income that’s nontaxable may have to be
shown on your tax return but isn’t taxable.
This chapter begins with discussions of the
following income items.
Bartering.
Canceled debts.
Sales parties at which you’re the host or
hostess.
Life insurance proceeds.
Partnership income.
S corporation income.
Recoveries (including state income tax re-
funds).
Rents from personal property.
Repayments.
Royalties.
Unemployment benefits.
Welfare and other public assistance bene-
fits.
These discussions are followed by brief discus-
sions of other income items.
Useful Items
You may want to see:
Publication
Taxable and Nontaxable Income525
Sales and Other Dispositions of
Assets
Canceled Debts, Foreclosures,
Repossessions, and Abandonments
Bartering
Bartering is an exchange of property or serv-
ices. You must include in your income, at the
time received, the fair market value of property
or services you receive in bartering. If you ex-
change services with another person and you
both have agreed ahead of time on the value of
the services, that value will be accepted as fair
market value unless the value can be shown to
be otherwise.
Generally, you report this income on Sched-
ule C (Form 1040), Profit or Loss From Busi-
ness, or Schedule C-EZ (Form 1040), Net Profit
From Business. However, if the barter involves
an exchange of something other than services,
such as in Example 3 below, you may have to
use another form or schedule instead.
Example 1. You’re a self-employed attor-
ney who performs legal services for a client, a
small corporation. The corporation gives you
shares of its stock as payment for your serv-
ices. You must include the fair market value of
the shares in your income on Schedule C (Form
1040) or Schedule C-EZ (Form 1040) in the
year you receive them.
Example 2. You’re self-employed and a
member of a barter club. The club uses “credit
units” as a means of exchange. It adds credit
units to your account for goods or services you
provide to members, which you can use to pur-
chase goods or services offered by other mem-
bers of the barter club. The club subtracts credit
units from your account when you receive
goods or services from other members. You
must include in your income the value of the
credit units that are added to your account,
even though you may not actually receive
goods or services from other members until a
later tax year.
Example 3. You own a small apartment
building. In return for 6 months rent-free use of
an apartment, an artist gives you a work of art
she created. You must report as rental income
on Schedule E (Form 1040), Supplemental In-
come and Loss, the fair market value of the art-
work, and the artist must report as income on
Schedule C (Form 1040) or Schedule C-EZ
(Form 1040) the fair rental value of the apart-
ment.
Form 1099B from barter exchange. If you
exchanged property or services through a bar-
ter exchange, Form 1099-B, Proceeds From
Broker and Barter Exchange Transactions, or a
similar statement from the barter exchange
should be sent to you by February 15, 2017. It
should show the value of cash, property, serv-
ices, credits, or scrip you received from ex-
changes during 2016. The IRS also will receive
a copy of Form 1099-B.
4681
Page 88 Chapter 12 Other Income
Canceled Debts
In most cases, if a debt you owe is canceled or
forgiven, other than as a gift or bequest, you
must include the canceled amount in your in-
come. You have no income from the canceled
debt if it’s intended as a gift to you. A debt in-
cludes any indebtedness for which you’re liable
or which attaches to property you hold.
If the debt is a nonbusiness debt, report the
canceled amount on Form 1040, line 21. If it’s a
business debt, report the amount on Sched-
ule C (Form 1040) or Schedule C-EZ (Form
1040) (or on Schedule F (Form 1040), Profit or
Loss From Farming, if the debt is farm debt and
you‘re a farmer).
Form 1099C. If a federal government agency,
financial institution, or credit union cancels or
forgives a debt you owe of $600 or more, you
will receive a Form 1099-C, Cancellation of
Debt. The amount of the canceled debt is
shown in box 2.
Interest included in canceled debt. If any
interest is forgiven and included in the amount
of canceled debt in box 2, the amount of inter-
est also will be shown in box 3. Whether or not
you must include the interest portion of the can-
celed debt in your income depends on whether
the interest would be deductible when you paid
it. See Deductible debt under Exceptions, later.
If the interest wouldn’t be deductible (such
as interest on a personal loan), include in your
income the amount from Form 1099-C, box 2. If
the interest would be deductible (such as on a
business loan), include in your income the net
amount of the canceled debt (the amount
shown in box 2 less the interest amount shown
in box 3).
Discounted mortgage loan. If your financial
institution offers a discount for the early pay-
ment of your mortgage loan, the amount of the
discount is canceled debt. You must include the
canceled amount in your income.
Mortgage relief upon sale or other disposi
tion. If you’re personally liable for a mortgage
(recourse debt), and you’re relieved of the mort-
gage when you dispose of the property, you
may realize gain or loss up to the fair market
value of the property. Also, to the extent the
mortgage discharge exceeds the fair market
value of the property, it’s income from dis-
charge of indebtedness unless it qualifies for
exclusion under Excluded debt, later. Report
any income from discharge of indebtedness on
nonbusiness debt that doesn’t qualify for exclu-
sion as other income on Form 1040, line 21.
If you aren’t personally liable for a mortgage
(nonrecourse debt), and you’re relieved of the
mortgage when you dispose of the property
(such as through foreclosure), that relief is in-
cluded in the amount you realize. You may have
a taxable gain if the amount you realize ex-
ceeds your adjusted basis in the property. Re-
port any gain on nonbusiness property as a
capital gain.
See Pub. 4681 for more information.
Stockholder debt. If you’re a stockholder in a
corporation and the corporation cancels or for-
gives your debt to it, the canceled debt is a con-
structive distribution that’s generally dividend
income to you. For more information, see Pub.
542, Corporations.
If you’re a stockholder in a corporation and
you cancel a debt owed to you by the corpora-
tion, you generally don’t realize income. This is
because the canceled debt is considered as a
contribution to the capital of the corporation
equal to the amount of debt principal that you
canceled.
Repayment of canceled debt. If you included
a canceled amount in your income and later pay
the debt, you may be able to file a claim for re-
fund for the year the amount was included in in-
come. You can file a claim on Form 1040X if the
statute of limitations for filing a claim is still
open. The statute of limitations generally
doesn’t end until 3 years after the due date of
your original return.
Exceptions
There are several exceptions to the inclusion of
canceled debt in income. These are explained
next.
Student loans. Certain student loans contain
a provision that all or part of the debt incurred to
attend the qualified educational institution will
be canceled if you work for a certain period of
time in certain professions for any of a broad
class of employers.
You don’t have income if your student loan
is canceled after you agreed to this provision
and then performed the services required. To
qualify, the loan must have been made by:
1. The federal government, a state or local
government, or an instrumentality, agency,
or subdivision thereof;
2. A tax-exempt public benefit corporation
that has assumed control of a state,
county, or municipal hospital, and whose
employees are considered public employ-
ees under state law; or
3. An educational institution:
a. Under an agreement with an entity de-
scribed in (1) or (2) that provided the
funds to the institution to make the
loan; or
b. As part of a program of the institution
designed to encourage its students to
serve in occupations with unmet
needs or in areas with unmet needs
and under which the services provi-
ded by the students (or former stu-
dents) are for or under the direction of
a governmental unit or a tax-exempt
organization described in section
501(c)(3).
A loan to refinance a qualified student loan
also will qualify if it was made by an educational
institution or a qualified tax-exempt organization
under its program designed as described in (3)
(b) above.
Education loan repayment assistance.
Education loan repayments made to you by the
National Health Service Corps Loan Repay-
ment Program (NHSC Loan Repayment Pro-
gram), a state education loan repayment pro-
gram eligible for funds under the Public Health
Service Act, or any other state loan repayment
or loan forgiveness program that’s intended to
provide for the increased availability of health
services in underserved or health professional
shortage areas aren’t taxable.
Deductible debt. You don’t have income from
the cancellation of a debt if your payment of the
debt would be deductible. This exception ap-
plies only if you use the cash method of ac-
counting. For more information, see chapter 5
of Pub. 334, Tax Guide for Small Business.
Price reduced after purchase. In most ca-
ses, if the seller reduces the amount of debt you
owe for property you purchased, you don’t have
income from the reduction. The reduction of the
debt is treated as a purchase price adjustment
and reduces your basis in the property.
Excluded debt. Don’t include a canceled debt
in your gross income in the following situations.
The debt is canceled in a bankruptcy case
under title 11 of the U.S. Code. See Pub.
908, Bankruptcy Tax Guide.
The debt is canceled when you’re insol-
vent. However, you can’t exclude any
amount of canceled debt that’s more than
the amount by which you’re insolvent. See
Pub. 908.
The debt is qualified farm debt and is can-
celed by a qualified person. See chapter 3
of Pub. 225, Farmer's Tax Guide.
The debt is qualified real property business
debt. See chapter 5 of Pub. 334.
The cancellation is intended as a gift.
The debt is qualified principal residence in-
debtedness.
Host or Hostess
If you host a party or event at which sales are
made, any gift or gratuity you receive for giving
the event is a payment for helping a direct seller
make sales. You must report this item as in-
come at its fair market value.
Your out-of-pocket party expenses are sub-
ject to the 50% limit for meal and entertainment
expenses. These expenses are deductible as
miscellaneous itemized deductions subject to
the 2%-of-AGI limit on Schedule A (Form 1040),
but only up to the amount of income you receive
for giving the party.
For more information about the 50% limit for
meal and entertainment expenses, see chap-
ter 26.
Life Insurance
Proceeds
Life insurance proceeds paid to you because of
the death of the insured person aren’t taxable
unless the policy was turned over to you for a
price. This is true even if the proceeds were
paid under an accident or health insurance pol-
icy or an endowment contract. However, inter-
est income received as a result of life insurance
proceeds may be taxable.
Proceeds not received in installments. If
death benefits are paid to you in a lump sum or
Chapter 12 Other Income Page 89
other than at regular intervals, include in your
income only the benefits that are more than the
amount payable to you at the time of the in-
sured person's death. If the benefit payable at
death isn’t specified, you include in your income
the benefit payments that are more than the
present value of the payments at the time of
death.
Proceeds received in installments. If you re-
ceive life insurance proceeds in installments,
you can exclude part of each installment from
your income.
To determine the excluded part, divide the
amount held by the insurance company (gener-
ally the total lump sum payable at the death of
the insured person) by the number of install-
ments to be paid. Include anything over this ex-
cluded part in your income as interest.
Surviving spouse. If your spouse died be-
fore October 23, 1986, and insurance proceeds
paid to you because of the death of your
spouse are received in installments, you can
exclude up to $1,000 a year of the interest in-
cluded in the installments. If you remarry, you
can continue to take the exclusion.
Surrender of policy for cash. If you surren-
der a life insurance policy for cash, you must in-
clude in income any proceeds that are more
than the cost of the life insurance policy. In most
cases, your cost (or investment in the contract)
is the total of premiums that you paid for the life
insurance policy, less any refunded premiums,
rebates, dividends, or unrepaid loans that
weren’t included in your income.
You should receive a Form 1099-R showing
the total proceeds and the taxable part. Report
these amounts on lines 16a and 16b of Form
1040 or lines 12a and 12b of Form 1040A.
More information. For more information, see
Life Insurance Proceeds in Pub. 525.
Endowment Contract
Proceeds
An endowment contract is a policy under which
you’re paid a specified amount of money on a
certain date unless you die before that date, in
which case, the money is paid to your designa-
ted beneficiary. Endowment proceeds paid in a
lump sum to you at maturity are taxable only if
the proceeds are more than the cost of the pol-
icy. To determine your cost, subtract any
amount that you previously received under the
contract and excluded from your income from
the total premiums (or other consideration) paid
for the contract. Include the part of the lump
sum payment that’s more than your cost in your
income.
Accelerated Death
Benefits
Certain amounts paid as accelerated death
benefits under a life insurance contract or viati-
cal settlement before the insured's death are
excluded from income if the insured is termi-
nally or chronically ill.
Viatical settlement. This is the sale or assign-
ment of any part of the death benefit under a life
insurance contract to a viatical settlement pro-
vider. A viatical settlement provider is a person
who regularly engages in the business of buy-
ing or taking assignment of life insurance con-
tracts on the lives of insured individuals who are
terminally or chronically ill and who meets the
requirements of section 101(g)(2)(B) of the In-
ternal Revenue Code.
Exclusion for terminal illness. Accelerated
death benefits are fully excludable if the insured
is a terminally ill individual. This is a person who
has been certified by a physician as having an
illness or physical condition that can reasonably
be expected to result in death within 24 months
from the date of the certification.
Exclusion for chronic illness. If the insured
is a chronically ill individual who’s not terminally
ill, accelerated death benefits paid on the basis
of costs incurred for qualified long-term care
services are fully excludable. Accelerated death
benefits paid on a per diem or other periodic
basis are excludable up to a limit. This limit ap-
plies to the total of the accelerated death bene-
fits and any periodic payments received from
long-term care insurance contracts. For infor-
mation on the limit and the definitions of chroni-
cally ill individual, qualified long-term care serv-
ices, and long-term care insurance contracts,
see Long-Term Care Insurance Contracts un-
der Sickness and Injury Benefits in Pub. 525.
Exception. The exclusion doesn’t apply to any
amount paid to a person (other than the in-
sured) who has an insurable interest in the life
of the insured because the insured:
Is a director, officer, or employee of the
person; or
Has a financial interest in the person's
business.
Form 8853. To claim an exclusion for acceler-
ated death benefits made on a per diem or
other periodic basis, you must file Form 8853,
Archer MSAs and Long-Term Care Insurance
Contracts, with your return. You don’t have to
file Form 8853 to exclude accelerated death
benefits paid on the basis of actual expenses
incurred.
Public Safety Officer Killed
or Injured in the Line of
Duty
A spouse, former spouse, and child of a public
safety officer killed in the line of duty can ex-
clude from gross income survivor benefits re-
ceived from a governmental section 401(a) plan
attributable to the officer’s service. See section
101(h).
A public safety officer who’s permanently
and totally disabled or killed in the line of duty
and a surviving spouse or child can exclude
from income death or disability benefits re-
ceived from the federal Bureau of Justice Assis-
tance or death benefits paid by a state program.
See section 104(a)(6).
For this purpose, the term public safety offi-
cer includes law enforcement officers, firefight-
ers, chaplains, and rescue squad and ambu-
lance crew members. For more information, see
Pub. 559, Survivors, Executors, and Adminis-
trators.
Partnership Income
A partnership generally isn’t a taxable entity.
The income, gains, losses, deductions, and
credits of a partnership are passed through to
the partners based on each partner's distribu-
tive share of these items.
Schedule K1 (Form 1065). Although a part-
nership generally pays no tax, it must file an in-
formation return on Form 1065, U.S. Return of
Partnership Income, and send Schedule K-1
(Form 1065) to each partner. In addition, the
partnership will send each partner a copy of the
Partner's Instructions for Schedule K-1 (Form
1065) to help each partner report his or her
share of the partnership's income, deductions,
credits, and tax preference items.
Keep Schedule K-1 (Form 1065) for
your records. Don’t attach it to your
Form 1040, unless you’re specifically
required to do so.
For more information on partnerships, see
Pub. 541, Partnerships.
Qualified joint venture. If you and your
spouse each materially participate as the only
members of a jointly owned and operated busi-
ness, and you file a joint return for the tax year,
you can make a joint election to be treated as a
qualified joint venture instead of a partnership.
To make this election, you must divide all items
of income, gain, loss, deduction, and credit at-
tributable to the business between you and your
spouse in accordance with your respective in-
terests in the venture. For further information on
how to make the election and which sched-
ule(s) to file, see the instructions for your indi-
vidual tax return.
S Corporation Income
In most cases, an S corporation doesn’t pay tax
on its income. Instead, the income, losses, de-
ductions, and credits of the corporation are
passed through to the shareholders based on
each shareholder's pro rata share.
Schedule K1 (Form 1120S). An S corpora-
tion must file a return on Form 1120S, U.S. In-
come Tax Return for an S Corporation, and
send Schedule K-1 (Form 1120S) to each
shareholder. In addition, the S corporation will
send each shareholder a copy of the Share-
holder's Instructions for Schedule K-1 (Form
1120S) to help each shareholder report his or
her share of the S corporation's income, losses,
credits, and deductions.
Keep Schedule K-1 (Form 1120S) for
your records. Don’t attach it to your
Form 1040, unless you’re specifically
required to do so.
For more information on S corporations and
their shareholders, see the Instructions for Form
1120S.RECORDSRECORDS
Page 90 Chapter 12 Other Income
Recoveries
A recovery is a return of an amount you deduc-
ted or took a credit for in an earlier year. The
most common recoveries are refunds, reim-
bursements, and rebates of deductions item-
ized on Schedule A (Form 1040). You also may
have recoveries of non-itemized deductions
(such as payments on previously deducted bad
debts) and recoveries of items for which you
previously claimed a tax credit.
Tax benefit rule. You must include a recovery
in your income in the year you receive it up to
the amount by which the deduction or credit you
took for the recovered amount reduced your tax
in the earlier year. For this purpose, any in-
crease to an amount carried over to the current
year that resulted from the deduction or credit is
considered to have reduced your tax in the ear-
lier year. For more information, see Pub. 525.
Federal income tax refund. Refunds of fed-
eral income taxes aren’t included in your in-
come because they’re never allowed as a de-
duction from income.
State tax refund. If you received a state or lo-
cal income tax refund (or credit or offset) in
2016, you generally must include it in income if
you deducted the tax in an earlier year. The
payer should send Form 1099-G, Certain Gov-
ernment Payments, to you by January 31, 2017.
The IRS also will receive a copy of the Form
1099-G. If you file Form 1040, use the State
and Local Income Tax Refund Worksheet in the
2016 Form 1040 instructions for line 10 to figure
the amount (if any) to include in your income.
See Pub. 525 for when you must use another
worksheet.
If you could choose to deduct for a tax year
either:
State and local income taxes, or
State and local general sales taxes, then
the maximum refund that you may have to in-
clude in income is limited to the excess of the
tax you chose to deduct for that year over the
tax you didn’t choose to deduct for that year.
For examples, see Pub. 525.
Mortgage interest refund. If you received a
refund or credit in 2016 of mortgage interest
paid in an earlier year, the amount should be
shown in box 4 of your Form 1098, Mortgage In-
terest Statement. Don’t subtract the refund
amount from the interest you paid in 2016. You
may have to include it in your income under the
rules explained in the following discussions.
Interest on recovery. Interest on any of the
amounts you recover must be reported as inter-
est income in the year received. For example,
report any interest you received on state or lo-
cal income tax refunds on Form 1040, line 8a.
Recovery and expense in same year. If the
refund or other recovery and the expense occur
in the same year, the recovery reduces the de-
duction or credit and isn’t reported as income.
Recovery for 2 or more years. If you receive
a refund or other recovery that’s for amounts
you paid in 2 or more separate years, you must
allocate, on a pro rata basis, the recovered
amount between the years in which you paid it.
This allocation is necessary to determine the
amount of recovery from any earlier years and
to determine the amount, if any, of your allowa-
ble deduction for this item for the current year.
For information on how to compute the alloca-
tion, see Recoveries in Pub. 525.
Itemized Deduction
Recoveries
If you recover any amount that you deducted in
an earlier year on Schedule A (Form 1040), you
generally must include the full amount of the re-
covery in your income in the year you receive it.
Where to report. Enter your state or local in-
come tax refund on Form 1040, line 10, and the
total of all other recoveries as other income on
Form 1040, line 21. You can’t use Form 1040A
or Form 1040EZ.
Standard deduction limit. You generally are
allowed to claim the standard deduction if you
don’t itemize your deductions. Only your item-
ized deductions that are more than your stand-
ard deduction are subject to the recovery rule
(unless you’re required to itemize your deduc-
tions). If your total deductions on the earlier
year return weren’t more than your income for
that year, include in your income this year the
lesser of:
Your recoveries, or
The amount by which your itemized deduc-
tions exceeded the standard deduction.
Example. For 2015, you filed a joint return.
Your taxable income was $60,000 and you
weren’t entitled to any tax credits. Your stand-
ard deduction was $12,600, and you had item-
ized deductions of $14,200. In 2016, you re-
ceived the following recoveries for amounts
deducted on your 2015 return.
Medical expenses . . . . . . . . . . . . . . . $200
State and local income tax refund . . . . . . . 400
Refund of mortgage interest . . . . . . . . . . 325
Total recoveries . . . . . . . . . . . . . . . . $925
None of the recoveries were more than the de-
ductions taken for 2015. The difference be-
tween the state and local income tax you de-
ducted and your local general sales tax was
more than $400.
Your total recoveries are less than the
amount by which your itemized deductions ex-
ceeded the standard deduction ($14,200 −
12,600 = $1,600), so you must include your to-
tal recoveries in your income for 2016. Report
the state and local income tax refund of $400
on Form 1040, line 10, and the balance of your
recoveries, $525, on Form 1040, line 21.
Standard deduction for earlier years. To de-
termine if amounts recovered in 2016 must be
included in your income, you must know the
standard deduction for your filing status for the
year the deduction was claimed. Look in the in-
structions for your tax return from prior years to
locate the standard deduction for the filing sta-
tus for that prior year.
Example. You filed a joint return on Form
1040 for 2015 with taxable income of $45,000.
Your itemized deductions were $12,850. The
standard deduction that you could have claimed
was $12,600. In 2016, you recovered $2,100 of
your 2015 itemized deductions. None of the re-
coveries were more than the actual deductions
for 2015. Include $250 of the recoveries in your
2016 income. This is the smaller of your recov-
eries ($2,100) or the amount by which your
itemized deductions were more than the stand-
ard deduction ($12,850 − $12,600 = $250).
Recovery limited to deduction. You don’t in-
clude in your income any amount of your recov-
ery that’s more than the amount you deducted
in the earlier year. The amount you include in
your income is limited to the smaller of:
The amount deducted on Schedule A
(Form 1040), or
The amount recovered.
Example. During 2015 you paid $1,700 for
medical expenses. Of this amount, you deduc-
ted $200 on your 2015 Schedule A. In 2016,
you received a $500 reimbursement from your
medical insurance for your 2015 expenses. The
only amount of the $500 reimbursement that
must be included in your income for 2016 is
$200—the amount actually deducted.
Other recoveries. See Recoveries in Pub.
525 if:
You have recoveries of items other than
itemized deductions, or
You received a recovery for an item for
which you claimed a tax credit (other than
investment credit or foreign tax credit) in a
prior year.
Rents From Personal
Property
If you rent out personal property, such as equip-
ment or vehicles, how you report your income
and expenses is in most cases determined by:
Whether or not the rental activity is a busi-
ness, and
Whether or not the rental activity is con-
ducted for profit.
In most cases, if your primary purpose is in-
come or profit and you’re involved in the rental
activity with continuity and regularity, your rental
activity is a business. See Pub. 535, Business
Expenses, for details on deducting expenses
for both business and not-for-profit activities.
Reporting business income and expenses.
If you’re in the business of renting personal
property, report your income and expenses on
Schedule C or Schedule C-EZ (Form 1040).
The form instructions have information on how
to complete them.
Reporting nonbusiness income. If you aren’t
in the business of renting personal property, re-
port your rental income on Form 1040, line 21.
List the type and amount of the income on the
dotted line next to line 21.
Reporting nonbusiness expenses. If you
rent personal property for profit, include your
rental expenses in the total amount you enter
Chapter 12 Other Income Page 91
on Form 1040, line 36, and see the instructions
there.
If you don’t rent personal property for profit,
your deductions are limited and you can’t report
a loss to offset other income. See Activity not
for profit under Other Income, later.
Repayments
If you had to repay an amount that you included
in your income in an earlier year, you may be
able to deduct the amount repaid from your in-
come for the year in which you repaid it. Or, if
the amount you repaid is more than $3,000, you
may be able to take a credit against your tax for
the year in which you repaid it. Generally, you
can claim a deduction or credit only if the repay-
ment qualifies as an expense or loss incurred in
your trade or business or in a for-profit transac-
tion.
Type of deduction. The type of deduction
you’re allowed in the year of repayment de-
pends on the type of income you included in the
earlier year. You generally deduct the repay-
ment on the same form or schedule on which
you previously reported it as income. For exam-
ple, if you reported it as self-employment in-
come, deduct it as a business expense on
Schedule C or Schedule C-EZ (Form 1040) or
Schedule F (Form 1040). If you reported it as a
capital gain, deduct it as a capital loss as ex-
plained in Instructions for Schedule D (Form
1040). If you reported it as wages, unemploy-
ment compensation, or other nonbusiness in-
come, deduct it as a miscellaneous itemized
deduction on Schedule A (Form 1040).
Repaid social security benefits. If you repaid
social security benefits or equivalent railroad re-
tirement benefits, see Repayment of benefits in
chapter 11.
Repayment of $3,000 or less. If the amount
you repaid was $3,000 or less, deduct it from
your income in the year you repaid it. If you
must deduct it as a miscellaneous itemized de-
duction, enter it on Schedule A (Form 1040),
line 23.
Repayment over $3,000. If the amount you
repaid was more than $3,000, you can deduct
the repayment (as explained under Type of de-
duction, earlier). However, you can choose in-
stead to take a tax credit for the year of repay-
ment if you included the income under a claim
of right. This means that at the time you inclu-
ded the income, it appeared that you had an un-
restricted right to it. If you qualify for this choice,
figure your tax under both methods and com-
pare the results. Use the method (deduction or
credit) that results in less tax.
When determining whether the amount
you repaid was more or less than
$3,000, consider the total amount be-
ing repaid on the return. Each instance of re-
payment isn’t considered separately.
Method 1. Figure your tax for 2016 claiming
a deduction for the repaid amount. If you must
deduct it as a miscellaneous itemized deduc-
tion, enter it on Schedule A (Form 1040),
line 28.CAUTION
!
Method 2. Figure your tax for 2016 claiming
a credit for the repaid amount. Follow these
steps.
1. Figure your tax for 2016 without deducting
the repaid amount.
2. Refigure your tax from the earlier year
without including in income the amount
you repaid in 2016.
3. Subtract the tax in (2) from the tax shown
on your return for the earlier year. This is
the credit.
4. Subtract the answer in (3) from the tax for
2016 figured without the deduction (Step
1).
If method 1 results in less tax, deduct the
amount repaid. If method 2 results in less tax,
claim the credit figured in (3) above on Form
1040, line 73, by adding the amount of the
credit to any other credits on this line, and see
the instructions there.
An example of this computation can be
found in Pub. 525.
Repaid wages subject to social security
and Medicare taxes. If you had to repay an
amount that you included in your wages or com-
pensation in an earlier year on which social se-
curity, Medicare, or tier 1 RRTA taxes were
paid, ask your employer to refund the excess
amount to you. If the employer refuses to refund
the taxes, ask for a statement indicating the
amount of the overcollection to support your
claim. File a claim for refund using Form 843,
Claim for Refund and Request for Abatement.
Repaid wages subject to Additional Medi
care Tax. Employers can’t make an adjust-
ment or file a claim for refund for Additional
Medicare Tax withholding when there is a re-
payment of wages received by an employee in
a prior year because the employee determines
liability for Additional Medicare Tax on the em-
ployee's income tax return for the prior year. If
you had to repay an amount that you included in
your wages or compensation in an earlier year,
and on which Additional Medicare Tax was
paid, you may be able to recover the Additional
Medicare Tax paid on the amount. To recover
Additional Medicare Tax on the repaid wages or
compensation, you must file Form 1040X,
Amended U.S. Individual Income Tax Return,
for the prior year in which the wages or com-
pensation were originally received. See Instruc-
tions for Form 1040X.
Royalties
Royalties from copyrights, patents, and oil, gas,
and mineral properties are taxable as ordinary
income.
In most cases, you report royalties in Part I
of Schedule E (Form 1040). However, if you
hold an operating oil, gas, or mineral interest or
are in business as a self-employed writer, in-
ventor, artist, etc., report your income and ex-
penses on Schedule C or Schedule C-EZ (Form
1040).
Copyrights and patents. Royalties from
copyrights on literary, musical, or artistic works,
and similar property, or from patents on inven-
tions, are amounts paid to you for the right to
use your work over a specified period of time.
Royalties generally are based on the number of
units sold, such as the number of books, tickets
to a performance, or machines sold.
Oil, gas, and minerals. Royalty income from
oil, gas, and mineral properties is the amount
you receive when natural resources are extrac-
ted from your property. The royalties are based
on units, such as barrels, tons, etc., and are
paid to you by a person or company that leases
the property from you.
Depletion. If you’re the owner of an eco-
nomic interest in mineral deposits or oil and gas
wells, you can recover your investment through
the depletion allowance. For information on this
subject, see chapter 9 of Pub. 535.
Coal and iron ore. Under certain circum-
stances, you can treat amounts you receive
from the disposal of coal and iron ore as pay-
ments from the sale of a capital asset, rather
than as royalty income. For information about
gain or loss from the sale of coal and iron ore,
see Pub. 544, chapter 2.
Sale of property interest. If you sell your
complete interest in oil, gas, or mineral rights,
the amount you receive is considered payment
for the sale of property used in a trade or busi-
ness under section 1231, not royalty income.
Under certain circumstances, the sale is subject
to capital gain or loss treatment as explained in
Instructions for Schedule D (Form 1040). For
more information on selling section 1231 prop-
erty, see chapter 3 of Pub. 544.
If you retain a royalty, an overriding royalty,
or a net profit interest in a mineral property for
the life of the property, you have made a lease
or a sublease, and any cash you receive for the
assignment of other interests in the property is
ordinary income subject to a depletion allow-
ance.
Part of future production sold. If you own
mineral property but sell part of the future pro-
duction, in most cases you treat the money you
receive from the buyer at the time of the sale as
a loan from the buyer. Don’t include it in your in-
come or take depletion based on it.
When production begins, you include all the
proceeds in your income, deduct all the produc-
tion expenses, and deduct depletion from that
amount to arrive at your taxable income from
the property.
Unemployment
Benefits
The tax treatment of unemployment benefits
you receive depends on the type of program
paying the benefits.
Unemployment compensation. You must in-
clude in income all unemployment compensa-
tion you receive. You should receive a Form
1099-G showing in box 1 the total unemploy-
ment compensation paid to you. In most cases,
you enter unemployment compensation on
line 19 of Form 1040, line 13 of Form 1040A, or
line 3 of Form 1040EZ.
Types of unemployment compensation.
Unemployment compensation generally in-
cludes any amount received under an
Page 92 Chapter 12 Other Income
unemployment compensation law of the United
States or of a state. It includes the following
benefits.
Benefits paid by a state or the District of
Columbia from the Federal Unemployment
Trust Fund.
State unemployment insurance benefits.
Railroad unemployment compensation
benefits.
Disability payments from a government
program paid as a substitute for unemploy-
ment compensation. (Amounts received as
workers' compensation for injuries or ill-
ness aren’t unemployment compensation.
See chapter 5 for more information.)
Trade readjustment allowances under the
Trade Act of 1974.
Unemployment assistance under the Dis-
aster Relief and Emergency Assistance
Act.
Unemployment assistance under the Air-
line Deregulation Act of 1978 Program.
Governmental program. If you contribute
to a governmental unemployment compensa-
tion program and your contributions aren’t de-
ductible, amounts you receive under the pro-
gram aren’t included as unemployment
compensation until you recover your contribu-
tions. If you deducted all of your contributions to
the program, the entire amount you receive un-
der the program is included in your income.
Repayment of unemployment compensa-
tion. If you repaid in 2016 unemployment com-
pensation you received in 2016, subtract the
amount you repaid from the total amount you
received and enter the difference on line 19 of
Form 1040, line 13 of Form 1040A, or line 3 of
Form 1040EZ. On the dotted line next to your
entry, enter “Repaid” and the amount you re-
paid. If you repaid unemployment compensa-
tion in 2016 that you included in income in an
earlier year, you can deduct the amount repaid
on Schedule A (Form 1040), line 23, if you item-
ize deductions. If the amount is more than
$3,000, see Repayments, earlier.
Tax withholding. You can choose to have
federal income tax withheld from your unem-
ployment compensation. To make this choice,
complete Form W-4V, Voluntary Withholding
Request, and give it to the paying office. Tax
will be withheld at 10% of your payment.
If you don’t choose to have tax withheld
from your unemployment compensa-
tion, you may be liable for estimated
tax. If you don’t pay enough tax, either through
withholding or estimated tax, or a combination
of both, you may have to pay a penalty. For
more information on estimated tax, see chap-
ter 4.
Supplemental unemployment benefits.
Benefits received from an employer-financed
fund (to which the employees didn’t contribute)
aren’t unemployment compensation. They are
taxable as wages. For more information, see
Supplemental Unemployment Benefits in sec-
tion 5 of Pub. 15-A, Employer's SupplementalCAUTION
!
Tax Guide. Report these payments on line 7 of
Form 1040 or Form 1040A or on line 1 of Form
1040EZ.
Repayment of benefits. You may have to
repay some of your supplemental unemploy-
ment benefits to qualify for trade readjustment
allowances under the Trade Act of 1974. If you
repay supplemental unemployment benefits in
the same year you receive them, reduce the to-
tal benefits by the amount you repay. If you re-
pay the benefits in a later year, you must in-
clude the full amount of the benefits received in
your income for the year you received them.
Deduct the repayment in the later year as an
adjustment to gross income on Form 1040.
(You can’t use Form 1040A or Form 1040EZ.)
Include the repayment on Form 1040, line 36,
and see the instructions there. If the amount
you repay in a later year is more than $3,000,
you may be able to take a credit against your
tax for the later year instead of deducting the
amount repaid. For more information on this,
see Repayments, earlier.
Private unemployment fund. Unemployment
benefit payments from a private (nonunion)
fund to which you voluntarily contribute are tax-
able only if the amounts you receive are more
than your total payments into the fund. Report
the taxable amount on Form 1040, line 21.
Payments by a union. Benefits paid to you as
an unemployed member of a union from regular
union dues are included in your income on
Form 1040, line 21. However, if you contribute
to a special union fund and your payments to
the fund aren’t deductible, the unemployment
benefits you receive from the fund are includible
in your income only to the extent they’re more
than your contributions.
Guaranteed annual wage. Payments you re-
ceive from your employer during periods of un-
employment, under a union agreement that
guarantees you full pay during the year, are tax-
able as wages. Include them on line 7 of Form
1040 or Form 1040A or on line 1 of Form
1040EZ.
State employees. Payments similar to a
state's unemployment compensation may be
made by the state to its employees who aren’t
covered by the state's unemployment compen-
sation law. Although the payments are fully tax-
able, don’t report them as unemployment com-
pensation. Report these payments on Form
1040, line 21.
Welfare and Other
Public Assistance
Benefits
Don’t include in your income governmental ben-
efit payments from a public welfare fund based
upon need, such as payments to blind individu-
als under a state public assistance law. Pay-
ments from a state fund for the victims of crime
shouldn’t be included in the victims' incomes if
they’re in the nature of welfare payments. Don’t
deduct medical expenses that are reimbursed
by such a fund. You must include in your in-
come any welfare payments that are compen-
sation for services or that are obtained fraudu-
lently.
Reemployment Trade Adjustment Assis
tance (RTAA) payments. RTAA payments
received from a state must be included in your
income. The state must send you Form 1099-G
to advise you of the amount you should include
in income. The amount should be reported on
Form 1040, line 21.
Persons with disabilities. If you have a disa-
bility, you must include in income compensation
you receive for services you perform unless the
compensation is otherwise excluded. However,
you don’t include in income the value of goods,
services, and cash that you receive, not in re-
turn for your services, but for your training and
rehabilitation because you have a disability. Ex-
cludable amounts include payments for trans-
portation and attendant care, such as inter-
preter services for the deaf, reader services for
the blind, and services to help individuals with
an intellectual disability do their work.
Disaster relief grants. Don’t include post-dis-
aster grants received under the Robert T. Staf-
ford Disaster Relief and Emergency Assistance
Act in your income if the grant payments are
made to help you meet necessary expenses or
serious needs for medical, dental, housing, per-
sonal property, transportation, child care, or fu-
neral expenses. Don’t deduct casualty losses or
medical expenses that are specifically reim-
bursed by these disaster relief grants. If you
have deducted a casualty loss for the loss of
your personal residence and you later receive a
disaster relief grant for the loss of the same res-
idence, you may have to include part or all of
the grant in your taxable income. See Recover-
ies, earlier. Unemployment assistance pay-
ments under the Act are taxable unemployment
compensation. See Unemployment compensa-
tion under Unemployment Benefits, earlier.
Disaster relief payments. You can exclude
from income any amount you receive that’s a
qualified disaster relief payment. A qualified dis-
aster relief payment is an amount paid to you:
1. To reimburse or pay reasonable and nec-
essary personal, family, living, or funeral
expenses that result from a qualified dis-
aster;
2. To reimburse or pay reasonable and nec-
essary expenses incurred for the repair or
rehabilitation of your home or repair or re-
placement of its contents to the extent it’s
due to a qualified disaster;
3. By a person engaged in the furnishing or
sale of transportation as a common carrier
because of the death or personal physical
injuries incurred as a result of a qualified
disaster; or
4. By a federal, state, or local government, or
agency, or instrumentality in connection
with a qualified disaster in order to pro-
mote the general welfare.
You can exclude this amount only to the extent
any expense it pays for isn’t paid for by insur-
ance or otherwise. The exclusion doesn’t apply
Chapter 12 Other Income Page 93
if you were a participant or conspirator in a ter-
rorist action or a representative of one.
A qualified disaster is:
A disaster which results from a terrorist or
military action;
A federally declared disaster; or
A disaster which results from an accident
involving a common carrier, or from any
other event, which is determined to be
catastrophic by the Secretary of the Treas-
ury or his or her delegate.
For amounts paid under item (4), a disaster
is qualified if it’s determined by an applicable
federal, state, or local authority to warrant assis-
tance from the federal, state, or local govern-
ment, agency, or instrumentality.
Disaster mitigation payments. You can ex-
clude from income any amount you receive
that’s a qualified disaster mitigation payment.
Qualified disaster mitigation payments are most
commonly paid to you in the period immediately
following damage to property as a result of a
natural disaster. However, disaster mitigation
payments are used to mitigate (reduce the se-
verity of) potential damage from future natural
disasters. They’re paid to you through state and
local governments based on the provisions of
the Robert T. Stafford Disaster Relief and
Emergency Assistance Act or the National
Flood Insurance Act.
You can’t increase the basis or adjusted ba-
sis of your property for improvements made
with nontaxable disaster mitigation payments.
Home Affordable Modification Program
(HAMP). If you benefit from Pay-for-Perform-
ance Success Payments under HAMP, the pay-
ments aren’t taxable.
Mortgage assistance payments under sec
tion 235 of the National Housing Act. Pay-
ments made under section 235 of the National
Housing Act for mortgage assistance aren’t in-
cluded in the homeowner's income. Interest
paid for the homeowner under the mortgage as-
sistance program can’t be deducted.
Medicare. Medicare benefits received under ti-
tle XVIII of the Social Security Act aren’t includi-
ble in the gross income of the individuals for
whom they’re paid. This includes basic (part A
(Hospital Insurance Benefits for the Aged)) and
supplementary (part B (Supplementary Medical
Insurance Benefits for the Aged)).
Social Security Benefits (including
lumpsum payments attributable to prior
years), Supplemental Security Income Ben
efits, and LumpSum Death Benefits. The
Social Security Administration (SSA) provides
benefits such as old-age benefits, benefits to
disabled workers, and benefits to spouses and
dependents. These benefits may be subject to
federal income tax depending on your filing sta-
tus and other income. See chapter 11, Social
Security and Equivalent Railroad Retirement, in
this publication and Pub. 915, Social Security
and Equivalent Railroad Retirement Benefits,
for more information. An individual originally de-
nied benefits, but later approved, may receive a
lump-sum payment for the period when benefits
were denied (which may be prior years). See
Pub. 915 for information on how to make a
lump-sum election, which may reduce your tax
liability. There are also other types of benefits
paid by the SSA. However, Supplemental Se-
curity Income (SSI) benefits and lump-sum
death benefits (one-time payment to spouse
and children of deceased) aren’t subject to fed-
eral income tax. For more information on these
benefits, go to www.socialsecurity.gov.
Nutrition Program for the Elderly. Food ben-
efits you receive under the Nutrition Program for
the Elderly aren’t taxable. If you prepare and
serve free meals for the program, include in
your income as wages the cash pay you re-
ceive, even if you’re also eligible for food bene-
fits.
Payments to reduce cost of winter energy.
Payments made by a state to qualified people
to reduce their cost of winter energy use aren’t
taxable.
Other Income
The following brief discussions are arranged in
alphabetical order. Other income items briefly
discussed below are referenced to publications
which provide more topical information.
Activity not for profit. You must include on
your return income from an activity from which
you don’t expect to make a profit. An example
of this type of activity is a hobby or a farm you
operate mostly for recreation and pleasure. En-
ter this income on Form 1040, line 21. Deduc-
tions for expenses related to the activity are
limited. They can’t total more than the income
you report and can be taken only if you itemize
deductions on Schedule A (Form 1040). See
Not-for-Profit Activities in Pub. 535, chapter 1,
for information on whether an activity is consid-
ered carried on for a profit.
Alaska Permanent Fund dividend. If you re-
ceived a payment from Alaska's mineral income
fund (Alaska Permanent Fund dividend), report
it as income on line 21 of Form 1040, line 13 of
Form 1040A, or line 3 of Form 1040EZ. The
state of Alaska sends each recipient a docu-
ment that shows the amount of the payment
with the check. The amount also is reported to
IRS.
Alimony. Include in your income on Form
1040, line 11, any alimony payments you re-
ceive. Amounts you receive for child support
aren’t income to you. Alimony and child support
payments are discussed in chapter 18.
Bribes. If you receive a bribe, include it in your
income.
Campaign contributions. These contribu-
tions aren’t income to a candidate unless
they’re diverted to his or her personal use. To
be nontaxable, the contributions must be spent
for campaign purposes or kept in a fund for use
in future campaigns. However, interest earned
on bank deposits, dividends received on con-
tributed securities, and net gains realized on
sales of contributed securities are taxable and
must be reported on Form 1120-POL, U.S. In-
come Tax Return for Certain Political Organiza-
tions. Excess campaign funds transferred to an
office account must be included in the office-
holder's income on Form 1040, line 21, in the
year transferred.
Car pools. Don’t include in your income
amounts you receive from the passengers for
driving a car in a car pool to and from work.
These amounts are considered reimbursement
for your expenses. However, this rule doesn’t
apply if you have developed car pool arrange-
ments into a profit-making business of trans-
porting workers for hire.
Cash rebates. A cash rebate you receive from
a dealer or manufacturer of an item you buy
isn’t income, but you must reduce your basis by
the amount of the rebate.
Example. You buy a new car for $24,000
cash and receive a $2,000 rebate check from
the manufacturer. The $2,000 isn’t income to
you. Your basis in the car is $22,000. This is the
basis on which you figure gain or loss if you sell
the car and depreciation if you use it for busi-
ness.
Casualty insurance and other reimburse
ments. You generally shouldn’t report these
reimbursements on your return unless you’re
figuring gain or loss from the casualty or theft.
See chapter 25 for more information.
Child support payments. You shouldn’t re-
port these payments on your return. See chap-
ter 18 for more information.
Court awards and damages. To determine if
settlement amounts you receive by compromise
or judgment must be included in your income,
you must consider the item that the settlement
replaces. The character of the income as ordi-
nary income or capital gain depends on the na-
ture of the underlying claim. Include the follow-
ing as ordinary income.
1. Interest on any award.
2. Compensation for lost wages or lost profits
in most cases.
3. Punitive damages, in most cases. It
doesn’t matter if they relate to a physical
injury or physical sickness.
4. Amounts received in settlement of pension
rights (if you didn’t contribute to the plan).
5. Damages for:
a. Patent or copyright infringement,
b. Breach of contract, or
c. Interference with business operations.
6. Back pay and damages for emotional dis-
tress received to satisfy a claim under title
VII of the Civil Rights Act of 1964.
7. Attorney fees and costs (including contin-
gent fees) where the underlying recovery
is included in gross income.
Don’t include in your income compensatory
damages for personal physical injury or physi-
cal sickness (whether received in a lump sum or
installments).
Emotional distress. Emotional distress it-
self isn’t a physical injury or physical sickness,
but damages you receive for emotional distress
due to a physical injury or sickness are treated
as received for the physical injury or sickness.
Don’t include them in your income.
Page 94 Chapter 12 Other Income
If the emotional distress is due to a personal
injury that isn’t due to a physical injury or sick-
ness (for example, employment discrimination
or injury to reputation), you must include the
damages in your income, except for any dam-
ages that aren’t more than amounts paid for
medical care due to that emotional distress.
Emotional distress includes physical symptoms
that result from emotional distress, such as
headaches, insomnia, and stomach disorders.
Credit card insurance. In most cases, if you
receive benefits under a credit card disability or
unemployment insurance plan, the benefits are
taxable to you. These plans make the minimum
monthly payment on your credit card account if
you can’t make the payment due to injury, ill-
ness, disability, or unemployment. Report on
Form 1040, line 21, the amount of benefits you
received during the year that’s more than the
amount of the premiums you paid during the
year.
Down payment assistance. If you purchase a
home and receive assistance from a nonprofit
corporation to make the down payment, that as-
sistance isn’t included in your income. If the cor-
poration qualifies as a tax-exempt charitable or-
ganization, the assistance is treated as a gift
and is included in your basis of the house. If the
corporation doesn’t qualify, the assistance is
treated as a rebate or reduction of the purchase
price and isn’t included in your basis.
Employment agency fees. If you get a job
through an employment agency, and the fee is
paid by your employer, the fee isn’t includible in
your income if you aren’t liable for it. However, if
you pay it and your employer reimburses you
for it, it’s includible in your income.
Energy conservation subsidies. You can ex-
clude from gross income any subsidy provided,
either directly or indirectly, by public utilities for
the purchase or installation of an energy con-
servation measure for a dwelling unit.
Energy conservation measure. This in-
cludes installations or modifications that are pri-
marily designed to reduce consumption of elec-
tricity or natural gas, or improve the
management of energy demand.
Dwelling unit. This includes a house, apart-
ment, condominium, mobile home, boat, or sim-
ilar property. If a building or structure contains
both dwelling and other units, any subsidy must
be properly allocated.
Estate and trust income. An estate or trust,
unlike a partnership, may have to pay federal in-
come tax. If you’re a beneficiary of an estate or
trust, you may be taxed on your share of its in-
come distributed or required to be distributed to
you. However, there is never a double tax. Es-
tates and trusts file their returns on Form 1041,
U.S. Income Tax Return for Estates and Trusts,
and your share of the income is reported to you
on Schedule K-1 (Form 1041).
Current income required to be distrib-
uted. If you’re the beneficiary of an estate or
trust that must distribute all of its current in-
come, you must report your share of the distrib-
utable net income, whether or not you actually
received it.
Current income not required to be dis-
tributed. If you’re the beneficiary of an estate
or trust and the fiduciary has the choice of
whether to distribute all or part of the current in-
come, you must report:
All income that’s required to be distributed
to you, whether or not it’s actually distrib-
uted, plus
All other amounts actually paid or credited
to you,
up to the amount of your share of distributable
net income.
How to report. Treat each item of income
the same way that the estate or trust would treat
it. For example, if a trust's dividend income is
distributed to you, you report the distribution as
dividend income on your return. The same rule
applies to distributions of tax-exempt interest
and capital gains.
The fiduciary of the estate or trust must tell
you the type of items making up your share of
the estate or trust income and any credits
you’re allowed on your individual income tax re-
turn.
Losses. Losses of estates and trusts gener-
ally aren’t deductible by the beneficiaries.
Grantor trust. Income earned by a grantor
trust is taxable to the grantor, not the benefi-
ciary, if the grantor keeps certain control over
the trust. (The grantor is the one who transfer-
red property to the trust.) This rule applies if the
property (or income from the property) put into
the trust will or may revert (be returned) to the
grantor or the grantor's spouse.
Generally, a trust is a grantor trust if the
grantor has a reversionary interest valued (at
the date of transfer) at more than 5% of the
value of the transferred property.
Expenses paid by another. If your personal
expenses are paid for by another person, such
as a corporation, the payment may be taxable
to you depending upon your relationship with
that person and the nature of the payment. But
if the payment makes up for a loss caused by
that person, and only restores you to the posi-
tion you were in before the loss, the payment
isn’t includible in your income.
Fees for services. Include all fees for your
services in your income. Examples of these
fees are amounts you receive for services you
perform as:
A corporate director;
An executor, administrator, or personal
representative of an estate;
A manager of a trade or business you op-
erated before declaring Chapter 11 bank-
ruptcy;
A notary public; or
An election precinct official.
Nonemployee compensation. If you aren’t
an employee and the fees for your services
from a single payer in the course of the payer's
trade or business total $600 or more for the
year, the payer should send you a Form
1099-MISC. You may need to report your fees
as self-employment income. See Self-Em-
ployed Persons, in chapter 1, for a discussion of
when you’re considered self-employed.
Corporate director. Corporate director fees
are self-employment income. Report these pay-
ments on Schedule C or Schedule C-EZ (Form
1040).
Personal representatives. All personal
representatives must include in their gross in-
come fees paid to them from an estate. If you
aren’t in the trade or business of being an exec-
utor (for instance, you’re the executor of a
friend's or relative's estate), report these fees
on Form 1040, line 21. If you’re in the trade or
business of being an executor, report these
fees as self-employment income on Schedule C
or Schedule C-EZ (Form 1040). The fee isn’t in-
cludible in income if it’s waived.
Manager of trade or business for bank-
ruptcy estate. Include in your income all pay-
ments received from your bankruptcy estate for
managing or operating a trade or business that
you operated before you filed for bankruptcy.
Report this income on Form 1040, line 21.
Notary public. Report payments for these
services on Schedule C or Schedule C-EZ
(Form 1040). These payments aren’t subject to
self-employment tax. See the separate instruc-
tions for Schedule SE (Form 1040) for details.
Election precinct official. You should re-
ceive a Form W-2 showing payments for serv-
ices performed as an election official or election
worker. Report these payments on line 7 of
Form 1040 or Form 1040A or on line 1 of Form
1040EZ.
Foster care providers. Generally, payment
you receive from a state, political subdivision, or
a qualified foster care placement agency for
caring for a qualified foster individual in your
home is excluded from your income. However,
you must include in your income payment to the
extent it’s received for the care of more than 5
qualified foster individuals age 19 years or
older.
A qualified foster individual is a person who:
1. Is living in a foster family home, and
2. Was placed there by:
a. An agency of a state or one of its polit-
ical subdivisions, or
b. A qualified foster care placement
agency.
Difficulty-of-care payments. These are
payments that are designated by the payer as
compensation for providing the additional care
that’s required for physically, mentally, or emo-
tionally handicapped qualified foster individuals.
A state must determine that this compensation
is needed, and the care for which the payments
are made must be provided in the foster care
provider's home in which the qualified foster in-
dividual was placed.
Certain Medicaid waiver payments are
treated as difficulty-of-care payments when re-
ceived by an individual care provider for caring
for an eligible individual (whether related or un-
related) living in the provider's home. See No-
tice 2014-7 available at IRS.gov/irb/
2014-4_IRB/ar06.html and related questions
Chapter 12 Other Income Page 95
and answers available at IRS.gov/Individuals/
Certain-Medicaid-Waiver-Payments-May-Be-
Excludable-From-Income for more information.
You must include in your income diffi-
culty-of-care payments to the extent they’re re-
ceived for more than:
10 qualified foster individuals under age
19, or
5 qualified foster individuals age 19 or
older.
Maintaining space in home. If you’re paid
to maintain space in your home for emergency
foster care, you must include the payment in
your income.
Reporting taxable payments. If you re-
ceive payments that you must include in your
income and you’re in business as a foster care
provider, report the payments on Schedule C or
Schedule C-EZ (Form 1040). See Pub. 587,
Business Use of Your Home, to help you deter-
mine the amount you can deduct for the use of
your home.
Found property. If you find and keep property
that doesn’t belong to you that has been lost or
abandoned (treasure trove), it’s taxable to you
at its fair market value in the first year it’s your
undisputed possession.
Free tour. If you received a free tour from a
travel agency for organizing a group of tourists,
you must include its value in your income. Re-
port the fair market value of the tour on Form
1040, line 21, if you aren’t in the trade or busi-
ness of organizing tours. You can’t deduct your
expenses in serving as the voluntary leader of
the group at the group's request. If you organize
tours as a trade or business, report the tour's
value on Schedule C or Schedule C-EZ (Form
1040).
Gambling winnings. You must include your
gambling winnings in income on Form 1040,
line 21. If you itemize your deductions on
Schedule A (Form 1040), you can deduct gam-
bling losses you had during the year, but only
up to the amount of your winnings. If you’re in
the trade or business of gambling, use Sched-
ule C.
Lotteries and raffles. Winnings from lotter-
ies and raffles are gambling winnings. In addi-
tion to cash winnings, you must include in your
income the fair market value of bonds, cars,
houses, and other noncash prizes.
If you win a state lottery prize payable
in installments, see Pub. 525 for more
information.
Form W-2G. You may have received a Form
W-2G, Certain Gambling Winnings, showing
the amount of your gambling winnings and any
tax taken out of them. Include the amount from
box 1 on Form 1040, line 21. Include the
amount shown in box 4 on Form 1040, line 64,
as federal income tax withheld.
Reporting winnings and recordkeeping.
For more information on reporting gambling
winnings and recordkeeping, see Gambling
Losses Up to the Amount of Gambling Win-
nings in chapter 28.TIP
Gifts and inheritances. In most cases, prop-
erty you receive as a gift, bequest, or inheri-
tance isn’t included in your income. However, if
property you receive this way later produces in-
come such as interest, dividends, or rents, that
income is taxable to you. If property is given to
a trust and the income from it is paid, credited,
or distributed to you, that income is also taxable
to you. If the gift, bequest, or inheritance is the
income from the property, that income is taxa-
ble to you.
Inherited pension or IRA. If you inherited a
pension or an individual retirement arrangement
(IRA), you may have to include part of the in-
herited amount in your income. See Survivors
and Beneficiaries in Pub. 575, if you inherited a
pension. See What if You Inherit an IRA? in
Pubs. 590-A and 590-B, if you inherited an IRA.
Hobby losses. Losses from a hobby aren’t de-
ductible from other income. A hobby is an activ-
ity from which you don’t expect to make a profit.
See Activity not for profit, earlier.
If you collect stamps, coins, or other
items as a hobby for recreation and
pleasure, and you sell any of the items,
your gain is taxable as a capital gain. (See
chapter 16.) However, if you sell items from
your collection at a loss, you can’t deduct the
loss.
Illegal activities. Income from illegal activities,
such as money from dealing illegal drugs, must
be included in your income on Form 1040,
line 21, or on Schedule C or Schedule C-EZ
(Form 1040) if from your self-employment activ-
ity.
Indian fishing rights. If you’re a member of a
qualified Indian tribe that has fishing rights se-
cured by treaty, executive order, or an Act of
Congress as of March 17, 1988, don’t include in
your income amounts you receive from activi-
ties related to those fishing rights. The income
isn’t subject to income tax, self-employment
tax, or employment taxes.
Interest on frozen deposits. In general, you
exclude from your income the amount of inter-
est earned on a frozen deposit. See Interest in-
come on frozen deposits in chapter 7.
Interest on qualified savings bonds. You
may be able to exclude from income the interest
from qualified U.S. savings bonds you redeem if
you pay qualified higher education expenses in
the same year. For more information on this ex-
clusion, see Education Savings Bond Program
under U.S. Savings Bonds in chapter 7.
Job interview expenses. If a prospective em-
ployer asks you to appear for an interview and
either pays you an allowance or reimburses you
for your transportation and other travel expen-
ses, the amount you receive is generally not
taxable. You include in income only the amount
you receive that’s more than your actual expen-
ses.
Jury duty. Jury duty pay you receive must be
included in your income on Form 1040, line 21.
If you gave any of your jury duty pay to your em-
ployer because your employer continued to pay
you while you served jury duty, include the
amount you gave your employer as an incomeCAUTION
!
adjustment on Form 1040, line 36, and see the
instructions there.
Kickbacks. You must include kickbacks, side
commissions, push money, or similar payments
you receive in your income on Form 1040,
line 21, or on Schedule C or Schedule C-EZ
(Form 1040), if from your self-employment ac-
tivity.
Example. You sell cars and help arrange
car insurance for buyers. Insurance brokers pay
back part of their commissions to you for refer-
ring customers to them. You must include the
kickbacks in your income.
Medical savings accounts (Archer MSAs
and Medicare Advantage MSAs). In most ca-
ses, you don’t include in income amounts you
withdraw from your Archer MSA or Medicare
Advantage MSA if you use the money to pay for
qualified medical expenses. Generally, qualified
medical expenses are those you can deduct on
Schedule A (Form 1040), Itemized Deductions.
For more information about qualified medical
expenses, see chapter 21. For more informa-
tion about Archer MSAs or Medicare Advantage
MSAs, see Pub. 969, Health Savings Accounts
and Other Tax-Favored Health Plans.
Prizes and awards. If you win a prize in a
lucky number drawing, television or radio quiz
program, beauty contest, or other event, you
must include it in your income. For example, if
you win a $50 prize in a photography contest,
you must report this income on Form 1040,
line 21. If you refuse to accept a prize, don’t in-
clude its value in your income.
Prizes and awards in goods or services
must be included in your income at their fair
market value.
Employee awards or bonuses. Cash
awards or bonuses given to you by your em-
ployer for good work or suggestions generally
must be included in your income as wages.
However, certain noncash employee achieve-
ment awards can be excluded from income.
See Bonuses and awards in chapter 5.
Pulitzer, Nobel, and similar prizes. If you
were awarded a prize in recognition of accom-
plishments in religious, charitable, scientific, ar-
tistic, educational, literary, or civic fields, you
generally must include the value of the prize in
your income. However, you don’t include this
prize in your income if you meet all of the follow-
ing requirements.
You were selected without any action on
your part to enter the contest or proceed-
ing.
You aren’t required to perform substantial
future services as a condition to receiving
the prize or award.
The prize or award is transferred by the
payer directly to a governmental unit or
tax-exempt charitable organization as des-
ignated by you.
See Pub. 525 for more information about the
conditions that apply to the transfer.
Qualified tuition programs (QTPs). A quali-
fied tuition program (also known as a 529 pro-
gram) is a program set up to allow you to either
prepay or contribute to an account established
Page 96 Chapter 12 Other Income
for paying a student's qualified higher education
expenses at an eligible educational institution.
A program can be established and maintained
by a state, an agency or instrumentality of a
state, or an eligible educational institution.
The part of a distribution representing the
amount paid or contributed to a QTP isn’t inclu-
ded in income. This is a return of the investment
in the program.
In most cases, the beneficiary doesn’t in-
clude in income any earnings distributed from a
QTP if the total distribution is less than or equal
to adjusted qualified higher education expen-
ses. See Pub. 970 for more information.
Railroad retirement annuities. The following
types of payments are treated as pension or an-
nuity income and are taxable under the rules
explained in Pub. 575, Pension and Annuity In-
come.
Tier 1 railroad retirement benefits that are
more than the social security equivalent
benefit.
Tier 2 benefits.
Vested dual benefits.
Rewards. If you receive a reward for providing
information, include it in your income.
Sale of home. You may be able to exclude
from income all or part of any gain from the sale
or exchange of your main home. See chap-
ter 15.
Sale of personal items. If you sold an item
you owned for personal use, such as a car, re-
frigerator, furniture, stereo, jewelry, or silver-
ware, your gain is taxable as a capital gain. Re-
port it as explained in Instructions for
Schedule D (Form 1040). You can’t deduct a
loss.
However, if you sold an item you held for in-
vestment, such as gold or silver bullion, coins,
or gems, any gain is taxable as a capital gain
and any loss is deductible as a capital loss.
Example. You sold a painting on an online
auction website for $100. You bought the paint-
ing for $20 at a garage sale years ago. Report
your gain as a capital gain as explained in In-
structions for Schedule D (Form 1040).
Scholarships and fellowships. A candidate
for a degree can exclude amounts received as
a qualified scholarship or fellowship. A qualified
scholarship or fellowship is any amount you re-
ceive that’s for:
Tuition and fees to enroll at or attend an
educational institution; or
Fees, books, supplies, and equipment re-
quired for courses at the educational insti-
tution.
Amounts used for room and board don’t qualify
for the exclusion. See Pub. 970 for more infor-
mation on qualified scholarships and fellowship
grants.
Payment for services. In most cases, you
must include in income the part of any scholar-
ship or fellowship that represents payment for
past, present, or future teaching, research, or
other services. This applies even if all candi-
dates for a degree must perform the services to
receive the degree.
For information about the rules that apply to
a tax-free qualified tuition reduction provided to
employees and their families by an educational
institution, see Pub. 970.
VA payments. Allowances paid by the De-
partment of Veterans Affairs aren’t included in
your income. These allowances aren’t consid-
ered scholarship or fellowship grants.
Prizes. Scholarship prizes won in a contest
aren’t scholarships or fellowships if you don’t
have to use the prizes for educational purpo-
ses. You must include these amounts in your in-
come on Form 1040, line 21, whether or not you
use the amounts for educational purposes.
Stolen property. If you steal property, you
must report its fair market value in your income
in the year you steal it unless in the same year,
you return it to its rightful owner.
Transporting school children. Don’t include
in your income a school board mileage allow-
ance for taking children to and from school if
you aren’t in the business of taking children to
school. You can’t deduct expenses for provid-
ing this transportation.
Union benefits and dues. Amounts deducted
from your pay for union dues, assessments,
contributions, or other payments to a union
can’t be excluded from your income.
You may be able to deduct some of these
payments as a miscellaneous deduction sub-
ject to the 2%-of-AGI limit if they’re related to
your job and if you itemize deductions on
Schedule A (Form 1040). For more information,
see Union Dues and Expenses in chapter 28.
Strike and lockout benefits. Benefits paid
to you by a union as strike or lockout benefits,
including both cash and the fair market value of
other property, are usually included in your in-
come as compensation. You can exclude these
benefits from your income only when the facts
clearly show that the union intended them as
gifts to you.
Utility rebates. If you’re a customer of an elec-
tric utility company and you participate in the
utility's energy conservation program, you may
receive on your monthly electric bill either:
A reduction in the purchase price of elec-
tricity furnished to you (rate reduction), or
A nonrefundable credit against the pur-
chase price of the electricity.
The amount of the rate reduction or nonrefund-
able credit isn’t included in your income.
Chapter 12 Other Income Page 97
Part Three.
Gains and
Losses
The four chapters in this part discuss investment gains and losses,
including how to figure your basis in property. A gain from selling or trading
stocks, bonds, or other investment property generally is taxable. A loss
may or may not be deductible. These chapters also discuss gains from
selling property you personally use — including the special rules for selling
your home. Nonbusiness casualty and theft losses are discussed in
chapter 25 in Part Five.
13.
Basis of
Property
Introduction
This chapter discusses how to figure your basis
in property. It is divided into the following sec-
tions.
Cost basis.
Adjusted basis.
Basis other than cost.
Your basis is the amount of your investment
in property for tax purposes. Use the basis to
figure the gain or loss on the sale, exchange, or
other disposition of property. Also use it to fig-
ure deductions for depreciation, amortization,
depletion, and casualty losses.
If you use property for both business or for
production of income purposes, and for per-
sonal purposes, you must allocate the basis
based on the use. Only the basis allocated to
the business or the production of income part of
the property can be depreciated.
Your original basis in property is adjusted
(increased or decreased) by certain events. For
example, if you make improvements to the
property, increase your basis. If you take de-
ductions for depreciation or casualty losses, or
claim certain credits, reduce your basis.
Keep accurate records of all items that
affect the basis of your property. For
more information on keeping records,
see chapter 1.
Useful Items
You may want to see:
Publication
Employer's Tax Guide to Fringe
Benefits
Taxable and Nontaxable Income
Business Expenses
Installment SalesRECORDS
15B
Sales and Other Dispositions of
Assets
Investment Income and Expenses
Basis of Assets
How To Depreciate Property
Cost Basis
The basis of property you buy is usually its cost.
The cost is the amount you pay in cash, debt
obligations, other property, or services. Your
cost also includes amounts you pay for the fol-
lowing items:
Sales tax,
Freight,
Installation and testing,
Excise taxes,
Legal and accounting fees (when they
must be capitalized),
Revenue stamps,
Recording fees, and
Real estate taxes (if you assume liability
for the seller).
In addition, the basis of real estate and busi-
ness assets may include other items.
Loans with low or no interest. If you buy
property on a time-payment plan that charges
little or no interest, the basis of your property is
your stated purchase price minus any amount
considered to be unstated interest. You gener-
ally have unstated interest if your interest rate is
less than the applicable federal rate.
For more information, see Unstated Interest
and Original Issue Discount (OID) in Pub. 537.
Real Property
Real property, also called real estate, is land
and generally anything built on, growing on, or
attached to land.
If you buy real property, certain fees and
other expenses you pay are part of your cost
basis in the property.
Lump sum purchase. If you buy buildings and
the land on which they stand for a lump sum, al-
locate the cost basis between the land and the
buildings. Allocate the cost basis according to
the respective fair market values (FMVs) of the
land and buildings at the time of purchase. Fig-
ure the basis of each asset by multiplying the
lump sum by a fraction. The numerator is the
FMV of that asset and the denominator is the
FMV of the whole property at the time of pur-
chase.
If you are not certain of the FMVs of the
land and buildings, you can allocate
the basis according to their assessed
values for real estate tax purposes.
Fair market value (FMV). FMV is the price
at which the property would change hands be-
tween a willing buyer and a willing seller, neither
having to buy or sell, and both having reasona-
ble knowledge of all the necessary facts. Sales
of similar property on or about the same date
may be helpful in figuring the FMV of the prop-
erty.
Assumption of mortgage. If you buy property
and assume (or buy the property subject to) an
existing mortgage on the property, your basis
includes the amount you pay for the property
plus the amount to be paid on the mortgage.
Settlement costs. Your basis includes the set-
tlement fees and closing costs you paid for buy-
ing the property. (A fee for buying property is a
cost that must be paid even if you buy the prop-
erty for cash.) Do not include fees and costs for
getting a loan on the property in your basis.
The following are some of the settlement
fees or closing costs you can include in the ba-
sis of your property.
Abstract fees (abstract of title fees).
Charges for installing utility services.
Legal fees (including fees for the title
search and preparation of the sales con-
tract and deed).
Recording fees.
Survey fees.
Transfer taxes.
Owner's title insurance.
Any amounts the seller owes that you
agree to pay, such as back taxes or inter-
est, recording or mortgage fees, charges
for improvements or repairs, and sales
commissions.
Settlement costs do not include amounts
placed in escrow for the future payment of items
such as taxes and insurance.
The following are some of the settlement
fees and closing costs you cannot include in the
basis of property.
Casualty insurance premiums.TIP
Page 98 Chapter 13 Basis of Property
Rent for occupancy of the property before
closing.
Charges for utilities or other services rela-
ted to occupancy of the property before
closing.
Charges connected with getting a loan,
such as points (discount points, loan origi-
nation fees), mortgage insurance premi-
ums, loan assumption fees, cost of a credit
report, and fees for an appraisal required
by a lender.
Fees for refinancing a mortgage.
Real estate taxes. If you pay real estate taxes
the seller owed on real property you bought,
and the seller did not reimburse you, treat those
taxes as part of your basis. You cannot deduct
the taxes as an expense.
If you reimburse the seller for taxes the
seller paid for you, you can usually deduct that
amount as an expense in the year of purchase.
Do not include the amount of real estate taxes
you deducted as an expense in the basis of
your property. If you did not reimburse the
seller, you must reduce your basis by the
amount of those taxes.
Points. If you pay points to get a loan (includ-
ing a mortgage, second mortgage, line of credit,
or a home equity loan), do not add the points to
the basis of the related property. Generally, you
deduct the points over the term of the loan. For
more information on how to deduct points, see
chapter 23.
Points on home mortgage. Special rules
may apply to points you and the seller pay
when you get a mortgage to buy your main
home. If certain requirements are met, you can
deduct the points in full for the year in which
they are paid. Reduce the basis of your home
by any seller-paid points.
Adjusted Basis
Before figuring gain or loss on a sale, ex-
change, or other disposition of property or figur-
ing allowable depreciation, depletion, or amorti-
zation, you must usually make certain
adjustments (increases and decreases) to the
cost basis or basis other than cost (discussed
later) of the property. The result is the adjusted
basis.
Increases to Basis
Increase the basis of any property by all items
properly added to a capital account. Examples
of items that increase basis are shown in Ta-
ble 13-1. These include the items discussed be-
low.
Improvements. Add to your basis in property
the cost of improvements having a useful life of
more than 1 year, that increase the value of the
property, lengthen its life, or adapt it to a differ-
ent use. For example, improvements include
putting a recreation room in your unfinished
basement, adding another bathroom or bed-
room, putting up a fence, putting in new plumb-
ing or wiring, installing a new roof, or paving
your driveway.
Assessments for local improvements.
Add to the basis of property assessments for
improvements such as streets and sidewalks if
they increase the value of the property as-
sessed. Do not deduct them as taxes. How-
ever, you can deduct as taxes assessments for
maintenance or repairs, or for meeting interest
charges related to the improvements.
Example. Your city changes the street in
front of your store into an enclosed pedestrian
mall and assesses you and other affected prop-
erty owners for the cost of the conversion. Add
the assessment to your property's basis. In this
example, the assessment is a depreciable as-
set.
Decreases to Basis
Decrease the basis of any property by all items
that represent a return of capital for the period
during which you held the property. Examples
of items that decrease basis are shown in Ta-
ble 13-1. These include the items discussed be-
low.
Casualty and theft losses. If you have a
casualty or theft loss, decrease the basis in
your property by any insurance proceeds or
other reimbursement and by any deductible
loss not covered by insurance.
You must increase your basis in the property
by the amount you spend on repairs that restore
the property to its pre-casualty condition.
For more information on casualty and theft
losses, see chapter 25.
Depreciation and section 179 deduction.
Decrease the basis of your qualifying business
property by any section 179 deduction you take
and the depreciation you deducted, or could
have deducted (including any special deprecia-
tion allowance), on your tax returns under the
method of depreciation you selected.
For more information about depreciation
and the section 179 deduction, see Pub. 946
and the Instructions for Form 4562.
Example. You owned a duplex used as
rental property that cost you $40,000, of which
$35,000 was allocated to the building and
$5,000 to the land. You added an improvement
to the duplex that cost $10,000. In February last
year, the duplex was damaged by fire. Up to
that time, you had been allowed depreciation of
$23,000. You sold some salvaged material for
$1,300 and collected $19,700 from your insur-
ance company. You deducted a casualty loss of
$1,000 on your income tax return for last year.
You spent $19,000 of the insurance proceeds
for restoration of the duplex, which was comple-
ted this year. You must use the duplex's adjus-
ted basis after the restoration to determine de-
preciation for the rest of the property's recovery
period. Figure the adjusted basis of the duplex
as follows:
Table 13-1. Examples of Adjustments to Basis
Increases to Basis Decreases to Basis
• Capital improvements: • Exclusion from income of
Putting an addition on your home subsidies for energy conservation
Replacing an entire roof measures
Paving your driveway
Installing central air conditioning • Casualty or theft loss deductions
Rewiring your home and insurance reimbursements
• Assessments for local improvements:
Water connections
Extending utility service lines to the
property
• Postponed gain from the sale of a home
Sidewalks
Roads
• Alternative fuel vehicle refueling
property credit (Form 8911)
• Residential energy credit (Form 5695)
• Casualty losses: • Depreciation and section 179 deduction
Restoring damaged property
• Nontaxable corporate distributions
• Legal fees:
Cost of defending and perfecting a title • Certain canceled debt excluded from
Fees for getting a reduction of an
assessment
income
• Zoning costs • Easements
• Adoption tax benefits
Chapter 13 Basis of Property Page 99
Original cost of duplex . . . . . . . . . . . $35,000
Addition to duplex . . . . . . . . . . . . . 10,000
Total cost of duplex . . . . . . . . . . . . $45,000
Minus: Depreciation . . . . . . . . . . 23,000
Adjusted basis before casualty . . . . . . . $22,000
Minus: Insurance
proceeds . . . . . . $19,700
Deducted casualty
loss . . . . . . . . . 1,000
Salvage
proceeds . . . . . . 1,300 22,000
Adjusted basis after casualty . . . . . . . . $-0-
Add: Cost of restoring duplex . . . . . . . . 19,000
Adjusted basis after restoration . . . . . $19,000
Note. Your basis in the land is its original
cost of $5,000.
Easements. The amount you receive for grant-
ing an easement is generally considered to be
proceeds from the sale of an interest in real
property. It reduces the basis of the affected
part of the property. If the amount received is
more than the basis of the part of the property
affected by the easement, reduce your basis in
that part to zero and treat the excess as a rec-
ognized gain.
If the gain is on a capital asset, see chap-
ter 16 for information about how to report it. If
the gain is on property used in a trade or busi-
ness, see Pub. 544 for information about how to
report it.
Exclusion of subsidies for energy conser
vation measures. You can exclude from gross
income any subsidy you received from a public
utility company for the purchase or installation
of an energy conservation measure for a dwell-
ing unit. Reduce the basis of the property for
which you received the subsidy by the excluded
amount. For more information about this sub-
sidy, see chapter 12.
Postponed gain from sale of home. If you
postponed gain from the sale of your main
home under rules in effect before May 7, 1997,
you must reduce the basis of the home you ac-
quired as a replacement by the amount of the
postponed gain. For more information on the
rules for the sale of a home, see chapter 15.
Basis Other Than Cost
There are many times when you cannot use
cost as basis. In these cases, the fair market
value or the adjusted basis of the property can
be used. Fair market value (FMV) and adjusted
basis were discussed earlier.
Property Received
for Services
If you receive property for your services, include
the FMV of the property in income. The amount
you include in income becomes your basis. If
the services were performed for a price agreed
on beforehand, it will be accepted as the FMV
of the property if there is no evidence to the
contrary.
Restricted property. If you receive property
for your services and the property is subject to
certain restrictions, your basis in the property is
its FMV when it becomes substantially vested.
However, this rule does not apply if you make
an election to include in income the FMV of the
property at the time it is transferred to you, less
any amount you paid for it. Property is substan-
tially vested when it is transferable or when it is
not subject to a substantial risk of forfeiture (you
do not have a good chance of losing it). For
more information, see Restricted Property in
Pub. 525.
Bargain purchases. A bargain purchase is
a purchase of an item for less than its FMV. If,
as compensation for services, you buy goods or
other property at less than FMV, include the dif-
ference between the purchase price and the
property's FMV in your income. Your basis in
the property is its FMV (your purchase price
plus the amount you include in income).
If the difference between your purchase
price and the FMV is a qualified employee dis-
count, do not include the difference in income.
However, your basis in the property is still its
FMV. See Employee Discounts in Pub. 15-B.
Taxable Exchanges
A taxable exchange is one in which the gain is
taxable or the loss is deductible. A taxable gain
or deductible loss also is known as a recog-
nized gain or loss. If you receive property in ex-
change for other property in a taxable ex-
change, the basis of the property you receive is
usually its FMV at the time of the exchange.
Nontaxable Exchanges
A nontaxable exchange is an exchange in
which you are not taxed on any gain and you
cannot deduct any loss. If you receive property
in a nontaxable exchange, its basis is generally
the same as the basis of the property you trans-
ferred. See Nontaxable Trades in chapter 14.
Involuntary Conversions
If you receive replacement property as a result
of an involuntary conversion, such as a casu-
alty, theft, or condemnation, figure the basis of
the replacement property using the basis of the
converted property.
Similar or related property. If you receive re-
placement property similar or related in service
or use to the converted property, the replace-
ment property's basis is the same as the con-
verted property's basis on the date of the con-
version, with the following adjustments.
1. Decrease the basis by the following.
a. Any loss you recognize on the invol-
untary conversion.
b. Any money you receive that you do
not spend on similar property.
2. Increase the basis by the following.
a. Any gain you recognize on the invol-
untary conversion.
b. Any cost of acquiring the replacement
property.
Money or property not similar or related. If
you receive money or property not similar or re-
lated in service or use to the converted prop-
erty, and you buy replacement property similar
or related in service or use to the converted
property, the basis of the replacement property
is its cost decreased by the gain not recognized
on the conversion.
Example. The state condemned your prop-
erty. The adjusted basis of the property was
$26,000 and the state paid you $31,000 for it.
You realized a gain of $5,000 ($31,000 −
$26,000). You bought replacement property
similar in use to the converted property for
$29,000. You recognize a gain of $2,000
($31,000 − $29,000), the unspent part of the
payment from the state. Your unrecognized
gain is $3,000, the difference between the
$5,000 realized gain and the $2,000 recognized
gain. The basis of the replacement property is
figured as follows:
Cost of replacement property . . . . . . . . $29,000
Minus: Gain not recognized . . . . . . . . . 3,000
Basis of replacement property. . . . . . . $26,000
Allocating the basis. If you buy more than
one piece of replacement property, allocate
your basis among the properties based on their
respective costs.
Basis for depreciation. Special rules apply in
determining and depreciating the basis of
MACRS property acquired in an involuntary
conversion. For information, see What Is the
Basis of Your Depreciable Property? in chap-
ter 1 of Pub. 946.
LikeKind Exchanges
The exchange of property for the same kind of
property is the most common type of nontaxa-
ble exchange. To qualify as a like-kind ex-
change, the property traded and the property
received must be both of the following.
Qualifying property.
Like-kind property.
The basis of the property you receive is gen-
erally the same as the adjusted basis of the
property you gave up. If you trade property in a
like-kind exchange and also pay money, the ba-
sis of the property received is the adjusted ba-
sis of the property you gave up increased by the
money you paid.
Qualifying property. In a like-kind exchange,
you must hold for investment or for productive
use in your trade or business both the property
you give up and the property you receive.
Likekind property. There must be an ex-
change of like-kind property. Like-kind proper-
ties are properties of the same nature or char-
acter, even if they differ in grade or quality. The
exchange of real estate for real estate and per-
sonal property for similar personal property are
exchanges of like-kind property.
Example. You trade in an old truck used in
your business with an adjusted basis of $1,700
for a new one costing $6,800. The dealer allows
you $2,000 on the old truck, and you pay
$4,800. This is a like-kind exchange. The basis
of the new truck is $6,500 (the adjusted basis of
the old one, $1,700, plus the amount you paid,
$4,800).
Page 100 Chapter 13 Basis of Property
If you sell your old truck to a third party for
$2,000 instead of trading it in and then buy a
new one from the dealer, you have a taxable
gain of $300 on the sale (the $2,000 sale price
minus the $1,700 adjusted basis). The basis of
the new truck is the price you pay the dealer.
Partially nontaxable exchanges. A partially
nontaxable exchange is an exchange in which
you receive unlike property or money in addition
to like-kind property. The basis of the property
you receive is the same as the adjusted basis of
the property you gave up, with the following ad-
justments.
1. Decrease the basis by the following
amounts.
a. Any money you receive.
b. Any loss you recognize on the ex-
change.
2. Increase the basis by the following
amounts.
a. Any additional costs you incur.
b. Any gain you recognize on the ex-
change.
If the other party to the exchange assumes your
liabilities, treat the debt assumption as money
you received in the exchange.
Allocation of basis. If you receive like-kind
and unlike properties in the exchange, allocate
the basis first to the unlike property, other than
money, up to its FMV on the date of the ex-
change. The rest is the basis of the like-kind
property.
More information. See Like-Kind Exchanges
in chapter 1 of Pub. 544 for more information.
Basis for depreciation. Special rules apply in
determining and depreciating the basis of
MACRS property acquired in a like-kind ex-
change. For information, see What Is the Basis
of Your Depreciable Property? in chapter 1 of
Pub. 946.
Property Transferred
From a Spouse
The basis of property transferred to you or
transferred in trust for your benefit by your
spouse is the same as your spouse's adjusted
basis. The same rule applies to a transfer by
your former spouse that is incident to divorce.
However, for property transferred in trust, adjust
your basis for any gain recognized by your
spouse or former spouse if the liabilities as-
sumed, plus the liabilities to which the property
is subject, are more than the adjusted basis of
the property transferred.
If the property transferred to you is a series
E, series EE, or series I U.S. savings bond, the
transferor must include in income the interest
accrued to the date of transfer. Your basis in the
bond immediately after the transfer is equal to
the transferor's basis increased by the interest
income includible in the transferor's income. For
more information on these bonds, see chap-
ter 7.
At the time of the transfer, the transferor
must give you the records needed to determine
the adjusted basis and holding period of the
property as of the date of the transfer.
For more information about the transfer of
property from a spouse, see chapter 14.
Property Received
as a Gift
To figure the basis of property you receive as a
gift, you must know its adjusted basis to the do-
nor just before it was given to you, its FMV at
the time it was given to you, and any gift tax
paid on it.
FMV less than donor's adjusted basis. If the
FMV of the property at the time of the gift is less
than the donor's adjusted basis, your basis de-
pends on whether you have a gain or a loss
when you dispose of the property. Your basis
for figuring gain is the same as the donor's ad-
justed basis plus or minus any required adjust-
ments to basis while you held the property.
Your basis for figuring loss is its FMV when you
received the gift plus or minus any required ad-
justments to basis while you held the property.
See Adjusted Basis, earlier.
Example. You received an acre of land as
a gift. At the time of the gift, the land had an
FMV of $8,000. The donor's adjusted basis was
$10,000. After you received the property, no
events occurred to increase or decrease your
basis. If you later sell the property for $12,000,
you will have a $2,000 gain because you must
use the donor's adjusted basis at the time of the
gift ($10,000) as your basis to figure gain. If you
sell the property for $7,000, you will have a
$1,000 loss because you must use the FMV at
the time of the gift ($8,000) as your basis to fig-
ure loss.
If the sales price is between $8,000 and
$10,000, you have neither gain nor loss.
Business property. If you hold the gift as
business property, your basis for figuring any
depreciation, depletion, or amortization deduc-
tions is the same as the donor's adjusted basis
plus or minus any required adjustments to basis
while you hold the property.
FMV equal to or greater than donor's adjus
ted basis. If the FMV of the property is equal
to or greater than the donor's adjusted basis,
your basis is the donor's adjusted basis at the
time you received the gift. Increase your basis
by all or part of any gift tax paid, depending on
the date of the gift, explained later.
Also, for figuring gain or loss from a sale or
other disposition or for figuring depreciation, de-
pletion, or amortization deductions on business
property, you must increase or decrease your
basis (the donor's adjusted basis) by any re-
quired adjustments to basis while you held the
property. See Adjusted Basis, earlier.
If you received a gift during the tax year, in-
crease your basis in the gift (the donor's adjus-
ted basis) by the part of the gift tax paid on it
due to the net increase in value of the gift. Fig-
ure the increase by multiplying the gift tax paid
by a fraction. The numerator of the fraction is
the net increase in value of the gift and the de-
nominator is the amount of the gift.
The net increase in value of the gift is the
FMV of the gift minus the donor's adjusted ba-
sis. The amount of the gift is its value for gift tax
purposes after reduction by any annual exclu-
sion and marital or charitable deduction that ap-
plies to the gift.
Example. In 2016, you received a gift of
property from your mother that had an FMV of
$50,000. Her adjusted basis was $20,000. The
amount of the gift for gift tax purposes was
$36,000 ($50,000 minus the $14,000 annual
exclusion). She paid a gift tax of $7,320 on the
property. Your basis is $26,076, figured as fol-
lows:
Fair market value . . . . . . . . . . . . . . $50,000
Minus: Adjusted basis . . . . . . . . . . . . −20,000
Net increase in value . . . . . . . . . . . . $30,000
Gift tax paid . . . . . . . . . . . . . . . . . $7,320
Multiplied by ($30,000 ÷ $36,000) . . . . . . × .83
Gift tax due to net increase in value . . . . . $6,076
Adjusted basis of property to your
mother . . . . . . . . . . . . . . . . . . . +20,000
Your basis in the property . . . . . . . . . $26,076
Inherited Property
Your basis in property you inherited from a de-
cedent is generally one of the following:
The FMV of the property at the date of the
decedent's death.
The FMV on the alternate valuation date if
the personal representative for the estate
elects to use alternate valuation.
The value under the special-use valuation
method for real property used in farming or
a closely held business if elected for estate
tax purposes.
The decedent's adjusted basis in land to
the extent of the value excluded from the
decedent's taxable estate as a qualified
conservation easement.
If a federal estate tax return does not have
to be filed, your basis in the inherited property is
its appraised value at the date of death for state
inheritance or transmission taxes.
For more information, see the instructions to
Form 706, United States Estate (and Genera-
tion-Skipping Transfer) Tax Return.
Community property. In community property
states (Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington, and
Wisconsin), married individuals are each usu-
ally considered to own half the community prop-
erty. When either spouse dies, the total value of
the community property, even the part belong-
ing to the surviving spouse, generally becomes
the basis of the entire property. For this rule to
apply, at least half the value of the community
property interest must be includible in the dece-
dent's gross estate, whether or not the estate
must file a return.
Example. You and your spouse owned
community property that had a basis of
$80,000. When your spouse died, half the FMV
of the community interest was includible in your
Chapter 13 Basis of Property Page 101
spouse's estate. The FMV of the community in-
terest was $100,000. The basis of your half of
the property after the death of your spouse is
$50,000 (half of the $100,000 FMV). The basis
of the other half to your spouse's heirs is also
$50,000.
For more information about community
property, see Pub. 555, Community Property.
Property Changed From
Personal to Business or
Rental Use
If you hold property for personal use and then
change it to business use or use it to produce
rent, you can begin to depreciate the property
at the time of the change. To do so, you must
figure its basis for depreciation at the time of the
change. An example of changing property held
for personal use to business or rental use would
be renting out your former personal residence.
Basis for depreciation. The basis for depreci-
ation is the lesser of the following amounts.
The FMV of the property on the date of the
change.
Your adjusted basis on the date of the
change.
Example. Several years ago, you paid
$160,000 to have your house built on a lot that
cost $25,000. You paid $20,000 for permanent
improvements to the house and claimed a
$2,000 casualty loss deduction for damage to
the house before changing the property to
rental use last year. Because land is not depre-
ciable, you include only the cost of the house
when figuring the basis for depreciation.
Your adjusted basis in the house when you
changed its use to rental property was
$178,000 ($160,000 + $20,000 − $2,000). On
the same date, your property had an FMV of
$180,000, of which $15,000 was for the land
and $165,000 was for the house. The basis for
figuring depreciation on the house is its FMV on
the date of the change ($165,000) because it is
less than your adjusted basis ($178,000).
Sale of property. If you later sell or dispose of
property changed to business or rental use, the
basis you use will depend on whether you are
figuring gain or loss.
Gain. The basis for figuring a gain is your
adjusted basis in the property when you sell the
property.
Example. Assume the same facts as in the
previous example except that you sell the prop-
erty at a gain after being allowed depreciation
deductions of $37,500. Your adjusted basis for
figuring gain is $165,500 ($178,000 + $25,000
(land) − $37,500).
Loss. Figure the basis for a loss starting with
the smaller of your adjusted basis or the FMV of
the property at the time of the change to busi-
ness or rental use. Then make adjustments (in-
creases and decreases) for the period after the
change in the property's use, as discussed ear-
lier under Adjusted Basis.
Example. Assume the same facts as in the
previous example, except that you sell the prop-
erty at a loss after being allowed depreciation
deductions of $37,500. In this case, you would
start with the FMV on the date of the change to
rental use ($180,000), because it is less than
the adjusted basis of $203,000 ($178,000 +
$25,000 (land)) on that date. Reduce that
amount ($180,000) by the depreciation deduc-
tions ($37,500). The basis for loss is $142,500
($180,000 − $37,500).
Stocks and Bonds
The basis of stocks or bonds you buy generally
is the purchase price plus any costs of pur-
chase, such as commissions and recording or
transfer fees. If you get stocks or bonds other
than by purchase, your basis is usually deter-
mined by the FMV or the previous owner's ad-
justed basis, as discussed earlier.
You must adjust the basis of stocks for cer-
tain events that occur after purchase. For exam-
ple, if you receive additional stock from nontax-
able stock dividends or stock splits, reduce your
basis for each share of stock by dividing the ad-
justed basis of the old stock by the number of
shares of old and new stock. This rule applies
only when the additional stock received is iden-
tical to the stock held. Also reduce your basis
when you receive nontaxable distributions. The
nontaxable distributions are a return of capital.
Example. In 2014 you bought 100 shares
of XYZ stock for $1,000 or $10 a share. In 2015
you bought 100 shares of XYZ stock for $1,600
or $16 a share. In 2016 XYZ declared a 2-for-1
stock split. You now have 200 shares of stock
with a basis of $5 a share and 200 shares with a
basis of $8 a share.
Other basis. There are other ways to figure
the basis of stocks or bonds depending on how
you acquired them. For detailed information,
see Stocks and Bonds under Basis of Invest-
ment Property in chapter 4 of Pub. 550.
Identifying stocks or bonds sold. If you can
adequately identify the shares of stock or the
bonds you sold, their basis is the cost or other
basis of the particular shares of stocks or
bonds. If you buy and sell securities at various
times in varying quantities and you cannot ade-
quately identify the shares you sell, the basis of
the securities you sell is the basis of the securi-
ties you acquired first. For more information
about identifying securities you sell, see Stocks
and Bonds under Basis of Investment Property
in chapter 4 of Pub. 550.
Mutual fund shares. If you sell mutual fund
shares you acquired at various times and prices
and left on deposit in an account kept by a cus-
todian or agent, you can elect to use an aver-
age basis. For more information, see Pub. 550.
Bond premium. If you buy a taxable bond at a
premium and elect to amortize the premium, re-
duce the basis of the bond by the amortized
premium you deduct each year. See Bond Pre-
mium Amortization in chapter 3 of Pub. 550 for
more information. Although you cannot deduct
the premium on a tax-exempt bond, you must
amortize the premium each year and reduce
your basis in the bond by the amortized
amount.
Original issue discount (OID) on debt in
struments. You must increase your basis in an
OID debt instrument by the OID you include in
income for that instrument. See Original Issue
Discount (OID) in chapter 7 and Pub. 1212,
Guide To Original Issue Discount (OID) Instru-
ments.
Tax-exempt obligations. OID on tax-ex-
empt obligations is generally not taxable. How-
ever, when you dispose of a tax-exempt obliga-
tion issued after September 3, 1982, and
acquired after March 1, 1984, you must accrue
OID on the obligation to determine its adjusted
basis. The accrued OID is added to the basis of
the obligation to determine your gain or loss.
See chapter 4 of Pub. 550.
14.
Sale of Property
Reminder
Foreign income. If you are a U.S. citizen who
sells property located outside the United States,
you must report all gains and losses from the
sale of that property on your tax return unless it
is exempt by U.S. law. This is true whether you
reside inside or outside the United States and
whether or not you receive a Form 1099 from
the payer.
Introduction
This chapter discusses the tax consequences
of selling or trading investment property. It ex-
plains the following.
What a sale or trade is.
Figuring gain or loss.
Nontaxable trades.
Related party transactions.
Capital gains or losses.
Capital assets and noncapital assets.
Holding period.
Rollover of gain from publicly traded secur-
ities.
Other property transactions. Certain trans-
fers of property aren’t discussed here. They are
discussed in other IRS publications. These in-
clude the following.
Sales of a main home, covered in chap-
ter 15.
Installment sales, covered in Pub. 537.
Transactions involving business property,
covered in Pub. 544.
Page 102 Chapter 14 Sale of Property
Dispositions of an interest in a passive ac-
tivity, covered in Pub. 925.
Pub. 550, provides a more detailed discus-
sion about sales and trades of investment prop-
erty. Pub. 550 includes information about the
rules covering nonbusiness bad debts, strad-
dles, section 1256 contracts, puts and calls,
commodity futures, short sales, and wash
sales. It also discusses investment-related ex-
penses.
Useful Items
You may want to see:
Publication
Investment Income and Expenses
Form (and Instructions)
Capital Gains
and Losses
Sales and Other Dispositions of
Capital Assets
Like-Kind Exchanges
Sales and Trades
If you sold property such as stocks, bonds, or
certain commodities through a broker during the
year, you should receive from the broker, a
Form 1099-B. You should receive a Form
1099-B for 2016 by February 15, 2017. It will
show the gross proceeds from the sale. It may
also show your basis. The IRS will also get a
copy of Form 1099-B from the broker.
Use Form 1099-B received from your broker
to complete Form 8949 and/or Schedule D
(Form 1040).
What Is a Sale or Trade?
This section explains what is a sale or trade. It
also explains certain transactions and events
that are treated as sales or trades.
A sale is generally a transfer of property for
money or a mortgage, note, or other promise to
pay money.
A trade is a transfer of property for other
property or services and may be taxed in the
same way as a sale.
Sale and purchase. Ordinarily, a transaction
isn’t a trade when you voluntarily sell property
for cash and immediately buy similar property to
replace it. The sale and purchase are two sepa-
rate transactions. But see Like-kind exchanges
under Nontaxable Trades, later.
Redemption of stock. A redemption of stock
is treated as a sale or trade and is subject to the
capital gain or loss provisions unless the re-
demption is a dividend or other distribution on
stock.
Dividend versus sale or trade. Whether a
redemption is treated as a sale, trade, dividend,
or other distribution depends on the circumstan-
ces in each case. Both direct and indirect own-
ership of stock will be considered. The redemp-
tion is treated as a sale or trade of stock if:
The redemption isn’t essentially equivalent
to a dividend (see chapter 8),
Schedule D (Form 1040)
8949
8824
There is a substantially disproportionate
redemption of stock,
There is a complete redemption of all the
stock of the corporation owned by the
shareholder, or
The redemption is a distribution in partial
liquidation of a corporation.
Redemption or retirement of bonds. A re-
demption or retirement of bonds or notes at
their maturity is generally treated as a sale or
trade.
In addition, a significant modification of a
bond is treated as a trade of the original bond
for a new bond. For details, see Regulations
section 1.1001-3.
Surrender of stock. A surrender of stock by a
dominant shareholder who retains ownership of
more than half of the corporation's voting
shares is treated as a contribution to capital
rather than as an immediate loss deductible
from taxable income. The surrendering share-
holder must reallocate his or her basis in the
surrendered shares to the shares he or she re-
tains.
Worthless securities. Stocks, stock rights,
and bonds (other than those held for sale by a
securities dealer) that became completely
worthless during the tax year are treated as
though they were sold on the last day of the tax
year. This affects whether your capital loss is
long-term or short-term. See Holding Period,
later.
Worthless securities also include securities
that you abandon after March 12, 2008. To
abandon a security, you must permanently sur-
render and relinquish all rights in the security
and receive no consideration in exchange for it.
All the facts and circumstances determine
whether the transaction is properly character-
ized as an abandonment or other type of trans-
action, such as an actual sale or exchange,
contribution to capital, dividend, or gift.
If you are a cash basis taxpayer and make
payments on a negotiable promissory note that
you issued for stock that became worthless,
you can deduct these payments as losses in the
years you actually make the payments. Don’t
deduct them in the year the stock became
worthless.
How to report loss. Report worthless se-
curities on Form 8949, Part I or Part II, which-
ever applies.
Report your worthless securities trans-
actions on Form 8949 with the correct
box checked for these transactions.
See Form 8949 and the Instructions for Form
8949.
For more information on Form 8949
and Schedule D (Form 1040), see Re-
porting Capital Gains and Losses in
chapter 16. See also Schedule D (Form 1040),
Form 8949, and their separate instructions.
Filing a claim for refund. If you don’t claim
a loss for a worthless security on your original
return for the year it becomes worthless, you
can file a claim for a credit or refund due to the
loss. You must use Form 1040X, to amend your
return for the year the security becameCAUTION
!TIP
worthless. You must file it within 7 years from
the date your original return for that year had to
be filed, or 2 years from the date you paid the
tax, whichever is later. For more information
about filing a claim, see Amended Returns and
Claims for Refund in chapter 1.
How To Figure
Gain or Loss
You figure gain or loss on a sale or trade of
property by comparing the amount you realize
with the adjusted basis of the property.
Gain. If the amount you realize from a sale or
trade is more than the adjusted basis of the
property you transfer, the difference is a gain.
Loss. If the adjusted basis of the property you
transfer is more than the amount you realize,
the difference is a loss.
Adjusted basis. The adjusted basis of prop-
erty is your original cost or other original basis
properly adjusted (increased or decreased) for
certain items. See chapter 13 for more informa-
tion about determining the adjusted basis of
property.
Amount realized. The amount you realize
from a sale or trade of property is everything
you receive for the property minus your expen-
ses of sale (such as redemption fees, sales
commissions, sales charges, or exit fees).
Amount realized includes the money you re-
ceive plus the fair market value of any property
or services you receive. If you received a note
or other debt instrument for the property, see
How To Figure Gain or Loss in chapter 4 of
Pub. 550 to figure the amount realized.
If you finance the buyer's purchase of your
property and the debt instrument doesn’t pro-
vide for adequate stated interest, the unstated
interest that you must report as ordinary income
will reduce the amount realized from the sale.
For more information, see Pub. 537.
Fair market value. Fair market value is the
price at which the property would change hands
between a buyer and a seller, neither being
forced to buy or sell and both having reasona-
ble knowledge of all the relevant facts.
Example. You trade A Company stock with
an adjusted basis of $7,000 for B Company
stock with a fair market value of $10,000, which
is your amount realized. Your gain is $3,000
($10,000 − $7,000).
Debt paid off. A debt against the property,
or against you, that is paid off as a part of the
transaction, or that is assumed by the buyer,
must be included in the amount realized. This is
true even if neither you nor the buyer is person-
ally liable for the debt. For example, if you sell
or trade property that is subject to a nonre-
course loan, the amount you realize generally
includes the full amount of the note assumed by
the buyer even if the amount of the note is more
than the fair market value of the property.
Example. You sell stock that you had
pledged as security for a bank loan of $8,000.
Your basis in the stock is $6,000. The buyer
pays off your bank loan and pays you $20,000
in cash. The amount realized is $28,000
Chapter 14 Sale of Property Page 103
($20,000 + $8,000). Your gain is $22,000
($28,000 − $6,000).
Payment of cash. If you trade property and
cash for other property, the amount you realize
is the fair market value of the property you re-
ceive. Determine your gain or loss by subtract-
ing the cash you pay plus the adjusted basis of
the property you trade in from the amount you
realize. If the result is a positive number, it is a
gain. If the result is a negative number, it is a
loss.
No gain or loss. You may have to use a basis
for figuring gain that is different from the basis
used for figuring loss. In this case, you may
have neither a gain nor a loss. See Basis Other
Than Cost in chapter 13.
Nontaxable Trades
This section discusses trades that generally
don’t result in a taxable gain or deductible loss.
For more information on nontaxable trades, see
chapter 1 of Pub. 544.
Likekind exchanges. If you trade business or
investment property for other business or in-
vestment property of a like kind, you don’t pay
tax on any gain or deduct any loss until you sell
or dispose of the property you receive. To be
nontaxable, a trade must meet all six of the fol-
lowing conditions.
1. The property must be business or invest-
ment property. You must hold both the
property you trade and the property you
receive for productive use in your trade or
business or for investment. Neither prop-
erty may be property used for personal
purposes, such as your home or family
car.
2. The property must not be held primarily for
sale. The property you trade and the prop-
erty you receive must not be property you
sell to customers, such as merchandise.
3. The property must not be stocks, bonds,
notes, choses in action, certificates of trust
or beneficial interest, or other securities or
evidences of indebtedness or interest, in-
cluding partnership interests. However,
see Special rules for mutual ditch, reser-
voir, or irrigation company stock, in chap-
ter 4 of Pub. 550 for an exception. Also,
you can have a nontaxable trade of corpo-
rate stocks under a different rule, as dis-
cussed later.
4. There must be a trade of like property. The
trade of real estate for real estate, or per-
sonal property for similar personal prop-
erty, is a trade of like property. The trade
of an apartment house for a store building,
or a panel truck for a pickup truck, is a
trade of like property. The trade of a piece
of machinery for a store building isn’t a
trade of like property. Real property loca-
ted in the United States and real property
located outside the United States aren’t
like property. Also, personal property used
predominantly within the United States
and personal property used predominantly
outside the United States aren’t like prop-
erty.
5. The property to be received must be iden-
tified in writing within 45 days after the
date you transfer the property given up in
the trade.
6. The property to be received must be re-
ceived by the earlier of:
a. The 180th day after the date on which
you transfer the property given up in
the trade, or
b. The due date, including extensions,
for your tax return for the year in
which the transfer of the property
given up occurs.
If you trade property with a related party in a
like-kind exchange, a special rule may apply.
See Related Party Transactions, later in this
chapter. Also, see chapter 1 of Pub. 544 for
more information on exchanges of business
property and special rules for exchanges using
qualified intermediaries or involving multiple
properties.
Partly nontaxable exchange. If you receive
money or unlike property in addition to like
property, and the above six conditions are met,
you have a partly nontaxable trade. You are
taxed on any gain you realize, but only up to the
amount of the money and the fair market value
of the unlike property you receive. You can’t de-
duct a loss.
Like property and unlike property trans-
ferred. If you give up unlike property in addi-
tion to the like property, you must recognize
gain or loss on the unlike property you give up.
The gain or loss is the difference between the
adjusted basis of the unlike property and its fair
market value.
Like property and money transferred. If all
of the above conditions (1) – (6) are met, you
have a nontaxable trade even if you pay money
in addition to the like property.
Basis of property received. To figure the ba-
sis of the property received, see Nontaxable
Exchanges in chapter 13.
How to report. You must report the trade of
like property on Form 8824. If you figure a rec-
ognized gain or loss on Form 8824, report it on
Schedule D (Form 1040), or on Form 4797,
Sales of Business Property, whichever applies.
See the instructions for Line 22 in the Instruc-
tions for Form 8824.
For information on using Form 4797, see
chapter 4 of Pub. 544.
Corporate stocks. The following trades of cor-
porate stocks generally don’t result in a taxable
gain or a deductible loss.
Corporate reorganizations. In some in-
stances, a company will give you common
stock for preferred stock, preferred stock for
common stock, or stock in one corporation for
stock in another corporation. If this is a result of
a merger, recapitalization, transfer to a control-
led corporation, bankruptcy, corporate division,
corporate acquisition, or other corporate reor-
ganization, you don’t recognize gain or loss.
Stock for stock of the same corporation.
You can exchange common stock for common
stock or preferred stock for preferred stock in
the same corporation without having a recog-
nized gain or loss. This is true for a trade be-
tween two stockholders as well as a trade be-
tween a stockholder and the corporation.
Convertible stocks and bonds. You gen-
erally will not have a recognized gain or loss if
you convert bonds into stock or preferred stock
into common stock of the same corporation ac-
cording to a conversion privilege in the terms of
the bond or the preferred stock certificate.
Property for stock of a controlled corpo-
ration. If you transfer property to a corporation
solely in exchange for stock in that corporation,
and immediately after the trade you are in con-
trol of the corporation, you ordinarily will not rec-
ognize a gain or loss. This rule applies both to
individuals and to groups who transfer property
to a corporation. It doesn’t apply if the corpora-
tion is an investment company.
For this purpose, to be in control of a corpo-
ration, you or your group of transferors must
own, immediately after the exchange, at least
80% of the total combined voting power of all
classes of stock entitled to vote and at least
80% of the outstanding shares of each class of
nonvoting stock of the corporation.
If this provision applies to you, you may
have to attach to your return a complete state-
ment of all facts pertinent to the exchange. For
details, see Regulations section 1.351-3.
Additional information. For more informa-
tion on trades of stock, see Nontaxable Trades
in chapter 4 of Pub. 550.
Insurance policies and annuities. You will
not have a recognized gain or loss if the insured
or annuitant is the same under both contracts
and you trade:
A life insurance contract for another life in-
surance contract or for an endowment or
annuity contract or for a qualified long-term
care insurance contract,
An endowment contract for another en-
dowment contract that provides for regular
payments beginning at a date no later than
the beginning date under the old contract
or for an annuity contract or for a qualified
long-term insurance contract,
An annuity contract for annuity contract or
for a qualified long-term care insurance
contract, or
A qualified long-term care insurance con-
tract for a qualified long-term care insur-
ance contract.
You also may not have to recognize gain or
loss on an exchange of a portion of an annuity
contract for another annuity contract. See Rev-
enue Ruling 2003-76 and Revenue Procedure
2011-38.
For tax years beginning after 2010, amounts
received as an annuity for a period of 10 years
or more, or for the lives of one or more individu-
als, under any portion of an annuity, endow-
ment, or life insurance contract, are treated as a
separate contract and are considered partial
annuities. A portion of an annuity, endowment,
or life insurance contract may be annuitized,
provided that the annuitization period is for 10
years or more or for the lives of one or more in-
dividuals. The investment in the contract is
Page 104 Chapter 14 Sale of Property
allocated between the part of the contract from
which amounts are received as an annuity and
the part of the contract from which amounts
aren’t received as an annuity.
Exchanges of contracts not included in this
list, such as an annuity contract for an endow-
ment contract, or an annuity or endowment con-
tract for a life insurance contract, are taxable.
Demutualization of life insurance compa-
nies. If you received stock in exchange for
your equity interest as a policyholder or an an-
nuitant, you generally will not have a recognized
gain or loss. See Demutualization of Life Insur-
ance Companies in Pub. 550.
U.S. Treasury notes or bonds. You can trade
certain issues of U.S. Treasury obligations for
other issues designated by the Secretary of the
Treasury, with no gain or loss recognized on the
trade. See Savings bonds traded in chapter 1 of
Pub. 550 for more information.
Transfers Between
Spouses
Generally, no gain or loss is recognized on a
transfer of property from an individual to (or in
trust for the benefit of) a spouse, or if incident to
a divorce, a former spouse. This nonrecognition
rule doesn’t apply in the following situations.
The recipient spouse or former spouse is a
nonresident alien.
Property is transferred in trust and liability
exceeds basis. Gain must be recognized
to the extent the amount of the liabilities
assumed by the trust, plus any liabilities on
the property, exceed the adjusted basis of
the property.
For other situations, see Transfers Between
Spouses in chapter 4 of Pub. 550.
Any transfer of property to a spouse or for-
mer spouse on which gain or loss isn’t recog-
nized is treated by the recipient as a gift and
isn’t considered a sale or exchange. The recipi-
ent's basis in the property will be the same as
the adjusted basis of the giver immediately be-
fore the transfer. This carryover basis rule ap-
plies whether the adjusted basis of the transfer-
red property is less than, equal to, or greater
than either its fair market value at the time of
transfer or any consideration paid by the recipi-
ent. This rule applies for purposes of determin-
ing loss as well as gain. Any gain recognized on
a transfer in trust increases the basis.
A transfer of property is incident to a divorce
if the transfer occurs within 1 year after the date
on which the marriage ends, or if the transfer is
related to the ending of the marriage.
Related Party
Transactions
Special rules apply to the sale or trade of prop-
erty between related parties.
Gain on sale or trade of depreciable prop
erty. Your gain from the sale or trade of prop-
erty to a related party may be ordinary income,
rather than capital gain, if the property can be
depreciated by the party receiving it. See chap-
ter 3 of Pub. 544 for more information.
Likekind exchanges. Generally, if you trade
business or investment property for other busi-
ness or investment property of a like kind, no
gain or loss is recognized. See Like-kind ex-
changes, earlier, under Nontaxable Trades.
This rule also applies to trades of property
between related parties, defined next under
Losses on sales or trades of property. However,
if either you or the related party disposes of the
like property within 2 years after the trade, you
both must report any gain or loss not recog-
nized on the original trade on your return filed
for the year in which the later disposition oc-
curs. See Related Party Transactions in chap-
ter 4 of Pub. 550 for exceptions.
Losses on sales or trades of property. You
can’t deduct a loss on the sale or trade of prop-
erty, other than a distribution in complete liqui-
dation of a corporation, if the transaction is di-
rectly or indirectly between you and the
following related parties.
Members of your family. This includes only
your brothers and sisters, half-brothers
and half-sisters, spouse, ancestors (pa-
rents, grandparents, etc.), and lineal de-
scendants (children, grandchildren, etc.).
A partnership in which you directly or indi-
rectly own more than 50% of the capital in-
terest or the profits interest.
A corporation in which you directly or indi-
rectly own more than 50% in value of the
outstanding stock. (See Constructive own-
ership of stock, later.)
A tax-exempt charitable or educational or-
ganization directly or indirectly controlled,
in any manner or by any method, by you or
by a member of your family, whether or not
this control is legally enforceable.
In addition, a loss on the sale or trade of
property isn’t deductible if the transaction is di-
rectly or indirectly between the following related
parties.
A grantor and fiduciary, or the fiduciary and
beneficiary, of any trust.
Fiduciaries of two different trusts, or the fi-
duciary and beneficiary of two different
trusts, if the same person is the grantor of
both trusts.
A trust fiduciary and a corporation of which
more than 50% in value of the outstanding
stock is directly or indirectly owned by or
for the trust, or by or for the grantor of the
trust.
A corporation and a partnership if the
same persons own more than 50% in value
of the outstanding stock of the corporation
and more than 50% of the capital interest,
or the profits interest, in the partnership.
Two S corporations if the same persons
own more than 50% in value of the out-
standing stock of each corporation.
Two corporations, one of which is an S
corporation, if the same persons own more
than 50% in value of the outstanding stock
of each corporation.
An executor and a beneficiary of an estate
(except in the case of a sale or trade to sat-
isfy a pecuniary bequest).
Two corporations that are members of the
same controlled group. (Under certain con-
ditions, however, these losses aren’t disal-
lowed but must be deferred.)
Two partnerships if the same persons own,
directly or indirectly, more than 50% of the
capital interests or the profit interests in
both partnerships.
Multiple property sales or trades. If you
sell or trade to a related party a number of
blocks of stock or pieces of property in a lump
sum, you must figure the gain or loss separately
for each block of stock or piece of property. The
gain on each item may be taxable. However,
you can’t deduct the loss on any item. Also, you
can’t reduce gains from the sales of any of
these items by losses on the sales of any of the
other items.
Indirect transactions. You can’t deduct
your loss on the sale of stock through your
broker if, under a prearranged plan, a related
party buys the same stock you had owned. This
doesn’t apply to a trade between related parties
through an exchange that is purely coincidental
and isn’t prearranged.
Constructive ownership of stock. In de-
termining whether a person directly or indirectly
owns any of the outstanding stock of a corpora-
tion, the following rules apply.
Rule 1. Stock directly or indirectly owned by
or for a corporation, partnership, estate, or trust
is considered owned proportionately by or for
its shareholders, partners, or beneficiaries.
Rule 2. An individual is considered to own
the stock directly or indirectly owned by or for
his or her family. Family includes only brothers
and sisters, half-brothers and half-sisters,
spouse, ancestors, and lineal descendants.
Rule 3. An individual owning, other than by
applying rule 2, any stock in a corporation is
considered to own the stock directly or indi-
rectly owned by or for his or her partner.
Rule 4. When applying rule 1, 2, or 3, stock
constructively owned by a person under rule 1
is treated as actually owned by that person. But
stock constructively owned by an individual un-
der rule 2 or rule 3 isn’t treated as owned by
that individual for again applying either rule 2 or
rule 3 to make another person the constructive
owner of the stock.
Property received from a related party. If
you sell or trade at a gain property you acquired
from a related party, you recognize the gain
only to the extent it is more than the loss previ-
ously disallowed to the related party. This rule
applies only if you are the original transferee
and you acquired the property by purchase or
exchange. This rule doesn’t apply if the related
party's loss was disallowed because of the
wash sale rules described in chapter 4 of Pub.
550 under Wash Sales.
If you sell or trade at a loss property you ac-
quired from a related party, you can’t recognize
the loss that wasn’t allowed to the related party.
Example 1. Your brother sells you stock for
$7,600. His cost basis is $10,000. Your brother
can’t deduct the loss of $2,400. Later, you sell
the same stock to an unrelated party for
Chapter 14 Sale of Property Page 105
$10,500, realizing a gain of $2,900. Your report-
able gain is $500 (the $2,900 gain minus the
$2,400 loss not allowed to your brother).
Example 2. If, in Example 1, you sold the
stock for $6,900 instead of $10,500, your rec-
ognized loss is only $700 (your $7,600 basis
minus $6,900). You can’t deduct the loss that
wasn't allowed to your brother.
Capital Gains
and Losses
This section discusses the tax treatment of
gains and losses from different types of invest-
ment transactions.
Character of gain or loss. You need to clas-
sify your gains and losses as either ordinary or
capital gains or losses. You then need to clas-
sify your capital gains and losses as either
short-term or long-term. If you have long-term
gains and losses, you must identify your 28%
rate gains and losses. If you have a net capital
gain, you must also identify any unrecaptured
section 1250 gain.
The correct classification and identification
helps you figure the limit on capital losses and
the correct tax on capital gains. Reporting capi-
tal gains and losses is explained in chapter 16.
Capital or Ordinary
Gain or Loss
If you have a taxable gain or a deductible loss
from a transaction, it may be either a capital
gain or loss or an ordinary gain or loss, depend-
ing on the circumstances. Generally, a sale or
trade of a capital asset (defined next) results in
a capital gain or loss. A sale or trade of a non-
capital asset generally results in ordinary gain
or loss. Depending on the circumstances, a
gain or loss on a sale or trade of property used
in a trade or business may be treated as either
capital or ordinary, as explained in Pub. 544. In
some situations, part of your gain or loss may
be a capital gain or loss and part may be an or-
dinary gain or loss.
Capital Assets and
Noncapital Assets
For the most part, everything you own and use
for personal purposes, pleasure, or investment
is a capital asset. Some examples are:
Stocks or bonds held in your personal ac-
count,
A house owned and used by you and your
family,
Household furnishings,
A car used for pleasure or commuting,
Coin or stamp collections,
Gems and jewelry, and
Gold, silver, or any other metal.
Any property you own is a capital asset, ex-
cept the following noncapital assets.
1. Property held mainly for sale to customers
or property that will physically become a
part of the merchandise for sale to cus-
tomers. For an exception, see Capital As-
set Treatment for Self-Created Musical
Works, later.
2. Depreciable property used in your trade or
business, even if fully depreciated.
3. Real property used in your trade or busi-
ness.
4. A copyright, a literary, musical, or artistic
composition, a letter or memorandum, or
similar property that is:
a. Created by your personal efforts,
b. Prepared or produced for you (in the
case of a letter, memorandum, or sim-
ilar property), or
c. Acquired under circumstances (for
example, by gift) entitling you to the
basis of the person who created the
property or for whom it was prepared
or produced.
For an exception to this rule, see Capi-
tal Asset Treatment for Self-Created Musi-
cal Works, later.
5. Accounts or notes receivable acquired in
the ordinary course of a trade or business
for services rendered or from the sale of
property described in (1).
6. U.S. Government publications that you re-
ceived from the government free or for
less than the normal sales price, or that
you acquired under circumstances enti-
tling you to the basis of someone who re-
ceived the publications free or for less
than the normal sales price.
7. Certain commodities derivative financial
instruments held by commodities deriva-
tives dealers.
8. Hedging transactions, but only if the trans-
action is clearly identified as a hedging
transaction before the close of the day on
which it was acquired, originated, or en-
tered into.
9. Supplies of a type you regularly use or
consume in the ordinary course of your
trade or business.
Investment Property
Investment property is a capital asset. Any gain
or loss from its sale or trade is generally a capi-
tal gain or loss.
Gold, silver, stamps, coins, gems, etc.
These are capital assets except when they are
held for sale by a dealer. Any gain or loss you
have from their sale or trade generally is a capi-
tal gain or loss.
Stocks, stock rights, and bonds. All of these
(including stock received as a dividend) are
capital assets except when held for sale by a
securities dealer. However, if you own small
business stock, see Losses on Section 1244
(Small Business) Stock, later, and Losses on
Small Business Investment Company Stock, in
chapter 4 of Pub. 550.
Personal Use Property
Property held for personal use only, rather than
for investment, is a capital asset, and you must
report a gain from its sale as a capital gain.
However, you can’t deduct a loss from selling
personal use property.
Capital Asset Treatment for
SelfCreated Musical Works
You can elect to treat musical compositions and
copyrights in musical works as capital assets
when you sell or exchange them if:
Your personal efforts created the property,
or
You acquired the property under circum-
stances (for example, by gift) entitling you
to the basis of the person who created the
property or for whom it was prepared or
produced.
You must make a separate election for each
musical composition (or copyright in a musical
work) sold or exchanged during the tax year.
Make the election by the due date (including ex-
tensions) of the income tax return for the tax
year of the sale or exchange. Make the election
on Form 8949 and your Schedule D (Form
1040) by treating the sale or exchange as the
sale or exchange of a capital asset, according
to Form 8949, Schedule D (Form 1040), and
their separate instructions.
You can revoke the election if you have IRS
approval. To get IRS approval, you must submit
a request for a letter ruling under the appropri-
ate IRS revenue procedure. See, for example,
Revenue Procedure 2016-1, available at
IRS.gov/irb/2016-01_IRB/ar07.html#d0e1497.
Alternatively, you are granted an automatic
6-month extension from the due date of your in-
come tax return (excluding extensions) to re-
voke the election, provided you timely file your
income tax return, and within this 6-month ex-
tension period, you file Form 1040X that treats
the sale or exchange as the sale or exchange of
property that isn’t a capital asset.
Discounted Debt Instruments
Treat your gain or loss on the sale, redemption,
or retirement of a bond or other debt instrument
originally issued at a discount or bought at a
discount as capital gain or loss, except as ex-
plained in the following discussions.
Shortterm government obligations. Treat
gains on short-term federal, state, or local gov-
ernment obligations (other than tax-exempt ob-
ligations) as ordinary income up to your ratable
share of the acquisition discount. This treatment
applies to obligations with a fixed maturity date
not more than 1 year from the date of issue. Ac-
quisition discount is the stated redemption price
at maturity minus your basis in the obligation.
However, don’t treat these gains as income
to the extent you previously included the dis-
count in income. See Discount on Short-Term
Obligations in chapter 1 of Pub. 550.
Shortterm nongovernment obligations.
Treat gains on short-term nongovernment obli-
gations as ordinary income up to your ratable
share of original issue discount (OID). This
Page 106 Chapter 14 Sale of Property
treatment applies to obligations with a fixed ma-
turity date of not more than 1 year from the date
of issue.
However, to the extent you previously inclu-
ded the discount in income, you don’t have to
include it in income again. See Discount on
Short-Term Obligations in chapter 1 of Pub.
550.
Taxexempt state and local government
bonds. If these bonds were originally issued at
a discount before September 4, 1982, or you
acquired them before March 2, 1984, treat your
part of OID as tax-exempt interest. To figure
your gain or loss on the sale or trade of these
bonds, reduce the amount realized by your part
of OID.
If the bonds were issued after September 3,
1982, and acquired after March 1, 1984, in-
crease the adjusted basis by your part of OID to
figure gain or loss. For more information on the
basis of these bonds, see Discounted Debt In-
struments in chapter 4 of Pub. 550.
Any gain from market discount is usually
taxable on disposition or redemption of tax-ex-
empt bonds. If you bought the bonds before
May 1, 1993, the gain from market discount is
capital gain. If you bought the bonds after April
30, 1993, the gain is ordinary income.
You figure the market discount by subtract-
ing the price you paid for the bond from the sum
of the original issue price of the bond and the
amount of accumulated OID from the date of is-
sue that represented interest to any earlier hold-
ers. For more information, see Market Discount
Bonds in chapter 1 of Pub. 550.
A loss on the sale or other disposition of a
tax-exempt state or local government bond is
deductible as a capital loss.
Redeemed before maturity. If a state or lo-
cal bond issued before June 9, 1980, is re-
deemed before it matures, the OID isn’t taxable
to you.
If a state or local bond issued after June 8,
1980, is redeemed before it matures, the part of
OID earned while you hold the bond isn’t taxa-
ble to you. However, you must report the un-
earned part of OID as a capital gain.
Example. On July 2, 2005, the date of is-
sue, you bought a 20-year, 6% municipal bond
for $800. The face amount of the bond was
$1,000. The $200 discount was OID. At the time
the bond was issued, the issuer had no inten-
tion of redeeming it before it matured. The bond
was callable at its face amount beginning 10
years after the issue date.
The issuer redeemed the bond at the end of
11 years (July 2, 2016) for its face amount of
$1,000 plus accrued annual interest of $60. The
OID earned during the time you held the bond,
$73, isn’t taxable. The $60 accrued annual in-
terest also isn’t taxable. However, you must re-
port the unearned part of OID, $127 ($200 −
$73 = $127) as a capital gain.
Long-term debt instruments issued after
1954 and before May 28, 1969 (or before
July 2, 1982, if a government instrument). If
you sell, trade, or redeem for a gain one of
these debt instruments, the part of your gain
that isn’t more than your ratable share of the
OID at the time of the sale or redemption is ordi-
nary income. The rest of the gain is capital gain.
If, however, there was an intention to call the
debt instrument before maturity, all of your gain
that isn’t more than the entire OID is treated as
ordinary income at the time of the sale. This
treatment of taxable gain also applies to corpo-
rate instruments issued after May 27, 1969, un-
der a written commitment that was binding on
May 27, 1969, and at all times thereafter.
Long-term debt instruments issued after
May 27, 1969 (or after July 1, 1982, if a gov-
ernment instrument). If you hold one of these
debt instruments, you must include a part of
OID in your gross income each year you own
the instrument. Your basis in that debt instru-
ment is increased by the amount of OID that
you have included in your gross income. See
Original Issue Discount (OID) in chapter 7 for in-
formation about OID that you must report on
your tax return.
If you sell or trade the debt instrument be-
fore maturity, your gain is a capital gain. How-
ever, if at the time the instrument was originally
issued there was an intention to call it before its
maturity, your gain generally is ordinary income
to the extent of the entire OID reduced by any
amounts of OID previously includible in your in-
come. In this case, the rest of the gain is capital
gain.
Market discount bonds. If the debt instru-
ment has market discount and you chose to in-
clude the discount in income as it accrued, in-
crease your basis in the debt instrument by the
accrued discount to figure capital gain or loss
on its disposition. If you didn’t choose to include
the discount in income as it accrued, you must
report gain as ordinary interest income up to the
instrument's accrued market discount. The rest
of the gain is capital gain. See Market Discount
Bonds in chapter 1 of Pub. 550.
A different rule applies to market discount
bonds issued before July 19, 1984, and pur-
chased by you before May 1, 1993. See Market
discount bonds under Discounted Debt Instru-
ments in chapter 4 of Pub. 550.
Retirement of debt instrument. Any
amount you receive on the retirement of a debt
instrument is treated in the same way as if you
had sold or traded that instrument.
Notes of individuals. If you hold an obligation
of an individual issued with OID after March 1,
1984, you generally must include the OID in
your income currently, and your gain or loss on
its sale or retirement is generally capital gain or
loss. An exception to this treatment applies if
the obligation is a loan between individuals and
all the following requirements are met.
The lender isn’t in the business of lending
money.
The amount of the loan, plus the amount of
any outstanding prior loans, is $10,000 or
less.
Avoiding federal tax isn’t one of the princi-
pal purposes of the loan.
If the exception applies, or the obligation
was issued before March 2, 1984, you don’t in-
clude the OID in your income currently. When
you sell or redeem the obligation, the part of
your gain that isn’t more than your accrued
share of OID at that time is ordinary income.
The rest of the gain, if any, is capital gain. Any
loss on the sale or redemption is capital loss.
Deposit in Insolvent or Bankrupt
Financial Institution
If you lose money you have on deposit in a
bank, credit union, or other financial institution
that becomes insolvent or bankrupt, you may
be able to deduct your loss in one of three
ways.
Ordinary loss.
Casualty loss.
Nonbusiness bad debt (short-term capital
loss).
For more information, see Deposit in Insolvent
or Bankrupt Financial Institution, in chapter 4 of
Pub. 550.
Sale of Annuity
The part of any gain on the sale of an annuity
contract before its maturity date that is based
on interest accumulated on the contract is ordi-
nary income.
Losses on Section 1244 (Small
Business) Stock
You can deduct as an ordinary loss, rather than
as a capital loss, your loss on the sale, trade, or
worthlessness of section 1244 stock. Report an
ordinary loss from the sale, exchange, or worth-
lessness of section 1244 stock on Form 4797.
However, if the total loss is more than the maxi-
mum amount that can be treated as an ordinary
loss, also report the transaction on Form 8949.
See the instructions for Forms 4797 and 8949.
Any gain on section 1244 stock is a capital
gain if the stock is a capital asset in your hands.
Report the gain on Form 8949. See Losses on
Section 1244 (Small Business) Stock in chap-
ter 4 of Pub. 550.
For more information on Form 8949
and Schedule D (Form 1040), see Re-
porting Capital Gains and Losses in
chapter 16. See also Schedule D (Form 1040),
Form 8949, and their separate instructions.
Holding Period
If you sold or traded investment property, you
must determine your holding period for the
property. Your holding period determines
whether any capital gain or loss was a
short-term or long-term capital gain or loss.
Longterm or shortterm. If you hold invest-
ment property more than 1 year, any capital
gain or loss is a long-term capital gain or loss. If
you hold the property 1 year or less, any capital
gain or loss is a short-term capital gain or loss.
To determine how long you held the invest-
ment property, begin counting on the date after
the day you acquired the property. The day you
disposed of the property is part of your holding
period.
Example. If you bought investment prop-
erty on February 5, 2015, and sold it on
February 5, 2016, your holding period isn’tTIP
Chapter 14 Sale of Property Page 107
more than 1 year and you have a short-term
capital gain or loss. If you sold it on February 6,
2016, your holding period is more than 1 year
and you will have a long-term capital gain or
loss.
Securities traded on established market.
For securities traded on an established securi-
ties market, your holding period begins the day
after the trade date you bought the securities,
and ends on the trade date you sold them.
Don’t confuse the trade date with the
settlement date, which is the date by
which the stock must be delivered and
payment must be made.
Example. You are a cash method, calendar
year taxpayer. You sold stock on December 30,
2016. According to the rules of the stock ex-
change, the sale was closed by delivery of the
stock and payment of the sale price in January
2017. Report your gain or loss on your 2016 re-
turn, even though you received the payment in
2017. The gain or loss is long-term or
short-term depending on whether you held the
stock more than 1 year. Your holding period
ended on December 30.
U.S. Treasury notes and bonds. The holding
period of U.S. Treasury notes and bonds sold at
auction on the basis of yield starts the day after
the Secretary of the Treasury, through news re-
leases, gives notification of acceptance to suc-
cessful bidders. The holding period of U.S.
Treasury notes and bonds sold through an of-
fering on a subscription basis at a specified
yield starts the day after the subscription is sub-
mitted.
Automatic investment service. In determin-
ing your holding period for shares bought by the
bank or other agent, full shares are considered
bought first and any fractional shares are con-
sidered bought last. Your holding period starts
on the day after the bank's purchase date. If a
share was bought over more than one purchase
date, your holding period for that share is a split
holding period. A part of the share is considered
to have been bought on each date that stock
was bought by the bank with the proceeds of
available funds.
Nontaxable trades. If you acquire investment
property in a trade for other investment property
and your basis for the new property is deter-
mined, in whole or in part, by your basis in the
old property, your holding period for the new
property begins on the day following the date
you acquired the old property.
Property received as a gift. If you receive a
gift of property and your basis is determined by
the donor's adjusted basis, your holding period
is considered to have started on the same day
the donor's holding period started.
If your basis is determined by the fair market
value of the property, your holding period starts
on the day after the date of the gift.
Inherited property. Generally, if you inherited
investment property, your capital gain or loss on
any later disposition of that property is
long-term capital gain or loss. This is true re-
gardless of how long you actually held the prop-
erty.CAUTION
!
Real property bought. To figure how long you
have held real property bought under an uncon-
ditional contract, begin counting on the day af-
ter you received title to it or on the day after you
took possession of it and assumed the burdens
and privileges of ownership, whichever hap-
pened first. However, taking delivery or posses-
sion of real property under an option agreement
isn’t enough to start the holding period. The
holding period can’t start until there is an actual
contract of sale. The holding period of the seller
can’t end before that time.
Real property repossessed. If you sell real
property but keep a security interest in it, and
then later repossess the property under the
terms of the sales contract, your holding period
for a later sale includes the period you held the
property before the original sale and the period
after the repossession. Your holding period
doesn’t include the time between the original
sale and the repossession. That is, it doesn’t in-
clude the period during which the first buyer
held the property. However, the holding period
for any improvements made by the first buyer
begins at the time of repossession.
Stock dividends. The holding period for stock
you received as a taxable stock dividend begins
on the date of distribution.
The holding period for new stock you re-
ceived as a nontaxable stock dividend begins
on the same day as the holding period of the
old stock. This rule also applies to stock ac-
quired in a “spin-off,” which is a distribution of
stock or securities in a controlled corporation.
Nontaxable stock rights. Your holding period
for nontaxable stock rights begins on the same
day as the holding period of the underlying
stock. The holding period for stock acquired
through the exercise of stock rights begins on
the date the right was exercised.
Nonbusiness Bad Debts
If someone owes you money that you can’t col-
lect, you have a bad debt. You may be able to
deduct the amount owed to you when you figure
your tax for the year the debt becomes worth-
less.
Generally, nonbusiness bad debts are bad
debts that didn’t come from operating your
trade or business, and are deductible as
short-term capital losses. To be deductible,
nonbusiness bad debts must be totally worth-
less. You can’t deduct a partly worthless non-
business debt.
Genuine debt required. A debt must be gen-
uine for you to deduct a loss. A debt is genuine
if it arises from a debtor-creditor relationship
based on a valid and enforceable obligation to
repay a fixed or determinable sum of money.
Basis in bad debt required. To deduct a bad
debt, you must have a basis in it—that is, you
must have already included the amount in your
income or loaned out your cash. For example,
you can’t claim a bad debt deduction for
court-ordered child support not paid to you by
your former spouse. If you are a cash method
taxpayer (as most individuals are), you gener-
ally can’t take a bad debt deduction for unpaid
salaries, wages, rents, fees, interest, dividends,
and similar items.
When deductible. You can take a bad debt
deduction only in the year the debt becomes
worthless. You don’t have to wait until a debt is
due to determine whether it is worthless. A debt
becomes worthless when there is no longer any
chance that the amount owed will be paid.
It isn’t necessary to go to court if you can
show that a judgment from the court would be
uncollectible. You must only show that you have
taken reasonable steps to collect the debt.
Bankruptcy of your debtor is generally good evi-
dence of the worthlessness of at least a part of
an unsecured and unpreferred debt.
How to report bad debts. Deduct nonbusi-
ness bad debts as short-term capital losses on
Form 8949.
Make sure you report your bad debt(s)
(and any other short-term transactions
for which you didn’t receive a Form
1099-B) on Form 8949, Part I, with box C
checked.
For more information on Form 8949
and Schedule D (Form 1040), see Re-
porting Capital Gains and Losses in
chapter 16. See also Schedule D (Form 1040),
Form 8949, and their separate instructions.
For each bad debt, attach a statement to
your return that contains:
A description of the debt, including the
amount, and the date it became due,
The name of the debtor, and any business
or family relationship between you and the
debtor,
The efforts you made to collect the debt,
and
Why you decided the debt was worthless.
For example, you could show that the bor-
rower has declared bankruptcy, or that le-
gal action to collect would probably not re-
sult in payment of any part of the debt.
Filing a claim for refund. If you don’t de-
duct a bad debt on your original return for the
year it becomes worthless, you can file a claim
for a credit or refund due to the bad debt. To do
this, use Form 1040X to amend your return for
the year the debt became worthless. You must
file it within 7 years from the date your original
return for that year had to be filed, or 2 years
from the date you paid the tax, whichever is
later. For more information about filing a claim,
see Amended Returns and Claims for Refund in
chapter 1.
Additional information. For more information,
see Nonbusiness Bad Debts in Pub. 550. For
information on business bad debts, see chap-
ter 10 of Pub. 535.
Wash Sales
You can’t deduct losses from sales or trades of
stock or securities in a wash sale.
A wash sale occurs when you sell or trade
stock or securities at a loss and within 30 days
before or after the sale you:CAUTION
!TIP
Page 108 Chapter 14 Sale of Property
1. Buy substantially identical stock or securi-
ties,
2. Acquire substantially identical stock or se-
curities in a fully taxable trade,
3. Acquire a contract or option to buy sub-
stantially identical stock or securities, or
4. Acquire substantially identical stock for
your individual retirement account (IRA) or
Roth IRA.
If your loss was disallowed because of the
wash sale rules, add the disallowed loss to the
cost of the new stock or securities (except in (4)
above). The result is your basis in the new stock
or securities. This adjustment postpones the
loss deduction until the disposition of the new
stock or securities. Your holding period for the
new stock or securities includes the holding pe-
riod of the stock or securities sold.
For more information, see Wash Sales, in
chapter 4 of Pub. 550.
Rollover of Gain From
Publicly Traded Securities
You may qualify for a tax-free rollover of certain
gains from the sale of publicly traded securities.
This means that if you buy certain replacement
property and make the choice described in this
section, you postpone part or all of your gain.
You postpone the gain by adjusting the ba-
sis of the replacement property as described in
Basis of replacement property, later. This post-
pones your gain until the year you dispose of
the replacement property.
You qualify to make this choice if you meet
all the following tests.
You sell publicly traded securities at a
gain. Publicly traded securities are securi-
ties traded on an established securities
market.
Your gain from the sale is a capital gain.
During the 60-day period beginning on the
date of the sale, you buy replacement
property. This replacement property must
be either common stock of, or a partner-
ship interest in a specialized small busi-
ness investment company (SSBIC). This is
any partnership or corporation licensed by
the Small Business Administration under
section 301(d) of the Small Business In-
vestment Act of 1958, as in effect on May
13, 1993.
Amount of gain recognized. If you make the
choice described in this section, you must rec-
ognize gain only up to the following amount.
The amount realized on the sale, minus
The cost of any common stock or partner-
ship interest in an SSBIC that you bought
during the 60-day period beginning on the
date of sale (and didn’t previously take into
account on an earlier sale of publicly tra-
ded securities).
If this amount is less than the amount of your
gain, you can postpone the rest of your gain,
subject to the limit described next. If this
amount is equal to or more than the amount of
your gain, you must recognize the full amount of
your gain.
Limit on gain postponed. The amount of
gain you can postpone each year is limited to
the smaller of:
$50,000 ($25,000 if you are married and
file a separate return), or
$500,000 ($250,000 if you are married and
file a separate return), minus the amount of
gain you postponed for all earlier years.
Basis of replacement property. You must
subtract the amount of postponed gain from the
basis of your replacement property.
How to report and postpone gain. See How
to report and postpone gain under Rollover of
Gain From Publicly Traded Securities in chap-
ter 4 of Pub. 550 for details.
15.
Selling Your
Home
Reminder
Home sold with undeducted points. If you
haven’t deducted all the points you paid to se-
cure a mortgage on your old home, you may be
able to deduct the remaining points in the year
of the sale. See Mortgage ending early under
Points in chapter 23.
Introduction
This chapter explains the tax rules that apply
when you sell your main home. In most cases,
your main home is the one in which you live
most of the time.
If you sold your main home in 2016, you
may be able to exclude from income any gain
up to a limit of $250,000 ($500,000 on a joint re-
turn in most cases). See Excluding the Gain,
later. Generally, if you can exclude all the gain,
you don’t need to report the sale on your tax re-
turn.
If you have gain that can’t be excluded, it’s
taxable. Report it on Form 8949, Sales and
Other Dispositions of Capital Assets, and
Schedule D (Form 1040). You may also have to
complete Form 4797, Sales of Business Prop-
erty. See Reporting the Sale, later.
If you have a loss on the sale, you generally
cannot deduct it on your return. However, you
may need to report it. See Reporting the Sale,
later.
The following are main topics in this chapter.
Figuring gain or loss.
Basis.
Excluding the gain.
Ownership and use tests.
Reporting the sale.
Other topics include the following.
Business use or rental of home.
Recapturing a federal mortgage subsidy.
Useful Items
You may want to see:
Publication
Selling Your Home
Tax Information for Homeowners
Casualties, Disasters, and Thefts
Form (and Instructions)
Capital Gains
and Losses
Reduction of Tax Attributes Due to
Discharge of Indebtedness
Recapture of Federal Mortgage
Subsidy
Sales and Other Dispositions of
Capital Assets
Main Home
This section explains the term “main home.”
Usually, the home you live in most of the time is
your main home and can be a:
House,
Houseboat,
Mobile home,
Cooperative apartment, or
Condominium.
To exclude gain under the rules of this chap-
ter, you in most cases must have owned and
lived in the property as your main home for at
least 2 years during the 5-year period ending on
the date of sale.
Land. If you sell the land on which your main
home is located, but not the house itself, you
cannot exclude any gain you have from the sale
of the land. However, if you sell vacant land
used as part of your main home and that is ad-
jacent to it, you may be able to exclude the gain
from the sale under certain circumstances. See
Pub. 523 for more information.
Example. You buy a piece of land and
move your main home to it. Then you sell the
land on which your main home was located.
This sale is not considered a sale of your main
home, and you cannot exclude any gain on the
sale of the land.
More than one home. If you have more than
one home, you can exclude gain only from the
sale of your main home. You must include in in-
come gain from the sale of any other home. If
you have two homes and live in both of them,
your main home is ordinarily the one you live in
most of the time during the year.
Example 1. You own two homes, one in
New York and one in Florida. From 2012
through 2016, you live in the New York home
for 7 months and in the Florida residence for 5
months of each year. In the absence of facts
Schedule D (Form 1040)
8828
8949
Chapter 15 Selling Your Home Page 109
and circumstances indicating otherwise, the
New York home is your main home. You would
be eligible to exclude the gain from the sale of
the New York home but not of the Florida home
in 2016.
Example 2. You own a house, but you live
in another house that you rent. The rented
house is your main home.
Example 3. You own two homes, one in
Virginia and one in New Hampshire. In 2012
and 2013, you lived in the Virginia home. In
2014 and 2015, you lived in the New Hamp-
shire home. In 2016, you lived again in the Vir-
ginia home. Your main home in 2012, 2013,
and 2016 is the Virginia home. Your main home
in 2014 and 2015 is the New Hampshire home.
You would be eligible to exclude gain from the
sale of either home (but not both) in 2016.
Property used partly as your main home. If
you use only part of the property as your main
home, the rules discussed in this publication
apply only to the gain or loss on the sale of that
part of the property. For details, see Business
Use or Rental of Home, later.
Figuring Gain or Loss
To figure the gain or loss on the sale of your
main home, you must know the selling price,
the amount realized, and the adjusted basis.
Subtract the adjusted basis from the amount re-
alized to get your gain or loss.
Selling price
− Selling expenses
Amount realized
Amount realized
− Adjusted basis
Gain or loss
Selling Price
The selling price is the total amount you receive
for your home. It includes money and the fair
market value of any other property or any other
services you receive and all notes, mortgages,
or other debts assumed by the buyer as part of
the sale.
Payment by employer. You may have to sell
your home because of a job transfer. If your em-
ployer pays you for a loss on the sale or for your
selling expenses, do not include the payment
as part of the selling price. Your employer will
include it as wages in box 1 of your Form W-2,
and you will include it in your income on Form
1040, line 7.
Option to buy. If you grant an option to buy
your home and the option is exercised, add the
amount you receive for the option to the selling
price of your home. If the option is not exer-
cised, you must report the amount as ordinary
income in the year the option expires. Report
this amount on Form 1040, line 21.
Form 1099S. If you received Form 1099-S,
Proceeds From Real Estate Transactions,
box 2 (Gross proceeds) should show the total
amount you received for your home.
However, box 2 will not include the fair mar-
ket value of any services or property other than
cash or notes you received or will receive. In-
stead, box 4 will be checked to indicate your re-
ceipt or expected receipt of these items.
Amount Realized
The amount realized is the selling price minus
selling expenses.
Selling expenses. Selling expenses include:
Commissions,
Advertising fees,
Legal fees, and
Loan charges paid by the seller, such as
loan placement fees or “points.”
Adjusted Basis
While you owned your home, you may have
made adjustments (increases or decreases) to
the basis. This adjusted basis must be deter-
mined before you can figure gain or loss on the
sale of your home. For information on how to
figure your home's adjusted basis, see Deter-
mining Basis, later.
Amount of Gain or Loss
To figure the amount of gain or loss, compare
the amount realized to the adjusted basis.
Gain on sale. If the amount realized is more
than the adjusted basis, the difference is a gain
and, except for any part you can exclude, in
most cases is taxable.
Loss on sale. If the amount realized is less
than the adjusted basis, the difference is a loss.
A loss on the sale of your main home cannot be
deducted.
Jointly owned home. If you and your spouse
sell your jointly owned home and file a joint re-
turn, you figure your gain or loss as one tax-
payer.
Separate returns. If you file separate re-
turns, each of you must figure your own gain or
loss according to your ownership interest in the
home. Your ownership interest is generally de-
termined by state law.
Joint owners not married. If you and a
joint owner other than your spouse sell your
jointly owned home, each of you must figure
your own gain or loss according to your owner-
ship interest in the home. Each of you applies
the rules discussed in this chapter on an indi-
vidual basis.
Dispositions Other Than
Sales
Some special rules apply to other dispositions
of your main home.
Foreclosure or repossession. If your home
was foreclosed on or repossessed, you have a
disposition. See Pub. 4681, Canceled Debts,
Foreclosures, Repossessions, and Abandon-
ments, to determine if you have ordinary in-
come, gain, or loss.
Abandonment. If you abandon your home,
see Pub. 4681 to determine if you have ordinary
income, gain, or loss.
Trading (exchanging) homes. If you trade
your old home for another home, treat the trade
as a sale and a purchase.
Example. You owned and lived in a home
with an adjusted basis of $41,000. A real estate
dealer accepted your old home as a trade-in
and allowed you $50,000 toward a new home
priced at $80,000. This is treated as a sale of
your old home for $50,000 with a gain of $9,000
($50,000 – $41,000).
If the dealer had allowed you $27,000 and
assumed your unpaid mortgage of $23,000 on
your old home, your sales price would still be
$50,000 (the $27,000 trade-in allowed plus the
$23,000 mortgage assumed).
Transfer to spouse. If you transfer your home
to your spouse or you transfer it to your former
spouse incident to your divorce, you in most ca-
ses have no gain or loss. This is true even if you
receive cash or other consideration for the
home. As a result, the rules in this chapter do
not apply.
More information. If you need more infor-
mation, see Pub. 523 and Property Settlements
in Pub. 504, Divorced or Separated Individuals.
Involuntary conversion. You have a disposi-
tion when your home is destroyed or con-
demned and you receive other property or
money in payment, such as insurance or a con-
demnation award. This is treated as a sale and
you may be able to exclude all or part of any
gain from the destruction or condemnation of
your home, as explained later under Special Sit-
uations.
Determining Basis
You need to know your basis in your home to
figure any gain or loss when you sell it. Your ba-
sis in your home is determined by how you got
the home. Generally, your basis is its cost if you
bought it or built it. If you got it in some other
way (inheritance, gift, etc.), your basis is gener-
ally either its fair market value when you re-
ceived it or the adjusted basis of the previous
owner.
While you owned your home, you may have
made adjustments (increases or decreases) to
your home's basis. The result of these adjust-
ments is your home's adjusted basis, which is
used to figure gain or loss on the sale of your
home. See Adjusted Basis, later.
You can find more information on basis and
adjusted basis in chapter 13 of this publication
and in Pub. 523.
Cost As Basis
The cost of property is the amount you paid for
it in cash, debt obligations, other property, or
services.
Purchase. If you bought your home, your basis
is its cost to you. This includes the purchase
Page 110 Chapter 15 Selling Your Home
price and certain settlement or closing costs. In
most cases, your purchase price includes your
down payment and any debt, such as a first or
second mortgage or notes you gave the seller
in payment for the home. If you build, or con-
tract to build, a new home, your purchase price
can include costs of construction, as discussed
in Pub. 523.
Settlement fees or closing costs. When you
bought your home, you may have paid settle-
ment fees or closing costs in addition to the
contract price of the property. You can include
in your basis some of the settlement fees and
closing costs you paid for buying the home, but
not the fees and costs for getting a mortgage
loan. A fee paid for buying the home is any fee
you would have had to pay even if you paid
cash for the home (that is, without the need for
financing).
Chapter 13 lists some of the settlement fees
and closing costs that you can include in the ba-
sis of property, including your home. It also lists
some settlement costs that cannot be included
in basis.
Also see Pub. 523 for additional items and a
discussion of basis other than cost.
Adjusted Basis
Adjusted basis is your cost or other basis in-
creased or decreased by certain amounts. To
figure your adjusted basis, see Pub. 523.
If you are selling a home in which you
acquired an interest from a decedent
who died in 2010, see Pub. 4895, Tax
Treatment of Property Acquired From a Dece-
dent Dying in 2010, to determine your basis.
Increases to basis. These include the follow-
ing.
Additions and other improvements that
have a useful life of more than 1 year.
Special assessments for local improve-
ments.
Amounts you spent after a casualty to re-
store damaged property.
Improvements. These add to the value of
your home, prolong its useful life, or adapt it to
new uses. You add the cost of additions and
other improvements to the basis of your prop-
erty.
For example, putting a recreation room or
another bathroom in your unfinished basement,
putting up a new fence, putting in new plumbing
or wiring, putting on a new roof, or paving your
unpaved driveway are improvements. An addi-
tion to your house, such as a new deck, a sun
room, or a new garage, is also an improvement.
Repairs. These maintain your home in good
condition but don’t add to its value or prolong its
life. You don’t add their cost to the basis of your
property.
Examples of repairs include repainting your
house inside or outside, fixing your gutters or
floors, repairing leaks or plastering, and replac-
ing broken window panes.CAUTION
!
Decreases to basis. These include the follow-
ing.
Discharge of qualified principal residence
indebtedness that was excluded from in-
come. See Discharges of qualified princi-
pal residence indebtedness, later.
Some or all of the cancellation of debt in-
come that was excluded due to your bank-
ruptcy or insolvency. For details, see Pub.
4681.
Gain you postponed from the sale of a pre-
vious home before May 7, 1997.
Deductible casualty losses.
Insurance payments you received or ex-
pect to receive for casualty losses.
Payments you received for granting an
easement or right-of-way.
Depreciation allowed or allowable if you
used your home for business or rental pur-
poses.
Energy-related credits allowed for expendi-
tures made on the residence. (Reduce the
increase in basis otherwise allowable for
expenditures on the residence by the
amount of credit allowed for those expen-
ditures.)
Adoption credit you claimed for improve-
ments added to the basis of your home.
Nontaxable payments from an adoption
assistance program of your employer you
used for improvements you added to the
basis of your home.
Energy conservation subsidy excluded
from your gross income because you re-
ceived it (directly or indirectly) from a pub-
lic utility after 1992 to buy or install any en-
ergy conservation measure. An energy
conservation measure is an installation or
modification primarily designed either to
reduce consumption of electricity or natural
gas or to improve the management of en-
ergy demand for a home.
District of Columbia first-time homebuyer
credit (allowed on the purchase of a princi-
pal residence in the District of Columbia
beginning on August 5, 1997 and before
January 1, 2012).
General sales taxes (beginning in 2004)
claimed as an itemized deduction on
Schedule A (Form 1040) that were im-
posed on the purchase of personal prop-
erty, such as a houseboat used as your
home or a mobile home.
Discharges of qualified principal residence
indebtedness. You may be able to exclude
from gross income a discharge of qualified prin-
cipal residence indebtedness. This exclusion
applies to discharges made after 2006 and be-
fore 2017. If you choose to exclude this income,
you must reduce (but not below zero) the basis
of the principal residence by the amount exclu-
ded from your gross income.
Recordkeeping. You should keep re-
cords to prove your home's adjusted
basis. Ordinarily, you must keep re-
cords for 3 years after the due date for filing
your return for the tax year in which you sold
your home. But if you sold a home before MayRECORDS
7, 1997, and postponed tax on any gain, the ba-
sis of that home affects the basis of the new
home you bought. Keep records proving the ba-
sis of both homes as long as they are needed
for tax purposes.
The records you should keep include:
Proof of the home's purchase price and
purchase expenses;
Receipts and other records for all improve-
ments, additions, and other items that af-
fect the home's adjusted basis;
Any worksheets or other computations you
used to figure the adjusted basis of the
home you sold, the gain or loss on the
sale; the exclusion, and the taxable gain;
Any Form 982 you filed to report any dis-
charge of qualified principal residence in-
debtedness;
Any Form 2119, Sale of Your Home, you
filed to postpone gain from the sale of a
previous home before May 7, 1997; and
Any worksheets you used to prepare Form
2119, such as the Adjusted Basis of Home
Sold Worksheet or the Capital Improve-
ments Worksheet from the Form 2119 in-
structions, or other source of computa-
tions.
Excluding the Gain
You may qualify to exclude from your income all
or part of any gain from the sale of your main
home. This means that, if you qualify, you will
not have to pay tax on the gain up to the limit
described under Maximum Exclusion, next. To
qualify, you must meet the ownership and use
tests described later.
You can choose not to take the exclusion by
including the gain from the sale in your gross in-
come on your tax return for the year of the sale.
See Pub. 523 to figure the amount of your
exclusion and your taxable gain, if any.
If you have any taxable gain from the
sale of your home, you may have to in-
crease your withholding or make esti-
mated tax payments. See Pub. 505, Tax With-
holding and Estimated Tax.
Maximum Exclusion
You can exclude up to $250,000 of the gain
(other than gain allocated to periods of nonqua-
lified use) on the sale of your main home if all of
the following are true.
You meet the ownership test.
You meet the use test.
During the 2-year period ending on the
date of the sale, you did not exclude gain
from the sale of another home.
For details on gain allocated to periods of
nonqualified use, see Periods of nonqualified
use, later.
You may be able to exclude up to $500,000
of the gain (other than gain allocated to periods
of nonqualified use) on the sale of your main
home if you are married and file a joint returnCAUTION
!
Chapter 15 Selling Your Home Page 111
and meet the requirements listed in the discus-
sion of the special rules for joint returns, later,
under Married Persons.
Ownership and Use Tests
To claim the exclusion, you must meet the own-
ership and use tests. This means that during
the 5-year period ending on the date of the sale,
you must have:
Owned the home for at least 2 years (the
ownership test), and
Lived in the home as your main home for at
least 2 years (the use test).
Exception. If you owned and lived in the prop-
erty as your main home for less than 2 years,
you can still claim an exclusion in some cases.
However, the maximum amount you may be
able to exclude will be reduced. See Reduced
Maximum Exclusion, later.
Example 1—home owned and occupied
for at least 2 years. Mya bought and moved
into her main home in September 2014. She
sold the home at a gain in October 2016. During
the 5-year period ending on the date of sale in
October 2016, she owned and lived in the home
for more than 2 years. She meets the ownership
and use tests.
Example 2—ownership test met but use
test not met. Ayden bought a home, lived in it
for 6 months, moved out, and never occupied
the home again. He later sold the home for a
gain. He owned the home during the entire
5-year period ending on the date of sale. He
meets the ownership test but not the use test.
He cannot exclude any part of his gain on the
sale unless he qualified for a reduced maximum
exclusion (explained later).
Period of Ownership and Use
The required 2 years of ownership and use dur-
ing the 5-year period ending on the date of the
sale do not have to be continuous nor do they
both have to occur at the same time.
You meet the tests if you can show that you
owned and lived in the property as your main
home for either 24 full months or 730 days (365
× 2) during the 5-year period ending on the date
of sale.
Temporary absence. Short temporary absen-
ces for vacations or other seasonal absences,
even if you rent out the property during the ab-
sences, are counted as periods of use. The fol-
lowing examples assume that the reduced max-
imum exclusion (discussed later) doesn’t apply
to the sales.
Example 1. David Johnson, who is single,
bought and moved into his home on February 1,
2014. Each year during 2014 and 2015, David
left his home for a 2-month summer vacation.
David sold the house on March 1, 2016. Al-
though the total time David used his home is
less than 2 years (21 months), he meets the re-
quirement and may exclude gain. The 2-month
vacations are short temporary absences and
are counted as periods of use in determining
whether David used the home for the required 2
years.
Example 2. Professor Paul Beard, who is
single, bought and moved into a house on Au-
gust 19, 2013. He lived in it as his main home
continuously until January 5, 2015, when he
went abroad for a 1-year sabbatical leave. On
February 5, 2016, 1 month after returning from
the leave, Paul sold the house at a gain. Be-
cause his leave was not a short temporary ab-
sence, he cannot include the period of leave to
meet the 2-year use test. He cannot exclude
any part of his gain, because he didn’t use the
residence for the required 2 years.
Ownership and use tests met at different
times. You can meet the ownership and use
tests during different 2-year periods. However,
you must meet both tests during the 5-year pe-
riod ending on the date of the sale.
Example. Beginning in 2005, Helen Jones
lived in a rented apartment. The apartment
building was later converted to condominiums,
and she bought her same apartment on De-
cember 2, 2013. In 2014, Helen became ill and
on April 14 of that year she moved to her
daughter's home. On July 7, 2016, while still liv-
ing in her daughter's home, she sold her condo-
minium.
Helen can exclude gain on the sale of her
condominium because she met the ownership
and use tests during the 5-year period from July
8, 2011, to July 7, 2016, the date she sold the
condominium. She owned her condominium
from December 2, 2013, to July 7, 2016 (more
than 2 years). She lived in the property from
July 8, 2011 (the beginning of the 5-year pe-
riod), to April 14, 2014 (more than 2 years).
The time Helen lived in her daughter's home
during the 5-year period can be counted toward
her period of ownership, and the time she lived
in her rented apartment during the 5-year period
can be counted toward her period of use.
Cooperative apartment. If you sold stock as a
tenant-stockholder in a cooperative housing
corporation, the ownership and use tests are
met if, during the 5-year period ending on the
date of sale, you:
Owned the stock for at least 2 years, and
Lived in the house or apartment that the
stock entitles you to occupy as your main
home for at least 2 years.
Exceptions to Ownership and Use
Tests
The following sections contain exceptions to the
ownership and use tests for certain taxpayers.
Exception for individuals with a disability.
There is an exception to the use test if:
You become physically or mentally unable
to care for yourself, and
You owned and lived in your home as your
main home for a total of at least 1 year dur-
ing the 5-year period before the sale of
your home.
Under this exception, you are considered to live
in your home during any time within the 5-year
period that you own the home and live in a fa-
cility (including a nursing home) licensed by a
state or political subdivision to care for persons
in your condition.
If you meet this exception to the use test,
you still have to meet the 2-out-of-5-year owner-
ship test to claim the exclusion.
Previous home destroyed or condemned.
For the ownership and use tests, you add the
time you owned and lived in a previous home
that was destroyed or condemned to the time
you owned and lived in the replacement home
on whose sale you wish to exclude gain. This
rule applies if any part of the basis of the home
you sold depended on the basis of the de-
stroyed or condemned home. Otherwise, you
must have owned and lived in the same home
for 2 of the 5 years before the sale to qualify for
the exclusion.
Members of the uniformed services or For
eign Service, employees of the intelligence
community, or employees or volunteers of
the Peace Corps. You can choose to have the
5-year test period for ownership and use sus-
pended during any period you or your spouse
serve on “qualified official extended duty” as a
member of the uniformed services or Foreign
Service of the United States, or as an employee
of the intelligence community. You can choose
to have the 5-year test period for ownership and
use suspended during any period you or your
spouse serve outside the United States either
as an employee of the Peace Corps on "quali-
fied official extended duty" or as an enrolled vol-
unteer or volunteer leader of the Peace Corps.
This means that you may be able to meet the
2-year use test even if, because of your service,
you did not actually live in your home for at least
the required 2 years during the 5-year period
ending on the date of sale.
If this helps you qualify to exclude gain, you
can choose to have the 5-year test period sus-
pended by filing a return for the year of sale that
doesn’t include the gain.
For more information about the suspension
of the 5-year test period, see Service, Intelli-
gence, and Peace Corps Personnel in Pub.
523.
Married Persons
If you and your spouse file a joint return for the
year of sale and one spouse meets the owner-
ship and use tests, you can exclude up to
$250,000 of the gain. (But see Special rules for
joint returns, next.)
Special rules for joint returns. You can ex-
clude up to $500,000 of the gain on the sale of
your main home if all of the following are true.
You are married and file a joint return for
the year.
Either you or your spouse meets the own-
ership test.
Both you and your spouse meet the use
test.
During the 2-year period ending on the
date of the sale, neither you nor your
spouse excluded gain from the sale of an-
other home.
If either spouse doesn’t satisfy all these require-
ments, the maximum exclusion that can be
Page 112 Chapter 15 Selling Your Home
claimed by the couple is the total of the maxi-
mum exclusions that each spouse would qualify
for if not married and the amounts were figured
separately. For this purpose, each spouse is
treated as owning the property during the pe-
riod that either spouse owned the property.
Example 1—one spouse sells a home.
Emily sells her home in June 2016 for a gain of
$300,000. She marries Jamie later in the year.
She meets the ownership and use tests, but Ja-
mie does not. Emily can exclude up to
$250,000 of gain on a separate or joint return
for 2016. The $500,000 maximum exclusion for
certain joint returns doesn’t apply because Ja-
mie does not meet the use test.
Example 2—each spouse sells a home.
The facts are the same as in Example 1 except
that Jamie also sells a home in 2016 for a gain
of $200,000 before he marries Emily. He meets
the ownership and use tests on his home, but
Emily does not. Emily can exclude $250,000 of
gain and Jamie can exclude $200,000 of gain
on the respective sales of their individual
homes. However, Emily cannot use Jamie's un-
used exclusion to exclude more than $250,000
of gain. Therefore, Emily and Jamie must rec-
ognize $50,000 of gain on the sale of Emily's
home. The $500,000 maximum exclusion for
certain joint returns doesn’t apply because Em-
ily and Jamie do not both meet the use test for
the same home.
Sale of main home by surviving spouse. If
your spouse died and you did not remarry be-
fore the date of sale, you are considered to
have owned and lived in the property as your
main home during any period of time when your
spouse owned and lived in it as a main home.
If you meet all of the following requirements,
you may qualify to exclude up to $500,000 of
any gain from the sale or exchange of your
main home.
The sale or exchange took place after
2008.
The sale or exchange took place no more
than 2 years after the date of death of your
spouse.
You haven’t remarried.
You and your spouse met the use test at
the time of your spouse's death.
You or your spouse met the ownership test
at the time of your spouse's death.
Neither you nor your spouse excluded gain
from the sale of another home during the
last 2 years.
Example. Harry owned and used a house
as his main home since 2012. Harry and Wilma
married on July 1, 2016, and from that date they
use Harry's house as their main home. Harry
died on August 15, 2016, and Wilma inherited
the property. Wilma sold the property on Sep-
tember 2, 2016, at which time she had not re-
married. Although Wilma owned and used the
house for less than 2 years, Wilma is consid-
ered to have satisfied the ownership and use
tests because her period of ownership and use
includes the period that Harry owned and used
the property before death.
Home transferred from spouse. If your home
was transferred to you by your spouse (or for-
mer spouse if the transfer was incident to di-
vorce), you are considered to have owned it
during any period of time when your spouse
owned it.
Use of home after divorce. You are consid-
ered to have used property as your main home
during any period when:
You owned it, and
Your spouse or former spouse is allowed
to live in it under a divorce or separation in-
strument and uses it as his or her main
home.
Reduced Maximum
Exclusion
If you fail to meet the requirements to qualify for
the $250,000 or $500,000 exclusion, you may
still qualify for a reduced exclusion. This applies
to those who:
Fail to meet the ownership and use tests,
or
Have used the exclusion within 2 years of
selling their current home.
In both cases, to qualify for a reduced exclu-
sion, the sale of your main home must be due to
one of the following reasons.
A change in place of employment.
Health.
Unforeseen circumstances.
Unforeseen circumstances. The sale of your
main home is because of an unforeseen cir-
cumstance if your primary reason for the sale is
the occurrence of an event that you could not
reasonably have anticipated before buying and
occupying your main home.
See Pub. 523 for more information.
Business Use or
Rental of Home
You may be able to exclude gain from the sale
of a home you have used for business or to pro-
duce rental income. But you must meet the
ownership and use tests.
Periods of nonqualified use. In most cases,
gain from the sale or exchange of your main
home will not qualify for the exclusion to the ex-
tent that the gains are allocated to periods of
nonqualified use. Nonqualified use is any pe-
riod after 2008 during which neither you nor
your spouse (or your former spouse) used the
property as a main home with the following ex-
ceptions.
Exceptions. A period of nonqualified use
doesn’t include:
1. Any portion of the 5-year period ending on
the date of the sale or exchange after the
last date you (or your spouse) use the
property as a main home;
2. Any period (not to exceed an aggregate
period of 10 years) during which you (or
your spouse) are serving on qualified offi-
cial extended duty:
a. As a member of the uniformed serv-
ices;
b. As a member of the Foreign Service
of the United States; or
c. As an employee of the intelligence
community; and
3. Any other period of temporary absence
(not to exceed an aggregate period of 2
years) due to change of employment,
health conditions, or such other unfore-
seen circumstances as may be specified
by the IRS.
The gain resulting from the sale of the prop-
erty is allocated between qualified and nonqua-
lified use periods based on the amount of time
the property was held for qualified and nonqua-
lified use. Gain from the sale or exchange of a
main home allocable to periods of qualified use
will continue to qualify for the exclusion for the
sale of your main home. Gain from the sale or
exchange of property allocable to nonqualified
use will not qualify for the exclusion.
Calculation. To figure the portion of the gain
allocated to the period of nonqualified use, mul-
tiply the gain by the following fraction.
Total nonqualified use during the
period of ownership after 2008
Total period of ownership
Example 1. On May 24, 2010, Amy, who is
unmarried for all years in this example, bought a
house. She moved in on that date and lived in it
until May 31, 2012, when she moved out of the
house and put it up for rent. The house was ren-
ted from June 1, 2012, to March 31, 2014. Amy
claimed depreciation deductions in 2012
through 2014 totaling $10,000. Amy moved
back into the house on April 1, 2014, and lived
there until she sold it on January 28, 2016, for a
gain of $200,000. During the 5-year period end-
ing on the date of the sale (January 29,
2011-January 28, 2016), Amy owned and lived
in the house for more than 2 years as shown in
the following table.
Five Year
Period
Used as
Home
Used as
Rental
1/29/11 –
5/31/12 16 months
6/1/12 –
3/31/14 22 months
4/1/14 –
1/28/16 21 months
37 months 22 months
Next, Amy must figure how much of her gain is
allocated to nonqualified use and how much is
allocated to qualified use. During the period
Amy owned the house (2,076 days), her period
of nonqualified use was 669 days. Amy divides
669 by 2,076 and obtains a decimal (rounded to
at least three decimal places) of 0.322. To fig-
ure her gain attributable to the period of non-
qualified use, she multiplies $190,000 (the gain
not attributable to the $10,000 depreciation
Chapter 15 Selling Your Home Page 113
deduction) by 0.322. Because the gain attribut-
able to periods of nonqualified use is $61,180,
Amy can exclude $128,820 of her gain.
See the worksheet for Taxable Gain on Sale
of Home—Completed Example 1 for Amy, later,
for how to figure Amy's taxable gain and exclu-
sion.
Example 2. William owned and used a
house as his main home from 2010 through
2013. On January 1, 2014, he moved to another
state. He rented his house from that date until
April 29, 2016, when he sold it. During the
5-year period ending on the date of sale (April
30, 2011-April 29, 2016), William owned and
lived in the house for more than 2 years. He
must report the sale on Form 4797 because it
was rental property at the time of sale. Because
the period of nonqualified use does not include
any part of the 5-year period after the last date
William lived in the house, he has no period of
nonqualified use. Because he met the owner-
ship and use tests, he can exclude gain up to
$250,000. However, he can’t exclude the part of
the gain equal to the depreciation he claimed or
could have claimed for renting the house, as ex-
plained next.
Depreciation after May 6, 1997. If you were
entitled to take depreciation deductions be-
cause you used your home for business purpo-
ses or as rental property, you can’t exclude the
part of your gain equal to any depreciation al-
lowed or allowable as a deduction for periods
after May 6, 1997. If you can show by adequate
records or other evidence that the depreciation
allowed was less than the amount allowable,
then you may limit the amount of gain recog-
nized to the depreciation allowed. See Pub. 544
for more information.
Property used partly for business or rental.
If you used property partly as a home and partly
for business or to produce rental income, see
Pub. 523.
Reporting the Sale
Do not report the 2016 sale of your main home
on your tax return unless:
You have a gain and don’t qualify to ex-
clude all of it,
You have a gain and choose not to ex-
clude it, or
You received Form 1099-S.
If any of these conditions apply, report the
entire gain or loss. For details on how to report
the gain or loss, see the Instructions for Sched-
ule D (Form 1040) and the Instructions for Form
8949.
If you used the home for business or to pro-
duce rental income, you may have to use Form
4797 to report the sale of the business or rental
part (or the sale of the entire property if used
entirely for business or rental). See Pub. 523
and the Instructions for Form 4797 for additional
information.
Installment sale. Some sales are made under
arrangements that provide for part or all of the
selling price to be paid in a later year. These
sales are called “installment sales.” If you fi-
nance the buyer's purchase of your home your-
self instead of having the buyer get a loan or
mortgage from a bank, you probably have an in-
stallment sale. You may be able to report the
part of the gain you cannot exclude on the in-
stallment basis.
Use Form 6252, Installment Sale Income, to
report the sale. Enter your exclusion on line 15
of Form 6252.
Seller-financed mortgage. If you sell your
home and hold a note, mortgage, or other finan-
cial agreement, the payments you receive in
most cases consist of both interest and princi-
pal. You must separately report as interest in-
come the interest you receive as part of each
payment. If the buyer of your home uses the
property as a main or second home, you must
also report the name, address, and social se-
curity number (SSN) of the buyer on line 1 of
Schedule B (Form 1040A or 1040). The buyer
must give you his or her SSN, and you must
give the buyer your SSN. Failure to meet these
requirements may result in a $50 penalty for
each failure. If either you or the buyer does not
have and is not eligible to get an SSN, see So-
cial Security Number (SSN) in chapter 1.
More information. For more information on
installment sales, see Pub. 537, Installment
Sales.
Special Situations
The situations that follow may affect your exclu-
sion.
Sale of home acquired in a likekind ex
change. You can’t claim the exclusion if:
You acquired your home in a like-kind ex-
change (also known as a section 1031 ex-
change), or your basis in your home is de-
termined by reference to the basis of the
home in the hands of the person who ac-
quired the property in a like-kind exchange
Taxable Gain on Sale of Home—
Completed Example 1 for Amy
Part 1. Gain or (Loss) on Sale
1. Selling price of home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
2. Selling expenses (including commissions, advertising and legal fees, and seller-paid loan charges) . . . . . . . 2.
3. Subtract line 2 from line 1. This is the amount realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Adjusted basis of home sold. See Pub. 523 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
5. Gain or (loss) on the sale. Subtract line 4 from line 3. If this is a loss, stop here . . . . . . . . . . . . . . . . . . . . . . . . 5. 200,000
Part 2. Exclusion and Taxable Gain
6. Enter any depreciation allowed or allowable on the property for periods after May 6, 1997. If none,
enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 10,000
7. Subtract line 6 from line 5. If the result is less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 190,000
8. Aggregate number of days of nonqualified use after 2008. If none, enter -0-.
If line 8 is equal to zero, skip to line 12 and enter the amount from line 7 on line 12 . . . . . . . . . . . . . . . . . . . . . . 8. 669
9. Number of days taxpayer owned the property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9. 2,076
10. Divide the amount on line 8 by the amount on line 9. Enter the result as a decimal (rounded to at least 3
places). Do not enter an amount greater than 1.000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 0.322
11. Gain allocated to nonqualified use. (Line 7 multiplied by line 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. 61,180
12. Gain eligible for exclusion. Subtract line 11 from line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12. 128,820
13. If you qualify to exclude gain on the sale, enter your maximum exclusion.
If you qualify for a reduced maximum exclusion, enter your reduced maximum exclusion.
If you do not qualify to exclude gain, enter -0-. See Pub. 523 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. 250,000
14. Exclusion. Enter the smaller of line 12 or line 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. 128,820
15. Taxable gain. Subtract line 14 from line 5.
If the amount on line 6 is more than zero, complete line 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. 71,180
16. Enter the smaller of line 6 or line 15. Enter this amount on line 12 of the Unrecaptured Section 1250 Gain
Worksheet in the instructions for Schedule D (Form 1040) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16. 10,000
Worksheet.
Page 114 Chapter 15 Selling Your Home
(for example, you received the home from
that person as a gift), and
You sold the home during the 5-year pe-
riod beginning with the date your home
was acquired in the like-kind exchange.
Gain from a like-kind exchange is not taxable at
the time of the exchange. This means that gain
will not be taxed until you sell or otherwise dis-
pose of the property you receive. To defer gain
from a like-kind exchange, you must have ex-
changed business or investment property for
business or investment property of a like kind.
For more information about like-kind ex-
changes, see Pub. 544, Sales and Other Dispo-
sitions of Assets.
Home relinquished in a likekind exchange.
If you use your main home partly for business or
rental purposes and then exchange the home
for another property, see Pub. 523.
Expatriates. You can’t claim the exclusion if
the expatriation tax applies to you. The expatri-
ation tax applies to certain U.S. citizens who
have renounced their citizenship (and to certain
long-term residents who have ended their resi-
dency). For more information about the expatri-
ation tax, see Expatriation Tax in chapter 4 of
Pub. 519, U.S. Tax Guide for Aliens.
Home destroyed or condemned. If your
home was destroyed or condemned, any gain
(for example, because of insurance proceeds
you received) qualifies for the exclusion.
Any part of the gain that cannot be excluded
(because it’s more than the maximum exclu-
sion) can be postponed under the rules ex-
plained in:
Pub. 547, in the case of a home that was
destroyed; or
Pub. 544, chapter 1, in the case of a home
that was condemned.
Sale of remainder interest. Subject to the
other rules in this chapter, you can choose to
exclude gain from the sale of a remainder inter-
est in your home. If you make this choice, you
can’t choose to exclude gain from your sale of
any other interest in the home that you sell sep-
arately.
Exception for sales to related persons.
You can’t exclude gain from the sale of a re-
mainder interest in your home to a related per-
son. Related persons include your brothers, sis-
ters, half-brothers, half-sisters, spouse,
ancestors (parents, grandparents, etc.), and lin-
eal descendants (children, grandchildren, etc.).
Related persons also include certain corpora-
tions, partnerships, trusts, and exempt organi-
zations.
Recapturing (Paying
Back) a Federal
Mortgage Subsidy
If you financed your home under a federally
subsidized program (loans from tax-exempt
qualified mortgage bonds or loans with mort-
gage credit certificates), you may have to re-
capture all or part of the benefit you received
from that program when you sell or otherwise
dispose of your home. You recapture the bene-
fit by increasing your federal income tax for the
year of the sale. You may have to pay this re-
capture tax even if you can exclude your gain
from income under the rules discussed earlier;
that exclusion doesn’t affect the recapture tax.
Loans subject to recapture rules. The re-
capture applies to loans that:
1. Came from the proceeds of qualified mort-
gage bonds, or
2. Were based on mortgage credit certifi-
cates.
The recapture also applies to assumptions of
these loans.
When recapture applies. Recapture of the
federal mortgage subsidy applies only if you
meet both of the following conditions.
You sell or otherwise dispose of your home
at a gain within the first 9 years after the
date you close your mortgage loan.
Your income for the year of disposition is
more than that year's adjusted qualifying
income for your family size for that year
(related to the income requirements a per-
son must meet to qualify for the federally
subsidized program).
When recapture does not apply. Recapture
does not apply in any of the following situations.
Your mortgage loan was a qualified home
improvement loan (QHIL) of not more than
$15,000 used for alterations, repairs, and
improvements that protect or improve the
basic livability or energy efficiency of your
home.
Your mortgage loan was a QHIL of not
more than $150,000 in the case of a QHIL
used to repair damage from Hurricane Ka-
trina to homes in the hurricane disaster
area; a QHIL funded by a qualified mort-
gage bond that is a qualified Gulf Opportu-
nity Zone Bond; or a QHIL for an
owner-occupied home in the Gulf Opportu-
nity Zone (GO Zone), Rita GO Zone, or
Wilma GO Zone. For more information,
see Pub. 4492, Information for Taxpayers
Affected by Hurricanes Katrina, Rita, and
Wilma. Also see Pub. 4492-B, Information
for Affected Taxpayers in the Midwestern
Disaster Areas.
The home is disposed of as a result of your
death.
You dispose of the home more than 9
years after the date you closed your mort-
gage loan.
You transfer the home to your spouse, or
to your former spouse incident to a di-
vorce, where no gain is included in your in-
come.
You dispose of the home at a loss.
Your home is destroyed by a casualty, and
you replace it on its original site within 2
years after the end of the tax year when
the destruction happened. The replace-
ment period is extended for main homes
destroyed in a federally declared disaster
area, a Midwestern disaster area, the Kan-
sas disaster area, and the Hurricane Ka-
trina disaster area. For more information,
see Replacement Period in Pub. 547.
You refinance your mortgage loan (unless
you later meet the conditions listed previ-
ously under When recapture applies).
Notice of amounts. At or near the time of set-
tlement of your mortgage loan, you should re-
ceive a notice that provides the federally subsi-
dized amount and other information you will
need to figure your recapture tax.
How to figure and report the recapture. The
recapture tax is figured on Form 8828. If you
sell your home and your mortgage is subject to
recapture rules, you must file Form 8828 even if
you don’t owe a recapture tax. Attach Form
8828 to your Form 1040. For more information,
see Form 8828 and its instructions.
16.
Reporting Gains
and Losses
Introduction
This chapter discusses how to report capital
gains and losses from sales, exchanges, and
other dispositions of investment property on
Form 8949 and Schedule D (Form 1040). The
discussion includes the following topics.
How to report short-term gains and losses.
How to report long-term gains and losses.
How to figure capital loss carryovers.
How to figure your tax on a net capital
gain.
If you sell or otherwise dispose of property
used in a trade or business or for the production
of income, see Pub. 544, Sales and Other Dis-
positions of Assets, before completing Sched-
ule D (Form 1040).
Useful Items
You may want to see:
Publication
Installment Sales
Sales and Other Dispositions of
Assets
Investment Income and Expenses
Form (and Instructions)
Capital Gains
and Losses
Sales of Business Property
Installment Sale Income
Passive Activity Loss Limitations
Schedule D (Form 1040)
4797
6252
8582
Chapter 16 Reporting Gains and Losses Page 115
Sales and Other Dispositions of
Capital Assets
Reporting Capital
Gains and Losses
Generally, report capital gains and losses on
Form 8949. Complete Form 8949 before you
complete line 1b, 2, 3, 8b, 9, or 10 of Sched-
ule D (Form 1040).
Use Form 8949 to report:
The sale or exchange of a capital asset not
reported on another form or schedule,
Gains from involuntary conversions (other
than from casualty or theft) of capital as-
sets not held for business or profit, and
Nonbusiness bad debts, and
Worthlessness of a security.
Use Schedule D (Form 1040) to report:
Overall gain or loss from transactions re-
ported on Form 8949;
Certain transactions you do not have to re-
port on Form 8949;
Gain from Form 2439 or 6252 or Part I of
Form 4797;
Gain or loss from Form 4684, 6781, or
8824;
Gain or loss from a partnership, S corpora-
tion, estate, or trust;
Capital gain distributions not reported di-
rectly on your Form 1040; and
Capital loss carryover from the previous
year to the current year.
On Form 8949, enter all sales and ex-
changes of capital assets, including stocks,
bonds, etc., and real estate (if not reported on
Form 4684, 4797, 6252, 6781, 8824, or line 1a
or 8a of Schedule D (Form 1040)). Include
these transactions even if you did not receive a
Form 1099-B or 1099-S for the transaction. Re-
port short-term gains or losses in Part I. Report
long-term gains or losses in Part II. Use as
many Forms 8949 as you need.
Exceptions to filing Form 8949 and Sched
ule D (Form 1040). There are certain situa-
tions where you may not have to file Form 8949
and/or Schedule D (Form 1040).
Exception 1. You do not have to file Form
8949 or Schedule D (Form 1040) if you have no
capital losses and your only capital gains are
capital gain distributions from Form(s)
1099-DIV, box 2a. If any Form(s) 1099-DIV you
receive have an amount in box 2b (unrecap-
tured section 1250 gain), box 2c (section 1202
gain), or box 2d (collectibles (28%) gain), you
do not qualify for this exception.
If you qualify for this exception, report your
capital gain distributions directly on line 13 of
Form 1040 (and check the box on line 13). Also
use the Qualified Dividends and Capital Gain
Tax Worksheet in the Form 1040 instructions to
figure your tax. You can report your capital gain
distributions on line 10 of Form 1040A, instead
of on Form 1040, if you do not have to file Form
1040.
8949 Exception 2. You must file Schedule D
(Form 1040), but generally do not have to file
Form 8949, if Exception 1 does not apply and
your only capital gains and losses are:
Capital gain distributions;
A capital loss carryover;
A gain from Form 2439 or 6252 or Part I of
Form 4797;
A gain or loss from Form 4684, 6781, or
8824;
A gain or loss from a partnership, S corpo-
ration, estate, or trust; or
Gains and losses from transactions for
which you received a Form 1099-B that
shows the basis was reported to the IRS
and for which you do not need to make any
adjustments in column (g) of Form 8949 or
enter any codes in column (f) of Form
8949.
Installment sales. You cannot use the install-
ment method to report a gain from the sale of
stock or securities traded on an established se-
curities market. You must report the entire gain
in the year of sale (the year in which the trade
date occurs).
Passive activity gains and losses. If you
have gains or losses from a passive activity,
you may also have to report them on Form
8582. In some cases, the loss may be limited
under the passive activity rules. Refer to Form
8582 and its instructions for more information
about reporting capital gains and losses from a
passive activity.
Form 1099B transactions. If you sold prop-
erty, such as stocks, bonds, or certain com-
modities, through a broker, you should receive
Form 1099-B from the broker. Use the Form
1099-B to complete Form 8949 and/or Sched-
ule D (Form 1040).
If you received a Form 1099-B for a transac-
tion, you usually report the transaction on Form
8949. Report the proceeds shown in box 1d of
Form 1099-B in column (d) of either Part I or
Part II of Form 8949, whichever applies. Include
in column (g) any selling expenses or option
premiums not reflected in Form 1099-B, box 1d
or box 1e. If you include a selling expense in
column (g), enter “E” in column (f). Enter the ba-
sis shown in box 1e in column (e). If the basis
shown on Form 1099-B is not correct, see How
To Complete Form 8949, Columns (f) and (g) in
the Instructions for Form 8949 for the adjust-
ment you must make. If no basis is shown on
Form 1099-B, enter the correct basis of the
property in column (e). See the instructions for
Form 1099-B, Form 8949, and Schedule D
(Form 1040) for more information.
Form 1099CAP transactions. If a corpora-
tion in which you own stock has had a change
in control or a substantial change in capital
structure, you should receive Form 1099-CAP
from the corporation. Use the Form 1099-CAP
to fill in Form 8949. If your computations show
that you would have a loss because of the
change, do not enter any amounts on Form
8949 or Schedule D (Form 1040). You cannot
claim a loss on Schedule D (Form 1040) as a
result of this transaction.
Report the aggregate amount received
shown in box 2 of Form 1099-CAP as the sales
price in column (d) of either Part I or Part II of
Form 8949, whichever applies.
Form 1099S transactions. If you sold or tra-
ded land (including air rights), a building or simi-
lar structure, a condominium unit, or co-op
stock, you may receive a Form 1099-S, Pro-
ceeds From Real Estate Transactions, showing
your proceeds and other important information.
See the Instructions for Form 8949 and the
Instructions for Schedule D (Form 1040) for
how to report these transactions and include
them in Part I or Part II of Form 8949 as appro-
priate. However, report like-kind exchanges on
Form 8824 instead.
See Form 1099-S and the Instructions for
Form 1099-S for more information.
Nominees. If you receive gross proceeds as a
nominee (that is, the gross proceeds are in your
name but actually belong to someone else), see
the Instructions for Form 8949 for how to report
these amounts on Form 8949.
File Form 1099-B or Form 1099-S with the
IRS. If you received gross proceeds as a nom-
inee in 2016, you must file a Form 1099-B or
Form 1099-S for those proceeds with the IRS.
Send the Form 1099-B or Form 1099-S with a
Form 1096, Annual Summary and Transmittal
of U.S. Information Returns, to your Internal
Revenue Service Center by February 28, 2017
(March 31, 2017, if you file Form 1099-B or
Form 1099-S electronically). Give the actual
owner of the proceeds Copy B of the Form
1099-B or Form 1099-S by February 15, 2017.
On Form 1099-B, you should be listed as the
“Payer.” The actual owner should be listed as
the “Recipient.” On Form 1099-S, you should
be listed as the “Filer.” The actual owner should
be listed as the “Transferor.” You do not have to
file a Form 1099-B or Form 1099-S to show pro-
ceeds for your spouse. For more information
about the reporting requirements and the penal-
ties for failure to file (or furnish) certain informa-
tion returns, see the General Instructions for
Certain Information Returns. If you are filing
electronically, see Pub. 1220.
Sale of property bought at various times. If
you sell a block of stock or other property that
you bought at various times, report the
short-term gain or loss from the sale on one row
in Part I of Form 8949, and the long-term gain or
loss on one row in Part II of Form 8949. Write
“Various” in column (b) for the “Date acquired.”
Sale expenses. On Form 8949, include in col-
umn (g) any expense of sale, such as broker's
fees, commissions, state and local transfer
taxes, and option premiums, unless you repor-
ted the net sales price in column (d). If you in-
clude an expense of sale in column (g), enter
“E” in column (f).
For information about adjustments to basis,
see chapter 13.
Shortterm gains and losses. Capital gain or
loss on the sale or trade of investment property
held 1 year or less is a short-term capital gain or
loss. You report it in Part I of Form 8949.
You combine your share of short-term capi-
tal gain or loss from partnerships, S corpora-
tions, estates, and trusts, and any short-term
Page 116 Chapter 16 Reporting Gains and Losses
capital loss carryover, with your other
short-term capital gains and losses to figure
your net short-term capital gain or loss on line 7
of Schedule D (Form 1040).
Longterm gains and losses. A capital gain
or loss on the sale or trade of investment prop-
erty held more than 1 year is a long-term capital
gain or loss. You report it in Part II of Form
8949.
You report the following in Part II of Sched-
ule D (Form 1040).
Undistributed long-term capital gains from
a mutual fund (or other regulated invest-
ment company) or real estate investment
trust (REIT).
Your share of long-term capital gains or
losses from partnerships, S corporations,
estates, and trusts.
All capital gain distributions from mutual
funds and REITs not reported directly on
line 10 of Form 1040A or line 13 of Form
1040.
Long-term capital loss carryovers.
The result after combining these items with
your other long-term capital gains and losses is
your net long-term capital gain or loss (Sched-
ule D (Form 1040), line 15).
Total net gain or loss. To figure your total net
gain or loss, combine your net short-term capi-
tal gain or loss (Schedule D (Form 1040), line 7)
with your net long-term capital gain or loss
(Schedule D (Form 1040), line 15). Enter the re-
sult on Schedule D (Form 1040), Part III,
line 16. If your losses are more than your gains,
see Capital Losses next. If both lines 15 and 16
of your Schedule D (Form 1040) are gains and
your taxable income on your Form 1040 is more
than zero, see Capital Gain Tax Rates, later.
Capital Losses
If your capital losses are more than your capital
gains, you can claim a capital loss deduction.
Report the amount of the deduction on line 13
of Form 1040, in parentheses.
Limit on deduction. Your allowable capital
loss deduction, figured on Schedule D (Form
1040), is the lesser of:
$3,000 ($1,500 if you are married and file a
separate return), or
Your total net loss as shown on line 16 of
Schedule D (Form 1040).
You can use your total net loss to reduce
your income dollar for dollar, up to the $3,000
limit.
Capital loss carryover. If you have a total net
loss on line 16 of Schedule D (Form 1040) that
is more than the yearly limit on capital loss de-
ductions, you can carry over the unused part to
the next year and treat it as if you had incurred it
in that next year. If part of the loss is still un-
used, you can carry it over to later years until it
is completely used up.
When you figure the amount of any capital
loss carryover to the next year, you must take
the current year's allowable deduction into ac-
count, whether or not you claimed it and
whether or not you filed a return for the current
year.
When you carry over a loss, it remains long
term or short term. A long-term capital loss you
carry over to the next tax year will reduce that
year's long-term capital gains before it reduces
that year's short-term capital gains.
Figuring your carryover. The amount of
your capital loss carryover is the amount of your
total net loss that is more than the lesser of:
1. Your allowable capital loss deduction for
the year, or
2. Your taxable income increased by your al-
lowable capital loss deduction for the year
and your deduction for personal exemp-
tions.
If your deductions are more than your gross
income for the tax year, use your negative taxa-
ble income in figuring the amount in item (2).
Complete the Capital Loss Carryover Work-
sheet in the Instructions for Schedule D or Pub.
550 to determine the part of your capital loss
that you can carry over.
Example. Brian and Jackie sold securities
in 2016. The sales resulted in a capital loss of
$7,000. They had no other capital transactions.
Their taxable income was $26,000. On their
joint 2016 return, they can deduct $3,000. The
unused part of the loss, $4,000 ($7,000 −
$3,000), can be carried over to 2017.
If their capital loss had been $2,000, their
capital loss deduction would have been $2,000.
They would have no carryover.
Use short-term losses first. When you fig-
ure your capital loss carryover, use your
short-term capital losses first, even if you incur-
red them after a long-term capital loss. If you
have not reached the limit on the capital loss
deduction after using the short-term capital los-
ses, use the long-term capital losses until you
reach the limit.
Decedent's capital loss. A capital loss
sustained by a decedent during his or her last
tax year (or carried over to that year from an
earlier year) can be deducted only on the final
income tax return filed for the decedent. The
capital loss limits discussed earlier still apply in
this situation. The decedent's estate cannot de-
duct any of the loss or carry it over to following
years.
Joint and separate returns. If you and
your spouse once filed separate returns and are
now filing a joint return, combine your separate
capital loss carryovers. However, if you and
your spouse once filed a joint return and are
now filing separate returns, any capital loss car-
ryover from the joint return can be deducted
only on the return of the spouse who actually
had the loss.
Capital Gain Tax Rates
The tax rates that apply to a net capital gain are
generally lower than the tax rates that apply to
other income. These lower rates are called the
maximum capital gain rates.
The term “net capital gain” means the
amount by which your net long-term capital gain
for the year is more than your net short-term
capital loss.
For 2016, the maximum capital gain rates
are 0%, 15%, 20%, 25%, and 28%. See Ta-
ble 16-1 for details.
If you figure your tax using the maxi-
mum capital gain rate and the regular
tax computation results in a lower tax,
the regular tax computation applies.
Example. All of your net capital gain is
from selling collectibles, so the capital gain rate
would be 28%. If you are otherwise subject to a
rate lower than 28%, the 28% rate does not ap-
ply.
Investment interest deducted. If you claim a
deduction for investment interest, you may have
to reduce the amount of your net capital gain
that is eligible for the capital gain tax rates. Re-
duce it by the amount of the net capital gain you
choose to include in investment income when
figuring the limit on your investment interest de-
duction. This is done on the Schedule D Tax
Worksheet or the Qualified Dividends and Capi-
tal Gain Tax Worksheet. For more information
about the limit on investment interest, see Inter-
est Expenses in chapter 3 of Pub. 550.
Collectibles gain or loss. This is gain or loss
from the sale or trade of a work of art, rug, anti-
que, metal (such as gold, silver, and platinum
bullion), gem, stamp, coin, or alcoholic bever-
age held more than 1 year.
Collectibles gain includes gain from sale of
an interest in a partnership, S corporation, or
trust due to unrealized appreciation of collecti-
bles.
Gain on qualified small business stock. If
you realized a gain from qualified small busi-
ness stock that you held more than 5 years, you
generally can exclude some or all of your gain
under section 1202. The eligible gain minus
your section 1202 exclusion is a 28% rate gain.
See Gains on Qualified Small Business Stock in
chapter 4 of Pub. 550.
Unrecaptured section 1250 gain. Generally,
this is any part of your capital gain from selling
section 1250 property (real property) that is due
to depreciation (but not more than your net sec-
tion 1231 gain), reduced by any net loss in the
28% group. Use the Unrecaptured Section
1250 Gain Worksheet in the Schedule D (Form
1040) instructions to figure your unrecaptured
section 1250 gain. For more information about
section 1250 property and section 1231 gain,
see chapter 3 of Pub. 544.
Tax computation using maximum capital
gain rates. Use the Qualified Dividends and
Capital Gain Tax Worksheet or the Schedule D
Tax Worksheet (whichever applies) to figure
your tax if you have qualified dividends or net
capital gain. You have net capital gain if Sched-
ule D (Form 1040), lines 15 and 16, are both
gains.
Schedule D Tax Worksheet. Use the
Schedule D Tax Worksheet in the Schedule D
(Form 1040) instructions to figure your tax if:
You have to file Schedule D (Form 1040);
andTIP
Chapter 16 Reporting Gains and Losses Page 117
Schedule D (Form 1040), line 18 (28% rate
gain) or line 19 (unrecaptured section 1250
gain), is more than zero.
Qualified Dividends and Capital Gain Tax
Worksheet. If you do not have to use the
Schedule D Tax Worksheet (as explained
above) and any of the following apply, use the
Qualified Dividends and Capital Gain Tax Work-
sheet in the instructions for Form 1040 or Form
1040A (whichever you file) to figure your tax.
You received qualified dividends. (See
Qualified Dividends in chapter 8.)
You do not have to file Schedule D (Form
1040) and you received capital gain distri-
butions. (See Exceptions to filing Form
8949 and Schedule D (Form 1040), ear-
lier.)
Schedule D (Form 1040), lines 15 and 16,
are both more than zero.
Alternative minimum tax. These capital gain
rates are also used in figuring alternative mini-
mum tax.
Table 16-1. What Is Your Maximum Capital Gain Rate?
IF your net capital gain is from ...
THEN your
maximum capital
gain rate is ...
collectibles gain 28%
eligible gain on qualified small business stock minus the
section 1202 exclusion 28%
unrecaptured section 1250 gain 25%
other gain1 and the regular tax rate that would apply is
39.6% 20%
other gain1 and the regular tax rate that would apply is 25%,
28%, 33%, or 35% 15%
other gain1 and the regular tax rate that would apply is 10%
or 15% 0%
1“Other gain” means any gain that is not collectibles gain, gain on small business stock, or
unrecaptured section 1250 gain.
Page 118 Chapter 16 Reporting Gains and Losses
Part Four.
Adjustments to
Income
The three chapters in this part discuss some of the adjustments to income
that you can deduct in figuring your adjusted gross income. These chapters
cover:
Contributions you make to traditional individual retirement
arrangements (IRAs) — chapter 17,
Alimony you pay — chapter 18, and
Student loan interest you pay — chapter 19.
Other adjustments to income are discussed elsewhere. See Table V.
Table V. Other Adjustments to Income
Use this table to find information about other adjustments to income not covered in this part of the publication.
IF you are looking for more information about the
deduction for...
THEN see...
Certain business expenses of reservists, performing artists, and
fee-basis officials
Chapter 26.
Contributions to a health savings account Pub. 969, Health Savings Accounts and Other Tax-Favored
Health Plans.
Moving expenses Pub. 521, Moving Expenses.
Part of your self-employment tax Chapter 22.
Self-employed health insurance Chapter 21.
Payments to self-employed SEP, SIMPLE, and qualified plans Pub. 560, Retirement Plans for Small Business (SEP, SIMPLE,
and Qualified Plans).
Penalty on the early withdrawal of savings Chapter 7.
Contributions to an Archer MSA Pub. 969.
Reforestation amortization or expense Chapters 7 and 8 of Pub. 535, Business Expenses.
Contributions to Internal Revenue Code section 501(c)(18)(D)
pension plans
Pub. 525, Taxable and Nontaxable Income.
Expenses from the rental of personal property Chapter 12.
Certain required repayments of supplemental unemployment
benefits (sub-pay)
Chapter 12.
Foreign housing costs Chapter 4 of Pub. 54, Tax Guide for U.S. Citizens and Resident
Aliens Abroad.
Jury duty pay given to your employer Chapter 12.
Contributions by certain chaplains to Internal Revenue Code
section 403(b) plans
Pub. 517, Social Security and Other Information for Members of
the Clergy and Religious Workers.
Attorney fees and certain costs for actions involving certain
unlawful discrimination claims or awards to whistleblowers
Pub. 525.
Domestic production activities deduction Form 8903, Domestic Production Activities Deduction.
Chapter 16 Reporting Gains and Losses Page 119
17.
Individual
Retirement
Arrangements
(IRAs)
What's New for 2016
Modified AGI limit for traditional IRA contri
butions increased. For 2016, if you were cov-
ered by a retirement plan at work, your deduc-
tion for contributions to a traditional IRA is
reduced (phased out) if your modified AGI is:
More than $98,000 but less than $118,000
for a married couple filing a joint return or a
qualifying widow(er),
More than $61,000 but less than $71,000
for a single individual or head of house-
hold, or
Less than $10,000 for a married individual
filing a separate return.
If you either live with your spouse or file a
joint return, and your spouse is covered by a re-
tirement plan at work, but you are not, your de-
duction is phased out if your modified AGI is
more than $184,000 but less than $194,000. If
your modified AGI is $194,000 or more, you
cannot take a deduction for contributions to a
traditional IRA. See How Much Can You De-
duct, later.
Modified AGI limit for Roth IRA contribu
tions increased. For 2016, your Roth IRA
contribution limit is reduced (phased out) in the
following situations.
Your filing status is married filing jointly or
qualifying widow(er) and your modified AGI
is at least $184,000. You cannot make a
Roth IRA contribution if your modified AGI
is $194,000 or more.
Your filing status is single, head of house-
hold, or married filing separately and you
did not live with your spouse at any time in
2016 and your modified AGI is at least
$117,000. You cannot make a Roth IRA
contribution if your modified AGI is
$132,000 or more.
Your filing status is married filing sepa-
rately, you lived with your spouse at any
time during the year, and your modified
AGI is more than -0-. You cannot make a
Roth IRA contribution if your modified AGI
is $10,000 or more.
See Can You Contribute to a Roth IRA, later.
Reminders
2017 limits. You can find information about the
2017 contribution and AGI limits in Pub. 590-A.
Contributions to both traditional and Roth
IRAs. For information on your combined contri-
bution limit if you contribute to both traditional
and Roth IRAs, see Roth IRAs and traditional
IRAs under How Much Can Be Contributed? in
Roth IRAs, later.
Statement of required minimum distribu
tion. If a minimum distribution from your IRA is
required, the trustee, custodian, or issuer that
held the IRA at the end of the preceding year
must either report the amount of the required
minimum distribution to you, or offer to calculate
it for you. The report or offer must include the
date by which the amount must be distributed.
The report is due January 31 of the year in
which the minimum distribution is required. It
can be provided with the year-end fair market
value statement that you normally get each
year. No report is required for IRAs of owners
who have died.
Application of onerolloverperyear limita
tion. You can make only one rollover from an
IRA to another (or the same) IRA in any 1-year
period regardless of the number of IRAs you
own. However, you can continue to make un-
limited trustee-to-trustee transfers between
IRAs because this type of transfer is not consid-
ered a rollover. Furthermore, there is no limit on
the number of rollovers from a traditional IRA to
a Roth IRA (also known as conversions). For
more information, see Application of one-roll-
over limitation, later.
IRA interest. Although interest earned from
your IRA is generally not taxed in the year
earned, it is not tax-exempt interest. Tax on
your traditional IRA is generally deferred until
you take a distribution. Do not report this inter-
est on your tax return as tax-exempt interest.
Net Investment Income Tax. For purposes of
the Net Investment Income Tax (NIIT), net in-
vestment income does not include distributions
from a qualified retirement plan including IRAs
(for example, 401(a), 403(a), 403(b), 408,
408A, or 457(b) plans). However, these distri-
butions are taken into account when determin-
ing the modified adjusted gross income thresh-
old. Distributions from a nonqualified retirement
plan are included in net investment income.
See Form 8960, Net Investment Income Tax -
Individuals, Estates, and Trusts, and its instruc-
tions for more information.
Form 8606. To designate contributions as
nondeductible, you must file Form 8606, Non-
deductible IRAs.
The term “50 or older” is used several
times in this chapter. It refers to an IRA
owner who is age 50 or older by the
end of the tax year.
Introduction
An individual retirement arrangement (IRA) is a
personal savings plan that gives you tax advan-
tages for setting aside money for your retire-
ment.TIP
This chapter discusses the following topics.
The rules for a traditional IRA (any IRA that
is not a Roth or SIMPLE IRA).
The Roth IRA, which features nondeducti-
ble contributions and tax-free distributions.
Simplified Employee Pensions (SEPs) and
Savings Incentive Match Plans for Employees
(SIMPLEs) are not discussed in this chapter.
For more information on these plans and em-
ployees' SEP IRAs and SIMPLE IRAs that are
part of these plans, see Pub. 560, Retirement
Plans for Small Business.
For information about contributions, deduc-
tions, withdrawals, transfers, rollovers, and
other transactions, see Pub. 590-A and Pub.
590-B.
Useful Items
You may want to see:
Publication
Retirement Plans for Small Business
Contributions to Individual
Retirement Arrangements (IRAs)
Distributions from Individual
Retirement Arrangements (IRAs)
Form (and Instructions)
Additional Taxes on Qualified Plans
(including IRAs) and Other
Tax-Favored Accounts
Nondeductible IRAs
Traditional IRAs
In this chapter, the original IRA (sometimes
called an ordinary or regular IRA) is referred to
as a “traditional IRA.” A traditional IRA is any
IRA that is not a Roth IRA or a SIMPLE IRA.Two
advantages of a traditional IRA are:
You may be able to deduct some or all of
your contributions to it, depending on your
circumstances, and
Generally, amounts in your IRA, including
earnings and gains, are not taxed until they
are distributed.
Who Can Open
a Traditional IRA?
You can open and make contributions to a tradi-
tional IRA if:
You (or, if you file a joint return, your
spouse) received taxable compensation
during the year, and
You were not age 701 2 by the end of the
year.
What is compensation? Generally, compen-
sation is what you earn from working. Compen-
sation includes wages, salaries, tips, professio-
nal fees, bonuses, and other amounts you
receive for providing personal services. The
IRS treats as compensation any amount prop-
erly shown in box 1 (Wages, tips, other com-
pensation) of Form W-2, Wage and Tax State-
ment, provided that this amount is reduced by
590A
590B
5329
8606
Page 120 Chapter 17 Individual Retirement Arrangements (IRAs)
any amount properly shown in box 11 (Nonqua-
lified plans).
Scholarship and fellowship payments are
compensation for this purpose only if shown in
box 1 of Form W-2.
Compensation also includes commissions
and taxable alimony and separate maintenance
payments.
Self-employment income. If you are
self-employed (a sole proprietor or a partner),
compensation is the net earnings from your
trade or business (provided your personal serv-
ices are a material income-producing factor) re-
duced by the total of:
The deduction for contributions made on
your behalf to retirement plans, and
The deductible part of your self-employ-
ment tax.
Compensation includes earnings from
self-employment even if they are not subject to
self-employment tax because of your religious
beliefs.
Nontaxable combat pay. For IRA purpo-
ses, if you were a member of the U.S. Armed
Forces, your compensation includes any non-
taxable combat pay you receive.
What is not compensation? Compensation
does not include any of the following items.
Earnings and profits from property, such as
rental income, interest income, and divi-
dend income.
Pension or annuity income.
Deferred compensation received (compen-
sation payments postponed from a past
year).
Income from a partnership for which you
do not provide services that are a material
income-producing factor.
Conservation Reserve Program (CRP)
payments reported on Schedule SE (Form
1040), line 1b.
Any amounts (other than combat pay) you
exclude from income, such as foreign
earned income and housing costs.
When and How Can a
Traditional IRA Be
Opened?
You can open a traditional IRA at any time.
However, the time for making contributions for
any year is limited. See When Can Contribu-
tions Be Made, later.
You can open different kinds of IRAs with a
variety of organizations. You can open an IRA
at a bank or other financial institution or with a
mutual fund or life insurance company. You can
also open an IRA through your stockbroker. Any
IRA must meet Internal Revenue Code require-
ments.
Kinds of traditional IRAs. Your traditional IRA
can be an individual retirement account or an-
nuity. It can be part of either a SEP or an em-
ployer or employee association trust account.
How Much Can Be
Contributed?
There are limits and other rules that affect the
amount that can be contributed to a traditional
IRA. These limits and other rules are explained
below.
Community property laws. Except as dis-
cussed later under Kay Bailey Hutchison
Spousal IRA limit, each spouse figures his or
her limit separately, using his or her own com-
pensation. This is the rule even in states with
community property laws.
Brokers' commissions. Brokers' commis-
sions paid in connection with your traditional
IRA are subject to the contribution limit.
Trustees' fees. Trustees' administrative fees
are not subject to the contribution limit.
Qualified reservist repayments. If you are
(or were) a member of a reserve component
and you were ordered or called to active duty
after September 11, 2001, you may be able to
contribute (repay) to an IRA amounts equal to
any qualified reservist distributions you re-
ceived. You can make these repayment contri-
butions even if they would cause your total con-
tributions to the IRA to be more than the general
limit on contributions. To be eligible to make
these repayment contributions, you must have
received a qualified reservist distribution from
an IRA or from a section 401(k) or 403(b) plan
or similar arrangement.
For more information, see Qualified reservist
repayments under How Much Can Be Contrib-
uted? in chapter 1 of Pub. 590-A.
Contributions on your behalf to a tradi-
tional IRA reduce your limit for contri-
butions to a Roth IRA. (See Roth IRAs,
later.)
General limit. For 2016, the most that can be
contributed to your traditional IRA generally is
the smaller of the following amounts.
$5,500 ($6,500 if you are 50 or older).
Your taxable compensation (defined ear-
lier) for the year.
This is the most that can be contributed regard-
less of whether the contributions are to one or
more traditional IRAs or whether all or part of
the contributions are nondeductible. (See Non-
deductible Contributions, later.) Qualified re-
servist repayments do not affect this limit.
Example 1. Betty, who is 34 years old and
single, earned $24,000 in 2016. Her IRA contri-
butions for 2016 are limited to $5,500.
Example 2. John, an unmarried college
student working part time, earned $3,500 in
2016. His IRA contributions for 2016 are limited
to $3,500, the amount of his compensation.
Kay Bailey Hutchison Spousal IRA limit.
For 2016, if you file a joint return and your taxa-
ble compensation is less than that of your
spouse, the most that can be contributed for the
year to your IRA is the smaller of the following
amounts.
1. $5,500 ($6,500 if you are 50 or older).CAUTION
!
2. The total compensation includible in the
gross income of both you and your spouse
for the year, reduced by the following two
amounts.
a. Your spouse's IRA contribution for the
year to a traditional IRA.
b. Any contribution for the year to a Roth
IRA on behalf of your spouse.
This means that the total combined contribu-
tions that can be made for the year to your IRA
and your spouse's IRA can be as much as
$11,000 ($12,000 if only one of you is 50 or
older, or $13,000 if both of you are 50 or older).
When Can Contributions
Be Made?
As soon as you open your traditional IRA, con-
tributions can be made to it through your
chosen sponsor (trustee or other administrator).
Contributions must be in the form of money
(cash, check, or money order). Property cannot
be contributed.
Contributions must be made by due date.
Contributions can be made to your traditional
IRA for a year at any time during the year or by
the due date for filing your return for that year,
not including extensions.
Age 701 2 rule. Contributions cannot be made
to your traditional IRA for the year in which you
reach age 701 2 or for any later year.
You attain age 701 2 on the date that is 6 cal-
endar months after the 70th anniversary of your
birth. If you were born on or before June 30,
1946, you cannot contribute for 2016 or any
later year.
Designating year for which contribution is
made. If an amount is contributed to your tradi-
tional IRA between January 1 and April 18, you
should tell the sponsor which year (the current
year or the previous year) the contribution is for.
If you do not tell the sponsor which year it is for,
the sponsor can assume, and report to the IRS,
that the contribution is for the current year (the
year the sponsor received it).
Filing before a contribution is made. You
can file your return claiming a traditional IRA
contribution before the contribution is actually
made. Generally, the contribution must be
made by the due date of your return, not includ-
ing extensions.
Contributions not required. You do not have
to contribute to your traditional IRA for every tax
year, even if you can.
How Much Can You
Deduct?
Generally, you can deduct the lesser of:
The contributions to your traditional IRA for
the year, or
The general limit (or the Kay Bailey Hutchi-
son Spousal IRA limit, if it applies).
However, if you or your spouse was covered by
an employer retirement plan, you may not be
Chapter 17 Individual Retirement Arrangements (IRAs) Page 121
able to deduct this amount. See Limit If
Covered by Employer Plan, later.
You may be able to claim a credit for
contributions to your traditional IRA.
For more information, see chapter 38.
Trustees' fees. Trustees' administrative fees
that are billed separately and paid in connection
with your traditional IRA are not deductible as
IRA contributions. However, they may be de-
ductible as a miscellaneous itemized deduction
on Schedule A (Form 1040). See chapter 28.
Brokers' commissions. Brokers' commis-
sions are part of your IRA contribution and, as
such, are deductible subject to the limits.
Full deduction. If neither you nor your spouse
was covered for any part of the year by an em-
ployer retirement plan, you can take a deduc-
tion for total contributions to one or more tradi-
tional IRAs of up to the lesser of:
$5,500 ($6,500 if you are age 50 or older in
2016).
100% of your compensation.
This limit is reduced by any contributions made
to a 501(c)(18) plan on your behalf.
Kay Bailey Hutchison Spousal IRA. In the
case of a married couple with unequal compen-
sation who file a joint return, the deduction for
contributions to the traditional IRA of the spouse
with less compensation is limited to the lesser
of the following amounts.
1. $5,500 ($6,500 if the spouse with the
lower compensation is age 50 or older in
2016).
2. The total compensation includible in the
gross income of both spouses for the year
reduced by the following three amounts.
a. The IRA deduction for the year of the
spouse with the greater compensa-
tion.
b. Any designated nondeductible contri-
bution for the year made on behalf of
the spouse with the greater compen-
sation.
c. Any contributions for the year to a
Roth IRA on behalf of the spouse with
the greater compensation.
This limit is reduced by any contributions to a
501(c)(18) plan on behalf of the spouse with the
lesser compensation.
Note. If you were divorced or legally sepa-
rated (and did not remarry) before the end of
the year, you cannot deduct any contributions
to your spouse's IRA. After a divorce or legal
separation, you can deduct only contributions to
your own IRA. Your deductions are subject to
the rules for single individuals.
Covered by an employer retirement plan. If
you or your spouse was covered by an em-
ployer retirement plan at any time during the
year for which contributions were made, your
deduction may be further limited. This is dis-
cussed later under Limit If Covered by Em-
ployer Plan. Limits on the amount you can de-
duct do not affect the amount that can beTIP
contributed. See Nondeductible Contributions,
later.
Are You Covered by an Employer
Plan?
The Form W-2 you receive from your employer
has a box used to indicate whether you were
covered for the year. The “Retirement plan” box
should be checked if you were covered.
Reservists and volunteer firefighters should
also see Situations in Which You Are Not Cov-
ered by an Employer Plan, later.
If you are not certain whether you were cov-
ered by your employer's retirement plan, you
should ask your employer.
Federal judges. For purposes of the IRA de-
duction, federal judges are covered by an em-
ployer retirement plan.
For Which Year(s) Are You
Covered by an Employer Plan?
Special rules apply to determine the tax years
for which you are covered by an employer plan.
These rules differ depending on whether the
plan is a defined contribution plan or a defined
benefit plan.
Tax year. Your tax year is the annual account-
ing period you use to keep records and report
income and expenses on your income tax re-
turn. For almost all people, the tax year is the
calendar year.
Defined contribution plan. Generally, you
are covered by a defined contribution plan for a
tax year if amounts are contributed or allocated
to your account for the plan year that ends with
or within that tax year.
A defined contribution plan is a plan that
provides for a separate account for each person
covered by the plan. Types of defined contribu-
tion plans include profit-sharing plans, stock bo-
nus plans, and money purchase pension plans.
Defined benefit plan. If you are eligible to par-
ticipate in your employer's defined benefit plan
for the plan year that ends within your tax year,
you are covered by the plan. This rule applies
even if you:
Declined to participate in the plan,
Did not make a required contribution, or
Did not perform the minimum service re-
quired to accrue a benefit for the year.
A defined benefit plan is any plan that is not
a defined contribution plan. Defined benefit
plans include pension plans and annuity plans.
No vested interest. If you accrue a benefit for
a plan year, you are covered by that plan even if
you have no vested interest in (legal right to) the
accrual.
Situations in Which You Are Not
Covered by an Employer Plan
Unless you are covered under another em-
ployer plan, you are not covered by an em-
ployer plan if you are in one of the situations de-
scribed below.
Social security or railroad retirement. Cov-
erage under social security or railroad retire-
ment is not coverage under an employer retire-
ment plan.
Benefits from a previous employer's plan. If
you receive retirement benefits from a previous
employer's plan, you are not covered by that
plan.
Reservists. If the only reason you participate
in a plan is because you are a member of a re-
serve unit of the armed forces, you may not be
covered by the plan. You are not covered by the
plan if both of the following conditions are met.
1. The plan you participate in is established
for its employees by:
a. The United States,
b. A state or political subdivision of a
state, or
c. An instrumentality of either (a) or (b)
above.
2. You did not serve more than 90 days on
active duty during the year (not counting
duty for training).
Volunteer firefighters. If the only reason you
participate in a plan is because you are a volun-
teer firefighter, you may not be covered by the
plan. You are not covered by the plan if both of
the following conditions are met.
1. The plan you participate in is established
for its employees by:
a. The United States,
b. A state or political subdivision of a
state, or
c. An instrumentality of either (a) or (b)
above.
2. Your accrued retirement benefits at the
beginning of the year will not provide more
than $1,800 per year at retirement.
Limit If Covered by Employer Plan
If either you or your spouse was covered by an
employer retirement plan, you may be entitled
to only a partial (reduced) deduction or no de-
duction at all, depending on your income and
your filing status.
Your deduction begins to decrease (phase
out) when your income rises above a certain
amount and is eliminated altogether when it
reaches a higher amount. These amounts vary
depending on your filing status.
To determine if your deduction is subject to
phaseout, you must determine your modified
adjusted gross income (AGI) and your filing sta-
tus. See Filing status and Modified adjusted
gross income (AGI), later. Then use Table 17-1
or 17-2 to determine if the phaseout applies.
Social security recipients. Instead of using
Table 17-1 or Table 17-2, use the worksheets in
Appendix B of Pub. 590-A if, for the year, all of
the following apply.
You received social security benefits.
You received taxable compensation.
Contributions were made to your traditional
IRA.
Page 122 Chapter 17 Individual Retirement Arrangements (IRAs)
You or your spouse was covered by an
employer retirement plan.
Use those worksheets to figure your IRA deduc-
tion, your nondeductible contribution, and the
taxable portion, if any, of your social security
benefits.
Deduction phaseout. If you are covered by an
employer retirement plan and you did not re-
ceive any social security retirement benefits,
your IRA deduction may be reduced or elimina-
ted depending on your filing status and modi-
fied AGI as shown in Table 17-1.
If your spouse is covered. If you are not
covered by an employer retirement plan, but
your spouse is, and you did not receive any so-
cial security benefits, your IRA deduction may
be reduced or eliminated entirely depending on
your filing status and modified AGI as shown in
Table 17-2.
Filing status. Your filing status depends pri-
marily on your marital status. For this purpose,
you need to know if your filing status is single or
head of household, married filing jointly or quali-
fying widow(er), or married filing separately. If
you need more information on filing status, see
chapter 2.
Lived apart from spouse. If you did not live
with your spouse at any time during the year
and you file a separate return, your filing status,
for this purpose, is single.
Modified adjusted gross income (AGI). How
you figure your modified AGI depends on
whether you are filing Form 1040 or Form
1040A. If you made contributions to your IRA for
2016 and received a distribution from your IRA
in 2016, see Pub. 590-A. You may be able to
use Worksheet 17-1 to figure your modified
AGI.
Do not assume that your modified AGI
is the same as your compensation.
Your modified AGI may include income
in addition to your compensation (discussed
earlier), such as interest, dividends, and income
from IRA distributions.
Form 1040. If you file Form 1040, refigure
the amount on the page 1 “adjusted gross in-
come” line without taking into account any of
the following amounts.
IRA deduction.
Student loan interest deduction.
Tuition and fees deduction.
Domestic production activities deduction.
Foreign earned income exclusion.
Foreign housing exclusion or deduction.
Exclusion of qualified savings bond inter-
est shown on Form 8815, Exclusion of In-
terest From Series EE and I U.S. Savings
Bonds Issued After 1989.
Exclusion of employer-provided adoption
benefits shown on Form 8839, Qualified
Adoption Expenses.
This is your modified AGI.
Form 1040A. If you file Form 1040A, refig-
ure the amount on the page 1 “adjusted gross
income” line without taking into account any of
the following amounts.
IRA deduction.
Student loan interest deduction.
Tuition and fees deduction.
Exclusion of qualified savings bond inter-
est shown on Form 8815.
This is your modified AGI.
Both contributions for 2016 and distribu-
tions in 2016. If all three of the following apply,
any IRA distributions you received in 2016 may
be partly tax free and partly taxable.
You received distributions in 2016 from
one or more traditional IRAs.
You made contributions to a traditional IRA
for 2016.
Some of those contributions may be non-
deductible contributions.
If this is your situation, you must figure the taxa-
ble part of the traditional IRA distribution before
you can figure your modified AGI. To do this,
you can use Worksheet 1-1, Figuring the Taxa-
ble Part of Your IRA Distribution, in Pub. 590-B.
If at least one of the above does not apply,
figure your modified AGI using Worksheet 17-1,
later.
How to figure your reduced IRA deduction.
You can figure your reduced IRA deduction for
either Form 1040 or Form 1040A by using the
worksheets in chapter 1 of Pub. 590-A. Also,
the instructions for Form 1040 and Form 1040ACAUTION
!
Table 17-1. Effect of Modified AGI1 on Deduction if You Are Covered by
Retirement Plan at Work
If you are covered by a retirement plan at work, use this table to determine if your modified AGI
affects the amount of your deduction.
IF your filing status is... AND your modified AGI is... THEN you can take...
single
or
head of household
$61,000 or less a full deduction.
more than $61,000
but less than $71,000
a partial deduction.
$71,000 or more no deduction.
married filing jointly
or
qualifying widow(er)
$98,000 or less a full deduction.
more than $98,000
but less than $118,000
a partial deduction.
$118,000 or more no deduction.
married filing
separately2
less than $10,000 a partial deduction.
$10,000 or more no deduction.
1Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI).
2If you did not live with your spouse at any time during the year, your filing status is considered Single for this
purpose (therefore, your IRA deduction is determined under the “Single” column).
Table 17-2. Effect of Modified AGI1 on Deduction if You Are NOT
Covered by Retirement Plan at Work
If you are not covered by a retirement plan at work, use this table to determine if your modified AGI
affects the amount of your deduction.
IF your filing status is... AND your modified AGI is... THEN you can take...
single,
head of household, or
qualifying widow(er)
any amount a full deduction.
married filing jointly or
separately with a spouse who is
not covered by a plan at work
any amount a full deduction.
married filing jointly with a
spouse who is covered by a plan
at work
$184,000 or less a full deduction.
more than $184,000
but less than $194,000
a partial deduction.
$194,000 or more no deduction.
married filing separately with a
spouse who is covered by a plan
at work2
less than $10,000 a partial deduction.
$10,000 or more no deduction.
1Modified AGI (adjusted gross income). See Modified adjusted gross income (AGI).
2You are entitled to the full deduction if you did not live with your spouse at any time during the year.
Chapter 17 Individual Retirement Arrangements (IRAs) Page 123
include similar worksheets that you may be able
to use instead.
Reporting Deductible
Contributions
If you file Form 1040, enter your IRA deduction
on line 32 of that form. If you file Form 1040A,
enter your IRA deduction on line 17. You cannot
deduct IRA contributions on Form 1040EZ.
Nondeductible
Contributions
Although your deduction for IRA contributions
may be reduced or eliminated, contributions
can be made to your IRA up to the general limit
or, if it applies, the Kay Bailey Hutchison
Spousal IRA limit. The difference between your
total permitted contributions and your IRA de-
duction, if any, is your nondeductible contribu-
tion.
Example. Mike is 30 years old and single.
In 2016, he was covered by a retirement plan at
work. His salary was $67,000. His modified AGI
was $80,000. Mike made a $5,500 IRA contri-
bution for 2016. Because he was covered by a
retirement plan and his modified AGI was over
$71,000, he cannot deduct his $5,500 IRA con-
tribution. He must designate this contribution as
a nondeductible contribution by reporting it on
Form 8606, as explained next.
Form 8606. To designate contributions as
nondeductible, you must file Form 8606.
You do not have to designate a contribution
as nondeductible until you file your tax return.
When you file, you can even designate other-
wise deductible contributions as nondeductible.
You must file Form 8606 to report nonde-
ductible contributions even if you do not have to
file a tax return for the year.
A Form 8606 is not used for the year
that you make a rollover from a quali-
fied retirement plan to a traditional IRA
and the rollover includes nontaxable amounts.
In those situations, a Form 8606 is completed
for the year you take a distribution from that
IRA. See Form 8606 under Distributions Fully or
Partly Taxable, later.CAUTION
!
Failure to report nondeductible contribu-
tions. If you do not report nondeductible contri-
butions, all of the contributions to your tradi-
tional IRA will be treated as deductible
contributions when withdrawn. All distributions
from your IRA will be taxed unless you can
show, with satisfactory evidence, that nonde-
ductible contributions were made.
Penalty for overstatement. If you over-
state the amount of nondeductible contributions
on your Form 8606 for any tax year, you must
pay a penalty of $100 for each overstatement,
unless it was due to reasonable cause.
Penalty for failure to file Form 8606. You
will have to pay a $50 penalty if you do not file a
required Form 8606, unless you can prove that
the failure was due to reasonable cause.
Tax on earnings on nondeductible contri
butions. As long as contributions are within
the contribution limits, none of the earnings or
gains on contributions (deductible or nondeduc-
tible) will be taxed until they are distributed. See
When Can You Withdraw or Use IRA Assets,
later.
Cost basis. You will have a cost basis in your
traditional IRA if you made any nondeductible
contributions. Your cost basis is the sum of the
nondeductible contributions to your IRA minus
any withdrawals or distributions of nondeducti-
ble contributions.
Inherited IRAs
If you inherit a traditional IRA, you are called a
beneficiary. A beneficiary can be any person or
entity the owner chooses to receive the benefits
of the IRA after he or she dies. Beneficiaries of
a traditional IRA must include in their gross in-
come any taxable distributions they receive.
Inherited from spouse. If you inherit a tradi-
tional IRA from your spouse, you generally have
the following three choices. You can:
1. Treat it as your own IRA by designating
yourself as the account owner.
2. Treat it as your own by rolling it over into
your IRA, or to the extent it is taxable, into
a:
a. Qualified employer plan,
b. Qualified employee annuity plan (sec-
tion 403(a) plan),
c. Tax-sheltered annuity plan (section
403(b) plan), or
d. Deferred compensation plan of a
state or local government (section
457 plan).
3. Treat yourself as the beneficiary rather
than treating the IRA as your own.
Treating it as your own. You will be con-
sidered to have chosen to treat the IRA as your
own if:
Contributions (including rollover contribu-
tions) are made to the inherited IRA, or
You do not take the required minimum dis-
tribution for a year as a beneficiary of the
IRA.
You will only be considered to have chosen to
treat the IRA as your own if:
You are the sole beneficiary of the IRA,
and
You have an unlimited right to withdraw
amounts from it.
However, if you receive a distribution from
your deceased spouse's IRA, you can roll that
distribution over into your own IRA within the
60-day time limit, as long as the distribution is
not a required distribution, even if you are not
the sole beneficiary of your deceased spouse's
IRA.
Inherited from someone other than spouse.
If you inherit a traditional IRA from anyone other
than your deceased spouse, you cannot treat
the inherited IRA as your own. This means that
you cannot make any contributions to the IRA. It
also means you cannot roll over any amounts
into or out of the inherited IRA. However, you
can make a trustee-to-trustee transfer as long
as the IRA into which amounts are being moved
is set up and maintained in the name of the de-
ceased IRA owner for the benefit of you as ben-
eficiary.
For more information, see the discussion of
inherited IRAs under Rollover From One IRA
Into Another, later.
Worksheet 17-1. Figuring Your Modified AGI
Keep for Your Records
Use this worksheet to figure your modified adjusted gross income for traditional IRA purposes.
1. Enter your adjusted gross income (AGI) from Form 1040, line 38, or Form 1040A, line 22, figured without
taking into account the amount from Form 1040, line 32, or Form 1040A, line 17 . . . . . . . . . . . . . . . . . . . . 1.
2. Enter any student loan interest deduction from Form 1040, line 33, or Form 1040A, line 18 . . . . . . . . . . . . 2.
3. Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 . . . . . . . . . . . . . . . . 3.
4. Enter any domestic production activities deduction from Form 1040, line 35 . . . . . . . . . . . . . . . . . . . . . . . 4.
5. Enter any foreign earned income and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ,
line 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
6. Enter any foreign housing deduction from Form 2555, line 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
7. Enter any excludable savings bond interest from Form 8815, line 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
8. Enter any excluded employer-provided adoption benefits from Form 8839, line 28 . . . . . . . . . . . . . . . . . . 8.
9. Add lines 1 through 8. This is your Modified AGI for traditional IRA purposes . . . . . . . . . . . . . . . . . . . . . . 9.
Page 124 Chapter 17 Individual Retirement Arrangements (IRAs)
Can You Move Retirement
Plan Assets?
You can transfer, tax free, assets (money or
property) from other retirement plans (including
traditional IRAs) to a traditional IRA. You can
make the following kinds of transfers.
Transfers from one trustee to another.
Rollovers.
Transfers incident to a divorce.
Transfers to Roth IRAs. Under certain condi-
tions, you can move assets from a traditional
IRA or from a designated Roth account to a
Roth IRA. You can also move assets from a
qualified retirement plan to a Roth IRA. See
Can You Move Amounts Into a Roth IRA? under
Roth IRAs, later.
TrusteetoTrustee Transfer
A transfer of funds in your traditional IRA from
one trustee directly to another, either at your re-
quest or at the trustee's request, is not a roll-
over. This includes the situation where the cur-
rent trustee issues a check to the new trustee
but gives it to you to deposit. Because there is
no distribution to you, the transfer is tax free.
Because it is not a rollover, it is not affected by
the 1-year waiting period required between roll-
overs, discussed later under Rollover From One
IRA Into Another. For information about direct
transfers to IRAs from retirement plans other
than IRAs, see Can You Move Retirement Plan
Assets? in chapter 1 and Can You Move
Amounts Into a Roth IRA? in chapter 2 of Pub.
590-A.
Rollovers
Generally, a rollover is a tax-free distribution to
you of cash or other assets from one retirement
plan that you contribute (roll over) to another re-
tirement plan. The contribution to the second
retirement plan is called a “rollover contribu-
tion.”
Note. An amount rolled over tax free from
one retirement plan to another is generally in-
cludible in income when it is distributed from the
second plan.
Kinds of rollovers to a traditional IRA. You
can roll over amounts from the following plans
into a traditional IRA:
A traditional IRA,
An employer's qualified retirement plan for
its employees,
A deferred compensation plan of a state or
local government (section 457 plan), or
A tax-sheltered annuity plan (section
403(b) plan).
Treatment of rollovers. You cannot deduct a
rollover contribution, but you must report the
rollover distribution on your tax return as dis-
cussed later under Reporting rollovers from
IRAs and under Reporting rollovers from em-
ployer plans.
Kinds of rollovers from a traditional IRA.
You may be able to roll over, tax free, a distribu-
tion from your traditional IRA into a qualified
plan. These plans include the federal Thrift Sav-
ings Fund (for federal employees), deferred
compensation plans of state or local govern-
ments (section 457 plans), and tax-sheltered
annuity plans (section 403(b) plans). The part of
the distribution that you can roll over is the part
that would otherwise be taxable (includible in
your income). Qualified plans may, but are not
required to, accept such rollovers.
Time limit for making a rollover contribu
tion. You generally must make the rollover
contribution by the 60th day after the day you
receive the distribution from your traditional IRA
or your employer's plan.
The IRS may waive the 60-day requirement
where the failure to do so would be against
equity or good conscience, such as in the event
of a casualty, disaster, or other event beyond
your reasonable control. For more information,
see Can You Move Retirement Plan Assets? in
chapter 1 of Pub. 590-A.
Extension of rollover period. If an amount
distributed to you from a traditional IRA or a
qualified employer retirement plan is a frozen
deposit at any time during the 60-day period al-
lowed for a rollover, special rules extend the
rollover period. For more information, see Can
You Move Retirement Plan Assets? in chapter 1
of Pub. 590-A.
More information. For more information on
rollovers, see Can You Move Retirement Plan
Assets? in chapter 1 of Pub. 590-A.
Rollover From One IRA Into
Another
You can withdraw, tax free, all or part of the as-
sets from one traditional IRA if you reinvest
them within 60 days in the same or another tra-
ditional IRA. Because this is a rollover, you can-
not deduct the amount that you reinvest in an
IRA.
Waiting period between rollovers. Gener-
ally, if you make a tax-free rollover of any part of
a distribution from a traditional IRA, you cannot,
within a 1-year period, make a tax-free rollover
of any later distribution from that same IRA. You
also cannot make a tax-free rollover of any
amount distributed, within the same 1-year pe-
riod, from the IRA into which you made the
tax-free rollover.
The 1-year period begins on the date you re-
ceive the IRA distribution, not on the date you
roll it over into an IRA. New rules apply to the
number of rollovers you can have with your tra-
ditional IRAs. See Application of one-rollover
limitation, below.
Application of onerollover limitation. You
can make only one rollover from an IRA to an-
other (or the same) IRA in any 1-year period, re-
gardless of the number of IRAs you own. The
limit applies by aggregating all of an individual's
IRAs, including SEP and SIMPLE IRAs, as well
as traditional and Roth IRAs, effectively treating
them as one IRA for purposes of the limit. How-
ever, trustee-to-trustee transfers between IRAs
are not limited and rollovers from traditional
IRAs to Roth IRAs (conversions) are not limited.
Example. John has three traditional IRAs,
IRA-1, IRA-2, IRA-3. John did not take any dis-
tributions from his IRAs in 2016. On January 1,
2017, John took a distribution from IRA-1 and
rolled it over into IRA-2 on the same day. For
2017, John cannot rollover any other 2017 IRA
distribution, including a rollover distribution in-
volving IRA-3. This would not apply to a
trustee-to-trustee transfer or a Roth IRA conver-
sion.
Partial rollovers. If you withdraw assets from
a traditional IRA, you can roll over part of the
withdrawal tax free and keep the rest of it. The
amount you keep will generally be taxable (ex-
cept for the part that is a return of nondeductible
contributions). The amount you keep may be
subject to the 10% additional tax on early distri-
butions, discussed later under What Acts Re-
sult in Penalties or Additional Taxes?
Required distributions. Amounts that must
be distributed during a particular year under the
required distribution rules (discussed later) are
not eligible for rollover treatment.
Inherited IRAs. If you inherit a traditional IRA
from your spouse, you generally can roll it over,
or you can choose to make the inherited IRA
your own. See Treating it as your own, earlier.
Not inherited from spouse. If you inherit a
traditional IRA from someone other than your
spouse, you cannot roll it over or allow it to re-
ceive a rollover contribution. You must withdraw
the IRA assets within a certain period. For more
information, see When Must You Withdraw As-
sets? in chapter 1 of Pub. 590-B.
Reporting rollovers from IRAs. Report any
rollover from one traditional IRA to the same or
another traditional IRA on lines 15a and 15b,
Form 1040, or lines 11a and 11b, Form 1040A,
as follows.
Enter the total amount of the distribution on
Form 1040, line 15a, or Form 1040A, line 11a. If
the total amount on Form 1040, line 15a, or
Form 1040A, line 11a, was rolled over, enter
zero on Form 1040, line 15b, or Form 1040A,
line 11b. If the total distribution was not rolled
over, enter the taxable portion of the part that
was not rolled over on Form 1040, line 15b, or
Form 1040A, line 11b. Put “Rollover” next to
Form 1040, line 15b, or Form 1040A, line 11b.
See your tax return instructions.
If you rolled over the distribution into a quali-
fied plan (other than an IRA) or you make the
rollover in 2017, attach a statement explaining
what you did.
Rollover From Employer's Plan
Into an IRA
You can roll over into a traditional IRA all or part
of an eligible rollover distribution you receive
from your (or your deceased spouse's):
Employer's qualified pension, profit-shar-
ing, or stock bonus plan;
Annuity plan;
Tax-sheltered annuity plan (section 403(b)
plan); or
Governmental deferred compensation plan
(section 457 plan).
Chapter 17 Individual Retirement Arrangements (IRAs) Page 125
A qualified plan is one that meets the re-
quirements of the Internal Revenue Code.
Eligible rollover distribution. Generally, an
eligible rollover distribution is any distribution of
all or part of the balance to your credit in a quali-
fied retirement plan except the following.
1. A required minimum distribution (ex-
plained later under When Must You With-
draw IRA Assets? (Required Minimum
Distributions)).
2. A hardship distribution.
3. Any of a series of substantially equal peri-
odic distributions paid at least once a year
over:
a. Your lifetime or life expectancy,
b. The lifetimes or life expectancies of
you and your beneficiary, or
c. A period of 10 years or more.
4. Corrective distributions of excess contri-
butions or excess deferrals, and any in-
come allocable to the excess, or of excess
annual additions and any allocable gains.
5. A loan treated as a distribution because it
does not satisfy certain requirements ei-
ther when made or later (such as upon de-
fault), unless the participant's accrued
benefits are reduced (offset) to repay the
loan.
6. Dividends on employer securities.
7. The cost of life insurance coverage.
Any nontaxable amounts that you roll
over into your traditional IRA become
part of your basis (cost) in your IRAs.
To recover your basis when you take distribu-
tions from your IRA, you must complete Form
8606 for the year of the distribution. See Form
8606 under Distributions Fully or Partly Taxa-
ble, later.
Rollover by nonspouse beneficiary. A direct
transfer from a deceased employee's qualified
pension, profit-sharing, or stock bonus plan; an-
nuity plan; tax-sheltered annuity (section
403(b)) plan; or governmental deferred com-
pensation (section 457) plan to an IRA set up to
receive the distribution on your behalf can be
treated as an eligible rollover distribution if you
are the designated beneficiary of the plan and
not the employee's spouse. The IRA is treated
as an inherited IRA. For more information about
inherited IRAs, see Inherited IRAs, earlier.
Reporting rollovers from employer plans.
Enter the total distribution (before income tax or
other deductions were withheld) on Form 1040,
line 16a, or Form 1040A, line 12a. This amount
should be shown in box 1 of Form 1099-R.
From this amount, subtract any contributions
(usually shown in box 5 of Form 1099-R) that
were taxable to you when made. From that re-
sult, subtract the amount that was rolled over ei-
ther directly or within 60 days of receiving the
distribution. Enter the remaining amount, even if
zero, on Form 1040, line 16b, or Form 1040A,
line 12b. Also, enter "Rollover" next to Form
1040, line 16b, or Form 1040A, line 12b.TIP
Transfers Incident to Divorce
If an interest in a traditional IRA is transferred
from your spouse or former spouse to you by a
divorce or separate maintenance decree or a
written document related to such a decree, the
interest in the IRA, starting from the date of the
transfer, is treated as your IRA. The transfer is
tax free. For detailed information, see Can You
Move Retirement Plan Assets? in chapter 1 of
Pub. 590-A.
Converting From Any Traditional
IRA to a Roth IRA
Allowable conversions. You can withdraw all
or part of the assets from a traditional IRA and
reinvest them (within 60 days) in a Roth IRA.
The amount that you withdraw and timely con-
tribute (convert) to the Roth IRA is called a con-
version contribution. If properly (and timely) rol-
led over, the 10% additional tax on early
distributions will not apply. However, a part or
all of the conversion contribution from your tra-
ditional IRA is included in your gross income.
Required distributions. You cannot convert
amounts that must be distributed from your tra-
ditional IRA for a particular year (including the
calendar year in which you reach age 701 2) un-
der the required distribution rules (discussed
later).
Income. You must include in your gross in-
come distributions from a traditional IRA that
you would have had to include in income if you
had not converted them into a Roth IRA. These
amounts are normally included in income on
your return for the year that you converted them
from a traditional IRA to a Roth IRA.
You do not include in gross income any part
of a distribution from a traditional IRA that is a
return of your basis, as discussed later.
You must file Form 8606 to report 2016 con-
versions from traditional, SEP, or SIMPLE IRAs
to a Roth IRA in 2016 (unless you recharacter-
ized the entire amount) and to figure the amount
to include in income.
If you must include any amount in your gross
income, you may have to increase your with-
holding or make estimated tax payments. See
chapter 4.
Recharacterizations
You may be able to treat a contribution made to
one type of IRA as having been made to a dif-
ferent type of IRA. This is called recharacteriz-
ing the contribution. See Can You Move Retire-
ment Plan Assets? in chapter 1 of Pub. 590-A
for more detailed information.
How to recharacterize a contribution. To re-
characterize a contribution, you generally must
have the contribution transferred from the first
IRA (the one to which it was made) to the sec-
ond IRA in a trustee-to-trustee transfer. If the
transfer is made by the due date (including ex-
tensions) for your tax return for the year during
which the contribution was made, you can elect
to treat the contribution as having been origi-
nally made to the second IRA instead of to the
first IRA. If you recharacterize your contribution,
you must do all three of the following.
Include in the transfer any net income allo-
cable to the contribution. If there was a
loss, the net income you must transfer may
be a negative amount.
Report the recharacterization on your tax
return for the year during which the contri-
bution was made.
Treat the contribution as having been
made to the second IRA on the date that it
was actually made to the first IRA.
No deduction allowed. You cannot deduct
the contribution to the first IRA. Any net income
you transfer with the recharacterized contribu-
tion is treated as earned in the second IRA.
Required notifications. To recharacterize
a contribution, you must notify both the trustee
of the first IRA (the one to which the contribution
was actually made) and the trustee of the sec-
ond IRA (the one to which the contribution is
being moved) that you have elected to treat the
contribution as having been made to the sec-
ond IRA rather than the first. You must make
the notifications by the date of the transfer. Only
one notification is required if both IRAs are
maintained by the same trustee. The notifica-
tion(s) must include all of the following informa-
tion.
The type and amount of the contribution to
the first IRA that is to be recharacterized.
The date on which the contribution was
made to the first IRA and the year for which
it was made.
A direction to the trustee of the first IRA to
transfer in a trustee-to-trustee transfer the
amount of the contribution and any net in-
come (or loss) allocable to the contribution
to the trustee of the second IRA.
The name of the trustee of the first IRA and
the name of the trustee of the second IRA.
Any additional information needed to make
the transfer.
Reporting a recharacterization. If you elect
to recharacterize a contribution to one IRA as a
contribution to another IRA, you must report the
recharacterization on your tax return as directed
by Form 8606 and its instructions. You must
treat the contribution as having been made to
the second IRA.
When Can You Withdraw
or Use IRA Assets?
There are rules limiting use of your IRA assets
and distributions from it. Violation of the rules
generally results in additional taxes in the year
of violation. See What Acts Result in Penalties
or Additional Taxes, later.
Contributions returned before the due date
of return. If you made IRA contributions in
2016, you can withdraw them tax free by the
due date of your return. If you have an exten-
sion of time to file your return, you can withdraw
them tax free by the extended due date. You
Page 126 Chapter 17 Individual Retirement Arrangements (IRAs)
can do this if, for each contribution you with-
draw, both of the following conditions apply.
You did not take a deduction for the contri-
bution.
You withdraw any interest or other income
earned on the contribution. You can take
into account any loss on the contribution
while it was in the IRA when calculating the
amount that must be withdrawn. If there
was a loss, the net income earned on the
contribution may be a negative amount.
Note. To calculate the amount you must
withdraw, see Worksheet 1-4 under When Can
You Withdraw or Use Assets? in chapter 1 of
Pub. 590-A.
Earnings includible in income. You must
include in income any earnings on the contribu-
tions you withdraw. Include the earnings in in-
come for the year in which you made the contri-
butions, not in the year in which you withdraw
them.
Generally, except for any part of a with-
drawal that is a return of nondeductible
contributions (basis), any withdrawal of
your contributions after the due date (or exten-
ded due date) of your return will be treated as a
taxable distribution. Excess contributions can
also be recovered tax free as discussed under
What Acts Result in Penalties or Additional
Taxes?, later.
Early distributions tax. The 10% additional
tax on distributions made before you reach age
591 2 does not apply to these tax-free withdraw-
als of your contributions. However, the distribu-
tion of interest or other income must be repor-
ted on Form 5329 and, unless the distribution
qualifies as an exception to the age 591 2 rule, it
will be subject to this tax.
When Must You Withdraw
IRA Assets? (Required
Minimum Distributions)
You cannot keep funds in a traditional IRA in-
definitely. Eventually they must be distributed. If
there are no distributions, or if the distributions
are not large enough, you may have to pay a
50% excise tax on the amount not distributed as
required. See Excess Accumulations (Insuffi-
cient Distributions), later. The requirements for
distributing IRA funds differ depending on
whether you are the IRA owner or the benefi-
ciary of a decedent's IRA.
Required minimum distribution. The amount
that must be distributed each year is referred to
as the required minimum distribution.
Distributions not eligible for rollover.
Amounts that must be distributed (required min-
imum distributions) during a particular year are
not eligible for rollover treatment.
IRA owners. If you are the owner of a tradi-
tional IRA, you must generally start receiving
distributions from your IRA by April 1 of the year
following the year in which you reach age 701 2.
April 1 of the year following the year in which
you reach age 701 2 is referred to as the required
beginning date.CAUTION
!
Distributions by the required beginning
date. You must receive at least a minimum
amount for each year starting with the year you
reach age 701 2 (your 701 2 year). If you do not (or
did not) receive that minimum amount in your
701 2 year, then you must receive distributions
for your 701 2 year by April 1 of the next year.
If an IRA owner dies after reaching age 701 2,
but before April 1 of the next year, no minimum
distribution is required because death occurred
before the required beginning date.
Even if you begin receiving distribu-
tions before you attain age 701 2, you
must begin calculating and receiving
required minimum distributions by your required
beginning date.
Distributions after the required beginning
date. The required minimum distribution for
any year after the year you turn 701 2 must be
made by December 31 of that later year.
Beneficiaries. If you are the beneficiary of a
decedent's traditional IRA, the requirements for
distributions from that IRA generally depend on
whether the IRA owner died before or after the
required beginning date for distributions.
More information. For more information, in-
cluding how to figure your minimum required
distribution each year and how to figure your re-
quired distribution if you are a beneficiary of a
decedent's IRA, see When Must You Withdraw
Assets? in chapter 1 of Pub. 590-B.
Are Distributions Taxable?
In general, distributions from a traditional IRA
are taxable in the year you receive them.
Exceptions. Exceptions to distributions from
traditional IRAs being taxable in the year you re-
ceive them are:
Rollovers,
Qualified charitable distributions (QCD),
discussed later,
Tax-free withdrawals of contributions, dis-
cussed earlier, and
The return of nondeductible contributions,
discussed later under Distributions Fully or
Partly Taxable.
Although a conversion of a traditional
IRA is considered a rollover for Roth
IRA purposes, it is not an exception to
the rule that distributions from a traditional IRA
are taxable in the year you receive them. Con-
version distributions are includible in your gross
income subject to this rule and the special rules
for conversions explained in Converting From
Any Traditional IRA Into a Roth IRA under Can
You Move Retirement Plan Assets? in chapter 1
of Pub. 590-A.
Qualified charitable distributions (QCD). A
qualified charitable distribution (QCD) is gener-
ally a nontaxable distribution made directly by
the trustee of your IRA to an organization eligi-
ble to receive tax deductible contributions. See
Qualified Charitable Distributions in Pub. 590-B
for more information.CAUTION
!CAUTION
!
Ordinary income. Distributions from tradi-
tional IRAs that you include in income are taxed
as ordinary income.
No special treatment. In figuring your tax, you
cannot use the 10-year tax option or capital
gain treatment that applies to lump-sum distri-
butions from qualified retirement plans.
Distributions Fully or Partly
Taxable
Distributions from your traditional IRA may be
fully or partly taxable, depending on whether
your IRA includes any nondeductible contribu-
tions.
Fully taxable. If only deductible contributions
were made to your traditional IRA (or IRAs, if
you have more than one), you have no basis in
your IRA. Because you have no basis in your
IRA, any distributions are fully taxable when re-
ceived. See Reporting taxable distributions on
your return, later.
Partly taxable. If you made nondeductible
contributions or rolled over any after-tax
amounts to any of your traditional IRAs, you
have a cost basis (investment in the contract)
equal to the amount of those contributions.
These nondeductible contributions are not
taxed when they are distributed to you. They
are a return of your investment in your IRA.
Only the part of the distribution that repre-
sents nondeductible contributions and rolled
over after-tax amounts (your cost basis) is tax
free. If nondeductible contributions have been
made or after-tax amounts have been rolled
over to your IRA, distributions consist partly of
nondeductible contributions (basis) and partly
of deductible contributions, earnings, and gains
(if there are any). Until all of your basis has
been distributed, each distribution is partly non-
taxable and partly taxable.
Form 8606. You must complete Form 8606
and attach it to your return if you receive a distri-
bution from a traditional IRA and have ever
made nondeductible contributions or rolled over
after-tax amounts to any of your traditional
IRAs. Using the form, you will figure the nontax-
able distributions for 2016 and your total IRA
basis for 2016 and earlier years.
Note. If you are required to file Form 8606,
but you are not required to file an income tax re-
turn, you still must file Form 8606. Send it to the
IRS at the time and place you would otherwise
file an income tax return.
Distributions reported on Form 1099R. If
you receive a distribution from your traditional
IRA, you will receive Form 1099-R, Distributions
From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Con-
tracts, etc., or a similar statement. IRA distribu-
tions are shown in boxes 1 and 2a of Form
1099-R. The number or letter codes in box 7 tell
you what type of distribution you received from
your IRA.
Withholding. Federal income tax is withheld
from distributions from traditional IRAs unless
you choose not to have tax withheld. See chap-
ter 4.
Chapter 17 Individual Retirement Arrangements (IRAs) Page 127
IRA distributions delivered outside the
United States. In general, if you are a U.S. citi-
zen or resident alien and your home address is
outside the United States or its possessions,
you cannot choose exemption from withholding
on distributions from your traditional IRA.
Reporting taxable distributions on your re
turn. Report fully taxable distributions, includ-
ing early distributions, on Form 1040, line 15b,
or Form 1040A, line 11b (no entry is required on
Form 1040, line 15a, or Form 1040A, line 11a).
If only part of the distribution is taxable, enter
the total amount on Form 1040, line 15a, or
Form 1040A, line 11a, and the taxable part on
Form 1040, line 15b, or Form 1040A, line 11b.
You cannot report distributions on Form
1040EZ.
What Acts Result in
Penalties or Additional
Taxes?
The tax advantages of using traditional IRAs for
retirement savings can be offset by additional
taxes and penalties if you do not follow the
rules.
There are additions to the regular tax for us-
ing your IRA funds in prohibited transactions.
There are also additional taxes for the following
activities.
Investing in collectibles.
Making excess contributions.
Taking early distributions.
Allowing excess amounts to accumulate
(failing to take required distributions).
There are penalties for overstating the
amount of nondeductible contributions and for
failure to file a Form 8606, if required.
Prohibited Transactions
Generally, a prohibited transaction is any im-
proper use of your traditional IRA by you, your
beneficiary, or any disqualified person.
Disqualified persons include your fiduciary
and members of your family (spouse, ancestor,
lineal descendent, and any spouse of a lineal
descendent).
The following are examples of prohibited
transactions with a traditional IRA.
Borrowing money from it.
Selling property to it.
Using it as security for a loan.
Buying property for personal use (present
or future) with IRA funds.
Effect on an IRA account. Generally, if you or
your beneficiary engages in a prohibited trans-
action in connection with your traditional IRA
account at any time during the year, the ac-
count stops being an IRA as of the first day of
that year.
Effect on you or your beneficiary. If your ac-
count stops being an IRA because you or your
beneficiary engaged in a prohibited transaction,
the account is treated as distributing all its as-
sets to you at their fair market values on the first
day of the year. If the total of those values is
more than your basis in the IRA, you will have a
taxable gain that is includible in your income.
For information on figuring your gain and report-
ing it in income, see Are Distributions Taxable,
earlier. The distribution may be subject to addi-
tional taxes or penalties.
Taxes on prohibited transactions. If some-
one other than the owner or beneficiary of a tra-
ditional IRA engages in a prohibited transaction,
that person may be liable for certain taxes. In
general, there is a 15% tax on the amount of the
prohibited transaction and a 100% additional
tax if the transaction is not corrected.
More information. For more information on
prohibited transactions, see What Acts Result
in Penalties or Additional Taxes? in chapter 1 of
Pub. 590-A.
Investment in Collectibles
If your traditional IRA invests in collectibles, the
amount invested is considered distributed to
you in the year invested. You may have to pay
the 10% additional tax on early distributions,
discussed later.
Collectibles. These include:
Artworks,
Rugs,
Antiques,
Metals,
Gems,
Stamps,
Coins,
Alcoholic beverages, and
Certain other tangible personal property.
Exception. Your IRA can invest in one-,
one-half-, one-quarter-, or one-tenth-ounce
U.S. gold coins, or one-ounce silver coins min-
ted by the Treasury Department. It can also in-
vest in certain platinum coins and certain gold,
silver, palladium, and platinum bullion.
Excess Contributions
Generally, an excess contribution is the amount
contributed to your traditional IRA(s) for the
year that is more than the smaller of:
The maximum deductible amount for the
year. For 2016, this is $5,500 ($6,500 if
you are 50 or older), or
Your taxable compensation for the year.
Tax on excess contributions. In general, if
the excess contributions for a year are not with-
drawn by the date your return for the year is due
(including extensions), you are subject to a 6%
tax. You must pay the 6% tax each year on ex-
cess amounts that remain in your traditional IRA
at the end of your tax year. The tax cannot be
more than 6% of the combined value of all your
IRAs as of the end of your tax year.
Excess contributions withdrawn by due
date of return. You will not have to pay the 6%
tax if you withdraw an excess contribution made
during a tax year and you also withdraw interest
or other income earned on the excess contribu-
tion. You must complete your withdrawal by the
date your tax return for that year is due, includ-
ing extensions.
How to treat withdrawn contributions. Do
not include in your gross income an excess
contribution that you withdraw from your tradi-
tional IRA before your tax return is due if both
the following conditions are met.
No deduction was allowed for the excess
contribution.
You withdraw the interest or other income
earned on the excess contribution.
You can take into account any loss on the con-
tribution while it was in the IRA when calculating
the amount that must be withdrawn. If there was
a loss, the net income you must withdraw may
be a negative amount.
How to treat withdrawn interest or other
income. You must include in your gross in-
come the interest or other income that was
earned on the excess contribution. Report it on
your return for the year in which the excess con-
tribution was made. Your withdrawal of interest
or other income may be subject to an additional
10% tax on early distributions, discussed later.
Excess contributions withdrawn after due
date of return. In general, you must include all
distributions (withdrawals) from your traditional
IRA in your gross income. However, if the fol-
lowing conditions are met, you can withdraw ex-
cess contributions from your IRA and not in-
clude the amount withdrawn in your gross
income.
Total contributions (other than rollover con-
tributions) for 2016 to your IRA were not
more than $5,500 ($6,500 if you are 50 or
older).
You did not take a deduction for the ex-
cess contribution being withdrawn.
The withdrawal can take place at any time,
even after the due date, including extensions,
for filing your tax return for the year.
Excess contribution deducted in an earlier
year. If you deducted an excess contribution in
an earlier year for which the total contributions
were not more than the maximum deductible
amount for that year (see the following table),
you can still remove the excess from your tradi-
tional IRA and not include it in your gross in-
come. To do this, file Form 1040X for that year
and do not deduct the excess contribution on
the amended return. Generally, you can file an
amended return within 3 years after you filed
your return, or 2 years from the time the tax was
paid, whichever is later.
Page 128 Chapter 17 Individual Retirement Arrangements (IRAs)
Year(s)
Contribution
limit
Contribution
limit if age
50 or older
at the end of
the year
2013 through
2015 $5,500 $6,500
2008 through
2012 $5,000 $6,000
2006 or 2007 $4,000 $5,000
2005 $4,000 $4,500
2002 through
2004 $3,000 $3,500
1997 through
2001 $2,000 —
before 1997 $2,250 —
Excess due to incorrect rollover informa
tion. If an excess contribution in your tradi-
tional IRA is the result of a rollover and the ex-
cess occurred because the information the plan
was required to give you was incorrect, you can
withdraw the excess contribution. The limits
mentioned above are increased by the amount
of the excess that is due to the incorrect infor-
mation. You will have to amend your return for
the year in which the excess occurred to correct
the reporting of the rollover amounts in that
year. Do not include in your gross income the
part of the excess contribution caused by the in-
correct information.
Early Distributions
You must include early distributions of taxable
amounts from your traditional IRA in your gross
income. Early distributions are also subject to
an additional 10% tax. See the discussion of
Form 5329 under Reporting Additional Taxes,
later, to figure and report the tax.
Early distributions defined. Early distribu-
tions generally are amounts distributed from
your traditional IRA account or annuity before
you are age 591 2.
Age 591 2 rule. Generally, if you are under age
591 2, you must pay a 10% additional tax on the
distribution of any assets (money or other prop-
erty) from your traditional IRA. Distributions be-
fore you are age 591 2 are called early distribu-
tions.
The 10% additional tax applies to the part of
the distribution that you have to include in gross
income. It is in addition to any regular income
tax on that amount.
Exceptions. There are several exceptions
to the age 591 2 rule. Even if you receive a distri-
bution before you are age 591 2, you may not
have to pay the 10% additional tax if you are in
one of the following situations.
You have unreimbursed medical expenses
that are more than 10% (or 7.5% if you or
your spouse were born before January 2,
1952) of your adjusted gross income.
The distributions are not more than the
cost of your medical insurance due to a pe-
riod of unemployment.
You are totally and permanently disabled.
You are the beneficiary of a deceased IRA
owner.
You are receiving distributions in the form
of an annuity.
The distributions are not more than your
qualified higher education expenses.
You use the distributions to buy, build, or
rebuild a first home.
The distribution is due to an IRS levy of the
qualified plan.
The distribution is a qualified reservist dis-
tribution.
Most of these exceptions are explained under
Early Distributions in What Acts Result in Penal-
ties or Additional Taxes? in chapter 1 of Pub.
590-B.
Note. Distributions that are timely and prop-
erly rolled over, as discussed earlier, are not
subject to either regular income tax or the 10%
additional tax. Certain withdrawals of excess
contributions after the due date of your return
are also tax free and therefore not subject to the
10% additional tax. (See Excess contributions
withdrawn after due date of return, earlier.) This
also applies to transfers incident to divorce, as
discussed earlier.
Receivership distributions. Early distribu-
tions (with or without your consent) from sav-
ings institutions placed in receivership are sub-
ject to this tax unless one of the exceptions
listed earlier applies. This is true even if the dis-
tribution is from a receiver that is a state
agency.
Additional 10% tax. The additional tax on
early distributions is 10% of the amount of the
early distribution that you must include in your
gross income. This tax is in addition to any reg-
ular income tax resulting from including the dis-
tribution in income.
Nondeductible contributions. The tax on
early distributions does not apply to the part of a
distribution that represents a return of your non-
deductible contributions (basis).
More information. For more information on
early distributions, see What Acts Result in
Penalties or Additional Taxes? in chapter 1 of
Pub. 590-B.
Excess Accumulations
(Insufficient Distributions)
You cannot keep amounts in your traditional
IRA indefinitely. Generally, you must begin re-
ceiving distributions by April 1 of the year fol-
lowing the year in which you reach age 701 2.
The required minimum distribution for any year
after the year in which you reach age 701 2 must
be made by December 31 of that later year.
Tax on excess. If distributions are less than
the required minimum distribution for the year,
you may have to pay a 50% excise tax for that
year on the amount not distributed as required.
Request to waive the tax. If the excess accu-
mulation is due to reasonable error, and you
have taken, or are taking, steps to remedy the
insufficient distribution, you can request that the
tax be waived. If you believe you qualify for this
relief, attach a statement of explanation and
complete Form 5329 as instructed under
Waiver of tax in the Instructions for Form 5329.
Exemption from tax. If you are unable to take
required distributions because you have a tradi-
tional IRA invested in a contract issued by an in-
surance company that is in state insurer delin-
quency proceedings, the 50% excise tax does
not apply if the conditions and requirements of
Revenue Procedure 92-10 are satisfied.
More information. For more information on
excess accumulations, see What Acts Result in
Penalties or Additional Taxes? in chapter 1 of
Pub. 590-B.
Reporting Additional Taxes
Generally, you must use Form 5329 to report
the tax on excess contributions, early distribu-
tions, and excess accumulations. If you must
file Form 5329, you cannot use Form 1040A or
Form 1040EZ.
Filing a tax return. If you must file an individ-
ual income tax return, complete Form 5329 and
attach it to your Form 1040. Enter the total addi-
tional taxes due on Form 1040, line 59.
Not filing a tax return. If you do not have to
file a tax return but do have to pay one of the
additional taxes mentioned earlier, file the com-
pleted Form 5329 with the IRS at the time and
place you would have filed your Form 1040. Be
sure to include your address on page 1 and
your signature and date on page 2. Enclose, but
do not attach, a check or money order payable
to the United States Treasury for the tax you
owe, as shown on Form 5329. Enter your social
security number and “2016 Form 5329” on your
check or money order.
Form 5329 not required. You do not have to
use Form 5329 if either of the following situa-
tions exists.
Distribution code 1 (early distribution) is
correctly shown in box 7 of all your Forms
1099-R. If you do not owe any other addi-
tional tax on a distribution, multiply the tax-
able part of the early distribution by 10%
and enter the result on Form 1040, line 59.
Put “No” to the left of the line to indicate
that you do not have to file Form 5329.
However, if you owe this tax and also owe
any other additional tax on a distribution,
do not enter this 10% additional tax directly
on your Form 1040. You must file Form
5329 to report your additional taxes.
If you rolled over part or all of a distribution
from a qualified retirement plan, the part
rolled over is not subject to the tax on early
distributions.
Roth IRAs
Regardless of your age, you may be able to es-
tablish and make nondeductible contributions to
a retirement plan called a Roth IRA.
Contributions not reported. You do not re-
port Roth IRA contributions on your return.
Chapter 17 Individual Retirement Arrangements (IRAs) Page 129
What Is a Roth IRA?
A Roth IRA is an individual retirement plan that,
except as explained in this chapter, is subject to
the rules that apply to a traditional IRA (defined
earlier). It can be either an account or an annu-
ity. Individual retirement accounts and annuities
are described under How Can a Traditional IRA
Be Opened? in chapter 1 of Pub. 590-A.
To be a Roth IRA, the account or annuity
must be designated as a Roth IRA when it is
opened. A deemed IRA can be a Roth IRA, but
neither a SEP IRA nor a SIMPLE IRA can be
designated as a Roth IRA.
Unlike a traditional IRA, you cannot deduct
contributions to a Roth IRA. But, if you satisfy
the requirements, qualified distributions (dis-
cussed later) are tax free. Contributions can be
made to your Roth IRA after you reach age 701 2
and you can leave amounts in your Roth IRA as
long as you live.
When Can a Roth IRA Be
Opened?
You can open a Roth IRA at any time. However,
the time for making contributions for any year is
limited. See When Can You Make Contribu-
tions?, later, under Can You Contribute to a
Roth IRA?
Can You Contribute to a
Roth IRA?
Generally, you can contribute to a Roth IRA if
you have taxable compensation (defined later)
and your modified AGI (defined later) is less
than:
$194,000 for married filing jointly or qualify-
ing widow(er),
$132,000 for single, head of household, or
married filing separately and you did not
live with your spouse at any time during the
year, or
$10,000 for married filing separately and
you lived with your spouse at any time dur-
ing the year.
You may be eligible to claim a credit for
contributions to your Roth IRA. For
more information, see chapter 38.TIP
Is there an age limit for contributions? Con-
tributions can be made to your Roth IRA regard-
less of your age.
Can you contribute to a Roth IRA for your
spouse? You can contribute to a Roth IRA for
your spouse provided the contributions satisfy
the Kay Bailey Hutchison Spousal IRA limit (dis-
cussed in How Much Can Be Contributed? un-
der Traditional IRAs), you file jointly, and your
modified AGI is less than $194,000.
Compensation. Compensation includes wa-
ges, salaries, tips, professional fees, bonuses,
and other amounts received for providing per-
sonal services. It also includes commissions,
self-employment income, nontaxable combat
pay, military differential pay, and taxable ali-
mony and separate maintenance payments.
Modified AGI. Your modified AGI for Roth IRA
purposes is your adjusted gross income (AGI)
as shown on your return with some adjust-
ments. Use Worksheet 17-2 below to determine
your modified AGI.
Worksheet 17-2. Modified Adjusted Gross Income for Roth IRA Purposes Keep for Your Records
Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes.
1. Enter your adjusted gross income from Form 1040, line 38, or Form 1040A, line 22 . . . . . . . . 1.
2. Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth
IRA (included on Form 1040, line 15b, or Form 1040A, line 11b) and a rollover from a qualified
retirement plan to a Roth IRA (included on Form 1040, line 16b, or Form 1040A,
line 12b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.
3. Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Enter any traditional IRA deduction from Form 1040, line 32, or Form 1040A, line 17 . . . . . . . 4.
5. Enter any student loan interest deduction from Form 1040, line 33, or Form 1040A,
line 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
6. Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 . . . . . . 6.
7. Enter any domestic production activities deduction from Form 1040, line 35 . . . . . . . . . . . . . 7.
8. Enter any foreign earned income and/or housing exclusion from Form 2555, line 45, or Form
2555-EZ, line 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.
9. Enter any foreign housing deduction from Form 2555, line 50 . . . . . . . . . . . . . . . . . . . . . . . . . 9.
10. Enter any excludable savings bond interest from Form 8815, line 14 . . . . . . . . . . . . . . . . . . . 10.
11. Enter any excluded employer-provided adoption benefits from Form 8839, line 28 . . . . . . . . 11.
12. Add the amounts on lines 3 through 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.
13. Enter:
• $194,000 if married filing jointly or qualifying widow(er)
• $10,000 if married filing separately and you lived with your
spouse at any time during the year
• $132,000 for all others 13.
Is the amount on line 12 more than the amount on line 13?
If yes, then see the Note below.
If no, then the amount on line 12 is your modified AGI for Roth IRA purposes.
Note. If the amount on line 12 is more than the amount on line 13 and you have other income or loss items, such as social security
income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of
figuring your modified AGI for Roth IRA purposes. (If you receive social security benefits, use Worksheet 1 in Appendix B of Pub.
590-A to refigure your AGI.) Then go to line 3 above in this Worksheet 17-2 to refigure your modified AGI. If you do not have other
income or loss items subject to AGI-based phaseouts, your modified AGI for Roth IRA purposes is the amount on line 12.
Page 130 Chapter 17 Individual Retirement Arrangements (IRAs)
How Much Can Be Contributed?
The contribution limit for Roth IRAs generally
depends on whether contributions are made
only to Roth IRAs or to both traditional IRAs and
Roth IRAs.
Roth IRAs only. If contributions are made only
to Roth IRAs, your contribution limit generally is
the lesser of the following amounts.
$5,500 ($6,500 if you are 50 or older in
2016).
Your taxable compensation.
However, if your modified AGI is above a cer-
tain amount, your contribution limit may be re-
duced, as explained later under Contribution
limit reduced.
Roth IRAs and traditional IRAs. If contribu-
tions are made to both Roth IRAs and tradi-
tional IRAs established for your benefit, your
contribution limit for Roth IRAs generally is the
same as your limit would be if contributions
were made only to Roth IRAs, but then reduced
by all contributions for the year to all IRAs other
than Roth IRAs. Employer contributions under a
SEP or SIMPLE IRA plan do not affect this limit.
This means that your contribution limit is
generally the lesser of the following amounts.
$5,500 ($6,500 if you are 50 or older in
2016) minus all contributions (other than
employer contributions under a SEP or
SIMPLE IRA plan) for the year to all IRAs
other than Roth IRAs.
Your taxable compensation minus all con-
tributions (other than employer contribu-
tions under a SEP or SIMPLE IRA plan) for
the year to all IRAs other than Roth IRAs.
However, if your modified AGI is above a cer-
tain amount, your contribution limit may be re-
duced, as explained next under Contribution
limit reduced.
Contribution limit reduced. If your modified
AGI is above a certain amount, your contribu-
tion limit is gradually reduced. Use Table 17-3
to determine if this reduction applies to you.
Table 17-3. Effect of Modified AGI on Roth IRA Contribution
This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income (modified AGI).
IF you have taxable compensation and
your filing status is...
AND your modified
AGI is... THEN...
married filing jointly, or
qualifying widow(er)
less than $184,000 you can contribute up to $5,500 ($6,500 if you are 50 or
older in 2016).
at least $184,000
but less than $194,000
the amount you can contribute is reduced as explained
under Contribution limit reduced in chapter 2 of Pub.
590-A.
$194,000 or more you cannot contribute to a Roth IRA.
married filing separately and you lived
with your spouse at any time during the year
zero (-0-) you can contribute up to $5,500 ($6,500 if you are 50 or
older in 2016).
more than zero (-0-)
but less than $10,000
the amount you can contribute is reduced as explained
under Contribution limit reduced in chapter 2 of Pub.
590-A.
$10,000 or more you cannot contribute to a Roth IRA.
single,
head of household, or married filing
separately and you did not live with your
spouse at any time during the year
less than $117,000 you can contribute up to $5,500 ($6,500 if you are 50 or
older in 2016).
at least $117,000
but less than $132,000
the amount you can contribute is reduced as explained
under Contribution limit reduced in chapter 2 of Pub.
590-A.
$132,000 or more you cannot contribute to a Roth IRA.
Figuring the reduction. If the amount you
can contribute to your Roth IRA is reduced, see
Worksheet 2-2 under Can You Contribute to a
Roth IRA? in chapter 2 of Pub. 590-A for how to
figure the reduction.
When Can You Make
Contributions?
You can make contributions to a Roth IRA for a
year at any time during the year or by the due
date of your return for that year (not including
extensions).
You can make contributions for 2016
by the due date (not including exten-
sions) for filing your 2016 tax return.
What if You Contribute Too Much?
A 6% excise tax applies to any excess contribu-
tion to a Roth IRA.TIP
Excess contributions. These are the contri-
butions to your Roth IRAs for a year that equal
the total of:
1. Amounts contributed for the tax year to
your Roth IRAs (other than amounts prop-
erly and timely rolled over from a Roth IRA
or properly converted from a traditional
IRA or rolled over from a qualified retire-
ment plan, as described later) that are
more than your contribution limit for the
year, plus
2. Any excess contributions for the preceding
year, reduced by the total of:
a. Any distributions out of your Roth
IRAs for the year, plus
b. Your contribution limit for the year mi-
nus your contributions to all your IRAs
for the year.
Withdrawal of excess contributions. For
purposes of determining excess contributions,
any contribution that is withdrawn on or before
the due date (including extensions) for filing
your tax return for the year is treated as an
amount not contributed. This treatment applies
only if any earnings on the contributions are
also withdrawn. The earnings are considered to
have been earned and received in the year the
excess contribution was made.
Applying excess contributions. If contribu-
tions to your Roth IRA for a year were more
than the limit, you can apply the excess contri-
bution in one year to a later year if the contribu-
tions for that later year are less than the maxi-
mum allowed for that year.
Can You Move Amounts
Into a Roth IRA?
You may be able to convert amounts from either
a traditional, SEP, or SIMPLE IRA into a Roth
IRA. You may be able to roll amounts over from
a qualified retirement plan to a Roth IRA. You
may be able to recharacterize contributions
Chapter 17 Individual Retirement Arrangements (IRAs) Page 131
made to one IRA as having been made directly
to a different IRA. You can roll amounts over
from a designated Roth account or from one
Roth IRA to another Roth IRA.
Conversions
You can convert a traditional IRA to a Roth IRA.
The conversion is treated as a rollover, regard-
less of the conversion method used. Most of the
rules for rollovers, described earlier under Roll-
over From One IRA Into Another under Tradi-
tional IRAs, apply to these rollovers. However,
the 1-year waiting period does not apply.
Conversion methods. You can convert
amounts from a traditional IRA to a Roth IRA in
any of the following ways.
Rollover. You can receive a distribution
from a traditional IRA and roll it over (con-
tribute it) to a Roth IRA within 60 days after
the distribution.
Trustee-to-trustee transfer. You can di-
rect the trustee of the traditional IRA to
transfer an amount from the traditional IRA
to the trustee of the Roth IRA.
Same trustee transfer. If the trustee of
the traditional IRA also maintains the Roth
IRA, you can direct the trustee to transfer
an amount from the traditional IRA to the
Roth IRA.
Same trustee. Conversions made with the
same trustee can be made by redesignating the
traditional IRA as a Roth IRA, rather than open-
ing a new account or issuing a new contract.
Rollover from a qualified retirement plan
into a Roth IRA. You can roll over into a Roth
IRA all or part of an eligible rollover distribution
you receive from your (or your deceased spou-
se's):
Employer's qualified pension, profit-shar-
ing, or stock bonus plan;
Annuity plan;
Tax-sheltered annuity plan (section 403(b)
plan); or
Governmental deferred compensation plan
(section 457 plan).
Any amount rolled over is subject to the same
rules as those for converting a traditional IRA
into a Roth IRA. Also, the rollover contribution
must meet the rollover requirements that apply
to the specific type of retirement plan.
Income. You must include in your gross in-
come distributions from a qualified retirement
plan that you would have had to include in in-
come if you had not rolled them over into a Roth
IRA. You do not include in gross income any
part of a distribution from a qualified retirement
plan that is a return of basis (after-tax contribu-
tions) to the plan that were taxable to you when
paid. These amounts are normally included in
income on your return for the year you rolled
them over from the employer plan to a Roth
IRA.
If you must include any amount in your
gross income, you may have to in-
crease your withholding or make esti-
mated tax payments. See Pub. 505, Tax With-
holding and Estimated Tax.
For more information, see Rollover From
Employer's Plan Into a Roth IRA in chapter 2 of
Pub. 590-A.
Converting from a SIMPLE IRA. Generally,
you can convert an amount in your SIMPLE IRA
to a Roth IRA under the same rules explained
earlier under Converting From Any Traditional
IRA to a Roth IRA under Traditional IRAs.
However, you cannot convert any amount
distributed from the SIMPLE IRA during the
2-year period beginning on the date you first
participated in any SIMPLE IRA plan main-
tained by your employer.
More information. For more detailed informa-
tion on conversions, see Can You Move
Amounts Into a Roth IRA? under chapter 2 in
Pub. 590-A.
Rollover From a Roth IRA
You can withdraw, tax free, all or part of the as-
sets from one Roth IRA if you contribute them
within 60 days to another Roth IRA. Most of the
rules for rollovers, explained earlier under Roll-
over From One IRA Into Another under Tradi-
tional IRAs, apply to these rollovers.
Rollover from designated Roth account. A
rollover from a designated Roth account can
only be made to another designated Roth ac-
count or to a Roth IRA. For more information
about designated Roth accounts, see chap-
ter 10.
Are Distributions Taxable?
You do not include in your gross income quali-
fied distributions or distributions that are a re-
turn of your regular contributions from your Roth
IRA(s). You also do not include distributions
from your Roth IRA that you roll over tax free
into another Roth IRA. You may have to include
part of other distributions in your income. See
Ordering rules for distributions, later.
What are qualified distributions? A qualified
distribution is any payment or distribution from
your Roth IRA that meets the following require-
ments.
1. It is made after the 5-year period begin-
ning with the first taxable year for which a
contribution was made to a Roth IRA set
up for your benefit, and
2. The payment or distribution is:
a. Made on or after the date you reach
age 591 2,
b. Made because you are disabled,
c. Made to a beneficiary or to your es-
tate after your death, or
d. To pay up to $10,000 (lifetime limit) of
certain qualified first-time homebuyer
amounts. See First home under What
Acts Result in Penalties or AdditionalCAUTION
!
Taxes? in chapter 1 of Pub. 590-B for
more information.
Additional tax on distributions of conver
sion and certain rollover contributions
within 5year period. If, within the 5-year pe-
riod starting with the first day of your tax year in
which you convert an amount from a traditional
IRA or roll over an amount from a qualified re-
tirement plan to a Roth IRA, you take a distribu-
tion from a Roth IRA, you may have to pay the
10% additional tax on early distributions. You
generally must pay the 10% additional tax on
any amount attributable to the part of the
amount converted or rolled over (the conversion
or rollover contribution) that you had to include
in income. A separate 5-year period applies to
each conversion and rollover. See Ordering
rules for distributions, later, to determine the
amount, if any, of the distribution that is attribut-
able to the part of the conversion or rollover
contribution that you had to include in income.
Additional tax on other early distributions.
Unless an exception applies, you must pay the
10% additional tax on the taxable part of any
distributions that are not qualified distributions.
See Pub. 590-B for more information.
Ordering rules for distributions. If you re-
ceive a distribution from your Roth IRA that is
not a qualified distribution, part of it may be tax-
able. There is a set order in which contributions
(including conversion contributions and rollover
contributions from qualified retirement plans)
and earnings are considered to be distributed
from your Roth IRA. Regular contributions are
distributed first. See Ordering Rules for Distri-
butions under Are Distributions Taxable? in
chapter 2 of Pub. 590-B for more information.
Must you withdraw or use Roth IRA assets?
You are not required to take distributions from
your Roth IRA at any age. The minimum distri-
bution rules that apply to traditional IRAs do not
apply to Roth IRAs while the owner is alive.
However, after the death of a Roth IRA owner,
certain minimum distribution rules that apply to
traditional IRAs also apply to Roth IRAs.
More information. For more detailed informa-
tion on Roth IRAs, see chapter 2 of Pub. 590-A
and Pub. 590-B.
18.
Alimony
Introduction
This chapter discusses the rules that apply if
you pay or receive alimony. It covers the follow-
ing topics.
What payments are alimony.
What payments are not alimony, such as
child support.
Page 132 Chapter 18 Alimony
How to deduct alimony you paid.
How to report alimony you received as in-
come.
Whether you must recapture the tax bene-
fits of alimony. Recapture means adding
back in your income all or part of a deduc-
tion you took in a prior year.
Alimony is a payment to or for a spouse or
former spouse under a divorce or separation in-
strument. It doesn’t include voluntary payments
that aren’t made under a divorce or separation
instrument.
Alimony is deductible by the payer, and the
recipient must include it in income. Although
this chapter is generally written for the payer of
the alimony, the recipient can also use the infor-
mation to determine whether an amount re-
ceived is alimony.
To be alimony, a payment must meet certain
requirements. There are some differences be-
tween the requirements that apply to payments
under instruments executed after 1984 and to
payments under instruments executed before
1985. The general requirements that apply to
payments regardless of when the divorce or
separation agreement was executed and the
specific requirements that apply to post-1984
(and, in certain cases, some pre-1985 instru-
ments) are discussed in this chapter. If you are
looking for information on the specific require-
ments that apply to pre-1985 instruments, get
and keep a copy of the 2004 version of Pub.
504. That was the last year the information on
pre-1985 instruments was included in Pub. 504.
Use Table 18-1 in this chapter as a guide to
determine whether certain payments are con-
sidered alimony.
Definitions. The following definitions apply
throughout this chapter.
Spouse or former spouse. Unless other-
wise stated, the term “spouse” includes former
spouse.
Divorce or separation instrument. The
term “divorce or separation instrument” means:
A decree of divorce or separate mainte-
nance or a written instrument incident to
that decree;
A written separation agreement; or
A decree or any type of court order requir-
ing a spouse to make payments for the
support or maintenance of the other
spouse. This includes a temporary decree,
an interlocutory (not final) decree, and a
decree of alimony pendente lite (while
awaiting action on the final decree or
agreement).
Useful Items
You may want to see:
Publication
Divorced or Separated Individuals
General Rules
The following rules apply to alimony regardless
of when the divorce or separation instrument
was executed.
Payments not alimony. Not all payments un-
der a divorce or separation instrument are ali-
mony. Alimony doesn’t include:
Child support;
Noncash property settlements;
Payments that are your spouse's part of
community income, as explained under
Community Property in Pub. 504;
Payments to keep up the payer's property;
or
Use of the payer's property.
Payments to a third party. Cash payments,
checks, or money orders to a third party on be-
half of your spouse under the terms of your di-
vorce or separation instrument can be alimony,
if they otherwise qualify. These include pay-
ments for your spouse's medical expenses,
housing costs (rent, utilities, etc.), taxes, tuition,
etc. The payments are treated as received by
your spouse and then paid to the third party.
Life insurance premiums. Alimony includes
premiums you must pay under your divorce or
separation instrument for insurance on your life
to the extent your spouse owns the policy.
Payments for jointly owned home. If your di-
vorce or separation instrument states that you
must pay expenses for a home owned by you
and your spouse, some of your payments may
be alimony.
Mortgage payments. If you must pay all the
mortgage payments (principal and interest) on a
jointly owned home, and they otherwise qualify
as alimony, you can deduct half of the total pay-
ments as alimony. If you itemize deductions and
the home is a qualified home, you can claim half
of the interest in figuring your deductible inter-
est. Your spouse must report half of the pay-
ments as alimony received. If your spouse item-
izes deductions and the home is a qualified
home, he or she can claim half of the interest on
the mortgage in figuring deductible interest.
Taxes and insurance. If you must pay all
the real estate taxes or insurance on a home
held as tenants in common, you can deduct half
of these payments as alimony. Your spouse
must report half of these payments as alimony
received. If you and your spouse itemize deduc-
tions, you can each claim half of the real estate
taxes and none of the home insurance.
If your home is held as tenants by the en-
tirety or joint tenants, none of your payments for
taxes or insurance are alimony. But if you item-
ize deductions, you can claim all of the real es-
tate taxes and none of the home insurance.
Other payments to a third party. If you
made other third-party payments, see Pub. 504
to see whether any part of the payments quali-
fies as alimony.
Instruments
Executed After 1984
The following rules for alimony apply to pay-
ments under divorce or separation instruments
executed after 1984.
Exception for instruments executed before
1985. There are two situations where the rules
for instruments executed after 1984 apply to in-
struments executed before 1985.
1. A divorce or separation instrument execu-
ted before 1985 and then modified after
1984 to specify that the after-1984 rules
will apply.
2. A temporary divorce or separation instru-
ment executed before 1985 and incorpo-
rated into, or adopted by, a final decree
executed after 1984 that:
a. Changes the amount or period of pay-
ment, or
b. Adds or deletes any contingency or
condition.
For the rules for alimony payments under
pre-1985 instruments not meeting these excep-
tions, get the 2004 version of Pub. 504 at
IRS.gov/pub504.
Example 1. In November 1984, you and
your former spouse executed a written separa-
tion agreement. In February 1985, a decree of
divorce was substituted for the written separa-
tion agreement. The decree of divorce didn’t
change the terms for the alimony you pay your
former spouse. The decree of divorce is treated
as executed before 1985. Alimony payments
under this decree aren’t subject to the rules for
payments under instruments executed after
1984.
Example 2. Assume the same facts as in
Example 1 except that the decree of divorce
changed the amount of the alimony. In this ex-
ample, the decree of divorce isn’t treated as
executed before 1985. The alimony payments
are subject to the rules for payments under in-
struments executed after 1984.
Alimony requirements. A payment to or for a
spouse under a divorce or separation instru-
ment is alimony if the spouses don’t file a joint
return with each other and all the following re-
quirements are met.
The payment is in cash.
The instrument doesn’t designate the pay-
ment as not alimony.
The spouses aren’t members of the same
household at the time the payments are
made. This requirement applies only if the
spouses are legally separated under a de-
cree of divorce or separate maintenance.
There is no liability to make any payment
(in cash or property) after the death of the
recipient spouse.
The payment isn’t treated as child support.
Each of these requirements is discussed next.
Cash payment requirement. Only cash pay-
ments, including checks and money orders,
qualify as alimony. The following don’t qualify
as alimony.
Transfers of services or property (including
a debt instrument of a third party or an an-
nuity contract).
Execution of a debt instrument by the
payer.
The use of the payer's property.
Chapter 18 Alimony Page 133
Payments to a third party. Cash payments
to a third party under the terms of your divorce
or separation instrument can qualify as cash
payments to your spouse. See Payments to a
third party under General Rules, earlier.
Also, cash payments made to a third party at
the written request of your spouse may qualify
as alimony if all the following requirements are
met.
The payments are in lieu of payments of
alimony directly to your spouse.
The written request states that both spou-
ses intend the payments to be treated as
alimony.
You receive the written request from your
spouse before you file your return for the
year you made the payments.
Payments designated as not alimony. You
and your spouse can designate that otherwise
qualifying payments aren’t alimony. You do this
by including a provision in your divorce or sepa-
ration instrument that states the payments
aren’t deductible as alimony by you and are ex-
cludable from your spouse's income. For this
purpose, any instrument (written statement)
signed by both of you that makes this designa-
tion and that refers to a previous written separa-
tion agreement is treated as a written separa-
tion agreement (and therefore a divorce or
separation instrument). If you are subject to
temporary support orders, the designation must
be made in the original or a later temporary sup-
port order.
Your spouse can exclude the payments
from income only if he or she attaches a copy of
the instrument designating them as not alimony
to his or her return. The copy must be attached
each year the designation applies.
Spouses can’t be members of the same
household. Payments to your spouse while
you are members of the same household aren’t
alimony if you are legally separated under a de-
cree of divorce or separate maintenance. A
home you formerly shared is considered one
household, even if you physically separate
yourselves in the home.
You aren’t treated as members of the same
household if one of you is preparing to leave the
household and does leave no later than 1
month after the date of the payment.
Exception. If you aren’t legally separated
under a decree of divorce or separate mainte-
nance, a payment under a written separation
agreement, support decree, or other court order
may qualify as alimony even if you are mem-
bers of the same household when the payment
is made.
Liability for payments after death of recipi
ent spouse. If any part of payments you make
must continue to be made for any period after
your spouse's death, that part of your payments
isn’t alimony, whether made before or after the
death. If all of the payments would continue,
then none of the payments made before or after
the death are alimony.
The divorce or separation instrument
doesn’t have to expressly state that the pay-
ments cease upon the death of your spouse if,
for example, the liability for continued payments
would end under state law.
Example. You must pay your former
spouse $10,000 in cash each year for 10 years.
Your divorce decree states that the payments
will end upon your former spouse's death. You
must also pay your former spouse or your for-
mer spouse's estate $20,000 in cash each year
for 10 years. The death of your spouse wouldn’t
end these payments under state law.
The $10,000 annual payments may qualify
as alimony. The $20,000 annual payments that
don’t end upon your former spouse's death
aren’t alimony.
Substitute payments. If you must make
any payments in cash or property after your
spouse's death as a substitute for continuing
otherwise qualifying payments before the
death, the otherwise qualifying payments aren’t
alimony. To the extent that your payments be-
gin, accelerate, or increase because of the
death of your spouse, otherwise qualifying pay-
ments you made may be treated as payments
that weren’t alimony. Whether or not such pay-
ments will be treated as not alimony depends
on all the facts and circumstances.
Example 1. Under your divorce decree,
you must pay your former spouse $30,000 an-
nually. The payments will stop at the end of 6
years or upon your former spouse's death, if
earlier.
Your former spouse has custody of your mi-
nor children. The decree provides that if any
child is still a minor at your spouse's death, you
must pay $10,000 annually to a trust until the
youngest child reaches the age of majority. The
trust income and corpus (principal) are to be
used for your children's benefit.
These facts indicate that the payments to be
made after your former spouse's death are a
substitute for $10,000 of the $30,000 annual
payments. Of each of the $30,000 annual pay-
ments, $10,000 isn’t alimony.
Example 2. Under your divorce decree,
you must pay your former spouse $30,000 an-
nually. The payments will stop at the end of 15
years or upon your former spouse's death, if
earlier. The decree provides that if your former
spouse dies before the end of the 15-year pe-
riod, you must pay the estate the difference be-
tween $450,000 ($30,000 × 15) and the total
amount paid up to that time. For example, if
your spouse dies at the end of the tenth year,
you must pay the estate $150,000 ($450,000 −
$300,000).
These facts indicate that the lump-sum pay-
ment to be made after your former spouse's
death is a substitute for the full amount of the
$30,000 annual payments. None of the annual
payments are alimony. The result would be the
same if the payment required at death were to
be discounted by an appropriate interest factor
to account for the prepayment.
Child support. A payment that is specifically
designated as child support or treated as spe-
cifically designated as child support under your
divorce or separation instrument isn’t alimony.
The amount of child support may vary over
time. Child support payments aren’t deductible
by the payer and aren’t taxable to the recipient.
Specifically designated as child support.
A payment will be treated as specifically desig-
nated as child support to the extent that the
payment is reduced either:
On the happening of a contingency relating
to your child, or
Table 181. Alimony Requirements (Instruments Executed After 1984)
Payments ARE alimony if all of the
following are true:
Payments are NOT alimony if any of the
following are true:
Payments are required by a divorce or
separation instrument.
Payments aren’t required by a divorce or
separation instrument.
Payer and recipient spouse don’t file a joint
return with each other.
Payer and recipient spouse file a joint return
with each other.
Payment is in cash (including checks or money
orders).
Payment is:
Not in cash,
A noncash property settlement,
Spouse's part of community income, or
To keep up the payer's property.
Payment isn’t designated in the instrument as
not alimony.
Payment is designated in the instrument as
not alimony.
Spouses legally separated under a decree of
divorce or separate maintenance aren’t
members of the same household.
Spouses legally separated under a decree of
divorce or separate maintenance are
members of the same household.
Payments aren’t required after death of the
recipient spouse.
Payments are required after death of the
recipient spouse.
Payment isn’t treated as child support. Payment is treated as child support.
These payments are deductible by the payer
and includible in income by the recipient.
These payments are neither deductible by
the payer nor includible in income by the
recipient.
Page 134 Chapter 18 Alimony
At a time that can be clearly associated
with the contingency.
A payment may be treated as specifically desig-
nated as child support even if other separate
payments are specifically designated as child
support.
Contingency relating to your child. A
contingency relates to your child if it depends
on any event relating to that child. It doesn’t
matter whether the event is certain or likely to
occur. Events relating to your child include the
child's:
Becoming employed,
Dying,
Leaving the household,
Leaving school,
Marrying, or
Reaching a specified age or income level.
Clearly associated with a contingency.
Payments that would otherwise qualify as ali-
mony are presumed to be reduced at a time
clearly associated with the happening of a con-
tingency relating to your child only in the follow-
ing situations.
The payments are to be reduced not more
than 6 months before or after the date the
child will reach 18, 21, or local age of ma-
jority.
The payments are to be reduced on two or
more occasions that occur not more than 1
year before or after a different one of your
children reaches a certain age from 18 to
24. This certain age must be the same for
each child, but needn’t be a whole number
of years.
In all other situations, reductions in payments
are not treated as clearly associated with the
happening of a contingency relating to your
child.
Either you or the IRS can overcome the pre-
sumption in the two situations above. This is
done by showing that the time at which the pay-
ments are to be reduced was determined inde-
pendently of any contingencies relating to your
children. For example, if you can show that the
period of alimony payments is customary in the
local jurisdiction, such as a period equal to half
of the duration of the marriage, you can over-
come the presumption and may be able to treat
the amount as alimony.
How To Deduct
Alimony Paid
You can deduct alimony you paid, whether or
not you itemize deductions on your return. You
must file Form 1040. You can’t use Form 1040A
or Form 1040EZ.
Enter the amount of alimony you paid on
Form 1040, line 31a. In the space provided on
line 31b, enter the recipient’s social security
number (SSN) or individual taxpayer identifica-
tion number (ITIN).
If you paid alimony to more than one person,
enter the SSN or ITIN of one of the recipients.
Show the SSN or ITIN and amount paid to each
additional recipient on an attached statement.
Enter your total payments on line 31a.
If you don’t provide your spouse's SSN
or ITIN, you may have to pay a $50
penalty and your deduction may be
disallowed. For more information on SSNs and
ITINs, see Social Security Number (SSN) in
chapter 1.
How To Report
Alimony Received
Report alimony you received as income on
Form 1040, line 11, or on Schedule NEC (Form
1040NR), line 12. You can’t use Form 1040A or
Form 1040EZ.
You must give the person who paid the
alimony your SSN or ITIN. If you don’t,
you may have to pay a $50 penalty.
Recapture Rule
If your alimony payments decrease or end dur-
ing the first 3 calendar years, you may be sub-
ject to the recapture rule. If you are subject to
this rule, you have to include in income in the
third year part of the alimony payments you pre-
viously deducted. Your spouse can deduct in
the third year part of the alimony payments he
or she previously included in income.
The 3-year period starts with the first calen-
dar year you make a payment qualifying as ali-
mony under a decree of divorce or separate
maintenance or a written separation agreement.
Don’t include any time in which payments were
being made under temporary support orders.
The second and third years are the next 2 cal-
endar years, whether or not payments are
made during those years.
The reasons for a reduction or end of ali-
mony payments that can require a recapture in-
clude:
A change in your divorce or separation in-
strument,
A failure to make timely payments,
A reduction in your ability to provide sup-
port, or
A reduction in your spouse's support
needs.
When to apply the recapture rule. You are
subject to the recapture rule in the third year if
the alimony you pay in the third year decreases
by more than $15,000 from the second year or
the alimony you pay in the second and third
years decreases significantly from the alimony
you pay in the first year.
When you figure a decrease in alimony,
don’t include the following amounts.
Payments made under a temporary sup-
port order.
Payments required over a period of at least
3 calendar years that vary because they
are a fixed part of your income from a busi-
ness or property, or from compensation for
employment or self-employment.CAUTION
!CAUTION
!
Payments that decrease because of the
death of either spouse or the remarriage of
the spouse receiving the payments before
the end of the third year.
Figuring the recapture. You can use Work-
sheet 1 in Pub. 504 to figure recaptured ali-
mony.
Including the recapture in income. If you
must include a recaptured amount in income,
show it on Form 1040, line 11 (“Alimony re-
ceived”). Cross out “received” and enter “recap-
ture.” On the dotted line next to the amount, en-
ter your spouse's last name and SSN or ITIN.
Deducting the recapture. If you can deduct a
recaptured amount, show it on Form 1040,
line 31a (“Alimony paid”). Cross out “paid” and
enter “recapture.” In the space provided, enter
your spouse's SSN or ITIN.
19.
Education-
Related
Adjustments
Introduction
This chapter discusses the education-related
adjustments you can deduct in figuring your ad-
justed gross income.
This chapter covers the student loan interest
deduction, tuition and fees deduction, and the
deduction for educator expenses.
Useful Items
You may want to see:
Publication
Tax Benefits for Education
What's New
Student loan interest deduction. For 2016,
the amount of your student loan interest deduc-
tion is gradually reduced (phased out) if your
MAGI is between $65,000 and $80,000
($130,000 and $160,000 if you file a joint re-
turn). You can't claim the deduction if your
MAGI is $80,000 or more ($160,000 or more if
you file a joint return).
Tuition and fees deduction. The tuition and
fees deduction was extended to cover qualified
education expenses paid in 2015 and 2016.
Form 1098T requirement. For tax years be-
ginning after June 29, 2015, generally tax year
2016 returns for most taxpayers, the law re-
quires a taxpayer (or a dependent) to have re-
ceived a Form 1098-T from an eligible
Chapter 19 Education Related Adjustments Page 135
educational institution in order to claim the tui-
tion and fees deduction, American opportunity
credit, or the lifetime learning credit.
However, for tax year 2016, a taxpayer may
claim one of these education benefits if the stu-
dent does not receive a Form 1098-T because
the student’s educational institution is not re-
quired to send a Form 1098-T to the student un-
der existing rules (for example, if the student is
a nonresident alien, has qualified education ex-
penses paid entirely with scholarships, or has
qualified education expenses paid under a for-
mal billing arrangement). If a student’s educa-
tional institution is not required to provide a
Form 1098-T to the student, a taxpayer may
claim one of these education benefits without a
Form 1098-T if the taxpayer otherwise qualifies,
can demonstrate that the taxpayer (or a de-
pendent) was enrolled at an eligible educational
institution, and can substantiate the payment of
qualified tuition and related expenses.
Deduction for educator expenses. The de-
duction for educator expenses was made per-
manent for tax years beginning after 2014.
Student Loan Interest
Deduction
Generally, personal interest you pay, other than
certain mortgage interest, isn't deductible on
your tax return. However, if your modified adjus-
ted gross income (MAGI) is less than $80,000
($160,000 if filing a joint return), there is a spe-
cial deduction allowed for paying interest on a
student loan (also known as an education loan)
used for higher education. For most taxpayers,
MAGI is the adjusted gross income as figured
on their federal income tax return before sub-
tracting any deduction for student loan interest.
This deduction can reduce the amount of your
income subject to tax by up to $2,500. Ta-
ble 19-1 summarizes the features of the student
loan interest deduction.
Table 191. Student Loan Interest
Deduction at a Glance
Do not rely on this table alone.
Refer to the text for more details.
Feature Description
Maximum
benefit
You can reduce your income
subject to tax by up to $2,500.
Loan
qualifications
Your student loan:
• must have been taken out
solely to pay qualified
education expenses, and
• can't be from a related
person or made under a
qualified employer plan.
Student
qualifications
The student must be:
• you, your spouse, or your
dependent; and
• enrolled at least half-time
in a program leading to a
degree, certificate, or
other recognized
educational credential at
an eligible educational
institution.
Limit on
modified
adjusted
gross income
(MAGI)
$160,000 if married filing a
joint return;
$80,000 if single, head of
household, or qualifying
widow(er).
Student Loan Interest
Defined
Student loan interest is interest you paid during
the year on a qualified student loan. It includes
both required and voluntary interest payments.
Qualified Student Loan
This is a loan you took out solely to pay quali-
fied education expenses (defined later) that
were:
For you, your spouse, or a person who was
your dependent (defined in chapter 3)
when you took out the loan;
Paid or incurred within a reasonable period
of time before or after you took out the
loan; and
For education provided during an aca-
demic period for an eligible student.
Loans from the following sources aren't
qualified student loans.
A related person.
A qualified employer plan.
Exceptions. For purposes of the student
loan interest deduction, the following are excep-
tions to the general rules for dependents.
An individual can be your dependent even
if you are the dependent of another tax-
payer.
An individual can be your dependent even
if the individual files a joint return with a
spouse.
An individual can be your dependent even
if the individual had gross income for the
year that was equal to or more than the ex-
emption amount for the year ($4,050 for
2016).
Reasonable period of time. Qualified educa-
tion expenses are treated as paid or incurred
within a reasonable period of time before or af-
ter you take out the loan if they are paid with the
proceeds of student loans that are part of a fed-
eral postsecondary education loan program.
Even if not paid with the proceeds of that
type of loan, the expenses are treated as paid
or incurred within a reasonable period of time if
both of the following requirements are met.
The expenses relate to a specific aca-
demic period.
The loan proceeds are disbursed within a
period that begins 90 days before the start
of that academic period and ends 90 days
after the end of that academic period.
If neither of the above situations applies, the
reasonable period of time is determined based
on all the relevant facts and circumstances.
Academic period. An academic period in-
cludes a semester, trimester, quarter, or other
period of study (such as a summer school ses-
sion) as reasonably determined by an educa-
tional institution. If an educational institution
uses credit hours or clock hours and doesn't
have academic terms, each payment period
can be treated as an academic period.
Eligible student. This is a student who was
enrolled at least half-time in a program leading
to a degree, certificate, or other recognized ed-
ucational credential.
Enrolled at least half-time. A student was
enrolled at least half-time if the student was tak-
ing at least half the normal full-time work load
for his or her course of study.
The standard for what is half of the normal
full-time work load is determined by each eligi-
ble educational institution. However, the stand-
ard may not be lower than any of those estab-
lished by the U.S. Department of Education
under the Higher Education Act of 1965.
Related person. You can't deduct interest on
a loan you get from a related person. Related
persons include:
Your spouse;
Your brothers and sisters;
Your half brothers and half sisters;
Your ancestors (parents, grandparents,
etc.);
Your lineal descendants (children, grand-
children, etc.); and
Certain corporations, partnerships, trusts,
and exempt organizations.
Qualified employer plan. You can't deduct
interest on a loan made under a qualified em-
ployer plan or under a contract purchased un-
der such a plan.
Page 136 Chapter 19 Education Related Adjustments
Qualified Education Expenses
For purposes of the student loan interest de-
duction, these expenses are the total costs of
attending an eligible educational institution, in-
cluding graduate school. They include amounts
paid for the following items.
Tuition and fees.
Room and board.
Books, supplies, and equipment.
Other necessary expenses (such as trans-
portation).
The cost of room and board qualifies only to
the extent that it isn't more than:
The allowance for room and board, as de-
termined by the eligible educational institu-
tion, that was included in the cost of at-
tendance (for federal financial aid
purposes) for a particular academic period
and living arrangement of the student; or
If greater, the actual amount charged if the
student is residing in housing owned or op-
erated by the eligible educational institu-
tion.
Eligible educational institution. An eligible
educational institution is any college, university,
vocational school, or other postsecondary edu-
cational institution eligible to participate in a stu-
dent aid program administered by the U.S. De-
partment of Education. It includes virtually all
accredited public, nonprofit, and proprietary
(privately owned profit-making) postsecondary
institutions.
Certain educational institutions located out-
side the United States also participate in the
U.S. Department of Education's Federal Stu-
dent Aid (FSA) programs.
For purposes of the student loan interest de-
duction, an eligible educational institution also
includes an institution conducting an internship
or residency program leading to a degree or
certificate from an institution of higher educa-
tion, a hospital, or a health care facility that of-
fers postgraduate training.
An educational institution must meet the
above criteria only during the academic pe-
riod(s) for which the student loan was incurred.
The deductibility of interest on the loan isn't af-
fected by the institution's subsequent loss of eli-
gibility.
The educational institution should be
able to tell you if it is an eligible educa-
tional institution.
Adjustments to qualified education expen
ses. You must reduce your qualified education
expenses by certain tax-free items (such as the
tax-free part of scholarships and fellowship
grants). See chapter 4 of Pub. 970 for details.
Include as Interest
In addition to simple interest on the loan, if all
other requirements are met, the items dis-
cussed below can be student loan interest.
Loan origination fee. In general, this is a
one-time fee charged by the lender when a loan
is made. To be deductible as interest, the fee
must be for the use of money rather than forTIP
property or services (such as commitment fees
or processing costs) provided by the lender. A
loan origination fee treated as interest accrues
over the life of the loan.
Capitalized interest. This is unpaid interest
on a student loan that is added by the lender to
the outstanding principal balance of the loan.
Interest on revolving lines of credit. This in-
terest, which includes interest on credit card
debt, is student loan interest if the borrower
uses the line of credit (credit card) only to pay
qualified education expenses. See Qualified
Education Expenses, earlier.
Interest on refinanced student loans. This
includes interest on both:
Consolidated loans—loans used to refi-
nance more than one student loan of the
same borrower, and
Collapsed loans—two or more loans of the
same borrower that are treated by both the
lender and the borrower as one loan.
If you refinance a qualified student loan
for more than your original loan and
you use the additional amount for any
purpose other than qualified education expen-
ses, you can't deduct any interest paid on the
refinanced loan.
Do Not Include as Interest
You can't claim a student loan interest deduc-
tion for any of the following items.
Interest you paid on a loan if, under the
terms of the loan, you aren't legally obliga-
ted to make interest payments.
Loan origination fees that are payments for
property or services provided by the
lender, such as commitment fees or pro-
cessing costs.
Interest you paid on a loan to the extent
payments were made through your partici-
pation in the National Health Service
Corps Loan Repayment Program (the
“NHSC Loan Repayment Program”) or cer-
tain other loan repayment assistance pro-
grams. For more information, see Student
Loan Repayment Assistance in chapter 5
of Pub. 970.
Can You Claim the
Deduction?
Generally, you can claim the deduction if all of
the following requirements are met.
Your filing status is any filing status except
married filing separately.
No one else is claiming an exemption for
you on his or her tax return.
You are legally obligated to pay interest on
a qualified student loan.
You paid interest on a qualified student
loan.
Interest paid by others. If you are the person
legally obligated to make interest payments and
someone else makes a payment of interest on
your behalf, you are treated as receiving theCAUTION
!
payments from the other person and, in turn,
paying the interest. See chapter 4 of Pub. 970
for more information.
No Double Benefit Allowed
You can't deduct as interest on a student loan
any amount that is an allowable deduction un-
der any other provision of the tax law (for exam-
ple, home mortgage interest).
How Much Can You
Deduct?
Your student loan interest deduction is gener-
ally the smaller of:
$2,500, or
The interest you paid during the tax year.
However, the amount determined above is
phased out (gradually reduced) if your MAGI is
between $65,000 and $80,000 ($130,000 and
$160,000 if you file a joint return). You can't
take a student loan interest deduction if your
MAGI is $80,000 or more ($160,000 or more if
you file a joint return). For details on figuring
your MAGI, see chapter 4 of Pub. 970.
How Do You Figure the
Deduction?
Generally, you figure the deduction using the
Student Loan Interest Deduction Worksheet in
the Form 1040 or Form 1040A instructions.
However, if you are filing Form 2555, 2555-EZ,
or 4563, or you are excluding income from sour-
ces within Puerto Rico, you must complete
Worksheet 4-1 in chapter 4 of Pub. 970.
To help you figure your student loan interest
deduction, you should receive Form 1098-E,
Student Loan Interest Statement. Generally, an
institution (such as a bank or governmental
agency) that received interest payments of
$600 or more during 2016 on one or more quali-
fied student loans must send Form 1098-E (or
acceptable substitute) to each borrower by Jan-
uary 31, 2017.
For qualified student loans taken out before
September 1, 2004, the institution is required to
include on Form 1098-E only payments of sta-
ted interest. Other interest payments, such as
certain loan origination fees and capitalized in-
terest, may not appear on the form you receive.
However, if you pay qualifying interest that isn't
included on Form 1098-E, you can also deduct
those amounts. For information on allocating
payments between interest and principal, see
chapter 4 of Pub. 970.
To claim the deduction, enter the allowable
amount on Form 1040, line 33, or Form 1040A,
line 18.
Tuition and Fees
Deduction
You may be able to deduct qualified education
expenses paid during the year for yourself, your
spouse, or your dependent(s). You can't claim
this deduction if your filing status is married fil-
ing separately or if another person can claim an
Chapter 19 Education Related Adjustments Page 137
exemption for you as a dependent on his or her
tax return. The qualified expenses must be for
higher education, as explained later under
Qualified Education Expenses.
What is the tax benefit of the tuition and
fees deduction? The tuition and fees deduc-
tion can reduce the amount of your income sub-
ject to tax by up to $4,000.
This deduction is claimed as an adjustment
to income. This means you can claim this de-
duction even if you don't itemize deductions on
Schedule A (Form 1040). This deduction may
be beneficial to you if you don't qualify for the
American opportunity or lifetime learning credit.
You can choose the education benefit
that will give you the lowest tax. You
may want to compare the tuition and
fees deduction to the education credits. See
chapter 35 for more information on the educa-
tion credits.
Table 19-2 summarizes the features of the tui-
tion and fees deduction.
Can You Claim the
Deduction?
The following rules will help you determine if
you can claim the tuition and fees deduction.
Who Can Claim the Deduction?
Generally, you can claim the tuition and fees
deduction if all three of the following require-
ments are met.
1. You pay qualified education expenses of
higher education.
2. You pay the education expenses for an eli-
gible student.
3. The eligible student is yourself, your
spouse, or your dependent for whom you
claim an exemption (defined in chapter 3)
on your tax return.
The term “qualified education expenses” is
defined later under Qualified Education Expen-
ses. “Eligible student” is defined later under
Who is an Eligible Student. For more informa-
tion on claiming the deduction for a dependent,
see Who Can Claim a Dependent's Expenses,
later.TIP
Table 192. Tuition and Fees
Deduction at a Glance
Don't rely on this table alone. Refer to the
text for complete details.
Question Answer
What is the maximum
benefit?
You can reduce your
income subject to tax by
up to $4,000.
What is the limit on
modified adjusted gross
income (MAGI)?
$160,000 if married filing a
joint return; $80,000 if
single, head of household,
or qualifying widow(er).
Where is the deduction
taken?
As an adjustment to
income on Form 1040 or
Form 1040A.
For whom must the
expenses be paid?
A student enrolled in an
eligible educational
institution who is either:
• you,
• your spouse, or
• your dependent for whom
you claim an exemption.
What tuition and fees are
deductible?
Tuition and fees required
for enrollment or
attendance at an eligible
postsecondary educational
institution, but not
including personal, living,
or family expenses, such
as room and board.
Who Can't Claim the Deduction?
You can't claim the tuition and fees deduction if
any of the following apply.
Your filing status is married filing sepa-
rately.
Another person can claim an exemption for
you as a dependent on his or her tax re-
turn. You can't take the deduction even if
the other person doesn't actually claim that
exemption.
Your MAGI is more than $80,000
($160,000 if filing a joint return).
You (or your spouse) were a nonresident
alien for any part of 2016 and the nonresi-
dent alien didn't elect to be treated as a
resident alien for tax purposes. More infor-
mation on nonresident aliens can be found
in Pub. 519.
What Expenses Qualify?
The tuition and fees deduction is based on
qualified education expenses you pay for your-
self, your spouse, or a dependent for whom you
claim an exemption on your tax return. Gener-
ally, the deduction is allowed for qualified edu-
cation expenses paid in 2016 in connection with
enrollment at an institution of higher education
during 2016 or for an academic period begin-
ning in 2016 or in the first 3 months of 2017.
Academic period. An academic period in-
cludes a semester, trimester, quarter, or other
period of study (such as a summer school ses-
sion) as reasonably determined by an educa-
tional institution. If an educational institution
uses credit hours or clock hours and doesn't
have academic terms, each payment period
can be treated as an academic period.
Paid with borrowed funds. You can claim a
tuition and fees deduction for qualified educa-
tion expenses paid with the proceeds of a loan.
Use the expenses to figure the deduction for the
year in which the expenses are paid, not the
year in which the loan is repaid. Treat loan dis-
bursements sent directly to the educational in-
stitution as paid on the date the institution cred-
its the student's account.
Student withdraws from class(es). You can
claim a tuition and fees deduction for qualified
education expenses not refunded when a stu-
dent withdraws.
Qualified Education Expenses
For purposes of the tuition and fees deduction,
qualified education expenses are tuition and
certain related expenses required for enroll-
ment or attendance at an eligible educational
institution.
Eligible educational institution. An eligible
educational institution is any college, university,
vocational school, or other postsecondary edu-
cational institution eligible to participate in a stu-
dent aid program administered by the U.S. De-
partment of Education. It includes virtually all
accredited public, nonprofit, and proprietary
(privately owned profit-making) postsecondary
institutions.
An eligible educational institution also in-
cludes certain educational institutions located
outside the United States that are eligible to
participate in a student aid program adminis-
tered by the U.S. Department of Education.
The educational institution should be
able to tell you if it is an eligible educa-
tional institution.
Related expenses. Student activity fees and
expenses for course-related books, supplies,
and equipment are included in qualified educa-
tion expenses only if the fees and expenses
must be paid to the institution as a condition of
enrollment or attendance.
Prepaid expenses. Qualified education ex-
penses paid in 2016 for an academic period
that begins in the first 3 months of 2017 can be
used in figuring an education credit for 2016
only. See Academic period, earlier.
You can't use any amount you paid in
2015 or 2017 to figure the qualified ed-
ucation expenses you use to figure
your 2016 education credit(s).
No Double Benefit Allowed
You can't do any of the following.
Deduct qualified education expenses you
deduct under any other provision of the
law, for example, as a business expense.
Deduct qualified education expenses for a
student on your income tax return if you or
anyone else claims an American opportu-
nity or lifetime learning credit for that same
student in the same year.TIPCAUTION
!
Page 138 Chapter 19 Education Related Adjustments
Deduct qualified education expenses that
have been used to figure the tax-free por-
tion of a distribution from a Coverdell edu-
cation savings account (ESA) or a qualified
tuition program (QTP). For a QTP, this ap-
plies only to the amount of tax-free earn-
ings that were distributed, not to the recov-
ery of contributions to the program. See
Coordination with Tuition and Fees Deduc-
tion in chapter 8 of Pub. 970.
Deduct qualified education expenses that
have been paid with tax-free interest on
U.S. savings bonds (Form 8815). See Fig-
uring the Tax-Free Amount in chapter 10 of
Pub. 970.
Deduct qualified education expenses that
have been paid with tax-free educational
assistance, such as a scholarship, grant,
or assistance provided by an employer.
See the following section on Adjustments
to Qualified Education Expenses.
Adjustments to Qualified
Education Expenses
For each student, reduce the qualified educa-
tion expenses paid by or on behalf of that stu-
dent under the following rules. The result is the
amount of adjusted qualified education expen-
ses for each student. You must also reduce
qualified education expenses by the other
amounts referred to in No Double Benefit Al-
lowed, earlier.
Taxfree educational assistance. For
tax-free educational assistance received in
2016, reduce the qualified education expenses
for each academic period by the amount of
tax-free educational assistance allocable to that
academic period. See Academic period, earlier.
Some tax-free educational assistance re-
ceived after 2016 may be treated as a refund of
qualified education expenses paid in 2016. This
tax-free educational assistance is any tax-free
educational assistance received by you or any-
one else after 2016 for qualified education ex-
penses paid on behalf of a student in 2016 (or
attributable to enrollment at an eligible educa-
tional institution during 2016).
If this tax-free educational assistance is re-
ceived after 2016 but before you file your 2016
income tax return, see Refunds received after
2016 but before your income tax return is filed,
later. If this tax-free educational assistance is
received after 2016 and after you file your 2016
income tax return, see Refunds received after
2016 and after your income tax return is filed,
later.
This tax-free educational assistance in-
cludes:
The tax-free part of scholarships and fel-
lowship grants (see Tax-Free Scholarships
and Fellowship Grants in chapter 1 of Pub.
970);
The tax-free part of Pell grants (see Pell
Grants and Other Title IV Need-Based Ed-
ucation Grants in chapter 1 of Pub. 970);
Employer-provided educational assistance
(see chapter 11 of Pub. 970);
Veterans' educational assistance (see Vet-
erans' Benefits in chapter 1 of Pub. 970);
and
Any other nontaxable (tax-free) payments
(other than gifts or inheritances) received
as educational assistance.
Generally, any scholarship or fellowship
grant is treated as tax free. However, a scholar-
ship or fellowship grant isn't treated as tax free
to the extent the student includes it in gross in-
come (the student may or may not be required
to file a tax return for the year the scholarship or
fellowship grant is received) and either of the
following is true.
The scholarship or fellowship grant (or any
part of it) must be applied (by its terms) to
expenses (such as room and board) other
than qualified education expenses as de-
fined in Qualified education expenses in
chapter 1 of Pub. 970.
The scholarship or fellowship grant (or any
part of it) may be applied (by its terms) to
expenses (such as room and board) other
than qualified education expenses as de-
fined in Qualified education expenses in
chapter 1 of Pub. 970.
You may be able to increase the com-
bined value of an education credit and
certain educational assistance if the
student includes some or all of the educational
assistance in income in the year it is received.
For details, see Adjustments to Qualified Edu-
cation Expenses in chapter 35.
Refunds. A refund of qualified education ex-
penses may reduce adjusted qualified educa-
tion expenses for the tax year or require repay-
ment (recapture) of a credit claimed in an earlier
year. Some tax-free educational assistance re-
ceived after 2016 may be treated as a refund.
See Tax-free educational assistance, earlier.
Refunds received in 2016. For each student,
figure the adjusted qualified education expen-
ses for 2016 by adding all the qualified educa-
tion expenses for 2016 and subtracting any re-
funds of those expenses received from the
eligible educational institution during 2016.
Refunds received after 2016 but before
your income tax return is filed. If anyone re-
ceives a refund after 2016 of qualified educa-
tion expenses paid on behalf of a student in
2016 and the refund is paid before you file an
income tax return for 2016, the amount of quali-
fied education expenses for 2016 is reduced by
the amount of the refund.
Refunds received after 2016 and after your
income tax return is filed. If anyone receives
a refund after 2016 of qualified education ex-
penses paid on behalf of a student in 2016 and
the refund is paid after you file an income tax
return for 2016, you may need to repay some or
all of the credit. See Credit recapture, later.
Coordination with education savings
bonds, Coverdell education savings ac
count, and qualified tuition programs. Re-
duce your qualified education expenses by any
qualified education expenses used to figure the
exclusion from gross income of (a) interest re-
ceived under an education savings bond pro-TIP
gram, or (b) any distribution from a Coverdell
education savings account or qualified tuition
program (QTP). For a QTP, this applies only to
the amount of tax-free earnings that were dis-
tributed, not to the recovery of contributions to
the program.
Credit recapture. If any tax-free educational
assistance for the qualified education expenses
paid in 2016 or any refund of your qualified edu-
cation expenses paid in 2016 is received after
you file your 2016 income tax return, you must
recapture (repay) any excess credit. You do this
by refiguring the amount of your adjusted quali-
fied education expenses for 2016 by reducing
that amount by the amount of the refund or
tax-free educational assistance. You then refig-
ure your education credit(s) for 2016 and figure
the amount by which your 2016 tax liability
would have increased if you had claimed the re-
figured credit(s). Include that amount as an ad-
ditional tax for the year the refund or tax-free
assistance was received.
Amounts that don't reduce qualified educa
tion expenses. Don't reduce qualified educa-
tion expenses by amounts paid with funds the
student receives as:
Payment for services, such as wages;
A loan;
A gift;
An inheritance; or
A withdrawal from the student's personal
savings.
Don't reduce the qualified education expen-
ses by any scholarship or fellowship grant re-
ported as income on the student's tax return in
the following situations.
The use of the money is restricted, by the
terms of the scholarship or fellowship
grant, to costs of attendance (such as
room and board) other than qualified edu-
cation expenses as defined in Qualified
education expenses in chapter 1 of Pub.
970.
The use of the money isn't restricted.
Expenses That Don't Qualify
Qualified education expenses don't include
amounts paid for:
Insurance;
Medical expenses (including student
health fees);
Room and board;
Transportation; or
Similar personal, living, or family expen-
ses.
This is true even if the amount must be paid
to the institution as a condition of enrollment or
attendance.
Sports, games, hobbies, and noncredit
courses. Qualified education expenses gen-
erally don't include expenses that relate to any
course of instruction or other education that in-
volves sports, games or hobbies, or any non-
credit course. However, if the course of instruc-
tion or other education is part of the student's
degree program, these expenses can qualify.
Chapter 19 Education Related Adjustments Page 139
Comprehensive or bundled fees. Some eli-
gible educational institutions combine all of their
fees for an academic period into one amount. If
you don't receive, or don't have access to, an
allocation showing how much you paid for quali-
fied education expenses and how much you
paid for personal expenses, such as those lis-
ted above, contact the institution. The institution
is generally required to make this allocation and
provide you with the amount you paid (or were
billed) for qualified education expenses on
Form 1098-T. See Figuring the Deduction, later,
for more information about Form 1098-T.
Who Is an Eligible
Student?
For purposes of the tuition and fees deduction,
an eligible student is a student who is enrolled
in one or more courses at an eligible educa-
tional institution (as defined under Qualified Ed-
ucation Expenses, earlier).
Who Can Claim a
Dependent's Expenses?
Generally, in order to claim the tuition and fees
deduction for qualified education expenses for
a dependent, you must:
1. Have paid the expenses, and
2. Claim an exemption for the student as a
dependent.
For you to be able to deduct qualified edu-
cation expenses for your dependent, you must
claim an exemption for that individual. You do
this by listing your dependent's name and other
required information on Form 1040 (or Form
1040A), line 6c.
Table 193. Who Can Claim a
Dependent's Expenses
Don't rely on this table alone. Refer to the
text for complete details.
IF your
dependent is an
eligible student
and you...
AND... THEN...
claim an
exemption for
your dependent
you paid all
qualified
education
expenses for
your dependent
only you can
deduct the
qualified
education
expenses that
you paid. Your
dependent can't
take a deduction.
claim an
exemption for
your dependent
your dependent
paid all qualified
education
expenses
no one is allowed
to take a
deduction.
don't claim an
exemption for
your dependent
you paid all
qualified
education
expenses
no one is allowed
to take a
deduction.
don't claim an
exemption for
your dependent
your dependent
paid all qualified
education
expenses
no one is allowed
to take a
deduction.
Expenses paid by dependent. If your de-
pendent pays qualified education expenses, no
one can take a tuition and fees deduction for
those expenses. Neither you nor your depend-
ent can deduct the expenses. For purposes of
the tuition and fees deduction, you aren't
treated as paying any expenses actually paid
by a dependent for whom you or anyone other
than the dependent can claim an exemption.
This rule applies even if you don't claim an ex-
emption for your dependent on your tax return.
Expenses paid by you. If you claim an ex-
emption for a dependent who is an eligible stu-
dent, only you can include any expenses you
paid when figuring your tuition and fees deduc-
tion.
Expenses paid under divorce decree.
Qualified education expenses paid directly to
an eligible educational institution for a student
under a court-approved divorce decree are
treated as paid by the student. Only the student
would be eligible to take a tuition and fees de-
duction for that payment, and then only if no
one else could claim an exemption for the stu-
dent.
Expenses paid by others. Someone other
than you, your spouse, or your dependent (such
as a relative or former spouse) may make a
payment directly to an eligible educational insti-
tution to pay for an eligible student's qualified
education expenses. In this case, the student is
treated as receiving the payment from the other
person and, in turn, paying the institution. If you
claim, or can claim, an exemption on your tax
return for the student, you aren't considered to
have paid the expenses and you can't deduct
them. If the student isn't a dependent, only the
student can deduct payments made directly to
the institution for his or her expenses. If the stu-
dent is your dependent, no one can deduct the
payments.
Tuition reduction. When an eligible educa-
tional institution provides a reduction in tuition
to an employee of the institution (or spouse or
dependent child of an employee), the amount of
the reduction may or may not be taxable. If it is
taxable, the employee is treated as receiving a
payment of that amount and, in turn, paying it to
the educational institution on behalf of the stu-
dent. For more information on tuition reduc-
tions, see Qualified Tuition Reduction in chap-
ter 1 of Pub 970.
Figuring the Deduction
The maximum tuition and fees deduction in
2016 is $4,000, $2,000, or $0, depending on
the amount of your MAGI. See Effect of the
Amount of Your Income on the Amount of Your
Deduction, later.
Form 1098T. To help you figure your tuition
and fees deduction, the student may receive
Form 1098-T. Generally, an eligible educational
institution (such as a college or university) must
send Form 1098-T (or acceptable substitute) to
each enrolled student by January 31, 2017. An
institution may choose to report either pay-
ments received (box 1), or amounts billed
(box 2), for qualified education expenses. How-
ever, the amount on Form 1098-T, boxes 1 and
2, might be different from what you paid. When
figuring the deduction, use only the amounts
you paid in 2016 for qualified education expen-
ses.
In addition, Form 1098-T should give other
information for that institution, such as adjust-
ments made for prior years, the amount of
scholarships or grants, reimbursements or re-
funds, and whether the student was enrolled at
least half-time or was a graduate student.
The eligible educational institution may ask
for a completed Form W-9S or similar statement
to obtain the student's name, address, and tax-
payer identification number.
Effect of the Amount of Your
Income on the Amount of Your
Deduction
If your MAGI isn't more than $65,000 ($130,000
if you are married filing jointly), your maximum
tuition and fees deduction is $4,000. If your
MAGI is larger than $65,000 ($130,000 if you
are married filing jointly), but isn't more than
$80,000 ($160,000 if you are married filing
jointly), your maximum deduction is $2,000. No
tuition and fees deduction is allowed if your
MAGI is larger than $80,000 ($160,000 if you
are married filing jointly).
Modified adjusted gross income (MAGI).
For most taxpayers, MAGI is adjusted gross in-
come (AGI) as figured on their federal income
tax return before subtracting any deduction for
tuition and fees. However, as discussed below,
there may be other modifications.
MAGI when using Form 1040A. If you file
Form 1040A, your MAGI is the AGI on line 22 of
that form, figured without taking into account
any amount on line 19 (tuition and fees deduc-
tion).
MAGI when using Form 1040. If you file
Form 1040, your MAGI is the AGI on line 38 of
that form, figured without taking into account
any amount on line 34 (tuition and fees deduc-
tion) or line 35 (domestic production activities
deduction), and modified by adding back any:
1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Foreign housing deduction,
4. Exclusion of income by bona fide resi-
dents of American Samoa, and
5. Exclusion of income by bona fide resi-
dents of Puerto Rico.
Table 19-4 shows how the amount of your
MAGI can affect your tuition and fees deduc-
tion.
You can use Worksheet 6-1 in chapter 6 of
Pub. 970 to figure your MAGI.
Page 140 Chapter 19 Education Related Adjustments
Table 194. Effect of MAGI on
Maximum Tuition and Fees
Deduction
IF your filing
status is...
AND your
MAGI is...
THEN your
maximum
tuition and fees
deduction is...
single, head of
household, or
qualifying
widow(er)
not more than
$65,000
$4,000.
more than
$65,000 but not
more than
$80,000
$2,000.
more than
$80,000
$0.
married filing
joint return
not more than
$130,000
$4,000.
more than
$130,000 but
not more than
$160,000
$2,000.
more than
$160,000
$0.
Claiming the Deduction
You claim a tuition and fees deduction by com-
pleting Form 8917 and submitting it with your
Form 1040 or Form 1040A. Enter the deduction
on Form 1040, line 34, or Form 1040A, line 19.
Educator Expenses
If you were an eligible educator in 2016, you
can deduct up to $250 of qualified expenses
you paid in 2016 as an adjustment to gross in-
come on Form 1040, line 23, rather than as a
miscellaneous itemized deduction. If you file
Form 1040A, you can deduct these expenses
on line 16. If you and your spouse are filing
jointly and both of you were eligible educators,
the maximum deduction is $500. However, nei-
ther spouse can deduct more than $250 of his
or her qualified expenses.
Eligible educator. An eligible educator is a
kindergarten through grade 12 teacher, instruc-
tor, counselor, principal, or aide in school for at
least 900 hours during a school year.
Qualified expenses. Qualified expenses in-
clude ordinary and necessary expenses paid in
connection with books, supplies, equipment (in-
cluding computer equipment, software, and
services), and other materials used in the class-
room. An ordinary expense is one that is com-
mon and accepted in your educational field. A
necessary expense is one that is helpful and
appropriate for your profession as an educator.
An expense doesn’t have to be required to be
considered necessary.
Note. Beginning in 2016, qualified expen-
ses also include those expenses you incur
while participating in professional development
courses related to the curriculum in which you
provide instruction. It also includes those ex-
penses related to those students for whom you
provide that instruction.
Qualified expenses don’t include expenses
for home schooling or for nonathletic supplies
for courses in health or physical education. You
must reduce your qualified expenses by the
following amounts.
Excludable U.S. series EE and I savings
bond interest from Form 8815.
Nontaxable qualified state tuition program
earnings.
Nontaxable earnings from Coverdell edu-
cation savings accounts.
Any reimbursements you received for
those expenses that weren’t reported to
you on your Form W-2, box 1.
Educator expenses over limit. If you were
an educator in 2016 and you had qualified ex-
penses that you can’t take as an adjustment to
gross income, you can deduct the rest as an
itemized deduction subject to the 2% limit.
Chapter 19 Education Related Adjustments Page 141
Part Five.
Standard
Deduction and
Itemized
Deductions
After you have figured your adjusted gross income, you are ready to
subtract the deductions used to figure taxable income. You can subtract
either the standard deduction or itemized deductions. Itemized deductions
are deductions for certain expenses that are listed on Schedule A (Form
1040). The 10 chapters in this part discuss the standard deduction, each
itemized deduction, and a limit on some of your itemized deductions if your
adjusted gross income is more than a certain amount. See chapter 20 for
the factors to consider when deciding whether to take the standard
deduction or itemized deductions.
20.
Standard
Deduction
What's New
Standard deduction increased. The stand-
ard deduction for some taxpayers who don't
itemize their deductions on Schedule A (Form
1040) is higher for 2016 than it was for 2015.
The amount depends on your filing status. You
can use the 2016 Standard Deduction Tables in
this chapter to figure your standard deduction.
Introduction
This chapter discusses the following topics.
How to figure the amount of your standard
deduction.
The standard deduction for dependents.
Who should itemize deductions.
Most taxpayers have a choice of either tak-
ing a standard deduction or itemizing their de-
ductions. If you have a choice, you can use the
method that gives you the lower tax.
The standard deduction is a dollar amount
that reduces your taxable income. It is a benefit
that eliminates the need for many taxpayers to
itemize actual deductions, such as medical ex-
penses, charitable contributions, and taxes, on
Schedule A (Form 1040). The standard deduc-
tion is higher for taxpayers who:
Are 65 or older, or
Are blind.
You benefit from the standard deduc-
tion if your standard deduction is more
than the total of your allowable item-
ized deductions.TIP
Persons not eligible for the standard de
duction. Your standard deduction is zero and
you should itemize any deductions you have if:
Your filing status is married filing sepa-
rately, and your spouse itemizes deduc-
tions on his or her return,
You are filing a tax return for a short tax
year because of a change in your annual
accounting period, or
You are a nonresident or dual-status alien
during the year. You are considered a
dual-status alien if you were both a nonres-
ident and resident alien during the year.
If you are a nonresident alien who is
married to a U.S. citizen or resident alien at
the end of the year, you can choose to be
treated as a U.S. resident. (See Pub. 519,
U.S. Tax Guide for Aliens.) If you make this
choice, you can take the standard deduc-
tion.
If an exemption for you can be claimed
on another person's return (such as
your parents' return), your standard de-
duction may be limited. See Standard Deduc-
tion for Dependents, later.
Standard Deduction
Amount
The standard deduction amount depends on
your filing status, whether you are 65 or older or
blind, and whether another taxpayer can claim
an exemption for you. Generally, the standard
deduction amounts are adjusted each year for
inflation. The standard deduction amounts for
most people are shown in Table 20-1.
Decedent's final return. The standard deduc-
tion for a decedent's final tax return is the same
as it would have been had the decedent contin-
ued to live. However, if the decedent wasn't 65
or older at the time of death, the higher stand-
ard deduction for age can't be claimed.
Higher Standard
Deduction
for Age (65 or Older)
If you are age 65 or older on the last day of the
year and don't itemize deductions, you are enti-
tled to a higher standard deduction. You areCAUTION
!
considered 65 on the day before your 65th
birthday. Therefore, you can take a higher
standard deduction for 2016 if you were born
before January 2, 1952.
Use Table 20-2 to figure the standard de-
duction amount.
Death of a taxpayer. If you are preparing a re-
turn for someone who died in 2016, see Death
of taxpayer in Pub. 501 before using Table 20-2
or Table 20-3.
Higher Standard
Deduction
for Blindness
If you are blind on the last day of the year and
you don't itemize deductions, you are entitled to
a higher standard deduction.
Not totally blind. If you aren't totally blind, you
must get a certified statement from an eye doc-
tor (ophthalmologist or optometrist) that:
You can't see better than 20/200 in the bet-
ter eye with glasses or contact lenses, or
Your field of vision is 20 degrees or less.
If your eye condition isn't likely to improve
beyond these limits, the statement should in-
clude this fact. Keep the statement in your re-
cords.
If your vision can be corrected beyond these
limits only by contact lenses that you can wear
only briefly because of pain, infection, or ulcers,
you can take the higher standard deduction for
blindness if you otherwise qualify.
Spouse 65 or Older or
Blind
You can take the higher standard deduction if
your spouse is age 65 or older or blind and:
You file a joint return, or
You file a separate return and can claim an
exemption for your spouse because your
spouse had no gross income and can't be
claimed as a dependent by another tax-
payer.
Death of a spouse. If your spouse died in
2016 before reaching age 65, you can't take a
higher standard deduction because of your
spouse. Even if your spouse was born before
Page 142 Chapter 20 Standard Deduction
January 2, 1952, he or she isn't considered 65
or older at the end of 2016 unless he or she was
65 or older at the time of death.
A person is considered to reach age 65 on
the day before his or her 65th birthday.
Example. Your spouse was born on Febru-
ary 14, 1951, and died on February 13, 2016.
Your spouse is considered age 65 at the time of
death. However, if your spouse died on Febru-
ary 12, 2016, your spouse isn't considered age
65 at the time of death and isn't 65 or older at
the end of 2016.
You can't claim the higher standard de-
duction for an individual other than
yourself and your spouse.
Examples
The following examples illustrate how to deter-
mine your standard deduction using Tables
20-1 and 20-2.
Example 1. Larry, 46, and Donna, 33, are
filing a joint return for 2016. Neither is blind, and
neither can be claimed as a dependent. They
decide not to itemize their deductions. They use
Table 20-1. Their standard deduction is
$12,600.
Example 2. The facts are the same as in
Example 1 except that Larry is blind at the end
of 2016. Larry and Donna use Table 20-2. Their
standard deduction is $13,850.
Example 3. Bill and Lisa are filing a joint re-
turn for 2016. Both are over age 65. Neither is
blind, and neither can be claimed as a depend-
ent. If they don't itemize deductions, they use
Table 20-2. Their standard deduction is
$15,100.
Standard Deduction
for Dependents
The standard deduction for an individual who
can be claimed as a dependent on another per-
son's tax return is generally limited to the
greater of:
$1,050, or
The individual's earned income for the year
plus $350 (but not more than the regular
standard deduction amount, generally
$6,300).
However, if the individual is 65 or older or
blind, the standard deduction may be higher.
If you (or your spouse, if filing jointly) can be
claimed as a dependent on someone else's re-
turn, use Table 20-3 to determine your standard
deduction.
Earned income defined. Earned income is
salaries, wages, tips, professional fees, and
other amounts received as pay for work you ac-
tually perform.
For purposes of the standard deduction,
earned income also includes any part of a taxa-
ble scholarship or fellowship grant. See Schol-
arships and fellowships in chapter 12 for moreCAUTION
!
information on what qualifies as a scholarship
or fellowship grant.
Example 1. Michael is 16 years old and
single. His parents can claim an exemption for
him on their 2016 tax return. He has interest in-
come of $780 and wages of $150. He has no
itemized deductions. Michael uses Table 20-3
to find his standard deduction. He enters $150
(his earned income) on line 1, $500 ($150 +
$350) on line 3, $1,050 (the larger of $500 and
$1,050) on line 5, and $6,300 on line 6. His
standard deduction, on line 7a, is $1,050 (the
smaller of $1,050 and $6,300).
Example 2. Joe, a 22-year-old full-time col-
lege student, can be claimed as a dependent
on his parents' 2016 tax return. Joe is married
and files a separate return. His wife doesn't
itemize deductions on her separate return. Joe
has $1,500 in interest income and wages of
$3,800. He has no itemized deductions. Joe
finds his standard deduction by using Ta-
ble 20-3. He enters his earned income, $3,800,
on line 1. He adds lines 1 and 2 and enters
$4,150 on line 3. On line 5, he enters $4,150,
the larger of lines 3 and 4. Because Joe is mar-
ried filing a separate return, he enters $6,300 on
line 6. On line 7a he enters $4,150 as his stand-
ard deduction because it is smaller than $6,300,
the amount on line 6.
Example 3. Amy, who is single, can be
claimed as a dependent on her parents' 2016
tax return. She is 18 years old and blind. She
has interest income of $1,300 and wages of
$2,900. She has no itemized deductions. Amy
uses Table 20-3 to find her standard deduction.
She enters her wages of $2,900 on line 1. She
adds lines 1 and 2 and enters $3,250 ($2,900 +
$350) on line 3. On line 5, she enters $3,250,
the larger of lines 3 and 4. Because she is sin-
gle, Amy enters $6,300 on line 6. She enters
$3,250 on line 7a. This is the smaller of the
amounts on lines 5 and 6. Because she
checked the box in the top part of the work-
sheet, indicating she is blind, she enters $1,550
on line 7b. She then adds the amounts on lines
7a and 7b and enters her standard deduction of
$4,800 on line 7c.
Example 4. Ed is 18 years old and single.
His parents can claim an exemption for him on
their 2016 tax return. He has wages of $7,000,
interest income of $500, and a business loss of
$3,000. He has no itemized deductions. Ed
uses Table 20-3 to figure his standard deduc-
tion. He enters $4,000 ($7,000 - $3,000) on
line 1. He adds lines 1 and 2 and enters $4,350
on line 3. On line 5 he enters $4,350, the larger
of lines 3 and 4. Because he is single, Ed enters
$6,300 on line 6. On line 7a he enters $4,350 as
his standard deduction because it is smaller
than $6,300, the amount on line 6.
Who Should Itemize
You should itemize deductions if your total de-
ductions are more than the standard deduction
amount. Also, you should itemize if you don't
qualify for the standard deduction, as discussed
earlier under Persons not eligible for the stand-
ard deduction.
You should first figure your itemized deduc-
tions and compare that amount to your stand-
ard deduction to make sure you are using the
method that gives you the greater benefit.
You may be subject to a limit on some
of your itemized deductions if your ad-
justed gross income is more than:
$259,400 if single ($285,350 if head of house-
hold; $311,300 if married filing jointly or qualify-
ing widow(er); or $155,650 if married filing sep-
arately). See chapter 29 or the instructions for
Schedule A (Form 1040) for more information
on figuring the correct amount of your itemized
deductions.
When to itemize. You may benefit from
itemizing your deductions on Schedule A (Form
1040) if you:
Don't qualify for the standard deduction, or
the amount you can claim is limited,
Had large uninsured medical and dental
expenses during the year,
Paid interest and taxes on your home,
Had large unreimbursed employee busi-
ness expenses or other miscellaneous de-
ductions,
Had large uninsured casualty or theft los-
ses,
Made large contributions to qualified chari-
ties, or
Have total itemized deductions that are
more than the standard deduction to which
you otherwise are entitled.
These deductions are explained in chapters
21–28.
If you decide to itemize your deductions,
complete Schedule A and attach it to your Form
1040. Enter the amount from Schedule A,
line 29, on Form 1040, line 40.
Electing to itemize for state tax or other
purposes. Even if your itemized deductions
are less than your standard deduction, you can
elect to itemize deductions on your federal re-
turn rather than take the standard deduction.
You may want to do this if, for example, the tax
benefit of itemizing your deductions on your
state tax return is greater than the tax benefit
you lose on your federal return by not taking the
standard deduction. To make this election, you
must check the box on line 30 of Schedule A.
Changing your mind. If you don't itemize your
deductions and later find that you should have
itemized — or if you itemize your deductions
and later find you shouldn't have — you can
change your return by filing Form 1040X,
Amended U.S. Individual Income Tax Return.
See Amended Returns and Claims for Refund
in chapter 1 for more information on amended
returns.
Married persons who filed separate re-
turns. You can change methods of taking de-
ductions only if you and your spouse both make
the same changes. Both of you must file a con-
sent to assessment for any additional tax either
one may owe as a result of the change.
You and your spouse can use the method
that gives you the lower total tax, even though
one of you may pay more tax than you wouldCAUTION
!
Chapter 20 Standard Deduction Page 143
have paid by using the other method. You both
must use the same method of claiming deduc-
tions. If one itemizes deductions, the other
should itemize because he or she won't qualify
for the standard deduction. See Persons not eli-
gible for the standard deduction, earlier.
2016 Standard Deduction TablesCAUTION
!
If you are married filing a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you can't take the standard deduction
even if you were born before January 2, 1952, or are blind.
Standard Deduction Chart for Most People*Table 201.
If your filing status is... Your standard deduction is:
Single or Married filing separately $ 6,300
Married filing jointly or Qualifying widow(er) with dependent child 12,600
Head of household 9,300
*Don't use this chart if you were born before January 2, 1952, are blind, or if someone else can claim you (or your spouse if filing jointly) as a dependent. Use Table 20-2 or 20-3
instead.
Standard Deduction Chart for People Born Before January 2, 1952, or Who are Blind*Table 202.
Check the correct number of boxes below. Then go to the chart.
You: Born before January 2, 1952 Blind
Your spouse, if claiming spouse's exemption: Born before January 2, 1952 Blind
Total number of boxes checked
IF
your filing status is...
AND
the number in the box above is...
THEN
your standard deduction is...
Single 1 $ 7,850
2 9,400
Married filing jointly 1 $13,850
or Qualifying 2 15,100
widow(er) with 3 16,350
dependent child 4 17,600
Married filing 1 $ 7,550
separately 2 8,800
3 10,050
4 11,300
Head of household 1 $10,850
2 12,400
*If someone else can claim you (or your spouse if filing jointly) as a dependent, use Table 20-3 instead.
Page 144 Chapter 20 Standard Deduction
Standard Deduction Worksheet for Dependents
Use this worksheet only if someone else can claim you (or your spouse if filing jointly) as a dependent.
Table 203.
Check the correct number of boxes below. Then go to the worksheet.
You: Born before January 2, 1952 Blind
Your spouse, if claiming spouse's exemption: Born before January 2, 1952 Blind
Total number of boxes checked
1. Enter your earned income (defined below). If none, enter -0-. 1.
2. Additional amount. 2. $350
3. Add lines 1 and 2. 3.
4. Minimum standard deduction. 4. $1,050
5. Enter the larger of line 3 or line 4. 5.
6. Enter the amount shown below for your filing status.
Single or Married filing separately—$6,300
Married filing jointly—$12,600
Head of household—$9,300
6.
7. Standard deduction.
a. Enter the smaller of line 5 or line 6. If born after January 1, 1952, and not blind, stop here. This is your
standard deduction. Otherwise, go on to line 7b. 7a.
b. If born before January 2, 1952, or blind, multiply $1,550 ($1,250 if married) by the number in the box above. 7b.
c. Add lines 7a and 7b. This is your standard deduction for 2016. 7c.
Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also includes any
taxable scholarship or fellowship grant.
Chapter 20 Standard Deduction Page 145
21.
Medical and
Dental Expenses
What's New
Standard mileage rate. The standard mileage
rate allowed for operating expenses for a car
when you use it for medical reasons is 19 cents
per mile. See Transportation under What Medi-
cal Expenses Are Includible.
Introduction
This chapter will help you determine the follow-
ing.
What medical expenses are.
What expenses you can include this year.
How much of the expenses you can de-
duct.
Whose medical expenses you can include.
What medical expenses are includible.
How to treat reimbursements.
How to report the deduction on your tax re-
turn.
How to report impairment-related work ex-
penses.
How to report health insurance costs if you
are self-employed.
Useful Items
You may want to see:
Publication
Medical and Dental Expenses
Health Savings Accounts and Other
Tax-Favored Health Plans
Form (and Instructions)
U.S. Individual Tax Return
Itemized
Deductions
Health Coverage Tax Credit
Premium Tax Credit (PTC)
What Are Medical
Expenses?
Medical expenses are the costs of diagnosis,
cure, mitigation, treatment, or prevention of dis-
ease, and the costs for treatments affecting any
part or function of the body. These expenses in-
clude payments for legal medical services ren-
dered by physicians, surgeons, dentists, and
other medical practitioners. They include the
1040
Schedule A (Form 1040)
8885
8962
costs of equipment, supplies, and diagnostic
devices needed for these purposes.
Medical care expenses must be primarily to
alleviate or prevent a physical or mental defect
or illness. They don't include expenses that are
merely beneficial to general health, such as vi-
tamins or a vacation.
Medical expenses include the premiums
you pay for insurance that covers the expenses
of medical care, and the amounts you pay for
transportation to get medical care. Medical ex-
penses also include amounts paid for qualified
long-term care services and limited amounts
paid for any qualified long-term care insurance
contract.
What Expenses Can
You Include This Year?
You can include only the medical and dental ex-
penses you paid this year, regardless of when
the services were provided. If you pay medical
expenses by check, the day you mail or deliver
the check generally is the date of payment. If
you use a “pay-by-phone” or “online” account to
pay your medical expenses, the date reported
on the statement of the financial institution
showing when payment was made is the date of
payment. If you use a credit card, include medi-
cal expenses you charge to your credit card in
the year the charge is made, not when you ac-
tually pay the amount charged.
Separate returns. If you and your spouse live
in a noncommunity property state and file sepa-
rate returns, each of you can include only the
medical expenses each actually paid. Any med-
ical expenses paid out of a joint checking ac-
count in which you and your spouse have the
same interest are considered to have been paid
equally by each of you, unless you can show
otherwise.
Community property states. If you and
your spouse live in a community property state
and file separate returns, or are registered do-
mestic partners in Nevada, Washington, or Cali-
fornia, any medical expenses paid out of com-
munity funds are divided equally. Each of you
should include half the expenses. If medical ex-
penses are paid out of the separate funds of
one individual, only the individual who paid the
medical expenses can include them. If you live
in a community property state, and aren't filing a
joint return, see Pub. 555.
How Much of the
Expenses Can You
Deduct?
Generally, you can deduct on Schedule A
(Form 1040) only the amount of your medical
and dental expenses that is more than 10% of
your adjusted gross income (AGI), found on
Form 1040, line 38 (7.5% of your AGI if either
you or your spouse was born before January 2,
1952).
Example. You are unmarried and were
born after January 2, 1952, and your AGI is
$40,000, 10% of which is $4,000. You paid
medical expenses of $2,500. You can't deduct
any of your medical expenses because they
aren't more than 10% of your AGI.
Whose Medical
Expenses
Can You Include?
You can generally include medical expenses
you pay for yourself, as well as those you pay
for someone who was your spouse or your de-
pendent either when the services were provi-
ded or when you paid for them. There are differ-
ent rules for decedents and for individuals who
are the subject of multiple support agreements.
See Support claimed under a multiple support
agreement, later.
Spouse
You can include medical expenses you paid for
your spouse. To include these expenses, you
must have been married either at the time your
spouse received the medical services or at the
time you paid the medical expenses.
Example 1. Mary received medical treat-
ment before she married Bill. Bill paid for the
treatment after they married. Bill can include
these expenses in figuring his medical expense
deduction even if Bill and Mary file separate re-
turns.
If Mary had paid the expenses, Bill couldn't
include Mary's expenses in his separate return.
Mary would include the amounts she paid dur-
ing the year in her separate return. If they filed a
joint return, the medical expenses both paid
during the year would be used to figure their
medical expense deduction.
Example 2. This year, John paid medical
expenses for his wife Louise, who died last
year. John married Belle this year and they file
a joint return. Because John was married to
Louise when she received the medical services,
he can include those expenses in figuring his
medical expense deduction for this year.
Dependent
You can include medical expenses you paid for
your dependent. For you to include these ex-
penses, the person must have been your de-
pendent either at the time the medical services
were provided or at the time you paid the ex-
penses. A person generally qualifies as your
dependent for purposes of the medical expense
deduction if both of the following requirements
are met.
1. The person was a qualifying child (defined
later) or a qualifying relative (defined
later); and
2. The person was a U.S. citizen or national,
or a resident of the United States, Canada,
or Mexico. If your qualifying child was
adopted, see Exception for adopted child
next.
You can include medical expenses you paid for
an individual that would have been your de-
pendent except that:
Page 146 Chapter 21 Medical and Dental Expenses
1. He or she received gross income of
$4,050 or more in 2016;
2. He or she filed a joint return for 2016; or
3. You, or your spouse if filing jointly, could
be claimed as a dependent on someone
else's 2016 return.
Exception for adopted child. If you are a
U.S. citizen or U.S. national and your adopted
child lived with you as a member of your house-
hold for 2016, that child doesn't have to be a
U.S. citizen or national or a resident of the Uni-
ted States, Canada, or Mexico.
Qualifying Child
A qualifying child is a child who:
1. Is your son, daughter, stepchild, foster
child, brother, sister, stepbrother, stepsis-
ter, half brother, half sister, or a descend-
ant of any of them (for example, your
grandchild, niece, or nephew);
2. Was:
a. Under age 19 at the end of 2016 and
younger than you (or your spouse, if
filing jointly);
b. Under age 24 at the end of 2016, a
full-time student, and younger than
you (or your spouse, if filing jointly); or
c. Any age and permanently and totally
disabled;
3. Lived with you for more than half of 2016;
4. Didn't provide over half of his or her own
support for 2016; and
5. Didn't file a joint return, or, if he or she did,
it was only to claim a refund.
Adopted child. A legally adopted child is
treated as your own child. This includes a child
lawfully placed with you for legal adoption.
You can include medical expenses that you
paid for a child before adoption if the child quali-
fied as your dependent when the medical serv-
ices were provided or when the expenses were
paid.
If you pay back an adoption agency or other
persons for medical expenses they paid under
an agreement with you, you are treated as hav-
ing paid those expenses provided you clearly
substantiate that the payment is directly attribut-
able to the medical care of the child.
But if you pay the agency or other person for
medical care that was provided and paid for be-
fore adoption negotiations began, you can't in-
clude them as medical expenses.
You may be able to take an adoption
credit for other expenses related to an
adoption. See the Instructions for Form
8839, Qualified Adoption Expenses, for more
information.
Child of divorced or separated parents. For
purposes of the medical and dental expenses
deduction, a child of divorced or separated pa-
rents can be treated as a dependent of both pa-
rents. Each parent can include the medical ex-
penses he or she pays for the child, even if theTIP
other parent claims the child's dependency ex-
emption, if:
1. The child is in the custody of one or both
parents for more than half the year,
2. The child receives over half of his or her
support during the year from his or her pa-
rents, and
3. The child's parents:
a. Are divorced or legally separated un-
der a decree of divorce or separate
maintenance,
b. Are separated under a written separa-
tion agreement, or
c. Live apart at all times during the last 6
months of the year.
This doesn't apply if the child's exemption is be-
ing claimed under a multiple support agreement
(discussed later).
Qualifying Relative
A qualifying relative is a person:
1. Who is your:
a. Son, daughter, stepchild, foster child,
or a descendant of any of them (for
example, your grandchild);
b. Brother, sister, half brother, half sister,
or a son or daughter of any of them;
c. Father, mother, or an ancestor or sib-
ling of either of them (for example,
your grandmother, grandfather, aunt,
or uncle);
d. Stepbrother, stepsister, stepfather,
stepmother, son-in-law, daugh-
ter-in-law, father-in-law,
mother-in-law, brother-in-law, or sis-
ter-in-law; or
e. Any other person (other than your
spouse) who lived with you all year as
a member of your household if your
relationship didn't violate local law;
2. Who wasn't a qualifying child (see Qualify-
ing Child, earlier) of any other person for
2016; and
3. For whom you provided over half of the
support in 2016. But see Child of divorced
or separated parents, earlier, and Support
claimed under a multiple support agree-
ment next.
Support claimed under a multiple support
agreement. If you are considered to have pro-
vided more than half of a qualifying relative's
support under a multiple support agreement,
you can include medical expenses you pay for
that person. A multiple support agreement is
used when two or more people provide more
than half of a person's support, but no one
alone provides more than half.
Any medical expenses paid by others who
joined you in the agreement can't be included
as medical expenses by anyone. However, you
can include the entire unreimbursed amount
you paid for medical expenses.
Example. You and your three brothers
each provide one-fourth of your mother's total
support. Under a multiple support agreement,
you treat your mother as your dependent. You
paid all of her medical expenses. Your brothers
repaid you for three-fourths of these expenses.
In figuring your medical expense deduction, you
can include only one-fourth of your mother's
medical expenses. Your brothers can't include
any part of the expenses. However, if you and
your brothers share the nonmedical support
items and you separately pay all of your moth-
er's medical expenses, you can include the un-
reimbursed amount you paid for her medical ex-
penses in your medical expenses.
Decedent
Medical expenses paid before death by the de-
cedent are included in figuring any deduction
for medical and dental expenses on the dece-
dent's final income tax return. This includes ex-
penses for the decedent's spouse and depend-
ents as well as for the decedent.
The survivor or personal representative of a
decedent can choose to treat certain expenses
paid by the decedent's estate for the decedent's
medical care as paid by the decedent at the
time the medical services were provided. The
expenses must be paid within the 1-year period
beginning with the day after the date of death. If
you are the survivor or personal representative
making this choice, you must attach a state-
ment to the decedent's Form 1040 (or the dece-
dent's amended return, Form 1040X) saying
that the expenses haven't been and won't be
claimed on the estate tax return.
Qualified medical expenses paid be-
fore death by the decedent aren't de-
ductible if paid with a tax-free distribu-
tion from any Archer MSA, Medicare Advantage
MSA, or health savings account.
Amended returns and claims for refund are
discussed in chapter 1.
What if you pay medical expenses of a de
ceased spouse or dependent? If you paid
medical expenses for your deceased spouse or
dependent, include them as medical expenses
on your Schedule A (Form 1040) in the year
paid, whether they are paid before or after the
decedent's death. The expenses can be inclu-
ded if the person was your spouse or depend-
ent either at the time the medical services were
provided or at the time you paid the expenses.
What Medical
Expenses Are
Includible?
Use Table 21-1, later, as a guide to determine
which medical and dental expenses you can in-
clude on Schedule A (Form 1040).
This table doesn't include all possible medi-
cal expenses. To determine if an expense not
listed can be included in figuring your medical
expense deduction, see What Are Medical Ex-
penses, earlier.CAUTION
!
Chapter 21 Medical and Dental Expenses Page 147
Insurance Premiums
You can include in medical expenses insurance
premiums you pay for policies that cover medi-
cal care. Medical care policies can provide pay-
ment for treatment that includes:
Hospitalization, surgical services, X-rays;
Prescription drugs and insulin;
Dental care;
Replacement of lost or damaged contact
lenses; and
Long-term care (subject to additional limi-
tations). See Qualified Long-Term Care In-
surance Contracts in Pub. 502.
Premium tax credit. When figuring the
amount of insurance premiums you can deduct
on Schedule A, don't include the amount of net
premium tax credit you are claiming on Form
1040.
If advance payments of the premium
tax credit were made, or you think you
may be eligible to claim a premium tax
credit, fill out Form 8962 before filling out
Schedule A. See Pub. 502 for more information
on how to figure your deduction.
If you have a policy that provides payments
for other than medical care, you can include the
premiums for the medical care part of the policy
if the charge for the medical part is reasonable.
The cost of the medical part must be separately
stated in the insurance contract or given to you
in a separate statement.
Employersponsored health insurance plan.
Don't include in your medical and dental expen-
ses any insurance premiums paid by an em-
ployer-sponsored health insurance plan unless
the premiums are included on your Form W-2.
Also, don't include any other medical and dental
expenses paid by the plan unless the amount
paid is included on your Form W-2.
Example. You are a federal employee par-
ticipating in the premium conversion plan of the
Federal Employee Health Benefits (FEHB) pro-
gram. Your share of the FEHB premium is paid
by making a pre-tax reduction in your salary.
Because you are an employee whose insur-
ance premiums are paid with money that is
never included in your gross income, you can't
deduct the premiums paid with that money.
Longterm care services. Contributions
made by your employer to provide coverage for
qualified long-term care services under a flexi-
ble spending or similar arrangement must be in-
cluded in your income. This amount will be re-
ported as wages on your Form W-2.
Retired public safety officers. If you are a re-
tired public safety officer, don't include as medi-
cal expenses any health or long-term care pre-
miums that you elected to have paid with
tax-free distributions from your retirement plan.
This applies only to distributions that would oth-
erwise be included in income.
Health reimbursement arrangement (HRA).
If you have medical expenses that are reim-
bursed by a health reimbursement arrange-
ment, you can't include those expenses in yourTIP
medical expenses. This is because an HRA is
funded solely by the employer.
Medicare A. If you are covered under social
security (or if you are a government employee
who paid Medicare tax), you are enrolled in
Medicare A. The payroll tax paid for Medicare A
isn't a medical expense.
If you aren't covered under social security
(or weren't a government employee who paid
Medicare tax), you can voluntarily enroll in Med-
icare A. In this situation you can include the pre-
miums you paid for Medicare A as a medical
expense.
Medicare B. Medicare B is supplemental med-
ical insurance. Premiums you pay for Medicare
B are a medical expense. Check the informa-
tion you received from the Social Security Ad-
ministration to find out your premium.
Medicare D. Medicare D is a voluntary pre-
scription drug insurance program for persons
with Medicare A or B. You can include as a
medical expense premiums you pay for Medi-
care D.
Prepaid insurance premiums. Premiums you
pay before you are age 65 for insurance for
medical care for yourself, your spouse, or your
dependents after you reach age 65 are medical
care expenses in the year paid if they are:
Payable in equal yearly installments, or
more often; and
Payable for at least 10 years, or until you
reach age 65 (but not for less than 5
years).
Unused sick leave used to pay premiums.
You must include in gross income cash pay-
ments you receive at the time of retirement for
unused sick leave. You also must include in
gross income the value of unused sick leave
that, at your option, your employer applies to
the cost of your continuing participation in your
employer's health plan after you retire. You can
include this cost of continuing participation in
the health plan as a medical expense.
If you participate in a health plan where your
employer automatically applies the value of un-
used sick leave to the cost of your continuing
participation in the health plan (and you don't
have the option to receive cash), don't include
the value of the unused sick leave in gross in-
come. You can't include this cost of continuing
participation in that health plan as a medical ex-
pense.
Meals and Lodging
You can include in medical expenses the cost
of meals and lodging at a hospital or similar in-
stitution if a principal reason for being there is to
get medical care. See Nursing home, later.
You may be able to include in medical ex-
penses the cost of lodging not provided in a
hospital or similar institution. You can include
the cost of such lodging while away from home
if all of the following requirements are met.
The lodging is primarily for and essential to
medical care.
The medical care is provided by a doctor in
a licensed hospital or in a medical care fa-
cility related to, or the equivalent of, a li-
censed hospital.
The lodging isn't lavish or extravagant un-
der the circumstances.
There is no significant element of personal
pleasure, recreation, or vacation in the
travel away from home.
The amount you include in medical expenses
for lodging can't be more than $50 for each
night for each person. You can include lodging
for a person traveling with the person receiving
the medical care. For example, if a parent is
traveling with a sick child, up to $100 per night
can be included as a medical expense for lodg-
ing. Meals aren't included.
Nursing home. You can include in medical ex-
penses the cost of medical care in a nursing
home, home for the aged, or similar institution,
for yourself, your spouse, or your dependents.
This includes the cost of meals and lodging in
the home if a principal reason for being there is
to get medical care.
Don't include the cost of meals and lodging
if the reason for being in the home is personal.
You can, however, include in medical expenses
the part of the cost that is for medical or nursing
care.
Transportation
Include in medical expenses amounts paid for
transportation primarily for, and essential to,
medical care. You can include:
Bus, taxi, train, or plane fares, or ambu-
lance service;
Transportation expenses of a parent who
must go with a child who needs medical
care;
Transportation expenses of a nurse or
other person who can give injections, med-
ications, or other treatment required by a
patient who is traveling to get medical care
and is unable to travel alone; and
Transportation expenses for regular visits
to see a mentally ill dependent, if these vis-
its are recommended as a part of treat-
ment.
Car expenses. You can include out-of-pocket
expenses, such as the cost of gas and oil, when
you use your car for medical reasons. You can't
include depreciation, insurance, general repair,
or maintenance expenses.
If you don't want to use your actual expen-
ses for 2016, you can use the standard medical
mileage rate of 19 cents per mile.
You can also include parking fees and tolls.
You can add these fees and tolls to your medi-
cal expenses whether you use actual expenses
or use the standard mileage rate.
Example. In 2016, Bill Jones drove 2,800
miles for medical reasons. He spent $450 for
gas, $30 for oil, and $100 for tolls and parking.
He wants to figure the amount he can include in
medical expenses both ways to see which
gives him the greater deduction.
Page 148 Chapter 21 Medical and Dental Expenses
He figures the actual expenses first. He
adds the $450 for gas, the $30 for oil, and the
$100 for tolls and parking for a total of $580.
He then figures the standard mileage
amount. He multiplies 2,800 miles by 19 cents a
mile for a total of $532. He then adds the $100
tolls and parking for a total of $632.
Bill includes the $632 of car expenses with
his other medical expenses for the year be-
cause the $632 is more than the $580 he fig-
ured using actual expenses.
Transportation expenses you can't include.
You can't include in medical expenses the cost
of transportation in the following situations.
Going to and from work, even if your condi-
tion requires an unusual means of trans-
portation.
Travel for purely personal reasons to an-
other city for an operation or other medical
care.
Travel that is merely for the general im-
provement of one's health.
The costs of operating a specially equip-
ped car for other than medical reasons.
Disabled Dependent
Care Expenses
Some disabled dependent care expenses may
qualify as either:
Medical expenses, or
Work-related expenses for purposes of
taking a credit for dependent care. (See
chapter 32 and Pub. 503, Child and De-
pendent Care Expenses.)
You can choose to apply them either way as
long as you don't use the same expenses to
claim both a credit and a medical expense de-
duction.
How Do You Treat
Reimbursements?
You can include in medical expenses only
those amounts paid during the taxable year for
which you received no insurance or other reim-
bursement.
Insurance Reimbursement
You must reduce your total medical expenses
for the year by all reimbursements for medical
expenses that you receive from insurance or
other sources during the year. This includes
payments from Medicare.
Even if a policy provides reimbursement for
only certain specific medical expenses, you
must use amounts you receive from that policy
to reduce your total medical expenses, includ-
ing those it doesn't reimburse.
Example. You have insurance policies that
cover your hospital and doctors' bills but not
your nursing bills. The insurance you receive for
the hospital and doctors' bills is more than their
charges. In figuring your medical deduction, you
must reduce the total amount you spent for
medical care by the total amount of insurance
you received, even if the policies don't cover
some of your medical expenses.
Health reimbursement arrangement (HRA).
A health reimbursement arrangement is an em-
ployer-funded plan that reimburses employees
for medical care expenses and allows unused
amounts to be carried forward. An HRA is fun-
ded solely by the employer and the reimburse-
ments for medical expenses, up to a maximum
dollar amount for a coverage period, aren't in-
cluded in your income.
Other reimbursements. Generally, you don't
reduce medical expenses by payments you re-
ceive for:
Permanent loss or loss of use of a member
or function of the body (loss of limb, sight,
hearing, etc.) or disfigurement to the extent
the payment is based on the nature of the
injury without regard to the amount of time
lost from work; or
Loss of earnings.
You must, however, reduce your medical
expenses by any part of these payments that is
designated for medical costs. See How Do You
Figure and Report the Deduction on Your Tax
Return, later.
Table 21-1. Medical and Dental Expenses Checklist. See Pub. 502 for more information about these and other
expenses.
You can include: You can't include:
Bandages
Birth control pills prescribed
by your doctor
Body scan
Braille books
Breast pump and supplies
Capital expenses for
equipment or improvements
to your home needed for
medical care (see the
worksheet in Pub. 502)
Diagnostic devices
Expenses of an organ donor
Eye surgery—to promote
the correct function of the
eye
Fertility enhancement,
certain procedures
Guide dogs or other animals
aiding the blind, deaf, and
disabled
Hospital services fees (lab
work, therapy, nursing
services, surgery, etc.)
Lead-based paint removal
Legal abortion
Legal operation to prevent
having children such as a
vasectomy or tubal ligation
Long-term care contracts,
qualified
Meals and lodging provided
by a hospital during medical
treatment
Medical services fees (from
doctors, dentists, surgeons,
specialists, and other
medical practitioners)
Medicare Part D premiums
Medical and hospital
insurance premiums
Nursing services
Oxygen equipment and
oxygen
Part of life-care fee paid to
retirement home designated
for medical care
Physical examination
Pregnancy test kit
Prescription medicines
(prescribed by a doctor) and
insulin
Psychiatric and
psychological treatment
Social security tax,
Medicare tax, FUTA, and
state employment tax for
worker providing medical
care (see Wages for nursing
services below)
Special items (artificial
limbs, false teeth,
eye-glasses, contact lenses,
hearing aids, crutches,
wheelchair, etc.)
Special education for
mentally or physically
disabled persons
Stop-smoking programs
Transportation for needed
medical care
Treatment at a drug or
alcohol center (includes
meals and lodging provided
by the center)
Wages for nursing services
Weight loss, certain
expenses for obesity
Baby sitting and childcare
Bottled water
Contributions to Archer
MSAs (see Pub. 969)
Diaper service
Expenses for your general
health (even if following your
doctor's advice) such as—
—Health club dues
—Household help (even if
recommended by a doctor)
—Social activities, such as
dancing or swimming lessons
—Trip for general health
improvement
Flexible spending account
reimbursements for medical
expenses (if contributions
were on a pre-tax basis)
Funeral, burial, or cremation
expenses
Health savings account
payments for medical
expenses
Operation, treatment, or
medicine that is illegal under
federal or state law
Life insurance or income
protection policies, or
policies providing payment
for loss of life, limb, sight, etc.
Maternity clothes
Medical insurance
included in a car insurance
policy covering all persons
injured in or by your car
Medicine you buy without
a prescription
Nursing care for a healthy
baby
Prescription drugs you
brought in (or ordered
shipped) from another
country, in most cases
Nutritional supplements,
vitamins, herbal
supplements, “natural
medicines,” etc., unless
recommended by a
medical practitioner as a
treatment for a specific
medical condition
diagnosed by a physician
Surgery for purely
cosmetic reasons
Toothpaste, toiletries,
cosmetics, etc.
Teeth whitening
Weight-loss expenses not
for the treatment of obesity
or other disease
Chapter 21 Medical and Dental Expenses Page 149
For how to treat damages received for per-
sonal injury or sickness, see Damages for Per-
sonal Injuries, later.
You don't have a medical deduction if you
are reimbursed for all of your medical expenses
for the year.
Excess reimbursement. If you are reim-
bursed more than your medical expenses, you
may have to include the excess in income. You
may want to use Figure 21-A to help you decide
if any of your reimbursement is taxable.
Premiums paid by you. If you pay either
the entire premium for your medical insurance
or all of the costs of a plan similar to medical in-
surance and your insurance payments or other
reimbursements are more than your total medi-
cal expenses for the year, you have an excess
reimbursement. Generally, you don't include the
excess reimbursement in your gross income.
Premiums paid by you and your employer.
If both you and your employer contribute to your
medical insurance plan and your employer's
contributions aren't included in your gross in-
come, you must include in your gross income
the part of your excess reimbursement that is
from your employer's contribution.
See Pub. 502 to figure the amount of the ex-
cess reimbursement you must include in gross
income.
Reimbursement in a later year. If you are re-
imbursed in a later year for medical expenses
you deducted in an earlier year, you generally
must report the reimbursement as income up to
the amount you previously deducted as medical
expenses.
However, don't report as income the amount
of reimbursement you received up to the
amount of your medical deductions that didn't
reduce your tax for the earlier year. For more in-
formation about the recovery of an amount that
you claimed as an itemized deduction in an ear-
lier year, see Itemized Deduction Recoveries in
chapter 12.
Medical expenses not deducted. If you
didn't deduct a medical expense in the year you
paid it because your medical expenses weren't
more than 10% of your AGI (7.5% of your AGI if
either you or your spouse was born before Jan-
uary 2, 1952), or because you didn't itemize de-
ductions, don't include the reimbursement up to
the amount of the expense in income. However,
if the reimbursement is more than the expense,
see Excess reimbursement, earlier.
Example. For 2016, you were unmarried,
you were born after January 2, 1952, and you
had $500 of medical expenses. You can't de-
duct the $500 because it is less than 10% of
your AGI. If, in a later year, you are reimbursed
for any of the $500 in medical expenses, you
don't include the amount reimbursed in your
gross income.
Damages for Personal
Injuries
If you receive an amount in settlement of a per-
sonal injury suit, part of that award may be for
medical expenses that you deducted in an ear-
lier year. If it is, you must include that part in
your income in the year you receive it to the ex-
tent it reduced your taxable income in the ear-
lier year. See Reimbursement in a Later Year,
discussed under How Do You Treat Reimburse-
ments, earlier.
Future medical expenses. If you receive an
amount in settlement of a damage suit for per-
sonal injuries, part of that award may be for fu-
ture medical expenses. If it is, you must reduce
any future medical expenses for these injuries
until the amount you received has been com-
pletely used.
How Do You Figure
and Report the
Deduction on Your
Tax Return?
Once you have determined which medical ex-
penses you can include, you figure and report
the deduction on your tax return.
What Tax Form Do You
Use?
You report your medical expense deduction on
Schedule A (Form 1040). You can't claim medi-
cal expenses on Form 1040A or Form 1040EZ.
If you need more information on itemized de-
ductions or you aren't sure if you can itemize,
see chapter 20.
ImpairmentRelated
Work Expenses
If you are a person with a disability, you can
take a business deduction for expenses that are
necessary for you to be able to work. If you take
a business deduction for impairment-related
work expenses, they aren't subject to the 10%
limit (or 7.5% if either you or your spouse was
born before January 2, 1952), that applies to
medical expenses.
You have a disability if you have:
A physical or mental disability (for exam-
ple, blindness or deafness) that function-
ally limits your being employed, or
A physical or mental impairment (for exam-
ple, a sight or hearing impairment) that
substantially limits one or more of your ma-
jor life activities, such as performing man-
ual tasks, walking, speaking, breathing,
learning, or working.
Impairmentrelated expenses defined. Im-
pairment-related expenses are those ordinary
and necessary business expenses that are:
Necessary for you to do your work satis-
factorily,
Figure 21-A. Is Your Excess Medical Reimbursement Taxable?No
Yes
Yes
No
No
Yes
Was any part of your
premiums paid by
your employer?
NONE of the excess
reimbursement is
taxable.
Were your employer’s
contributions to your
premiums included in
your income?
Did you pay any part
of the premiums?
ALL of the excess
reimbursement is
taxable.
PART of the excess
reimbursement is
taxable.*
*See Premiums paid by you and your employer in this chapter.
Page 150 Chapter 21 Medical and Dental Expenses
For goods and services not required or
used, other than incidentally, in your per-
sonal activities, and
Not specifically covered under other in-
come tax laws.
Where to report. If you are self-employed, de-
duct the business expenses on the appropriate
form (Schedule C, C-EZ, E, or F) used to report
your business income and expenses.
If you are an employee, complete Form
2106, Employee Business Expenses, or Form
2106-EZ, Unreimbursed Employee Business
Expenses. Enter on Schedule A (Form 1040),
that part of the amount on Form 2106, or Form
2106-EZ, that is related to your impairment. En-
ter the amount that is unrelated to your impair-
ment also on Schedule A (Form 1040). Your im-
pairment-related work expenses aren't subject
to the 2%-of-adjusted-gross-income limit that
applies to other employee business expenses.
Example. You are blind. You must use a
reader to do your work. You use the reader both
during your regular working hours at your place
of work and outside your regular working hours
away from your place of work. The reader's
services are only for your work. You can deduct
your expenses for the reader as business ex-
penses.
Health Insurance Costs
for SelfEmployed
Persons
If you were self-employed and had a net profit
for the year, you may be able to deduct, as an
adjustment to income, amounts paid for medi-
cal and qualified long-term care insurance on
behalf of yourself, your spouse, your depend-
ents, and your children who were under age 27
at the end of 2016. For this purpose, you were
self-employed if you were a general partner (or
a limited partner receiving guaranteed pay-
ments) or you received wages from an S corpo-
ration in which you were more than a 2% share-
holder. The insurance plan must be established
under your trade or business and the deduction
can't be more than your earned income from
that trade or business.
You can't deduct payments for medical in-
surance for any month in which you were eligi-
ble to participate in a health plan subsidized by
your employer, your spouse's employer, or an
employer of your dependent or your child under
age 27 at the end of 2016. You can't deduct
payments for a qualified long-term care insur-
ance contract for any month in which you were
eligible to participate in a long-term care insur-
ance plan subsidized by your employer or your
spouse's employer.
If you qualify to take the deduction, use the
Self-Employed Health Insurance Deduction
Worksheet in the Form 1040 instructions to fig-
ure the amount you can deduct. But if any of the
following applies, don't use that worksheet. In-
stead, use the worksheet in Pub. 535, Business
Expenses, to figure your deduction.
You had more than one source of income
subject to self-employment tax.
You file Form 2555, Foreign Earned In-
come, or Form 2555-EZ, Foreign Earned
Income Exclusion.
You are using amounts paid for qualified
long-term care insurance to figure the de-
duction.
Use Pub. 974 instead of the worksheet in the
Form 1040 instructions if you, your spouse, or a
dependent enrolled in health insurance through
the Health Insurance Marketplace and you are
claiming the premium tax credit.
Note. When figuring the amount you can
deduct for insurance premiums, don't include
any advance payments shown on Form
1099-H, Health Coverage Tax Credit (HCTC)
Advance Payments. If you are claiming the
HCTC, subtract the amount shown on Form
8885, from the total insurance premiums you
paid.
Don't include amounts paid for health insur-
ance coverage with retirement plan distributions
that were tax free because you are a retired
public safety officer.
Where to report. You take this deduction on
Form 1040. If you itemize your deductions and
don't claim 100% of your self-employed health
insurance on Form 1040, you can generally in-
clude any remaining premiums with all other
medical expenses on Schedule A (Form 1040),
subject to the 10% limit (7.5% if either you or
your spouse was born before January 2, 1952).
See Self-Employed Health Insurance Deduction
in Pub. 535 and Medical and Dental Expenses
in the Instructions for Schedule A (Form 1040),
for more information.
22.
Taxes
Introduction
This chapter discusses which taxes you can de-
duct if you itemize deductions on Schedule A
(Form 1040). It also explains which taxes you
can deduct on other schedules or forms and
which taxes you cannot deduct.
This chapter covers the following topics.
Income taxes (federal, state, local, and for-
eign).
General sales taxes (state and local).
Real estate taxes (state, local, and for-
eign).
Personal property taxes (state and local).
Taxes and fees you cannot deduct.
Use Table 22-1 as a guide to determine
which taxes you can deduct.
The end of the chapter contains a section
that explains which forms you use to deduct dif-
ferent types of taxes.
Business taxes. You can deduct certain taxes
only if they are ordinary and necessary expen-
ses of your trade or business or of producing in-
come. For information on these taxes, see Pub.
535, Business Expenses.
State or local taxes. These are taxes im-
posed by the 50 states, U.S. possessions, or
any of their political subdivisions (such as a
county or city), or by the District of Columbia.
Indian tribal government. An Indian tribal
government recognized by the Secretary of the
Treasury as performing substantial government
functions will be treated as a state for purposes
of claiming a deduction for taxes. Income taxes,
real estate taxes, and personal property taxes
imposed by that Indian tribal government (or by
any of its subdivisions that are treated as politi-
cal subdivisions of a state) are deductible.
General sales taxes. These are taxes im-
posed at one rate on retail sales of a broad
range of classes of items.
Foreign taxes. These are taxes imposed by a
foreign country or any of its political subdivi-
sions.
Useful Items
You may want to see:
Publication
Foreign Tax Credit for Individuals
Tax Information for Homeowners
Form (and Instructions)
Itemized
Deductions
Supplemental
Income and Loss
Foreign Tax Credit
Tests To Deduct
Any Tax
The following two tests must be met for you to
deduct any tax.
The tax must be imposed on you.
You must pay the tax during your tax year.
The tax must be imposed on you. In gen-
eral, you can deduct only taxes imposed on
you.
Generally, you can deduct property taxes
only if you are an owner of the property. If your
spouse owns the property and pays the real es-
tate taxes, the taxes are deductible on your
spouse's separate return or on your joint return.
You must pay the tax during your tax year.
If you are a cash basis taxpayer, you can de-
duct only those taxes you actually paid during
your tax year. If you pay your taxes by check
and the check is honored by your financial insti-
tution, the day you mail or deliver the check is
the date of payment. If you use a pay-by-phone
account (such as a credit card or electronic
funds withdrawal), the date reported on the
statement of the financial institution showing
when payment was made is the date of
payment. If you contest a tax liability and are a
Schedule A (Form 1040)
Schedule E (Form 1040)
1116
Chapter 22 Taxes Page 151
cash basis taxpayer, you can deduct the tax
only in the year you actually pay it (or transfer
money or other property to provide for satisfac-
tion of the contested liability). See Pub. 538,
Accounting Periods and Methods, for details.
If you use an accrual method of accounting,
see Pub. 538 for more information.
Income Taxes
This section discusses the deductibility of state
and local income taxes (including employee
contributions to state benefit funds) and foreign
income taxes.
State and Local Income
Taxes
You can deduct state and local income taxes.
Exception. You can’t deduct state and local in-
come taxes you pay on income that is exempt
from federal income tax, unless the exempt in-
come is interest income. For example, you can’t
deduct the part of a state's income tax that is on
a cost-of-living allowance exempt from federal
income tax.
What To Deduct
Your deduction may be for withheld taxes, esti-
mated tax payments, or other tax payments as
follows.
Withheld taxes. You can deduct state and lo-
cal income taxes withheld from your salary in
the year they are withheld. Your Form(s) W-2
will show these amounts. Forms W-2G,
1099-G, 1099-R, and 1099-MISC may also
show state and local income taxes withheld.
Estimated tax payments. You can deduct es-
timated tax payments you made during the year
to a state or local government. However, you
must have a reasonable basis for making the
estimated tax payments. Any estimated state or
local tax payments that aren’t made in good
faith at the time of payment aren’t deductible.
Example. You made an estimated state in-
come tax payment. However, the estimate of
your state tax liability shows that you will get a
refund of the full amount of your estimated pay-
ment. You had no reasonable basis to believe
you had any additional liability for state income
taxes and you can’t deduct the estimated tax
payment.
Refund applied to taxes. You can deduct any
part of a refund of prior-year state or local in-
come taxes that you chose to have credited to
your 2016 estimated state or local income
taxes.
Don’t reduce your deduction by either of the
following items.
Any state or local income tax refund (or
credit) you expect to receive for 2016.
Any refund of (or credit for) prior-year state
and local income taxes you actually re-
ceived in 2016.
However, part or all of this refund (or credit)
may be taxable. See Refund (or credit) of state
or local income taxes, later.
Separate federal returns. If you and your
spouse file separate state, local, and federal in-
come tax returns, each of you can deduct on
your federal return only the amount of your own
state and local income tax that you paid during
the tax year.
Joint state and local returns. If you and
your spouse file joint state and local returns and
separate federal returns, each of you can de-
duct on your separate federal return a part of
the total state and local income taxes paid dur-
ing the tax year. You can deduct only the
amount of the total taxes that is proportionate to
your gross income compared to the combined
gross income of you and your spouse. How-
ever, you can’t deduct more than the amount
you actually paid during the year. You can avoid
this calculation if you and your spouse are
jointly and individually liable for the full amount
of the state and local income taxes. If so, you
and your spouse can deduct on your separate
federal returns the amount you each actually
paid.
Joint federal return. If you file a joint federal
return, you can deduct the total of the state and
local income taxes both of you paid.
Contributions to state benefit funds. As an
employee, you can deduct mandatory contribu-
tions to state benefit funds withheld from your
wages that provide protection against loss of
wages. For example, certain states require em-
ployees to make contributions to state funds
providing disability or unemployment insurance
benefits. Mandatory payments made to the fol-
lowing state benefit funds are deductible as
state income taxes on Schedule A (Form 1040),
line 5.
Alaska Unemployment Compensation
Fund.
California Nonoccupational Disability Ben-
efit Fund.
New Jersey Nonoccupational Disability
Benefit Fund.
New Jersey Unemployment Compensation
Fund.
New York Nonoccupational Disability Ben-
efit Fund.
Pennsylvania Unemployment Compensa-
tion Fund.
Rhode Island Temporary Disability Benefit
Fund.
Washington State Supplemental Work-
men's Compensation Fund.
Employee contributions to private or
voluntary disability plans aren’t deduc-
tible.
Refund (or credit) of state or local income
taxes. If you receive a refund of (or credit for)
state or local income taxes in a year after the
year in which you paid them, you may have to
include the refund in income on Form 1040,
line 10, in the year you receive it. This includes
refunds resulting from taxes that were overwith-
held, applied from a prior year return, not fig-
ured correctly, or figured again because of an
amended return. If you didn’t itemize your de-
ductions in the previous year, don’t include the
refund in income. If you deducted the taxes inCAUTION
!
the previous year, include all or part of the re-
fund on Form 1040, line 10, in the year you re-
ceive the refund. For a discussion of how much
to include, see Recoveries in chapter 12.
Foreign Income Taxes
Generally, you can take either a deduction or a
credit for income taxes imposed on you by a
foreign country or a U.S. possession. However,
you can’t take a deduction or credit for foreign
income taxes paid on income that is exempt
from U.S. tax under the foreign earned income
exclusion or the foreign housing exclusion. For
information on these exclusions, see Pub. 54,
Tax Guide for U.S. Citizens and Resident Aliens
Abroad. For information on the foreign tax
credit, see Pub. 514.
State and Local
General Sales Taxes
You can elect to deduct state and local general
sales taxes, instead of state and local income
taxes, as an itemized deduction on Schedule A
(Form 1040), line 5b. You can use either your
actual expenses or the state and local sales tax
tables to figure your sales tax deduction.
Actual expenses. Generally, you can deduct
the actual state and local general sales taxes
(including compensating use taxes) if the tax
rate was the same as the general sales tax rate.
However, sales taxes on food, clothing, medical
supplies, and motor vehicles are deductible as
a general sales tax even if the tax rate was less
than the general sales tax rate. If you paid sales
tax on a motor vehicle at a rate higher than the
general sales tax rate, you can deduct only the
amount of tax that you would have paid at the
general sales tax rate on that vehicle. If you use
the actual expenses method, you must have re-
ceipts to show the general sales taxes paid.
Don’t include sales taxes paid on items used in
your trade or business.
Motor vehicles. For purposes of this sec-
tion, motor vehicles include cars, motorcycles,
motor homes, recreational vehicles, sport utility
vehicles, trucks, vans, and off-road vehicles.
This also includes sales taxes on a leased mo-
tor vehicle, but not on vehicles used in your
trade or business.
Optional sales tax tables. Instead of using
your actual expenses, you can figure your state
and local general sales tax deduction using the
state and local sales tax tables in the Instruc-
tions for Schedule A (Form 1040). You may
also be able to add the state and local general
sales taxes paid on certain specified items.
Your applicable table amount is based on
the state where you live, your income, and the
number of exemptions claimed on your tax re-
turn. Your income is your adjusted gross in-
come plus any nontaxable items such as the
following.
Tax-exempt interest.
Veterans’ benefits.
Nontaxable combat pay.
Workers’ compensation.
Page 152 Chapter 22 Taxes
Nontaxable part of social security and rail-
road retirement benefits.
Nontaxable part of IRA, pension, or annuity
distributions, excluding rollovers.
Public assistance payments.
If you lived in different states during the
same tax year, you must prorate your applica-
ble table amount for each state based on the
days you lived in each state. See the Instruc-
tions for Schedule A (Form 1040), line 5, for de-
tails.
Real Estate Taxes
Deductible real estate taxes are any state, local,
or foreign taxes on real property levied for the
general public welfare. You can deduct these
taxes only if they are assessed uniformly
against all property under the jurisdiction of the
taxing authority. The proceeds must be for gen-
eral community or governmental purposes and
not be a payment for a special privilege granted
or service rendered to you.
Deductible real estate taxes generally don’t
include taxes charged for local benefits and im-
provements that increase the value of the prop-
erty. They also don’t include itemized charges
for services (such as trash collection) assessed
against specific property or certain people,
even if the charge is paid to the taxing authority.
For more information about taxes and charges
that aren’t deductible, see Real Estate-Related
Items You Can’t Deduct, later.
Tenantshareholders in a cooperative hous
ing corporation. Generally, if you are a ten-
ant-stockholder in a cooperative housing corpo-
ration, you can deduct the amount paid to the
corporation that represents your share of the
real estate taxes the corporation paid or incur-
red for your dwelling unit. The corporation
should provide you with a statement showing
your share of the taxes. For more information,
see Special Rules for Cooperatives in Pub. 530.
Division of real estate taxes between buy
ers and sellers. If you bought or sold real es-
tate during the year, the real estate taxes must
be divided between the buyer and the seller.
The buyer and the seller must divide the real
estate taxes according to the number of days in
the real property tax year (the period to which
the tax is imposed relates) that each owned the
property. The seller is treated as paying the
taxes up to, but not including, the date of sale.
The buyer is treated as paying the taxes begin-
ning with the date of sale. This applies regard-
less of the lien dates under local law. Generally,
this information is included on the settlement
statement provided at the closing.
If you (the seller) can’t deduct taxes until
they are paid because you use the cash method
of accounting, and the buyer of your property is
personally liable for the tax, you are considered
to have paid your part of the tax at the time of
the sale. This lets you deduct the part of the tax
to the date of sale even though you didn’t ac-
tually pay it. However, you must also include
the amount of that tax in the selling price of the
property. The buyer must include the same
amount in his or her cost of the property.
You figure your deduction for taxes on each
property bought or sold during the real property
tax year as follows.
Worksheet 22-1. Figuring
Your Real Estate Tax
Deduction
Keep for Your Records
1. Enter the total real estate taxes for the
real property tax year . . . . . . . . . .
2. Enter the number of days in the real
property tax year that you owned the
property . . . . . . . . . . . . . . . . .
3. Divide line 2 by 365 (for leap years,
divide line 2 by 366) . . . . . . . . . . . .
4. Multiply line 1 by line 3. This is your
deduction. Enter it on Schedule A (Form
1040), line 6 . . . . . . . . . . . . . . .
Note. Repeat steps 1 through 4 for each property you bought
or sold during the real property tax year. Your total deduction is
the sum of the line 4 amounts for all of the properties.
Real estate taxes for prior years. Don’t di-
vide delinquent taxes between the buyer and
seller if the taxes are for any real property tax
year before the one in which the property is
sold. Even if the buyer agrees to pay the delin-
quent taxes, the buyer can’t deduct them. The
buyer must add them to the cost of the property.
The seller can deduct these taxes paid by the
buyer. However, the seller must include them in
the selling price.
Examples. The following examples illustrate
how real estate taxes are divided between
buyer and seller.
Example 1. Dennis and Beth White's real
property tax year for both their old home and
their new home is the calendar year, with pay-
ment due August 1. The tax on their old home,
sold on May 7, was $620. The tax on their new
home, bought on May 3, was $732. Dennis and
Beth are considered to have paid a proportion-
ate share of the real estate taxes on the old
home even though they didn’t actually pay them
to the taxing authority. On the other hand, they
can claim only a proportionate share of the
taxes they paid on their new property even
though they paid the entire amount.
Dennis and Beth owned their old home dur-
ing the real property tax year for 127 days (Jan-
uary 1 to May 6, the day before the sale). They
figure their deduction for taxes on their old
home as follows.
Worksheet 22-1. Figuring Your
Real Estate Tax Deduction —
Taxes on Old Home
1. Enter the total real estate taxes for the
real property tax year . . . . . . . . . $620
2. Enter the number of days in the real
property tax year that you owned the
property . . . . . . . . . . . . . . . . 127
3. Divide line 2 by 365 (for leap years,
divide line 2 by 366) . . . . . . . . . . .3470
4. Multiply line 1 by line 3. This is your
deduction. Enter it on Schedule A (Form
1040), line 6 . . . . . . . . . . . . . . $215
Since the buyers of their old home paid all of
the taxes, Dennis and Beth also include the
$215 in the selling price of the old home. (The
buyers add the $215 to their cost of the home.)
Dennis and Beth owned their new home
during the real property tax year for 243 days
(May 3 to December 31, including their date of
purchase). They figure their deduction for taxes
on their new home as follows.
Worksheet 22-1. Figuring Your
Real Estate Tax Deduction —
Taxes on New Home
1. Enter the total real estate taxes for the
real property tax year . . . . . . . . . $732
2. Enter the number of days in the real
property tax year that you owned the
property . . . . . . . . . . . . . . . . 243
3. Divide line 2 by 365 (for leap years,
divide line 2 by 366) . . . . . . . . . . .6639
4. Multiply line 1 by line 3. This is your
deduction. Enter it on Schedule A (Form
1040), line 6 . . . . . . . . . . . . . . $486
Since Dennis and Beth paid all of the taxes on
the new home, they add $246 ($732 paid less
$486 deduction) to their cost of the new home.
(The sellers add this $246 to their selling price
and deduct the $246 as a real estate tax.)
Dennis and Beth's real estate tax deduction
for their old and new homes is the sum of $215
and $486, or $701. They will enter this amount
on Schedule A (Form 1040), line 6.
Example 2. George and Helen Brown
bought a new home on May 3, 2016. Their real
property tax year for the new home is the calen-
dar year. Real estate taxes for 2015 were as-
sessed in their state on January 1, 2016. The
taxes became due on May 31, 2016, and Octo-
ber 31, 2016.
The Browns agreed to pay all taxes due af-
ter the date of purchase. Real estate taxes for
2015 were $680. They paid $340 on May 31,
2016, and $340 on October 31, 2016. These
taxes were for the 2015 real property tax year.
The Browns cannot deduct them since they
didn’t own the property until 2016. Instead, they
must add $680 to the cost of their new home.
In January 2017, the Browns receive their
2016 property tax statement for $752, which
they will pay in 2017. The Browns owned their
new home during the 2016 real property tax
year for 243 days (May 3 to December 31).
They will figure their 2017 deduction for taxes
as follows.
Worksheet 22-1. Figuring Your
Real Estate Tax Deduction —
Taxes on New Home
1. Enter the total real estate taxes for the
real property tax year . . . . . . . . . $752
2. Enter the number of days in the real
property tax year that you owned the
property . . . . . . . . . . . . . . . . 243
3. Divide line 2 by 365 (for leap years,
divide line 2 by 366) . . . . . . . . . . .6639
4. Multiply line 1 by line 3. This is your
deduction. Claim it on Schedule A
(Form 1040), line 6 . . . . . . . . . . . $499
Chapter 22 Taxes Page 153
The remaining $253 ($752 paid less $499 de-
duction) of taxes paid in 2017, along with the
$680 paid in 2016, is added to the cost of their
new home.
Because the taxes up to the date of sale are
considered paid by the seller on the date of
sale, the seller is entitled to a 2016 tax deduc-
tion of $933. This is the sum of the $680 for
2015 and the $253 for the 123 days the seller
owned the home in 2016. The seller must also
include the $933 in the selling price when he or
she figures the gain or loss on the sale. The
seller should contact the Browns in January
2017 to find out how much real estate tax is due
for 2016.
Form 1099-S. For certain sales or ex-
changes of real estate, the person responsible
for closing the sale (generally the settlement
agent) prepares Form 1099-S, Proceeds From
Real Estate Transactions, to report certain infor-
mation to the IRS and to the seller of the prop-
erty. Box 2 of Form 1099-S is for the gross pro-
ceeds from the sale and should include the
portion of the seller's real estate tax liability that
the buyer will pay after the date of sale. The
buyer includes these taxes in the cost basis of
the property, and the seller both deducts this
amount as a tax paid and includes it in the sales
price of the property.
For a real estate transaction that involves a
home, any real estate tax the seller paid in ad-
vance but that is the liability of the buyer ap-
pears on Form 1099-S, box 5. The buyer de-
ducts this amount as a real estate tax, and the
seller reduces his or her real estate tax deduc-
tion (or includes it in income) by the same
amount. See Refund (or rebate), later.
Taxes placed in escrow. If your monthly
mortgage payment includes an amount placed
in escrow (put in the care of a third party) for
real estate taxes, you may not be able to deduct
the total amount placed in escrow. You can de-
duct only the real estate tax that the third party
actually paid to the taxing authority. If the third
party doesn’t notify you of the amount of real
estate tax that was paid for you, contact the
third party or the taxing authority to find the
proper amount to show on your return.
Tenants by the entirety. If you and your
spouse held property as tenants by the entirety
and you file separate federal returns, each of
you can deduct only the taxes each of you paid
on the property.
Divorced individuals. If your divorce or sepa-
ration agreement states that you must pay the
real estate taxes for a home owned by you and
your spouse, part of your payments may be de-
ductible as alimony and part as real estate
taxes. See Taxes and insurance in chapter 18
for more information.
Ministers' and military housing allowances.
If you are a minister or a member of the uni-
formed services and receive a housing allow-
ance that you can exclude from income, you still
can deduct all of the real estate taxes you pay
on your home.
Refund (or rebate). If you received a refund
or rebate in 2016 of real estate taxes you paid
in 2016, you must reduce your deduction by the
amount refunded to you. If you received a re-
fund or rebate in 2016 of real estate taxes you
deducted in an earlier year, you generally must
include the refund or rebate in income in the
year you receive it. However, the amount you
include in income is limited to the amount of the
deduction that reduced your tax in the earlier
year. For more information, see Recoveries in
chapter 12.
Table 22-1. Which Taxes Can You Deduct?
Type of Tax You Can Deduct You Can’t Deduct
Fees and Charges Fees and charges that are expenses of your trade or
business or of producing income.
Fees and charges that aren’t expenses of your trade or
business or of producing income, such as fees for
driver's licenses, car inspections, parking, or
charges for water bills (see Taxes and Fees You
Can’t Deduct).
Fines and penalties.
Income Taxes State and local income taxes. Federal income taxes.
Foreign income taxes.
Employee contributions to state funds listed under
Contributions to state benefit funds.
Employee contributions to private or voluntary
disability plans.
State and local general sales taxes if you choose to
deduct state and local income taxes.
General Sales Taxes State and local general sales taxes, including
compensating use taxes.
State and local income taxes if you choose to deduct
state and local general sales taxes.
Other Taxes Taxes that are expenses of your trade or business. Federal excise taxes, such as tax on gasoline, that
aren’t expenses of your trade or business or of
producing income.
Taxes on property producing rent or royalty income. Per capita taxes.
Occupational taxes. See chapter 28.
One-half of self-employment tax paid.
Personal Property
Taxes
State and local personal property taxes. Customs duties that aren’t expenses of your trade or
business or of producing income.
Real Estate Taxes State and local real estate taxes. Real estate taxes that are treated as imposed on
someone else (see Division of real estate taxes
between buyers and sellers).
Foreign real estate taxes. Taxes for local benefits (with exceptions). See Real
Estate-Related Items You Can’t Deduct.
Tenant's share of real estate taxes paid by
cooperative housing corporation.
Trash and garbage pickup fees (with exceptions). See
Real Estate-Related Items You Can’t Deduct.
Rent increase due to higher real estate taxes.
Homeowners' association charges.
Page 154 Chapter 22 Taxes
Real EstateRelated Items
You Can’t Deduct
Payments for the following items generally
aren’t deductible as real estate taxes.
Taxes for local benefits.
Itemized charges for services (such as
trash and garbage pickup fees).
Transfer taxes (or stamp taxes).
Rent increases due to higher real estate
taxes.
Homeowners' association charges.
Taxes for local benefits. Deductible real es-
tate taxes generally don’t include taxes charged
for local benefits and improvements tending to
increase the value of your property. These in-
clude assessments for streets, sidewalks, water
mains, sewer lines, public parking facilities, and
similar improvements. You should increase the
basis of your property by the amount of the as-
sessment.
Local benefit taxes are deductible only if
they are for maintenance, repair, or interest
charges related to those benefits. If only a part
of the taxes is for maintenance, repair, or inter-
est, you must be able to show the amount of
that part to claim the deduction. If you can’t de-
termine what part of the tax is for maintenance,
repair, or interest, none of it is deductible.
Taxes for local benefits may be inclu-
ded in your real estate tax bill. If your
taxing authority (or mortgage lender)
doesn’t furnish you a copy of your real estate
tax bill, ask for it. You should use the rules
above to determine if the local benefit tax is de-
ductible. Contact the taxing authority if you
need additional information about a specific
charge on your real estate tax bill.
Itemized charges for services. An itemized
charge for services assessed against specific
property or certain people isn’t a tax, even if the
charge is paid to the taxing authority. For exam-
ple, you can’t deduct the charge as a real estate
tax if it is:
A unit fee for the delivery of a service (such
as a $5 fee charged for every 1,000 gal-
lons of water you use),
A periodic charge for a residential service
(such as a $20 per month or $240 annual
fee charged to each homeowner for trash
collection), or
A flat fee charged for a single service pro-
vided by your government (such as a $30
charge for mowing your lawn because it
was allowed to grow higher than permitted
under your local ordinance).
You must look at your real estate tax
bill to determine if any nondeductible
itemized charges, such as those listed
above, are included in the bill. If your taxing au-
thority (or mortgage lender) doesn’t furnish you
a copy of your real estate tax bill, ask for it.CAUTION
!CAUTION
!
Exception. Service charges used to main-
tain or improve services (such as trash collec-
tion or police and fire protection) are deductible
as real estate taxes if:
The fees or charges are imposed at a like
rate against all property in the taxing juris-
diction,
The funds collected are not earmarked; in-
stead, they are commingled with general
revenue funds, and
Funds used to maintain or improve serv-
ices are not limited to or determined by the
amount of these fees or charges collected.
Transfer taxes (or stamp taxes). Transfer
taxes and similar taxes and charges on the sale
of a personal home aren’t deductible. If they are
paid by the seller, they are expenses of the sale
and reduce the amount realized on the sale. If
paid by the buyer, they are included in the cost
basis of the property.
Rent increase due to higher real estate
taxes. If your landlord increases your rent in
the form of a tax surcharge because of in-
creased real estate taxes, you can’t deduct the
increase as taxes.
Homeowners' association charges. These
charges aren’t deductible because they are im-
posed by the homeowners' association, rather
than the state or local government.
Personal Property
Taxes
Personal property tax is deductible if it is a state
or local tax that is:
Charged on personal property,
Based only on the value of the personal
property, and
Charged on a yearly basis, even if it is col-
lected more or less than once a year.
A tax that meets the above requirements
can be considered charged on personal prop-
erty even if it is for the exercise of a privilege.
For example, a yearly tax based on value quali-
fies as a personal property tax even if it is called
a registration fee and is for the privilege of reg-
istering motor vehicles or using them on the
highways.
If the tax is partly based on value and partly
based on other criteria, it may qualify in part.
Example. Your state charges a yearly mo-
tor vehicle registration tax of 1% of value plus
50 cents per hundredweight. You paid $32
based on the value ($1,500) and weight (3,400
lbs.) of your car. You can deduct $15 (1% ×
$1,500) as a personal property tax because it is
based on the value. The remaining $17 ($.50 ×
34), based on the weight, isn’t deductible.
Taxes and Fees
You Can’t Deduct
Many federal, state, and local government
taxes aren’t deductible because they don’t fall
within the categories discussed earlier. Other
taxes and fees, such as federal income taxes,
aren’t deductible because the tax law specifi-
cally prohibits a deduction for them. See Ta-
ble 22-1.
Taxes and fees that are generally not de-
ductible include the following items.
Employment taxes. This includes social
security, Medicare, and railroad retirement
taxes withheld from your pay. However,
one-half of self-employment tax you pay is
deductible. In addition, the social security
and other employment taxes you pay on
the wages of a household worker may be
included in medical expenses that you can
deduct or child care expenses that allow
you to claim the child and dependent care
credit. For more information, see chapters
21 and 32.
Estate, inheritance, legacy, or succes-
sion taxes. However, you can deduct the
estate tax attributable to income in respect
of a decedent if you, as a beneficiary, must
include that income in your gross income.
In that case, deduct the estate tax as a
miscellaneous deduction that isn’t subject
to the 2%-of-adjusted-gross-income limit.
For more information, see Pub. 559, Survi-
vors, Executors, and Administrators.
Federal income taxes. This includes in-
come taxes withheld from your pay.
Fines and penalties. You can’t deduct
fines and penalties paid to a government
for violation of any law, including related
amounts forfeited as collateral deposits.
Gift taxes.
License fees. You can’t deduct license
fees for personal purposes (such as mar-
riage, driver's, and dog license fees).
Per capita taxes. You can’t deduct state
or local per capita taxes.
Many taxes and fees other than those listed
above are also nondeductible, unless they are
ordinary and necessary expenses of a business
or income producing activity. For other nonde-
ductible items, see Real Estate-Related Items
You Can’t Deduct, earlier.
Where To Deduct
You deduct taxes on the following schedules.
State and local income taxes. These taxes
are deducted on Schedule A (Form 1040),
line 5, even if your only source of income is
from business, rents, or royalties. Check box a
on line 5.
General sales taxes. Sales taxes are deduc-
ted on Schedule A (Form 1040), line 5. You
must check box b on line 5. If you elect to de-
duct sales taxes, you can’t deduct state and lo-
cal income taxes on Schedule A (Form 1040),
line 5, box a.
Foreign income taxes. Generally, income
taxes you pay to a foreign country or U.S. pos-
session can be claimed as an itemized deduc-
tion on Schedule A (Form 1040), line 8, or as a
credit against your U.S. income tax on Form
1040, line 48. To claim the credit, you may have
Chapter 22 Taxes Page 155
to complete and attach Form 1116. For more in-
formation, see chapter 38, the Form 1040 in-
structions, or Pub. 514.
Real estate taxes and personal property
taxes. Real estate and personal property taxes
are deducted on Schedule A (Form 1040), lines
6 and 7, respectively, unless they are paid on
property used in your business, in which case
they are deducted on Schedule C, Sched-
ule C-EZ, or Schedule F (Form 1040). Taxes on
property that produces rent or royalty income
are deducted on Schedule E (Form 1040).
Selfemployment tax. Deduct one-half of your
self-employment tax on Form 1040, line 27.
Other taxes. All other deductible taxes are de-
ducted on Schedule A (Form 1040), line 8.
23.
Interest
Expense
Introduction
This chapter discusses what interest expenses
you can deduct. Interest is the amount you pay
for the use of borrowed money.
The following are types of interest you can
deduct as itemized deductions on Schedule A
(Form 1040).
Home mortgage interest, including certain
points and mortgage insurance premiums.
Investment interest.
This chapter explains these deductions. It also
explains where to deduct other types of interest
and lists some types of interest you can't de-
duct.
Use Table 23-1 to find out where to get
more information on various types of interest,
including investment interest.
Useful Items
You may want to see:
Publication
Home Mortgage Interest Deduction
Investment Income and Expenses
Home Mortgage
Interest
Generally, home mortgage interest is any inter-
est you pay on a loan secured by your home
(main home or a second home). The loan may
be a mortgage to buy your home, a second
mortgage, a line of credit, or a home equity
loan.
You can deduct home mortgage interest if
all the following conditions are met.
You file Form 1040 and itemize deductions
on Schedule A (Form 1040).
The mortgage is a secured debt on a quali-
fied home in which you have an ownership
interest. (Generally, your mortgage is a se-
cured debt if you put your home up as col-
lateral to protect the interest of the lender.
The term “qualified home” means your
main home or second home. For details,
see Pub. 936.)
Both you and the lender must intend that the
loan be repaid.
Amount Deductible
In most cases, you can deduct all of your home
mortgage interest. How much you can deduct
depends on the date of the mortgage, the
amount of the mortgage, and how you use the
mortgage proceeds.
Fully deductible interest. If all of your mort-
gages fit into one or more of the following three
categories at all times during the year, you can
deduct all of the interest on those mortgages. (If
any one mortgage fits into more than one cate-
gory, add the debt that fits in each category to
your other debt in the same category.)
The three categories are as follows:
1. Mortgages you took out on or before Octo-
ber 13, 1987 (called grandfathered debt).
2. Mortgages you (or your spouse if married
filing a joint return) took out after October
13, 1987, to buy, build, or improve your
home (called home acquisition debt), but
only if throughout 2016 these mortgages
plus any grandfathered debt totaled $1
million or less ($500,000 or less if married
filing separately).
3. Mortgages you (or your spouse if married
filing a joint return) took out after October
13, 1987, that are home equity debt but
that are not home acquisition debt, but
only if throughout 2016 these mortgages
totaled $100,000 or less ($50,000 or less if
married filing separately) and totaled no
more than the fair market value of your
home reduced by (1) and (2).
The dollar limits for the second and third cate-
gories apply to the combined mortgages on
your main home and second home.
See Part II of Pub. 936 for more detailed
definitions of grandfathered, home acquisition,
and home equity debt.
You can use Figure 23-A to check whether
your home mortgage interest is fully deductible.
Limits on deduction. You can't fully deduct
interest on a mortgage that doesn't fit into any
of the three categories listed earlier. If this ap-
plies to you, see Part II of Pub. 936 to figure the
amount of interest you can deduct.
Special Situations
This section describes certain items that can be
included as home mortgage interest and others
that can't. It also describes certain special situa-
tions that may affect your deduction.
Late payment charge on mortgage pay
ment. You can deduct as home mortgage in-
terest a late payment charge if it wasn't for a
specific service performed in connection with
your mortgage loan.
Mortgage prepayment penalty. If you pay off
your home mortgage early, you may have to
pay a penalty. You can deduct that penalty as
home mortgage interest provided the penalty
isn't for a specific service performed or cost in-
curred in connection with your mortgage loan.
Sale of home. If you sell your home, you can
deduct your home mortgage interest (subject to
any limits that apply) paid up to, but not includ-
ing, the date of sale.
Example. John and Peggy Harris sold their
home on May 7. Through April 30, they made
home mortgage interest payments of $1,220.
The settlement sheet for the sale of the home
showed $50 interest for the 6-day period in May
up to, but not including, the date of sale. Their
mortgage interest deduction is $1,270 ($1,220
+ $50).
Prepaid interest. If you pay interest in ad-
vance for a period that goes beyond the end of
the tax year, you must spread this interest over
the tax years to which it applies. You can de-
duct in each year only the interest that qualifies
as home mortgage interest for that year. How-
ever, there is an exception that applies to
points, discussed later.
Mortgage interest credit. You may be able to
claim a mortgage interest credit if you were is-
sued a mortgage credit certificate (MCC) by a
state or local government. Figure the credit on
Form 8396, Mortgage Interest Credit. If you
take this credit, you must reduce your mortgage
interest deduction by the amount of the credit.
For more information on the credit, see
chapter 38.
Ministers' and military housing allowance.
If you are a minister or a member of the uni-
formed services and receive a housing allow-
ance that isn't taxable, you can still deduct your
home mortgage interest.
Hardest Hit Fund and Emergency Home
owners' Loan Programs. You can use a spe-
cial method to compute your deduction for
mortgage interest and real estate taxes on your
main home if you meet the following two condi-
tions.
1. You received assistance under:
a. A State Housing Finance Agency
(State HFA) Hardest Hit Fund pro-
gram in which program payments
could be used to pay mortgage inter-
est, or
b. An Emergency Homeowners' Loan
Program administered by the Depart-
ment of Housing and Urban Develop-
ment (HUD) or a state.
2. You meet the rules to deduct all of the
mortgage interest on your loan and all of
the real estate taxes on your main home.
If you meet these conditions, then you can de-
duct all of the payments you actually made dur-
ing the year to your mortgage servicer, the
Page 156 Chapter 23 Interest Expense
Figure 23-A. Is My Home Mortgage Interest Fully Deductible?2
Start Here:
No
Were all of your home mortgages taken out on or
before October 13, 1987?
No
No
Yes
Yes
No
Yes
No
No
Yes
Yes
Yes
Your home mortgage interest is fully deductible.
You do not need Publication 936.
Go to Part II of Publication 936 to determine the
limits on your deductible home mortgage interest.
If all mortgages on your main or second home exceed the home’s fair market value, a lower limit may apply. See Home equity debt limit under Home Equity
Debt in Part II of Publication 936.
Amounts over the $1,000,000 limit ($500,000 if married filing separately) may qualify as home equity debt if they are not more than the total home equity
debt limit. See Publication 936 for more information about grandfathered debt, home acquisition debt, and home equity debt.
Do you meet the conditions to deduct home
mortgage interest?
Yes
You cannot deduct the interest payments as
home mortgage interest.4
No
You must itemize deductions on Schedule A (Form 1040). The loan must be a secured debt on a qualified home. See Home Mortgage Interest.
See Table 23-1 for where to deduct other types of interest payments.4
(Instructions: Include balances of ALL mortgages secured by your main home and second home.)
Were all of your home mortgages taken out after
October 13, 1987, used to buy, build, or improve
the main home secured by that main home
mortgage or used to buy, build, or improve the
second home secured by that second home
mortgage, or both?
Were your (or your spouse’s if married filing a joint
return) grandfathered debt plus home acquisition
debt balances $1,000,000 or less ($500,000 or
less if married filing separately) at all times during
the year?
Were your (or your spouse’s if married filing a joint
return) mortgage balances $1,000,000 or less
($500,000 or less if married filing separately) at all
times during the year?
Were your (or your spouse’s if married filing a joint
return) home equity debt balances $100,000 or
less ($50,000 or less if married filing separately)
at all times during the year?
Were your (or your spouse’s if married filing a joint
return) total mortgage balances $100,000 or less
($50,000 or less if married filing separately) at all
times during the year?
Chapter 23 Interest Expense Page 157
State HFA, or HUD on the home mortgage (in-
cluding the amount shown on box 3 of Form
1098-MA, Mortgage Assistance Payments), but
not more than the sum of the amounts shown
on Form 1098, Mortgage Interest Statement, in
box 1 (mortgage interest received from
payer(s)/borrower(s)), box 5 (mortgage insur-
ance premiums), and box 10 (real property
taxes). However, you aren't required to use this
special method to compute your deduction for
mortgage interest and real estate taxes on your
main home.
Mortgage assistance payments under sec
tion 235 of the National Housing Act. If you
qualify for mortgage assistance payments for
lower-income families under section 235 of the
National Housing Act, part or all of the interest
on your mortgage may be paid for you. You
can’t deduct the interest that is paid for you.
No other effect on taxes. Don't include
these mortgage assistance payments in your in-
come. Also, don't use these payments to re-
duce other deductions, such as real estate
taxes.
Divorced or separated individuals. If a di-
vorce or separation agreement requires you or
your spouse or former spouse to pay home
mortgage interest on a home owned by both of
you, the payment of interest may be alimony.
See the discussion of Payments for
jointly-owned home in chapter 18.
Redeemable ground rents. If you make an-
nual or periodic rental payments on a redeema-
ble ground rent, you can deduct them as mort-
gage interest.
Payments made to end the lease and to buy
the lessor's entire interest in the land aren't de-
ductible as mortgage interest. For more infor-
mation, see Pub. 936.
Nonredeemable ground rents. Payments
on a nonredeemable ground rent aren't mort-
gage interest. You can deduct them as rent if
they are a business expense or if they are for
rental property.
Reverse mortgages. A reverse mortgage is a
loan where the lender pays you (in a lump sum,
a monthly advance, a line of credit, or a combi-
nation of all three) while you continue to live in
your home. With a reverse mortgage, you retain
title to your home. Depending on the plan, your
reverse mortgage becomes due with interest
when you move, sell your home, reach the end
of a pre-selected loan period, or die. Because
reverse mortgages are considered loan advan-
ces and not income, the amount you receive
isn't taxable. Any interest (including original is-
sue discount) accrued on a reverse mortgage
isn't deductible until the loan is paid in full. Your
deduction may be limited because a reverse
mortgage loan generally is subject to the limit
on Home Equity Debt discussed in Pub. 936.
Rental payments. If you live in a house before
final settlement on the purchase, any payments
you make for that period are rent and not inter-
est. This is true even if the settlement papers
call them interest. You can't deduct these pay-
ments as home mortgage interest.
Mortgage proceeds invested in taxexempt
securities. You can't deduct the home mort-
gage interest on grandfathered debt or home
equity debt if you used the proceeds of the
mortgage to buy securities or certificates that
produce tax-free income. “Grandfathered debt”
and “home equity debt” are defined earlier un-
der Amount Deductible.
Refunds of interest. If you receive a refund of
interest in the same tax year you paid it, you
must reduce your interest expense by the
amount refunded to you. If you receive a refund
of interest you deducted in an earlier year, you
generally must include the refund in income in
the year you receive it. However, you need to
include it only up to the amount of the deduction
that reduced your tax in the earlier year. This is
true whether the interest overcharge was refun-
ded to you or was used to reduce the outstand-
ing principal on your mortgage.
If you received a refund of interest you over-
paid in an earlier year, you generally will receive
a Form 1098, Mortgage Interest Statement,
showing the refund in box 4. For information
about Form 1098, see Form 1098, Mortgage In-
terest Statement, later.
For more information on how to treat refunds
of interest deducted in earlier years, see Recov-
eries in chapter 12.
Points
The term “points” is used to describe certain
charges paid, or treated as paid, by a borrower
to obtain a home mortgage. Points may also be
called loan origination fees, maximum loan
charges, loan discount, or discount points.
A borrower is treated as paying any points
that a home seller pays for the borrower's mort-
gage. See Points paid by the seller, later.
General Rule
You generally can't deduct the full amount of
points in the year paid. Because they are pre-
paid interest, you generally deduct them ratably
over the life (term) of the mortgage. See Deduc-
tion Allowed Ratably next.
For exceptions to the general rule, see De-
duction Allowed in Year Paid, later.
Deduction Allowed Ratably
If you don't meet the tests listed under Deduc-
tion Allowed in Year Paid next, the loan isn't a
home improvement loan, or you choose not to
deduct your points in full in the year paid, you
can deduct the points ratably (equally) over the
life of the loan if you meet all the following tests.
1. You use the cash method of accounting.
This means you report income in the year
you receive it and deduct expenses in the
year you pay them. Most individuals use
this method.
2. Your loan is secured by a home. (The
home doesn't need to be your main
home.)
3. Your loan period isn't more than 30 years.
4. If your loan period is more than 10 years,
the terms of your loan are the same as
other loans offered in your area for the
same or longer period.
5. Either your loan amount is $250,000 or
less, or the number of points isn’t more
than:
a. 4, if your loan period is 15 years or
less, or
b. 6, if your loan period is more than 15
years.
Deduction Allowed in Year Paid
You can fully deduct points in the year paid if
you meet all the following tests. (You can use
Figure 23-B as a quick guide to see whether
your points are fully deductible in the year paid.)
1. Your loan is secured by your main home.
(Your main home is the one you ordinarily
live in most of the time.)
2. Paying points is an established business
practice in the area where the loan was
made.
3. The points paid weren't more than the
points generally charged in that area.
4. You use the cash method of accounting.
This means you report income in the year
you receive it and deduct expenses in the
year you pay them. (If you want more in-
formation about this method, see Account-
ing Methods in chapter 1.)
5. The points weren't paid in place of
amounts that ordinarily are stated sepa-
rately on the settlement statement, such
as appraisal fees, inspection fees, title
fees, attorney fees, and property taxes.
6. The funds you provided at or before clos-
ing, plus any points the seller paid, were at
least as much as the points charged. The
funds you provided aren't required to have
been applied to the points. They can in-
clude a down payment, an escrow de-
posit, earnest money, and other funds you
paid at or before closing for any purpose.
You cannot have borrowed these funds
from your lender or mortgage broker.
7. You use your loan to buy or build your
main home.
8. The points were computed as a percent-
age of the principal amount of the mort-
gage.
9. The amount is clearly shown on the settle-
ment statement (such as the Settlement
Statement, Form HUD-1) as points
charged for the mortgage. The points may
be shown as paid from either your funds or
the seller's.
Note. If you meet all of these tests, you can
choose to either fully deduct the points in the
year paid, or deduct them over the life of the
loan.
Home improvement loan. You can also fully
deduct in the year paid points paid on a loan to
improve your main home, if tests (1) through (6)
are met.
Page 158 Chapter 23 Interest Expense
Figure 23-B. Are My Points Fully Deductible This Year?Start Here:
Yes
No
Yes
No
Yes
No
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
Yes
Yes
No
Is the loan secured by your main home?
Is the payment of points an established
business practice in your area?
Were the points paid more than the amount
generally charged in your area?
Do you use the cash method of accounting?
Were the points paid in place of amounts that
ordinarily are separately stated on the
settlement sheet?
Were the funds you provided (other than those
you borrowed from your lender or mortgage
broker), plus any points the seller paid, at least
as much as the points charged?*
Did you take out the loan to improve your
main home?
Did you take out the loan to buy or build
your main home?
Were the points computed as a percentage of
the principal amount of the mortgage?
Is the amount paid clearly shown as points on
the settlement statement?
You can fully deduct the points this year on
Schedule A (Form 1040).
You cannot fully deduct the points this year. See
the discussion on Points.
* The funds you provided are not required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and
other funds you paid at or before closing for any purpose.
Chapter 23 Interest Expense Page 159
Second home. You can’t fully deduct
in the year paid points you pay on
loans secured by your second home.
You can deduct these points only over the life of
the loan.
Refinancing. Generally, points you pay to refi-
nance a mortgage aren't deductible in full in the
year you pay them. This is true even if the new
mortgage is secured by your main home.
However, if you use part of the refinanced
mortgage proceeds to improve your main home
and you meet the first 6 tests listed under De-
duction Allowed in Year Paid, earlier, you can
fully deduct the part of the points related to the
improvement in the year you paid them with
your own funds. You can deduct the rest of the
points over the life of the loan.
Example 1. In 2001, Bill Fields got a mort-
gage to buy a home. In 2016, Bill refinanced
that mortgage with a 15-year $100,000 mort-
gage loan. The mortgage is secured by his
home. To get the new loan, he had to pay three
points ($3,000). Two points ($2,000) were for
prepaid interest, and one point ($1,000) was
charged for services, in place of amounts that
ordinarily are stated separately on the settle-
ment statement. Bill paid the points out of his
private funds, rather than out of the proceeds of
the new loan. The payment of points is an es-
tablished practice in the area, and the points
charged aren't more than the amount generally
charged there. Bill's first payment on the new
loan was due July 1. He made six payments on
the loan in 2016 and is a cash basis taxpayer.
Bill used the funds from the new mortgage
to repay his existing mortgage. Although the
new mortgage loan was for Bill's continued
ownership of his main home, it wasn't for the
purchase or improvement of that home. He
can't deduct all of the points in 2016. He can
deduct two points ($2,000) ratably over the life
of the loan. He deducts $67 [($2,000 ÷ 180
months) × 6 payments] of the points in 2016.
The other point ($1,000) was a fee for services
and isn't deductible.
Example 2. The facts are the same as in
Example 1, except that Bill used $25,000 of the
loan proceeds to improve his home and
$75,000 to repay his existing mortgage. Bill de-
ducts 25% ($25,000 ÷ $100,000) of the points
($2,000) in 2016. His deduction is $500 ($2,000
× 25%).
Bill also deducts the ratable part of the re-
maining $1,500 ($2,000 − $500) that must be
spread over the life of the loan. This is $50
[($1,500 ÷ 180 months) × 6 payments] in 2016.
The total amount Bill deducts in 2016 is $550
($500 + $50).
Special Situations
This section describes certain special situations
that may affect your deduction of points.
Original issue discount. If you don't qualify to
either deduct the points in the year paid or de-
duct them ratably over the life of the loan, or if
you choose not to use either of these methods,
the points reduce the issue price of the loan.
This reduction results in original issue discount,
which is discussed in chapter 4 of Pub. 535.CAUTION
!
Amounts charged for services. Amounts
charged by the lender for specific services con-
nected to the loan aren't interest. Examples of
these charges are:
Appraisal fees,
Notary fees, and
Preparation costs for the mortgage note or
deed of trust.
You can't deduct these amounts as points ei-
ther in the year paid or over the life of the mort-
gage.
Points paid by the seller. The term “points”
includes loan placement fees that the seller
pays to the lender to arrange financing for the
buyer.
Treatment by seller. The seller can't de-
duct these fees as interest. But they are a sell-
ing expense that reduces the amount realized
by the seller. See chapter 15 for information on
selling your home.
Treatment by buyer. The buyer reduces
the basis of the home by the amount of the
seller-paid points and treats the points as if he
or she had paid them. If all the tests under De-
duction Allowed in Year Paid, earlier, are met,
the buyer can deduct the points in the year
paid. If any of those tests aren't met, the buyer
deducts the points over the life of the loan.
For information about basis, see chapter 13.
Funds provided are less than points. If you
meet all the tests in Deduction Allowed in Year
Paid, earlier, except that the funds you provided
were less than the points charged to you (test
(6)), you can deduct the points in the year paid,
up to the amount of funds you provided. In addi-
tion, you can deduct any points paid by the
seller.
Example 1. When you took out a $100,000
mortgage loan to buy your home in December,
you were charged one point ($1,000). You meet
all the tests for deducting points in the year
paid, except the only funds you provided were a
$750 down payment. Of the $1,000 charged for
points, you can deduct $750 in the year paid.
You spread the remaining $250 over the life of
the mortgage.
Example 2. The facts are the same as in
Example 1, except that the person who sold you
your home also paid one point ($1,000) to help
you get your mortgage. In the year paid, you
can deduct $1,750 ($750 of the amount you
were charged plus the $1,000 paid by the
seller). You spread the remaining $250 over the
life of the mortgage. You must reduce the basis
of your home by the $1,000 paid by the seller.
Excess points. If you meet all the tests in De-
duction Allowed in Year Paid, earlier, except
that the points paid were more than generally
paid in your area (test (3)), you deduct in the
year paid only the points that are generally
charged. You must spread any additional points
over the life of the mortgage.
Mortgage ending early. If you spread your
deduction for points over the life of the mort-
gage, you can deduct any remaining balance in
the year the mortgage ends. However, if you re-
finance the mortgage with the same lender, you
can't deduct any remaining balance of spread
points. Instead, deduct the remaining balance
over the term of the new loan.
A mortgage may end early due to a prepay-
ment, refinancing, foreclosure, or similar event.
Example. Dan paid $3,000 in points in
2005 that he had to spread out over the 15-year
life of the mortgage. He deducts $200 points
per year. Through 2015, Dan has deducted
$2,200 of the points.
Dan prepaid his mortgage in full in 2016. He
can deduct the remaining $800 of points in
2016.
Limits on deduction. You can't fully deduct
points paid on a mortgage unless the mortgage
fits into one of the categories listed earlier under
Fully deductible interest. See Pub. 936 for de-
tails.
Mortgage Insurance
Premiums
You can treat amounts you paid during 2016 for
qualified mortgage insurance as home mort-
gage interest. The insurance must be in con-
nection with home acquisition debt and the in-
surance contract must have been issued after
2006.
Qualified mortgage insurance. Qualified
mortgage insurance is mortgage insurance pro-
vided by the Department of Veterans Affairs,
the Federal Housing Administration, or the Ru-
ral Housing Service, and private mortgage in-
surance (as defined in section 2 of the Home-
owners Protection Act of 1998 as in effect on
December 20, 2006).
Mortgage insurance provided by the Depart-
ment of Veterans Affairs is commonly known as
a funding fee. If provided by the Rural Housing
Service, it is commonly known as a guarantee
fee. These fees can be deducted fully in 2016 if
the mortgage insurance contract was issued in
2016. Contact the mortgage insurance issuer to
determine the deductible amount if it is not re-
ported in box 5 of Form 1098.
Special rules for prepaid mortgage insur
ance. Generally, if you paid premiums for
qualified mortgage insurance that are allocable
to periods after the close of the tax year, such
premiums are treated as paid in the period to
which they are allocated. You must allocate the
premiums over the shorter of the stated term of
the mortgage or 84 months, beginning with the
month the insurance was obtained. No deduc-
tion is allowed for the unamortized balance if
the mortgage is satisfied before its term. This
paragraph does not apply to qualified mortgage
insurance provided by the Department of Veter-
ans Affairs or the Rural Housing Service. See
the Example below.
Example. Ryan purchased a home in May
of 2015 and financed the home with a 15-year
mortgage. Ryan also prepaid all of the $9,240 in
private mortgage insurance required at the time
of closing in May. Since the $9,240 in private
mortgage insurance is allocable to periods after
2015, Ryan must allocate the $9,240 over the
shorter of the life of the mortgage or 84 months.
Ryan's adjusted gross income (AGI) for 2015 is
Page 160 Chapter 23 Interest Expense
$76,000. Ryan can deduct $880 ($9,240 ÷ 84 ×
8 months) for qualified mortgage insurance pre-
miums in 2015. For 2016, Ryan can deduct
$1,320 ($9,240 ÷ 84 × 12 months) if his AGI is
$100,000 or less.
In this example, the mortgage insurance
premiums are allocated over 84 months, which
is shorter than the life of the mortgage of 15
years (180 months).
Limit on deduction. If your adjusted gross in-
come on Form 1040, line 38, is more than
$100,000 ($50,000 if your filing status is mar-
ried filing separately), the amount of your mort-
gage insurance premiums that are otherwise
deductible is reduced and may be eliminated.
See Line 13 in the instructions for Schedule A
(Form 1040) and complete the Mortgage Insur-
ance Premiums Deduction Worksheet to figure
the amount you can deduct. If your adjusted
gross income is more than $109,000 ($54,500 if
married filing separately), you cannot deduct
your mortgage insurance premiums.
Form 1098, Mortgage
Interest Statement
If you paid $600 or more of mortgage interest
(including certain points and mortgage insur-
ance premiums) during the year on any one
mortgage, you generally will receive a Form
1098 or a similar statement from the mortgage
holder. You will receive the statement if you pay
interest to a person (including a financial institu-
tion or a cooperative housing corporation) in the
course of that person's trade or business. A
governmental unit is a person for purposes of
furnishing the statement.
The statement for each year should be sent
to you by January 31 of the following year. A
copy of this form will also be sent to the IRS.
The statement will show the total interest
you paid during the year, any mortgage insur-
ance premiums you paid, and if you purchased
a main home during the year, it also will show
the deductible points paid during the year, in-
cluding seller-paid points. However, it shouldn't
show any interest that was paid for you by a
government agency.
As a general rule, Form 1098 will include
only points that you can fully deduct in the year
paid. However, certain points not included on
Form 1098 also may be deductible, either in the
year paid or over the life of the loan. See Points,
earlier, to determine whether you can deduct
points not shown on Form 1098.
Prepaid interest on Form 1098. If you pre-
paid interest in 2016 that accrued in full by Jan-
uary 15, 2017, this prepaid interest may be in-
cluded in box 1 of Form 1098. However, you
can't deduct the prepaid amount for January
2017 in 2016. (See Prepaid interest, earlier.)
You will have to figure the interest that accrued
for 2017 and subtract it from the amount in
box 1. You will include the interest for January
2017 with the other interest you pay for 2017.
See How To Report, later.
Refunded interest. If you received a refund of
mortgage interest you overpaid in an earlier
year, you generally will receive a Form 1098
showing the refund in box 4. See Refunds of in-
terest, earlier.
Mortgage insurance premiums. The amount
of mortgage insurance premiums you paid dur-
ing 2016 may be shown in box 5 of Form 1098.
See Mortgage Insurance Premiums, earlier.
Investment Interest
This section discusses interest expenses you
may be able to deduct as an investor.
If you borrow money to buy property you
hold for investment, the interest you pay is in-
vestment interest. You can deduct investment
interest subject to the limit discussed later.
However, you can't deduct interest you incurred
to produce tax-exempt income. Nor can you de-
duct interest expenses on straddles.
Investment interest doesn't include any
qualified home mortgage interest or any interest
taken into account in computing income or loss
from a passive activity.
Investment Property
Property held for investment includes property
that produces interest, dividends, annuities, or
royalties not derived in the ordinary course of a
trade or business. It also includes property that
produces gain or loss (not derived in the ordi-
nary course of a trade or business) from the
sale or trade of property producing these types
of income or held for investment (other than an
interest in a passive activity). Investment prop-
erty also includes an interest in a trade or busi-
ness activity in which you didn't materially par-
ticipate (other than a passive activity).
Partners, shareholders, and beneficiaries.
To determine your investment interest, combine
your share of investment interest from a part-
nership, S corporation, estate, or trust with your
other investment interest.
Allocation of Interest
Expense
If you borrow money for business or personal
purposes as well as for investment, you must al-
locate the debt among those purposes. Only
the interest expense on the part of the debt
used for investment purposes is treated as in-
vestment interest. The allocation isn't affected
by the use of property that secures the debt.
Limit on Deduction
Generally, your deduction for investment inter-
est expense is limited to the amount of your net
investment income.
You can carry over the amount of invest-
ment interest that you couldn't deduct because
of this limit to the next tax year. The interest car-
ried over is treated as investment interest paid
or accrued in that next year.
You can carry over disallowed investment
interest to the next tax year even if it's more
than your taxable income in the year the interest
was paid or accrued.
Net Investment Income
Determine the amount of your net investment
income by subtracting your investment expen-
ses (other than interest expense) from your in-
vestment income.
Investment income. This generally includes
your gross income from property held for invest-
ment (such as interest, dividends, annuities,
and royalties). Investment income doesn't in-
clude Alaska Permanent Fund dividends. It also
doesn't include qualified dividends or net capital
gain unless you choose to include them.
Choosing to include qualified dividends.
Investment income generally doesn't include
qualified dividends, discussed in chapter 8.
However, you can choose to include all or part
of your qualified dividends in investment in-
come.
You make this choice by completing Form
4952, line 4g, according to its instructions.
If you choose to include any amount of your
qualified dividends in investment income, you
must reduce your qualified dividends that are
eligible for the lower capital gains tax rates by
the same amount.
Choosing to include net capital gain. In-
vestment income generally doesn't include net
capital gain from disposing of investment prop-
erty (including capital gain distributions from
mutual funds). However, you can choose to in-
clude all or part of your net capital gain in in-
vestment income.
You make this choice by completing Form
4952, line 4g, according to its instructions.
If you choose to include any amount of your
net capital gain in investment income, you must
reduce your net capital gain that is eligible for
the lower capital gains tax rates by the same
amount.
Before making either choice, consider
the overall effect on your tax liability.
Compare your tax if you make one or
both of these choices with your tax if you don't
make either choice.
Investment income of child reported on pa
rent's return. Investment income includes the
part of your child's interest and dividend income
that you choose to report on your return. If the
child doesn't have qualified dividends, Alaska
Permanent Fund dividends, or capital gain dis-
tributions, this is the amount on line 6 of Form
8814, Parents' Election To Report Child's Inter-
est and Dividends.
Child's qualified dividends. If part of the
amount you report is your child's qualified divi-
dends, that part (which is reported on Form
1040, line 9b) generally doesn't count as invest-
ment income. However, you can choose to in-
clude all or part of it in investment income, as
explained under Choosing to include qualified
dividends, earlier.
Your investment income also includes the
amount on Form 8814, line 12 (or, if applicable,
the reduced amount figured next under Child's
Alaska Permanent Fund dividends).
Child's Alaska Permanent Fund divi-
dends. If part of the amount you report is your
child's Alaska Permanent Fund dividends, that
part doesn't count as investment income. ToTIP
Chapter 23 Interest Expense Page 161
figure the amount of your child's income that
you can consider your investment income, start
with the amount on Form 8814, line 6. Multiply
that amount by a percentage that is equal to the
Alaska Permanent Fund dividends divided by
the total amount on Form 8814, line 4. Subtract
the result from the amount on Form 8814,
line 12.
Child's capital gain distributions. If part of
the amount you report is your child's capital
gain distributions, that part (which is reported
on Schedule D, line 13, or Form 1040, line 13)
generally doesn't count as investment income.
However, you can choose to include all or part
of it in investment income, as explained in
Choosing to include net capital gain, earlier.
Your investment income also includes the
amount on Form 8814, line 12 (or, if applicable,
the reduced amount figured under Child's
Alaska Permanent Fund dividends, earlier).
Investment expenses. Investment expenses
are your allowed deductions (other than interest
expense) directly connected with the production
of investment income. Investment expenses
that are included as a miscellaneous itemized
deduction on Schedule A (Form 1040) are al-
lowable deductions after applying the 2% limit
that applies to miscellaneous itemized deduc-
tions. Use the smaller of:
The investment expenses included on
Schedule A (Form 1040), line 23, or
The amount on Schedule A, line 27.
Losses from passive activities. Income or
expenses that you used in computing income or
loss from a passive activity aren't included in
determining your investment income or invest-
ment expenses (including investment interest
expense). See Pub. 925, Passive Activity and
At-Risk Rules, for information about passive ac-
tivities.
Form 4952
Use Form 4952, Investment Interest Expense
Deduction, to figure your deduction for invest-
ment interest.
Exception to use of Form 4952. You don't
have to complete Form 4952 or attach it to your
return if you meet all of the following tests.
Your investment interest expense isn't
more than your investment income from in-
terest and ordinary dividends minus any
qualified dividends.
You don't have any other deductible in-
vestment expenses.
You have no carryover of investment inter-
est expense from 2015.
If you meet all of these tests, you can deduct all
of your investment interest.
More Information
For more information on investment interest,
see Interest Expenses in chapter 3 of Pub. 550.
Items You
Can’t Deduct
Some interest payments aren't deductible. Cer-
tain expenses similar to interest also aren't de-
ductible. Nondeductible expenses include the
following items.
Personal interest (discussed later).
Service charges (however, see Other Ex-
penses (Line 23) in chapter 28).
Annual fees for credit cards.
Loan fees.
Credit investigation fees.
Interest to purchase or carry tax-exempt
securities.
Penalties. You can't deduct fines and penal-
ties paid to a government for violations of law,
regardless of their nature.
Personal Interest
Personal interest isn't deductible. Personal in-
terest is any interest that isn't home mortgage
interest, investment interest, business interest,
or other deductible interest. It includes the fol-
lowing items.
Interest on car loans (unless you use the
car for business).
Interest on federal, state, or local income
tax.
Finance charges on credit cards, retail in-
stallment contracts, and revolving charge
accounts incurred for personal expenses.
Late payment charges by a public utility.
You may be able to deduct interest you
pay on a qualified student loan. For de-
tails, see Pub. 970, Tax Benefits for
Education.
Allocation of Interest
If you use the proceeds of a loan for more than
one purpose (for example, personal and busi-
ness), you must allocate the interest on the loan
to each use. However, you don't have to allo-
cate home mortgage interest if it is fully deducti-
ble, regardless of how the funds are used.
You allocate interest (other than fully deduc-
tible home mortgage interest) on a loan in the
same way as the loan itself is allocated. You do
this by tracing disbursements of the debt pro-
ceeds to specific uses. For details on how to do
this, see chapter 4 of Pub. 535.
How To Report
You must file Form 1040 to deduct any home
mortgage interest expense on your tax return.
Where you deduct your interest expense gener-
ally depends on how you use the loan pro-
ceeds. See Table 23-1 for a summary of where
to deduct your interest expense.
Home mortgage interest and points. Deduct
the home mortgage interest and points reportedTIP
to you on Form 1098 on Schedule A (Form
1040), line 10. If you paid more deductible inter-
est to the financial institution than the amount
shown on Form 1098, show the larger deducti-
ble amount on line 10. Attach a statement ex-
plaining the difference and print “See attached”
next to line 10.
Deduct home mortgage interest that wasn't
reported to you on Form 1098 on Schedule A
(Form 1040), line 11. If you paid home mort-
gage interest to the person from whom you
bought your home, show that person's name,
address, and taxpayer identification number
(TIN) on the dotted lines next to line 11. The
seller must give you this number and you must
give the seller your TIN. A Form W-9, Request
for Taxpayer Identification Number and Certifi-
cation, can be used for this purpose. Failure to
meet any of these requirements may result in a
$50 penalty for each failure. The TIN can be ei-
ther a social security number, an individual tax-
payer identification number (issued by the Inter-
nal Revenue Service), or an employer
identification number. See Social Security Num-
ber (SSN) in chapter 1 for more information
about TINs.
If you can take a deduction for points that
weren't reported to you on Form 1098, deduct
those points on Schedule A (Form 1040),
line 12.
Deduct mortgage insurance premiums on
Schedule A (Form 1040), line 13.
More than one borrower. If you and at
least one other person (other than your spouse
if you file a joint return) were liable for and paid
interest on a mortgage that was for your home,
and the other person received a Form 1098
showing the interest that was paid during the
year, attach a statement to your return explain-
ing this. Show how much of the interest each of
you paid, and give the name and address of the
person who received the form. Deduct your
share of the interest on Schedule A (Form
1040), line 11, and print “See attached” next to
the line. Also, deduct your share of any qualified
mortgage insurance premiums on Schedule A
(Form 1040), line 13.
Similarly, if you are the payer of record on a
mortgage on which there are other borrowers
entitled to a deduction for the interest shown on
the Form 1098 you received, deduct only your
share of the interest on Schedule A (Form
1040), line 10. You should let each of the other
borrowers know what his or her share is.
Mortgage proceeds used for business or
investment. If your home mortgage interest
deduction is limited, but all or part of the mort-
gage proceeds were used for business, invest-
ment, or other deductible activities, see Ta-
ble 23-1. It shows where to deduct the part of
your excess interest that is for those activities.
Investment interest. Deduct investment inter-
est, subject to certain limits discussed in Pub.
550, on Schedule A (Form 1040), line 14.
Amortization of bond premium. There are
various ways to treat the premium you pay to
buy taxable bonds. See Bond Premium Amorti-
zation in Pub. 550.
Incomeproducing rental or royalty interest.
Deduct interest on a loan for income-producing
Page 162 Chapter 23 Interest Expense
rental or royalty property that isn't used in your
business in Part I of Schedule E (Form 1040).
Example. You rent out part of your home
and borrow money to make repairs. You can
deduct only the interest payment for the rented
part in Part I of Schedule E (Form 1040). De-
duct the rest of the interest payment on Sched-
ule A (Form 1040) if it is deductible home mort-
gage interest.
Table 23-1. Where To Deduct Your Interest Expense
IF you have ... THEN deduct it on ...
AND for more
information go to ...
deductible student loan interest Form 1040, line 33, or
Form 1040A, line 18
Pub. 970.
deductible home mortgage interest and
points reported on Form 1098
Schedule A (Form 1040),
line 10
Pub. 936.
deductible home mortgage interest not
reported on Form 1098
Schedule A (Form 1040),
line 11
Pub. 936.
deductible points not reported on Form
1098
Schedule A (Form 1040),
line 12
Pub. 936.
deductible mortgage insurance
premiums
Schedule A (Form 1040),
line 13
Pub. 936.
deductible investment interest (other
than incurred to produce rents or
royalties)
Schedule A (Form 1040),
line 14
Pub. 550.
deductible business interest (non-farm) Schedule C or C-EZ
(Form 1040)
Pub. 535.
deductible farm business interest Schedule F (Form 1040) Pub. 225 and Pub. 535.
deductible interest incurred to produce
rents or royalties
Schedule E (Form 1040) Pub. 527 and Pub. 535.
personal interest not deductible.
Chapter 23 Interest Expense Page 163
24.
Contributions
Introduction
This chapter explains how to claim a deduction
for your charitable contributions. It discusses
the following topics.
The types of organizations to which you
can make deductible charitable contribu-
tions.
The types of contributions you can deduct.
How much you can deduct.
What records you must keep.
How to report your charitable contributions.
A charitable contribution is a donation or gift
to, or for the use of, a qualified organization. It is
voluntary and is made without getting, or ex-
pecting to get, anything of equal value.
Form 1040 required. To deduct a charitable
contribution, you must file Form 1040 and item-
ize deductions on Schedule A. The amount of
your deduction may be limited if certain rules
and limits explained in this chapter apply to you.
The limits are explained in detail in Pub. 526.
Useful Items
You may want to see:
Publication
Charitable Contributions
Determining the Value of Donated
Property
Form (and Instructions)
Itemized
Deductions
Noncash Charitable Contributions
Organizations That
Qualify To Receive
Deductible
Contributions
You can deduct your contributions only if you
make them to a qualified organization. Most or-
ganizations other than churches and govern-
ments must apply to the IRS to become a quali-
fied organization.
How to check whether an organization can
receive deductible charitable contributions.
You can ask any organization whether it is a
qualified organization, and most will be able to
tell you. Or go to IRS.gov. Click on “Tools” and
then on “Exempt Organizations Select Check”
(IRS.gov/Charities- &-Non-Profits/Exempt-
Organizations-Select-Check). This online tool
will enable you to search for qualified organiza-
tions.
Schedule A (Form 1040)
8283
Types of Qualified
Organizations
Generally, only the following types of organiza-
tions can be qualified organizations.
1. A community chest, corporation, trust,
fund, or foundation organized or created in
or under the laws of the United States, any
state, the District of Columbia, or any pos-
session of the United States (including Pu-
erto Rico). It must, however, be organized
and operated only for charitable, religious,
scientific, literary, or educational purpo-
ses, or for the prevention of cruelty to chil-
dren or animals. Certain organizations that
foster national or international amateur
sports competition also qualify.
2. War veterans' organizations, including
posts, auxiliaries, trusts, or foundations,
organized in the United States or any of its
possessions (including Puerto Rico).
3. Domestic fraternal societies, orders, and
associations operating under the lodge
system. (Your contribution to this type of
organization is deductible only if it is to be
used solely for charitable, religious, scien-
tific, literary, or educational purposes, or
for the prevention of cruelty to children or
animals.)
4. Certain nonprofit cemetery companies or
corporations. (Your contribution to this
type of organization isn't deductible if it
can be used for the care of a specific lot or
mausoleum crypt.)
5. The United States or any state, the District
of Columbia, a U.S. possession (including
Puerto Rico), a political subdivision of a
state or U.S. possession, or an Indian
tribal government or any of its subdivisions
that perform substantial government func-
tions. (Your contribution to this type of or-
ganization is only deductible if it is to be
used solely for public purposes.)
Examples. The following list gives some ex-
amples of qualified organizations.
Churches, a convention or association of
churches, temples, synagogues, mosques,
and other religious organizations.
Most nonprofit charitable organizations
such as the American Red Cross and the
United Way.
Most nonprofit educational organizations,
including the Boy Scouts of America, Girl
Scouts of America, colleges, and muse-
ums. This also includes nonprofit daycare
centers that provide childcare to the gen-
eral public if substantially all the childcare
is provided to enable parents and guardi-
ans to be gainfully employed. However, if
your contribution is a substitute for tuition
or other enrollment fee, it isn't deductible
as a charitable contribution, as explained
later under Contributions You Can't De-
duct.
Nonprofit hospitals and medical research
organizations.
Utility company emergency energy pro-
grams, if the utility company is an agent for
a charitable organization that assists indi-
viduals with emergency energy needs.
Nonprofit volunteer fire companies.
Nonprofit organizations that develop and
maintain public parks and recreation facili-
ties.
Civil defense organizations.
Certain foreign charitable organizations.
Under income tax treaties with Canada, Israel,
and Mexico, you may be able to deduct contri-
butions to certain Canadian, Israeli, or Mexican
charitable organizations. Generally, you must
have income from sources in that country. For
additional information on the deduction of con-
tributions to Canadian charities, see Pub. 597,
Information on the United States–Canada In-
come Tax Treaty. If you need more information
on how to figure your contribution to Mexican
and Israeli charities, see Pub. 526.
Contributions
You Can Deduct
Generally, you can deduct contributions of
money or property you make to, or for the use
of, a qualified organization. A contribution is “for
the use of” a qualified organization when it is
held in a legally enforceable trust for the quali-
fied organization or in a similar legal arrange-
ment. The contributions must be made to a
qualified organization and not set aside for use
by a specific person.
If you give property to a qualified organiza-
tion, you generally can deduct the fair market
value of the property at the time of the contribu-
tion. See Contributions of Property, later, in this
chapter.
Your deduction for charitable contributions
generally can't be more than 50% of your adjus-
ted gross income (AGI), but in some cases 20%
and 30% limits may apply. See Limits on De-
ductions, later.
In addition, the total of your charitable contri-
bution deduction and certain other itemized de-
ductions may be limited. See chapter 29.
Table 24-1 gives examples of contributions
you can and can't deduct.
Contributions From
Which You Benefit
If you receive a benefit as a result of making a
contribution to a qualified organization, you can
deduct only the amount of your contribution that
is more than the value of the benefit you re-
ceive. Also see Contributions From Which You
Benefit under Contributions You Can't Deduct,
later.
If you pay more than fair market value to a
qualified organization for goods or services, the
excess may be a charitable contribution. For
the excess amount to qualify, you must pay it
with the intent to make a charitable contribution.
Example 1. You pay $65 for a ticket to a
dinner dance at a church. Your entire $65 pay-
ment goes to the church. The ticket to the
dinner dance has a fair market value of $25.
Page 164 Chapter 24 Contributions
When you buy your ticket, you know that its
value is less than your payment. To figure the
amount of your charitable contribution, subtract
the value of the benefit you receive ($25) from
your total payment ($65). You can deduct $40
as a contribution to the church.
Example 2. At a fundraising auction con-
ducted by a charity, you pay $600 for a week's
stay at a beach house. The amount you pay is
no more than the fair rental value. You haven't
made a deductible charitable contribution.
Athletic events. If you make a payment to, or
for the benefit of, a college or university and, as
a result, you receive the right to buy tickets to
an athletic event in the athletic stadium of the
college or university, you can deduct 80% of the
payment as a charitable contribution.
If any part of your payment is for tickets
(rather than the right to buy tickets), 100% of
that part isn't deductible. Subtract the price of
the tickets from your payment. You can deduct
80% of the remaining amount as a charitable
contribution.
Example 1. You pay $300 a year for mem-
bership in a university's athletic scholarship pro-
gram. The only benefit of membership is that
you have the right to buy one season ticket for a
seat in a designated area of the stadium at the
university's home football games. You can de-
duct $240 (80% of $300) as a charitable contri-
bution.
Example 2. The facts are the same as in
Example 1 except your $300 payment includes
the purchase of one season ticket for the stated
ticket price of $120. You must subtract the
usual price of a ticket ($120) from your $300
payment. The result is $180. Your deductible
charitable contribution is $144 (80% of $180).
Charity benefit events. If you pay a qualified
organization more than fair market value for the
right to attend a charity ball, banquet, show,
sporting event, or other benefit event, you can
deduct only the amount that is more than the
value of the privileges or other benefits you re-
ceive.
If there is an established charge for the
event, that charge is the value of your benefit. If
there is no established charge, the reasonable
value of the right to attend the event is the value
of your benefit. Whether you use the tickets or
other privileges has no effect on the amount
you can deduct. However, if you return the
ticket to the qualified organization for resale,
you can deduct the entire amount you paid for
the ticket.
Even if the ticket or other evidence of
payment indicates that the payment is
a “contribution,” this doesn't mean you
can deduct the entire amount. If the ticket
shows the price of admission and the amount of
the contribution, you can deduct the contribu-
tion amount.
Example. You pay $40 to see a special
showing of a movie for the benefit of a qualified
organization. Printed on the ticket is “Contribu-
tion—$40.” If the regular price for the movie is
$8, your contribution is $32 ($40 payment − $8
regular price).CAUTION
!
Membership fees or dues. You may be able
to deduct membership fees or dues you pay to
a qualified organization. However, you can de-
duct only the amount that is more than the value
of the benefits you receive.
You can't deduct dues, fees, or assess-
ments paid to country clubs and other social or-
ganizations. They aren't qualified organizations.
Certain membership benefits can be dis-
regarded. Both you and the organization can
disregard the following membership benefits if
you receive them in return for an annual pay-
ment of $75 or less.
1. Any rights or privileges, other than those
discussed under Athletic events, earlier,
that you can use frequently while you are a
member, such as:
a. Free or discounted admission to the
organization's facilities or events,
b. Free or discounted parking,
c. Preferred access to goods or serv-
ices, and
d. Discounts on the purchase of goods
and services.
2. Admission, while you are a member, to
events open only to members of the or-
ganization, if the organization reasonably
projects that the cost per person (exclud-
ing any allocated overhead) isn't more
than $10.60.
Token items. You don't have to reduce your
contribution by the value of any benefit you re-
ceive if both of the following are true.
1. You receive only a small item or other ben-
efit of token value.
2. The qualified organization correctly deter-
mines that the value of the item or benefit
you received isn't substantial and informs
you that you can deduct your payment in
full.
Written statement. A qualified organization
must give you a written statement if you make a
payment of more than $75 that is partly a contri-
bution and partly for goods or services. The
statement must say that you can deduct only
the amount of your payment that is more than
the value of the goods or services you received.
It must also give you a good faith estimate of
the value of those goods or services.
The organization can give you the statement
either when it solicits or when it receives the
payment from you.
Exception. An organization won't have to
give you this statement if one of the following is
true.
1. The organization is:
a. A governmental organization descri-
bed in (5) under Types of Qualified
Organizations, earlier; or
b. An organization formed only for reli-
gious purposes, and the only benefit
you receive is an intangible religious
benefit (such as admission to a reli-
gious ceremony) that generally isn't
sold in commercial transactions out-
side the donative context.
Table 24-1. Examples of Charitable Contributions—A Quick Check
Use the following lists for a quick check of whether you can deduct a contribution. See the
rest of this chapter for more information and additional rules and limits that may apply.
Deductible As
Charitable Contributions
Not Deductible
As Charitable Contributions
Money or property you give to:
Churches, synagogues, temples,
mosques, and other religious
organizations
Federal, state, and local governments, if
your contribution is solely for public
purposes (for example, a gift to reduce
the public debt or maintain a public park)
Nonprofit schools and hospitals
The Salvation Army, American Red
Cross, CARE, Goodwill Industries,
United Way, Boy Scouts of America, Girl
Scouts of America, Boys and Girls Clubs
of America, etc.
War veterans' groups
Expenses paid for a student living with you,
sponsored by a qualified organization
Out-of-pocket expenses when you serve a
qualified organization as a volunteer
Money or property you give to:
Civic leagues, social and sports
clubs, labor unions, and chambers of
commerce
Foreign organizations (except certain
Canadian, Israeli, and Mexican
charities)
Groups that are run for personal profit
Groups whose purpose is to lobby for
law changes
Homeowners' associations
Individuals
Political groups or candidates for
public office
Cost of raffle, bingo, or lottery tickets
Dues, fees, or bills paid to country clubs,
lodges, fraternal orders, or similar groups
Tuition
Value of your time or services
Value of blood given to a blood bank
Chapter 24 Contributions Page 165
2. You receive only items whose value isn't
substantial as described under Token
items, earlier.
3. You receive only membership benefits that
can be disregarded, as described under
Membership fees or dues, earlier.
Expenses Paid for Student
Living With You
You may be able to deduct some expenses of
having a student live with you. You can deduct
qualifying expenses for a foreign or American
student who:
1. Lives in your home under a written agree-
ment between you and a qualified organi-
zation as part of a program of the organi-
zation to provide educational opportunities
for the student,
2. Isn't your relative or dependent, and
3. Is a full-time student in the twelfth or any
lower grade at a school in the United
States.
You can deduct up to $50 a month for
each full calendar month the student
lives with you. Any month when condi-
tions (1) through (3) are met for 15 days or more
counts as a full month.
For additional information, see Expenses
Paid for Student Living With You in Pub. 526.
Mutual exchange program. You can't deduct
the costs of a foreign student living in your
home under a mutual exchange program
through which your child will live with a family in
a foreign country.
OutofPocket Expenses in
Giving Services
Although you can't deduct the value of your
services given to a qualified organization, you
may be able to deduct some amounts you payTIP
in giving services to a qualified organization.
The amounts must be:
Unreimbursed;
Directly connected with the services;
Expenses you had only because of the
services you gave; and
Not personal, living, or family expenses.
Table 24-2 contains questions and answers
that apply to some individuals who volunteer
their services.
Conventions. If a qualified organization se-
lects you to attend a convention as its represen-
tative, you can deduct unreimbursed expenses
for travel, including reasonable amounts for
meals and lodging, while away from home over-
night in connection with the convention. How-
ever, see Travel, later.
You can't deduct personal expenses for
sightseeing, fishing parties, theater tickets, or
nightclubs. You also can't deduct transporta-
tion, meals and lodging, and other expenses for
your spouse or children.
You can't deduct your travel expenses in at-
tending a church convention if you go only as a
member of your church rather than as a chosen
representative. You can, however, deduct unre-
imbursed expenses that are directly connected
with giving services for your church during the
convention.
Uniforms. You can deduct the cost and up-
keep of uniforms that aren't suitable for every-
day use and that you must wear while perform-
ing donated services for a charitable
organization.
Foster parents. You may be able to deduct as
a charitable contribution some of the costs of
being a foster parent (foster care provider) if
you have no profit motive in providing the foster
care and aren't, in fact, making a profit. A quali-
fied organization must select the individuals you
take into your home for foster care.
You can deduct expenses that meet both of
the following requirements.
1. They are unreimbursed out-of-pocket ex-
penses to feed, clothe, and care for the
foster child.
2. They are incurred primarily to benefit the
qualified organization.
Unreimbursed expenses that you can't de-
duct as charitable contributions may be consid-
ered support provided by you in determining
whether you can claim the foster child as a de-
pendent. For details, see chapter 3.
Example. You cared for a foster child be-
cause you wanted to adopt her, not to benefit
the agency that placed her in your home. Your
unreimbursed expenses aren't deductible as
charitable contributions.
Car expenses. You can deduct as a charitable
contribution any unreimbursed out-of-pocket
expenses, such as the cost of gas and oil, that
are directly related to the use of your car in giv-
ing services to a charitable organization. You
can't deduct general repair and maintenance
expenses, depreciation, registration fees, or the
costs of tires or insurance.
If you don't want to deduct your actual ex-
penses, you can use a standard mileage rate of
14 cents a mile to figure your contribution.
You can deduct parking fees and tolls
whether you use your actual expenses or the
standard mileage rate.
You must keep reliable written records of
your car expenses. For more information, see
Car expenses under Records To Keep, later.
Travel. Generally, you can claim a charitable
contribution deduction for travel expenses nec-
essarily incurred while you are away from home
performing services for a charitable organiza-
tion only if there is no significant element of per-
sonal pleasure, recreation, or vacation in the
travel. This applies whether you pay the expen-
ses directly or indirectly. You are paying the ex-
penses indirectly if you make a payment to the
charitable organization and the organization
pays for your travel expenses.
Table 24-2. Volunteers' Questions and Answers
If you volunteer for a qualified organization, the following questions and answers may apply to you. All of the rules explained in this chapter
also apply. See, in particular, Out-of-Pocket Expenses in Giving Services.
Question Answer
I volunteer 6 hours a week in the office of a qualified organization.
The receptionist is paid $10 an hour for the same work. Can I deduct
$60 a week for my time?
No, you can't deduct the value of your time or services.
The office is 30 miles from my home. Can I deduct any of my car
expenses for these trips?
Yes, you can deduct the costs of gas and oil that are directly related
to getting to and from the place where you volunteer. If you don't
want to figure your actual costs, you can deduct 14 cents for each
mile.
I volunteer as a Red Cross nurse's aide at a hospital. Can I deduct
the cost of the uniforms I must wear?
Yes, you can deduct the cost of buying and cleaning your uniforms
if the hospital is a qualified organization, the uniforms aren't suitable
for everyday use, and you must wear them when volunteering.
I pay a babysitter to watch my children while I volunteer for a
qualified organization. Can I deduct these costs?
No, you can't deduct payments for childcare expenses as a
charitable contribution, even if you would be unable to volunteer
without childcare. (If you have childcare expenses so you can work
for pay, see chapter 32.)
Page 166 Chapter 24 Contributions
The deduction for travel expenses won't be
denied simply because you enjoy providing
services to the charitable organization. Even if
you enjoy the trip, you can take a charitable
contribution deduction for your travel expenses
if you are on duty in a genuine and substantial
sense throughout the trip. However, if you have
only nominal duties, or if for significant parts of
the trip you don't have any duties, you can't de-
duct your travel expenses.
Example 1. You are a troop leader for a
tax-exempt youth group and you take the group
on a camping trip. You are responsible for over-
seeing the setup of the camp and for providing
adult supervision for other activities during the
entire trip. You participate in the activities of the
group and enjoy your time with them. You over-
see the breaking of camp and you transport the
group home. You can deduct your travel expen-
ses.
Example 2. You sail from one island to an-
other and spend 8 hours a day counting whales
and other forms of marine life. The project is
sponsored by a charitable organization. In most
circumstances, you can't deduct your expen-
ses.
Example 3. You work for several hours
each morning on an archaeological dig spon-
sored by a charitable organization. The rest of
the day is free for recreation and sightseeing.
You can't take a charitable contribution deduc-
tion even though you work very hard during
those few hours.
Example 4. You spend the entire day at-
tending a charitable organization's regional
meeting as a chosen representative. In the eve-
ning you go to the theater. You can claim your
travel expenses as charitable contributions, but
you can't claim the cost of your evening at the
theater.
Daily allowance (per diem). If you provide
services for a charitable organization and re-
ceive a daily allowance to cover reasonable
travel expenses, including meals and lodging
while away from home overnight, you must in-
clude in income any part of the allowance that is
more than your deductible travel expenses. You
may be able to deduct any necessary travel ex-
penses that are more than the allowance.
Deductible travel expenses. These in-
clude:
Air, rail, and bus transportation;
Out-of-pocket expenses for your car;
Taxi fares or other costs of transportation
between the airport or station and your ho-
tel;
Lodging costs; and
The cost of meals.
Because these travel expenses aren't business
related, they aren't subject to the same limits as
business-related expenses. For information on
business travel expenses, see Travel Expenses
in chapter 26.
Contributions
You Can't Deduct
There are some contributions you can't deduct,
such as those made to specific individuals and
those made to nonqualified organizations. (See
Contributions to Individuals and Contributions
to Nonqualified Organizations next.) There are
others you can deduct only part of, as dis-
cussed later under Contributions From Which
You Benefit.
Contributions to
Individuals
You can't deduct contributions to specific indi-
viduals, including the following.
Contributions to fraternal societies made
for the purpose of paying medical or burial
expenses of deceased members.
Contributions to individuals who are needy
or worthy. You can't deduct these contribu-
tions even if you make them to a qualified
organization for the benefit of a specific
person. But you can deduct a contribution
to a qualified organization that helps needy
or worthy individuals if you don't indicate
that your contribution is for a specific per-
son.
Example. You can deduct contribu-
tions to a qualified organization for flood
relief, hurricane relief, or other disaster re-
lief. However, you can’t deduct contribu-
tions earmarked for relief of a particular in-
dividual or family.
Payments to a member of the clergy that
can be spent as he or she wishes, such as
for personal expenses.
Expenses you paid for another person who
provided services to a qualified organiza-
tion.
Example. Your son does missionary
work. You pay his expenses. You can't
claim a deduction for your son's unreim-
bursed expenses related to his contribu-
tion of services.
Payments to a hospital that are for a spe-
cific patient's care or for services for a spe-
cific patient. You can't deduct these pay-
ments even if the hospital is operated by a
city, a state, or other qualified organization.
Contributions to
Nonqualified
Organizations
You can't deduct contributions to organizations
that aren't qualified to receive tax-deductible
contributions, including the following.
1. Certain state bar associations if:
a. The bar isn't a political subdivision of
a state;
b. The bar has private, as well as public,
purposes, such as promoting the pro-
fessional interests of members; and
c. Your contribution is unrestricted and
can be used for private purposes.
2. Chambers of commerce and other busi-
ness leagues or organizations (but see
chapter 28 about miscellaneous deduc-
tions).
3. Civic leagues and associations.
4. Country clubs and other social clubs.
5. Most foreign organizations (other than cer-
tain Canadian, Israeli, or Mexican charita-
ble organizations). For details, see Pub.
526.
6. Homeowners' associations.
7. Labor unions (but see chapter 28 about
miscellaneous deductions).
8. Political organizations and candidates.
Contributions From
Which You Benefit
If you receive or expect to receive a financial or
economic benefit as a result of making a contri-
bution to a qualified organization, you can't de-
duct the part of the contribution that represents
the value of the benefit you receive. See Contri-
butions From Which You Benefit under Contri-
butions You Can Deduct, earlier. These contri-
butions include the following.
Contributions for lobbying. This includes
amounts that you earmark for use in, or in
connection with, influencing specific legis-
lation.
Contributions to a retirement home for
room, board, maintenance, or admittance.
Also, if the amount of your contribution de-
pends on the type or size of apartment you
will occupy, it isn't a charitable contribu-
tion.
Costs of raffles, bingo, lottery, etc. You
can't deduct as a charitable contribution
amounts you pay to buy raffle or lottery
tickets or to play bingo or other games of
chance. For information on how to report
gambling winnings and losses, see Gam-
bling winnings in chapter 12 and Gambling
Losses Up to the Amount of Gambling
Winnings in chapter 28.
Dues to fraternal orders and similar
groups. However, see Membership fees or
dues, earlier, under Contributions You Can
Deduct.
Tuition, or amounts you pay instead of tui-
tion. You can't deduct as a charitable con-
tribution amounts you pay as tuition even if
you pay them for children to attend paro-
chial schools or qualifying nonprofit day-
care centers. You also can't deduct any
fixed amount you must pay in addition to,
or instead of, tuition to enroll in a private
school, even if it is designated as a “dona-
tion.”
Chapter 24 Contributions Page 167
Value of Time or Services
You can't deduct the value of your time or serv-
ices, including:
Blood donations to the American Red
Cross or to blood banks, and
The value of income lost while you work as
an unpaid volunteer for a qualified organi-
zation.
Personal Expenses
You can't deduct personal, living, or family ex-
penses, such as the following items.
The cost of meals you eat while you per-
form services for a qualified organization
unless it is necessary for you to be away
from home overnight while performing the
services.
Adoption expenses, including fees paid to
an adoption agency and the costs of keep-
ing a child in your home before adoption is
final (but see Adoption Credit in chap-
ter 38, and the Instructions for Form 8839,
Qualified Adoption Expenses). You also
may be able to claim an exemption for the
child. See Adopted child in chapter 3.
Appraisal Fees
You can't deduct as a charitable contribution
any fees you pay to find the fair market value of
donated property (but see chapter 28 about
miscellaneous deductions).
Contributions
of Property
If you contribute property to a qualified organi-
zation, the amount of your charitable contribu-
tion is generally the fair market value of the
property at the time of the contribution. How-
ever, if the property has increased in value, you
may have to make some adjustments to the
amount of your deduction. See Giving Property
That Has Increased in Value, later.
For information about the records you must
keep and the information you must furnish with
your return if you donate property, see Records
To Keep and How To Report, later.
Clothing and household items. You can't
take a deduction for clothing or household items
you donate unless the clothing or household
items are in good used condition or better.
Exception. You can take a deduction for a
contribution of an item of clothing or household
item that isn't in good used condition or better if
you deduct more than $500 for it and include a
qualified appraisal of it with your return.
Household items. Household items in-
clude:
Furniture and furnishings,
Electronics,
Appliances,
Linens, and
Other similar items.
Household items don't include:
Food;
Paintings, antiques, and other objects of
art;
Jewelry and gems; and
Collections.
Cars, boats, and airplanes. The following
rules apply to any donation of a qualified vehi-
cle.
A qualified vehicle is:
A car or any motor vehicle manufactured
mainly for use on public streets, roads, and
highways;
A boat; or
An airplane.
Deduction more than $500. If you donate
a qualified vehicle with a claimed fair market
value of more than $500, you can deduct the
smaller of:
The gross proceeds from the sale of the
vehicle by the organization, or
The vehicle's fair market value on the date
of the contribution. If the vehicle's fair mar-
ket value was more than your cost or other
basis, you may have to reduce the fair
market value to figure the deductible
amount, as described under Giving Prop-
erty That Has Increased in Value, later.
Form 1098-C. You must attach to your re-
turn Copy B of the Form 1098-C, Contributions
of Motor Vehicles, Boats, and Airplanes, (or
other statement containing the same informa-
tion as Form 1098-C) you received from the or-
ganization. The Form 1098-C (or other state-
ment) will show the gross proceeds from the
sale of the vehicle.
If you e-file your return, you must:
Attach Copy B of Form 1098-C to Form
8453 and mail the forms to the IRS, or
Include Copy B of Form 1098-C as a PDF
attachment if your software program allows
it.
If you don't attach Form 1098-C (or other
statement), you can't deduct your contribution.
You must get Form 1098-C (or other state-
ment) within 30 days of the sale of the vehicle.
But if exception 1 or 2 (described later) applies,
you must get Form 1098-C (or other statement)
within 30 days of your donation.
Filing deadline approaching and still no
Form 1098-C. If the filing deadline is ap-
proaching and you still don't have a Form
1098-C, you have two choices.
Request an automatic 6-month extension
of time to file your return. You can get this
extension by filing Form 4868, Application
for Automatic Extension of Time to File
U.S. Individual Income Tax Return. For
more information, see Automatic Extension
in chapter 1.
File the return on time without claiming the
deduction for the qualified vehicle. After re-
ceiving the Form 1098-C, file an amended
return, Form 1040X, claiming the deduc-
tion. Attach Copy B of Form 1098-C (or
other statement) to the amended return.
For more information about amended re-
turns, see Amended Returns and Claims
for Refund in chapter 1.
Exceptions. There are two exceptions to the
rules just described for deductions of more than
$500.
Exception 1—vehicle used or improved
by organization. If the qualified organization
makes a significant intervening use of or mate-
rial improvement to the vehicle before transfer-
ring it, you generally can deduct the vehicle's
fair market value at the time of the contribution.
But if the vehicle's fair market value was more
than your cost or other basis, you may have to
reduce the fair market value to get the deducti-
ble amount, as described under Giving Property
That Has Increased in Value, later. The Form
1098-C (or other statement) will show whether
this exception applies.
Exception 2—vehicle given or sold to
needy individual. If the qualified organization
will give the vehicle, or sell it for a price well be-
low fair market value, to a needy individual to
further the organization's charitable purpose,
you generally can deduct the vehicle's fair mar-
ket value at the time of the contribution. But if
the vehicle's fair market value was more than
your cost or other basis, you may have to re-
duce the fair market value to get the deductible
amount, as described under Giving Property
That Has Increased in Value, later. The Form
1098-C (or other statement) will show whether
this exception applies.
This exception doesn't apply if the organiza-
tion sells the vehicle at auction. In that case,
you can't deduct the vehicle's fair market value.
Example. Anita donates a used car to a
qualified organization. She bought it 3 years
ago for $9,000. A used car guide shows the fair
market value for this type of car is $6,000. How-
ever, Anita gets a Form 1098-C from the organi-
zation showing the car was sold for $2,900. Nei-
ther exception 1 nor exception 2 applies. If
Anita itemizes her deductions, she can deduct
$2,900 for her donation. She must attach Form
1098-C and Form 8283 to her return.
Deduction $500 or less. If the qualified or-
ganization sells the vehicle for $500 or less and
exceptions 1 and 2 don't apply, you can deduct
the smaller of:
$500, or
The vehicle's fair market value on the date
of the contribution. But if the vehicle's fair
market value was more than your cost or
other basis, you may have to reduce the
fair market value to get the deductible
amount, as described under Giving Prop-
erty That Has Increased in Value, later.
If the vehicle's fair market value is at least
$250 but not more than $500, you must have a
written statement from the qualified organiza-
tion acknowledging your donation. The state-
ment must contain the information and meet the
tests for an acknowledgment described under
Deductions of At Least $250 But Not More
Than $500 under Records To Keep, later.
Page 168 Chapter 24 Contributions
Partial interest in property. Generally, you
can't deduct a charitable contribution of less
than your entire interest in property.
Right to use property. A contribution of the
right to use property is a contribution of less
than your entire interest in that property and
isn't deductible. For exceptions and more infor-
mation, see Partial Interest in Property Not in
Trust in Pub. 561.
Future interests in tangible personal prop
erty. You can't deduct the value of a charitable
contribution of a future interest in tangible per-
sonal property until all intervening interests in
and rights to the actual possession or enjoy-
ment of the property have either expired or
been turned over to someone other than your-
self, a related person, or a related organization.
Tangible personal property. This is any
property, other than land or buildings, that can
be seen or touched. It includes furniture, books,
jewelry, paintings, and cars.
Future interest. This is any interest that is
to begin at some future time, regardless of
whether it is designated as a future interest un-
der state law.
Determining
Fair Market Value
This section discusses general guidelines for
determining the fair market value of various
types of donated property. Pub. 561 contains a
more complete discussion.
Fair market value is the price at which prop-
erty would change hands between a willing
buyer and a willing seller, neither having to buy
or sell, and both having reasonable knowledge
of all the relevant facts.
Used clothing and household items. The
fair market value of used clothing and house-
hold goods is usually far less than what you
paid for them when they were new.
For used clothing, you should claim as the
value the price that buyers of used items ac-
tually pay in used clothing stores, such as con-
signment or thrift shops. See Household Goods
in Pub. 561 for information on the valuation of
household goods, such as furniture, appliances,
and linens.
Example. Dawn Greene donated a coat to
a thrift store operated by her church. She paid
$300 for the coat 3 years ago. Similar coats in
the thrift store sell for $50. The fair market value
of the coat is $50. Dawn's donation is limited to
$50.
Cars, boats, and airplanes. If you contribute
a car, boat, or airplane to a charitable organiza-
tion, you must determine its fair market value.
Certain commercial firms and trade organiza-
tions publish used car pricing guides, com-
monly called “blue books,” containing complete
dealer sale prices or dealer average prices for
recent model years. The guides may be pub-
lished monthly or seasonally and for different
regions of the country. These guides also pro-
vide estimates for adjusting for unusual equip-
ment, unusual mileage, and physical condition.
The prices aren't “official” and these publica-
tions aren't considered an appraisal of any spe-
cific donated property. But they do provide
clues for making an appraisal and suggest rela-
tive prices for comparison with current sales
and offerings in your area.
You can also find used car pricing informa-
tion on the Internet.
Example. You donate a used car in poor
condition to a local high school for use by stu-
dents studying car repair. A used car guide
shows the dealer retail value for this type of car
in poor condition is $1,600. However, the guide
shows the price for a private party sale of the
car is only $750. The fair market value of the car
is considered to be $750.
Large quantities. If you contribute a large
number of the same item, fair market value is
the price at which comparable numbers of the
item are being sold.
Giving Property That
Has Decreased in Value
If you contribute property with a fair market
value that is less than your basis in it, your de-
duction is limited to its fair market value. You
can't claim a deduction for the difference be-
tween the property's basis and its fair market
value.
Giving Property That
Has Increased in Value
If you contribute property with a fair market
value that is more than your basis in it, you may
have to reduce the fair market value by the
amount of appreciation (increase in value)
when you figure your deduction.
Your basis in property is generally what you
paid for it. See chapter 13 if you need more in-
formation about basis.
Different rules apply to figuring your deduc-
tion, depending on whether the property is:
Ordinary income property, or
Capital gain property.
Ordinary income property. Property is ordi-
nary income property if you would have recog-
nized ordinary income or short-term capital gain
had you sold it at fair market value on the date it
was contributed. Examples of ordinary income
property are inventory, works of art created by
the donor, manuscripts prepared by the donor,
and capital assets (defined in chapter 14) held
1 year or less.
Amount of deduction. The amount you can
deduct for a contribution of ordinary income
property is its fair market value minus the
amount that would be ordinary income or
short-term capital gain if you sold the property
for its fair market value. Generally, this rule lim-
its the deduction to your basis in the property.
Example. You donate stock you held for 5
months to your church. The fair market value of
the stock on the day you donate it is $1,000, but
you paid only $800 (your basis). Because the
$200 of appreciation would be short-term capi-
tal gain if you sold the stock, your deduction is
limited to $800 (fair market value minus the ap-
preciation).
Capital gain property. Property is capital gain
property if you would have recognized
long-term capital gain had you sold it at fair
market value on the date of the contribution. It
includes capital assets held more than 1 year,
as well as certain real property and depreciable
property used in your trade or business and,
generally, held more than 1 year.
Amount of deduction—general rule.
When figuring your deduction for a contribution
of capital gain property, you generally can use
the fair market value of the property.
Exceptions. However, in certain situations,
you must reduce the fair market value by any
amount that would have been long-term capital
gain if you had sold the property for its fair mar-
ket value. Generally, this means reducing the
fair market value to the property's cost or other
basis.
Bargain sales. A bargain sale of property is a
sale or exchange for less than the property's fair
market value. A bargain sale to a qualified or-
ganization is partly a charitable contribution and
partly a sale or exchange. A bargain sale may
result in a taxable gain.
More information. For more information on
donating appreciated property, see Giving
Property That Has Increased in Value in Pub.
526.
When To Deduct
You can deduct your contributions only in the
year you actually make them in cash or other
property (or in a later carryover year, as ex-
plained later under Carryovers). This applies
whether you use the cash or an accrual method
of accounting.
Time of making contribution. Usually, you
make a contribution at the time of its uncondi-
tional delivery.
Checks. A check you mail to a charity is
considered delivered on the date you mail it.
Text message. Contributions made by text
message are deductible in the year you send
the text message if the contribution is charged
to your telephone or wireless account.
Credit card. Contributions charged on your
credit card are deductible in the year you make
the charge.
Pay-by-phone account. Contributions
made through a pay-by-phone account are con-
sidered delivered on the date the financial insti-
tution pays the amount.
Stock certificate. A properly endorsed
stock certificate is considered delivered on the
date of mailing or other delivery to the charity or
to the charity's agent. However, if you give a
stock certificate to your agent or to the issuing
corporation for transfer to the name of the char-
ity, your contribution isn't delivered until the
date the stock is transferred on the books of the
corporation.
Promissory note. If you issue and deliver a
promissory note to a charity as a contribution, it
Chapter 24 Contributions Page 169
isn't a contribution until you make the note pay-
ments.
Option. If you grant a charity an option to
buy real property at a bargain price, it isn't a
contribution until the organization exercises the
option.
Borrowed funds. If you contribute bor-
rowed funds, you can deduct the contribution in
the year you deliver the funds to the charity, re-
gardless of when you repay the loan.
Limits on Deductions
The amount you can deduct for charitable con-
tributions can't be more than 50% of your AGI.
Your deduction may be further limited to 30% or
20% of your AGI, depending on the type of
property you give and the type of organization
you give it to. If your total contributions for the
year are 20% or less of your AGI, these limits
don't apply to you. The limits are discussed in
detail under Limits on Deductions in Pub. 526.
A higher limit applies to certain qualified
conservation contributions. See Pub. 526 for
details.
Carryovers
You can carry over any contributions you can't
deduct in the current year because they exceed
your adjusted-gross-income limits. You may be
able to deduct the excess in each of the next 5
years until it is used up, but not beyond that
time. For more information, see Carryovers in
Pub. 526.
Records To Keep
You must keep records to prove the amount of
the contributions you make during the year. The
kind of records you must keep depends on the
amount of your contributions and whether they
are:
Cash contributions,
Noncash contributions, or
Out-of-pocket expenses when donating
your services.
Note. An organization generally must give
you a written statement if it receives a payment
from you that is more than $75 and is partly a
contribution and partly for goods or services.
(See Contributions From Which You Benefit un-
der Contributions You Can Deduct, earlier.)
Keep the statement for your records. It may sat-
isfy all or part of the recordkeeping require-
ments explained in the following discussions.
Cash Contributions
Cash contributions include those paid by cash,
check, electronic funds transfer, debit card,
credit card, or payroll deduction.
You can't deduct a cash contribution, re-
gardless of the amount, unless you keep one of
the following.
1. A bank record that shows the name of the
qualified organization, the date of the con-
tribution, and the amount of the
contribution. Bank records may include:
a. A canceled check,
b. A bank or credit union statement, or
c. A credit card statement.
2. A receipt (or a letter or other written com-
munication) from the qualified organization
showing the name of the organization, the
date of the contribution, and the amount of
the contribution.
3. The payroll deduction records described
next.
Payroll deductions. If you make a contribu-
tion by payroll deduction, you must keep:
1. A pay stub, Form W-2, or other document
furnished by your employer that shows the
date and amount of the contribution; and
2. A pledge card or other document prepared
by or for the qualified organization that
shows the name of the organization.
If your employer withheld $250 or more from a
single paycheck, see Contributions of $250 or
More next.
Contributions of $250 or More
You can claim a deduction for a contribution of
$250 or more only if you have an acknowledg-
ment of your contribution from the qualified or-
ganization or certain payroll deduction records.
If you made more than one contribution of
$250 or more, you must have either a separate
acknowledgment for each or one acknowledg-
ment that lists each contribution and the date of
each contribution and shows your total contri-
butions.
Amount of contribution. In figuring whether
your contribution is $250 or more, don't com-
bine separate contributions. For example, if you
gave your church $25 each week, your weekly
payments don't have to be combined. Each
payment is a separate contribution.
If contributions are made by payroll deduc-
tion, the deduction from each paycheck is
treated as a separate contribution.
If you made a payment that is partly for
goods and services, as described earlier under
Contributions From Which You Benefit, your
contribution is the amount of the payment that is
more than the value of the goods and services.
Acknowledgment. The acknowledgment must
meet these tests.
1. It must be written.
2. It must include:
a. The amount of cash you contributed;
b. Whether the qualified organization
gave you any goods or services as a
result of your contribution (other than
certain token items and membership
benefits);
c. A description and good faith estimate
of the value of any goods or services
described in (b) (other than intangible
religious benefits); and
d. A statement that the only benefit you
received was an intangible religious
benefit, if that was the case. The ac-
knowledgment doesn't need to de-
scribe or estimate the value of an in-
tangible religious benefit. An
intangible religious benefit is a benefit
that generally isn't sold in commercial
transactions outside a donative (gift)
context. An example is admission to a
religious ceremony.
3. You must get it on or before the earlier of:
a. The date you file your return for the
year you make the contribution; or
b. The due date, including extensions,
for filing the return.
If the acknowledgment doesn't show the
date of the contribution, you must also have a
bank record or receipt, as described earlier, that
does show the date of the contribution. If the
acknowledgment shows the date of the contri-
bution and meets the other tests just described,
you don't need any other records.
Payroll deductions. If you make a contribu-
tion by payroll deduction and your employer
withholds $250 or more from a single paycheck,
you must keep:
1. A pay stub, Form W-2, or other document
furnished by your employer that shows the
amount withheld as a contribution; and
2. A pledge card or other document prepared
by or for the qualified organization that
shows the name of the organization and
states the organization doesn't provide
goods or services in return for any contri-
bution made to it by payroll deduction.
A single pledge card may be kept for all contri-
butions made by payroll deduction regardless
of amount as long as it contains all the required
information.
If the pay stub, Form W-2, pledge card, or
other document doesn't show the date of the
contribution, you must have another document
that does show the date of the contribution. If
the pay stub, Form W-2, pledge card, or other
document shows the date of the contribution,
you don't need any other records except those
just described in (1) and (2).
Noncash Contributions
For a contribution not made in cash, the records
you must keep depend on whether your deduc-
tion for the contribution is:
1. Less than $250,
2. At least $250 but not more than $500,
3. Over $500 but not more than $5,000, or
4. Over $5,000.
Amount of deduction. In figuring whether
your deduction is $500 or more, combine your
claimed deductions for all similar items of prop-
erty donated to any charitable organization dur-
ing the year.
Page 170 Chapter 24 Contributions
If you received goods or services in return,
as described earlier in Contributions From
Which You Benefit, reduce your contribution by
the value of those goods or services. If you fig-
ure your deduction by reducing the fair market
value of the donated property by its apprecia-
tion, as described earlier in Giving Property
That Has Increased in Value, your contribution
is the reduced amount.
Deductions of Less Than $250
If you make any noncash contribution, you must
get and keep a receipt from the charitable or-
ganization showing:
1. The name of the charitable organization,
2. The date and location of the charitable
contribution, and
3. A reasonably detailed description of the
property.
A letter or other written communication from
the charitable organization acknowledging re-
ceipt of the contribution and containing the in-
formation in (1), (2), and (3) will serve as a re-
ceipt.
You aren't required to have a receipt where
it is impractical to get one (for example, if you
leave property at a charity's unattended drop
site).
Additional records. You must also keep relia-
ble written records for each item of contributed
property. Your written records must include the
following information.
The name and address of the organization
to which you contributed.
The date and location of the contribution.
A description of the property in detail rea-
sonable under the circumstances. For a
security, keep the name of the issuer, the
type of security, and whether it is regularly
traded on a stock exchange or in an
over-the-counter market.
The fair market value of the property at the
time of the contribution and how you fig-
ured the fair market value. If it was deter-
mined by appraisal, keep a signed copy of
the appraisal.
The cost or other basis of the property if
you must reduce its fair market value by
appreciation. Your records should also in-
clude the amount of the reduction and how
you figured it.
The amount you claim as a deduction for
the tax year as a result of the contribution if
you contribute less than your entire interest
in the property during the tax year. Your re-
cords must include the amount you
claimed as a deduction in any earlier years
for contributions of other interests in this
property. They must also include the name
and address of each organization to which
you contributed the other interests, the
place where any such tangible property is
located or kept, and the name of any per-
son in possession of the property, other
than the organization to which you contrib-
uted it.
The terms of any conditions attached to
the contribution of property.
Deductions of At Least $250
But Not More Than $500
If you claim a deduction of at least $250 but not
more than $500 for a noncash charitable contri-
bution, you must get and keep an acknowledg-
ment of your contribution from the qualified or-
ganization. If you made more than one
contribution of $250 or more, you must have ei-
ther a separate acknowledgment for each or
one acknowledgment that shows your total con-
tributions.
The acknowledgment must contain the infor-
mation in items (1) through (3) under Deduc-
tions of Less Than $250, earlier, and your writ-
ten records must include the information listed
in that discussion under Additional records.
The acknowledgment must also meet these
tests.
1. It must be written.
2. It must include:
a. A description (but not necessarily the
value) of any property you contrib-
uted,
b. Whether the qualified organization
gave you any goods or services as a
result of your contribution (other than
certain token items and membership
benefits), and
c. A description and good faith estimate
of the value of any goods or services
described in (b). If the only benefit you
received was an intangible religious
benefit (such as admission to a reli-
gious ceremony) that generally isn't
sold in a commercial transaction out-
side the donative context, the ac-
knowledgment must say so and
doesn't need to describe or estimate
the value of the benefit.
3. You must get it on or before the earlier of:
a. The date you file your return for the
year you make the contribution; or
b. The due date, including extensions,
for filing the return.
Deductions Over $500
You are required to give additional information if
you claim a deduction over $500 for noncash
charitable contributions. See Records To Keep
in Pub. 526 for more information.
OutofPocket Expenses
If you give services to a qualified organization
and have unreimbursed out-of-pocket expen-
ses related to those services, the following two
rules apply.
1. You must have adequate records to prove
the amount of the expenses.
2. If any of your unreimbursed out-of-pocket
expenses, considered separately, are
$250 or more (for example, you pay $250
or more for an airline ticket to attend a
convention of a qualified organization as a
chosen representative), you must get an
acknowledgment from the qualified organi-
zation that contains:
a. A description of the services you pro-
vided;
b. A statement of whether or not the or-
ganization provided you any goods or
services to reimburse you for the ex-
penses you incurred;
c. A description and a good faith esti-
mate of the value of any goods or
services (other than intangible reli-
gious benefits) provided to reimburse
you; and
d. A statement that the only benefit you
received was an intangible religious
benefit, if that was the case. The ac-
knowledgment doesn't need to de-
scribe or estimate the value of an in-
tangible religious benefit (defined
earlier under Acknowledgment).
You must get the acknowledgment on or before
the earlier of:
1. The date you file your return for the year
you make the contribution; or
2. The due date, including extensions, for fil-
ing the return.
Car expenses. If you claim expenses directly
related to use of your car in giving services to a
qualified organization, you must keep reliable
written records of your expenses. Whether your
records are considered reliable depends on all
the facts and circumstances. Generally, they
may be considered reliable if you made them
regularly and at or near the time you had the ex-
penses.
For example, your records might show the
name of the organization you were serving and
the dates you used your car for a charitable pur-
pose. If you use the standard mileage rate of 14
cents a mile, your records must show the miles
you drove your car for the charitable purpose. If
you deduct your actual expenses, your records
must show the costs of operating the car that
are directly related to a charitable purpose.
See Car expenses under Out-of-Pocket Ex-
penses in Giving Services, earlier, for the ex-
penses you can deduct.
How To Report
Report your charitable contributions on Sched-
ule A (Form 1040).
If your total deduction for all noncash contri-
butions for the year is over $500, you must also
file Form 8283. See How To Report in Pub. 526
for more information.
Chapter 24 Contributions Page 171
25.
Nonbusiness
Casualty and
Theft Losses
Introduction
This chapter explains the tax treatment of per-
sonal (not business or investment related)
casualty losses, theft losses, and losses on de-
posits.
The chapter also explains the following
topics.
How to figure the amount of your loss.
How to treat insurance and other reim-
bursements you receive.
The deduction limits.
When and how to report a casualty or theft.
Forms to file. When you have a casualty or
theft, you have to file Form 4684. You will also
have to file one or more of the following forms.
Schedule A (Form 1040), Itemized Deduc-
tions.
Schedule D (Form 1040), Capital Gains
and Losses.
Condemnations. For information on condem-
nations of property, see Involuntary Conver-
sions in chapter 1 of Pub. 544, Sales and Other
Dispositions of Assets.
Workbook for casualties and thefts. Pub.
584 is available to help you make a list of your
stolen or damaged personal-use property and
figure your loss. It includes schedules to help
you figure the loss on your home, its contents,
and your motor vehicles.
Business or investmentrelated losses. For
information on a casualty or theft loss of busi-
ness or income-producing property, see Pub.
547.
Useful Items
You may want to see:
Publication
Sales and Other Dispositions
of Assets
Casualties, Disasters, and
Thefts
Casualty, Disaster, and Theft
Loss Workbook (Personal-Use
Property)
Form (and Instructions)
Itemized
Deductions
Capital Gains
and Losses
Schedule A (Form 1040)
Schedule D (Form 1040)
Casualties and Thefts
Casualty
A casualty is the damage, destruction, or loss of
property resulting from an identifiable event that
is sudden, unexpected, or unusual.
A sudden event is one that is swift, not
gradual or progressive.
An unexpected event is one that is ordina-
rily unanticipated and unintended.
An unusual event is one that isn't a
day-to-day occurrence and that isn't typical
of the activity in which you were engaged.
Deductible losses. Deductible casualty los-
ses can result from a number of different cau-
ses, including the following.
Car accidents (but see Nondeductible los-
ses next for exceptions).
Earthquakes.
Fires (but see Nondeductible losses next
for exceptions).
Floods.
Government-ordered demolition or reloca-
tion of a home that is unsafe to use be-
cause of a disaster as discussed under
Disaster Area Losses in Pub. 547.
Mine cave-ins.
Shipwrecks.
Sonic booms.
Storms, including hurricanes and torna-
does.
Terrorist attacks.
Vandalism.
Volcanic eruptions.
Nondeductible losses. A casualty loss isn't
deductible if the damage or destruction is
caused by the following.
Accidentally breaking articles such as
glassware or china under normal condi-
tions.
A family pet (explained below).
A fire if you willfully set it or pay someone
else to set it.
A car accident if your willful negligence or
willful act caused it. The same is true if the
willful act or willful negligence of someone
acting for you caused the accident.
Progressive deterioration (explained later).
Family pet. Loss of property due to damage
by a family pet isn't deductible as a casualty
loss unless the requirements discussed earlier
under Casualty are met.
Example. Your antique oriental rug was
damaged by your new puppy before it was
housebroken. Because the damage wasn't un-
expected and unusual, the loss isn't deductible
as a casualty loss.
Progressive deterioration. Loss of prop-
erty due to progressive deterioration isn't de-
ductible as a casualty loss. This is because the
damage results from a steadily operating cause
4684 or a normal process, rather than from a sudden
event. The following are examples of damage
due to progressive deterioration.
The steady weakening of a building due to
normal wind and weather conditions.
The deterioration and damage to a water
heater that bursts. However, the rust and
water damage to rugs and drapes caused
by the bursting of a water heater does
qualify as a casualty.
Most losses of property caused by
droughts. To be deductible, a drought-rela-
ted loss generally must be incurred in a
trade or business or in a transaction en-
tered into for profit.
Termite or moth damage.
The damage or destruction of trees,
shrubs, or other plants by a fungus, dis-
ease, insects, worms, or similar pests.
However, a sudden destruction due to an
unexpected or unusual infestation of bee-
tles or other insects may result in a casu-
alty loss.
Damage from corrosive drywall. Under a
special procedure, you may be able to claim a
casualty loss deduction for amounts you paid to
repair damage to your home and household ap-
pliances that resulted from corrosive drywall.
For details, see Pub. 547.
Theft
A theft is the taking and removing of money or
property with the intent to deprive the owner of
it. The taking of property must be illegal under
the laws of the state where it occurred and it
must have been done with criminal intent. You
don't need to show a conviction for theft.
Theft includes the taking of money or prop-
erty by the following means.
Blackmail.
Burglary.
Embezzlement.
Extortion.
Kidnapping for ransom.
Larceny.
Robbery.
The taking of money or property through
fraud or misrepresentation is theft if it is illegal
under state or local law.
Decline in market value of stock. You can't
deduct as a theft loss the decline in market
value of stock acquired on the open market for
investment if the decline is caused by disclo-
sure of accounting fraud or other illegal miscon-
duct by the officers or directors of the corpora-
tion that issued the stock. However, you can
deduct as a capital loss the loss you sustain
when you sell or exchange the stock or the
stock becomes completely worthless. You re-
port a capital loss on Schedule D (Form 1040).
For more information about stock sales, worth-
less stock, and capital losses, see chapter 4 of
Pub. 550.
Mislaid or lost property. The simple disap-
pearance of money or property isn't a theft.
Page 172 Chapter 25 Nonbusiness Casualty and Theft Losses
However, an accidental loss or disappearance
of property can qualify as a casualty if it results
from an identifiable event that is sudden, unex-
pected, or unusual. Sudden, unexpected, and
unusual events are defined earlier.
Example. A car door is accidentally slam-
med on your hand, breaking the setting of your
diamond ring. The diamond falls from the ring
and is never found. The loss of the diamond is a
casualty.
Losses from Ponzitype investment
schemes. If you had a loss from a Ponzi-type
investment scheme, see the following.
Revenue Ruling 2009-9, 2009-14 I.R.B.
735 (available at IRS.gov/irb/2009-14_IRB/
ar07.html).
Revenue Procedure 2009-20, 2009-14
I.R.B. 749 (available at IRS.gov/irb/
2009-14_IRB/ar11.html).
Revenue Procedure 2011-58, 2011-50
I.R.B. 849 (available at IRS.gov/irb/
2011-50_IRB/ar11.html).
If you qualify to use Revenue Procedure
2009-20, as modified by Revenue Procedure
2011-58, and you choose to follow the proce-
dures in the guidance, first fill out Section C of
Form 4684 to determine the amount to enter on
Section B, line 28. Skip lines 19 to 27. Sec-
tion C of Form 4684 replaces Appendix A in
Revenue Procedure 2009-20. You don't need to
complete Appendix A. For more information,
see the above revenue ruling and revenue pro-
cedures, and the Instructions for Form 4684.
If you choose not to use the procedures in
Revenue Procedure 2009-20, you may claim
your theft loss by filling out Section B, lines 19
to 39, as appropriate.
Loss on Deposits
A loss on deposits can occur when a bank,
credit union, or other financial institution be-
comes insolvent or bankrupt. If you incurred this
type of loss, you can choose one of the follow-
ing ways to deduct the loss.
As a casualty loss.
As an ordinary loss.
As a nonbusiness bad debt.
Casualty loss or ordinary loss. You can
choose to deduct a loss on deposits as a casu-
alty loss or as an ordinary loss for any year in
which you can reasonably estimate how much
of your deposits you have lost in an insolvent or
bankrupt financial institution. The choice is gen-
erally made on the return you file for that year
and applies to all your losses on deposits for
the year in that particular financial institution. If
you treat the loss as a casualty or ordinary loss,
you can't treat the same amount of the loss as a
nonbusiness bad debt when it actually be-
comes worthless. However, you can take a
nonbusiness bad debt deduction for any
amount of loss that is more than the estimated
amount you deducted as a casualty or ordinary
loss. Once you make this choice, you can't
change it without permission from the IRS.
If you claim an ordinary loss, report it as a
miscellaneous itemized deduction on
Schedule A (Form 1040), line 23. The maximum
amount you can claim is $20,000 ($10,000 if
you are married filing separately) reduced by
any expected state insurance proceeds. Your
loss is subject to the 2%-of-adjusted-gross-in-
come limit. You can't choose to claim an ordi-
nary loss if any part of the deposit is federally
insured.
Nonbusiness bad debt. If you don't choose to
deduct the loss as a casualty loss or as an ordi-
nary loss, you must wait until the year the actual
loss is determined and deduct the loss as a
nonbusiness bad debt in that year.
How to report. The kind of deduction you
choose for your loss on deposits determines
how you report your loss.
Casualty loss — report it on Form 4684
first and then on Schedule A (Form 1040);
Ordinary loss — report it on Schedule A
(Form 1040) as a miscellaneous itemized
deduction; or
Nonbusiness bad debt — report it on Form
8949 first and then on Schedule D (Form
1040).
More information. For more information, see
Special Treatment for Losses on Deposits in In-
solvent or Bankrupt Financial Institutions in the
Instructions for Form 4684, or Deposit in Insol-
vent or Bankrupt Financial Institution in Pub.
550.
Proof of Loss
To deduct a casualty or theft loss, you must be
able to prove that you had a casualty or theft.
You also must be able to support the amount
you take as a deduction.
Casualty loss proof. For a casualty loss, your
records should show all the following.
The type of casualty (car accident, fire,
storm, etc.) and when it occurred.
That the loss was a direct result of the
casualty.
That you were the owner of the property or,
if you leased the property from someone
else, that you were contractually liable to
the owner for the damage.
Whether a claim for reimbursement exists
for which there is a reasonable expectation
of recovery.
Theft loss proof. For a theft loss, your records
should show all the following.
When you discovered that your property
was missing.
That your property was stolen.
That you were the owner of the property.
Whether a claim for reimbursement exists
for which there is a reasonable expectation
of recovery.
It is important that you have records
that will prove your deduction. If you
don't have the actual records to sup-
port your deduction, you can use other satisfac-
tory evidence to support it.RECORDS
Figuring a Loss
Figure the amount of your loss using the follow-
ing steps.
1. Determine your adjusted basis in the prop-
erty before the casualty or theft.
2. Determine the decrease in fair market
value (FMV) of the property as a result of
the casualty or theft.
3. From the smaller of the amounts you de-
termined in (1) and (2), subtract any insur-
ance or other reimbursement you received
or expect to receive.
For personal-use property and property used in
performing services as an employee, apply the
deduction limits, discussed later, to determine
the amount of your deductible loss.
Gain from reimbursement. If your reimburse-
ment is more than your adjusted basis in the
property, you have a gain. This is true even if
the decrease in the FMV of the property is
smaller than your adjusted basis. If you have a
gain, you may have to pay tax on it, or you may
be able to postpone reporting the gain. See
Pub. 547 for more information on how to treat a
gain from a reimbursement for a casualty or
theft.
Leased property. If you are liable for casualty
damage to property you lease, your loss is the
amount you must pay to repair the property mi-
nus any insurance or other reimbursement you
receive or expect to receive.
Decrease in
FMV
FMV is the price for which you could sell your
property to a willing buyer when neither of you
has to sell or buy and both of you know all the
relevant facts.
The decrease in FMV used to figure the
amount of a casualty or theft loss is the differ-
ence between the property's FMV immediately
before and immediately after the casualty or
theft.
FMV of stolen property. The FMV of property
immediately after a theft is considered to be
zero, since you no longer have the property.
Example. Several years ago, you pur-
chased silver dollars at face value for $150.
This is your adjusted basis in the property. Your
silver dollars were stolen this year. The FMV of
the coins was $1,000 just before they were sto-
len, and insurance didn't cover them. Your theft
loss is $150.
Recovered stolen property. Recovered sto-
len property is your property that was stolen
and later returned to you. If you recovered prop-
erty after you had already taken a theft loss de-
duction, you must refigure your loss using the
smaller of the property's adjusted basis (ex-
plained later) or the decrease in FMV from the
time just before it was stolen until the time it was
recovered. Use this amount to refigure your to-
tal loss for the year in which the loss was de-
ducted.
Chapter 25 Nonbusiness Casualty and Theft Losses Page 173
If your refigured loss is less than the loss
you deducted, you generally have to report the
difference as income in the recovery year. But
report the difference only up to the amount of
the loss that reduced your tax. For more infor-
mation on the amount to report, see Recoveries
in chapter 12.
Figuring Decrease in FMV—
Items To Consider
To figure the decrease in FMV because of a
casualty or theft, you generally need a compe-
tent appraisal. However, other measures can
also be used to establish certain decreases.
Appraisal. An appraisal to determine the dif-
ference between the FMV of the property imme-
diately before a casualty or theft and immedi-
ately afterward should be made by a competent
appraiser. The appraiser must recognize the ef-
fects of any general market decline that may oc-
cur along with the casualty. This information is
needed to limit any deduction to the actual loss
resulting from damage to the property.
Several factors are important in evaluating
the accuracy of an appraisal, including the fol-
lowing.
The appraiser's familiarity with your prop-
erty before and after the casualty or theft.
The appraiser's knowledge of sales of
comparable property in the area.
The appraiser's knowledge of conditions in
the area of the casualty.
The appraiser's method of appraisal.
You may be able to use an appraisal
that you used to get a federal loan (or a
federal loan guarantee) as the result of
a federally declared disaster to establish the
amount of your disaster loss. For more informa-
tion on disasters, see Disaster Area Losses in
Pub. 547.
Cost of cleaning up or making repairs. The
cost of repairing damaged property isn't part of
a casualty loss. Neither is the cost of cleaning
up after a casualty. But you can use the cost of
cleaning up or making repairs after a casualty
as a measure of the decrease in FMV if you
meet all the following conditions.
The repairs are actually made.
The repairs are necessary to bring the
property back to its condition before the
casualty.
The amount spent for repairs isn't exces-
sive.
The repairs take care of the damage only.
The value of the property after the repairs
isn't, due to the repairs, more than the
value of the property before the casualty.
Landscaping. The cost of restoring land-
scaping to its original condition after a casualty
may indicate the decrease in FMV. You may be
able to measure your loss by what you spend
on the following.
Removing destroyed or damaged trees
and shrubs minus any salvage you re-
ceive.TIP
Pruning and other measures taken to pre-
serve damaged trees and shrubs.
Replanting necessary to restore the prop-
erty to its approximate value before the
casualty.
Car value. Books issued by various automo-
bile organizations that list your car may be use-
ful in figuring the value of your car. You can use
the books' retail values and modify them by
such factors as mileage and the condition of
your car to figure its value. The prices aren't offi-
cial, but they may be useful in determining value
and suggesting relative prices for comparison
with current sales and offerings in your area. If
your car isn't listed in the books, determine its
value from other sources. A dealer's offer for
your car as a trade-in on a new car isn't usually
a measure of its true value.
Figuring Decrease in FMV—
Items Not To Consider
You generally shouldn't consider the following
items when attempting to establish the de-
crease in FMV of your property.
Cost of protection. The cost of protecting
your property against a casualty or theft isn't
part of a casualty or theft loss. The amount you
spend on insurance or to board up your house
against a storm isn't part of your loss.
If you make permanent improvements to
your property to protect it against a casualty or
theft, add the cost of these improvements to
your basis in the property. An example would
be the cost of a dike to prevent flooding.
Exception. You can't increase your basis in
the property by, or deduct as a business ex-
pense, any expenditures you made with respect
to qualified disaster mitigation payments. See
Disaster Area Losses in Pub. 547.
Incidental expenses. Any incidental expen-
ses you have due to a casualty or theft, such as
expenses for the treatment of personal injuries,
for temporary housing, or for a rental car, aren't
part of your casualty or theft loss.
Replacement cost. The cost of replacing sto-
len or destroyed property isn't part of a casualty
or theft loss.
Sentimental value. Don't consider sentimen-
tal value when determining your loss. If a family
portrait, heirloom, or keepsake is damaged, de-
stroyed, or stolen, you must base your loss on
its FMV, as limited by your adjusted basis in the
property.
Decline in market value of property in or
near casualty area. A decrease in the value of
your property because it is in or near an area
that suffered a casualty, or that might again suf-
fer a casualty, isn't to be taken into considera-
tion. You have a loss only for actual casualty
damage to your property. However, if your
home is in a federally declared disaster area,
see Disaster Area Losses in Pub. 547.
Costs of photographs and appraisals. Pho-
tographs taken after a casualty will be helpful in
establishing the condition and value of the prop-
erty after it was damaged. Photographs show-
ing the condition of the property after it was re-
paired, restored, or replaced may also be
helpful.
Appraisals are used to figure the decrease
in FMV because of a casualty or theft. See Ap-
praisal, earlier, under Figuring Decrease in
FMV—Items To Consider, for information about
appraisals.
The costs of photographs and appraisals
used as evidence of the value and condition of
property damaged as a result of a casualty
aren't a part of the loss. You can claim these
costs as a miscellaneous itemized deduction
subject to the 2%-of-adjusted-gross-income
limit on Schedule A (Form 1040). For informa-
tion about miscellaneous deductions, see chap-
ter 28.
Adjusted Basis
Adjusted basis is your basis in the property
(usually cost) increased or decreased by vari-
ous events, such as improvements and casu-
alty losses. For more information, see chap-
ter 13.
Insurance and Other
Reimbursements
If you receive an insurance payment or other
type of reimbursement, you must subtract the
reimbursement when you figure your loss. You
don't have a casualty or theft loss to the extent
you are reimbursed.
If you expect to be reimbursed for part or all
of your loss, you must subtract the expected re-
imbursement when you figure your loss. You
must reduce your loss even if you don't receive
payment until a later tax year. See Reimburse-
ment Received After Deducting Loss, later.
Failure to file a claim for reimbursement. If
your property is covered by insurance, you
must file a timely insurance claim for reimburse-
ment of your loss. Otherwise, you can't deduct
this loss as a casualty or theft loss. However,
this rule doesn't apply to the portion of the loss
not covered by insurance (for example, a de-
ductible).
Example. Your car insurance policy in-
cludes collision coverage with a $1,000 deduc-
tible. Because your insurance doesn't cover the
first $1,000 of an auto collision, the $1,000 is
deductible (subject to the deduction limits dis-
cussed later). This is true even if you don't file
an insurance claim, because your insurance
policy won't reimburse you for the deductible.
Types of Reimbursements
The most common type of reimbursement is an
insurance payment for your stolen or damaged
property. Other types of reimbursements are
discussed next. Also see the Instructions for
Form 4684.
Employer's emergency disaster fund. If you
receive money from your employer's emer-
gency disaster fund and you must use that
money to rehabilitate or replace property on
which you are claiming a casualty loss deduc-
tion, you must take that money into considera-
tion in figuring the casualty loss deduction.
Page 174 Chapter 25 Nonbusiness Casualty and Theft Losses
Take into consideration only the amount you
used to replace your destroyed or damaged
property.
Example. Your home was extensively dam-
aged by a tornado. Your loss after reimburse-
ment from your insurance company was
$10,000. Your employer set up a disaster relief
fund for its employees. Employees receiving
money from the fund had to use it to rehabilitate
or replace their damaged or destroyed property.
You received $4,000 from the fund and spent
the entire amount on repairs to your home. In
figuring your casualty loss, you must reduce
your unreimbursed loss ($10,000) by the
$4,000 you received from your employer's fund.
Your casualty loss before applying the deduc-
tion limits discussed later is $6,000.
Cash gifts. If you receive excludable cash gifts
as a disaster victim and there are no limits on
how you can use the money, you don't reduce
your casualty loss by these excludable cash
gifts. This applies even if you use the money to
pay for repairs to property damaged in the dis-
aster.
Example. Your home was damaged by a
hurricane. Relatives and neighbors made cash
gifts to you that were excludable from your in-
come. You used part of the cash gifts to pay for
repairs to your home. There were no limits or
restrictions on how you could use the cash gifts.
Because it was an excludable gift, the money
you received and used to pay for repairs to your
home doesn't reduce your casualty loss on the
damaged home.
Insurance payments for living expenses.
You don't reduce your casualty loss by insur-
ance payments you receive to cover living ex-
penses in either of the following situations.
You lose the use of your main home be-
cause of a casualty.
Government authorities don't allow you ac-
cess to your main home because of a
casualty or threat of one.
Inclusion in income. If these insurance
payments are more than the temporary in-
crease in your living expenses, you must in-
clude the excess in your income. Report this
amount on Form 1040, line 21. However, if the
casualty occurs in a federally declared disaster
area, none of the insurance payments are taxa-
ble. See Qualified disaster relief payments un-
der Disaster Area Losses in Pub. 547.
A temporary increase in your living expen-
ses is the difference between the actual living
expenses you and your family incurred during
the period you couldn't use your home and your
normal living expenses for that period. Actual
living expenses are the reasonable and neces-
sary expenses incurred because of the loss of
your main home. Generally, these expenses in-
clude the amounts you pay for the following.
Rent for suitable housing.
Transportation.
Food.
Utilities.
Miscellaneous services.
Normal living expenses consist of these same
expenses that you would have incurred but
didn't because of the casualty or the threat of
one.
Example. As a result of a fire, you vacated
your apartment for a month and moved to a mo-
tel. You normally pay $525 a month for rent.
None was charged for the month the apartment
was vacated. Your motel rent for this month was
$1,200. You normally pay $200 a month for
food. Your food expenses for the month you
lived in the motel were $400. You received
$1,100 from your insurance company to cover
your living expenses. You determine the pay-
ment you must include in income as follows.
1) Insurance payment for living
expenses . . . . . . . . . . . . . . . . . $1,100
2) Actual expenses during the month
you are unable to use your home
because of fire . . . . . . . . . . . 1,600
3) Normal living expenses . . . . . . 725
4) Temporary increase in living
expenses: Subtract line 3
from line 2 . . . . . . . . . . . . . . . . . 875
5) Amount of payment includible
in income: Subtract line 4
from line 1 . . . . . . . . . . . . . . . . . $ 225
Tax year of inclusion. You include the tax-
able part of the insurance payment in income
for the year you regain the use of your main
home or, if later, for the year you receive the
taxable part of the insurance payment.
Example. Your main home was destroyed
by a tornado in August 2014. You regained use
of your home in November 2015. The insurance
payments you received in 2014 and 2015 were
$1,500 more than the temporary increase in
your living expenses during those years. You in-
clude this amount in income on your 2015 Form
1040. If, in 2016, you received further payments
to cover the living expenses you had in 2014
and 2015, you must include those payments in
income on your 2016 Form 1040.
Disaster relief. Food, medical supplies, and
other forms of assistance you receive don't re-
duce your casualty loss unless they are re-
placements for lost or destroyed property.
Qualified disaster relief payments you
receive for expenses you incurred as a
result of a federally declared disaster
aren't taxable income to you. For more informa-
tion, see Disaster Area Losses in Pub. 547.
Disaster unemployment assistance pay-
ments are unemployment benefits that are taxa-
ble.
Generally, disaster relief grants and quali-
fied disaster mitigation payments made under
the Robert T. Stafford Disaster Relief and
Emergency Assistance Act or the National
Flood Insurance Act (as in effect on April 15,
2005) aren't includible in your income. See Dis-
aster Area Losses in Pub. 547.
Reimbursement Received After
Deducting Loss
If you figured your casualty or theft loss using
your expected reimbursement, you may have to
adjust your tax return for the tax year in whichTIP
you receive your actual reimbursement. This
section explains the adjustment you may have
to make.
Actual reimbursement less than expected.
If you later receive less reimbursement than you
expected, include that difference as a loss with
your other losses (if any) on your return for the
year in which you can reasonably expect no
more reimbursement.
Example. Your personal car had an FMV of
$2,000 when it was destroyed in a collision with
another car in 2015. The accident was due to
the negligence of the other driver. At the end of
2015, there was a reasonable prospect that the
owner of the other car would reimburse you in
full. You didn't have a deductible loss in 2015.
In January 2016, the court awarded you a
judgment of $2,000. However, in July it became
apparent that you will be unable to collect any
amount from the other driver. You can deduct
the loss in 2016 subject to the deduction limits
discussed later.
Actual reimbursement more than expected.
If you later receive more reimbursement than
you expected after you claimed a deduction for
the loss, you may have to include the extra re-
imbursement in your income for the year you re-
ceive it. However, if any part of the original de-
duction didn't reduce your tax for the earlier
year, don't include that part of the reimburse-
ment in your income. You don't refigure your tax
for the year you claimed the deduction. For
more information, see Recoveries in chap-
ter 12.
If the total of all the reimbursements
you receive is more than your adjusted
basis in the destroyed or stolen prop-
erty, you will have a gain on the casualty or
theft. If you have already taken a deduction for
a loss and you receive the reimbursement in a
later year, you may have to include the gain in
your income for the later year. Include the gain
as ordinary income up to the amount of your de-
duction that reduced your tax for the earlier
year. See Figuring a Gain in Pub. 547 for more
information on how to treat a gain from the reim-
bursement of a casualty or theft.
Actual reimbursement same as expected. If
you receive exactly the reimbursement you ex-
pected to receive, you don't have to include any
of the reimbursement in your income and you
can't deduct any additional loss.
Example. In December 2016, you had a
collision while driving your personal car. Re-
pairs to the car cost $950. You had $100 de-
ductible collision insurance. Your insurance
company agreed to reimburse you for the rest
of the damage. Because you expected a reim-
bursement from the insurance company, you
didn't have a casualty loss deduction in 2016.
Due to the $100 rule (discussed later under
Deduction Limits), you can't deduct the $100
you paid as the deductible. When you receive
the $850 from the insurance company in 2017,
don't report it as income.CAUTION
!
Chapter 25 Nonbusiness Casualty and Theft Losses Page 175
Single Casualty on
Multiple Properties
Personal property. Personal property is any
property that isn't real property. If your personal
property is stolen or is damaged or destroyed
by a casualty, you must figure your loss sepa-
rately for each item of property. Then combine
these separate losses to figure the total loss
from that casualty or theft.
Example. A fire in your home destroyed an
upholstered chair, an oriental rug, and an anti-
que table. You didn't have fire insurance to
cover your loss. (This was the only casualty or
theft you had during the year.) You paid $750
for the chair and you established that it had an
FMV of $500 just before the fire. The rug cost
$3,000 and had an FMV of $2,500 just before
the fire. You bought the table at an auction for
$100 before discovering it was an antique. It
had been appraised at $900 before the fire. You
figure your loss on each of these items as fol-
lows.
Chair Rug Table
1) Basis (cost) . . . . . . $750 $3,000 $100
2) FMV before fire . . . . $500 $2,500 $900
3) FMV after fire . . . . . –0– –0– –0–
4) Decrease in FMV . . . . $500 $2,500 $900
5) Loss (smaller of (1) or
(4)) . . . . . . . . . . . $500 $2,500 $100
6) Total loss . . . . . . . $3,100
Real property. In figuring a casualty loss on
personal-use real property, treat the entire
property (including any improvements, such as
buildings, trees, and shrubs) as one item. Fig-
ure the loss using the smaller of the adjusted
basis or the decrease in FMV of the entire prop-
erty.
Example. You bought your home a few
years ago. You paid $160,000 ($20,000 for the
land and $140,000 for the house). You also
spent $2,000 for landscaping. This year a fire
destroyed your home. The fire also damaged
the shrubbery and trees in your yard. The fire
was your only casualty or theft loss this year.
Competent appraisers valued the property as a
whole at $200,000 before the fire, but only
$30,000 after the fire. (The loss to your house-
hold furnishings isn't shown in this example. It
would be figured separately on each item, as
explained earlier under Personal property.)
Shortly after the fire, the insurance company
paid you $155,000 for the loss. You figure your
casualty loss as follows.
1) Adjusted basis of the entire property
(land, building, and landscaping) . . $162,000
2) FMV of entire property before
fire . . . . . . . . . . . . . . . . . $200,000
3) FMV of entire property after fire . . . 30,000
4) Decrease in FMV of entire
property . . . . . . . . . . . . . . . $170,000
5) Loss (smaller of (1) or (4)) . . . . . . $162,000
6) Subtract insurance . . . . . . . . . . 155,000
7) Amount of loss after
reimbursement . . . . . . . . . . . $7,000
Deduction Limits
After you have figured your casualty or theft
loss, you must figure how much of the loss you
can deduct. If the loss was to property for your
personal use or your family's use, there are two
limits on the amount you can deduct for your
casualty or theft loss.
1. You must reduce each casualty or theft
loss by $100 ($100 rule).
2. You must further reduce the total of all
your casualty or theft losses by 10% of
your adjusted gross income (AGI) (10%
rule).
You make these reductions on Form 4684.
These rules are explained next and Ta-
ble 25-1 summarizes how to apply the $100 rule
and the 10% rule in various situations. For more
detailed explanations and examples, see Pub.
547.
Property used partly for business and
partly for personal purposes. When property
is used partly for personal purposes and partly
for business or income-producing purposes, the
casualty or theft loss deduction must be figured
separately for the personal-use part and for the
business or income-producing part. You must
figure each loss separately because the $100
rule and the 10% rule apply only to the loss on
the personal-use part of the property.
$100 Rule
After you have figured your casualty or theft
loss on personal-use property, you must reduce
that loss by $100. This reduction applies to
each total casualty or theft loss. It doesn't mat-
ter how many pieces of property are involved in
an event. Only a single $100 reduction applies.
Example. A hailstorm damages your home
and your car. Determine the amount of loss, as
discussed earlier, for each of these items. Since
the losses are due to a single event, you com-
bine the losses and reduce the combined
amount by $100.
Single event. Generally, events closely rela-
ted in origin cause a single casualty. It is a sin-
gle casualty when the damage is from two or
more closely related causes, such as wind and
flood damage caused by the same storm.
10% Rule
You must reduce the total of all your casualty or
theft losses on personal-use property by 10% of
your AGI. Apply this rule after you reduce each
loss by $100. For more information, see the
Form 4684 instructions. If you have both gains
and losses from casualties or thefts, see Gains
and losses, later.
Example 1. In June, you discovered that
your house had been burglarized. Your loss af-
ter insurance reimbursement was $2,000. Your
AGI for the year you discovered the theft is
$29,500. You first apply the $100 rule and then
the 10% rule. Figure your theft loss deduction
as follows.
Table 25-1. How To Apply the Deduction Limits for PersonalUse Property
$100 Rule 10% Rule
General Application You must reduce each casualty or theft loss by
$100 when figuring your deduction. Apply this
rule after you have figured the amount of your
loss.
You must reduce your total casualty or theft
loss by 10% of your AGI. Apply this rule after
you reduce each loss by $100 ($100 rule).
Single Event Apply this rule only once, even if many pieces
of property are affected.
Apply this rule only once, even if many
pieces of property are affected.
More Than One Event Apply to the loss from each event. Apply to the total of all your losses from all
events.
More Than One Person—
With Loss From the Same Event
(other than a married couple filing jointly)
Apply separately to each person. Apply separately to each person.
Married Couple—
With Loss From the
Same Event
Filing Jointly Apply as if you were one person. Apply as if you were one person.
Filing Separately Apply separately to each spouse. Apply separately to each spouse.
More Than One Owner
(other than a married couple filing jointly)
Apply separately to each owner of jointly
owned property.
Apply separately to each owner of jointly
owned property.
Page 176 Chapter 25 Nonbusiness Casualty and Theft Losses
1) Loss after insurance . . . . . . . . . . . $2,000
2) Subtract $100 . . . . . . . . . . . . . . 100
3) Loss after $100 rule . . . . . . . . . . . $1,900
4) Subtract 10% × $29,500 AGI . . . . . . . 2,950
5) Theft loss deduction . . . . . . . . . . –0–
You don't have a theft loss deduction be-
cause your loss after you apply the $100 rule
($1,900) is less than 10% of your AGI ($2,950).
Example 2. In March, you had a car acci-
dent that totally destroyed your car. You didn't
have collision insurance on your car, so you
didn't receive any insurance reimbursement.
Your loss on the car was $1,800. In November,
a fire damaged your basement and totally de-
stroyed the furniture, washer, dryer, and other
items stored there. Your loss on the basement
items after reimbursement was $2,100. Your
AGI for the year that the accident and fire occur-
red is $25,000. You figure your casualty loss
deduction as follows.
Base
Car ment
1) Loss . . . . . . . . . . . . . $1,800 $2,100
2) Subtract $100 per
incident . . . . . . . . . . . 100 100
3) Loss after $100 rule . . . . . $1,700 $2,000
4) Total loss . . . . . . . . . . . . . . . $3,700
5) Subtract 10% × $25,000 AGI . . . . . 2,500
6) Casualty loss deduction . . . . . . . $1,200
Gains and losses. If you had both gains and
losses from casualties or thefts to personal-use
property, you must compare your total gains to
your total losses. Do this after you have re-
duced each loss by any reimbursements and by
$100, but before you have reduced the losses
by 10% of your AGI.
Casualty or theft gains don't include
gains you choose to postpone. See
Pub. 547 for information on the post-
ponement of gain.
Losses more than gains. If your losses are
more than your recognized gains, subtract your
gains from your losses and reduce the result by
10% of your AGI. The rest, if any, is your deduc-
tible loss from personal-use property.
Gains more than losses. If your recog-
nized gains are more than your losses, subtract
your losses from your gains. The difference is
treated as capital gain and must be reported on
Schedule D (Form 1040). The 10% rule doesn't
apply to your gains.
When To Report
Gains and Losses
Gains. If you receive an insurance or other re-
imbursement that is more than your adjusted
basis in the destroyed or stolen property, you
have a gain from the casualty or theft. You must
include this gain in your income in the year you
receive the reimbursement, unless you choose
to postpone reporting the gain as explained in
Pub. 547.CAUTION
!
Losses. Generally, you can deduct a casualty
loss that isn't reimbursable only in the tax year
in which the casualty occurred. This is true even
if you don't repair or replace the damaged prop-
erty until a later year.
You can deduct theft losses that aren't reim-
bursable only in the year you discover your
property was stolen.
If you aren't sure whether part of your casu-
alty or theft loss will be reimbursed, don't de-
duct that part until the tax year when you be-
come reasonably certain that it won't be
reimbursed.
If you have a loss, see Table 25-2.
Loss on deposits. If your loss is a loss on de-
posits in an insolvent or bankrupt financial insti-
tution, see Loss on Deposits, earlier.
Disaster Area Loss
You generally must deduct a casualty loss in
the year it occurred. However, if you have a
casualty loss from a federally declared disaster
that occurred in an area warranting public or in-
dividual assistance (or both), you can choose to
deduct the loss on your tax return or amended
return for either of the following years.
The year the disaster occurred.
The year immediately preceding the year
the disaster occurred.
Gains. Special rules apply if you choose to
postpone reporting gain on property damaged
or destroyed in a federally declared disaster
area. For those special rules, see Pub. 547.
Postponed tax deadlines. The IRS may post-
pone for up to 1 year certain tax deadlines of
taxpayers who are affected by a federally de-
clared disaster. The tax deadlines the IRS may
postpone include those for filing income and
employment tax returns, paying income and
employment taxes, and making contributions to
a traditional IRA or Roth IRA.
If any tax deadline is postponed, the IRS will
publicize the postponement in your area by
publishing a news release, revenue ruling, reve-
nue procedure, notice, announcement, or other
guidance in the Internal Revenue Bulletin (IRB).
Go to IRS.gov/uac/Tax-Relief-in-Disaster-
Situations to find out if a tax deadline has been
postponed for your area.
Who is eligible. If the IRS postpones a tax
deadline, the following taxpayers are eligible for
the postponement.
Any individual whose main home is located
in a covered disaster area (defined next).
Any business entity or sole proprietor
whose principal place of business is loca-
ted in a covered disaster area.
Any individual who is a relief worker affili-
ated with a recognized government or phil-
anthropic organization who is assisting in a
covered disaster area.
Any individual, business entity, or sole pro-
prietorship whose records are needed to
meet a postponed tax deadline, provided
those records are maintained in a covered
disaster area. The main home or principal
place of business doesn't have to be loca-
ted in the covered disaster area.
Any estate or trust that has tax records
necessary to meet a postponed tax dead-
line, provided those records are main-
tained in a covered disaster area.
The spouse on a joint return with a tax-
payer who is eligible for postponements.
Any individual, business entity, or sole pro-
prietorship not located in a covered disas-
ter area, but whose records necessary to
meet a postponed tax deadline are located
in the covered disaster area.
Any individual visiting the covered disaster
area who was killed or injured as a result of
the disaster.
Any other person determined by the IRS to
be affected by a federally declared disas-
ter.
Covered disaster area. This is an area of a
federally declared disaster in which the IRS has
decided to postpone tax deadlines for up to 1
year.
Abatement of interest and penalties. The
IRS may abate the interest and penalties on un-
derpaid income tax for the length of any post-
ponement of tax deadlines.
More information. For more information, see
Disaster Area Losses in Pub. 547.
How To Report
Gains and Losses
Use Form 4684 to report a gain or a deductible
loss from a casualty or theft. If you have more
than one casualty or theft, use a separate Form
4684 to determine your gain or loss for each
event. Combine the gains and losses on one
Form 4684. Follow the form instructions as to
which lines to fill out. In addition, you must use
the appropriate schedule to report a gain or
loss. The schedule you use depends on
whether you have a gain or loss.
Table 25-2. When To Deduct a Loss
IF you have a loss... THEN deduct it in the year...
from a casualty, the loss occurred.
in a federally declared disaster area, the disaster occurred or the year immediately before the
disaster.
from a theft, the theft was discovered.
on a deposit treated as a:
• casualty or any ordinary loss, a reasonable estimate can be made.
• bad debt, deposits are totally worthless.
Chapter 25 Nonbusiness Casualty and Theft Losses Page 177
If you have a: Report it on:
Gain . . . . . . . . . Schedule D (Form 1040)
Loss . . . . . . . . . Schedule A (Form 1040)
Adjustments to basis. If you have a casualty
or theft loss, you must decrease your basis in
the property by any insurance or other reim-
bursement you receive, and by any deductible
loss. If you make either of the basis adjustments
described above, amounts you spend on re-
pairs to restore your property to its pre-casualty
condition increase your adjusted basis. See Ad-
justed Basis in chapter 13 for more information.
Net operating loss (NOL). If your casualty or
theft loss deduction causes your deductions for
the year to be more than your income for the
year, you may have an NOL. You can use an
NOL to lower your tax in an earlier year, allow-
ing you to get a refund for tax you have already
paid. Or, you can use it to lower your tax in a
later year. You don't have to be in business to
have an NOL from a casualty or theft loss. For
more information, see Pub. 536.
26.
Car Expenses
and Other
Employee
Business
Expenses
What's New
Standard mileage rate. For 2016, the stand-
ard mileage rate for the cost of operating your
car for business use is 54 cents (0.54) per mile.
Car expenses and use of the standard mile-
age rate are explained under Transportation Ex-
penses, later.
Depreciation limits on cars, trucks, and
vans. For 2016, the first-year limit on the total
depreciation deduction for cars remains at
$11,160 ($3,160 if you elect not to claim the
special depreciation allowance). For trucks and
vans, the first-year limit is $11,460 ($3,560 if
you elect not to claim the special depreciation
allowance).
Special depreciation allowance. For 2016,
the special (“bonus”) depreciation allowance on
qualified property (including cars, trucks, and
vans) remains at 50%. The special depreciation
allowance is explained in chapter 4 of Pub 463.
Introduction
You may be able to deduct the ordinary and
necessary business-related expenses you have
for:
Travel,
Entertainment,
Gifts, or
Transportation.
An ordinary expense is one that is common and
accepted in your trade or business. A neces-
sary expense is one that is helpful and appropri-
ate for your business. An expense does not
have to be required to be considered neces-
sary.
This chapter explains the following.
What expenses are deductible.
How to report your expenses on your re-
turn.
What records you need to prove your ex-
penses.
How to treat any expense reimbursements
you may receive.
Who does not need to use this chapter. If
you are an employee, you won’t need to read
this chapter if all of the following are true.
You fully accounted to your employer for
your work-related expenses.
You received full reimbursement for your
expenses.
Your employer required you to return any
excess reimbursement and you did so.
There is no amount shown with a code L in
box 12 of your Form W-2, Wage and Tax
Statement.
If you meet all of these conditions, there is no
need to show the expenses or the reimburse-
ments on your return. See Reimbursements,
later, if you would like more information on reim-
bursements and accounting to your employer.
If you meet these conditions and your
employer included reimbursements on
your Form W-2 in error, ask your em-
ployer for a corrected Form W-2.
Useful Items
You may want to see:
Publication
Travel, Entertainment, Gift, and Car
Expenses
Business Expenses
Form (and Instructions)
Itemized
Deductions
Profit or Loss
From Business
Net Profit
From BusinessTIP
Schedule A (Form 1040)
Schedule C (Form 1040)
Schedule CEZ (Form 1040)
Profit or Loss
From Farming
Employee Business
Expenses
Unreimbursed Employee
Business Expenses
Travel Expenses
If you temporarily travel away from your tax
home, you can use this section to determine if
you have deductible travel expenses. This sec-
tion discusses:
Traveling away from home,
Tax home,
Temporary assignment or job, and
What travel expenses are deductible.
It also discusses the standard meal allowance,
rules for travel inside and outside the United
States, and deductible convention expenses.
Travel expenses defined. For tax purposes,
travel expenses are the ordinary and necessary
expenses (defined earlier) of traveling away
from home for your business, profession, or job.
You will find examples of deductible travel
expenses in Table 26-1.
Traveling Away From
Home
You are traveling away from home if:
Your duties require you to be away from
the general area of your Tax Home (de-
fined later) substantially longer than an or-
dinary day's work, and
You need to sleep or rest to meet the de-
mands of your work while away from
home.
This rest requirement is not satisfied by merely
napping in your car. You don’t have to be away
from your tax home for a whole day or from
dusk to dawn as long as your relief from duty is
long enough to get necessary sleep or rest.
Example 1. You are a railroad conductor.
You leave your home terminal on a regularly
scheduled round-trip run between two cities
and return home 16 hours later. During the run,
you have 6 hours off at your turnaround point
where you eat two meals and rent a hotel room
to get necessary sleep before starting the return
trip. You are considered to be away from home.
Example 2. You are a truck driver. You
leave your terminal and return to it later the
same day. You get an hour off at your turn-
around point to eat. Because you are not off to
get necessary sleep and the brief time off isn’t
an adequate rest period, you are not traveling
away from home.
Members of the Armed Forces. If you are a
member of the U.S. Armed Forces on a perma-
nent duty assignment overseas, you are not
traveling away from home. You cannot deduct
your expenses for meals and lodging. You can-
not deduct these expenses even if you have to
maintain a home in the United States for your
Schedule F (Form 1040)
Form 2106
Form 2106EZ
Page 178 Chapter 26 Car Expenses and Other Employee Business Expenses
family members who are not allowed to accom-
pany you overseas. If you are transferred from
one permanent duty station to another, you may
have deductible moving expenses, which are
explained in Pub. 521, Moving Expenses.
A naval officer assigned to permanent duty
aboard a ship that has regular eating and living
facilities has a tax home aboard ship for travel
expense purposes.
Tax Home
To determine whether you are traveling away
from home, you must first determine the loca-
tion of your tax home.
Generally, your tax home is your regular
place of business or post of duty, regardless of
where you maintain your family home. It in-
cludes the entire city or general area in which
your business or work is located.
If you have more than one regular place of
business, your tax home is your main place of
business. See Main place of business or work,
later.
If you don’t have a regular or a main place of
business because of the nature of your work,
then your tax home may be the place where you
regularly live. See No main place of business or
work, later.
If you don’t have a regular or a main place of
business or post of duty and there is no place
where you regularly live, you are considered an
itinerant (a transient) and your tax home is
wherever you work. As an itinerant, you cannot
claim a travel expense deduction because you
are never considered to be traveling away from
home.
Main place of business or work. If you have
more than one place of business or work, con-
sider the following when determining which one
is your main place of business or work.
The total time you ordinarily spend in each
place.
The level of your business activity in each
place.
Whether your income from each place is
significant or insignificant.
Example. You live in Cincinnati where you
have a seasonal job for 8 months each year and
earn $40,000. You work the other 4 months in
Miami, also at a seasonal job, and earn
$15,000. Cincinnati is your main place of work
because you spend most of your time there and
earn most of your income there.
No main place of business or work. You
may have a tax home even if you don’t have a
regular or main place of business or work. Your
tax home may be the home where you regularly
live.
Factors used to determine tax home. If
you don’t have a regular or main place of busi-
ness or work, use the following three factors to
determine where your tax home is.
1. You perform part of your business in the
area of your main home and use that
home for lodging while doing business in
the area.
2. You have living expenses at your main
home that you duplicate because your
business requires you to be away from
that home.
3. You haven’t abandoned the area in which
both your historical place of lodging and
your claimed main home are located; you
have a member or members of your family
living at your main home; or you often use
that home for lodging.
If you satisfy all three factors, your tax home
is the home where you regularly live. If you sat-
isfy only two factors, you may have a tax home
depending on all the facts and circumstances. If
you satisfy only one factor, you are an itinerant;
your tax home is wherever you work and you
cannot deduct travel expenses.
Example. You are single and live in Boston
in an apartment you rent. You have worked for
your employer in Boston for a number of years.
Your employer enrolls you in a 12-month execu-
tive training program. You don’t expect to return
to work in Boston after you complete your train-
ing.
During your training, you don’t do any work
in Boston. Instead, you receive classroom and
on-the-job training throughout the United
States. You keep your apartment in Boston and
return to it frequently. You use your apartment
to conduct your personal business. You also
keep up your community contacts in Boston.
When you complete your training, you are
transferred to Los Angeles.
You don’t satisfy factor (1) because you did
not work in Boston. You satisfy factor (2) be-
cause you had duplicate living expenses. You
also satisfy factor (3) because you did not
abandon your apartment in Boston as your
main home, you kept your community contacts,
and you frequently returned to live in your apart-
ment. Therefore, you have a tax home in Bos-
ton.
Tax home different from family home. If you
(and your family) don’t live at your tax home
(defined earlier), you cannot deduct the cost of
traveling between your tax home and your fam-
ily home. You also cannot deduct the cost of
meals and lodging while at your tax home. See
Example 1.
If you are working temporarily in the same
city where you and your family live, you may be
considered as traveling away from home. See
Example 2.
Example 1. You are a truck driver and you
and your family live in Tucson. You are em-
ployed by a trucking firm that has its terminal in
Phoenix. At the end of your long runs, you re-
turn to your home terminal in Phoenix and
spend one night there before returning home.
You cannot deduct any expenses you have for
meals and lodging in Phoenix or the cost of
traveling from Phoenix to Tucson. This is be-
cause Phoenix is your tax home.
Example 2. Your family home is in Pitts-
burgh, where you work 12 weeks a year. The
rest of the year you work for the same employer
in Baltimore. In Baltimore, you eat in restaurants
and sleep in a rooming house. Your salary is
the same whether you are in Pittsburgh or Balti-
more.
Because you spend most of your working
time and earn most of your salary in Baltimore,
that city is your tax home. You cannot deduct
any expenses you have for meals and lodging
there. However, when you return to work in
Pittsburgh, you are away from your tax home
even though you stay at your family home. You
can deduct the cost of your round trip between
Baltimore and Pittsburgh. You can also deduct
your part of your family's living expenses for
meals and lodging while you are living and
working in Pittsburgh.
Temporary Assignment
or Job
You may regularly work at your tax home and
also work at another location. It may not be
practical to return to your tax home from this
other location at the end of each work day.
Temporary assignment vs. indefinite as
signment. If your assignment or job away from
your main place of work is temporary, your tax
home does not change. You are considered to
be away from home for the whole period you
are away from your main place of work. You
can deduct your travel expenses if they other-
wise qualify for deduction. Generally, a tempo-
rary assignment in a single location is one that
is realistically expected to last (and does in fact
last) for 1 year or less.
However, if your assignment or job is indefi-
nite, the location of the assignment or job be-
comes your new tax home and you cannot de-
duct your travel expenses while there. An
assignment or job in a single location is consid-
ered indefinite if it is realistically expected to
last for more than 1 year, whether or not it ac-
tually lasts for more than 1 year.
If your assignment is indefinite, you must in-
clude in your income any amounts you receive
from your employer for living expenses, even if
they are called travel allowances and you ac-
count to your employer for them. You may be
able to deduct the cost of relocating to your new
tax home as a moving expense. See Pub. 521
for more information.
Exception for federal crime investigations
or prosecutions. If you are a federal em-
ployee participating in a federal crime investiga-
tion or prosecution, you are not subject to the
1-year rule. This means you may be able to de-
duct travel expenses even if you are away from
your tax home for more than 1 year, provided
you meet the other requirements for deductibil-
ity.
For you to qualify, the Attorney General (or
his or her designee) must certify that you are
traveling:
For the federal government,
In a temporary duty status, and
To investigate or prosecute, or provide
support services for the investigation or
prosecution of a federal crime.
Determining temporary or indefinite. You
must determine whether your assignment is
temporary or indefinite when you start work. If
you expect an assignment or job to last for 1
Chapter 26 Car Expenses and Other Employee Business Expenses Page 179
year or less, it is temporary unless there are
facts and circumstances that indicate other-
wise. An assignment or job that is initially tem-
porary may become indefinite due to changed
circumstances. A series of assignments to the
same location, all for short periods but that to-
gether cover a long period, may be considered
an indefinite assignment.
Going home on days off. If you go back to
your tax home from a temporary assignment on
your days off, you are not considered away
from home while you are in your hometown.
You cannot deduct the cost of your meals and
lodging there. However, you can deduct your
travel expenses, including meals and lodging,
while traveling between your temporary place of
work and your tax home. You can claim these
expenses up to the amount it would have cost
you to stay at your temporary place of work.
If you keep your hotel room during your visit
home, you can deduct the cost of your hotel
room. In addition, you can deduct your expen-
ses of returning home up to the amount you
would have spent for meals had you stayed at
your temporary place of work.
Probationary work period. If you take a job
that requires you to move, with the understand-
ing that you will keep the job if your work is sat-
isfactory during a probationary period, the job is
indefinite. You cannot deduct any of your ex-
penses for meals and lodging during the proba-
tionary period.
What Travel Expenses Are
Deductible?
Once you have determined that you are travel-
ing away from your tax home, you can deter-
mine what travel expenses are deductible.
You can deduct ordinary and necessary ex-
penses you have when you travel away from
home on business. The type of expense you
can deduct depends on the facts and your cir-
cumstances.
Table 26-1 summarizes travel expenses you
may be able to deduct. You may have other de-
ductible travel expenses that are not covered
there, depending on the facts and your circum-
stances.
When you travel away from home on
business, you should keep records of
all the expenses you have and any ad-
vances you receive from your employer. You
can use a log, diary, notebook, or any other
written record to keep track of your expenses.
The types of expenses you need to record,
along with supporting documentation, are de-
scribed in Table 26-2, later.
Separating costs. If you have one expense
that includes the costs of meals, entertainment,
and other services (such as lodging or transpor-
tation), you must allocate that expense between
the cost of meals and entertainment and the
cost of other services. You must have a reason-
able basis for making this allocation. For exam-
ple, you must allocate your expenses if a hotel
includes one or more meals in its room charge.
Travel expenses for another individual. If a
spouse, dependent, or other individual goesRECORDS
with you (or your employee) on a business trip
or to a business convention, you generally can-
not deduct his or her travel expenses.
Employee. You can deduct the travel ex-
penses of someone who goes with you if that
person:
1. Is your employee,
2. Has a bona fide business purpose for the
travel, and
3. Would otherwise be allowed to deduct the
travel expenses.
Business associate. If a business asso-
ciate travels with you and meets the conditions
in (2) and (3) above, you can deduct the travel
expenses you have for that person. A business
associate is someone with whom you could rea-
sonably expect to engage or deal in the active
conduct of your business. A business associate
can be a current or prospective (likely to be-
come) customer, client, supplier, employee,
agent, partner, or professional advisor.
Bona fide business purpose. A bona fide
business purpose exists if you can prove a real
business purpose for the individual's presence.
Incidental services, such as typing notes or as-
sisting in entertaining customers, are not
enough to make the expenses deductible.
Example. Jerry drives to Chicago on busi-
ness and takes his wife, Linda, with him. Linda
isn’t Jerry's employee. Linda occasionally types
notes, performs similar services, and accompa-
nies Jerry to luncheons and dinners. The per-
formance of these services does not establish
that her presence on the trip is necessary to the
conduct of Jerry's business. Her expenses are
not deductible.
Jerry pays $199 a day for a double room. A
single room costs $149 a day. He can deduct
the total cost of driving his car to and from Chi-
cago, but only $149 a day for his hotel room. If
he uses public transportation, he can deduct
only his fare.
Meals and Incidental Expenses
You can deduct the cost of meals in either of
the following situations.
It is necessary for you to stop for substan-
tial sleep or rest to properly perform your
duties while traveling away from home on
business.
The meal is business-related entertain-
ment.
Business-related entertainment is discussed
under Entertainment Expenses, later. The fol-
lowing discussion deals only with meals (and in-
cidental expenses) that are not business-rela-
ted entertainment.
Lavish or extravagant. You cannot deduct
expenses for meals that are lavish or extrava-
gant. An expense isn’t considered lavish or ex-
travagant if it is reasonable based on the facts
and circumstances. Expenses won’t be disal-
lowed merely because they are more than a
fixed dollar amount or take place at deluxe res-
taurants, hotels, nightclubs, or resorts.
50% limit on meals. You can figure your meal
expenses using either of the following methods.
Actual cost.
The standard meal allowance.
Both of these methods are explained below.
But, regardless of the method you use, you
generally can deduct only 50% of the unreim-
bursed cost of your meals.
If you are reimbursed for the cost of your
meals, how you apply the 50% limit depends on
whether your employer's reimbursement plan
was accountable or nonaccountable. If you are
not reimbursed, the 50% limit applies whether
the unreimbursed meal expense is for business
travel or business entertainment. The 50% limit
is explained later under Entertainment Expen-
ses. Accountable and nonaccountable plans
are discussed later under Reimbursements.
Actual cost. You can use the actual cost of
your meals to figure the amount of your ex-
pense before reimbursement and application of
the 50% deduction limit. If you use this method,
you must keep records of your actual cost.
Standard meal allowance. Generally, you
can use the “standard meal allowance” method
as an alternative to the actual cost method. It al-
lows you to use a set amount for your daily
meals and incidental expenses (M&IE), instead
of keeping records of your actual costs. The set
amount varies depending on where and when
you travel. In this chapter, “standard meal allow-
ance” refers to the federal rate for M&IE, dis-
cussed later under Amount of standard meal al-
lowance. If you use the standard meal
allowance, you still must keep records to prove
the time, place, and business purpose of your
travel. See Recordkeeping, later.
Incidental expenses. The term “incidental
expenses” means fees and tips given to por-
ters, baggage carriers, hotel staff, and staff on
ships. Incidental expenses don’t include expen-
ses for laundry, cleaning and pressing of cloth-
ing, lodging taxes, costs of telegrams or tele-
phone calls, transportation between places of
lodging or business and places where meals
are taken, or the mailing cost of filing travel
vouchers and paying employer-sponsored
charge card billings.
Incidental expenses only method. You
can use an optional method (instead of actual
cost) for deducting incidental expenses only.
The amount of the deduction is $5 a day. You
can use this method only if you did not pay or
incur any meal expenses. You cannot use this
method on any day that you use the standard
meal allowance.
Federal employees should refer to the
Federal Travel Regulations at
www.gsa.gov. Find “What GSA Offers”
and click on “Regulations: FMR, FTR, & FAR”
for Federal Travel Regulation (FTR) for
changes affecting claims for reimbursement.
50% limit may apply. If you use the stand-
ard meal allowance method for meal expenses
and you are not reimbursed or you are reim-
bursed under a nonaccountable plan, you can
generally deduct only 50% of the standard meal
allowance. If you are reimbursed under an ac-
countable plan and you are deducting amountsCAUTION
!
Page 180 Chapter 26 Car Expenses and Other Employee Business Expenses
that are more than your reimbursements, you
can deduct only 50% of the excess amount.
The 50% limit is explained later under Entertain-
ment Expenses. Accountable and nonaccount-
able plans are discussed later under Reim-
bursements.
There is no optional standard lodging
amount similar to the standard meal al-
lowance. Your allowable lodging ex-
pense deduction is your actual cost.
Who can use the standard meal allow-
ance. You can use the standard meal allow-
ance whether you are an employee or self-em-
ployed, and whether or not you are reimbursed
for your traveling expenses.
Use of the standard meal allowance for
other travel. You can use the standard meal
allowance to figure your meal expenses when
you travel in connection with investment andCAUTION
!
other income-producing property. You can also
use it to figure your meal expenses when you
travel for qualifying educational purposes. You
cannot use the standard meal allowance to fig-
ure the cost of your meals when you travel for
medical or charitable purposes.
Amount of standard meal allowance. The
standard meal allowance is the federal M&IE
rate. For travel in 2016, the rate for most small
localities in the United States is $51 a day.
Most major cities and many other localities
in the United States are designated as
high-cost areas, qualifying for higher standard
meal allowances. You can find this information
(organized by year and location) on the Internet
at www.gsa.gov/perdiem.
If you travel to more than one location in one
day, use the rate in effect for the area where
you stop for sleep or rest. If you work in the
transportation industry, however, see Special
rate for transportation workers, later.
Standard meal allowance for areas out-
side the continental United States. The
standard meal allowance rates above don’t ap-
ply to travel in Alaska, Hawaii, or any other loca-
tion outside the continental United States. The
Department of Defense establishes per diem
rates for Alaska, Hawaii, Puerto Rico, American
Samoa, Guam, Midway, the Northern Mariana
Islands, the U.S. Virgin Islands, Wake Island,
and other non-foreign areas outside the conti-
nental United States. The Department of State
establishes per diem rates for all other foreign
areas.
You can access per diem rates for
non-foreign areas outside the continen-
tal United States at
www.defensetravel.dod.mil/site/
perdiemCalc.cfm. You can access all other for-
eign per diem rates at www.state.gov/travel/.
Click on “Travel Per Diem Allowances for For-
eign Areas” under “Foreign Per Diem Rates,” to
obtain the latest foreign per diem rates.
Special rate for transportation workers.
You can use a special standard meal allowance
if you work in the transportation industry. You
are in the transportation industry if your work:
Directly involves moving people or goods
by airplane, barge, bus, ship, train, or
truck; and
Regularly requires you to travel away from
home and, during any single trip, usually
involves travel to areas eligible for different
standard meal allowance rates.
If this applies to you, the standard daily meal al-
lowance for 2016 is $63 a day ($68 for travel
outside the continental United States). To deter-
mine which rate you should use, see Transition
Rules in Pub. 463.
Using the special rate for transportation
workers eliminates the need for you to deter-
mine the standard meal allowance for every
area where you stop for sleep or rest. If you
choose to use the special rate for any trip, you
must use the special rate (and not use the regu-
lar standard meal allowance rates) for all trips
you take that year.
Travel for days you depart and return. For
both the day you depart for and the day you re-
turn from a business trip, you must prorate the
standard meal allowance (figure a reduced
amount for each day). You can do so by one of
two methods.
Method 1: You can claim 3 4 of the standard
meal allowance.
Method 2: You can prorate using any
method that you consistently apply and
that is in accordance with reasonable busi-
ness practice.
Example. Jen is employed in New Orleans
as a convention planner. In March, her em-
ployer sent her on a 3-day trip to Washington,
DC, to attend a planning seminar. She left her
home in New Orleans at 10 a.m. on Wednesday
and arrived in Washington, DC, at 5:30 p.m. Af-
ter spending two nights there, she flew back to
New Orleans on Friday and arrived back home
at 8:00 p.m. Jen's employer gave her a flat
amount to cover her expenses and included it
with her wages.
Travel Expenses You Can Deduct
This chart summarizes expenses you can deduct when you
travel away from home for business purposes.
IF you have
expenses for... THEN you can deduct the cost of...
transportation travel by airplane, train, bus, or car between your home and
your business destination. If you were provided with a ticket or
you are riding free as a result of a frequent traveler or similar
program, your cost is zero. If you travel by ship, see Luxury
Water Travel and Cruise Ships (under Conventions) in Pub.
463 for additional rules and limits.
taxi, commuter
bus, and airport
limousine
fares for these and other types of transportation that take you
between:
The airport or station and your hotel, and
The hotel and the work location of your customers or
clients, your business meeting place, or your temporary
work location.
baggage and
shipping
sending baggage and sample or display material between your
regular and temporary work locations.
car operating and maintaining your car when traveling away from
home on business. You can deduct actual expenses or the
standard mileage rate as well as business-related tolls and
parking. If you rent a car while away from home on business,
you can deduct only the business-use portion of the expenses.
lodging and meals your lodging and meals if your business trip is overnight or long
enough that you need to stop for sleep or rest to properly
perform your duties. Meals include amounts spent for food,
beverages, taxes, and related tips. See Meals and Incidental
Expenses for additional rules and limits.
cleaning dry cleaning and laundry.
telephone business calls while on your business trip. This includes
business communication by fax machine or other
communication devices.
tips tips you pay for any expenses in this chart.
other other similar ordinary and necessary expenses related to your
business travel. These expenses might include transportation
to or from a business meal, public stenographer's fees,
computer rental fees, and operating and maintaining a house
trailer.
Table 26-1.
Chapter 26 Car Expenses and Other Employee Business Expenses Page 181
Under Method 1, Jen can claim 21 2 days of
the standard meal allowance for Washington,
DC: 3 4 of the daily rate for Wednesday and Fri-
day (the days she departed and returned), and
the full daily rate for Thursday.
Under Method 2, Jen could also use any
method that she applies consistently and that is
in accordance with reasonable business prac-
tice. For example, she could claim 3 days of the
standard meal allowance even though a federal
employee would have to use Method 1 and be
limited to only 21 2 days.
Travel in the
United States
The following discussion applies to travel in the
United States. For this purpose, the United
States includes only the 50 states and the Dis-
trict of Columbia. The treatment of your travel
expenses depends on how much of your trip
was business related and on how much of your
trip occurred within the United States. See Part
of Trip Outside the United States, later.
Trip Primarily for Business
You can deduct all your travel expenses if your
trip was entirely business related. If your trip
was primarily for business and, while at your
business destination, you extended your stay
for a vacation, made a personal side trip, or had
other personal activities, you can deduct your
business-related travel expenses. These ex-
penses include the travel costs of getting to and
from your business destination and any busi-
ness-related expenses at your business desti-
nation.
Example. You work in Atlanta and take a
business trip to New Orleans in May. Your busi-
ness travel totals 900 miles round trip. On your
way home, you stop in Mobile to visit your pa-
rents. You spend $2,165 for the 9 days you are
away from home for travel, meals, lodging, and
other travel expenses. If you hadn’t stopped in
Mobile, you would’ve been gone only 6 days,
and your total cost would have been $1,602.
You can deduct $1,602 for your trip, including
the cost of round-trip transportation to and from
New Orleans. The deduction for your meals is
subject to the 50% limit on meals mentioned
earlier.
Trip Primarily for
Personal Reasons
If your trip was primarily for personal reasons,
such as a vacation, the entire cost of the trip is a
nondeductible personal expense. However, you
can deduct any expenses you have while at
your destination that are directly related to your
business.
A trip to a resort or on a cruise ship may be a
vacation even if the promoter advertises that it
is primarily for business. The scheduling of inci-
dental business activities during a trip, such as
viewing videotapes or attending lectures deal-
ing with general subjects, won’t change what is
really a vacation into a business trip.
Part of Trip Outside
the United States
If part of your trip is outside the United States,
use the rules described later under Travel Out-
side the United States for that part of the trip.
For the part of your trip that is inside the United
States, use the rules for travel in the United
States. Travel outside the United States does
not include travel from one point in the United
States to another point in the United States.
The following discussion can help you deter-
mine whether your trip was entirely within the
United States.
Public transportation. If you travel by public
transportation, any place in the United States
where that vehicle makes a scheduled stop is a
point in the United States. Once the vehicle
leaves the last scheduled stop in the United
States on its way to a point outside the United
States, you apply the rules under Travel Out-
side the United States.
Example. You fly from New York to Puerto
Rico with a scheduled stop in Miami. You return
to New York nonstop. The flight from New York
to Miami is in the United States, so only the
flight from Miami to Puerto Rico is outside the
United States. Because there are no scheduled
stops between Puerto Rico and New York, all of
the return trip is outside the United States.
Private car. Travel by private car in the United
States is travel between points in the United
States, even when you are on your way to a
destination outside the United States.
Example. You travel by car from Denver to
Mexico City and return. Your travel from Denver
to the border and from the border back to Den-
ver is travel in the United States, and the rules
in this section apply. The rules under Travel
Outside the United States apply to your trip
from the border to Mexico City and back to the
border.
Travel Outside
the United States
If any part of your business travel is outside the
United States, some of your deductions for the
cost of getting to and from your destination may
be limited. For this purpose, the United States
includes only the 50 states and the District of
Columbia.
How much of your travel expenses you can
deduct depends in part upon how much of your
trip outside the United States was business re-
lated.
See chapter 1 of Pub. 463 for information on
luxury water travel.
Travel Entirely for Business
or Considered Entirely
for Business
You can deduct all your travel expenses of get-
ting to and from your business destination if
your trip is entirely for business or considered
entirely for business.
Travel entirely for business. If you travel out-
side the United States and you spend the entire
time on business activities, you can deduct all
of your travel expenses.
Travel considered entirely for business.
Even if you did not spend your entire time on
business activities, your trip is considered en-
tirely for business if you meet at least one of the
following four exceptions.
Exception 1—No substantial control.
Your trip is considered entirely for business if
you did not have substantial control over ar-
ranging the trip. The fact that you control the
timing of your trip does not, by itself, mean that
you have substantial control over arranging
your trip.
You don’t have substantial control over your
trip if you:
Are an employee who was reimbursed or
paid a travel expense allowance,
Are not related to your employer, or
Are not a managing executive.
“Related to your employer” is defined later in
this chapter under Per Diem and Car Allowan-
ces.
A “managing executive” is an employee who
has the authority and responsibility, without be-
ing subject to the veto of another, to decide on
the need for the business travel.
A self-employed person generally has sub-
stantial control over arranging business trips.
Exception 2—Outside United States no
more than a week. Your trip is considered en-
tirely for business if you were outside the United
States for a week or less, combining business
and nonbusiness activities. One week means 7
consecutive days. In counting the days, don’t
count the day you leave the United States, but
do count the day you return to the United
States.
Exception 3—Less than 25% of time on
personal activities. Your trip is considered
entirely for business if:
You were outside the United States for
more than a week, and
You spent less than 25% of the total time
you were outside the United States on
nonbusiness activities.
For this purpose, count both the day your trip
began and the day it ended.
Exception 4—Vacation not a major con-
sideration. Your trip is considered entirely for
business if you can establish that a personal va-
cation was not a major consideration, even if
you have substantial control over arranging the
trip.
Travel Primarily for Business
If you travel outside the United States primarily
for business but spend some of your time on
nonbusiness activities, you generally cannot
deduct all of your travel expenses. You only can
deduct the business portion of your cost of get-
ting to and from your destination. You must allo-
cate the costs between your business and non-
business activities to determine your deductible
amount. These travel allocation rules are dis-
cussed in chapter 1 of Pub. 463.
Page 182 Chapter 26 Car Expenses and Other Employee Business Expenses
You don’t have to allocate your travel
expense deduction if you meet one of
the four exceptions listed earlier under
Travel considered entirely for business. In those
cases, you can deduct the total cost of getting
to and from your destination.
Travel Primarily for Personal
Reasons
If you travel outside the United States primarily
for vacation or for investment purposes, the en-
tire cost of the trip is a nondeductible personal
expense. If you spend some time attending
brief professional seminars or a continuing edu-
cation program, you can deduct your registra-
tion fees and other expenses you have that are
directly related to your business.
Conventions
You can deduct your travel expenses when you
attend a convention if you can show that your
attendance benefits your trade or business. You
cannot deduct the travel expenses for your fam-
ily.
If the convention is for investment, political,
social, or other purposes unrelated to your
trade or business, you cannot deduct the ex-
penses.
Your appointment or election as a dele-
gate does not, in itself, determine
whether you can deduct travel expen-
ses. You can deduct your travel expenses only
if your attendance is connected to your own
trade or business.
Convention agenda. The convention agenda
or program generally shows the purpose of the
convention. You can show your attendance at
the convention benefits your trade or business
by comparing the agenda with the official duties
and responsibilities of your position. The
agenda does not have to deal specifically with
your official duties and responsibilities; it will be
enough if the agenda is so related to your posi-
tion that it shows your attendance was for busi-
ness purposes.
Conventions held outside the North Ameri
can area. See chapter 1 of Pub. 463 for infor-
mation on conventions held outside the North
American area.
Entertainment
Expenses
You may be able to deduct business-related en-
tertainment expenses you have for entertaining
a client, customer, or employee.
You can deduct entertainment expenses
only if they are both ordinary and necessary
(defined earlier in the Introduction) and meet
one of the following tests.
Directly related test.
Associated test.
Both of these tests are explained in chapter 2 of
Pub. 463.TIPCAUTION
!
The amount you can deduct for enter-
tainment expenses may be limited.
Generally, you can deduct only 50% of
your unreimbursed entertainment expenses.
This limit is discussed next.
50% Limit
In general, you can deduct only 50% of your
business-related meal and entertainment ex-
penses. (If you are subject to the Department of
Transportation's “hours of service” limits, you
can deduct 80% of your business-related meal
and entertainment expenses. See Individuals
subject to “hours of service” limits, later.)
The 50% limit applies to employees or their
employers, and to self-employed persons (in-
cluding independent contractors) or their cli-
ents, depending on whether the expenses are
reimbursed.
Figure 26-A summarizes the general rules
explained in this section.
The 50% limit applies to business meals or
entertainment expenses you have while:
Traveling away from home (whether eating
alone or with others) on business;
Entertaining customers at your place of
business, a restaurant, or other location; or
Attending a business convention or recep-
tion, business meeting, or business lun-
cheon at a club.
Included expenses. Expenses subject to the
50% limit include:
Taxes and tips relating to a business meal
or entertainment activity,
Cover charges for admission to a night-
club,
Rent paid for a room in which you hold a
dinner or cocktail party, and
Amounts paid for parking at a sports
arena.
However, the cost of transportation to and from
a business meal or a business-related enter-
tainment activity isn’t subject to the 50% limit.
Application of 50% limit. The 50% limit on
meal and entertainment expenses applies if the
expense is otherwise deductible and isn’t cov-
ered by one of the exceptions discussed later in
this section.
The 50% limit also applies to certain meal
and entertainment expenses that are not busi-
ness related. It applies to meal and entertain-
ment expenses incurred for the production of in-
come, including rental or royalty income. It also
applies to the cost of meals included in deducti-
ble educational expenses.
When to apply the 50% limit. You apply the
50% limit after determining the amount that
would otherwise qualify for a deduction. You
first have to determine the amount of meal and
entertainment expenses that would be deducti-
ble under the other rules discussed in this chap-
ter.
Example 1. You spend $200 for a busi-
ness-related meal. If $110 of that amount isn’t
allowable because it is lavish and extravagant,CAUTION
!
the remaining $90 is subject to the 50% limit.
Your deduction cannot be more than $45 (0.50
× $90).
Example 2. You purchase two tickets to a
concert and give them to a client. You pur-
chased the tickets through a ticket agent. You
paid $200 for the two tickets, which had a face
value of $80 each ($160 total). Your deduction
cannot be more than $80 (0.50 × $160).
Exceptions to the 50% Limit
Generally, business-related meal and entertain-
ment expenses are subject to the 50% limit.
Figure 26-A can help you determine if the 50%
limit applies to you.
Your meal or entertainment expense isn’t
subject to the 50% limit if the expense meets
one of the following exceptions.
Employee's reimbursed expenses. If you
are an employee, you are not subject to the
50% limit on expenses for which your employer
reimburses you under an accountable plan. Ac-
countable plans are discussed later under Re-
imbursements.
Individuals subject to “hours of service”
limits. You can deduct a higher percentage of
your meal expenses while traveling away from
your tax home if the meals take place during or
incident to any period subject to the Department
of Transportation's “hours of service” limits. The
percentage is 80%.
Individuals subject to the Department of
Transportation's “hours of service” limits include
the following persons.
Certain air transportation workers (such as
pilots, crew, dispatchers, mechanics, and
control tower operators) who are under
Federal Aviation Administration regula-
tions.
Interstate truck operators and bus drivers
who are under Department of Transporta-
tion regulations.
Certain railroad employees (such as engi-
neers, conductors, train crews, dispatch-
ers, and control operations personnel) who
are under Federal Railroad Administration
regulations.
Certain merchant mariners who are under
Coast Guard regulations.
Other exceptions. There are also exceptions
for the self-employed, advertising expenses,
selling meals or entertainment, and charitable
sports events. These are discussed in Pub.
463.
What Entertainment
Expenses Are Deductible?
This section explains different types of enter-
tainment expenses you may be able to deduct.
Entertainment. Entertainment includes any
activity generally considered to provide enter-
tainment, amusement, or recreation. Examples
include entertaining guests at nightclubs; at so-
cial, athletic, and sporting clubs; at theaters; at
sporting events; or on hunting, fishing, vacation,
and similar trips.
Chapter 26 Car Expenses and Other Employee Business Expenses Page 183
A meal as a form of entertainment. Enter-
tainment includes the cost of a meal you pro-
vide to a customer or client, whether the meal is
a part of other entertainment or by itself. A meal
expense includes the cost of food, beverages,
taxes, and tips for the meal. To deduct an enter-
tainment-related meal, you or your employee
must be present when the food or beverages
are provided.
You cannot claim the cost of your meal
both as an entertainment expense and
as a travel expense.
Separating costs. If you have one expense
that includes the costs of entertainment and
other services (such as lodging or transporta-
tion), you must allocate that expense between
the cost of entertainment and the cost of other
services. You must have a reasonable basis for
making this allocation. For example, you must
allocate your expenses if a hotel includes enter-
tainment in its lounge on the same bill with your
room charge.
Taking turns paying for meals or entertain
ment. If a group of business acquaintances
take turns picking up each others' meal or en-
tertainment checks without regard to whether
any business purposes are served, no member
of the group can deduct any part of the ex-
pense.
Lavish or extravagant expenses. You can-
not deduct expenses for entertainment that are
lavish or extravagant. An expense isn’t consid-
ered lavish or extravagant if it is reasonable
considering the facts and circumstances. Ex-
penses won’t be disallowed just because they
are more than a fixed dollar amount or take
place at deluxe restaurants, hotels, nightclubs,
or resorts.
Trade association meetings. You can deduct
entertainment expenses that are directly related
to, and necessary for, attending business meet-
ings or conventions of certain exempt organiza-
tions if the expenses of your attendance are re-
lated to your active trade or business. These
organizations include business leagues, cham-
bers of commerce, real estate boards, trade as-
sociations, and professional associations.
Entertainment tickets. Generally, you cannot
deduct more than the face value of an entertain-
ment ticket, even if you paid a higher price. For
example, you cannot deduct service fees you
pay to ticket agencies or brokers or any amount
over the face value of the tickets you pay to
scalpers.
What Entertainment
Expenses Are Not
Deductible?
This section explains different types of enter-
tainment expenses you generally may not be
able to deduct.
Club dues and membership fees. You can-
not deduct dues (including initiation fees) for
membership in any club organized for:
Business,
Pleasure,CAUTION
!
Recreation, or
Other social purpose.
This rule applies to any membership organiza-
tion if one of its principal purposes is either:
To conduct entertainment activities for
members or their guests, or
To provide members or their guests with
access to entertainment facilities.
The purposes and activities of a club, not its
name, will determine whether or not you can
deduct the dues. You cannot deduct dues paid
to:
Country clubs,
Golf and athletic clubs,
Airline clubs,
Hotel clubs, and
Clubs operated to provide meals under cir-
cumstances generally considered to be
conducive to business discussions.
Entertainment facilities. Generally, you can-
not deduct any expense for the use of an enter-
tainment facility. This includes expenses for de-
preciation and operating costs such as rent,
utilities, maintenance, and protection.
An entertainment facility is any property you
own, rent, or use for entertainment. Examples
include a yacht, hunting lodge, fishing camp,
swimming pool, tennis court, bowling alley, car,
airplane, apartment, hotel suite, or home in a
vacation resort.
Out-of-pocket expenses. You can deduct
out-of-pocket expenses, such as for food and
beverages, catering, gas, and fishing bait, that
you provided during entertainment at a facility.
These are not expenses for the use of an enter-
tainment facility. However, these expenses are
subject to the directly-related and associated
tests and to the 50% Limit discussed earlier.
Additional information. For more information
on entertainment expenses, including discus-
sions of the directly-related and associated
tests, see chapter 2 of Pub. 463.
Gift Expenses
If you give gifts in the course of your trade or
business, you can deduct all or part of the cost.
Figure 26-A. Does the 50% Limit Apply to Your Expenses?
There are exceptions to these rules. See Exceptions to the 50% Limit.All employees and self-employed persons can use this chart. For more information, see
50% Limit.
Were your meal and entertainment expenses reimbursed?
(Count only reimbursements your employer did not include
in box 1 of your Form W-2. If self-employed, count only
reimbursements from clients or customers that are not
included on Form 1099-MISC, Miscellaneous Income.)
If an employee, did you adequately account
to your employer under an accountable plan?
If self-employed, did you provide the payer
with adequate records? (See How To Report.)
Did your expenses exceed the reimbursement?
For the amount reimbursed. . . For the excess amount. . .
Your meal and entertainment
expenses are NOT subject to
the 50% limit. However,
since the reimbursement was
not treated as wages or as
other taxable income, you
cannot deduct the expenses.
Your meal and
entertainment expenses
ARE subject to
the 50% limit.
Yes
No








Yes
No
Yes
No
Start Here

Page 184 Chapter 26 Car Expenses and Other Employee Business Expenses
This section explains the limits and rules for de-
ducting the costs of gifts.
$25 limit. You can deduct no more than $25
for business gifts you give directly or indirectly
to each person during your tax year. A gift to a
company that is intended for the eventual per-
sonal use or benefit of a particular person or a
limited class of people will be considered an in-
direct gift to that particular person or to the indi-
viduals within that class of people who receive
the gift.
If you give a gift to a member of a custom-
er's family, the gift is generally considered to be
an indirect gift to the customer. This rule does
not apply if you have a bona fide independent
business connection with that family member
and the gift isn’t intended for the customer's
eventual use or benefit.
If you and your spouse both give gifts, both
of you are treated as one taxpayer. It does not
matter whether you have separate businesses,
are separately employed, or whether each of
you has an independent connection with the re-
cipient. If a partnership gives gifts, the partner-
ship and the partners are treated as one tax-
payer.
Incidental costs. Incidental costs, such as en-
graving on jewelry, or packaging, insuring, and
mailing, are generally not included in determin-
ing the cost of a gift for purposes of the $25
limit.
A cost is incidental only if it does not add
substantial value to the gift. For example, the
cost of customary gift wrapping is an incidental
cost. However, the purchase of an ornamental
basket for packaging fruit isn’t an incidental cost
if the value of the basket is substantial com-
pared to the value of the fruit.
Exceptions. The following items are not con-
sidered gifts for purposes of the $25 limit.
1. An item that costs $4 or less and:
a. Has your name clearly and perma-
nently imprinted on the gift, and
b. Is one of a number of identical items
you widely distribute. Examples in-
clude pens, desk sets, and plastic
bags and cases.
2. Signs, display racks, or other promotional
material to be used on the business prem-
ises of the recipient.
Gift or entertainment. Any item that might be
considered either a gift or entertainment gener-
ally will be considered entertainment. However,
if you give a customer packaged food or bever-
ages you intend the customer to use at a later
date, treat it as a gift.
If you give a customer tickets to a theater
performance or sporting event and you don’t go
with the customer to the performance or event,
you have a choice. You can treat the cost of the
tickets as either a gift expense or an entertain-
ment expense, whichever is to your advantage.
If you go with the customer to the event, you
must treat the cost of the tickets as an entertain-
ment expense. You cannot choose, in this case,
to treat the cost of the tickets as a gift expense.
Transportation
Expenses
This section discusses expenses you can de-
duct for business transportation when you are
not traveling away from home as defined earlier
under Travel Expenses. These expenses in-
clude the cost of transportation by air, rail, bus,
taxi, etc., and the cost of driving and maintain-
ing your car.
Transportation expenses include the ordi-
nary and necessary costs of all of the following.
Getting from one workplace to another in
the course of your business or profession
when you are traveling within the area of
your tax home. (Tax home is defined ear-
lier under Travel Expenses.)
Visiting clients or customers.
Going to a business meeting away from
your regular workplace.
Getting from your home to a temporary
workplace when you have one or more
regular places of work. These temporary
workplaces can be either within the area of
your tax home or outside that area.
Transportation expenses don’t include expen-
ses you have while traveling away from home
overnight. Those expenses are travel expen-
ses, discussed earlier. However, if you use your
car while traveling away from home overnight,
use the rules in this section to figure your car
expense deduction. See Car Expenses, later.
Illustration of transportation expenses. Fig-
ure 26-B illustrates the rules for when you can
deduct transportation expenses when you have
a regular or main job away from your home. You
may want to refer to it when deciding whether
you can deduct your transportation expenses.
Daily transportation expenses you incur while
traveling from home to one or more regular pla-
ces of business are generally nondeductible
commuting expenses. However, there are
many exceptions for deducting transportation
expenses, like whether your work location is
temporary (inside or outside the metropolitan
area), traveling for same trade or business, or if
you have a home office.
Temporary work location. If you have one or
more regular work locations away from your
home and you commute to a temporary work lo-
cation in the same trade or business, you can
deduct the expenses of the daily round-trip
transportation between your home and the tem-
porary location, regardless of distance.
If your employment at a work location is real-
istically expected to last (and does in fact last)
for 1 year or less, the employment is temporary
unless there are facts and circumstances that
would indicate otherwise.
If your employment at a work location is real-
istically expected to last for more than 1 year or
if there is no realistic expectation that the em-
ployment will last for 1 year or less, the employ-
ment isn’t temporary, regardless of whether it
actually lasts for more than 1 year.
If employment at a work location initially is
realistically expected to last for 1 year or less,
but at some later date the employment is realis-
tically expected to last more than 1 year, that
employment will be treated as temporary (un-
less there are facts and circumstances that
would indicate otherwise) until your expectation
changes. It won’t be treated as temporary after
the date you determine it will last more than 1
year.
If the temporary work location is beyond the
general area of your regular place of work and
you stay overnight, you are traveling away from
home. You may have deductible travel expen-
ses as discussed earlier in this chapter.
No regular place of work. If you have no reg-
ular place of work but ordinarily work in the met-
ropolitan area where you live, you can deduct
daily transportation costs between home and a
temporary work site outside that metropolitan
area.
Generally, a metropolitan area includes the
area within the city limits and the suburbs that
are considered part of that metropolitan area.
You cannot deduct daily transportation costs
between your home and temporary work sites
within your metropolitan area. These are nonde-
ductible commuting expenses.
Two places of work. If you work at two places
in one day, whether or not for the same em-
ployer, you can deduct the expense of getting
from one workplace to the other. However, if for
some personal reason you don’t go directly
from one location to the other, you cannot de-
duct more than the amount it would have cost
you to go directly from the first location to the
second.
Transportation expenses you have in going
between home and a part-time job on a day off
from your main job are commuting expenses.
You cannot deduct them.
Armed Forces reservists. A meeting of an
Armed Forces reserve unit is a second place of
business if the meeting is held on a day on
which you work at your regular job. You can de-
duct the expense of getting from one workplace
to the other as just discussed under Two places
of work, earlier.
You usually cannot deduct the expense if
the reserve meeting is held on a day on which
you don’t work at your regular job. In this case,
your transportation generally is a nondeductible
commuting expense. However, you can deduct
your transportation expenses if the location of
the meeting is temporary and you have one or
more regular places of work.
If you ordinarily work in a particular metro-
politan area but not at any specific location and
the reserve meeting is held at a temporary loca-
tion outside that metropolitan area, you can de-
duct your transportation expenses.
If you travel away from home overnight to at-
tend a guard or reserve meeting, you can de-
duct your travel expenses. These expenses are
discussed earlier under Travel Expenses.
If you travel more than 100 miles away from
home in connection with your performance of
services as a member of the reserves, you may
be able to deduct some of your reserve-related
travel costs as an adjustment to income rather
than as an itemized deduction. See Armed
Forces reservists traveling more than 100 miles
from home under Special Rules, later.
Chapter 26 Car Expenses and Other Employee Business Expenses Page 185
Commuting expenses. You cannot deduct
the costs of taking a bus, trolley, subway, or
taxi, or of driving a car between your home and
your main or regular place of work. These costs
are personal commuting expenses. You cannot
deduct commuting expenses no matter how far
your home is from your regular place of work.
You cannot deduct commuting expenses even
if you work during the commuting trip.
Example. You sometimes use your cell
phone to make business calls while commuting
to and from work. Sometimes business asso-
ciates ride with you to and from work, and you
have a business discussion in the car. These
activities don’t change the trip from personal to
business. You cannot deduct your commuting
expenses.
Parking fees. Fees you pay to park your car
at your place of business are nondeductible
commuting expenses. You can, however, de-
duct business-related parking fees when visit-
ing a customer or client.
Advertising display on car. Putting display
material that advertises your business on your
car does not change the use of your car from
personal use to business use. If you use this car
for commuting or other personal uses, you still
cannot deduct your expenses for those uses.
Car pools. You cannot deduct the cost of
using your car in a nonprofit car pool. Do not in-
clude payments you receive from the passen-
gers in your income. These payments are con-
sidered reimbursements of your expenses.
However, if you operate a car pool for a profit,
you must include payments from passengers in
your income. You can then deduct your car ex-
penses (using the rules in this chapter).
Hauling tools or instruments. Hauling
tools or instruments in your car while commut-
ing to and from work does not make your car
expenses deductible. However, you can deduct
any additional costs you have for hauling tools
or instruments (such as for renting a trailer you
tow with your car).
Union members' trips from a union hall.
If you get your work assignments at a union hall
and then go to your place of work, the costs of
getting from the union hall to your place of work
are nondeductible commuting expenses. Al-
though you need the union to get your work as-
signments, you are employed where you work,
not where the union hall is located.
Office in the home. If you have an office in
your home that qualifies as a principal place of
business, you can deduct your daily transporta-
tion costs between your home and another
work location in the same trade or business.
(See chapter 28 for information on determining
if your home office qualifies as a principal place
of business.)
Examples of deductible transportation. The
following examples show when you can deduct
transportation expenses based on the location
of your work and your home.
Example 1. You regularly work in an office
in the city where you live. Your employer sends
you to a 1-week training session at a different
office in the same city. You travel directly from
your home to the training location and return
each day. You can deduct the cost of your daily
round-trip transportation between your home
and the training location.
Example 2. Your principal place of busi-
ness is in your home. You can deduct the cost
of round-trip transportation between your quali-
fying home office and your client's or custom-
er's place of business.
Example 3. You have no regular office, and
you don’t have an office in your home. In this
case, the location of your first business contact
inside the metropolitan area is considered your
office. Transportation expenses between your
home and this first contact are nondeductible
commuting expenses. Transportation expenses
between your last business contact and your
home are also nondeductible commuting ex-
penses. While you cannot deduct the costs of
these first and last trips, you can deduct the
costs of going from one client or customer to
another. With no regular or home office, the
costs of travel between two or more business
contacts in a metropolitan area are deductible
while the costs of travel between the home to
(and from) business contacts are not deducti-
ble.
Car Expenses
If you use your car for business purposes, you
may be able to deduct car expenses. You gen-
erally can use one of the following two methods
to figure your deductible expenses.
Standard Mileage Rate.
Actual Car Expenses.
If you use actual car expenses to figure your
deduction for a car you lease, there are rules
that affect the amount of your lease payments
you can deduct. See Leasing a car under Actual
Car Expenses, later.
In this chapter, the term “car” includes a van,
pickup, or panel truck.
Figure 26-B. When Are Transportation Expenses Deductible?
Most employees and self-employed persons can use this chart. (Do not use this chart if your home
is your principal place of business. See Office in the home.)
 









Temporary
work location
Home Regular or
main job
Always
deductible
Always
deductible
Second job
Never deductible
Never deductible
Deductible if you have a
regular or main job
at another location
Always deductible
Home: The place where you reside. Transportation expenses between your home and
your main or regular place of work are personal commuting expenses.
Regular or main job: Your principal place of business. If you have more than one job,
you must determine which one is your regular or main job. Consider the time you
spend at each, the activity you have at each, and the income you earn at each.
Temporary work location: A place where your work assignment is realistically
expected to last (and does in fact last) one year or less. Unless you have a regular
place of business, you can only deduct your transportation expenses to a temporary
work location outside your metropolitan area.
Second job: If you regularly work at two or more places in one day, whether or not
for the same employer, you can deduct your transportation expenses of getting from
one workplace to another. If you do not go directly from your first job to your second
job, you can only deduct the transportation expenses of going directly from your first
job to your second job. You cannot deduct your transportation expenses between
your home and a second job on a day off from your main job.
Page 186 Chapter 26 Car Expenses and Other Employee Business Expenses
Rural mail carriers. If you are a rural mail car-
rier, you may be able to treat the amount of
qualified reimbursement you received as the
amount of your allowable expense. Because
the qualified reimbursement is treated as paid
under an accountable plan, your employer
shouldn’t include the amount of reimbursement
in your income.
If your vehicle expenses are more than the
amount of your reimbursement, you can deduct
the unreimbursed expenses as an itemized de-
duction on Schedule A (Form 1040). You must
complete Form 2106 and attach it to your Form
1040.
A “qualified reimbursement” is the reim-
bursement you receive that meets both of the
following conditions.
It is given as an equipment maintenance
allowance (EMA) to employees of the U.S.
Postal Service.
It is at the rate contained in the 1991 col-
lective bargaining agreement. Any later
agreement cannot increase the qualified
reimbursement amount by more than the
rate of inflation.
See your employer for information on your reim-
bursement.
If you are a rural mail carrier and re-
ceived a qualified reimbursement, you
cannot use the standard mileage rate.
Standard Mileage Rate
You may be able to use the standard mileage
rate to figure the deductible costs of operating
your car for business purposes. For 2016, the
standard mileage rate for business use is 54
cents (0.54) per mile.
If you use the standard mileage rate for
a year, you cannot deduct your actual
car expenses for that year, but see
Parking fees and tolls, later.
You generally can use the standard mileage
rate whether or not you are reimbursed and
whether or not any reimbursement is more or
less than the amount figured using the standard
mileage rate. See Reimbursements under How
To Report, later.
Choosing the standard mileage rate. If you
want to use the standard mileage rate for a car
you own, you must choose to use it in the first
year the car is available for use in your busi-
ness. Then in later years, you can choose to
use either the standard mileage rate or actual
expenses.
If you want to use the standard mileage rate
for a car you lease, you must use it for the entire
lease period.
You must make the choice to use the stand-
ard mileage rate by the due date (including ex-
tensions) of your return. You cannot revoke the
choice. However, in a later year, you can switch
from the standard mileage rate to the actual ex-
penses method. If you change to the actual ex-
penses method in a later year, but before your
car is fully depreciated, you have to estimate
the remaining useful life of the car and use
straight line depreciation.CAUTION
!CAUTION
!
Example. Larry is an employee who occa-
sionally uses his own car for business purpo-
ses. He purchased the car in 2014, but he did
not claim any unreimbursed employee expen-
ses on his 2014 tax return. Because Larry did
not use the standard mileage rate the first year
the car was available for business use, he can-
not use the standard mileage rate in 2016 to
claim unreimbursed employee business expen-
ses.
For more information about depreciation in-
cluded in the standard mileage rate, see the ex-
ception in Methods of depreciation under De-
preciation Deduction in chapter 4 of Pub. 463.
Standard mileage rate not allowed. You
cannot use the standard mileage rate if you:
Use five or more cars at the same time (as
in fleet operations),
Claimed a depreciation deduction for the
car using any method other than straight
line depreciation,
Claimed a section 179 deduction on the
car,
Claimed the special depreciation allow-
ance on the car,
Claimed actual car expenses after 1997 for
a car you leased, or
Are a rural mail carrier who received a
qualified reimbursement. (See Rural mail
carriers, earlier.)
Five or more cars. If you own or lease five
or more cars that are used for business at the
same time, you cannot use the standard mile-
age rate for the business use of any car. How-
ever, you may be able to deduct your actual ex-
penses for operating each of the cars in your
business. See Actual Car Expenses in chap-
ter 4 of Pub. 463 for information on how to fig-
ure your deduction.
You are not using five or more cars for busi-
ness at the same time if you alternate using
(use at different times) the cars for business.
Note. You can elect to use the standard
mileage rate if you used a car for hire (such as a
taxi).
Parking fees and tolls. In addition to using
the standard mileage rate, you can deduct any
business-related parking fees and tolls. (Park-
ing fees you pay to park your car at your place
of work are nondeductible commuting expen-
ses.)
Actual Car Expenses
If you don’t use the standard mileage rate, you
may be able to deduct your actual car expen-
ses.
If you qualify to use both methods, you
may want to figure your deduction both
ways to see which gives you a larger
deduction.
Actual car expenses include:TIP
Depreciation
Licenses
Lease
payments
Registration
fees
Gas Insurance Repairs
Oil Garage rent Tires
Tolls Parking fees
Business and personal use. If you use your
car for both business and personal purposes,
you must divide your expenses between busi-
ness and personal use. You can divide your ex-
penses based on the miles driven for each pur-
pose.
Example. You are a contractor and drive
your car 20,000 miles during the year: 12,000
miles for business use and 8,000 miles for per-
sonal use. You can claim only 60% (12,000 ÷
20,000) of the cost of operating your car as a
business expense.
Interest on car loans. If you are an employee,
you cannot deduct any interest paid on a car
loan. This interest is treated as personal interest
and isn’t deductible. However, if you are
self-employed and use your car in that busi-
ness, see chapter 4 of Pub. 535.
If you use a home equity loan to pur-
chase your car, you may be able to de-
duct the interest. See chapter 23 for
more information.
Taxes paid on your car. If you are an em-
ployee, you can deduct personal property taxes
paid on your car if you itemize deductions. En-
ter the amount paid on line 7 of Schedule A
(Form 1040). (See chapter 22 for more informa-
tion on taxes.) If you are not an employee, see
your form instructions for information on how to
deduct personal property taxes paid on your
car.
Sales taxes. Generally, sales taxes on your
car are part of your car's basis and are recov-
ered through depreciation, discussed later.
Fines and collateral. You cannot deduct fines
you pay and collateral you forfeited for traffic vi-
olations.
Depreciation and section 179 deductions.
Generally, the cost of a car, plus sales tax and
improvements, is a capital expense. Because
the benefits last longer than 1 year, you gener-
ally cannot deduct a capital expense. However,
you can recover this cost through the section
179 deduction and depreciation deductions.
Depreciation allows you to recover the cost
over more than 1 year by deducting part of it
each year. The section 179 deduction and the
depreciation deductions are discussed in more
detail in chapter 4 of Pub. 463.
Generally, there are limits on these deduc-
tions. Special rules apply if you use your car
50% or less in your work or business.
Leasing a car. If you lease a car, truck, or van
that you use in your business, you can use the
standard mileage rate or actual expenses to fig-
ure your deductible car expense.
Deductible payments. If you choose to use
actual expenses, you can deduct the part of
each lease payment that is for the use of the ve-
hicle in your business. You cannot deduct anyTIP
Chapter 26 Car Expenses and Other Employee Business Expenses Page 187
part of a lease payment that is for personal use
of the vehicle, such as commuting.
You must spread any advance payments
over the entire lease period. You cannot deduct
any payments you make to buy a vehicle, even
if the payments are called lease payments.
If you lease a car, truck, or van for 30 days
or more, you may have to reduce your lease
payment deduction by an “inclusion amount.”
For information on reporting lease inclusion
amounts, see Leasing a Car in chapter 4 of
Pub. 463.
Sale, TradeIn, or Other
Disposition
If you sell, trade in, or otherwise dispose of your
car, you may have a taxable gain or a deducti-
ble loss. This is true whether you used the
standard mileage rate or actual car expenses to
deduct the business use of your car. Pub. 544
has information on sales of property used in a
trade or business, and details on how to report
the disposition.
Recordkeeping
If you deduct travel, entertainment, gift, or trans-
portation expenses, you must be able to prove
(substantiate) certain elements of the expense.
This section discusses the records you need to
keep to prove these expenses.
If you keep timely and accurate re-
cords, you will have support to show
the IRS if your tax return is ever exam-
ined. You will also have proof of expenses that
your employer may require if you are reim-
bursed under an accountable plan. These plans
are discussed later under Reimbursements.
How To Prove Expenses
Table 26-2 is a summary of records you need to
prove each expense discussed in this chapter.
You must be able to prove the elements listed
across the top portion of the table. You prove
them by having the information and receipts
(where needed) for the expenses listed in the
first column.
You cannot deduct amounts that you
approximate or estimate.
You should keep adequate records to prove
your expenses or have sufficient evidence that
will support your own statement. You must gen-
erally prepare a written record for it to be con-
sidered adequate. This is because written evi-
dence is more reliable than oral evidence alone.
However, if you contemporaneously
prepare a record on a computer it is
considered an adequate record.
What Are Adequate Records?
You should keep the proof you need in an ac-
count book, diary, statement of expense, or
similar record. You should also keep documen-
tary evidence that, together with your records,
will support each element of an expense.RECORDSCAUTION
!TIP
Documentary evidence. You generally must
have documentary evidence, such as receipts,
canceled checks, or bills, to support your ex-
penses.
Exception. Documentary evidence is not
needed if any of the following conditions apply.
You have meals or lodging expenses while
traveling away from home for which you
account to your employer under an ac-
countable plan and you use a per diem al-
lowance method that includes meals
and/or lodging. (Accountable plans and
per diem allowances are discussed later
under Reimbursements.)
Your expense, other than lodging, is less
than $75.
You have a transportation expense for
which a receipt is not readily available.
Adequate evidence. Documentary evi-
dence ordinarily will be considered adequate if
it shows the amount, date, place, and essential
character of the expense.
For example, a hotel receipt is enough to
support expenses for business travel if it has all
of the following information.
The name and location of the hotel.
The dates you stayed there.
Separate amounts for charges such as
lodging, meals, and telephone calls.
A restaurant receipt is enough to prove an
expense for a business meal if it has all of the
following information.
The name and location of the restaurant.
The number of people served.
The date and amount of the expense.
If a charge is made for items other than food
and beverages, the receipt must show that this
is the case.
Canceled check. A canceled check, to-
gether with a bill from the payee, ordinarily es-
tablishes the cost. However, a canceled check
by itself does not prove a business expense
without other evidence to show that it was for a
business purpose.
Duplicate information. You don’t have to re-
cord information in your account book or other
record that duplicates information shown on a
receipt as long as your records and receipts
complement each other in an orderly manner.
You don’t have to record amounts your em-
ployer pays directly for any ticket or other travel
item. However, if you charge these items to
your employer, through a credit card or other-
wise, you must keep a record of the amounts
you spend.
Timely kept records. You should record the
elements of an expense or of a business use at
or near the time of the expense or use and sup-
port it with sufficient documentary evidence. A
timely-kept record has more value than a state-
ment prepared later when generally there is a
lack of accurate recall.
You don’t need to write down the elements
of every expense on the day of the expense. If
you maintain a log on a weekly basis which ac-
counts for use during the week, the log is con-
sidered a timely-kept record.
If you give your employer, client, or cus-
tomer an expense account statement, it can
also be considered a timely-kept record. This is
true if you copy it from your account book, diary,
statement of expense, or similar record.
Proving business purpose. You must gener-
ally provide a written statement of the business
purpose of an expense. However, the degree of
proof varies according to the circumstances in
each case. If the business purpose of an ex-
pense is clear from the surrounding circumstan-
ces, then you don’t need to give a written ex-
planation.
Confidential information. You don’t need to
put confidential information relating to an ele-
ment of a deductible expense (such as the
place, business purpose, or business relation-
ship) in your account book, diary, or other re-
cord. However, you do have to record the infor-
mation elsewhere at or near the time of the
expense and have it available to fully prove that
element of the expense.
What if I Have Incomplete
Records?
If you don’t have complete records to prove an
element of an expense, then you must prove
the element with:
Your own written or oral statement, con-
taining specific information about the ele-
ment; and
Other supporting evidence that is sufficient
to establish the element.
Destroyed records. If you cannot produce a
receipt because of reasons beyond your con-
trol, you can prove a deduction by reconstruct-
ing your records or expenses. Reasons beyond
your control include fire, flood, and other casu-
alty.
Separating and Combining
Expenses
This section explains when expenses must be
kept separate and when expenses can be com-
bined.
Separating expenses. Each separate pay-
ment is generally considered a separate ex-
pense. For example, if you entertain a customer
or client at dinner and then go to the theater, the
dinner expense and the cost of the theater tick-
ets are two separate expenses. You must re-
cord them separately in your records.
Combining items. You can make one daily
entry in your record for reasonable categories of
expenses. Examples are taxi fares, telephone
calls, or other incidental travel costs. Meals
should be in a separate category. You can in-
clude tips for meal-related services with the
costs of the meals.
Expenses of a similar nature occurring dur-
ing the course of a single event are considered
a single expense. For example, if during enter-
tainment at a cocktail lounge, you pay sepa-
rately for each serving of refreshments, the total
expense for the refreshments is treated as a
single expense.
Page 188 Chapter 26 Car Expenses and Other Employee Business Expenses
Allocating total cost. If you can prove the to-
tal cost of travel or entertainment but you can-
not prove how much it cost for each person who
participated in the event, you may have to allo-
cate the total cost among you and your guests
on a pro rata basis. An allocation would be nee-
ded, for example, if you did not have a business
relationship with all of your guests.
If your return is examined. If your return is
examined, you may have to provide additional
information to the IRS. This information could
be needed to clarify or to establish the accuracy
or reliability of information contained in your re-
cords, statements, testimony, or documentary
evidence before a deduction is allowed.
How Long To Keep
Records and Receipts
You must keep records as long as they may be
needed for the administration of any provision
of the Internal Revenue Code. Generally, this
means you must keep your records that support
your deduction (or an item of income) for 3
years from the date you file the income tax re-
turn on which the deduction is claimed. A return
filed early is considered filed on the due date.
For a more complete explanation, see Pub.
583, Starting a Business and Keeping Records.
Reimbursed for expenses. Employees who
give their records and documentation to their
employers and are reimbursed for their expen-
ses generally don’t have to keep copies of this
information. However, you may have to prove
your expenses if any of the following conditions
apply.
You claim deductions for expenses that
are more than reimbursements.
Your expenses are reimbursed under a
nonaccountable plan.
Your employer does not use adequate ac-
counting procedures to verify expense ac-
counts.
You are related to your employer, as de-
fined later under Related to employer.
See the next section, How To Report, for a
discussion of reimbursements, adequate ac-
counting, and nonaccountable plans.
Additional information. Chapter 5 of Pub.
463 has more information on recordkeeping, in-
cluding examples.
How To Report
This section explains where and how to report
the expenses discussed in this chapter. It dis-
cusses reimbursements and how to treat them
under accountable and nonaccountable plans.
It also explains rules for independent contrac-
tors and clients, fee-basis officials, certain per-
forming artists, Armed Forces reservists, and
certain disabled employees. This section ends
with an illustration of how to report travel, enter-
tainment, gift, and car expenses on Form
2106-EZ.
Selfemployed. You must report your income
and expenses on Schedule C or C-EZ (Form
1040) if you are a sole proprietor, or on Sched-
ule F (Form 1040) if you are a farmer. You don’t
use Form 2106 or 2106-EZ. See your form in-
structions for information on how to complete
your tax return. You can also find information in
Pub. 535 if you are a sole proprietor, or in Pub.
225, Farmer's Tax Guide, if you are a farmer.
Both selfemployed and an employee. If you
are both self-employed and an employee, you
must keep separate records for each business
activity. Report your business expenses for
self-employment on Schedule C, C-EZ, or F
(Form 1040), as discussed earlier. Report your
business expenses for your work as an em-
ployee on Form 2106 or 2106-EZ, as discussed
next.
Employees. If you are an employee, you gen-
erally must complete Form 2106 to deduct your
travel, transportation, and entertainment expen-
ses. However, you can use the shorter Form
2106-EZ instead of Form 2106 if you meet all of
the following conditions.
You are an employee deducting expenses
attributable to your job.
You were not reimbursed by your employer
for your expenses (amounts included in
box 1 of your Form W-2 are not considered
reimbursements).
If you claim car expenses, you use the
standard mileage rate.
For more information on how to report your
expenses on Forms 2106 and 2106-EZ, see
Completing Forms 2106 and 2106-EZ, later.
Gifts. If you did not receive any reimburse-
ments (or the reimbursements were all included
in box 1 of your Form W-2), the only business
expense you are claiming is for gifts, and the
rules for certain individuals (such as performing
artists) discussed later under Special Rules
don’t apply to you, don’t complete Form 2106 or
2106-EZ. Instead, claim the amount of your de-
ductible gifts directly on line 21 of Schedule A
(Form 1040).
Statutory employees. If you received a
Form W-2 and the “Statutory employee” box in
box 13 was checked, report your income and
expenses related to that income on Schedule C
or C-EZ (Form 1040). Do not complete Form
2106 or 2106-EZ.
Statutory employees include full-time life in-
surance salespersons, certain agent or com-
mission drivers, traveling salespersons, and
certain homeworkers.
If you are entitled to a reimbursement
from your employer but you don’t claim
it, you cannot claim a deduction for the
expenses to which that unclaimed reimburse-
ment applies.
Reimbursement for personal expenses. If
your employer reimburses you for nondeducti-
ble personal expenses, such as for vacation
trips, your employer must report the reimburse-
ment as wage income in box 1 of your Form
W-2. You cannot deduct personal expenses.
Reimbursements
This section explains what to do when you re-
ceive an advance or are reimbursed for any ofCAUTION
!
the employee business expenses discussed in
this chapter.
If you received an advance, allowance, or
reimbursement for your expenses, how you re-
port this amount and your expenses depends
on whether your employer reimbursed you un-
der an accountable plan or a nonaccountable
plan.
This section explains the two types of plans,
how per diem and car allowances simplify prov-
ing the amount of your expenses, and the tax
treatment of your reimbursements and expen-
ses.
No reimbursement. You are not reimbursed
or given an allowance for your expenses if you
are paid a salary or commission with the under-
standing that you will pay your own expenses.
In this situation, you have no reimbursement or
allowance arrangement, and you do not have to
read this section on reimbursements. Instead,
see Completing Forms 2106 and 2106-EZ,
later, for information on completing your tax re-
turn.
Reimbursement, allowance, or advance. A
reimbursement or other expense allowance ar-
rangement is a system or plan that an employer
uses to pay, substantiate, and recover the ex-
penses, advances, reimbursements, and
amounts charged to the employer for employee
business expenses. Arrangements include per
diem and car allowances.
A per diem allowance is a fixed amount of
daily reimbursement your employer gives you
for your lodging, meal, and incidental expenses
when you are away from home on business.
(The term “incidental expenses” is defined ear-
lier under Meals and Incidental Expenses.) A
car allowance is an amount your employer
gives you for the business use of your car.
Your employer should tell you what method
of reimbursement is used and what records you
must provide.
Accountable Plans
To be an accountable plan, your employer's re-
imbursement or allowance arrangement must
include all of the following rules.
1. Your expenses must have a business con-
nection — that is, you must have paid or
incurred deductible expenses while per-
forming services as an employee of your
employer.
2. You must adequately account to your em-
ployer for these expenses within a reason-
able period of time.
3. You must return any excess reimburse-
ment or allowance within a reasonable pe-
riod of time.
See Adequate Accounting and Returning
Excess Reimbursements, later.
An excess reimbursement or allowance is
any amount you are paid that is more than the
business-related expenses that you adequately
accounted for to your employer.
The definition of a reasonable period of time
depends on the facts and circumstances of
your situation. However, regardless of the facts
and circumstances of your situation, actions
that take place within the times specified in the
Chapter 26 Car Expenses and Other Employee Business Expenses Page 189
following list will be treated as taking place
within a reasonable period of time.
You receive an advance within 30 days of
the time you have an expense.
You adequately account for your expenses
within 60 days after they were paid or in-
curred.
You return any excess reimbursement
within 120 days after the expense was paid
or incurred.
You are given a periodic statement (at
least quarterly) that asks you to either re-
turn or adequately account for outstanding
advances and you comply within 120 days
of the statement.
Employee meets accountable plan rules. If
you meet the three rules for accountable plans,
your employer shouldn’t include any reimburse-
ments in your income in box 1 of your Form
W-2. If your expenses equal your reimburse-
ment, you don’t complete Form 2106. You have
no deduction since your expenses and reim-
bursement are equal.
If your employer included reimburse-
ments in box 1 of your Form W-2 and
you meet all the rules for accountable
plans, ask your employer for a corrected Form
W-2.
Accountable plan rules not met. Even
though you are reimbursed under an accounta-
ble plan, some of your expenses may not meet
all the rules. Those expenses that fail to meet
all three rules for accountable plans are treated
as having been reimbursed under a nonac-
countable plan (discussed later).
Reimbursement of nondeductible expen-
ses. You may be reimbursed under your em-
ployer's accountable plan for expenses related
to that employer's business, some of which are
deductible as employee business expenses
and some of which are not deductible. The re-
imbursements you receive for the nondeducti-
ble expenses don’t meet rule (1) for accounta-
ble plans, and they are treated as paid under a
nonaccountable plan.TIP
Example. Your employer's plan reimburses
you for travel expenses while away from home
on business and also for meals when you work
late at the office, even though you are not away
from home. The part of the arrangement that re-
imburses you for the nondeductible meals when
you work late at the office is treated as paid un-
der a nonaccountable plan.
The employer makes the decision
whether to reimburse employees under
an accountable plan or a nonaccounta-
ble plan. If you are an employee who receives
payments under a nonaccountable plan, you
cannot convert these amounts to payments un-
der an accountable plan by voluntarily account-
ing to your employer for the expenses and vol-
untarily returning excess reimbursements to the
employer.
Adequate Accounting
One of the rules for an accountable plan is that
you must adequately account to your employer
for your expenses. You adequately account byTIP
Table 26-2. How To Prove Certain Business Expenses
IF you have
expenses for...
THEN you must keep records that show details of the following elements...
Amount Time
Place or
Description
Business Purpose and
Business Relationship
Travel Cost of each separate
expense for travel, lodging,
and meals. Incidental
expenses may be totaled in
reasonable categories such
as taxis, fees and tips, etc.
Dates you left
and returned
for each trip
and number of
days spent on
business.
Destination or area
of your travel
(name of city, town,
or other
designation).
Purpose: Business purpose for the
expense or the business benefit gained or
expected to be gained.
Relationship: N/A
Entertainment Cost of each separate
expense. Incidental
expenses such as taxis,
telephones, etc., may be
totaled on a daily basis.
Date of
entertainment.
(Also see
Business
Purpose.)
Name and address
or location of place
of entertainment.
Type of
entertainment if not
otherwise
apparent. (Also see
Business Purpose.)
Purpose: Business purpose for the
expense or the business benefit gained or
expected to be gained. For entertainment,
the nature of the business discussion or
activity. If the entertainment was directly
before or after a business discussion: the
date, place, nature, and duration of the
business discussion, and the identities of
the persons who took part in both the
business discussion and the
entertainment activity.
Relationship: Occupations or other
information (such as names, titles, or
other designations) about the recipients
that shows their business relationship to
you. For entertainment, you must also
prove that you or your employee was
present if the entertainment was a
business meal.
Gifts Cost of the gift. Date of the gift. Description of the
gift.
Transportation Cost of each separate
expense. For car expenses,
the cost of the car and any
improvements, the date you
started using it for business,
the mileage for each
business use, and the total
miles for the year.
Date of the
expense. For
car expenses,
the date of the
use of the car.
Your business
destination.
Purpose: Business purpose for the
expense.
Relationship: N/A
Page 190 Chapter 26 Car Expenses and Other Employee Business Expenses
giving your employer a statement of expense,
an account book, a diary, or a similar record in
which you entered each expense at or near the
time you had it, along with documentary evi-
dence (such as receipts) of your travel, mile-
age, and other employee business expenses.
(See Table 26-2 for details you need to enter in
your record and documents you need to prove
certain expenses.) A per diem or car allowance
satisfies the adequate accounting requirement
under certain conditions. See Per Diem and Car
Allowances, later.
You must account for all amounts you re-
ceived from your employer during the year as
advances, reimbursements, or allowances. This
includes amounts you charged to your em-
ployer by credit card or other method. You must
give your employer the same type of records
and supporting information that you would have
to give to the IRS if the IRS questioned a de-
duction on your return. You must pay back the
amount of any reimbursement or other expense
allowance for which you don’t adequately ac-
count or that is more than the amount for which
you accounted.
Per Diem and Car Allowances
If your employer reimburses you for your expen-
ses using a per diem or car allowance, you can
generally use the allowance as proof of the
amount of your expenses. A per diem or car al-
lowance satisfies the adequate accounting re-
quirements for the amount of your expenses
only if all the following conditions apply.
Your employer reasonably limits payments
of your expenses to those that are ordinary
and necessary in the conduct of the trade
or business.
The allowance is similar in form to and not
more than the federal rate (discussed
later).
You prove the time (dates), place, and
business purpose of your expenses to your
employer (as explained in Table 26-2)
within a reasonable period of time.
You are not related to your employer (as
defined next). If you are related to your em-
ployer, you must be able to prove your ex-
penses to the IRS even if you have already
adequately accounted to your employer
and returned any excess reimbursement.
If the IRS finds that an employer's travel allow-
ance practices are not based on reasonably ac-
curate estimates of travel costs (including rec-
ognition of cost differences in different areas for
per diem amounts), you won’t be considered to
have accounted to your employer. In this case,
you must be able to prove your expenses to the
IRS.
Related to employer. You are related to your
employer if:
1. Your employer is your brother or sister,
half brother or half sister, spouse, ances-
tor, or lineal descendant;
2. Your employer is a corporation in which
you own, directly or indirectly, more than
10% in value of the outstanding stock; or
3. Certain relationships (such as grantor, fi-
duciary, or beneficiary) exist between you,
a trust, and your employer.
You may be considered to indirectly own stock,
for purposes of (2), if you have an interest in a
corporation, partnership, estate, or trust that
owns the stock or if a member of your family or
your partner owns the stock.
The federal rate. The federal rate can be fig-
ured using any one of the following methods.
1. For per diem amounts:
a. The regular federal per diem rate.
b. The standard meal allowance.
c. The high-low rate.
2. For car expenses:
a. The standard mileage rate.
b. A fixed and variable rate (FAVR).
For per diem amounts, use the rate in
effect for the area where you stop for
sleep or rest.
Regular federal per diem rate. The regular
federal per diem rate is the highest amount that
the federal government will pay to its employ-
ees for lodging, meal, and incidental expenses
(or meal and incidental expenses only) while
they are traveling away from home in a particu-
lar area. The rates are different for different lo-
cations. Your employer should have these rates
available. (They are also available at
www.gsa.gov.)
The standard meal allowance. The stand-
ard meal allowance (discussed earlier) is the
federal rate for meals and incidental expenses
(M&IE). For travel in 2016, the rate for most
small localities in the United States is $51 a
day. Most major cities and many other localities
qualify for higher rates. You can find the rates or
all localities within the continental United States
on the Internet at www.gsa.gov.
You receive an allowance only for meals
and incidental expenses when your employer
does one of the following.
Provides you with lodging (furnishes it in
kind).
Reimburses you, based on your receipts,
for the actual cost of your lodging.
Pays the hotel, motel, etc., directly for your
lodging.
Does not have a reasonable belief that you
had (or will have) lodging expenses, such
as when you stay with friends or relatives
or sleep in the cab of your truck.
Figures the allowance on a basis similar to
that used in computing your compensa-
tion, such as number of hours worked or
miles traveled.
High-low rate. This is a simplified method
of computing the federal per diem rate for travel
within the continental United States. It elimi-
nates the need to keep a current list of the per
diem rate for each city.
Under the high-low method, the per diem
amount for travel during January through Sep-
tember 2016 is $275 (including $68 for M&IE)TIP
for certain high-cost locations. All other areas
have a per diem amount of $185 (including $57
for M&IE). (You can find the areas eligible for
the $275 per diem amount under the high-low
method for all or part of this period at
www.gsa.gov).
Effective October 1, 2016 (FY2017),
the per diem rate for certain high-cost
locations increased to $282 (including
$68 for M&IE). The rate for all other locations in-
creased to $189 (including $57 for M&IE). Em-
ployers who didn’t use the high-low method dur-
ing the first 9 months of 2016 cannot begin to
use it before 2017. For more information see
Notice 2016-58, which can be found at IRS.gov/
pub/irs-drop/n-16-58.pdf and Revenue Proce-
dure 2011-47 at IRS.gov/irb/2011-42_IRB/
ar12.html.
Prorating the standard meal allowance
on partial days of travel. The standard meal
allowance is for a full 24-hour day of travel. If
you travel for part of a day, such as on the days
you depart and return, you must prorate the
full-day M&IE rate. This rule also applies if your
employer uses the regular federal per diem rate
or the high-low rate.
You can use either of the following methods
to figure the federal M&IE for that day.
1. Method 1:
a. For the day you depart, add 3 4 of the
standard meal allowance amount for
that day.
b. For the day you return, add 3 4 of the
standard meal allowance amount for
the preceding day.
2. Method 2: Prorate the standard meal al-
lowance using any method you consis-
tently apply in accordance with reasonable
business practice.
The standard mileage rate. This is a set
rate per mile that you can use to compute your
deductible car expenses. For 2016, the stand-
ard mileage rate for the cost of operating your
car is 54 cents (0.54) per mile.
Fixed and variable rate (FAVR). This is an
allowance your employer may use to reimburse
your car expenses. Under this method, your
employer pays an allowance that includes a
combination of payments covering fixed and
variable costs, such as a cents-per-mile rate to
cover your variable operating costs (such as
gas, oil, etc.) plus a flat amount to cover your
fixed costs (such as depreciation (or lease pay-
ments), insurance, etc.). If your employer choo-
ses to use this method, your employer will re-
quest the necessary records from you.
Reporting your expenses with a per diem or
car allowance. If your reimbursement is in the
form of an allowance received under an ac-
countable plan, the following facts affect your
reporting.
The federal rate.
Whether the allowance or your actual ex-
penses were more than the federal rate.
The following discussions explain where to re-
port your expenses depending upon how theCAUTION
!
Chapter 26 Car Expenses and Other Employee Business Expenses Page 191
amount of your allowance compares to the
federal rate.
Allowance less than or equal to the fed-
eral rate. If your allowance is less than or
equal to the federal rate, the allowance won’t be
included in box 1 of your Form W-2. You don’t
need to report the related expenses or the al-
lowance on your return if your expenses are
equal to or less than the allowance.
However, if your actual expenses are more
than your allowance, you can complete Form
2106 and deduct the excess amount on Sched-
ule A (Form 1040). If you are using actual ex-
penses, you must be able to prove to the IRS
the total amount of your expenses and reim-
bursements for the entire year. If you are using
the standard meal allowance or the standard
mileage rate, you don’t have to prove that
amount.
Example. Nicole drives 10,000 miles in
2016 for business. Under her employer's ac-
countable plan, she accounts for the time
(dates), place, and business purpose of each
trip. Her employer pays her a mileage allow-
ance of 40 cents a mile.
Since Nicole's $5,400 expense computed
under the standard mileage rate (10,000 miles x
54 cents (0.54) is more than her $4,000 reim-
bursement (10,000 miles × 40 cents), she item-
izes her deductions to claim the excess ex-
pense. Nicole completes Form 2106 (showing
all her expenses and reimbursements) and en-
ters $1,400 ($5,400 − $4,000) as an itemized
deduction.
Allowance more than the federal rate. If
your allowance is more than the federal rate,
your employer must include the allowance
amount up to the federal rate under code L in
box 12 of your Form W-2. This amount isn’t tax-
able. However, the excess allowance will be in-
cluded in box 1 of your Form W-2. You must re-
port this part of your allowance as if it were
wage income.
If your actual expenses are less than or
equal to the federal rate, you don’t complete
Form 2106 or claim any of your expenses on
your return.
However, if your actual expenses are more
than the federal rate, you can complete Form
2106 and deduct those excess expenses. You
must report on Form 2106 your reimbursements
up to the federal rate (as shown under code L in
box 12 of your Form W-2) and all your expen-
ses. You should be able to prove these
amounts to the IRS.
Example. Joe lives and works in Austin. In
May, his employer sent him to San Diego for 4
days and paid the hotel directly for Joe's hotel
bill. The employer reimbursed Joe $75 a day for
his meals and incidental expenses. The federal
rate for San Diego is $71 a day.
Joe can prove that his actual meal expenses
totaled $380. His employer's accountable plan
won’t pay more than $75 a day for travel to San
Diego, so Joe does not give his employer the
records that prove that he actually spent $380.
However, he does account for the time, place,
and business purpose of the trip. This is Joe's
only business trip this year.
Joe was reimbursed $300 ($75 × 4 days),
which is $16 more than the federal rate of $284
($71 × 4 days). His employer includes the $16
as income on Joe's Form W-2 in box 1. His em-
ployer also enters $284 under code L in box 12
of Joe's Form W-2.
Joe completes Form 2106 to figure his de-
ductible expenses. He enters the total of his ac-
tual expenses for the year ($380) on Form
2106. He also enters the reimbursements that
were not included in his income ($284). His to-
tal deductible expense, before the 50% limit, is
$96. After he figures the 50% limit on his unre-
imbursed meals and entertainment, he will in-
clude the balance, $48, as an itemized deduc-
tion on Schedule A (Form 1040).
Returning Excess
Reimbursements
Under an accountable plan, you are required to
return any excess reimbursement or other ex-
pense allowances for your business expenses
to the person paying the reimbursement or al-
lowance. Excess reimbursement means any
amount for which you did not adequately ac-
count within a reasonable period of time. For
example, if you received a travel advance and
you did not spend all the money on busi-
ness-related expenses or you don’t have proof
of all your expenses, you have an excess reim-
bursement.
For more information, see Adequate Ac-
counting, earlier.
Travel advance. You receive a travel advance
if your employer provides you with an expense
allowance before you actually have the ex-
pense, and the allowance is reasonably expec-
ted to be no more than your expense. Under an
accountable plan, you are required to ade-
quately account to your employer for this ad-
vance and to return any excess within a reason-
able period of time.
If you don’t adequately account for or don’t
return any excess advance within a reasonable
period of time, the amount you don’t account for
or return will be treated as having been paid un-
der a nonaccountable plan (discussed later).
Unproven amounts. If you don’t prove that
you actually traveled on each day for which you
received a per diem or car allowance (proving
the elements described in Table 26-2), you
must return this unproven amount of the travel
advance within a reasonable period of time. If
you don’t do this, the unproven amount will be
considered paid under a nonaccountable plan
(discussed later).
Per diem allowance more than federal
rate. If your employer's accountable plan pays
you an allowance that is higher than the federal
rate, you don’t have to return the difference be-
tween the two rates for the period you can
prove business-related travel expenses. How-
ever, the difference will be reported as wages
on your Form W-2. This excess amount is con-
sidered paid under a nonaccountable plan (dis-
cussed later).
Example. Your employer sends you on a
5-day business trip to Phoenix in March 2016
and gives you a $400 ($80 × 5 days) advance
to cover your meals and incidental expenses.
The federal per diem for meals and incidental
expenses for Phoenix is $59. Your trip lasts only
3 days. Under your employer's accountable
plan, you must return the $160 ($80 × 2 days)
advance for the 2 days you didn’t travel. For the
3 days you did travel, you don’t have to return
the $63 difference between the allowance you
received and the federal rate for Phoenix (($80
− $59) × 3 days). However, the $63 will be re-
ported on your Form W-2 as wages.
Nonaccountable Plans
A nonaccountable plan is a reimbursement or
expense allowance arrangement that does not
meet one or more of the three rules listed earlier
under Accountable Plans.
In addition, even if your employer has an ac-
countable plan, the following payments will be
treated as being paid under a nonaccountable
plan.
Excess reimbursements you fail to return
to your employer.
Reimbursement of nondeductible expen-
ses related to your employer's business.
See Reimbursement of nondeductible ex-
penses under Accountable Plans, earlier.
If you are not sure if the reimbursement or
expense allowance arrangement is an account-
able or nonaccountable plan, ask your em-
ployer.
Reporting your expenses under a nonac
countable plan. Your employer will combine
the amount of any reimbursement or other ex-
pense allowance paid to you under a nonac-
countable plan with your wages, salary, or other
pay. Your employer will report the total in box 1
of your Form W-2.
You must complete Form 2106 or 2106-EZ
and itemize your deductions to deduct your ex-
penses for travel, transportation, meals, or en-
tertainment. Your meal and entertainment ex-
penses will be subject to the 50% limit
discussed earlier under Entertainment Expen-
ses. Also, your total expenses will be subject to
the 2%-of-adjusted-gross-income limit that ap-
plies to most miscellaneous itemized deduc-
tions on Schedule A (Form 1040).
Example. Kim's employer gives her $1,000
a month ($12,000 for the year) for her business
expenses. Kim does not have to provide any
proof of her expenses to her employer, and Kim
can keep any funds that she does not spend.
Kim is being reimbursed under a nonac-
countable plan. Her employer will include the
$12,000 on Kim's Form W-2 as if it were wages.
If Kim wants to deduct her business expenses,
she must complete Form 2106 or 2106-EZ and
itemize her deductions.
Completing Forms
2106 and 2106EZ
This section briefly describes how employees
complete Forms 2106 and 2106-EZ. Table 26-3
explains what the employer reports on Form
W-2 and what the employee reports on Form
2106. The instructions for the forms have more
information on completing them.
Page 192 Chapter 26 Car Expenses and Other Employee Business Expenses
If you are self-employed, don’t file
Form 2106 or 2106-EZ. Report your
expenses on Schedule C, C-EZ, or F
(Form 1040). See the instructions for the form
that you must file.
Form 2106EZ. You may be able to use the
shorter Form 2106-EZ to claim your employee
business expenses. You can use this form if
you meet all the following conditions.
You are an employee deducting expenses
attributable to your job.
You were not reimbursed by your employer
for your expenses (amounts included in
box 1 of your Form W-2 are not considered
reimbursements).
If you are claiming car expenses, you use
the standard mileage rate.CAUTION
!
Car expenses. If you used a car to perform
your job as an employee, you may be able to
deduct certain car expenses. These are gener-
ally figured on Form 2106, Part II, and then
claimed on Form 2106, Part I, line 1, column A.
Car expenses using the standard mileage rate
can also be figured on Form 2106-EZ by com-
pleting Part II and Part I, line 1.
Transportation expenses. Show your trans-
portation expenses that did not involve over-
night travel on Form 2106, line 2, column A, or
on Form 2106-EZ, Part I, line 2. Also include on
this line business expenses you have for park-
ing fees and tolls. Don’t include expenses of op-
erating your car or expenses of commuting be-
tween your home and work.
Employee business expenses other than
meals and entertainment. Show your other
employee business expenses on Form 2106,
lines 3 and 4, column A, or Form 2106-EZ, lines
3 and 4. Don’t include expenses for meals and
entertainment on those lines. Line 4 is for ex-
penses such as gifts, educational expenses
(tuition and books), office-in-the-home expen-
ses, and trade and professional publications.
If line 4 expenses are the only ones
you are claiming, you received no reim-
bursements (or the reimbursements
were all included in box 1 of your Form W-2),
and the Special Rules discussed later don’t ap-
ply to you, don’t complete Form 2106 or
2106-EZ. Claim these amounts directly on
Schedule A (Form 1040), line 21. List the type
and amount of each expense on the dotted
lines and include the total on line 21.
Meal and entertainment expenses. Show
the full amount of your expenses for busi-
ness-related meals and entertainment on Form
2106, line 5, column B. Include meals while
away from your tax home overnight and other
business meals and entertainment. Enter 50%
of the line 8, column B, meal and entertainment
expenses on line 9, column B.
If you file Form 2106-EZ, enter the full
amount of your meals and entertainment on the
line to the left of line 5 and multiply the total by
50% (0.50). Enter the result on line 5.
Hours of service limits. If you are subject
to the Department of Transportation's “hours of
service” limits, use 80% instead of 50% for
meals while away from your tax home.
Reimbursements. Enter on Form 2106, line 7,
the amounts your employer (or third party) reim-
bursed you that were not included in box 1 of
your Form W-2. (You cannot use Form
2106-EZ.) This includes any reimbursement re-
ported under code L in box 12 of Form W-2.
Allocating your reimbursement. If you
were reimbursed under an accountable plan
and want to deduct excess expenses that were
not reimbursed, you may have to allocate your
reimbursement. This is necessary if your em-
ployer pays your reimbursement in the following
manner.
Pays you a single amount that covers
meals and/or entertainment, as well as
other business expenses.
Does not clearly identify how much is for
deductible meals and/or entertainment.
You must allocate that single payment so that
you know how much to enter on Form 2106,
line 7, column A and column B.
Example. Rob's employer paid him an ex-
pense allowance of $12,000 this year under an
accountable plan. The $12,000 payment con-
sisted of $5,000 for airfare and $7,000 for enter-
tainment and car expenses. Rob's employer did
not clearly show how much of the $7,000 was
for the cost of deductible entertainment. Rob
actually spent $14,000 during the year ($5,500
for airfare, $4,500 for entertainment, and
$4,000 for car expenses).
Since the airfare allowance was clearly iden-
tified, Rob knows that $5,000 of the paymentTIP
Reporting Travel, Entertainment, Gift, and Car Expenses and
Reimbursements
IF the type of reimbursement (or
other expense allowance)
arrangement is under:
THEN the
employer reports
on Form W2:
AND the employee
reports on
Form 2106: *
An accountable plan with:
Actual expense reimbursement:
Adequate accounting made and excess
returned.
No amount. No amount.
Actual expense reimbursement:
Adequate accounting and return of
excess both required but excess not
returned.
The excess amount
as wages in box 1.
No amount.
Per diem or mileage allowance up to
the federal rate:
Adequate accounting made and excess
returned.
No amount. All expenses and
reimbursements only
if excess expenses
are claimed.
Otherwise, form is not
filed.
Per diem or mileage allowance up to
the federal rate:
Adequate accounting and return of
excess both required but excess not
returned.
The excess amount
as wages in box 1.
The amount up to
the federal rate is
reported only in
box 12—it is not
reported in box 1.
No amount.
Per diem or mileage allowance exceeds
the federal rate:
Adequate accounting up to the federal
rate only and excess not returned.
The excess amount
as wages in box 1.
The amount up to
the federal rate is
reported only in
box 12—it is not
reported in box 1.
All expenses (and
reimbursement
reported on Form
W-2, box 12) only if
expenses in excess
of the federal rate are
claimed. Otherwise,
form is not required.
A nonaccountable plan with:
Either adequate accounting or return of
excess, or both, not required by plan.
The entire amount
as wages in box 1.
All expenses.
No reimbursement plan: The entire amount
as wages in box 1.
All expenses.
* You may be able to use Form 2106-EZ. See Completing Forms 2106 and 2106-EZ, earlier.
Table 26-3.
Chapter 26 Car Expenses and Other Employee Business Expenses Page 193
goes in column A, line 7 of Form 2106. To allo-
cate the remaining $7,000, Rob uses the work-
sheet from the instructions for Form 2106. His
completed worksheet follows.
Reimbursement Allocation
Worksheet
(keep for your records)
1. Enter the total amount of
reimbursements your employer gave
you that were not reported to you in
box 1 of Form W-2 . . . . . . . . . . . $7,000
2. Enter the total amount of your expenses
for the periods covered by this
reimbursement . . . . . . . . . . . . . 8,500
3. Of the amount on line 2, enter your total
expense for meals and
entertainment . . . . . . . . . . . . . 4,500
4. Divide line 3 by line 2. Enter the result as
a decimal (rounded to at least three
places) . . . . . . . . . . . . . . . . . .529
5. Multiply line 1 by line 4. Enter the result
here and in column B, line 7 . . . . . . 3,703
6. Subtract line 5 from line 1. Enter the
result here and in column A, line 7 . . . $3,297
On line 7 of Form 2106, Rob enters $8,297
($5,000 airfare and $3,297 of the $7,000) in col-
umn A and $3,703 (of the $7,000) in column B.
After you complete the form. After you have
completed your Form 2106 or 2106-EZ, follow
the directions on that form to deduct your ex-
penses on the appropriate line of your tax re-
turn. For most taxpayers, this is line 21 of
Schedule A (Form 1040). However, if you are a
government official paid on a fee basis, a per-
forming artist, an Armed Forces reservist, or a
disabled employee with impairment-related
work expenses, see Special Rules, later.
Limits on employee business expenses.
Your employee business expenses may be
subject to either of the limits described next.
These limits are figured in the following order on
the specified form.
1. Limit on meals and entertainment.
Certain meal and entertainment expenses are
subject to a 50% limit. If you are an employee,
you figure this limit on line 9 of Form 2106 or
line 5 of Form 2106-EZ. See 50% Limit under
Entertainment Expenses, earlier.
2. Limit on miscellaneous itemized de-
ductions. If you are an employee, deduct em-
ployee business expenses (as figured on Form
2106 or 2106-EZ) on line 21 of Schedule A
(Form 1040). Most miscellaneous itemized de-
ductions, including employee business expen-
ses, are subject to a 2% limit. This limit is fig-
ured on line 26 of Schedule A (Form 1040).
3. Limit on total itemized deductions. To-
tal itemized deductions may be limited if your
adjusted gross income is over $311,300 if filing
as married filing jointly or qualifying widow(er);
$285,350 if head of household; $259,400 if sin-
gle; or $155,650 if married filing separately.
This limit is figured on the Itemized Deductions
Worksheet found in Instructions for Schedule A
(Form 1040).
Special Rules
This section discusses special rules that apply
to Armed Forces reservists, government offi-
cials who are paid on a fee basis, performing
artists, and disabled employees with impair-
ment-related work expenses.
Armed Forces reservists traveling more
than 100 miles from home. If you are a mem-
ber of a reserve component of the Armed
Forces of the United States and you travel more
than 100 miles away from home in connection
with your performance of services as a member
of the reserves, you can deduct your travel ex-
penses as an adjustment to gross income
rather than as a miscellaneous itemized deduc-
tion. The amount of expenses you can deduct
as an adjustment to gross income is limited to
the regular federal per diem rate (for lodging,
meals, and incidental expenses) and the stand-
ard mileage rate (for car expenses) plus any
parking fees, ferry fees, and tolls. The federal
rate is explained earlier under Per Diem and
Car Allowances. Any expenses in excess of
these amounts can be claimed only as a miscel-
laneous itemized deduction subject to the 2%
limit.
Member of a reserve component. You are
a member of a reserve component of the Armed
Forces of the United States if you are in the
Army, Navy, Marine Corps, Air Force, or Coast
Guard Reserve, the Army National Guard of the
United States, the Air National Guard of the Uni-
ted States, or the Reserve Corps of the Public
Health Service.
How to report. If you have reserve-related
travel that takes you more than 100 miles from
home, you should first complete Form 2106 or
Form 2106-EZ. Then include your expenses for
reserve travel over 100 miles from home, up to
the federal rate, from Form 2106, line 10, or
Form 2106-EZ, line 6, in the total on Form 1040,
line 24. Subtract this amount from the total on
Form 2106, line 10, or Form 2106-EZ, line 6,
and deduct the balance as an itemized deduc-
tion on Schedule A (Form 1040), line 21.
You cannot deduct expenses of travel that
does not take you more than 100 miles from
home as an adjustment to gross income. In-
stead, you must complete Form 2106 or
2106-EZ and deduct those expenses as an
itemized deduction on Schedule A (Form 1040),
line 21.
Officials paid on a fee basis. Certain fee-ba-
sis officials can claim their employee business
expenses whether or not they itemize their
other deductions on Schedule A (Form 1040).
Fee-basis officials are persons who are em-
ployed by a state or local government and who
are paid in whole or in part on a fee basis. They
can deduct their business expenses in perform-
ing services in that job as an adjustment to
gross income rather than as a miscellaneous
itemized deduction.
If you are a fee-basis official, include your
employee business expenses from Form 2106,
line 10, or Form 2106-EZ, line 6, on Form 1040,
line 24.
Expenses of certain performing artists. If
you are a performing artist, you may qualify to
deduct your employee business expenses as
an adjustment to gross income rather than as a
miscellaneous itemized deduction. To qualify,
you must meet all of the following requirements.
1. During the tax year, you perform services
in the performing arts as an employee for
at least two employers.
2. You receive at least $200 each from any
two of these employers.
3. Your related performing-arts business ex-
penses are more than 10% of your gross
income from the performance of those
services.
4. Your adjusted gross income isn’t more
than $16,000 before deducting these busi-
ness expenses.
Special rules for married persons. If you
are married, you must file a joint return unless
you lived apart from your spouse at all times
during the tax year.
If you file a joint return, you must figure re-
quirements (1), (2), and (3) separately for both
you and your spouse. However, requirement (4)
applies to your and your spouse's combined ad-
justed gross income.
Where to report. If you meet all of the
above requirements, you should first complete
Form 2106 or 2106-EZ. Then you include your
performing-arts-related expenses from line 10
of Form 2106 or line 6 of Form 2106-EZ in the
total on line 24 of Form 1040.
If you don’t meet all of the above require-
ments, you don’t qualify to deduct your expen-
ses as an adjustment to gross income. Instead,
you must complete Form 2106 or 2106-EZ and
deduct your employee business expenses as
an itemized deduction on Schedule A (Form
1040), line 21.
Impairmentrelated work expenses of disa
bled employees. If you are an employee with
a physical or mental disability, your impair-
ment-related work expenses are not subject to
the 2%-of-adjusted-gross-income limit that ap-
plies to most other employee business expen-
ses. After you complete Form 2106 or 2106-EZ,
enter your impairment-related work expenses
from Form 2106, line 10, or Form 2106-EZ,
line 6, on Schedule A (Form 1040), line 28, and
identify the type and amount of this expense on
the line next to line 28. Enter your employee
business expenses that are unrelated to your
disability from Form 2106, line 10, or Form
2106-EZ, line 6, on Schedule A, line 21.
Impairment-related work expenses are your
allowable expenses for attendant care at your
workplace and other expenses you have in con-
nection with your workplace that are necessary
for you to be able to work. For more information,
see chapter 21.
Page 194 Chapter 26 Car Expenses and Other Employee Business Expenses
27.
Tax Benefits for
Work-Related
Education
What's New
Standard mileage rate. Generally, if you
claim a business deduction for work-related ed-
ucation and you drive your car to and from
school, the amount you can deduct for miles
driven from January 1, 2016, through Decem-
ber 31, 2016, is 54 cents a mile. For more infor-
mation, see Transportation Expenses under
What Expenses Can Be Deducted.
Introduction
This chapter discusses work-related education
expenses you may be able to deduct as busi-
ness expenses.
To claim such a deduction, you must:
Itemize your deductions on Schedule A
(Form 1040) if you are an employee;
File Schedule C (Form 1040), Sched-
ule C-EZ (Form 1040), or Schedule F
(Form 1040) if you are self-employed; and
Have expenses for education that meet the
requirements discussed under Qualifying
Work-Related Education, later.
If you are an employee and can itemize your
deductions, you may be able to claim a deduc-
tion for the expenses you pay for your work-re-
lated education. Your deduction will be the
amount by which your qualifying work-related
education expenses plus other job and certain
miscellaneous expenses (except for impair-
ment-related work expenses of disabled individ-
uals) is greater than 2% of your adjusted gross
income. See chapter 28.
If you are self-employed, you deduct your
expenses for qualifying work-related education
directly from your self-employment income.
Your work-related education expenses may
also qualify you for other tax benefits, such as
the American opportunity and lifetime learning
credits (see chapter 35). You may qualify for
these other benefits even if you do not meet the
requirements listed earlier.
Also, your work-related education expenses
may qualify you to claim more than one tax ben-
efit. Generally, you may claim any number of
benefits as long as you use different expenses
to figure each one.
When you figure your taxes, you may
want to compare these tax benefits so
you can choose the method(s) that
give you the lowest tax liability.TIP
Useful Items
You may want to see:
Publication
Travel, Entertainment, Gift, and Car
Expenses
Tax Benefits for Education
Form (and Instructions)
Employee Business Expenses
Unreimbursed Employee
Business Expenses
Itemized
Deductions
Qualifying
WorkRelated
Education
You can deduct the costs of qualifying work-re-
lated education as business expenses. This is
education that meets at least one of the follow-
ing two tests.
The education is required by your em-
ployer or the law to keep your present sal-
ary, status, or job. The required education
must serve a bona fide business purpose
of your employer.
The education maintains or improves skills
needed in your present work.
However, even if the education meets one
or both of the above tests, it is not qualifying
work-related education if it:
Is needed to meet the minimum educa-
tional requirements of your present trade
or business, or
Is part of a program of study that will qual-
ify you for a new trade or business.
You can deduct the costs of qualifying
work-related education as a business expense
even if the education could lead to a degree.
Use Figure 27-A as a quick check to see if
your education qualifies.
Education Required by
Employer or by Law
Once you have met the minimum educational
requirements for your job, your employer or the
law may require you to get more education.
This additional education is qualifying work-re-
lated education if all three of the following re-
quirements are met.
It is required for you to keep your present
salary, status, or job.
The requirement serves a bona fide busi-
ness purpose of your employer.
The education is not part of a program that
will qualify you for a new trade or business.
When you get more education than your em-
ployer or the law requires, the additional educa-
tion can be qualifying work-related education
only if it maintains or improves skills required in
2106
2106EZ
Schedule A (Form 1040)
your present work. See Education To Maintain
or Improve Skills, later.
Example. You are a teacher who has satis-
fied the minimum requirements for teaching.
Your employer requires you to take an addi-
tional college course each year to keep your
teaching job. If the courses will not qualify you
for a new trade or business, they are qualifying
work-related education even if you eventually
receive a master's degree and an increase in
salary because of this extra education.
Education To Maintain
or Improve Skills
If your education is not required by your em-
ployer or the law, it can be qualifying work-rela-
ted education only if it maintains or improves
skills needed in your present work. This could
include refresher courses, courses on current
developments, and academic or vocational
courses.
Example. You repair televisions, radios,
and stereo systems for XYZ Store. To keep up
with the latest changes, you take special cour-
ses in radio and stereo service. These courses
maintain and improve skills required in your
work.
Maintaining skills vs. qualifying for new job.
Education to maintain or improve skills needed
in your present work is not qualifying education
if it will also qualify you for a new trade or busi-
ness.
Education during temporary absence. If
you stop working for a year or less in order to
get education to maintain or improve skills nee-
ded in your present work and then return to the
same general type of work, your absence is
considered temporary. Education that you get
during a temporary absence is qualifying
work-related education if it maintains or im-
proves skills needed in your present work.
Example. You quit your biology research
job to become a full-time biology graduate stu-
dent for 1 year. If you return to work in biology
research after completing the courses, the edu-
cation is related to your present work even if
you do not go back to work with the same em-
ployer.
Education during indefinite absence. If
you stop work for more than a year, your ab-
sence from your job is considered indefinite.
Education during an indefinite absence, even if
it maintains or improves skills needed in the
work from which you are absent, is considered
to qualify you for a new trade or business.
Therefore, it is not qualifying work-related edu-
cation.
Education To Meet
Minimum Requirements
Education you need to meet the minimum edu-
cational requirements for your present trade or
Chapter 27 Tax Benefits for WorkRelated Education Page 195
business is not qualifying work-related educa-
tion. The minimum educational requirements
are determined by:
Laws and regulations;
Standards of your profession, trade, or
business; and
Your employer.
Once you have met the minimum educa-
tional requirements that were in effect when you
were hired, you do not have to meet any new
minimum educational requirements. This
means that if the minimum requirements
change after you were hired, any education you
need to meet the new requirements can be
qualifying education.
You have not necessarily met the mini-
mum educational requirements of your
trade or business simply because you
are already doing the work.
Example 1. You are a full-time engineering
student. Although you have not received your
degree or certification, you work part-time as an
engineer for a firm that will employ you as a
full-time engineer after you finish college. Al-
though your college engineering courses im-
prove your skills in your present job, they are
also needed to meet the minimum job require-
ments for a full-time engineer. The education is
not qualifying work-related education.
Example 2. You are an accountant and you
have met the minimum educational require-
ments of your employer. Your employer later
changes the minimum educational require-
ments and requires you to take college courses
to keep your job. These additional courses can
be qualifying work-related education because
you have already satisfied the minimum require-
ments that were in effect when you were hired.
Requirements for Teachers
States or school districts usually set the mini-
mum educational requirements for teachers.
The requirement is the college degree or the
minimum number of college hours usually re-
quired of a person hired for that position.
If there are no requirements, you will have
met the minimum educational requirements
when you become a faculty member. The deter-
mination of whether you are a faculty member
of an educational institution must be made on
the basis of the particular practices of the insti-
tution. You generally will be considered a fac-
ulty member when one or more of the following
occurs.
You have tenure.
Your years of service count toward obtain-
ing tenure.
You have a vote in faculty decisions.
Your school makes contributions for you to
a retirement plan other than social security
or a similar program.
Example 1. The law in your state requires
beginning secondary school teachers to have a
bachelor's degree, including 10 professional
education courses. In addition, to keep the job a
teacher must complete a fifth year of trainingCAUTION
!
within 10 years from the date of hire. If the em-
ploying school certifies to the state Department
of Education that qualified teachers cannot be
found, the school can hire persons with only 3
years of college. However, to keep their jobs,
these teachers must get a bachelor's degree
and the required professional education cour-
ses within 3 years.
Under these facts, the bachelor's degree,
whether or not it includes the 10 professional
education courses, is considered the minimum
educational requirement for qualification as a
teacher in your state.
If you have all the required education except
the fifth year, you have met the minimum edu-
cational requirements. The fifth year of training
is qualifying work-related education unless it is
part of a program of study that will qualify you
for a new trade or business.
Example 2. Assume the same facts as in
Example 1 except that you have a bachelor's
degree and only six professional education
courses. The additional four education courses
can be qualifying work-related education. Al-
though you do not have all the required cour-
ses, you have already met the minimum educa-
tional requirements.
Example 3. Assume the same facts as in
Example 1 except that you are hired with only 3
years of college. The courses you take that lead
to a bachelor's degree (including those in edu-
cation) are not qualifying work-related educa-
tion. They are needed to meet the minimum
educational requirements for employment as a
teacher.
Example 4. You have a bachelor's degree
and you work as a temporary instructor at a uni-
versity. At the same time, you take graduate
courses toward an advanced degree. The rules
of the university state that you can become a
faculty member only if you get a graduate de-
gree. Also, you can keep your job as an instruc-
tor only as long as you show satisfactory pro-
gress toward getting this degree. You have not
met the minimum educational requirements to
qualify you as a faculty member. The graduate
courses are not qualifying work-related educa-
tion.
Certification in a new state. Once you have
met the minimum educational requirements for
teachers for your state, you are considered to
have met the minimum educational require-
ments in all states. This is true even if you must
get additional education to be certified in an-
other state. Any additional education you need
is qualifying work-related education. You have
already met the minimum requirements for
teaching. Teaching in another state is not a new
trade or business.
Example. You hold a permanent teaching
certificate in State A and are employed as a
teacher in that state for several years. You
move to State B and are promptly hired as a
teacher. You are required, however, to com-
plete certain prescribed courses to get a
Figure 27-A. Does Your WorkRelated Education Qualify?Start Here
Yes
Is the education required
by your employer or the
law to keep your present
salary, status, or job?
Does the requirement
serve a bona fide
business requirement of
your employer?
Is the education needed to meet
the minimum educational
requirements of your present
trade or business?
Is the education part of a
program of study that will
qualify you for a new
trade or business?
Does the education
maintain or improve skills
needed in your present
work?
Your education is not
qualifying work-related
education.

No

No


No
Yes
Yes
No

Yes

Yes

Your education is
qualifying work-related
education.


No

Page 196 Chapter 27 Tax Benefits for WorkRelated Education
permanent teaching certificate in State B.
These additional courses are qualifying
work-related education because the teaching
position in State B involves the same general
kind of work for which you were qualified in
State A.
Education That
Qualifies You for a
New Trade or Business
Education that is part of a program of study that
will qualify you for a new trade or business is
not qualifying work-related education. This is
true even if you do not plan to enter that trade or
business.
If you are an employee, a change of duties
that involves the same general kind of work is
not a new trade or business.
Example 1. You are an accountant. Your
employer requires you to get a law degree at
your own expense. You register at a law school
for the regular curriculum that leads to a law de-
gree. Even if you do not intend to become a
lawyer, the education is not qualifying because
the law degree will qualify you for a new trade or
business.
Example 2. You are a general practitioner
of medicine. You take a 2-week course to re-
view developments in several specialized fields
of medicine. The course does not qualify you
for a new profession. It is qualifying work-rela-
ted education because it maintains or improves
skills required in your present profession.
Example 3. While working in the private
practice of psychiatry, you enter a program to
study and train at an accredited psychoanalytic
institute. The program will lead to qualifying you
to practice psychoanalysis. The psychoanalytic
training does not qualify you for a new profes-
sion. It is qualifying work-related education be-
cause it maintains or improves skills required in
your present profession.
Bar or CPA Review Course
Review courses to prepare for the bar examina-
tion or the certified public accountant (CPA) ex-
amination are not qualifying work-related edu-
cation. They are part of a program of study that
can qualify you for a new profession.
Teaching and Related Duties
All teaching and related duties are considered
the same general kind of work. A change in du-
ties in any of the following ways is not consid-
ered a change to a new business.
Elementary school teacher to secondary
school teacher.
Teacher of one subject, such as biology, to
teacher of another subject, such as art.
Classroom teacher to guidance counselor.
Classroom teacher to school administrator.
What Expenses Can Be
Deducted?
If your education meets the requirements de-
scribed earlier under Qualifying Work-Related
Education, you can generally deduct your edu-
cation expenses as business expenses. If you
are not self-employed, you can deduct business
expenses only if you itemize your deductions.
You cannot deduct expenses related to
tax-exempt and excluded income.
Deductible expenses. The following educa-
tion expenses can be deducted.
Tuition, books, supplies, lab fees, and sim-
ilar items.
Certain transportation and travel costs.
Other education expenses, such as costs
of research and typing when writing a pa-
per as part of an educational program.
Nondeductible expenses. You cannot deduct
personal or capital expenses. For example, you
cannot deduct the dollar value of vacation time
or annual leave you take to attend classes. This
amount is a personal expense.
Unclaimed reimbursement. If you do not
claim reimbursement that you are entitled to re-
ceive from your employer, you cannot deduct
the expenses that apply to that unclaimed reim-
bursement.
Example. Your employer agrees to pay
your education expenses if you file a voucher
showing your expenses. You do not file a
voucher, and you do not get reimbursed. Be-
cause you did not file a voucher, you cannot de-
duct the expenses on your tax return.
Transportation Expenses
If your education qualifies, you can deduct local
transportation costs of going directly from work
to school. If you are regularly employed and go
to school on a temporary basis, you can also
deduct the costs of returning from school to
home.
Temporary basis. You go to school on a
temporary basis if either of the following situa-
tions applies to you.
1. Your attendance at school is realistically
expected to last 1 year or less and does
indeed last for 1 year or less.
2. Initially, your attendance at school is real-
istically expected to last 1 year or less, but
at a later date your attendance is reasona-
bly expected to last more than 1 year.
Your attendance is temporary up to the
date you determine it will last more than 1
year.
Note. If you are in either situation (1) or (2),
your attendance is not temporary if facts and
circumstances indicate otherwise.
Attendance not on a temporary basis.
You do not go to school on a temporary basis if
either of the following situations applies to you.
1. Your attendance at school is realistically
expected to last more than 1 year. It does
not matter how long you actually attend.
2. Initially, your attendance at school is real-
istically expected to last 1 year or less, but
at a later date your attendance is reasona-
bly expected to last more than 1 year.
Your attendance is not temporary after the
date you determine it will last more than 1
year.
Deductible Transportation
Expenses
If you are regularly employed and go directly
from home to school on a temporary basis, you
can deduct the round-trip costs of transporta-
tion between your home and school. This is true
regardless of the location of the school, the dis-
tance traveled, or whether you attend school on
nonwork days.
Transportation expenses include the actual
costs of bus, subway, cab, or other fares, as
well as the costs of using your car. Transporta-
tion expenses do not include amounts spent for
travel, meals, or lodging while you are away
from home overnight.
Example 1. You regularly work in a nearby
town, and go directly from work to home. You
also attend school every work night for 3
months to take a course that improves your job
skills. Since you are attending school on a tem-
porary basis, you can deduct your daily
round-trip transportation expenses in going be-
tween home and school. This is true regardless
of the distance traveled.
Example 2. Assume the same facts as in
Example 1 except that on certain nights you go
directly from work to school and then home.
You can deduct your transportation expenses
from your regular work site to school and then
home.
Example 3. Assume the same facts as in
Example 1 except that you attend the school for
9 months on Saturdays, nonwork days. Since
you are attending school on a temporary basis,
you can deduct your round-trip transportation
expenses in going between home and school.
Example 4. Assume the same facts as in
Example 1 except that you attend classes twice
a week for 15 months. Since your attendance in
school is not considered temporary, you cannot
deduct your transportation expenses in going
between home and school. If you go directly
from work to school, you can deduct the
one-way transportation expenses of going from
work to school. If you go from work to home to
school and return home, your transportation ex-
penses cannot be more than if you had gone di-
rectly from work to school.
Using your car. If you use your car (whether
you own or lease it) for transportation to school,
you can deduct your actual expenses or use the
standard mileage rate to figure the amount you
can deduct. The standard mileage rate for miles
driven from January 1, 2016, through Decem-
ber 31, 2016, is 54 cents a mile. Whichever
method you use, you can also deduct parking
Chapter 27 Tax Benefits for WorkRelated Education Page 197
fees and tolls. See chapter 26 for information on
deducting your actual expenses of using a car.
Travel Expenses
You can deduct expenses for travel, meals (see
50% limit on meals, later), and lodging if you
travel overnight mainly to obtain qualifying
work-related education.
Travel expenses for qualifying work-related
education are treated the same as travel expen-
ses for other employee business purposes. For
more information, see chapter 26.
You cannot deduct expenses for per-
sonal activities, such as sightseeing,
visiting, or entertaining.
Mainly personal travel. If your travel away
from home is mainly personal, you cannot de-
duct all of your expenses for travel, meals, and
lodging. You can deduct only your expenses for
lodging and 50% of your expenses for meals
during the time you attend the qualified educa-
tional activities.
Whether a trip's purpose is mainly personal
or educational depends upon the facts and cir-
cumstances. An important factor is the compari-
son of time spent on personal activities with
time spent on educational activities. If you
spend more time on personal activities, the trip
is considered mainly educational only if you can
show a substantial nonpersonal reason for trav-
eling to a particular location.
Example 1. John works in Newark, New
Jersey. He traveled to Chicago to take a deduc-
tible 1-week course at the request of his em-
ployer. His main reason for going to Chicago
was to take the course.
While there, he took a sightseeing trip, en-
tertained some friends, and took a side trip to
Pleasantville for a day.
Since the trip was mainly for business, John
can deduct his round-trip airfare to Chicago. He
cannot deduct his transportation expenses of
going to Pleasantville. He can deduct only the
meals (subject to the 50% limit) and lodging
connected with his educational activities.
Example 2. Sue works in Boston. She went
to a university in Michigan to take a course for
work. The course is qualifying work-related edu-
cation.
She took one course, which is one-fourth of
a full course load of study. She spent the rest of
the time on personal activities. Her reasons for
taking the course in Michigan were all personal.
Sue's trip is mainly personal because
three-fourths of her time is considered personal
time. She cannot deduct the cost of her
round-trip train ticket to Michigan. She can de-
duct one-fourth of the meals (subject to the 50%
limit) and lodging costs for the time she atten-
ded the university.
Example 3. Dave works in Nashville and
recently traveled to California to take a 2-week
seminar. The seminar is qualifying work-related
education.
While there, he spent an extra 8 weeks on
personal activities. The facts, including the ex-
tra 8-week stay, show that his main purpose
was to take a vacation.CAUTION
!
Dave cannot deduct his round-trip airfare or
his meals and lodging for the 8 weeks. He can
deduct only his expenses for meals (subject to
the 50% limit) and lodging for the 2 weeks he
attended the seminar.
Cruises and conventions. Certain cruises
and conventions offer seminars or courses as
part of their itinerary. Even if the seminars or
courses are work related, your deduction for
travel may be limited. This applies to:
Travel by ocean liner, cruise ship, or other
form of luxury water transportation; and
Conventions outside the North American
area.
For a discussion of the limits on travel ex-
pense deductions that apply to cruises and con-
ventions, see Luxury Water Travel and Conven-
tions in chapter 1 of Pub. 463.
50% limit on meals. You can deduct only
50% of the cost of your meals while traveling
away from home to obtain qualifying work-rela-
ted education. You cannot have been reim-
bursed for the meals.
Employees must use Form 2106 or Form
2106-EZ to apply the 50% limit.
Travel as Education
You cannot deduct the cost of travel as a form
of education even if it is directly related to your
duties in your work or business.
Example. You are a French language
teacher. While on sabbatical leave granted for
travel, you traveled through France to improve
your knowledge of the French language. You
chose your itinerary and most of your activities
to improve your French language skills. You
cannot deduct your travel expenses as educa-
tion expenses. This is true even if you spent
most of your time learning French by visiting
French schools and families, attending movies
or plays, and engaging in similar activities.
No Double Benefit Allowed
You cannot do either of the following.
Deduct work-related education expenses
as business expenses if you benefit from
these expenses under any other provision
of the law (see chapter 35).
Deduct work-related education expenses
paid with tax-free scholarship, grant, or
employer-provided educational assis-
tance.
Adjustments to Qualifying
WorkRelated Education Expenses
If you pay qualifying work-related education ex-
penses with certain tax-free funds, you cannot
claim a deduction for those amounts. You must
reduce the qualifying expenses by the amount
of such expenses allocable to the tax-free edu-
cational assistance.
Taxfree educational assistance in
cludes:
The tax-free part of scholarships and fel-
lowship grants (see chapter 1 of Pub. 970),
The tax-free part of Pell grants (see chap-
ter 1 of Pub. 970),
The tax-free part of employer-provided ed-
ucational assistance (see chapter 11 of
Pub. 970),
Veterans' educational assistance (see
chapter 1 of Pub. 970), and
Any other nontaxable (tax-free) payments
(other than gifts or inheritances) received
for education assistance.
Amounts that do not reduce qualifying
workrelated education expenses. Do not
reduce the qualifying work-related education
expenses by amounts paid with funds the stu-
dent receives as:
Payment for services, such as wages;
A loan;
A gift;
An inheritance; or
A withdrawal from the student's personal
savings.
Also, do not reduce the qualifying work-rela-
ted education expenses by any scholarship or
fellowship grant reported as income on the stu-
dent's return or any scholarship which, by its
terms, cannot be applied to qualifying work-re-
lated education expenses.
Reimbursements
How you treat reimbursements depends on the
arrangement you have with your employer.
There are two basic types of reimbursement
arrangements—accountable plans and nonac-
countable plans. You can tell the type of plan
you are reimbursed under by the way the reim-
bursement is reported on your Form W-2.
For information on how to treat reimburse-
ments under both accountable and nonac-
countable plans, see Reimbursements in chap-
ter 26.
Deducting Business
Expenses
Self-employed persons and employees report
business expenses differently.
The following information explains what
forms you must use to deduct the cost of your
qualifying work-related education as a business
expense.
SelfEmployed Persons
If you are self-employed, report the cost of your
qualifying work-related education on the appro-
priate form used to report your business income
and expenses (generally, Schedule C, C-EZ, or
F). If your educational expenses include expen-
ses for a car or truck, travel, or meals, report
those expenses the same way you report other
business expenses for those items. See the in-
structions for the form you file for information on
how to complete it.
Page 198 Chapter 27 Tax Benefits for WorkRelated Education
Employees
If you are an employee, you can deduct the cost
of qualifying work-related education only if you:
1. Did not receive (and were not entitled to
receive) any reimbursement from your em-
ployer;
2. Were reimbursed under a nonaccountable
plan (amount is included in box 1 of Form
W-2); or
3. Received reimbursement under an ac-
countable plan, but the amount received
was less than your expenses for which
you claimed reimbursement.
If either (1) or (2) applies, you can deduct the
total qualifying cost. If (3) applies, you can de-
duct only the qualifying costs that were more
than your reimbursement.
In order to deduct the cost of your qualifying
work-related education as a business expense,
include the amount with your deduction for any
other employee business expenses on Sched-
ule A (Form 1040), line 21. (Special rules for ex-
penses of certain performing artists and fee-ba-
sis officials and for impairment-related work
expenses are explained later.)
This deduction (except for impairment-rela-
ted work expenses of disabled individuals) is
subject to the 2%-of-adjusted-gross-income
limit that applies to most miscellaneous item-
ized deductions. See chapter 28 for more infor-
mation.
Form 2106 or 2106EZ. To figure your deduc-
tion for employee business expenses, including
qualifying work-related education, you generally
must complete Form 2106 or Form 2106-EZ.
Form not required. Do not complete either
Form 2106 or Form 2106-EZ if:
Amounts included in box 1 of your Form
W-2 are not considered reimbursements;
and
You are not claiming travel, transportation,
meal, or entertainment expenses.
If you meet both of these requirements, en-
ter the expenses directly on Schedule A (Form
1040), line 21. (Special rules for expenses of
certain performing artists and fee-basis officials
and for impairment-related work expenses are
explained later.)
Using Form 2106-EZ. This form is shorter
and easier to use than Form 2106. Generally,
you can use this form if:
All reimbursements, if any, are included in
box 1 of your Form W-2; and
You are using the standard mileage rate if
you are claiming vehicle expenses.
If you do not meet both of these require-
ments, use Form 2106.
Performing Artists and
FeeBasis Officials
If you are a qualified performing artist, or a state
(or local) government official who is paid in
whole or in part on a fee basis, you can deduct
the cost of your qualifying work-related
education as an adjustment to gross income
rather than as an itemized deduction.
Include the cost of your qualifying work-rela-
ted education with any other employee busi-
ness expenses on Form 1040, line 24. You do
not have to itemize your deductions on Sched-
ule A (Form 1040), and, therefore, the deduc-
tion is not subject to the 2%-of-adjus-
ted-gross-income limit. You must complete
Form 2106 or 2106-EZ to figure your deduction,
even if you meet the requirements described
earlier under Form not required.
For more information on qualified performing
artists, see chapter 6 of Pub. 463.
ImpairmentRelated Work
Expenses
If you are disabled and have impairment-related
work expenses that are necessary for you to be
able to get qualifying work-related education,
you can deduct these expenses on Schedule A
(Form 1040), line 28. They are not subject to
the 2%-of-adjusted-gross-income limit. To de-
duct these expenses, you must complete Form
2106 or 2106-EZ even if you meet the require-
ments described earlier under Form not re-
quired.
For more information on impairment-related
work expenses, see chapter 6 of Pub. 463.
Recordkeeping
You must keep records as proof of any
deduction claimed on your tax return.
Generally, you should keep your re-
cords for 3 years from the date of filing the tax
return and claiming the deduction.
For specific information about keeping re-
cords of business expenses, see Recordkeep-
ing in chapter 26.
28.
Miscellaneous
Deductions
What's New
Standard mileage rate. The 2016 rate for
business use of a vehicle is 54 cents per mile.
Introduction
This chapter explains which expenses you can
claim as miscellaneous itemized deductions on
Schedule A (Form 1040). You must reduce theRECORDS
total of most miscellaneous itemized deduc-
tions by 2% of your adjusted gross income. This
chapter covers the following topics.
Deductions subject to the 2% limit.
Deductions not subject to the 2% limit.
Expenses you can't deduct.
You must keep records to verify your
deductions. You should keep receipts,
canceled checks, substitute checks, fi-
nancial account statements, and other docu-
mentary evidence. For more information on re-
cordkeeping, see What Records Should I
Keep? in chapter 1.
Useful Items
You may want to see:
Publication
Travel, Entertainment, Gift, and Car
Expenses
Taxable and Nontaxable Income
Miscellaneous Deductions
Business Expenses
Business Use of Your Home
(Including Use by Daycare Providers)
How To Depreciate Property
Form (and Instructions)
Itemized
Deductions
Employee Business Expenses
Unreimbursed Employee
Business Expenses
Deductions Subject
to the 2% Limit
You can deduct certain expenses as miscella-
neous itemized deductions on Schedule A
(Form 1040). You can claim the amount of ex-
penses that is more than 2% of your adjusted
gross income. You figure your deduction on
Schedule A by subtracting 2% of your adjusted
gross income from the total amount of these ex-
penses. Your adjusted gross income is the
amount on Form 1040, line 38.
Generally, you apply the 2% limit after you
apply any other deduction limit. For example,
you apply the 50% (or 80%) limit on busi-
ness-related meals and entertainment (dis-
cussed in chapter 26) before you apply the 2%
limit.
Deductions subject to the 2% limit are dis-
cussed in the three categories in which you re-
port them on Schedule A (Form 1040).
Unreimbursed employee expenses
(line 21).
Tax preparation fees (line 22).
Other expenses (line 23).RECORDS
Schedule A (Form 1040)
2106
2106EZ
Chapter 28 Miscellaneous Deductions Page 199
Unreimbursed Employee
Expenses (Line 21)
Generally, you can deduct on Schedule A
(Form 1040), line 21, unreimbursed employee
expenses that are:
Paid or incurred during your tax year,
For carrying on your trade or business of
being an employee, and
Ordinary and necessary.
An expense is ordinary if it is common and
accepted in your trade, business, or profession.
An expense is necessary if it is appropriate and
helpful to your business. An expense doesn't
have to be required to be considered neces-
sary.
Examples of unreimbursed employee ex-
penses are listed next. The list is followed by
discussions of additional unreimbursed em-
ployee expenses.
Business bad debt of an employee.
Education that is work related. (See chap-
ter 27.)
Legal fees related to your job.
Licenses and regulatory fees.
Malpractice insurance premiums.
Medical examinations required by an em-
ployer.
Occupational taxes.
Passport for a business trip.
Subscriptions to professional journals and
trade magazines related to your work.
Travel, transportation, entertainment, and
gifts related to your work. (See chap-
ter 26.)
Business Liability Insurance
You can deduct insurance premiums you paid
for protection against personal liability for
wrongful acts on the job.
Damages for Breach of
Employment Contract
If you break an employment contract, you can
deduct damages you pay your former employer
that are attributable to the pay you received
from that employer.
Depreciation on Computers
You can claim a depreciation deduction for a
computer that you use in your work as an em-
ployee if its use is:
For the convenience of your employer, and
Required as a condition of your employ-
ment.
For more information about the rules and ex-
ceptions to the rules affecting the allowable de-
ductions for a home computer, see Pub. 529.
Dues to Chambers of Commerce
and Professional Societies
You may be able to deduct dues paid to profes-
sional organizations (such as bar associations
and medical associations) and to chambers of
commerce and similar organizations, if mem-
bership helps you carry out the duties of your
job. Similar organizations include:
Boards of trade,
Business leagues,
Civic or public service organizations,
Real estate boards, and
Trade associations.
Lobbying and political activities. You may
not be able to deduct that part of your dues that
is for certain lobbying and political activities.
See Dues used for lobbying under Nondeducti-
ble Expenses, later.
Educator Expenses
If you were an eligible educator in 2016, you
can deduct up to $250 of qualified expenses
you paid in 2016 as an adjustment to gross in-
come on Form 1040, line 23, rather than as a
miscellaneous itemized deduction. If you file
Form 1040A, you can deduct these expenses
on line 16. If you and your spouse are filing
jointly and both of you were eligible educators,
the maximum deduction is $500. However, nei-
ther spouse can deduct more than $250 of his
or her qualified expenses.
Home Office
If you use a part of your home regularly and ex-
clusively for business purposes, you may be
able to deduct a part of the operating expenses
and depreciation of your home.
You can claim this deduction for the busi-
ness use of a part of your home only if you use
that part of your home regularly and exclusively:
As your principal place of business for any
trade or business,
As a place to meet or deal with your pa-
tients, clients, or customers in the normal
course of your trade or business, or
In the case of a separate structure not at-
tached to your home, in connection with
your trade or business.
The regular and exclusive business use
must be for the convenience of your employer
and not just appropriate and helpful in your job.
See Pub. 587 for more detailed information and
a worksheet.
Job Search Expenses
You can deduct certain expenses you have in
looking for a new job in your present occupa-
tion, even if you don't get a new job. You can't
deduct these expenses if:
You are looking for a job in a new occupa-
tion,
There was a substantial break between the
ending of your last job and your looking for
a new one, or
You are looking for a job for the first time.
Employment and outplacement agency
fees. You can deduct employment and out-
placement agency fees you pay in looking for a
new job in your present occupation.
Employer pays you back. If, in a later year,
your employer pays you back for employment
agency fees, you must include the amount you
receive in your gross income up to the amount
of your tax benefit in the earlier year. (See Re-
coveries in chapter 12.)
Employer pays the employment agency.
If your employer pays the fees directly to the
employment agency and you aren't responsible
for them, you don't include them in your gross
income.
Résumé. You can deduct amounts you spend
for preparing and mailing copies of a résumé to
prospective employers if you are looking for a
new job in your present occupation.
Travel and transportation expenses. If you
travel to an area and, while there, you look for a
new job in your present occupation, you may be
able to deduct travel expenses to and from the
area. You can deduct the travel expenses if the
trip is primarily to look for a new job. The
amount of time you spend on personal activity
compared to the amount of time you spend in
looking for work is important in determining
whether the trip is primarily personal or is pri-
marily to look for a new job.
Even if you can't deduct the travel expenses
to and from an area, you can deduct the expen-
ses of looking for a new job in your present oc-
cupation while in the area.
You can choose to use the standard mile-
age rate to figure your car expenses. The 2016
rate for business use of a vehicle is 54 cents
per mile. See chapter 26 for more information.
Licenses and Regulatory Fees
You can deduct the amount you pay each year
to state or local governments for licenses and
regulatory fees for your trade, business, or pro-
fession.
Occupational Taxes
You can deduct an occupational tax charged at
a flat rate by a locality for the privilege of work-
ing or conducting a business in the locality. If
you are an employee, you can claim occupa-
tional taxes only as a miscellaneous deduction
subject to the 2% limit; you can't claim them as
a deduction for taxes elsewhere on your return.
Repayment of Income Aid
Payment
An “income aid payment” is one that is received
under an employer's plan to aid employees who
lose their jobs because of lack of work. If you
repay a lump-sum income aid payment that you
received and included in income in an earlier
year, you can deduct the repayment.
Page 200 Chapter 28 Miscellaneous Deductions
Research Expenses of a College
Professor
If you are a college professor, you can deduct
research expenses, including travel expenses,
for teaching, lecturing, or writing and publishing
on subjects that relate directly to your teaching
duties. You must have undertaken the research
as a means of carrying out the duties expected
of a professor and without expectation of profit
apart from salary. However, you can't deduct
the cost of travel as a form of education.
Tools Used in Your Work
Generally, you can deduct amounts you spend
for tools used in your work if the tools wear out
and are thrown away within 1 year from the date
of purchase. You can depreciate the cost of
tools that have a useful life substantially beyond
the tax year. For more information about depre-
ciation, see Pub. 946.
Union Dues and Expenses
You can deduct dues and initiation fees you pay
for union membership.
You can also deduct assessments for bene-
fit payments to unemployed union members.
However, you can't deduct the part of the as-
sessments or contributions that provides funds
for the payment of sick, accident, or death ben-
efits. Also, you can't deduct contributions to a
pension fund, even if the union requires you to
make the contributions.
You may not be able to deduct amounts you
pay to the union that are related to certain lob-
bying and political activities. See Lobbying Ex-
penses under Nondeductible Expenses, later.
Work Clothes and Uniforms
You can deduct the cost and upkeep of work
clothes if the following two requirements are
met.
You must wear them as a condition of your
employment.
The clothes aren't suitable for everyday
wear.
It isn't enough that you wear distinctive
clothing. The clothing must be specifi-
cally required by your employer. Nor is
it enough that you don't, in fact, wear your work
clothes away from work. The clothing must not
be suitable for taking the place of your regular
clothing.
Examples of workers who may be able to
deduct the cost and upkeep of work clothes are:
delivery workers, firefighters, health care work-
ers, law enforcement officers, letter carriers,
professional athletes, and transportation work-
ers (air, rail, bus, etc.).
Musicians and entertainers can deduct the
cost of theatrical clothing and accessories that
aren't suitable for everyday wear.
However, work clothing consisting of white
cap, white shirt or white jacket, white bib over-
alls, and standard work shoes, which a painter
is required by his union to wear on the job, isn't
distinctive in character or in the nature of a uni-
form. Similarly, the costs of buying andCAUTION
!
maintaining blue work clothes worn by a welder
at the request of a foreman aren't deductible.
Protective clothing. You can deduct the cost
of protective clothing required in your work,
such as safety shoes or boots, safety glasses,
hard hats, and work gloves.
Examples of workers who may be required
to wear safety items are: carpenters, cement
workers, chemical workers, electricians, fishing
boat crew members, machinists, oil field work-
ers, pipe fitters, steamfitters, and truck drivers.
Military uniforms. You generally can't deduct
the cost of your uniforms if you are on full-time
active duty in the armed forces. However, if you
are an armed forces reservist, you can deduct
the unreimbursed cost of your uniform if military
regulations restrict you from wearing it except
while on duty as a reservist. In figuring the de-
duction, you must reduce the cost by any non-
taxable allowance you receive for these expen-
ses.
If local military rules don't allow you to wear
fatigue uniforms when you are off duty, you can
deduct the amount by which the cost of buying
and keeping up these uniforms is more than the
uniform allowance you receive.
You can deduct the cost of your uniforms if
you are a civilian faculty or staff member of a
military school.
Tax Preparation Fees
(Line 22)
You can usually deduct tax preparation fees in
the year you pay them. Thus, on your 2016 re-
turn, you can deduct fees paid in 2016 for pre-
paring your 2015 return. These fees include the
cost of tax preparation software programs and
tax publications. They also include any fee you
paid for electronic filing of your return.
Other Expenses (Line 23)
You can deduct certain other expenses as mis-
cellaneous itemized deductions subject to the
2% limit. On Schedule A (Form 1040), line 23,
you can deduct expenses that you pay:
1. To produce or collect income that must be
included in your gross income,
2. To manage, conserve, or maintain prop-
erty held for producing such income, or
3. To determine, contest, pay, or claim a re-
fund of any tax.
You can deduct expenses you pay for the pur-
poses in (1) and (2) above only if they are rea-
sonably and closely related to these purposes.
Some of these other expenses are explained in
the following discussions.
If the expenses you pay produce income
that is only partially taxable, see Tax-Exempt In-
come Expenses, later, under Nondeductible Ex-
penses.
Appraisal Fees
You can deduct appraisal fees if you pay them
to figure a casualty loss or the fair market value
of donated property.
Casualty and Theft Losses
You can deduct a casualty or theft loss as a
miscellaneous itemized deduction subject to
the 2% limit if you used the damaged or stolen
property in performing services as an em-
ployee. First report the loss in Section B of
Form 4684, Casualties and Thefts. You may
also have to include the loss on Form 4797,
Sales of Business Property, if you are otherwise
required to file that form. To figure your deduc-
tion, add all casualty or theft losses from this
type of property included on Form 4684, lines
32 and 38b, or Form 4797, line 18a. For other
casualty and theft losses, see chapter 25.
Clerical Help and Office Rent
You can deduct office expenses, such as rent
and clerical help, that you have in connection
with your investments and collecting the taxable
income on them.
Credit or Debit Card Convenience
Fees
You can deduct the convenience fee charged
by the card processor for paying your income
tax (including estimated tax payments) by credit
or debit card. The fees are deductible in the
year paid.
Depreciation on Home Computer
You can deduct depreciation on your home
computer if you use it to produce income (for
example, to manage your investments that pro-
duce taxable income). You generally must de-
preciate the computer using the straight line
method over the Alternative Depreciation Sys-
tem (ADS) recovery period. But if you work as
an employee and also use the computer in that
work, see Pub. 946.
Excess Deductions of an Estate
If an estate's total deductions in its last tax year
are more than its gross income for that year, the
beneficiaries succeeding to the estate's prop-
erty can deduct the excess. Don't include de-
ductions for the estate's personal exemption
and charitable contributions when figuring the
estate's total deductions. The beneficiaries can
claim the deduction only for the tax year in
which, or with which, the estate terminates,
whether the year of termination is a normal year
or a short tax year. For more information, see
Termination of Estate in Pub. 559, Survivors,
Executors, and Administrators.
Fees to Collect Interest and
Dividends
You can deduct fees you pay to a broker, bank,
trustee, or similar agent to collect your taxable
bond interest or dividends on shares of stock.
But you can't deduct a fee you pay to a broker
to buy investment property, such as stocks or
bonds. You must add the fee to the cost of the
property.
You can't deduct the fee you pay to a broker
to sell securities. You can use the fee only to
figure gain or loss from the sale. See the
Chapter 28 Miscellaneous Deductions Page 201
Instructions for Form 8949 for information on
how to report the fee.
Hobby Expenses
You can generally deduct hobby expenses, but
only up to the amount of hobby income. A
hobby isn't a business because it isn't carried
on to make a profit. See Activity not for profit in
chapter 12 under Other Income.
Indirect Deductions of
PassThrough Entities
Pass-through entities include partnerships, S
corporations, and mutual funds that aren't pub-
licly offered. Deductions of pass-through enti-
ties are passed through to the partners or
shareholders. The partners or shareholders can
deduct their share of passed-through deduc-
tions for investment expenses as miscellaneous
itemized deductions subject to the 2% limit.
Example. You are a member of an invest-
ment club that is formed solely to invest in se-
curities. The club is treated as a partnership.
The partnership's income is solely from taxable
dividends, interest, and gains from sales of se-
curities. In this case, you can deduct your share
of the partnership's operating expenses as mis-
cellaneous itemized deductions subject to the
2% limit. However, if the investment club part-
nership has investments that also produce non-
taxable income, you can't deduct your share of
the partnership's expenses that produce the
nontaxable income.
Publicly offered mutual funds. Publicly of-
fered mutual funds don't pass deductions for in-
vestment expenses through to shareholders. A
mutual fund is “publicly offered” if it is:
Continuously offered pursuant to a public
offering,
Regularly traded on an established securi-
ties market, or
Held by or for at least 500 persons at all
times during the tax year.
A publicly offered mutual fund will send you
a Form 1099-DIV, Dividends and Distributions,
or a substitute form, showing the net amount of
dividend income (gross dividends minus invest-
ment expenses). This net figure is the amount
you report on your return as income. You can't
further deduct investment expenses related to
publicly offered mutual funds because they are
already included as part of the net income
amount.
Information returns. You should receive infor-
mation returns from pass-through entities.
Partnerships and S corporations. These
entities issue Schedule K-1, which lists the
items and amounts you must report and identi-
fies the tax return schedules and lines to use.
Nonpublicly offered mutual funds. These
funds will send you a Form 1099-DIV, Divi-
dends and Distributions, or a substitute form,
showing your share of gross income and invest-
ment expenses. You can claim the expenses
only as a miscellaneous itemized deduction
subject to the 2% limit.
Investment Fees and Expenses
You can deduct investment fees, custodial fees,
trust administration fees, and other expenses
you paid for managing your investments that
produce taxable income.
Legal Expenses
You can usually deduct legal expenses that you
incur in attempting to produce or collect taxable
income or that you pay in connection with the
determination, collection, or refund of any tax.
You can also deduct legal expenses that
are:
Related to either doing or keeping your job,
such as those you paid to defend yourself
against criminal charges arising out of your
trade or business,
For tax advice related to a divorce, if the
bill specifies how much is for tax advice
and it is determined in a reasonable way,
or
To collect taxable alimony.
You can deduct expenses of resolving tax
issues relating to profit or loss from business
(Schedule C or C-EZ), rentals or royalties
(Schedule E), or farm income and expenses
(Schedule F), on the appropriate schedule. You
deduct expenses of resolving nonbusiness tax
issues on Schedule A (Form 1040). See Tax
Preparation Fees, earlier.
Loss on Deposits
For information on whether, and if so, how, you
may deduct a loss on your deposit in a qualified
financial institution, see Loss on Deposits in
chapter 25.
Repayments of Income
If you had to repay an amount that you included
in income in an earlier year, you may be able to
deduct the amount you repaid. If the amount
you had to repay was ordinary income of
$3,000 or less, the deduction is subject to the
2% limit. If it was more than $3,000, see Repay-
ments Under Claim of Right under Deductions
Not Subject to the 2% Limit, later.
Repayments of Social Security
Benefits
For information on how to deduct your repay-
ments of certain social security benefits, see
Repayments More Than Gross Benefits in
chapter 11.
Safe Deposit Box Rent
You can deduct safe deposit box rent if you use
the box to store taxable income-producing
stocks, bonds, or investment-related papers
and documents. You can't deduct the rent if you
use the box only for jewelry, other personal
items, or tax-exempt securities.
Service Charges on Dividend
Reinvestment Plans
You can deduct service charges you pay as a
subscriber in a dividend reinvestment plan.
These service charges include payments for:
Holding shares acquired through a plan,
Collecting and reinvesting cash dividends,
and
Keeping individual records and providing
detailed statements of accounts.
Trustee's Administrative Fees for
IRA
Trustee's administrative fees that are billed sep-
arately and paid by you in connection with your
individual retirement arrangement (IRA) are de-
ductible (if they are ordinary and necessary) as
a miscellaneous itemized deduction subject to
the 2% limit. For more information about IRAs,
see chapter 17.
Deductions Not
Subject to the 2% Limit
You can deduct the items listed below as mis-
cellaneous itemized deductions. They aren't
subject to the 2% limit. Report these items on
Schedule A (Form 1040), line 28.
List of Deductions
Each of the following items is discussed in de-
tail after the list (except where indicated).
Amortizable premium on taxable bonds.
Casualty and theft losses from income-
producing property.
Federal estate tax on income in respect of
a decedent.
Gambling losses up to the amount of gam-
bling winnings.
Impairment-related work expenses of per-
sons with disabilities.
Loss from other activities from Sched-
ule K-1 (Form 1065-B), box 2.
Losses from Ponzi-type investment
schemes. See Losses from Ponzi-type in-
vestment schemes under Theft in chap-
ter 25.
Repayments of more than $3,000 under a
claim of right.
Unrecovered investment in an annuity.
Amortizable Premium on Taxable
Bonds
In general, if the amount you pay for a bond is
greater than its stated principal amount, the ex-
cess is bond premium. You can elect to amor-
tize the premium on taxable bonds. The amorti-
zation of the premium is generally an offset to
interest income on the bond rather than a sepa-
rate deduction item.
Part of the premium on some bonds may be
a miscellaneous deduction not subject to the
2% limit. For more information, see Amortizable
Page 202 Chapter 28 Miscellaneous Deductions
Premium on Taxable Bonds in Pub. 529, and
Bond Premium Amortization in chapter 3 of
Pub. 550, Investment Income and Expenses.
Casualty and Theft Losses of
IncomeProducing Property
You can deduct a casualty or theft loss as a
miscellaneous itemized deduction not subject
to the 2% limit if the damaged or stolen property
was income-producing property (property held
for investment, such as stocks, notes, bonds,
gold, silver, vacant lots, and works of art). First,
report the loss in Form 4684, Section B. You
may also have to include the loss on Form
4797, if you are otherwise required to file that
form. To figure your deduction, add all casualty
or theft losses from this type of property inclu-
ded on Form 4684, lines 32 and 38b, or Form
4797, line 18a. For more information on casu-
alty and theft losses, see chapter 25.
Federal Estate Tax on Income in
Respect of a Decedent
You can deduct the federal estate tax attributa-
ble to income in respect of a decedent that you
as a beneficiary include in your gross income.
Income in respect of the decedent is gross in-
come that the decedent would have received
had death not occurred and that wasn't properly
includible in the decedent's final income tax re-
turn. See Pub. 559 for more information.
Gambling Losses Up to the
Amount of Gambling Winnings
You must report the full amount of your gam-
bling winnings for the year on Form 1040,
line 21. You deduct your gambling losses for
the year on Schedule A (Form 1040), line 28.
You can't deduct gambling losses that are more
than your winnings.
You can't reduce your gambling win-
nings by your gambling losses and re-
port the difference. You must report the
full amount of your winnings as income and
claim your losses (up to the amount of win-
nings) as an itemized deduction. Therefore,
your records should show your winnings sepa-
rately from your losses.
Diary of winnings and losses. You
must keep an accurate diary or similar
record of your losses and winnings.
Your diary should contain at least the following
information.
The date and type of your specific wager
or wagering activity.
The name and address or location of the
gambling establishment.
The names of other persons present with
you at the gambling establishment.
The amount(s) you won or lost.
See Pub. 529 for more information.CAUTION
!RECORDS
ImpairmentRelated Work
Expenses
If you have a physical or mental disability that
limits your being employed, or substantially lim-
its one or more of your major life activities, such
as performing manual tasks, walking, speaking,
breathing, learning, and working, you can de-
duct your impairment-related work expenses.
Impairment-related work expenses are ordi-
nary and necessary business expenses for at-
tendant care services at your place of work and
for other expenses in connection with your
place of work that are necessary for you to be
able to work.
Self-employed. If you are self-employed,
enter your impairment-related work expenses
on the appropriate form (Schedule C, C-EZ, E,
or F) used to report your business income and
expenses.
Loss From Other Activities From
Schedule K1 (Form 1065B), Box 2
If the amount reported in Schedule K-1 (Form
1065-B), box 2, is a loss, report it on Sched-
ule A (Form 1040), line 28. It isn't subject to the
passive activity limitations.
Repayments Under Claim of Right
If you had to repay more than $3,000 that you
included in your income in an earlier year be-
cause at the time you thought you had an unre-
stricted right to it, you may be able to deduct the
amount you repaid or take a credit against your
tax. See Repayments in chapter 12 for more in-
formation.
Unrecovered Investment in
Annuity
A retiree who contributed to the cost of an an-
nuity can exclude from income a part of each
payment received as a tax-free return of the re-
tiree's investment. If the retiree dies before the
entire investment is recovered tax free, any un-
recovered investment can be deducted on the
retiree's final income tax return. See chapter 10
for more information about the tax treatment of
pensions and annuities.
Nondeductible
Expenses
Examples of nondeductible expenses are listed
next. The list is followed by discussions of addi-
tional nondeductible expenses.
List of Nondeductible
Expenses
Broker's commissions that you paid in con-
nection with your IRA or other investment
property.
Burial or funeral expenses, including the
cost of a cemetery lot.
Capital expenses.
Fees and licenses, such as car licenses,
marriage licenses, and dog tags.
Hobby losses, but see Hobby Expenses,
earlier.
Home repairs, insurance, and rent.
Illegal bribes and kickbacks. See Bribes
and kickbacks in chapter 11 of Pub. 535.
Losses from the sale of your home, furni-
ture, personal car, etc.
Personal disability insurance premiums.
Personal, living, or family expenses.
The value of wages never received or lost
vacation time.
Adoption Expenses
You can't deduct the expenses of adopting a
child, but you may be able to take a credit for
those expenses. See chapter 38.
Campaign Expenses
You can't deduct campaign expenses of a can-
didate for any office, even if the candidate is
running for reelection to the office. These in-
clude qualification and registration fees for pri-
mary elections.
Legal fees. You can't deduct legal fees paid
to defend charges that arise from participation
in a political campaign.
CheckWriting Fees on Personal
Account
If you have a personal checking account, you
can't deduct fees charged by the bank for the
privilege of writing checks, even if the account
pays interest.
Club Dues
Generally, you can't deduct the cost of mem-
bership in any club organized for business,
pleasure, recreation, or other social purpose.
This includes business, social, athletic, lun-
cheon, sporting, airline, hotel, golf, and country
clubs.
You can't deduct dues paid to an organiza-
tion if one of its main purposes is to:
Conduct entertainment activities for mem-
bers or their guests, or
Provide members or their guests with ac-
cess to entertainment facilities.
Dues paid to airline, hotel, and luncheon
clubs aren't deductible.
Commuting Expenses
You can't deduct commuting expenses (the
cost of transportation between your home and
your main or regular place of work). If you haul
tools, instruments, or other items, in your car to
and from work, you can deduct only the addi-
tional cost of hauling the items such as the rent
on a trailer to carry the items.
Chapter 28 Miscellaneous Deductions Page 203
Fines or Penalties
You can't deduct fines or penalties you pay to a
governmental unit for violating a law. This in-
cludes an amount paid in settlement of your ac-
tual or potential liability for a fine or penalty (civil
or criminal). Fines or penalties include parking
tickets, tax penalties, and penalties deducted
from teachers' paychecks after an illegal strike.
Health Spa Expenses
You can't deduct health spa expenses, even if
there is a job requirement to stay in excellent
physical condition, such as might be required of
a law enforcement officer.
Home Security System
You can't deduct the cost of a home security
system as a miscellaneous deduction. How-
ever, you may be able to claim a deduction for a
home security system as a business expense if
you have a home office. See Home Office un-
der Unreimbursed Employee Expenses, earlier,
and Security system under Figuring the Deduc-
tion in Pub. 587.
InvestmentRelated Seminars
You can't deduct any expenses for attending a
convention, seminar, or similar meeting for in-
vestment purposes.
Life Insurance Premiums
You can't deduct premiums you pay on your life
insurance. You may be able to deduct, as ali-
mony, premiums you pay on life insurance poli-
cies assigned to your former spouse. See chap-
ter 18 for information on alimony.
Lobbying Expenses
You generally can't deduct amounts paid or in-
curred for lobbying expenses. These include
expenses to:
Influence legislation,
Participate or intervene in any political
campaign for, or against, any candidate for
public office,
Attempt to influence the general public, or
segments of the public, about elections,
legislative matters, or referendums, or
Communicate directly with covered execu-
tive branch officials in any attempt to influ-
ence the official actions or positions of
those officials.
Lobbying expenses also include any amounts
paid or incurred for research, preparation, plan-
ning, or coordination of any of these activities.
Dues used for lobbying. If a tax-exempt
organization notifies you that part of the dues or
other amounts you pay to the organization are
used to pay nondeductible lobbying expenses,
you can't deduct that part. See Lobbying Ex-
penses in Pub. 529 for information on excep-
tions.
Lost or Mislaid Cash or Property
You can't deduct a loss based on the mere dis-
appearance of money or property. However, an
accidental loss or disappearance of property
can qualify as a casualty if it results from an
identifiable event that is sudden, unexpected, or
unusual. See chapter 25.
Example. A car door is accidentally slam-
med on your hand, breaking the setting of your
diamond ring. The diamond falls from the ring
and is never found. The loss of the diamond is a
casualty.
Lunches with Coworkers
You can't deduct the expenses of lunches with
co-workers, except while traveling away from
home on business. See chapter 26 for informa-
tion on deductible expenses while traveling
away from home.
Meals While Working Late
You can't deduct the cost of meals while work-
ing late. However, you may be able to claim a
deduction if the cost of meals is a deductible
entertainment expense, or if you are traveling
away from home. See chapter 26 for informa-
tion on deductible entertainment expenses and
expenses while traveling away from home.
Personal Legal Expenses
You can't deduct personal legal expenses such
as those for the following.
Custody of children.
Breach of promise to marry suit.
Civil or criminal charges resulting from a
personal relationship.
Damages for personal injury, except for
certain unlawful discrimination and whistle-
blower claims.
Preparation of a title (or defense or perfec-
tion of a title).
Preparation of a will.
Property claims or property settlement in a
divorce.
You can't deduct these expenses even if a
result of the legal proceeding is the loss of in-
come-producing property.
Political Contributions
You can't deduct contributions made to a politi-
cal candidate, a campaign committee, or a
newsletter fund. Advertisements in convention
bulletins and admissions to dinners or pro-
grams that benefit a political party or political
candidate aren't deductible.
Professional Accreditation Fees
You can't deduct professional accreditation
fees such as the following.
Accounting certificate fees paid for the ini-
tial right to practice accounting.
Bar exam fees and incidental expenses in
securing initial admission to the bar.
Medical and dental license fees paid to get
initial licensing.
Professional Reputation
You can't deduct expenses of radio and TV ap-
pearances to increase your personal prestige or
establish your professional reputation.
Relief Fund Contributions
You can't deduct contributions paid to a private
plan that pays benefits to any covered em-
ployee who can't work because of any injury or
illness not related to the job.
Residential Telephone Service
You can't deduct any charge (including taxes)
for basic local telephone service for the first tel-
ephone line to your residence, even if it is used
in a trade or business.
Stockholders' Meetings
You can't deduct transportation and other ex-
penses you pay to attend stockholders' meet-
ings of companies in which you own stock but
have no other interest. You can't deduct these
expenses even if you are attending the meeting
to get information that would be useful in mak-
ing further investments.
TaxExempt Income Expenses
You can't deduct expenses to produce tax-ex-
empt income. You can't deduct interest on a
debt incurred or continued to buy or carry
tax-exempt securities.
If you have expenses to produce both taxa-
ble and tax-exempt income, but you can't iden-
tify the expenses that produce each type of in-
come, you must divide the expenses based on
the amount of each type of income to determine
the amount that you can deduct.
Example. During the year, you received
taxable interest of $4,800 and tax-exempt inter-
est of $1,200. In earning this income, you had
total expenses of $500 during the year. You
can't identify the amount of each expense item
that is for each income item. Therefore, 80%
($4,800/$6,000) of the expense is for the taxa-
ble interest and 20% ($1,200/$6,000) is for the
tax-exempt interest. You can deduct, subject to
the 2% limit, expenses of $400 (80% of $500).
Travel Expenses for Another
Individual
You generally can't deduct travel expenses you
pay or incur for a spouse, dependent, or other
individual who accompanies you (or your em-
ployee) on business or personal travel unless
the spouse, dependent, or other individual is an
employee of the taxpayer, the travel is for a
bona fide business purpose, and such expen-
ses would otherwise be deductible by the
spouse, dependent, or other individual. See
chapter 26 for more information on deductible
travel expenses.
Page 204 Chapter 28 Miscellaneous Deductions
Voluntary Unemployment
Benefit Fund Contributions
You can't deduct voluntary unemployment ben-
efit fund contributions you make to a union fund
or a private fund. However, you can deduct
contributions as taxes if state law requires you
to make them to a state unemployment fund
that covers you for the loss of wages from un-
employment caused by business conditions.
Wristwatches
You can't deduct the cost of a wristwatch, even
if there is a job requirement that you know the
correct time to properly perform your duties.
29.
Limit on
Itemized
Deductions
Introduction
This chapter discusses the overall limit on item-
ized deductions on Schedule A (Form 1040).
The following topics are included.
Who is subject to the limit.
Which itemized deductions are limited.
How to figure the limit.
Useful Items
You may want to see:
Forms (and Instructions)
Itemized
Deductions
Are You Subject to the
Limit?
You are subject to the limit on certain itemized
deductions if your adjusted gross income (AGI)
is more than $311,300 if married filing jointly or
Schedule A (Form 1040)
qualifying widow(er), $285,350 if head of
household, $259,400 if single, or $155,650 if
married filing separately. Your AGI is the
amount on Form 1040, line 38.
Which Itemized
Deductions Are
Limited?
The following Schedule A (Form 1040) deduc-
tions are subject to the overall limit on itemized
deductions.
Taxes paid—line 9.
Interest paid—lines 10, 11, 12, and 13.
Gifts to charity—line 19.
Job expenses and certain miscellaneous
deductions—line 27.
Other miscellaneous deductions—line 28,
excluding gambling and casualty or theft
losses.
Which Itemized
Deductions Aren't
Limited?
The following Schedule A (Form 1040) deduc-
tions aren't subject to the overall limit on item-
ized deductions. However, they are still subject
to other applicable limits.
Medical and dental expenses—line 4.
Investment interest expense—line 14.
Casualty and theft losses of personal use
property—line 20.
Casualty and theft losses of income-pro-
ducing property—included on line 28.
Gambling losses—included on line 28.
How Do You Figure the
Limit?
If you are subject to the limit, the total of all your
itemized deductions is reduced by the smaller
of:
80% of your itemized deductions that are
subject to the overall limit. See Which
Itemized Deductions Are Limited, earlier,
or
3% of the amount by which your AGI ex-
ceeds $311,300 if married filing jointly or
qualifying widow(er), $285,350 if head of
household, $259,400 if single, or $155,650
if married filing separately.
Before you figure the overall limit on item-
ized deductions, you first must complete
Schedule A (Form 1040), lines 1 through 28, in-
cluding any related forms (such as Form 2106,
Form 4684, etc.).
The overall limit on itemized deductions is
figured after you have applied any other limit on
the allowance of any itemized deduction. These
other limits include charitable contribution limits
(chapter 24), the limit on certain meal and en-
tertainment expenses (chapter 26), and the
2%-of-adjusted-gross-income limit on certain
miscellaneous deductions (chapter 28).
Itemized Deductions Worksheet. After you
have completed Schedule A (Form 1040)
through line 28, you can use the Itemized De-
ductions Worksheet in the Instructions for
Schedule A (Form 1040) to figure your limit. En-
ter the result on Schedule A (Form 1040),
line 29. Keep the worksheet for your records.
You should compare the amount of
your standard deduction to the amount
of your itemized deductions after ap-
plying the limit. Use the greater amount when
completing Form 1040, line 40. See chapter 20
for information on how to figure your standard
deduction.
Example
For tax year 2016 Bill and Terry Willow are filing
a joint return on Form 1040. Their adjusted
gross income on line 38 is $325,500. Their
Schedule A itemized deductions are as follows:
Taxes paid—line 9 . . . . . . . . . $ 17,900
Interest paid—lines 10, 11, 12,
and 13 . . . . . . . . . . . . . . . . . 45,000
Investment interest expense—
line 14 . . . . . . . . . . . . . . . . . 41,000
Gifts to charity—line 19 . . . . . . . 21,000
Job expenses—line 27 . . . . . . . 17,240
Total . . . . . . . . . . . . . . . . . $142,140
The Willows’ investment interest expense
deduction ($41,000 from Schedule A (Form
1040), line 14) isn't subject to the overall limit on
itemized deductions. The Willows use the Item-
ized Deductions Worksheet in the Schedule A
(Form 1040) instructions to figure their overall
limit. Of their $142,140 total itemized deduc-
tions, the Willows can deduct only $141,714
($142,140 - $426). They enter $141,714 on
Schedule A (Form 1040), line 29.TIP
Chapter 29 Limit on Itemized Deductions Page 205
Part Six.
Figuring Your
Taxes and
Credits
The nine chapters in this part explain how to figure your tax and how to
figure the tax of certain children who have more than $2,100 of unearned
income. They also discuss tax credits that, unlike deductions, are
subtracted directly from your tax and reduce your tax dollar for dollar.
Chapter 36 discusses the earned income credit. Chapter 38 discusses a
wide variety of other credits, such as the adoption credit.
30.
How To Figure
Your Tax
Introduction
After you have figured your income and deduc-
tions as explained in Parts One through Five,
your next step is to figure your tax. This chapter
discusses:
The general steps you take to figure your
tax,
An additional tax you may have to pay
called the alternative minimum tax (AMT),
and
The conditions you must meet if you want
the IRS to figure your tax.
Figuring Your Tax
Your income tax is based on your taxable in-
come. After you figure your income tax and
AMT, if any, subtract your tax credits and add
any other taxes you may owe. The result is your
total tax. Compare your total tax with your total
payments to determine whether you are entitled
to a refund or must make a payment.
This section provides a general outline of
how to figure your tax. You can find
step-by-step directions in the Instructions for
Forms 1040EZ, 1040A, and 1040. If you are un-
sure of which tax form you should file, see
Which Form Should I Use? in chapter 1.
Tax. Most taxpayers use either the Tax Table
or the Tax Computation Worksheet to figure
their income tax. However, there are special
methods if your income includes any of the fol-
lowing items.
A net capital gain. (See chapter 16.)
Qualified dividends taxed at the same
rates as a net capital gain. (See chapters 8
and 16.)
Lump-sum distributions. (See chapter 10.)
Farming or fishing income. (See Sched-
ule J (Form 1040), Income Averaging for
Farmers and Fishermen.)
Tax for certain children who have un-
earned income. (See chapter 31.)
Parent's election to report child's interest
and dividends. (See chapter 31.)
Foreign earned income exclusion or the
housing exclusion. (See Form 2555, For-
eign Earned Income, or Form 2555-EZ,
Foreign Earned Income Exclusion, and the
Foreign Earned Income Tax Worksheet in
the Form 1040 instructions.)
Credits. After you figure your income tax and
any AMT (discussed later), determine if you are
eligible for any tax credits. Eligibility information
for these tax credits is discussed in chapters 32
through 38 and your form instructions. The fol-
lowing table lists some of the credits you may
be able to subtract from your tax and shows
where you can find more information on each
credit.
CREDITS
For information on:
See
chapter:
Adoption . . . . . . . . . . . . . . . . . 38
Alternative fuel vehicle refueling
property . . . . . . . . . . . . . . . . .
Alternative motor vehicle . . . . . . . . . 38
Child and dependent care . . . . . . . . 32
Child tax . . . . . . . . . . . . . . . . . 34
Credit to holders of tax credit
bonds . . . . . . . . . . . . . . . . . 38
Education . . . . . . . . . . . . . . . . 35
Elderly or disabled . . . . . . . . . . . . 33
Foreign tax . . . . . . . . . . . . . . . 38
Mortgage interest . . . . . . . . . . . . 38
Plug-in electric drive motor credit . . . . 38
Premium tax credit . . . . . . . . . . . . 37
Prior year minimum tax . . . . . . . . . 38
Residential energy . . . . . . . . . . . . 38
Retirement savings contributions . . . . 38
Some credits (such as the earned income
credit) aren’t listed because they are treated as
payments. See Payments, later.
There are other credits that aren’t discussed
in this publication. These include the following
credits.
General business credit, which is made up
of several separate business-related cred-
its. These generally are reported on Form
3800, General Business Credit, and are
discussed in chapter 4 of Pub. 334, Tax
Guide for Small Business.
Renewable electricity, refined coal, and In-
dian coal production credit for electricity
and refined coal produced at facilities
placed in service after October 22, 2004
(after October 2, 2008, for electricity pro-
duced from marine and hydrokinetic re-
newables). See Form 8835, Part II.
Work opportunity credit. See Form 5884.
Credit for employer social security and
Medicare taxes paid on certain employee
tips. See Form 8846.
Other taxes. After you subtract your tax cred-
its, determine whether there are any other taxes
you must pay. This chapter doesn’t explain
these other taxes. You can find that information
in other chapters of this publication and your
form instructions. See the following table for
other taxes you may need to add to your in-
come tax.
OTHER TAXES
For information on:
See
chapter:
Additional taxes on qualified retirement plans
and IRAs . . . . . . . . . . . . . . . . . 10, 17
Household employment taxes . . . . . . . . 32
Recapture of an education credit . . . . . . . 35
Social security and Medicare tax on
wages . . . . . . . . . . . . . . . . . . 5
Social security and Medicare tax on tips . . . 6
Uncollected social security and Medicare tax
on tips . . . . . . . . . . . . . . . . . . . 6
You also may have to pay AMT or make a
shared responsibility payment (both are dis-
cussed later in this chapter).
There are other taxes that aren’t discussed
in this publication. These include the following
items.
1. Self-employment tax. You must figure this
tax if either of the following applies to you
(or your spouse if you file a joint return).
a. Your net earnings from self-employ-
ment from other than church em-
ployee income were $400 or more.
The term “net earnings from self-em-
ployment” may include certain non-
employee compensation and other
amounts reported to you on Form
1099-MISC, Miscellaneous Income. If
you received a Form 1099-MISC, see
the Instructions for Recipient on the
back. Also see the Instructions for
Schedule SE (Form 1040), Self-Em-
ployment Tax; and Pub. 334.
b. You had church employee income of
$108.28 or more.
2. Additional Medicare Tax. You may be sub-
ject to a 0.9% Additional Medicare Tax
Page 206 Chapter 30 How To Figure Your Tax
that applies to Medicare wages, Railroad
Retirement Act compensation, and
self-employment income over a threshold
based on your filing status. For more infor-
mation, see the Instructions for Form
1040, line 62 and Form 8959.
3. Net Investment Income Tax (NIIT).You
may be subject to Net Investment Income
Tax (NIIT). NIIT is a 3.8% tax on the lesser
of net investment income or the excess of
your modified adjusted gross income over
a threshold amount. For more information,
see the Instructions for Form 1040, line 62
and Form 8960.
4. Recapture taxes. You may have to pay
these taxes if you previously claimed an
investment credit, a low-income housing
credit, a new markets credit, a qualified
plug-in electric drive motor vehicle credit,
an alternative motor vehicle credit, a credit
for employer-provided child care facilities,
an Indian employment credit, or other
credits listed in the instructions for Form
1040, line 62. For more information, see
the instructions for Form 1040, line 62.
5. Section 72(m)(5) excess benefits tax. If
you are (or were) a 5% owner of a busi-
ness and you received a distribution that
exceeds the benefits provided for you un-
der the qualified pension or annuity plan
formula, you may have to pay this addi-
tional tax. See Tax on Excess Benefits in
chapter 4 of Pub. 560, Retirement Plans
for Small Business.
6. Uncollected social security and Medicare
tax on group-term life insurance. If your
former employer provides you with more
than $50,000 of group-term life insurance
coverage, you must pay the employee part
of social security and Medicare taxes on
those premiums. The amount should be
shown in box 12 of your Form W-2 with
codes M and N.
7. Tax on golden parachute payments. This
tax applies if you received an “excess par-
achute payment” (EPP) due to a change in
a corporation's ownership or control. The
amount should be shown in box 12 of your
Form W-2 with code K. See the instruc-
tions for Form 1040, line 62.
8. Tax on accumulation distribution of trusts.
This applies if you are the beneficiary of a
trust that accumulated its income instead
of distributing it currently. See Form 4970
and its instructions.
9. Additional tax on HSA, MSA, or ABLE ac-
count. If amounts contributed to, or distrib-
uted from, your health savings account,
medical savings account, or ABLE ac-
count don’t meet the rules for these ac-
counts, you may have to pay additional
taxes. See Pub. 969, Health Savings Ac-
counts and Other Tax-Favored Health
Plans; Form 8853, Archer MSAs and
Long-Term Care Insurance Contracts;
Form 8889, Health Savings Accounts
(HSAs); and Form 5329, Additional Taxes
on Qualified Plans (Including IRAs) and
Other Tax-Favored Accounts.
10. Additional tax on Coverdell ESAs. This ap-
plies if amounts contributed to, or distrib-
uted from, your Coverdell ESA don’t meet
the rules for these accounts. See Pub.
970, Tax Benefits for Education, and Form
5329.
11. Additional tax on qualified tuition pro-
grams. This applies to amounts distributed
from qualified tuition programs that don’t
meet the rules for these accounts. See
Pub. 970 and Form 5329.
12. Excise tax on insider stock compensation
from an expatriated corporation. You may
owe a 15% excise tax on the value of non-
statutory stock options and certain other
stock-based compensation held by you or
a member of your family from an expatri-
ated corporation or its expanded affiliated
group in which you were an officer, direc-
tor, or more-than-10% owner. For more in-
formation, see the instructions for Form
1040, line 62.
13. Additional tax on income you received
from a nonqualified deferred compensa-
tion plan that fails to meet certain require-
ments. This income should be shown in
Form W-2, box 12, with code Z, or in Form
1099-MISC, box 15b. For more informa-
tion, see the instructions for Form 1040,
line 62.
14. Interest on the tax due on installment in-
come from the sale of certain residential
lots and timeshares. For more information,
see the instructions for Form 1040, line 62.
15. Interest on the deferred tax on gain from
certain installment sales with a sales price
over $150,000. For more information, see
the instructions for Form 1040, line 62.
16. Repayment of first-time homebuyer credit.
For more information, see Form 5405, Re-
payment of the First-Time Homebuyer
Credit, and its instructions. Also see the
instructions for Form 1040, line 60b.
Payments. After you determine your total tax,
figure the total payments you have already
made for the year. Include credits that are
treated as payments. This chapter doesn’t ex-
plain these payments and credits. You can find
that information in other chapters of this publi-
cation and your form instructions. See the fol-
lowing table for amounts you can include in
your total payments.
PAYMENTS
For information on:
See
chapter:
American opportunity credit . . . . . . . . . 35
Child tax credit (additional) . . . . . . . . . 34
Earned income credit . . . . . . . . . . . . 36
Estimated tax paid . . . . . . . . . . . . . 4
Excess social security
and RRTA tax withheld . . . . . . . . . . 38
Federal income tax withheld . . . . . . . . 4
Health coverage tax credit . . . . . . . . . 38
Net premium tax credit . . . . . . . . . . . 37
Credit for tax on
undistributed capital gain . . . . . . . . . 38
Tax paid with extension . . . . . . . . . . . 1
Another credit that is treated as a payment
is the credit for federal excise tax paid on fuels.
This credit is for persons who have a nontaxa-
ble use of certain fuels, such as diesel fuel and
kerosene. It is claimed on Form 1040, line 72.
See Form 4136, Credit for Federal Tax Paid on
Fuels.
Refund or balance due. To determine
whether you are entitled to a refund or whether
you must make a payment, compare your total
payments with your total tax. If you are entitled
to a refund, see your form instructions for infor-
mation on having it directly deposited into one
or more of your accounts (including a traditional
IRA, Roth IRA (including myRA) or a SEP-IRA),
or to purchase U.S. savings bonds instead of
receiving a paper check.
Alternative
Minimum Tax (AMT)
This section briefly discusses an additional tax
you may have to pay.
The tax law gives special treatment to some
kinds of income and allows special deductions
and credits for some kinds of expenses. Tax-
payers who benefit from this special treatment
may have to pay at least a minimum amount of
tax through an additional tax called AMT.
You may have to pay the AMT if your taxa-
ble income for regular tax purposes, combined
with certain adjustments and tax preference
items, is more than a certain amount. See Form
6251, Alternative Minimum Tax — Individuals.
Adjustments and tax preference items. The
more common adjustments and tax preference
items include:
Addition of personal exemptions,
Addition of the standard deduction (if
claimed),
Addition of itemized deductions claimed
for state and local taxes, certain interest,
most miscellaneous deductions, and part
of medical expenses,
Subtraction of any refund of state and local
taxes included in gross income,
Changes to accelerated depreciation of
certain property,
Difference between gain or loss on the
sale of property reported for regular tax
purposes and AMT purposes,
Addition of certain income from incentive
stock options,
Change in certain passive activity loss de-
ductions,
Addition of certain depletion that is more
than the adjusted basis of the property,
Addition of part of the deduction for certain
intangible drilling costs, and
Addition of tax-exempt interest on certain
private activity bonds.
More information. For more information about
the AMT, see the instructions for Form 6251.
Chapter 30 How To Figure Your Tax Page 207
Tax Figured by IRS
If you file by the due date of your return (not
counting extensions) – April 18, 2017, for most
people – you can have the IRS figure your tax
for you on Form 1040EZ, Form 1040A, or Form
1040.
If the IRS figures your tax and you paid too
much, you will receive a refund. If you didn’t pay
enough, you will receive a bill for the balance.
To avoid interest or the penalty for late pay-
ment, you must pay the bill within 30 days of the
date of the bill or by the due date for your return,
whichever is later.
The IRS can also figure the credit for the
elderly or the disabled and the earned income
credit for you.
When the IRS cannot figure your tax. The
IRS can’t figure your tax for you if any of the fol-
lowing apply.
1. You want your refund directly deposited
into your checking or savings account.
2. You want any part of your refund applied
to your 2017 estimated tax.
3. You had income for the year from sources
other than wages, salaries, tips, interest,
dividends, taxable social security benefits,
unemployment compensation, IRA distri-
butions, pensions, and annuities.
4. Your taxable income is $100,000 or more.
5. You itemize deductions.
6. You file any of the following forms.
a. Form 2555, Foreign Earned Income.
b. Form 2555-EZ, Foreign Earned In-
come Exclusion.
c. Form 4137, Social Security and Medi-
care Tax on Unreported Tip Income.
d. Form 4970, Tax on Accumulation Dis-
tribution of Trusts.
e. Form 4972, Tax on Lump-Sum Distri-
butions.
f. Form 6198, At-Risk Limitations.
g. Form 6251, Alternative Minimum
Tax—Individuals.
h. Form 8606, Nondeductible IRAs.
i. Form 8615, Tax for Certain Children
Who Have Unearned Income.
j. Form 8814, Parents' Election To Re-
port Child's Interest and Dividends.
k. Form 8839, Qualified Adoption Ex-
penses.
l. Form 8853, Archer MSAs and
Long-Term Care Insurance Contracts.
m. Form 8889, Health Savings Accounts
(HSAs).
n. Form 8919, Uncollected Social Secur-
ity and Medicare Tax on Wages.
7. You must make a shared responsibility
payment.
Shared responsibility payment. You must
make a shared responsibility payment with your
tax return unless you and your spouse (if filing
jointly), and anyone else you do or can claim as
a dependent, had minimum essential coverage
or a coverage exemption for each month during
2016. Use the Shared Responsibility Payment
Worksheet in the instructions for Form 8965 to
figure your shared responsibility payment.
Filing the Return
After you complete the line entries for the tax
form you are filing, fill in your name and ad-
dress. Enter your social security number in the
space provided. If you are married, enter the
social security numbers of you and your spouse
even if you file separately. Sign and date your
return and enter your occupation(s). If you are
filing a joint return, both you and your spouse
must sign it. Enter your daytime phone number
in the space provided. This may help speed the
processing of your return if we have a question
that can be answered over the phone. If you are
filing a joint return, you may enter either your or
your spouse's daytime phone number.
If you want to allow a friend, family member,
or any other person you choose to discuss your
2016 tax return with the IRS, check the “Yes”
box in the “Third party designee” area on your
return. Also enter the designee's name, phone
number, and any five digits the designee choo-
ses as his or her personal identification number
(PIN). If you check the “Yes” box, you, and your
spouse if filing a joint return, are authorizing the
IRS to call the designee to answer any ques-
tions that may arise during the processing of
your return.
Fill in and attach any schedules and forms
asked for on the lines you completed to your
paper return. Attach a copy of each of your
Forms W-2 to your paper return. Also attach to
your paper return any Form 1099-R you re-
ceived that has withholding tax in box 4.
Mail your return to the Internal Revenue
Service Center for the area where you live. A list
of Service Center addresses is in the instruc-
tions for your tax return.
Form 1040EZ Line Entries
Read lines 1 through 8b and fill in the lines that
apply to you. Don’t complete lines 9 and 10.
Complete line 11. Don’t complete lines 12
through 14. If you are filing a joint return, use
the space to the left of line 6 to separately show
your taxable income and your spouse's taxable
income.
The IRS can't figure your tax if you
must include a shared responsibility
payment on Form 1040EZ, line 11. See
the instructions for Form 1040EZ and Form
8965.
Payments. Enter any federal income tax with-
held on line 7. Federal income tax withheld is
shown on Form W-2, box 2, or Form 1099,
box 4.
Earned income credit. If you can take this
credit, as discussed in chapter 36, the IRS can
figure it for you. Enter “EIC” in the space to the
left of line 8a. Enter the nontaxable combat pay
you elect to include in earned income on
line 8b.CAUTION
!
If your credit for any year after 1996 was re-
duced or disallowed by the IRS, you may also
have to file Form 8862, Information To Claim
Earned Income Credit After Disallowance, with
your return. For details, see the Form 1040EZ
Instructions.
Form 1040A Line Entries
Read lines 1 through 27 and fill in the lines that
apply to you. If you are filing a joint return, use
the space to the left of the entry space for
line 27 to separately show your taxable income
and your spouse's taxable income. Skip lines
28 and 30, but complete lines 29, 31 through
35, 38, and 40 through 45 only if they apply to
you. However, don’t complete lines 32 and 42a
if you want the IRS to figure the credits shown
on those lines. Also, enter any write-in informa-
tion that applies to you in the space to the left of
line 46. Don’t complete lines 36, 37, 39, or 47
through 51.
The IRS can’t figure your tax for you if
you must include a shared responsibil-
ity payment on Form 1040A, line 38.
See the instructions for Form 1040A and Form
8965.
Payments. Enter any federal income tax with-
held that is shown on Form W-2, box 2, or Form
1099, box 4, on line 40. Enter any estimated tax
payments you made on line 41.
Credit for child and dependent care expen
ses. If you can take this credit, as discussed in
chapter 32, complete Form 2441, Child and De-
pendent Care Expenses, and attach it to your
return. Enter the amount of the credit on line 31.
The IRS will not figure this credit.
Net premium tax credit. If you can take this
credit, as discussed in chapter 37, complete
Form 8962, Premium Tax Credit, and attach it
to your return. Enter the amount of the credit on
line 45. The IRS will not figure this credit.
Credit for the elderly or the disabled. If you
can take this credit, as discussed in chapter 33,
the IRS can figure it for you. Enter “CFE” in the
space to the left of line 32 and attach Sched-
ule R (Form 1040A or 1040), Credit for the Eld-
erly or the Disabled, to your paper return. On
Schedule R (Form 1040A or 1040), check the
box in Part I for your filing status and age. Com-
plete Part II and Part III, lines 11 and 13, if they
apply.
Earned income credit. If you can take this
credit, as discussed in chapter 36, the IRS can
figure it for you. Enter “EIC” to the left of the en-
try space for line 42a. Enter the nontaxable
combat pay you elect to include in earned in-
come on line 42b.
If you have a qualifying child, you must fill in
Schedule EIC (Form 1040A or 1040), Earned
Income Credit, and attach it to your paper re-
turn. If you don’t provide the child's social se-
curity number on Schedule EIC, line 2, the
credit will be reduced or disallowed unless the
child was born and died in 2016.
If your credit for any year after 1996 was re-
duced or disallowed by the IRS, you may also
have to file Form 8862 with your return. For de-
tails, see the Form 1040A Instructions.CAUTION
!
Page 208 Chapter 30 How To Figure Your Tax
Form 1040 Line Entries
Read lines 1 through 43 and fill in the lines that
apply to you. Don’t complete line 44.
If you are filing a joint return, use the space
under the words “Adjusted Gross Income” on
the front of your return to separately show your
taxable income and your spouse's taxable in-
come.
Read lines 45 through 73. Fill in the lines
that apply to you, but don’t fill in lines 55, 63,
and 74. Also, don’t complete line 56 and lines
75 through 79. Don’t fill in line 54, box “c,” if you
are completing Schedule R (Form 1040A or
1040), or line 66a if you want the IRS to figure
the credits shown on those lines.
The IRS can’t figure your tax for you if
you must include a shared responsibil-
ity payment on Form 1040, line 61. See
the instructions for Form 1040 and Form 8965.
Payments. Enter any federal income tax with-
held that is shown on Form W-2, box 2, or Form
1099, box 4, on line 64. Enter any estimated tax
payments you made on line 65.
Credit for child and dependent care expen
ses. If you can take this credit, as discussed in
chapter 32, complete Form 2441 and attach it
to your paper return. Enter the amount of the
credit on line 49. The IRS will not figure this
credit.
Net premium tax credit. If you take this credit,
as discussed in chapter 37, complete Form
8962 and attach it to your return. Enter the
amount of the credit on line 69. The IRS will not
figure this credit.
Credit for the elderly or the disabled. If you
can take this credit, as discussed in chapter 33,
the IRS can figure it for you. Enter “CFE” on the
line next to line 54, check box “c,” and attach
Schedule R (Form 1040A or 1040) to your pa-
per return. On Schedule R (Form 1040A or
1040), check the box in Part I for your filing sta-
tus and age. Complete Part II and Part III, lines
11 and 13, if they apply.
Earned income credit. If you can take this
credit, as discussed in chapter 36, the IRS can
figure it for you. Enter “EIC” on the dotted line
next to Form 1040, line 66a. Enter the nontaxa-
ble combat pay you elect to include in earned
income on line 66b.
If you have a qualifying child, you must fill in
Schedule EIC (Form 1040A or 1040), Earned
Income Credit, and attach it to your paper re-
turn. If you don’t provide the child's social se-
curity number on Schedule EIC, line 2, the
credit will be reduced or disallowed unless the
child was born and died in 2016.
If your credit for any year after 1996 was re-
duced or disallowed by the IRS, you may also
have to file Form 8862 with your return. For de-
tails, see the Form 1040 Instructions.CAUTION
!
31.
Tax on
Unearned
Income of
Certain Children
Introduction
This chapter discusses the following two rules
that may affect the tax on unearned income of
certain children.
1. If the child's interest and dividend income
(including capital gain distributions) total
less than $10,500, the child's parent may
be able to choose to include that income
on the parent's return rather than file a re-
turn for the child. (See Parent's Election
To Report Child's Interest and Dividends,
later.)
2. If the child's interest, dividends, and other
unearned income total more than $2,100,
part of that income may be taxed at the
parent's tax rate instead of the child's tax
rate. (See Tax for Certain Children Who
Have Unearned Income, later.)
For these rules, the term “child” includes a le-
gally adopted child and a stepchild. These rules
apply whether or not the child is a dependent.
These rules do not apply if neither of the child's
parents were living at the end of the year.
Useful Items
You may want to see:
Publication
Tax Rules for Children and
Dependents
Form (and Instructions)
Tax for Certain Children Who Have
Unearned Income
Parents' Election To Report Child's
Interest and Dividends
Which Parent's
Return To Use
If a child's parents are married to each other
and file a joint return, use the joint return to fig-
ure the tax on the child's unearned income. The
tax rate and other return information from that
return are used to figure the child's tax as ex-
plained later under Tax for Certain Children
Who Have Unearned Income.
8615
8814
Parents Who Don't File a
Joint Return
For parents who don't file a joint return, the fol-
lowing discussions explain which parent's tax
return must be used to figure the tax.
Only the parent whose tax return is used
can make the election described under Parent's
Election To Report Child's Interest and Divi-
dends.
Parents are married. If the child's parents file
separate returns, use the return of the parent
with the greater taxable income.
Parents not living together. If the child's
parents are married to each other but not living
together, and the parent with whom the child
lives (the custodial parent) is considered un-
married, use the return of the custodial parent. If
the custodial parent isn't considered unmarried,
use the return of the parent with the greater tax-
able income.
For an explanation of when a married per-
son living apart from his or her spouse is con-
sidered unmarried, see Head of Household in
chapter 2.
Parents are divorced. If the child's parents
are divorced or legally separated, and the pa-
rent who had custody of the child for the greater
part of the year (the custodial parent) hasn't re-
married, use the return of the custodial parent.
Custodial parent remarried. If the custo-
dial parent has remarried, the stepparent (rather
than the noncustodial parent) is treated as the
child's other parent. Therefore, if the custodial
parent and the stepparent file a joint return, use
that joint return. Don't use the return of the non-
custodial parent.
If the custodial parent and the stepparent
are married, but file separate returns, use the
return of the one with the greater taxable in-
come. If the custodial parent and the stepparent
are married but not living together, the earlier
discussion under Parents not living together ap-
plies.
Parents never married. If a child's parents
have never been married to each other, but
lived together all year, use the return of the pa-
rent with the greater taxable income. If the pa-
rents didn't live together all year, the rules ex-
plained earlier under Parents are divorced
apply.
Widowed parent remarried. If a widow or
widower remarries, the new spouse is treated
as the child's other parent. The rules explained
earlier under Custodial parent remarried apply.
Parent's Election
To Report Child's
Interest and Dividends
You may be able to elect to include your child's
interest and dividend income (including capital
gain distributions) on your tax return. If you do,
your child won't have to file a return.
Chapter 31 Tax on Unearned Income of Certain Children Page 209
You can make this election only if all the fol-
lowing conditions are met.
Your child was under age 19 (or under age
24 if a full-time student) at the end of the
year.
Your child had income only from interest
and dividends (including capital gain distri-
butions and Alaska Permanent Fund divi-
dends).
The child's gross income was less than
$10,500.
The child is required to file a return unless
you make this election.
The child doesn't file a joint return for the
year.
No estimated tax payment was made for
the year, and no overpayment from the
previous year (or from any amended re-
turn) was applied to this year under your
child's name and social security number.
No federal income tax was taken out of
your child's income under the backup with-
holding rules.
You are the parent whose return must be
used when applying the special tax rules
for children. (See Which Parent's Return
To Use, earlier.)
These conditions are also shown in Figure 31-A
later.
Certain January 1 birthdays. A child born on
January 1, 1998, is considered to be age 19 at
the end of 2016. You can't make this election
for such a child unless the child was a full-time
student.
A child born on January 1, 1993, is consid-
ered to be age 24 at the end of 2016. You can't
make this election for such a child.
Fulltime student. A full-time student is a child
who during some part of each of any 5 calendar
months of the year was enrolled as a full-time
student at a school, or took a full-time on-farm
training course given by a school or a state,
county, or local government agency. A school
includes a technical, trade, or mechanical
school. It doesn't include an on-the-job training
course, correspondence school, or school offer-
ing courses only through the Internet.
How To Make the Election
Make the election by attaching Form 8814 to
your Form 1040. (If you make this election, you
can't file Form 1040A or Form 1040EZ.) Attach
a separate Form 8814 for each child for whom
you make the election. You can make the elec-
tion for one or more children and not for others.
Effect of Making the
Election
The federal income tax on your child's income
may be more if you make the Form 8814 elec-
tion.
Rate may be higher. If your child received
qualified dividends or capital gain distributions,
you may pay up to $105 more tax if you make
this election instead of filing a separate tax re-
turn for the child. This is because the tax rate on
the child's income between $1,050 and $2,100
is 10% if you make this election. However, if
you file a separate return for the child, the tax
rate may be as low as 0% (zero percent) be-
cause of the preferential tax rates for qualified
dividends and capital gain distributions.
Deductions you can't take. By making the
Form 8814 election, you can't take any of the
following deductions that the child would be en-
titled to on his or her return.
The additional standard deduction if the
child is blind.
The deduction for a penalty on an early
withdrawal of your child's savings.
Itemized deductions (such as your child's
investment expenses or charitable contri-
butions).
Reduced deductions or credits. If you use
Form 8814, your increased adjusted gross in-
come may reduce certain deductions or credits
on your return including the following.
Deduction for contributions to a traditional
individual retirement arrangement (IRA).
Deduction for student loan interest.
Itemized deductions for medical expenses,
casualty and theft losses, and certain mis-
cellaneous expenses.
Credit for child and dependent care expen-
ses.
Child tax credit.
Education tax credits.
Earned income credit.
Penalty for underpayment of estimated tax.
If you make this election for 2016 and didn't
have enough tax withheld or pay enough esti-
mated tax to cover the tax you owe, you may be
subject to a penalty. If you plan to make this
election for 2017, you may need to increase
your federal income tax withholding or your esti-
mated tax payments to avoid the penalty. See
chapter 4 for more information.
Page 210 Chapter 31 Tax on Unearned Income of Certain Children
Tax for Certain
Children Who Have
Unearned Income
If a child's interest, dividends, and other un-
earned income total more than $2,100, part of
that income may be taxed at the parent's tax
rate instead of the child's tax rate. If the parent
doesn't or can't choose to include the child's in-
come on the parent's return, use Form 8615 to
figure the child's tax. Attach the completed form
to the child's Form 1040 or Form 1040A.
When Form 8615 must be filed. Form 8615
must be filed for a child if all of the following
statements are true.
1. The child's unearned income was more
than $2,100.
2. The child is required to file a return for
2016.
3. The child either:
a. Was under age 18 at the end of the
year,
b. Was age 18 at the end of the year and
didn't have earned income that was
more than half of his or her support, or
c. Was a full-time student at least age 19
and under age 24 at the end of 2016
and didn't have earned income that
was more than half of the child's sup-
port.
4. At least one of the child's parents was
alive at the end of 2016.
5. The child doesn't file a joint return for
2016.
These conditions are also shown in
Figure 31-B, later.
Earned income. Earned income includes sal-
aries, wages, tips, and other payments received
for personal services performed. It doesn't in-
clude unearned income as defined next.
Unearned income defined. Unearned in-
come is generally all income other than salar-
ies, wages, and other amounts received as pay
for work actually done. It includes taxable inter-
est, dividends (including capital gain distribu-
tions), capital gains, unemployment compensa-
tion, taxable scholarship and fellowship grants
not reported on Form W-2, the taxable part of
social security and pension payments, and cer-
tain distributions from trusts. Unearned income
includes amounts produced by assets the child
obtained with earned income (such as interest
on a savings account into which the child de-
posited wages).
Nontaxable income. For this purpose, un-
earned income includes only amounts the child
must include in total income. Nontaxable un-
earned income, such as tax-exempt interest
and the nontaxable part of social security and
pension payments, isn't included.
Income from property received as a gift.
A child's unearned income includes all income
produced by property belonging to the child.
This is true even if the property was transferred
Figure 31-A. Can You Include Your Child's Income On Your Tax Return?No
Yes
Yes
No
No
No
No
Yes
No
No
No
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
No
Yes
No
Was your child under age 19 at the end
of 2016?
Was your child under age 24 at the end
of 2016?
Was your child a full-time student in
2016?
Was the child’s only income interest and
dividends (including capital gain
distributions and Alaska Permanent Fund
dividends)?
Was the child’s income less than
$10,500?
Is your child required to file a tax return
for 2016 if you don’t make this election?
Is your child filing a joint return for 2016?
Did the child make any estimated tax
payments for 2016?
Did the child have an overpayment of tax
on his or her 2015 return (or on any
amended return) applied to the 2016
estimated tax?
Was any federal income tax withheld from
the child’s income under backup
withholding rules?
Are you the parent whose return must
be used?*
You can include your child’s income on
your tax return by completing Form 8814
and attaching it to your return. If you do,
your child isn’t required to file a return.
You can’t include
your child’s income
on your return.
Start Here
*See Which Parent’s Return To Use
Chapter 31 Tax on Unearned Income of Certain Children Page 211
to the child, regardless of when the property
was transferred or purchased or who transfer-
red it.
A child's unearned income includes income
produced by property given as a gift to the
child. This includes gifts to the child from grand-
parents or any other person and gifts made un-
der the Uniform Gift to Minors Act.
Example. Amanda Black, age 13, received
the following income.
Dividends — $1,000
Wages — $2,100
Taxable interest — $1,200
Tax-exempt interest — $100
Capital gains — $300
Capital losses — ($200)
The dividends were qualified dividends on
stock given to her by her grandparents.
Amanda's unearned income is $2,300. This
is the total of the dividends ($1,000), taxable in-
terest ($1,200), and capital gains reduced by
capital losses ($300 - $200 = $100). Her wages
are earned (not unearned) income because
they are received for work actually done. Her
tax-exempt interest isn't included because it is
nontaxable.
Trust income. If a child is the beneficiary of
a trust, distributions of taxable interest, divi-
dends, capital gains, and other unearned in-
come from the trust are unearned income to the
child.
However, for purposes of completing Form
8615, a taxable distribution from a qualified dis-
ability trust is considered earned income, not
unearned income.
Support. Your child's support includes all
amounts spent to provide the child with food,
lodging, clothing, education, medical and dental
care, recreation, transportation, and similar ne-
cessities. To figure your child's support, count
support provided by you, your child, and others.
However, a scholarship received by your child
isn't considered support if your child is a
full-time student. See chapter 3 for details about
support.
Certain January 1 birthdays. Use the follow-
ing chart to determine whether certain children
with January 1 birthdays meet condition 3 under
When Form 8615 must be filed.
Figure 31-B. Do You Have To Use Form 8615 To Figure Your Child's Tax?Start Here
Yes
No
Yes
No
No
Yes
No
No
Yes
Yes
No
Yes
No
Yes
Yes
No
No
Yes
Was the child’s unearned income more than $2,100?
Is the child required to file a tax return for 2016?
Was the child under age 18 at the end of 2016?
Was the child age 18 at the end of 2016?
Was the child under age 24 at the end of 2016?
Was the child a full-time student in 2016?
Did the child have earned income that was more than
half of his or her support?
Was at least one of the child’s parents alive at the end
of 2016?
Is the child filing a joint return for 2016?
Use Form 8615 to figure the child’s tax. Attach it to the
child’s return.
Note. If the child’s parent* chooses to report the child’s income
by filing Form 8814, the child isn’t required to file a tax return.
Don’t use Form 8615. (See Parent’s Election To Report Child’s
Interest and Dividends.)
*See Which Parent’s Return To Use
Don’t use
Form 8615 to
figure the
child’s tax.
Page 212 Chapter 31 Tax on Unearned Income of Certain Children
IF a child was
born on...
THEN, at the end
of 2016, the child
is considered to
be...
January 1, 1999 18*
January 1, 1998 19**
January 1, 1993 24***
*This child isn't under age 18. The child
meets condition 3 only if the child didn't
have earned income that was more than half
of the child's support.
**This child meets condition 3 only if the
child was a full-time student who didn't have
earned income that was more than half of
the child's support.
***Don't use Form 8615 for this child.
Alternative minimum tax. A child may be
subject to alternative minimum tax (AMT) if he
or she has certain items given preferential treat-
ment under the tax law. See Alternative Mini-
mum Tax (AMT) in chapter 30.
For more information on who is liable for
AMT and how to figure it, see Form 6251, Alter-
native Minimum Tax—Individuals. For informa-
tion on special limits that apply to a child who
files Form 6251, see Certain Children Under
Age 24 in the Instructions for Form 6251.
Net Investment Income Tax. A child whose
tax is figured on Form 8615 may be subject to
the Net Investment Income Tax (NIIT). NIIT is a
3.8% tax on the lesser of the net investment in-
come or the excess of the child's modified ad-
justed gross income (MAGI) over the threshold
amount. Use Form 8960, Net Investment In-
come Tax, to figure this tax. For more informa-
tion on NIIT, go to IRS.gov and enter “Net In-
vestment Income Tax” in the search box.
Chapter 31 Tax on Unearned Income of Certain Children Page 213
32.
Child and
Dependent Care
Credit
Reminders
Taxpayer identification number needed for
each qualifying person. You must include on
line 2 of Form 2441 the name and taxpayer
identification number (generally the social se-
curity number) of each qualifying person. See
Taxpayer identification number under Who is a
Qualifying Person, later.
You may have to pay employment taxes. If
you pay someone to come to your home and
care for your dependent or spouse, you may be
a household employer who has to pay employ-
ment taxes. Usually, you aren’t a household
employer if the person who cares for your de-
pendent or spouse does so at his or her home
or place of business. See Do You Have House-
hold Employees, later.
Introduction
This chapter discusses the credit for child and
dependent care expenses and covers the fol-
lowing topics.
Tests you must meet to claim the credit.
How to figure the credit.
How to claim the credit.
Employment taxes you may have to pay as
a household employer.
You may be able to claim the credit if you
pay someone to care for your dependent who is
under age 13 or for your spouse or dependent
who isn’t able to care for himself or herself. The
credit can be up to 35% of your expenses. To
qualify, you must pay these expenses so you
can work or look for work.
This credit shouldn’t be confused with
the child tax credit discussed in chap-
ter 34.
Dependent care benefits. If you received any
dependent care benefits from your employer
during the year, you may be able to exclude
from your income all or part of them. You must
complete Form 2441, Part III, before you can
figure the amount of your credit. See Depend-
ent Care Benefits under How To Figure the
Credit, later.
Useful Items
You may want to see:
Publication
Exemptions, Standard Deduction,
and Filing Information
Child and Dependent Care Expenses
Household Employer's Tax Guide
Form (and Instructions)
Child and Dependent Care
Expenses
Household
Employment Taxes
Application for IRS Individual
Taxpayer Identification Number
Dependent Care Provider's
Identification and Certification
Can You Claim the
Credit?
To be able to claim the credit for child and de-
pendent care expenses, you must file Form
1040 or Form 1040A, not Form 1040EZ, and
meet all the tests, next, in Tests you must meet
to claim a credit for child and dependent care
expenses.
Tests you must meet to claim a credit for
child and dependent care expenses.
1. Qualifying Person Test. The care must
be for one or more qualifying persons who
are identified on Form 2441. (See Who is
a Qualifying Person, later.)
2. Earned Income Test. You (and your
spouse if filing jointly) must have earnedCAUTION
!
2441
Schedule H (Form 1040)
W7
W10
income during the year. (However, see
Rule for student-spouse or spouse not
able to care for self under You Must Have
Earned Income, later.)
3. WorkRelated Expense Test. You must
pay child and dependent care expenses
so you (and your spouse if filing jointly)
can work or look for work. (See Are These
Work-Related Expenses, later.)
4. You must make payments for child and
dependent care to someone you (and your
spouse) can’t claim as a dependent. If you
make payments to your child, he or she
can’t be your dependent and must be age
19 or older by the end of the year. You
can’t make payments to:
a. Your spouse, or
b. The parent of your qualifying person if
your qualifying person is your child
and under age 13.
(See Payments to Relatives or De-
pendents under Are These Work-Related
Expenses, later.)
5. Joint Return Test. Your filing status may
be single, head of household, or qualifying
widow(er) with dependent child. If you are
married, you must file a joint return, unless
an exception applies to you. (See What’s
Your Filing Status, later.)
6. Provider Identification Test. You must
identify the care provider on your tax re-
turn. (See Care Provider Identification
Test, later.)
7. If you exclude or deduct dependent care
benefits provided by a dependent care
benefits plan, the total amount you ex-
clude or deduct must be less than the dol-
lar limit for qualifying expenses (generally,
$3,000 if one qualifying person was cared
for or $6,000 if two or more qualifying per-
sons were cared for). (If two or more quali-
fying persons were cared for, the amount
you exclude or deduct will always be less
than the dollar limit, since the total amount
you can exclude or deduct is limited to
$5,000. See Reduced Dollar Limit under
How To Figure the Credit, later.)
These tests are presented in Figure 32-A and
are also explained in detail in this chapter.
Page 214 Chapter 32 Child and Dependent Care Credit
Figure 32-A. Can You Claim the Credit?Start Here
No
No
No
No
Yes
Yes
Yes
No
Yes
No
No
Yes
No
Yes
No
No
Yes
No
Yes
No
Yes Yes
Yes
Yes
Yes
No
Was the care for one or more qualifying persons?
Did you have earned income during the year?
Did you pay the expenses to allow you to work or look for work?
Were your payments made to someone you or your spouse could
claim as a dependent?
Were your payments made to your spouse or to the parent of your
qualifying person who is your qualifying child and under age 13?
Were your payments made to your child who was under the age of
19 at the end of the year?
Are you single? Are you filing a joint return?
Do you meet the requirements
to be considered unmarried?
Do you know the care provider’s name, address,
and identifying number?
Did you make a reasonable effort to get this
information? (See Due diligence.)
Did you pay expenses for more than one
qualifying person?
Are you excluding or deducting at least $3,000 of
dependent care benefits?
You may be able to claim the child and
dependent care credit. Fill out Form 2441.
You CAN’T claim the child and
dependent care credit.
 This also applies to your spouse, unless your spouse was disabled or a full-time student.
 If you had expenses that met the requirements for 2015, except that you didn’t pay them until 2016, you may be able to claim those expenses in 2016.
See Expenses not paid until the following year under How To Figure the Credit.
Chapter 32 Child and Dependent Care Credit Page 215
Who is a Qualifying
Person?
Your child and dependent care expenses must
be for the care of one or more qualifying per-
sons.
A qualifying person is:
1. Your qualifying child who is your depend-
ent and who was under age 13 when the
care was provided (but see Child of di-
vorced or separated parents or parents liv-
ing apart, later),
2. Your spouse who wasn’t physically or
mentally able to care for himself or herself
and lived with you for more than half the
year, or
3. A person who wasn’t physically or men-
tally able to care for himself or herself,
lived with you for more than half the year,
and either:
a. Was your dependent, or
b. Would have been your dependent ex-
cept that:
i. He or she received gross income
of $4,050 or more,
ii. He or she filed a joint return, or
iii. You, or your spouse if filing
jointly, could be claimed as a de-
pendent on someone else's 2016
return.
Dependent defined. A dependent is a person,
other than you or your spouse, for whom you
can claim an exemption. To be your dependent,
a person must be your qualifying child (or your
qualifying relative).
Qualifying child. To be your qualifying
child, a child must live with you for more than
half the year and meet other requirements.
More information. For more information
about who is a dependent or a qualifying child,
see chapter 3.
Physically or mentally not able to care for
oneself. Persons who can't dress, clean, or
feed themselves because of physical or mental
problems are considered not able to care for
themselves. Also, persons who must have con-
stant attention to prevent them from injuring
themselves or others are considered not able to
care for themselves.
Person qualifying for part of year. You de-
termine a person's qualifying status each day.
For example, if the person for whom you pay
child and dependent care expenses no longer
qualifies on September 16, count only those ex-
penses through September 15. Also see Yearly
limit under Dollar Limit, later.
Birth or death of otherwise qualifying per
son. In determining whether a person is a qual-
ifying person, a person who was born or died in
2016 is treated as having lived with you for
more than half of 2016 if your home was the
person's home for more than half the time he or
she was alive in 2016.
Taxpayer identification number. You must
include on your return the name and taxpayer
identification number (generally the social se-
curity number) of the qualifying person(s). If the
correct information isn’t shown, the credit may
be reduced or disallowed.
Individual taxpayer identification number
(ITIN) for aliens. If your qualifying person is a
nonresident or resident alien who doesn’t have
and can’t get a social security number (SSN),
use that person's ITIN. The ITIN is entered
wherever an SSN is requested on a tax return.
To apply for an ITIN, see Form W-7.
An ITIN is for tax use only. It doesn’t entitle
the holder to social security benefits or change
the holder's employment or immigration status
under U.S. law.
Adoption taxpayer identification number
(ATIN). If your qualifying person is a child who
was placed in your home for adoption and for
whom you don't have an SSN, you must get an
ATIN for the child. File Form W-7A, Application
for Taxpayer Identification Number for Pending
U.S. Adoptions.
Child of divorced or separated parents or
parents living apart. Even if you can't claim
your child as a dependent, he or she is treated
as your qualifying person if:
The child was under age 13 or wasn’t
physically or mentally able to care for him-
self or herself,
The child received over half of his or her
support during the calendar year from one
or both parents who are divorced or legally
separated under a decree of divorce or
separate maintenance, are separated un-
der a written separation agreement, or
lived apart at all times during the last 6
months of the calendar year,
The child was in the custody of one or both
parents for more than half the year, and
You were the child's custodial parent.
The custodial parent is the parent with
whom the child lived for the greater number of
nights in 2016. If the child was with each parent
for an equal number of nights, the custodial pa-
rent is the parent with the higher adjusted gross
income. For details and an exception for a pa-
rent who works at night, see Pub. 501.
The noncustodial parent can’t treat the child
as a qualifying person even if that parent is enti-
tled to claim the child as a dependent under the
special rules for a child of divorced or separated
parents.
You Must Have Earned
Income
To claim the credit, you (and your spouse if fil-
ing jointly) must have earned income during the
year.
Earned income. Earned income includes wa-
ges, salaries, tips, other taxable employee com-
pensation, and net earnings from self-employ-
ment. A net loss from self-employment reduces
earned income. Earned income also includes
strike benefits and any disability pay you report
as wages.
Generally, only taxable compensation is in-
cluded. However, you can elect to include non-
taxable combat pay in earned income. If you
are filing a joint return and both you and your
spouse received nontaxable combat pay, you
can each make your own election. (In other
words, if one of you makes the election, the
other one can also make it but doesn’t have to.)
You should figure your credit both ways and
make the election if it gives you a greater tax
benefit.
Members of certain religious faiths op-
posed to social security. Certain income
earned by persons who are members of certain
religious faiths that are opposed to participation
in Social Security Act programs and have an
IRS-approved form that exempts certain in-
come from social security and Medicare taxes
may not be considered earned income for this
purpose. See You Must Have Earned Income in
Pub. 503.
Not earned income. Earned income doesn’t
include:
Pensions and annuities,
Amounts reported on Form 1040, line 7 ex-
cluded as foreign earned income on Form
2555, line 43 or Form 2555-EZ, line 18,
Medicaid waiver payments you exclude
from income,
Social security and railroad retirement ben-
efits,
Workers' compensation,
Interest and dividends,
Unemployment compensation,
Scholarship or fellowship grants, except
for those reported on a Form W-2 and paid
to you for teaching or other services,
Nontaxable workfare payments,
Child support payments received by you,
Income of nonresident aliens that isn’t ef-
fectively connected with a U.S. trade or
business, or
Any amount received for work while an in-
mate in a penal institution.
Rule for studentspouse or spouse not able
to care for self. Your spouse is treated as
having earned income for any month that he or
she is:
1. A full-time student, or
2. Physically or mentally not able to care for
himself or herself. (Your spouse also must
live with you for more than half the year.)
If you are filing a joint return, this rule also
applies to you. You can be treated as having
earned income for any month you are a full-time
student or not able to care for yourself.
Figure the earned income of the nonworking
spouse described under (1) or (2) above as ex-
plained under Earned Income Limit, later.
This rule applies to only one spouse for any
one month. If, in the same month, both you and
your spouse don’t work and are either full-time
students or not physically or mentally able to
care for yourselves, only one of you can be
treated as having earned income in that month.
Full-time student. You are a full-time stu-
dent if you are enrolled at a school for the num-
ber of hours or classes that the school
Page 216 Chapter 32 Child and Dependent Care Credit
considers full time. You must have been a
full-time student for some part of each of 5 cal-
endar months during the year. (The months
need not be consecutive.)
School. The term “school” includes high
schools, colleges, universities, and technical,
trade, and mechanical schools. A school
doesn’t include an on-the-job training course,
correspondence school, or school offering cour-
ses only through the Internet.
Are These WorkRelated
Expenses?
Child and dependent care expenses must be
work-related to qualify for the credit. Expenses
are considered work-related only if both of the
following are true.
They allow you (and your spouse if filing
jointly) to work or look for work.
They are for a qualifying person's care.
Working or Looking for Work
To be work-related, your expenses must allow
you to work or look for work. If you are married,
generally both you and your spouse must work
or look for work. One spouse is treated as work-
ing during any month he or she is a full-time stu-
dent or isn’t physically or mentally able to care
for himself or herself.
Your work can be for others or in your own
business or partnership. It can be either full time
or part time.
Work also includes actively looking for work.
However, if you don’t find a job and have no
earned income for the year, you can't take this
credit. See You Must Have Earned Income, ear-
lier.
An expense isn’t considered work-related
merely because you had it while you were work-
ing. The purpose of the expense must be to al-
low you to work. Whether your expenses allow
you to work or look for work depends on the
facts.
Example 1. The cost of a babysitter while
you and your spouse go out to eat isn’t normally
a work-related expense.
Example 2. You work during the day. Your
spouse works at night and sleeps during the
day. You pay for care of your 5-year-old child
during the hours when you are working and
your spouse is sleeping. Your expenses are
considered work-related.
Volunteer work. For this purpose, you aren’t
considered to be working if you do unpaid vol-
unteer work or volunteer work for a nominal sal-
ary.
Work for part of year. If you work or actively
look for work during only part of the period cov-
ered by the expenses, then you must figure
your expenses for each day. For example, if
you work all year and pay care expenses of
$250 a month ($3,000 for the year), all the ex-
penses are work-related. However, if you work
or look for work for only 2 months and 15 days
during the year and pay expenses of $250 a
month, your work-related expenses are limited
to $625 (21 2 months × $250).
Temporary absence from work. You don't
have to figure your expenses for each day dur-
ing a short, temporary absence from work, such
as for vacation or a minor illness, if you have to
pay for care anyway. Instead, you can figure
your credit including the expenses you paid for
the period of absence.
An absence of 2 weeks or less is a short,
temporary absence. An absence of more than 2
weeks may be considered a short, temporary
absence, depending on the circumstances.
Example. You pay a nanny to care for your
2-year-old son and 4-year-old daughter so you
can work. You become ill and miss 4 months of
work but receive sick pay. You continue to pay
the nanny to care for the children while you are
ill. Your absence isn’t a short, temporary ab-
sence, and your expenses aren’t considered
work-related.
Parttime work. If you work part-time, you
generally must figure your expenses for each
day. However, if you have to pay for care
weekly, monthly, or in another way that includes
both days worked and days not worked, you
can figure your credit including the expenses
you paid for days you didn’t work. Any day
when you work at least 1 hour is a day of work.
Example 1. You work 3 days a week. While
you work, your 6-year-old child attends a de-
pendent care center, which complies with all
state and local regulations. You can pay the
center $150 for any 3 days a week or $250 for 5
days a week. Your child attends the center 5
days a week. Your work-related expenses are
limited to $150 a week.
Example 2. The facts are the same as in
Example 1 except the center doesn’t offer a
3-day option. The entire $250 weekly fee may
be a work-related expense.
Care of a Qualifying Person
To be work-related, your expenses must be to
provide care for a qualifying person.
You don't have to choose the least expen-
sive way of providing care. The cost of a paid
care provider may be an expense for the care of
a qualifying person even if another care pro-
vider is available at no cost.
Expenses are for the care of a qualifying
person only if their main purpose is the person's
well-being and protection.
Expenses for household services qualify if
part of the services is for the care of qualifying
persons. See Household services, later.
Expenses not for care. Expenses for care
don’t include amounts you pay for food, lodg-
ing, clothing, education, and entertainment.
However, you can include small amounts paid
for these items if they are incidental to and can’t
be separated from the cost of caring for the
qualifying person.
Child support payments aren’t for care and
don’t qualify for the credit.
Education. Expenses for a child in nursery
school, preschool, or similar programs for chil-
dren below the level of kindergarten are expen-
ses for care. Expenses to attend kindergarten
or a higher grade aren’t expenses for care.
Don’t use these expenses to figure your credit.
However, expenses for before- or af-
ter-school care of a child in kindergarten or a
higher grade may be expenses for care.
Summer school and tutoring programs
aren’t for care.
Example 1. You take your 3-year-old child
to a nursery school that provides lunch and ed-
ucational activities as a part of its preschool
childcare service. The lunch and educational
activities are incidental to the childcare, and
their cost can't be separated from the cost of
care. You can count the total cost when you fig-
ure the credit.
Example 2. You place your 10-year-old
child in a boarding school so you can work full
time. Only the part of the boarding school ex-
pense that is for the care of your child is a
work-related expense. You can count that part
of the expense in figuring your credit if it can be
separated from the cost of education. You can’t
count any part of the amount you pay the school
for your child's education.
Care outside your home. You can count the
cost of care provided outside your home if the
care is for your dependent under age 13 or any
other qualifying person who regularly spends at
least 8 hours each day in your home.
Dependent care center. You can count
care provided outside your home by a depend-
ent care center only if the center complies with
all state and local regulations that apply to
these centers.
A dependent care center is a place that pro-
vides care for more than six persons (other than
persons who live there) and receives a fee, pay-
ment, or grant for providing services for any of
those persons, even if the center isn’t run for
profit.
Camp. The cost of sending your child to an
overnight camp isn’t considered a work-related
expense. The cost of sending your child to a
day camp may be a work-related expense,
even if the camp specializes in a particular ac-
tivity, such as computers or soccer.
Transportation. If a care provider takes a
qualifying person to or from a place where care
is provided, that transportation is for the care of
the qualifying person. This includes transporta-
tion by bus, subway, taxi, or private car. How-
ever, transportation not provided by a care pro-
vider isn’t for the care of a qualifying person.
Also, if you pay the transportation cost for the
care provider to come to your home, that ex-
pense isn’t for care of a qualifying person.
Fees and deposits. Fees you paid to an
agency to get the services of a care provider,
deposits you paid to an agency or preschool,
application fees, and other indirect expenses
are work-related expenses if you have to pay
them to get care, even though they aren’t di-
rectly for care. However, a forfeited deposit isn’t
for the care of a qualifying person if care isn’t
provided.
Chapter 32 Child and Dependent Care Credit Page 217
Example 1. You paid a fee to an agency to
get the services of the nanny who cares for your
2-year-old daughter while you work. The fee
you paid is a work-related expense.
Example 2. You placed a deposit with a
preschool to reserve a place for your 3-year-old
child. You later sent your child to a different pre-
school and forfeited the deposit. The forfeited
deposit isn’t for care and so isn’t a work-related
expense.
Household services. Expenses you pay for
household services are work-related expenses
if they are at least partly for the well-being and
protection of a qualifying person.
Household services are ordinary and usual
services done in and around your home that are
necessary to run your home. They include the
services of a housekeeper, maid, or cook. How-
ever, they don’t include the services of a chauf-
feur, bartender, or gardener. See Household
Services in Pub. 503 for more information.
In this chapter, the term housekeeper refers
to any household employee whose services in-
clude the care of a qualifying person.
Taxes paid on wages. The taxes you pay
on wages for qualifying child and dependent
care services are work-related expenses. See
Do You Have Household Employees, later.
Payments to Relatives or
Dependents
You can count work-related payments you
make to relatives who aren’t your dependents,
even if they live in your home. However, don’t
count any amounts you pay to:
1. A dependent for whom you (or your
spouse if filing jointly) can claim an ex-
emption,
2. Your child who was under age 19 at the
end of the year, even if he or she isn’t your
dependent,
3. A person who was your spouse any time
during the year, or
4. The parent of your qualifying person if
your qualifying person is your child and
under age 13.
What's Your Filing Status?
Generally, married couples must file a joint re-
turn to take the credit. However, if you are le-
gally separated or living apart from your
spouse, you may be able to file a separate re-
turn and still take the credit.
Legally separated. You aren’t considered
married if you are legally separated from your
spouse under a decree of divorce or separate
maintenance. You may be eligible to take the
credit on your return using head of household
filing status.
Married and living apart. You aren’t consid-
ered married and are eligible to take the credit if
all the following apply.
1. You file a return apart from your spouse.
2. Your home is the home of a qualifying per-
son for more than half the year.
3. You pay more than half the cost of keeping
up your home for the year.
4. Your spouse doesn’t live in your home for
the last 6 months of the year.
Note. You may also be able to claim the
child and dependent care credit using the mar-
ried filing separate filing status. See Not legally
separated in Pub. 503.
Costs of keeping up a home. The costs of
keeping up a home normally include property
taxes, mortgage interest, rent, utility charges,
home repairs, insurance on the home, and food
eaten at home.
The costs of keeping up a home don’t in-
clude payments for clothing, education, medical
treatment, vacations, life insurance, transporta-
tion, or mortgage principal.
They also don’t include the purchase, per-
manent improvement, or replacement of prop-
erty. For example, you can’t include the cost of
replacing a water heater. However, you can in-
clude the cost of repairing a water heater.
Death of spouse. If your spouse died during
the year and you don’t remarry before the end
of the year, you generally must file a joint return
to take the credit. If you do remarry before the
end of the year, the credit can be claimed on
your deceased spouse's return.
Care Provider
Identification Test
You must identify all persons or organizations
that provide care for your child or dependent.
Use Form 2441, Part I, to show the information.
If you don’t have any care providers and you
are filing Form 2441 only to report taxable in-
come in Part III, enter “none” in line 1, column
(a).
Information needed. To identify the care pro-
vider, you must give the provider's:
1. Name,
2. Address, and
3. Taxpayer identification number.
If the care provider is an individual, the tax-
payer identification number is his or her social
security number or individual taxpayer identifi-
cation number. If the care provider is an organi-
zation, then it is the employer identification
number (EIN).
You don’t have to show the taxpayer identifi-
cation number if the care provider is a tax-ex-
empt organization (such as a church or school).
In this case, enter “Tax-Exempt” in the space
where Form 2441 asks for the number.
If you can’t provide all of the information or if
the information is incorrect, you must be able to
show that you used due diligence (discussed
later) in trying to furnish the necessary informa-
tion.
Getting the information. You can use Form
W-10 to request the required information from
the care provider. If you don't use Form W-10,
you can get the information from one of the
other sources listed in the instructions for Form
W-10 including:
1. A copy of the provider's social security
card,
2. A copy of the provider's completed Form
W-4 if he or she is your household em-
ployee,
3. A copy of the statement furnished by your
employer if the provider is your employer's
dependent care plan, or
4. A letter or invoice from the provider if it
shows the information.
You should keep this information with
your tax records. Don’t send Form
W-10 (or other document containing
this information) to the Internal Revenue Serv-
ice.
Due diligence. If the care provider information
you give is incorrect or incomplete, your credit
may not be allowed. However, if you can show
that you used due diligence in trying to supply
the information, you can still claim the credit.
You can show due diligence by getting and
keeping the provider's completed Form W-10 or
one of the other sources of information just lis-
ted. Care providers can be penalized if they
don't provide this information to you or if they
provide incorrect information.
Provider refusal. If the provider refuses to
give you their identifying information, you
should report on Form 2441 whatever informa-
tion you have (such as the name and address).
Enter “See Attached Statement” in the columns
calling for the information you don't have. Then
attach a statement explaining that you reques-
ted the information from the care provider, but
the provider didn't give you the information. Be
sure to write your name and social security
number on this statement. The statement will
show that you used due diligence in trying to
furnish the necessary information.
U.S. citizens and resident aliens living
abroad. If you are living abroad, your care pro-
vider may not have, and may not be required to
get, a U.S. taxpayer identification number (for
example, an SSN or EIN). If so, enter “LAFCP”
(Living Abroad Foreign Care Provider) in the
space for the care provider's taxpayer identifi-
cation number.
How To Figure
the Credit
Your credit is a percentage of your work-related
expenses. Your expenses are subject to the
earned income limit and the dollar limit. The
percentage is based on your adjusted gross in-
come.
Figuring Total
WorkRelated Expenses
To figure the credit for 2016 work-related ex-
penses, count only those you paid by Decem-
ber 31, 2016.
Expenses prepaid in an earlier year. If you
pay for services before they are provided, you
can count the prepaid expenses only in the year
the care is received. Claim the expenses for theRECORDS
Page 218 Chapter 32 Child and Dependent Care Credit
later year as if they were actually paid in that
later year.
Expenses not paid until the following year.
Don’t count 2015 expenses that you paid in
2016 as work-related expenses for 2016. You
may be able to claim an additional credit for
them on your 2016 return, but you must figure it
separately. See Payments for prior year's ex-
penses under Amount of Credit in Pub. 503.
If you had expenses in 2016 that you
didn’t pay until 2017, you can't count
them when figuring your 2016 credit.
You may be able to claim a credit for them on
your 2017 return.
Expenses reimbursed. If a state social serv-
ices agency pays you a nontaxable amount to
reimburse you for some of your child and de-
pendent care expenses, you can’t count the ex-
penses that are reimbursed as work-related ex-
penses.
Example. You paid work-related expenses
of $3,000. You are reimbursed $2,000 by a
state social services agency. You can use only
$1,000 to figure your credit.
Medical expenses. Some expenses for the
care of qualifying persons who aren’t able to
care for themselves may qualify as work-related
expenses and also as medical expenses. You
can use them either way, but you can’t use the
same expenses to claim both a credit and a
medical expense deduction.
If you use these expenses to figure the
credit and they are more than the earned in-
come limit or the dollar limit, discussed later,
you can add the excess to your medical expen-
ses. However, if you use your total expenses to
figure your medical expense deduction, you
can’t use any part of them to figure your credit.
Amounts excluded from your income
under your employer's dependent care
benefits plan can’t be used to claim a
medical expense deduction.
Dependent Care Benefits
If you receive dependent care benefits, your
dollar limit for purposes of the credit may be re-
duced. See Reduced Dollar Limit, later. But,
even if you can't take the credit, you may be
able to take an exclusion or deduction for the
dependent care benefits.
Dependent care benefits. Dependent care
benefits include:
1. Amounts your employer paid directly to ei-
ther you or your care provider for the care
of your qualifying person while you work,
2. The fair market value of care in a daycare
facility provided or sponsored by your em-
ployer, and
3. Pre-tax contributions you made under a
dependent care flexible spending arrange-
ment.
Your salary may have been reduced to pay for
these benefits. If you received benefits as an
employee, they should be shown in box 10 of
your Form W-2. See Statement for employee,
later. Benefits you received as a partner shouldTIPCAUTION
!
be shown in box 13 of your Schedule K-1 (Form
1065) with code O. Enter the amount of these
benefits on Form 2441, Part III, line 12.
Exclusion or deduction. If your employer pro-
vides dependent care benefits under a qualified
plan, you may be able to exclude these benefits
from your income. Your employer can tell you
whether your benefit plan qualifies. To claim the
exclusion, you must complete Part III of Form
2441. You can't use Form 1040EZ.
If you are self-employed and receive bene-
fits from a qualified dependent care benefit
plan, you are treated as both employer and em-
ployee. Therefore, you wouldn’t get an exclu-
sion from wages. Instead, you would get a de-
duction on Form 1040, Schedule C, line 14;
Schedule E, line 19 or 28; or Schedule F,
line 15. To claim the deduction, you must use
Form 2441.
The amount you can exclude or deduct is
limited to the smallest of:
1. The total amount of dependent care bene-
fits you received during the year,
2. The total amount of qualified expenses
you incurred during the year,
3. Your earned income,
4. Your spouse's earned income, or
5. $5,000 ($2,500 if married filing sepa-
rately).
The definition of earned income for the exclu-
sion or deduction is the same as the definition
used when figuring the credit except that
earned income for the exclusion or deduction
doesn’t include any dependent care benefits
you receive. See Earned Income Limit, later.
You can choose to include your non-
taxable combat pay in earned income
when figuring your exclusion or deduc-
tion, even if you choose not to include it in
earned income for the earned income credit or
the credit for child and dependent care expen-
ses.
Statement for employee. Your employer
must give you a Form W-2 (or similar state-
ment) showing in box 10 the total amount of de-
pendent care benefits provided to you during
the year under a qualified plan. Your employer
will also include any dependent care benefits
over $5,000 in your wages shown on your Form
W-2 in box 1.
Effect of exclusion on credit. If you exclude
dependent care benefits from your income, the
amount of the excluded benefits:
1. Isn’t included in your work-related expen-
ses, and
2. Reduces the dollar limit, discussed later.
Earned Income Limit
The amount of work-related expenses you use
to figure your credit can’t be more than:
1. Your earned income for the year if you are
single at the end of the year, or
2. The smaller of your or your spouse's
earned income for the year if you are
married at the end of the year.TIP
Earned income is defined under You Must Have
Earned Income, earlier.
For purposes of item (2), use your
spouse's earned income for the entire
year, even if you were married for only
part of the year.
Separated spouse. If you are legally separa-
ted or married and living apart from your spouse
(as described under What’s Your Filing Status,
earlier), you aren’t considered married for pur-
poses of the earned income limit. Use only your
income in figuring the earned income limit.
Surviving spouse. If your spouse died during
the year and you file a joint return as a surviving
spouse, you may, but aren’t required to, take
into account the earned income of your spouse
who died during the year.
Community property laws. You should disre-
gard community property laws when you figure
earned income for this credit.
You or your spouse is a student or not able
to care for self. Your spouse who is either a
full-time student or not able to care for himself
or herself is treated as having earned income.
His or her earned income for each month is
considered to be at least $250 if there is one
qualifying person in your home, or at least $500
if there are two or more.
Spouse works. If your spouse works during
that month, use the higher of $250 (or $500) or
his or her actual earned income for that month.
Spouse qualifies for part of month. If your
spouse is a full-time student or not able to care
for himself or herself for only part of a month,
the full $250 (or $500) still applies for that
month.
You are a student or not able to care for
self. These rules also apply if you are a stu-
dent or not able to care for yourself and you are
filing a joint return. For each month or part of a
month you are a student or not able to care for
yourself, your earned income is considered to
be at least $250 (or $500). If you also work dur-
ing that month, use the higher of $250 (or $500)
or your actual earned income for that month.
Both spouses qualify. If, in the same
month, both you and your spouse are either
full-time students or not able to care for your-
selves, only one spouse can be considered to
have this earned income of $250 (or $500) for
that month.
Dollar Limit
There is a dollar limit on the amount of your
work-related expenses you can use to figure
the credit. This limit is $3,000 for one qualifying
person, or $6,000 for two or more qualifying
persons.
If you paid work-related expenses for
the care of two or more qualifying per-
sons, the applicable dollar limit is
$6,000. This $6,000 limit doesn’t need to be
divided equally among them. For example, if
your work-related expenses for the care of one
qualifying person are $3,200 and your work-re-
lated expenses for another qualifying personTIPTIP
Chapter 32 Child and Dependent Care Credit Page 219
are $2,800, you can use the total, $6,000, when
figuring the credit.
Yearly limit. The dollar limit is a yearly limit.
The amount of the dollar limit remains the same
no matter how long, during the year, you have a
qualifying person in your household. Use the
$3,000 limit if you paid work-related expenses
for the care of one qualifying person at any time
during the year. Use $6,000 if you paid work-re-
lated expenses for the care of more than one
qualifying person at any time during the year.
Reduced Dollar Limit
If you received dependent care benefits that
you exclude or deduct from your income, you
must subtract that amount from the dollar limit
that applies to you. Your reduced dollar limit is
figured on Form 2441, Part III. See Dependent
Care Benefits, earlier, for information on exclud-
ing or deducting these benefits.
Example 1. George is a widower with one
child and earns $24,000 a year. He pays
work-related expenses of $2,900 for the care of
his 4-year-old child and qualifies to claim the
credit for child and dependent care expenses.
His employer pays an additional $1,000 under a
dependent care benefit plan. This $1,000 is ex-
cluded from George's income.
Although the dollar limit for his work-related
expenses is $3,000 (one qualifying person),
George figures his credit on only $2,000 of the
$2,900 work-related expenses he paid. This is
because his dollar limit is reduced as shown
next.
George's Reduced Dollar Limit
1) Maximum allowable expenses for one
qualifying person . . . . . . . . . . . $3,000
2) Minus: Dependent care benefits
George excludes from income . . . . −1,000
3) Reduced dollar limit on expenses
George can use for the credit . . . . . $2,000
Example 2. Randall is married and both he
and his wife are employed. Each has earned in-
come in excess of $6,000. They have two chil-
dren, Anne and Andy, ages 2 and 4, who attend
a daycare facility licensed and regulated by the
state. Randall's work-related expenses are
$6,000 for the year.
Randall's employer has a dependent care
assistance program as part of its cafeteria plan,
which allows employees to make pre-tax contri-
butions to a dependent care flexible spending
arrangement. Randall has elected to take the
maximum $5,000 exclusion from his salary to
cover dependent care expenses through this
program.
Although the dollar limit for his work-related
expenses is $6,000 (two or more qualifying per-
sons), Randall figures his credit on only $1,000
of the $6,000 work-related expense paid. This
is because his dollar limit is reduced as shown
next.
Randall's Reduced Dollar Limit
1) Maximum allowable expenses for two
qualifying persons . . . . . . . . . . . $6,000
2) Minus: Dependent care benefits Randall
selects from employer's cafeteria plan
and excludes from income . . . . . . . −5,000
3) Reduced dollar limit on expenses
Randall can use for the credit . . . . . . $1,000
Amount of Credit
To determine the amount of your credit, multiply
your work-related expenses (after applying the
earned income and dollar limits) by a percent-
age. This percentage depends on your adjusted
gross income shown on Form 1040, line 38, or
Form 1040A, line 22. The following table shows
the percentage to use based on adjusted gross
income.
IF your adjusted gross
income is:
THEN the
percentage
is:
Over
But
not
over
$ 0 $15,000 35%
15,000 17,000 34%
17,000 19,000 33%
19,000 21,000 32%
21,000 23,000 31%
23,000 25,000 30%
25,000 27,000 29%
27,000 29,000 28%
29,000 31,000 27%
31,000 33,000 26%
33,000 35,000 25%
35,000 37,000 24%
37,000 39,000 23%
39,000 41,000 22%
41,000 43,000 21%
43,000 No limit 20%
How To Claim the
Credit
To claim the credit, you can file Form 1040 or
Form 1040A. You can’t claim the credit on Form
1040EZ.
Form 1040 or 1040A. You must complete
Form 2441 and attach it to your Form 1040 or
1040A. Enter the credit on Form 1040, line 49,
or Form 1040A, line 31.
Limit on credit. The amount of credit you can
claim is generally limited to the amount of your
tax. For more information, see the Instructions
for Form 2441.
Tax credit not refundable. You can’t get a
refund for any part of the credit that is more than
this limit.
Recordkeeping. You should keep re-
cords of your work-related expenses.
Also, if your dependent or spouse isn’t
able to care for himself or herself, your records
should show both the nature and the length of
the disability. Other records you should keep to
support your claim for the credit are described
earlier under Care Provider Identification Test.RECORDS
Do You Have
Household
Employees?
If you pay someone to come to your home and
care for your dependent or spouse, you may be
a household employer. If you are a household
employer, you will need an employer identifica-
tion number (EIN) and you may have to pay em-
ployment taxes. If the individuals who work in
your home are self-employed, you aren’t liable
for any of the taxes discussed in this section.
Self-employed persons who are in business for
themselves aren’t household employees. Usu-
ally, you aren’t a household employer if the per-
son who cares for your dependent or spouse
does so at his or her home or place of business.
If you use a placement agency that exerci-
ses control over what work is done and how it
will be done by a babysitter or companion who
works in your home, the worker isn’t your em-
ployee. This control could include providing
rules of conduct and appearance and requiring
regular reports. In this case, you don’t have to
pay employment taxes. But, if an agency merely
gives you a list of sitters and you hire one from
that list, and pay the sitter directly, the sitter
may be your employee.
If you have a household employee, you may
be subject to:
1. Social security and Medicare taxes,
2. Federal unemployment tax, and
3. Federal income tax withholding.
Social security and Medicare taxes are gener-
ally withheld from the employee's pay and
matched by the employer. Federal unemploy-
ment (FUTA) tax is paid by the employer only
and provides for payments of unemployment
compensation to workers who have lost their
jobs. Federal income tax is withheld from the
employee's total pay if the employee asks you
to do so and you agree.
For more information on a household em-
ployer's tax responsibilities, see Pub. 926 and
Schedule H (Form 1040) and its instructions.
State employment tax. You may also have to
pay state unemployment tax. Contact your state
unemployment tax office for information. You
should also find out whether you need to pay or
collect other state employment taxes or carry
workers' compensation insurance. For a list of
state unemployment tax agencies, visit the U.S.
Department of Labor's website. A link to that
website is in Pub. 926, or you can find it with an
online search.
Page 220 Chapter 32 Child and Dependent Care Credit
33.
Credit for the
Elderly or the
Disabled
Introduction
If you qualify, you may be able to reduce the tax
you owe by taking the credit for the elderly or
the disabled on Schedule R (Form 1040A or
1040).
This chapter explains:
Who qualifies for the credit for the elderly
or the disabled, and
How to claim the credit.
You may be able to take the credit for the
elderly or the disabled if:
You are age 65 or older at the end of 2016,
or
You retired on permanent and total disabil-
ity and have taxable disability income.
Useful Items
You may want to see:
Publication
Credit for the Elderly or the Disabled
Tax Guide for Seniors
Form (and Instructions)
Credit for the Elderly or the Disabled
Are You Eligible
for the Credit?
You can take the credit for the elderly or the dis-
abled if you meet both of the following require-
ments.
You are a qualified individual.
Your income isn't more than certain limits.
You can use Figure 33-A and Table 33-1 as
guides to see if you are eligible for the credit.
Use Figure 33-A first to see if you are a qualified
individual. If you are, go to Table 33-1 to make
sure your income isn't too high to take the
credit.
You can take the credit only if you file
Form 1040 or Form 1040A. You can't
take the credit if you file Form 1040EZ
or Form 1040NR.
Qualified Individual
You are a qualified individual for this credit if
you are a U.S. citizen or resident alien, and
either of the following applies.
Schedule R (Form 1040A or 1040)TIP
1. You were age 65 or older at the end of
2016.
2. You were under age 65 at the end of 2016
and all three of the following statements
are true.
a. You retired on permanent and total
disability (explained later).
b. You received taxable disability in-
come for 2016.
c. On January 1, 2016, you had not
reached mandatory retirement age
(defined later under Disability in-
come).
Age 65. You are considered to be age 65 on
the day before your 65th birthday. Therefore, if
you were born on January 1, 1952, you are con-
sidered to be age 65 at the end of 2016.
Death of a taxpayer. If you are preparing a re-
turn for someone who died in 2016, consider
the taxpayer to be age 65 at the end of 2016 if
he or she was age 65 or older on the day before
their death. For example, if the taxpayer was
born on February 14, 1951, and died on Febru-
ary 13, 2016, the taxpayer is considered age 65
at the time of death. However, if the taxpayer
died on February 12, 2016, the taxpayer isn't
considered age 65 at the time of death or at the
end of 2016.
U.S. Citizen or Resident Alien
You must be a U.S. citizen or resident alien (or
be treated as a resident alien) to take the credit.
Generally, you can't take the credit if you were a
nonresident alien at any time during the tax
year.
Exceptions. You may be able to take the
credit if you are a nonresident alien who is mar-
ried to a U.S. citizen or resident alien at the end
of the tax year and you and your spouse
choose to treat you as a U.S. resident alien. If
you make that choice, both you and your
spouse are taxed on your worldwide incomes.
If you were a nonresident alien at the begin-
ning of the year and a resident alien at the end
of the year, and you were married to a U.S. citi-
zen or resident alien at the end of the year, you
may be able to choose to be treated as a U.S.
resident alien for the entire year. In that case,
you may be allowed to take the credit.
For information on these choices, see chap-
ter 1 of Pub. 519, U.S. Tax Guide for Aliens.
Married Persons
Generally, if you are married at the end of the
tax year, you and your spouse must file a joint
return to take the credit. However, if you and
your spouse didn't live in the same household
at any time during the tax year, you can file ei-
ther a joint return or separate returns and still
take the credit.
Head of household. You can file as head of
household and qualify to take the credit, even if
your spouse lived with you during the first 6
months of the year, if you meet certain tests.
See Head of Household in chapter 2 for the
tests you must meet.
Under Age 65
If you are under age 65 at the end of 2016, you
can qualify for the credit only if you are retired
on permanent and total disability (discussed
next) and have taxable disability income (dis-
cussed later under Disability income). You are
retired on permanent and total disability if:
You were permanently and totally disabled
when you retired, and
You retired on disability before the close of
the tax year.
Even if you don't retire formally, you may be
considered retired on disability when you have
stopped working because of your disability.
If you retired on disability before 1977, and
weren't permanently and totally disabled at the
time, you can qualify for the credit if you were
permanently and totally disabled on January 1,
1976, or January 1, 1977.
You are considered to be under age 65
at the end of 2016 if you were born af-
ter January 1, 1952.
Permanent and total disability. You have a
permanent and total disability if you can't en-
gage in any substantial gainful activity because
of your physical or mental condition. A qualified
physician must certify that the condition has las-
ted or can be expected to last continuously for
12 months or more, or that the condition can be
expected to result in death. See Physician's
statement, later.
Substantial gainful activity. Substantial
gainful activity is the performance of significant
duties over a reasonable period of time while
working for pay or profit, or in work generally
done for pay or profit. Full-time work (or
part-time work done at your employer's conven-
ience) in a competitive work situation for at least
the minimum wage conclusively shows that you
are able to engage in substantial gainful activity.
Note. Information on minimum wage rates
is available on the Department of Labor's Wage
and Hour Division webpage at www.dol.gov/
general/topic/wages/minimumwage.
Substantial gainful activity isn't work you do
to take care of yourself or your home. It isn't un-
paid work on hobbies, institutional therapy or
training, school attendance, clubs, social pro-
grams, and similar activities. However, the na-
ture of the work you perform may show that you
are able to engage in substantial gainful activity.
The fact that you haven't worked or have
been unemployed for some time isn't, of itself,
conclusive evidence that you can't engage in
substantial gainful activity. See Pub. 524 for
some examples of activity that may constitute
substantial gainful activity.
Sheltered employment. Certain work of-
fered at qualified locations to physically or men-
tally impaired persons is considered sheltered
employment. These qualified locations include
work centers that are certified by the Depart-
ment of Labor (formerly referred to as sheltered
workshops), hospitals, and similar institutions,
homebound programs, and Department of Vet-
erans Affairs (VA) sponsored homes.
Compared to commercial employment, pay
is lower for sheltered employment. Therefore,TIP
Chapter 33 Credit for the Elderly or the Disabled Page 221
one usually doesn't look for sheltered employ-
ment if he or she can get other employment.
The fact that one has accepted sheltered em-
ployment isn't proof of the person's ability to en-
gage in substantial gainful activity.
Physician's statement. If you are under age
65, you must have your physician complete a
statement certifying that you had a permanent
and total disability on the date you retired. You
can use the statement in the Instructions for
Schedule R.
You don't have to file this statement with
your Form 1040 or Form 1040A, but you must
keep it for your records.
Veterans. If the Department of Veterans Af-
fairs (VA) certifies that you have a permanent
and total disability, you can substitute VA Form
21-0172, Certification of Permanent and Total
Disability, for the physician's statement you are
required to keep. VA Form 21-0172 must be
signed by a person authorized by the VA to do
so. You can get this form from your local VA re-
gional office.
Physician's statement obtained in earlier
year. If you got a physician's statement in an
earlier year and, due to your continued disabled
condition, you were unable to engage in any
substantial gainful activity during 2016, you may
not need to get another physician's statement
for 2016. For a detailed explanation of the con-
ditions you must meet, see the instructions for
Schedule R, Part II. If you meet the required
conditions, check the box on your Schedule R,
Part II, line 2.
If you checked box 4, 5, or 6 in Part I of
Schedule R, enter in the space above the box
on line 2 in Part II the first name(s) of the
spouse(s) for whom the box is checked.
Disability income. If you are under age 65,
you must also have taxable disability income to
qualify for the credit. Disability income must
meet both of the following requirements.
1. It must be paid under your employer's ac-
cident or health plan or pension plan.
2. It must be included in your income as wa-
ges (or payments instead of wages) for the
time you are absent from work because of
permanent and total disability.
Payments that aren't disability income.
Any payment you receive from a plan that
doesn't provide for disability retirement isn't dis-
ability income. Any lump-sum payment for ac-
crued annual leave that you receive when you
retire on disability is a salary payment and isn't
disability income.
For purposes of the credit for the elderly or
the disabled, disability income doesn't include
amounts you receive after you reach mandatory
retirement age. Mandatory retirement age is the
age set by your employer at which you would
have had to retire, had you not become disa-
bled.
Income Limits
To determine if you can claim the credit, you
must consider two income limits. The first limit
is the amount of your adjusted gross income
(AGI). The second limit is the amount of nontax-
able social security and other nontaxable pen-
sions, annuities, or disability income you re-
ceived. The limits are shown in Table 33-1.
If your AGI and nontaxable pensions, annui-
ties, or disability income are less than the in-
come limits, you may be able to claim the credit.
See How to Claim the Credit, later.
If your AGI or your nontaxable pen-
sions, annuities, or disability income
are equal to or more than the income
limits, you can't take the credit.
How to Claim the
Credit
You can figure the credit yourself or the IRS will
figure it for you. If you want to figure the credit
yourself, skip to Credit Figured by You, later.
Credit Figured for You
If you want the IRS to figure the credit for you,
read the following discussion for the form you
will file (Form 1040 or 1040A).CAUTION
!
Figure 33-A. Are You a Qualified Individual?Were you married at the end of the tax
year?
No
Yes
No
Yes
Yes
Did you receive taxable disability
benefits during the tax year?
You are a qualified
individual and may be able
to take the credit for the
elderly or the disabled
unless your income
exceeds the limits in
Table 33-1.
Yes
You aren’t a qualified
individual and can’t
take the credit for the
elderly or the disabled.
Yes
No
Yes
If you were a nonresident alien at any time during the tax year and were married to a U.S. citizen or resident alien at the end of the tax year, see U.S. Citizen or
Resident Alien under Qualified Individual. If you and your spouse choose to treat you as a U.S. resident alien, answer “Yes” to this question.
Mandatory retirement age is the age set by your employer at which you would have been required to retire, had you not become disabled.
START HERE
Did you live with your
spouse at any time
during the tax year?
Are you a U.S. citizen or resident alien? 2
No
Yes
Are you filing a joint
return with your spouse?
Yes
Were you 65 or older at the end of
the tax year?
No
Are you retired on permanent and
total disability?
No
No
Did you reach mandatory retirement
age before the tax year? 3
No
1 However, you may be able to claim this credit even if you lived with your spouse during the first 6 months of the tax year, as long as you qualify to file as head of
household. You qualify to file as head of household if you are considered unmarried and meet certain other conditions. See chapter 2 for more information.
Page 222 Chapter 33 Credit for the Elderly or the Disabled
Form 1040. If you want the IRS to figure your
credit, see Form 1040 Line Entries under Tax
Figured by IRS in chapter 30.
Form 1040A. If you want the IRS to figure your
credit, see Form 1040A Line Entries under Tax
Figured by IRS in chapter 30.
If you want the IRS to figure your tax, see
chapter 30.
Credit Figured by You
To figure the credit yourself, first check the box
in Part I of Schedule R that applies to you. Only
check one box in Part I. If you check box 2, 4, 5,
6, or 9 in Part I, also complete Part II of Sched-
ule R.
Next, figure the amount of your credit using
Part III of Schedule R. For a step-by-step dis-
cussion about filling out Part III of Schedule R,
see Figuring the Credit Yourself in Pub. 524.
Finally, report the amount from line 22 of
Schedule R on your tax return. If you file Form
1040A, enter the amount from Schedule R,
line 22, on Form 1040A, line 32. If you file Form
1040, include the amount from Schedule R,
line 22, on line 54; check box c, and enter “Sch
R” on the line next to that box.
Limit on credit. The amount of the credit you
can claim is generally limited to the amount of
your tax. Use the Credit Limit Worksheet in the
Instructions for Schedule R to determine if your
credit is limited.
Table 33-1. Income Limits
IF your filing status is ...
THEN, even if you qualify (see Figure 33A ), you CANNOT take the credit if...
Your adjusted gross income (AGI)* is
equal to or more than...
OR the total of your nontaxable social
security and other nontaxable
pension(s), annuities, or disability
income is equal to or more than...
single, head of household, or
qualifying widow(er) with dependent
child
$17,500 $5,000
married filing jointly and only one
spouse qualifies in Figure 33-A
$20,000 $5,000
married filing jointly and both
spouses qualify in Figure 33-A
$25,000 $7,500
married filing separately and you
lived apart from your spouse for all
of 2016
$12,500 $3,750
*AGI is the amount on Form 1040A, line 22, or Form 1040, line 38.
Chapter 33 Credit for the Elderly or the Disabled Page 223
34.
Child Tax Credit
What's New
Taxpayer identification number needed by
due date of return. If you do not have a so-
cial security number (SSN) or IRS individual
taxpayer identification number (ITIN) by the due
date of your 2016 return (including extensions),
you cannot claim the child tax credit or the addi-
tional child tax credit on either your original or
an amended 2016 return, even if you later get
an SSN or ITIN. Also, neither credit is allowed
on either your original or an amended 2016 re-
turn for a child who does not have an SSN,
ITIN, or IRS adoption taxpayer identification
number (ATIN) by the due date of your return
(including extensions), even if that child later
gets one of those numbers.
If you apply for an ATIN or ITIN on or before
the due date of your 2016 return (including ex-
tensions) and the IRS issues you an ATIN or
ITIN as a result of the application, the IRS will
consider your ATIN or ITIN as issued on or be-
fore the due date of your return.
Refunds for 2016 tax returns claiming EIC
or ACTC cannot be issued before Feb. 15,
2017. Due to changes in the law, if you claim
the earned income tax credit (EIC) and/or the
additional child tax credit (ACTC) on your in-
come tax return, the IRS cannot issue your re-
fund before February 15. This applies to the en-
tire refund, not just the portion associated with
the EIC or ACTC. Hardship claims for these re-
funds will not be accepted prior to Feb. 15, as
this refund hold is required by law.
The IRS will begin accepting and processing
tax returns once the filing season begins.
Check Where’s My Refund? on IRS.gov after
February 15 for your personalized refund sta-
tus. It's updated once a day and remains the
best way to check the status of your refund.
New 2 and 10year bans for disregarding
CTC or ACTC rules. If you claim the child tax
credit (CTC) or additional child tax credit
(ACTC), but you are not eligible for either credit
and it is later determined that your error was
due to reckless or intentional disregard of the
CTC or ACTC rules, you will not be allowed to
claim either credit for 2 years. If it is determined
that your error was due to fraud, you will not be
allowed to claim either credit for 10 years. You
may also have to pay penalties.
Reminder
Foreign earned income. If you are filing Form
2555 or 2555-EZ (both relating to foreign
earned income), you cannot claim the addi-
tional child tax credit.
Introduction
The child tax credit is a credit that may reduce
your tax by as much as $1,000 for each of your
qualifying children.
The additional child tax credit is a credit you
may be able to take if you are not able to claim
the full amount of the child tax credit.
The child tax credit and the additional
child tax credit should not be confused
with the child and dependent care
credit discussed in chapter 32.
If you have no tax. Credits, such as the child
tax credit or the child and dependent care
credit, reduce your tax. If your tax on Form
1040, line 47, or Form 1040A, line 30, is zero,
you can't claim the child tax credit because
there is no tax to reduce. However, you may
qualify for the additional child tax credit on
line 67 (Form 1040) or line 43 (Form 1040A).
Useful Items
You may want to see:
Publication
Child Tax Credit
Form (and Instructions)
Child Tax Credit
Qualifying Child
A qualifying child for purposes of the child tax
credit is a child who:
1. Is your son, daughter, stepchild, foster
child, brother, sister, stepbrother, stepsis-
ter, half brother, half sister, or a descend-
ant of any of them (for example, your
grandchild, niece, or nephew),
2. Was under age 17 at the end of 2016,
3. Did not provide over half of his or her own
support for 2016,
4. Lived with you for more than half of 2016
(see Exceptions to time lived with you,
later),
5. Is claimed as a dependent on your return,
6. Does not file a joint return for the year (or
files it only to claim a refund of withheld in-
come tax or estimated tax paid), and
7. Was a U.S. citizen, a U.S. national, or a
resident of the United States. If the child
was adopted, see Adopted child, later.
For each qualifying child you must check the
box on Form 1040 or Form 1040A, line 6c.
Example 1. Your son turned 17 on Decem-
ber 30, 2016. He is a citizen of the United
States and you claimed him as a dependent on
your return. He is not a qualifying child for the
child tax credit because he was not under age
17 at the end of 2016.CAUTION
!
Schedule 8812 (Form 1040A or 1040)
Example 2. Your daughter turned 8 years
old in 2016. She is not a citizen of the United
States, has an ITIN, and lived in Mexico all of
2016. She is not a qualifying child for the child
tax credit because she was not a U.S. citizen or
national or a resident of the United States for
2016.
Filers who have certain child dependents
with an Individual Taxpayer Identification
Number (ITIN). If you are claiming a child tax
credit or additional child tax credit for a child
you identified on your tax return with an ITIN in-
stead of a social security number (SSN), you
must complete Part I of Schedule 8812 (Form
1040A or 1040).
Although a child may be your dependent,
you may claim a child tax credit or additional
child tax credit only for a dependent who is a
citizen, national, or resident of the United
States. To be treated as a resident of the United
States, a child generally will need to meet the
requirements of the substantial presence test.
For more information about the substantial
presence test, see Pub. 519, U.S. Tax Guide for
Aliens.
Adopted child. An adopted child is always
treated as your own child. An adopted child in-
cludes a child lawfully placed with you for legal
adoption.
If you are a U.S. citizen or U.S. national and
your adopted child lived with you all year as a
member of your household in 2016, that child
meets condition (7) above to be a qualifying
child for the child tax credit.
Exceptions to time lived with you. A child is
considered to have lived with you for more than
half of 2016 if the child was born or died in 2016
and your home was this child's home for more
than half the time he or she was alive. Tempo-
rary absences by you or the child for special cir-
cumstances, such as for school, vacation, busi-
ness, medical care, military service, or
detention in a juvenile facility, count as time the
child lived with you.
There are also exceptions for kidnapped
children and children of divorced or separated
parents. For details, see Residency Test in
chapter 3.
Qualifying child of more than one person.
A special rule applies if your qualifying child is
the qualifying child of more than one person.
For details, see Special Rule for Qualifying
Child of More Than One Person in chapter 3.
Amount of Credit
The maximum amount you can claim for the
credit is $1,000 for each qualifying child.
Limits on the Credit
You must reduce your child tax credit if either
(1) or (2) applies.
1. The amount on Form 1040, line 47, or
Form 1040A, line 30, is less than the
credit. If this amount is zero, you cannot
take this credit because there is no tax to
reduce. But you may be able to take the
additional child tax credit. See Additional
Child Tax Credit, later.
Page 224 Chapter 34 Child Tax Credit
2. Your modified adjusted gross income
(AGI) is more than the amount shown be-
low for your filing status.
a. Married filing jointly - $110,000.
b. Single, head of household, or qualify-
ing widow(er) - $75,000.
c. Married filing separately - $55,000.
Modified AGI. For purposes of the child tax
credit, your modified AGI is your AGI plus the
following amounts that may apply to you.
Any amount excluded from income be-
cause of the exclusion of income from
Puerto Rico. On the dotted line next to
Form 1040, line 38, enter the amount ex-
cluded and identify it as “EPRI.” Also at-
tach a copy of any Form(s) 499R-2/W-2PR
to your return.
Any amount on line 45 or line 50 of Form
2555, Foreign Earned Income.
Any amount on line 18 of Form 2555-EZ,
Foreign Earned Income Exclusion.
Any amount on line 15 of Form 4563, Ex-
clusion of Income for Bona Fide Residents
of American Samoa.
If you do not have any of the above, your
modified AGI is the same as your AGI.
AGI. Your AGI is the amount on Form 1040,
line 38, or Form 1040A, line 22.
Claiming the Credit
To claim the child tax credit, you must file Form
1040 or Form 1040A. You cannot claim the
child tax credit on Form 1040EZ. You must pro-
vide the name and identification number (usu-
ally a social security number) on your tax return
for each qualifying child.
If you claim the child tax credit with a
child identified by an ITIN, you must
also file Schedule 8812.
To figure your credit, first review the Child
Tax Credit Worksheet in your Form 1040 or
1040A instructions. If you are instructed to use
Pub. 972, you may not use the worksheet in
your tax return instructions; instead, you must
use Pub. 972 to figure the credit. If you are not
instructed to use Pub. 972, you may use the
Child Tax Credit Worksheet in your Form 1040
or 1040A instructions or Pub. 972 to figure the
credit.
Additional Child Tax
Credit
This credit is for certain individuals who get less
than the full amount of the child tax credit. The
additional child tax credit may give you a refund
even if you do not owe any tax.
Foreign earned income. If you file Form 2555
or 2555-EZ (both relating to foreign earned in-
come), you cannot claim the additional child tax
credit.
How to claim the additional child tax credit.
To claim the additional child tax credit, follow
the steps below.CAUTION
!
1. Make sure you figured the amount, if any,
of your child tax credit. See Claiming the
Credit, earlier.
2. If you answered “Yes” on line 9 or line 10
of the Child Tax Credit Worksheet in the
Form 1040 or Form 1040A instructions, or
line 13 of the Child Tax Credit Worksheet
in Pub. 972, use Parts II through IV of
Schedule 8812 to see if you can take the
additional child tax credit.
3. If you have an additional child tax credit on
line 13 of Schedule 8812, carry it to Form
1040, line 67, or Form 1040A, line 43.
Completing Schedule
8812 (Form 1040A or
1040)
Schedule 8812 contains four parts, but can also
be thought of as having two sections. Part I is
distinct and separate from Parts II–IV.
If all your children are identified by so-
cial security numbers or IRS adoption
taxpayer identification numbers and
you are not claiming the additional child tax
credit, you do not need to complete or attach
Schedule 8812 to your tax return.
Part I
Complete Part I only if you are claiming the
child tax credit for a child identified by an IRS
individual taxpayer identification number (ITIN).
When completing Part I, answer the questions
only with regard to children identified by an
ITIN; you do not need to complete Part I of
Schedule 8812 for any child who is identified by
a social security number (SSN) or an IRS adop-
tion taxpayer identification number (ATIN). If all
the children for whom you checked the box in
column 4 of line 6c on your Form 1040 or Form
1040A are identified by an SSN or an ATIN, you
do not need to complete Part I of Schedule
8812.
Parts II–IV
Parts II–IV help you figure your additional child
tax credit. Generally, you should complete Parts
II–IV only if you are instructed to do so after
completing the Child Tax Credit Worksheet in
your tax return instructions or Pub. 972. See
How to claim the additional child tax credit, ear-
lier.TIP
35.
Education
Credits
What’s New
Form 1098T requirement. For tax years be-
ginning after June 29, 2015, generally tax year
2016 returns for most taxpayers, the law re-
quires a taxpayer (or a dependent) to have re-
ceived a Form 1098-T from an eligible educa-
tional institution in order to claim the tuition and
fees deduction, American opportunity credit, or
the lifetime learning credit.
However, for tax year 2016, a taxpayer may
claim one of these education benefits if the stu-
dent does not receive a Form 1098-T because
the student’s educational institution is not re-
quired to send a Form 1098-T to the student un-
der existing rules (for example, if the student is
a nonresident alien, has qualified education ex-
penses paid entirely with scholarships, or has
qualified education expenses paid under a for-
mal billing arrangement). If a student’s educa-
tional institution is not required to provide a
Form 1098-T to the student, a taxpayer may
claim one of these education benefits without a
Form 1098-T if the taxpayer otherwise qualifies,
can demonstrate that the taxpayer (or a de-
pendent) was enrolled at an eligible educational
institution, and can substantiate the payment of
qualified tuition and related expenses.
American opportunity credit. The American
opportunity credit was made permanent for tax
years beginning after December 18, 2015.
Ban on claiming the American opportunity
credit. If you claim the American opportunity
credit even though you're not eligible, you may
be banned from claiming the credit for up to 10
years. See the Caution statement under Intro-
duction, later.
Taxpayer identification number needed by
due date of return. If you don’t have a tax-
payer identification number (TIN) by the due
date of your 2016 return (including extensions),
you can’t claim the American opportunity credit
on either your original or an amended 2016 re-
turn, even if you later get a TIN. Also, the Ameri-
can opportunity credit isn’t allowed on either
your original or an amended 2016 return for a
student who doesn’t have a TIN by the due date
of your return (including extensions), even if
that student later gets a TIN.
Limits on modified adjusted gross income
(MAGI). The lifetime learning credit MAGI limit
increases to $131,000 if you are filing married
filing jointly ($65,000 if you are filing single,
head of household, or qualifying widow(er)).
Chapter 35 Education Credits Page 225
The American opportunity credit MAGI limits re-
main unchanged. See Table 35-1.
Introduction
For 2016, there are two tax credits available to
help you offset the costs of higher education by
reducing the amount of your income tax. They
are:
The American opportunity credit, and
The lifetime learning credit.
This chapter will present an overview of these
education credits. To get the detailed informa-
tion you will need to claim either of the credits,
and for examples illustrating that information,
see chapters 2 and 3 of Pub. 970.
Can you claim more than one education
credit this year? For each student, you can
elect for any year only one of the credits. For
example, if you choose to claim the American
opportunity credit for a child on your 2016 tax
return, you can’t, for that same child, also claim
the lifetime learning credit for 2016.
If you are eligible to claim the American op-
portunity credit and you are also eligible to
claim the lifetime learning credit for the same
student in the same year, you can choose to
claim either credit, but not both.
If you pay qualified education expenses for
more than one student in the same year, you
can choose to claim the American opportunity
and the lifetime learning credits on a
per-student, per-year basis. This means that,
for example, you can claim the American oppor-
tunity credit for one student and the lifetime
learning credit for another student in the same
year.
The American opportunity credit will al-
ways be greater than or equal to the
lifetime learning credit for any student
who is eligible for both credits. However, if any
of the conditions for the American opportunity
credit, listed in Table 35-1, aren’t met for any
student, you can’t take the American opportu-
nity credit for that student. You may be able to
take the lifetime learning credit for part or all of
that student's qualified education expenses in-
stead. See chapter 19 and chapter 27 of this
publication, and also Pub. 970, for information
on other education benefits.
If you claim the American opportunity
credit even though you're not eligible
and it's determined that your error is
due to reckless or intentional disregard of the
rules, but not fraud, you won't be allowed to
claim the credit for 2 years. If it's determined
that your error is due to fraud, you won't be al-
lowed to claim the credit for 10 years.
Differences between the American opportu
nity and lifetime learning credits. There are
several differences between these two credits.
These differences are summarized in Ta-
ble 35-1.TIPCAUTION
!
Useful Items
You may want to see:
Publication
Tax Benefits for Education
Form (and Instructions)
Education Credits (American
Opportunity and Lifetime Learning
Credits)
Who Can Claim an
Education Credit
You may be able to claim an education credit if
you, your spouse, or a dependent you claim on
your tax return was a student enrolled at or at-
tending an eligible educational institution. For
2016, the credits are based on the amount of
qualified education expenses paid for the stu-
dent in 2016 for academic periods beginning in
2016 and in the first 3 months of 2017.
For example, if you paid $1,500 in Decem-
ber 2016 for qualified tuition for the spring 2017
semester beginning in January 2017, you may
be able to use that $1,500 in figuring your 2016
education credit(s).
Academic period. An academic period in-
cludes a semester, trimester, quarter, or other
period of study (such as a summer school ses-
sion) as reasonably determined by an educa-
tional institution. If an educational institution
8863
Table 35-1. Comparison of Education Credits for 2016
Caution. You can claim both the American opportunity credit and the lifetime learning credit on the same return—but not for the same student.
American Opportunity Credit Lifetime Learning Credit
Maximum credit Up to $2,500 credit per eligible student Up to $2,000 credit per return
Limit on modified
adjusted gross income
(MAGI)
$180,000 if married filing jointly;
$90,000 if single, head of household, or qualifying
widow(er)
$131,000 if married filing jointly;
$65,000 if single, head of household, or qualifying
widow(er)
Refundable or
nonrefundable
40% of credit may be refundable Nonrefundable—credit limited to the amount of tax you
must pay on your taxable income
Number of years of
postsecondary education
Available ONLY if the student had not completed the first
4 years of postsecondary education before 2016
Available for all years of postsecondary education and for
courses to acquire or improve job skills
Number of tax years
credit available
Available ONLY for 4 tax years per eligible student
(including any year(s) the Hope scholarship credit was
claimed)
Available for an unlimited number of tax years
Type of program required Student must be pursuing a program leading to a degree
or other recognized education credential
Student does not need to be pursuing a program leading
to a degree or other recognized education credential
Number of courses Student must be enrolled at least half-time for at least
one academic period beginning during 2016 (or the first 3
months of 2017 if the qualified expenses were paid in
2016)
Available for one or more courses
Felony drug conviction At the end of 2016, the student had not been convicted
of a felony for possessing or distributing a controlled
substance
Felony drug convictions do not make the student
ineligible
Qualified expenses Tuition, required enrollment fees, and course materials
that the student needs for a course of study whether or
not the materials are bought at the educational institution
as a condition of enrollment or attendance
Tuition and required enrollment fees (including amounts
required to be paid to the institution for course-related
books, supplies, and equipment)
Payments for academic
periods
Payments made in 2016 for academic periods beginning in 2016 or beginning in the first 3 months of 2017
Page 226 Chapter 35 Education Credits
uses credit hours or clock hours and doesn’t
have academic terms, each payment period
can be treated as an academic period.
Eligible educational institution. An eligible
educational institution is generally any college,
university, vocational school, or other postse-
condary educational institution eligible to partic-
ipate in a student aid program administered by
the U.S. Department of Education. Virtually all
accredited public, nonprofit, and proprietary
(privately owned profit-making) postsecondary
institutions meet this definition. The educational
institution should be able to tell you if it is an eli-
gible educational institution.
Certain educational institutions located out-
side the United States also participate in the
U.S. Department of Education's Federal Stu-
dent Aid (FSA) programs.
Who can claim a dependent's expenses. If
an exemption is allowed for any person who
claims the student as a dependent, all qualified
education expenses of the student are treated
as having been paid by that person. Therefore,
only that person can claim an education credit
for the student. If a student is not claimed as a
dependent on another person's tax return, only
the student can claim a credit.
Expenses paid by a third party. Qualified
education expenses paid on behalf of the stu-
dent by someone other than the student (such
as a relative) are treated as paid by the student.
However, qualified education expenses paid (or
treated as paid) by a student who is claimed as
a dependent on your tax return are treated as
paid by you. Therefore, you are treated as hav-
ing paid expenses that were paid by the third
party. For more information and an example,
see Who Can Claim a Dependent's Expenses
in Pub. 970, chapter 2 or 3.
Who cannot claim a credit. You can’t claim
an education credit if any of the following apply.
1. Your filing status is married filing sepa-
rately.
2. You are claimed as a dependent on an-
other person's tax return, such as your pa-
rent's return.
3. You (or your spouse) were a nonresident
alien for any part of 2016 and the nonresi-
dent alien did not elect to be treated as a
resident alien for tax purposes.
4. You didn't have an SSN (or ITIN) by the
due date of your 2016 return (including ex-
tensions), you can't claim the American
opportunity credit on either your original or
an amended 2016 return, even if you later
get an SSN (or ITIN). Also, you can't claim
this credit on your original or an amended
2016 return for a student who didn't have
an SSN, ATIN, or ITIN by the due date of
your return (including extensions), even if
the student later gets one of those num-
bers.
5. Your MAGI is one of the following.
a. American opportunity credit:
$180,000 or more if married filing
jointly, or $90,000 or more if single,
head of household, or qualifying
widow(er).
b. Lifetime learning credit: $131,000 or
more if married filing jointly, or
$65,000 or more if single, head of
household, or qualifying widow(er).
Generally, your MAGI is the amount on your
Form 1040, line 38, or Form 1040A, line 22.
However, if you are filing Form 2555, Form
2555-EZ, or Form 4563, or are excluding in-
come from Puerto RIco, add to the amount on
your Form 1040, line 38, or Form 1040A,
line 22, the amount of income you excluded.
For details, see Pub. 970.
Figure 35-A may be helpful in determining if
you can claim an education credit on your tax
return.
Qualified Education
Expenses
Generally, qualified education expenses are
amounts paid in 2016 for tuition and fees re-
quired for the student's enrollment or attend-
ance at an eligible educational institution. It
doesn’t matter whether the expenses were paid
in cash, by check, by credit or debit card, or
with borrowed funds.
For course-related books, supplies, and
equipment, only certain expenses qualify.
American opportunity credit: Qualified edu-
cation expenses include amounts spent on
books, supplies, and equipment needed
for a course of study, whether or not the
materials are purchased from the educa-
tional institution as a condition of enroll-
ment or attendance.
Lifetime learning credit: Qualified educa-
tion expenses include amounts for books,
supplies, and equipment only if required
to be paid to the institution as a condition
of enrollment or attendance.
Qualified education expenses include nona-
cademic fees, such as student activity fees, ath-
letic fees, or other expenses unrelated to the
academic course of instruction, only if the fee
must be paid to the institution as a condition of
enrollment or attendance. However, fees for
personal expenses (described below) are never
qualified education expenses.
Qualified education expenses for either
credit do not include amounts paid for the fol-
lowing.
Personal expenses. This means room and
board, insurance, medical expenses (in-
cluding student health fees), transporta-
tion, and other similar personal, living, or
family expenses.
Any course or other education involving
sports, games, or hobbies, or any noncre-
dit course, unless such course or other ed-
ucation is part of the student's degree pro-
gram or (for the lifetime learning credit
only) helps the student acquire or improve
job skills.
The student may receive Form 1098-T, Tui-
tion Statement, from the institution reporting ei-
ther payments received in 2016 (box 1) or
amounts billed in 2016 (box 2). However, the
amount on your Form 1098-T, box 1 or 2, may
be different from the amount you paid (or are
treated as having paid). In completing Form
8863, use only the amounts you actually paid
(plus any amounts you are treated as having
paid) in 2016, reduced as necessary, as descri-
bed in Adjustments to Qualified Education Ex-
penses, later. See chapters 2 and 3 of Pub. 970
for more information on Form 1098-T.
Qualified education expenses paid on be-
half of the student by someone other than the
student (such as a relative) are treated as paid
by the student. Qualified education expenses
paid (or treated as paid) by a student who is
claimed as a dependent on your tax return are
treated as paid by you.
If you or the student takes a deduction for
higher education expenses, such as on Sched-
ule A or C (Form 1040), you can’t use those ex-
penses in your qualified education expenses
when figuring your education credits.
Qualified education expenses for any
academic period must be reduced by
any tax-free educational assistance al-
locable to that academic period. See Adjust-
ments to Qualified Education Expenses, later.
Prepaid expenses. Qualified education ex-
penses paid in 2016 for an academic period
that begins in the first 3 months of 2017 can be
used in figuring an education credit for 2016
only. See Academic period, earlier. For exam-
ple, if you pay $2,000 in December 2016 for
qualified tuition for the 2017 winter quarter that
begins in January 2017, you can use that
$2,000 in figuring an education credit for 2016
only (if you meet all the other requirements).
You cannot use any amount you paid
in 2015 or 2017 to figure the qualified
education expenses you use to figure
your 2016 education credit(s).
Paid with borrowed funds. You can claim an
education credit for qualified education expen-
ses paid with the proceeds of a loan. Use the
expenses to figure the credit for the year in
which the expenses are paid, not the year in
which the loan is repaid. Treat loan payments
sent directly to the educational institution as
paid on the date the institution credits the stu-
dent's account.
Student withdraws from class(es). You can
claim an education credit for qualified education
expenses not refunded when a student with-
draws.
No Double Benefit Allowed
You can’t do any of the following.
Deduct higher education expenses on your
income tax return (as, for example, a busi-
ness expense) and also claim an educa-
tion credit based on those same expenses.
Claim more than one education credit
based on the same qualified education ex-
penses.
Claim an education credit based on the
same expenses used to figure the tax-free
portion of a distribution from a Coverdell
education savings account (ESA) or
qualified tuition program (QTP).CAUTION
!CAUTION
!
Chapter 35 Education Credits Page 227
Claim an education credit based on quali-
fied education expenses paid with educa-
tional assistance, such as a tax-free schol-
arship, grant, or employer-provided
educational assistance. See Adjustments
to Qualified Education Expenses next.
Adjustments to Qualified
Education Expenses
For each student, reduce the qualified educa-
tion expenses paid in 2016 by or on behalf of
that student under the following rules. The re-
sult is the amount of adjusted qualified educa-
tion expenses for each student.
Taxfree educational assistance. For
tax-free educational assistance received in
2016, reduce the qualified educational expen-
ses for each academic period by the amount of
tax-free educational assistance allocable to that
academic period. See Academic period, earlier.
Tax-free educational assistance includes:
The tax-free parts of scholarships and fel-
lowship grants (including Pell grants) (see
chapter 12 of this publication and chap-
ter 1 of Pub. 970 for more information),
The tax-free part of employer-provided ed-
ucational assistance (see Pub. 970),
Veterans' educational assistance (see
chapter 1 of Pub. 970), and
Any other nontaxable (tax-free) payments
(other than gifts or inheritances) received
as educational assistance.
You may be able to increase the com-
bined value of an education credit and
certain educational assistance if the
student includes some or all of the educational
assistance in income in the year it is received.
See Coordination with Pell grants and other
scholarships, later. Also, for more information,
see examples in Coordination with Pell grants
and other scholarships in chapters 2 and 3 of
Pub. 970.
Generally, any scholarship or fellowship
grant is treated as tax-free educational assis-
tance. However, a scholarship or fellowship
grant isn’t treated as tax-free educational assis-
tance to the extent the student includes it in
gross income (the student may or may not be
required to file a tax return) for the year the
scholarship or fellowship grant is received and
either:
The scholarship or fellowship grant (or any
part of it) must be applied (by its terms) to
expenses (such as room and board) other
than qualified education expenses as de-
fined in Qualified education expenses in
Pub. 970, chapter 1; or
The scholarship or fellowship grant (or any
part of it) may be applied (by its terms) to
expenses (such as room and board) other
than qualified education expenses as de-
fined in Qualified education expenses in
Pub. 970, chapter 1.
Coordination with Pell grants and other
scholarships. You may be able to increase
an education credit and reduce your total tax or
increase your tax refund if the student (you,TIP
your spouse, or your dependent) chooses to in-
clude all or part of certain scholarships or fel-
lowship grants in income. The scholarship or
fellowship grant must be one that may qualify
as a tax-free scholarship under the rules dis-
cussed in chapter 1 of Pub. 970. Also, the
scholarship or fellowship grant must be one that
may (by its terms) be used for expenses other
than qualified education expenses (such as
room and board).
The fact that the educational institution ap-
plies the scholarship or fellowship grant to
qualified education expenses (such as tuition
and related fees) doesn’t prevent the student
from choosing to apply certain scholarships or
fellowship grants to other expenses (such as
room and board). By choosing to do so, the stu-
dent will include the part applied to other expen-
ses (such as room and board) in gross income
and may be required to file a tax return. How-
ever, this allows payments made in cash, by
check, by credit or debit card, or with borrowed
funds such as a student loan, to be applied to
qualified education expenses. These payments,
unlike certain scholarships or fellowship grants,
will not reduce the qualified education expen-
ses available to figure an education credit. The
result is generally a larger education credit that
reduces your total tax or increases your tax re-
fund.
Example 1. Last year, your child gradu-
ated from high school and enrolled in college
for the fall semester. You and your child meet
all other requirements to claim the American op-
portunity credit, and you need to determine ad-
justed qualified education expenses to figure
the credit.
Your child has $5,000 of qualified education
expenses and $4,000 of room and board. Your
child received a $5,000 Pell grant and took out
a $2,750 student loan to pay these expenses.
You paid the remaining $1,250. The Pell grant
by its terms may be used for any of these ex-
penses.
If you and your child choose to apply the
Pell grant to the qualified education expenses, it
will qualify as a tax-free scholarship under the
rules discussed in chapter 1 of Pub. 970. Your
child will not include any part of the Pell grant in
gross income. After reducing qualified educa-
tion expenses by the tax-free scholarship you
will have $0 ($5,000 – $5,000) of adjusted quali-
fied education expenses available to figure your
credit. Your credit will be $0.
Example 2. The facts are the same as in
Example 1. If, unlike in Example 1, you and your
child choose to apply only $1,000 of the Pell
grant to the qualified education expenses and
to apply the remaining $4,000 to room and
board, only $1,000 will qualify as a tax-free
scholarship.
Your child will include the $4,000 applied to
room and board in gross income, and it will be
treated as earned income for purposes of deter-
mining whether your child is required to file a
tax return. If the $4,000 is your child’s only in-
come, your child will not be required to file a tax
return.
After reducing qualified education expenses
by the tax-free scholarship you will have $4,000
($5,000 – $1,000) of adjusted qualified educa-
tion expenses available to figure your credit.
Your refundable American opportunity credit
will be $1,000. Your nonrefundable credit may
be as much as $1,500, but depends on your tax
liability.
If you aren’t otherwise required to file a tax
return, you should file to get a refund of your
$1,000 refundable credit, but your tax liability
and nonrefundable credit will be $0.
Note. The result may be different if your
child has other income or if you are the student.
If you are the student and you claim the earned
income credit, choosing not to apply a Pell
grant to qualified education expenses may de-
crease your earned income credit at certain in-
come levels by raising your adjusted gross in-
come. However, you generally need at least
$2,000 of adjusted qualified education expen-
ses to receive the maximum benefit of claiming
both credits. For more information, see Coordi-
nation with Pell grants and other scholarships in
chapters 2 and 3 of Pub. 970.
Taxfree educational assistance treated as
a refund. Some tax-free educational assis-
tance received after 2016 may be treated as a
refund of qualified education expenses paid in
2016. This tax-free educational assistance is
any tax-free educational assistance received by
you or anyone else after 2016 for qualified edu-
cation expenses paid on behalf of a student in
2016 (or attributable to enrollment at an eligible
educational institution during 2016).
If this tax-free educational assistance is re-
ceived after 2016 but before you file your 2016
income tax return, see Refunds received after
2016 but before your income tax return is filed,
later. If this tax-free educational assistance is
received after 2016 and after you file your 2016
income tax return, see Refunds received after
2016 and after your income tax return is filed,
later.
Refunds. A refund of qualified education ex-
penses may reduce qualified education expen-
ses for the tax year or may require you to repay
(recapture) the credit that you claimed in an
earlier year. Some tax-free educational assis-
tance received after 2016 may be treated as a
refund. See Tax-free educational assistance,
earlier.
Refunds received in 2016. For each stu-
dent, figure the adjusted qualified education ex-
penses for 2016 by adding all the qualified edu-
cation expenses paid in 2016 and subtracting
any refunds of those expenses received from
the eligible educational institution during 2016.
Refunds received after 2016 but before
your income tax return is filed. If anyone re-
ceives a refund after 2016 of qualified educa-
tion expenses paid on behalf of a student in
2016 and the refund is received before you file
your 2016 income tax return, reduce the
amount of qualified education expenses for
2016 by the amount of the refund.
Refunds received after 2016 and after
your income tax return is filed. If anyone re-
ceives a refund after 2016 of qualified educa-
tion expenses paid on behalf of a student in
2016 and the refund is received after you file
your 2016 income tax return, you may need to
repay some or all of the credit that you claimed.
See Credit recapture next.
Page 228 Chapter 35 Education Credits
Credit recapture. If any tax-free educational
assistance for the qualified education expenses
paid in 2016, or any refund of your qualified ed-
ucation expenses paid in 2016, is received after
you file your 2016 income tax return, you must
recapture (repay) any excess credit. You do this
by refiguring the amount of your adjusted quali-
fied education expenses for 2016 by reducing
the expenses by the amount of the refund or
tax-free educational assistance. You then refig-
ure your education credit(s) for 2016 and figure
the amount by which your 2016 tax liability
would have increased if you had claimed the re-
figured credit(s). Include that amount as an ad-
ditional tax for the year the refund or tax-free
assistance was received.
Example. You paid $8,000 for tuition and
fees in December 2016 for your child's spring
semester beginning in January 2017. You filed
your 2016 tax return on February 3, 2017, and
claimed a lifetime learning credit of $1,600
($8,000 qualified education expense paid x
0.20). You claimed no other tax credits. After
you filed your return, your child withdrew from
two courses and you received a refund of
$1,400. You must refigure your 2016 lifetime
learning credit using $6,600 ($8,000 qualified
education expenses − $1,400 refund). The re-
figured credit is $1,320 and your tax liability in-
creased by $280. You must include the differ-
ence of $280 ($1,600 credit originally claimed −
$1,320 refigured credit) as additional tax on
your 2017 income tax return. See the instruc-
tions for your 2017 income tax return to deter-
mine where to include this tax.
If you also pay qualified education ex-
penses in both 2016 and 2017 for an
academic period that begins in the first
3 months of 2017 and you receive tax-free edu-
cational assistance, or a refund, as described
above, you may choose to reduce your qualified
education expenses for 2017 instead of reduc-
ing your expenses for 2016.
Amounts that do not reduce qualified edu
cation expenses. Do not reduce qualified ed-CAUTION
!
ucation expenses by amounts paid with funds
the student receives as:
Payment for services, such as wages;
A loan;
A gift;
An inheritance; or
A withdrawal from the student's personal
savings.
Don’t reduce the qualified education expen-
ses by any scholarship or fellowship grant re-
ported as income on the student's tax return in
the following situations.
The use of the money is restricted, by the
terms of the scholarship or fellowship
grant, to costs of attendance (such as
room and board) other than qualified edu-
cation expenses, as defined in chapter 1 of
Pub. 970.
The use of the money is not restricted.
For examples, see chapter 2 in Pub. 970.
Chapter 35 Education Credits Page 229
Figure 35A. Can You Claim an Education Credit for 2016?Yes
No
No
Yes
Yes
No
No
Yes
No
No
No
No
No
Yes
Yes
Yes
No
Yes
Yes
Yes
Did you* pay qualified education expenses in 2016 for an eligible student?
Did the academic period for which you paid qualified education
expenses begin in 2016 or the first 3 months of 2017?
Is the eligible student you, your spouse (if married filing jointly), or your
dependent for whom you claim an exemption on your tax return?
Are you listed as a dependent on another person’s tax return?
Is your filing status married filing separately?
For any part of 2016, were you (or your spouse) a nonresident alien
who did not elect to be treated as a resident alien for tax purposes?
Is your modified adjusted gross income (MAGI) less than $65,000
($131,000 if married filing jointly) for the lifetime learning credit or less than
$90,000 ($180,000 if married filing jointly) for the American opportunity
credit?
Did you use the same expenses to take a deduction?
Were the same expenses paid entirely with tax-free scholarship,
grant, or employer-provided educational assistance?
Did you or someone else receive a refund of all the expenses? You cannot
claim an education
credit for 2016
You can claim
an education credit
for 2016**
* Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you.
** Your education credits may be limited to your tax liability minus certain credits. See Form 8863 for more details.
Page 230 Chapter 35 Education Credits
36.
Earned Income
Credit (EIC)
What's New
Earned income amount is more. The maxi-
mum amount of income you can earn and still
get the credit has increased. You may be able
to take the credit if:
You have three or more qualifying children
and you earned less than $47,955
($53,505 if married filing jointly),
You have two qualifying children and you
earned less than $44,648 ($50,198 if mar-
ried filing jointly),
You have one qualifying child and you
earned less than $39,296 ($44,846 if mar-
ried filing jointly), or
You don't have a qualifying child and you
earned less than $14,880 ($20,430 if mar-
ried filing jointly).
Your adjusted gross income also must be less
than the amount in the above list that applies to
you. For details, see Rules 1 and 15.
Delayed refund if claiming EIC. Due to
changes in the law, the IRS cannot issue re-
funds before February 15, 2017, for returns that
claim the EIC. This applies to the entire refund,
not just the portion associated with the EIC.
Investment income amount is more. The
maximum amount of investment income you
can have and still get the credit has increased
to $3,400. See Rule 6.
Reminders
Valid SSN required by due date of return. If
you didn't have a social security number (SSN)
by the due date of your 2016 return (including
extensions), you can't claim the EIC on either
your original or an amended 2016 return, even if
you later get an SSN. Also, if a child didn't have
an SSN by the due date of your return (includ-
ing extensions), you can't count that child as a
qualifying child in figuring the EIC on either your
original or an amended 2016 return, even if that
child later gets an SSN.
Increased EIC on certain joint returns. A
married person filing a joint return may get more
EIC than someone with the same income but a
different filing status. As a result, the EIC table
has different columns for married persons filing
jointly than for everyone else. When you look up
your EIC in the EIC Table, be sure to use the
correct column for your filing status and the
number of children you have.
Online help. You can use the EITC Assistant
at IRS.gov/eitc to find out if you are eligible for
the credit. The EITC Assistant is available in
English and Spanish.
EIC questioned by IRS. The IRS may ask you
to provide documents to prove you are entitled
to claim the EIC. We will tell you what docu-
ments to send us. These may include: birth cer-
tificates, school records, medical records, etc.
The process of establishing your eligibility will
delay your refund.
Introduction
The earned income credit (EIC) is a tax credit
for certain people who work and have less than
$53,505 of earned income. A tax credit usually
means more money in your pocket. It reduces
the amount of tax you owe. The EIC may also
give you a refund.
How do you get the earned income credit?
To claim the EIC, you must:
1. Qualify by meeting certain rules, and
2. File a tax return, even if you:
a. Do not owe any tax,
b. Did not earn enough money to file a
return, or
c. Did not have income taxes withheld
from your pay.
Figure your EIC by using a worksheet in the
instructions for Form 1040, Form 1040A, or
Form 1040EZ. Or, if you prefer, you can let the
IRS figure the credit for you.
How will this chapter help you? This chapter
will explain the following.
The rules you must meet to qualify for the
EIC.
How to figure the EIC.
Useful Items
You may want to see:
Publication
Earned Income Credit (EIC)
Form (and Instructions)
Earned Income Credit
(Qualifying Child Information)
Information To Claim Earned
Income Credit After Disallowance
Do You Qualify for the
Credit?
To qualify to claim the EIC, you must first meet
all of the rules explained in Part A, Rules for Ev-
eryone. Then you must meet the rules in Part B,
Rules If You Have a Qualifying Child, or Part C,
Rules If You Do Not Have a Qualifying Child.
There is one final rule you must meet in Part D,
Figuring and Claiming the EIC. You qualify for
the credit if you meet all the rules in each part
that applies to you.
If you have a qualifying child, the rules in
Parts A, B, and D apply to you.
If you do not have a qualifying child, the
rules in Parts A, C, and D apply to you.
Table 361, Earned Income Credit in a Nut
shell. Use Table 36–1 as a guide to Parts A, B,
Schedule EIC
8862
C, and D. The table is a summary of all the rules
in each part.
Do you have a qualifying child? You have a
qualifying child only if you have a child who
meets the four tests described in Rule 8 and il-
lustrated in Figure 36–1.
If Improper Claim
Made in Prior Year
If your EIC for any year after 1996 was denied
or reduced for any reason other than a math or
clerical error, you must attach a completed
Form 8862 to your next tax return to claim the
EIC. You must also qualify to claim the EIC by
meeting all the rules described in this chapter.
However, if your EIC was denied or reduced
as a result of a math or clerical error, do not at-
tach Form 8862 to your next tax return. For ex-
ample, if your arithmetic is incorrect, the IRS
can correct it. If you do not provide a correct so-
cial security number, the IRS can deny the EIC.
These kinds of errors are called math or clerical
errors.
If your EIC for any year after 1996 was de-
nied and it was determined that your error was
due to reckless or intentional disregard of the
EIC rules, then you cannot claim the EIC for the
next 2 years. If your error was due to fraud, then
you cannot claim the EIC for the next 10 years.
More information. See chapter 5 in Pub. 596
for more detailed information about the disal-
lowance period and Form 8862.
Part A. Rules for
Everyone
This part of the chapter discusses Rules 1
through 7. You must meet all seven rules to
qualify for the earned income credit. If you do
not meet all seven rules, you cannot get the
credit and you do not need to read the rest of
the chapter.
If you meet all seven rules in this part, then
read either Part B or Part C (whichever applies)
for more rules you must meet.
Rule 1. Your AGI Must Be
Less Than:
$47,955 ($53,505 for married filing jointly)
if you have three or more qualifying chil-
dren,
$44,648 ($50,198 for married filing jointly)
if you have two qualifying children,
$39,296 ($44,846 for married filing jointly)
if you have one qualifying child, or
$14,880 ($20,430 for married filing jointly)
if you don't have a qualifying child.
Adjusted gross income (AGI). AGI is the
amount on line 38 (Form 1040), line 22 (Form
1040A), or line 4 (Form 1040EZ). If your AGI is
equal to or more than the applicable limit listed
above, you cannot claim the EIC.
Example. Your AGI is $39,550, you are sin-
gle, and you have one qualifying child. You
cannot claim the EIC because your AGI isn't
Chapter 36 Earned Income Credit (EIC) Page 231
less than $39,296. However, if your filing status
was married filing jointly, you might be able to
claim the EIC because your AGI is less than
$44,846.
Community property. If you are married,
but qualify to file as head of household under
special rules for married taxpayers living apart
(see Rule 3), and live in a state that has com-
munity property laws, your AGI includes that
portion of both your and your spouse's wages
that you are required to include in gross in-
come. This is different from the community
property rules that apply under Rule 7.
Rule 2. You Must Have a
Valid Social Security
Number (SSN)
To claim the EIC, you (and your spouse, if filing
a joint return) must have a valid SSN issued by
the Social Security Administration (SSA) by the
due date of your 2016 return (including exten-
sions). Any qualifying child listed on Sched-
ule EIC also must have a valid SSN by the due
date of your 2016 return (including extensions).
(See Rule 8 if you have a qualifying child.)
If your social security card (or your spouse's,
if filing a joint return) says “Not valid for employ-
ment” and your SSN was issued so that you (or
your spouse) could get a federally funded bene-
fit, you cannot get the EIC. An example of a fed-
erally funded benefit is Medicaid.
If you have a card with the legend “Not valid
for employment” and your immigration status
has changed so that you are now a U.S. citizen
or permanent resident, ask the SSA for a new
social security card without the legend.
U.S. citizen. If you were a U.S. citizen when
you received your SSN, you have a valid SSN.
Valid for work only with INS or DHS authori
zation. If your social security card reads “Valid
for work only with INS authorization” or “Valid
for work only with DHS authorization,” you have
a valid SSN, but only if that authorization is still
valid.
SSN missing or incorrect. If an SSN for you
or your spouse is missing from your tax return
or is incorrect, you may not get the EIC. If an
SSN for you or your spouse is missing from
your return because either you or your spouse
didn't have a valid SSN by the due date of your
2016 return (including extensions), and you
later get a valid SSN, you cannot file an amen-
ded return to claim the EIC.
Other taxpayer identification number. You
cannot get the EIC if, instead of an SSN, you (or
your spouse, if filing a joint return) have an indi-
vidual taxpayer identification number (ITIN).
ITINs are issued by the IRS to noncitizens who
cannot get an SSN.
No SSN. If you don't have a valid SSN by the
due date of your 2016 return (including exten-
sions), put “No” next to line 66a (Form 1040),
line 42a (Form 1040A), or line 8a (Form
1040EZ). You cannot claim the EIC on either
your original or an amended 2016 return.
Getting an SSN. If you (or your spouse, if
filing a joint return) don't have an SSN, you can
apply for one by filing Form SS-5, Application
for a Social Security Card, with the SSA. You
can get Form SS-5 online at
www.socialsecurity.gov, from your local SSA of-
fice, or by calling the SSA at 1-800-772-1213.
Filing deadline approaching and still no
SSN. If the filing deadline is approaching and
you still do not have an SSN, you can request
an automatic 6-month extension of time to file
your return. You can get this extension by filing
Form 4868, Application for Automatic Extension
of Time to File U.S. Individual Income Tax Re-
turn. For more information, see chapter 1.
Rule 3. Your Filing Status
Cannot Be Married Filing
Separately
If you are married, you usually must file a joint
return to claim the EIC. Your filing status cannot
be “Married filing separately.”
Spouse did not live with you. If you are mar-
ried and your spouse did not live in your home
at any time during the last 6 months of the year,
you may be able to file as head of household,
instead of married filing separately. In that case,
you may be able to claim the EIC. For detailed
information about filing as head of household,
see chapter 2.
Rule 4. You Must Be a
U.S. Citizen or Resident
Alien All Year
If you (or your spouse, if married) were a non-
resident alien for any part of the year, you can-
not claim the earned income credit unless your
Table 36-1. Earned Income Credit in a Nutshell
First, you must meet all the rules in this column. Second, you must meet all the rules in one of
these columns, whichever applies.
Third, you must meet the
rule in this column.
Part A.
Rules for Everyone
Part B.
Rules If You Have a
Qualifying Child
Part C.
Rules If You Do Not
Have a Qualifying
Child
Part D.
Figuring and Claiming the
EIC
1. Your adjusted gross
income (AGI) must be
less than:
• $47,955 ($53,505 for
married filing jointly) if
you have three or more
qualifying children,
• $44,648 ($50,198 for
married filing jointly) if
you have two qualifying
children,
•$39,296 ($44,846 for
married filing jointly) if
you have one qualifying
child, or
• $14,880 ($20,430 for
married filing jointly) if
you do not have a
qualifying child.
2. You must have a valid
social security number
by the due date of your
2016 return (including
extensions).
3. Your filing status
cannot be “Married filing
separately.”
4. You must be a U.S.
citizen or resident alien
all year.
5. You cannot file Form
2555 or Form 2555-EZ
(relating to foreign
earned income).
6. Your investment
income must be $3,400
or less.
7. You must have
earned income.
8. Your child must meet
the relationship, age,
residency, and joint return
tests.
9. Your qualifying child
cannot be used by more
than one person to claim
the EIC.
10. You cannot be a
qualifying child of another
person.
11. You must be at
least age 25 but under
age 65.
12. You cannot be the
dependent of another
person.
13. You cannot be a
qualifying child of
another person.
14. You must have
lived in the United
States more than half
of the year.
15. Your earned income must
be less than:
• $47,955 ($53,505 for
married filing jointly) if you
have three or more qualifying
children,
• $44,648 ($50,198 for
married filing jointly) if you
have two qualifying children,
• $39,296 ($44,846 for
married filing jointly) if you
have one qualifying child, or
• $14,880 ($20,430 for
married filing jointly) if you do
not have a qualifying child.
Page 232 Chapter 36 Earned Income Credit (EIC)
filing status is married filing jointly. You can use
that filing status only if one spouse is a U.S. citi-
zen or resident alien and you choose to treat
the nonresident spouse as a U.S. resident. If
you make this choice, you and your spouse are
taxed on your worldwide income. If you (or your
spouse, if married) were a nonresident alien for
any part of the year and your filing status isn't
married filing jointly, enter “No” on the dotted
line next to line 66a (Form 1040) or in the space
to the left of line 42a (Form 1040A). If you need
more information on making this choice, get
Pub. 519, U.S. Tax Guide for Aliens.
Rule 5. You Cannot File
Form 2555 or Form
2555EZ
You cannot claim the earned income credit if
you file Form 2555, Foreign Earned Income, or
Form 2555-EZ, Foreign Earned Income Exclu-
sion. You file these forms to exclude income
earned in foreign countries from your gross in-
come, or to deduct or exclude a foreign housing
amount. U.S. possessions aren't foreign coun-
tries. See Pub. 54, Tax Guide for U.S. Citizens
and Resident Aliens Abroad, for more detailed
information.
Rule 6. Your Investment
Income Must Be $3,400 or
Less
You cannot claim the earned income credit un-
less your investment income is $3,400 or less. If
your investment income is more than $3,400,
you cannot claim the credit. For most people,
investment income is the total of the following
amounts.
Taxable interest (line 8a of Form 1040 or
1040A).
Tax-exempt interest (line 8b of Form 1040
or 1040A).
Dividend income (line 9a of Form 1040 or
1040A).
Capital gain net income (line 13 of Form
1040, if more than zero, or line 10 of Form
1040A).
If you file Form 1040EZ, your investment in-
come is the total of the amount of line 2 and the
amount of any tax-exempt interest you wrote to
the right of the words “Form 1040EZ” on line 2.
However, see Rule 6 in chapter 1 of Pub.
596 if:
You are filing Schedule E (Form 1040),
Form 4797, or Form 8814,
You are reporting income from the rental of
personal property on Form 1040, line 21,
or
You have income or loss from a passive
activity.
Rule 7. You Must Have
Earned Income
This credit is called the “earned income” credit
because, to qualify, you must work and have
earned income. If you are married and file a
joint return, you meet this rule if at least one
spouse works and has earned income. If you
are an employee, earned income includes all
the taxable income you get from your employer.
If you are self-employed or a statutory em-
ployee, you will figure your earned income on
EIC Worksheet B in the instructions for Form
1040.
Earned Income
Earned income includes all of the following
types of income.
1. Wages, salaries, tips, and other taxable
employee pay. Employee pay is earned in-
come only if it is taxable. Nontaxable em-
ployee pay, such as certain dependent
care benefits and adoption benefits, isn't
earned income. But there is an exception
for nontaxable combat pay, which you can
choose to include in earned income, as
explained below.
2. Net earnings from self-employment.
3. Gross income received as a statutory em-
ployee.
Wages, salaries, and tips. Wages, salaries,
and tips you receive for working are reported to
you on Form W-2, in box 1. You should report
these on line 1 (Form 1040EZ) or line 7 (Forms
1040A and 1040).
Nontaxable combat pay election. You can
elect to include your nontaxable combat pay in
earned income for the earned income credit.
Electing to include nontaxable combat pay in
earned income may increase or decrease your
EIC. Figure the credit with and without your
nontaxable combat pay before making the elec-
tion.
If you make the election, you must include in
earned income all nontaxable combat pay you
received. If you are filing a joint return and both
you and your spouse received nontaxable com-
bat pay, you can each make your own election.
In other words, if one of you makes the election,
the other one can also make it but does not
have to.
The amount of your nontaxable combat pay
should be shown in box 12 of your Form W-2
with code “Q.”
Selfemployed persons and statutory em
ployees. If you are self-employed or received
income as a statutory employee, you must use
the Form 1040 instructions to see if you qualify
to get the EIC.
Approved Form 4361 or Form 4029
This section is for persons who have an ap-
proved:
Form 4361, Application for Exemption
From Self-Employment Tax for Use by
Ministers, Members of Religious Orders
and Christian Science Practitioners, or
Form 4029, Application for Exemption
From Social Security and Medicare Taxes
and Waiver of Benefits.
Each approved form exempts certain in-
come from social security taxes. Each form is
discussed here in terms of what is or isn't
earned income for the EIC.
Form 4361. Whether or not you have an ap-
proved Form 4361, amounts you received for
performing ministerial duties as an employee
count as earned income. This includes wages,
salaries, tips, and other taxable employee com-
pensation.
If you have an approved Form 4361, a non-
taxable housing allowance or the nontaxable
rental value of a home isn't earned income.
Also, amounts you received for performing min-
isterial duties, but not as an employee, don't
count as earned income. Examples include
fees for performing marriages and honoraria for
delivering speeches.
Form 4029. Whether or not you have an ap-
proved Form 4029, all wages, salaries, tips, and
other taxable employee compensation count as
earned income. However, amounts you re-
ceived as a self-employed individual don't count
as earned income. Also, in figuring earned in-
come, don't subtract losses on Schedule C,
C-EZ, or F from wages on line 7 of Form 1040.
Disability Benefits
If you retired on disability, taxable benefits you
receive under your employer's disability retire-
ment plan are considered earned income until
you reach minimum retirement age. Minimum
retirement age generally is the earliest age at
which you could have received a pension or an-
nuity if you were not disabled. You must report
your taxable disability payments on line 7 of ei-
ther Form 1040 or Form 1040A until you reach
minimum retirement age.
Beginning on the day after you reach mini-
mum retirement age, payments you receive are
taxable as a pension and aren't considered
earned income. Report taxable pension pay-
ments on Form 1040, lines 16a and 16b (or
Form 1040A, lines 12a and 12b).
Disability insurance payments. Payments
you received from a disability insurance policy
that you paid the premiums for aren't earned in-
come. It doesn't matter whether you have
reached minimum retirement age. If this policy
is through your employer, the amount may be
shown in box 12 of your Form W-2 with code
“J.”
Income That Is Not Earned Income
Examples of items that aren't earned income in-
clude interest and dividends, pensions and an-
nuities, social security and railroad retirement
benefits (including disability benefits), alimony
and child support, welfare benefits, workers'
compensation benefits, unemployment com-
pensation (insurance), nontaxable foster care
payments, and veterans' benefits, including VA
rehabilitation payments. Do not include any of
these items in your earned income.
Earnings while an inmate. Amounts received
for work performed while an inmate in a penal
institution aren't earned income when figuring
the earned income credit. This includes
amounts for work performed while in a work re-
lease program or while in a halfway house.
Chapter 36 Earned Income Credit (EIC) Page 233
Workfare payments. Nontaxable workfare
payments aren't earned income for the EIC.
These are cash payments certain people re-
ceive from a state or local agency that adminis-
ters public assistance programs funded under
the federal Temporary Assistance for Needy
Families (TANF) program in return for certain
work activities such as (1) work experience ac-
tivities (including remodeling or repairing public
housing) if private sector employment isn't
available, or (2) community service program ac-
tivities.
Community property. If you are married, but
qualify to file as head of household under spe-
cial rules for married taxpayers living apart (see
Rule 3), and live in a state that has community
property laws, your earned income for the EIC
doesn't include any amount earned by your
spouse that is treated as belonging to you un-
der those laws. That amount isn't earned in-
come for the EIC, even though you must include
it in your gross income on your income tax re-
turn. Your earned income includes the entire
amount you earned, even if part of it is treated
as belonging to your spouse under your state's
community property laws.
Nevada, Washington, and California do-
mestic partners. If you are a registered do-
mestic partner in Nevada, Washington, or Cali-
fornia, the same rules apply. Your earned
income for the EIC doesn't include any amount
earned by your partner. Your earned income in-
cludes the entire amount you earned. For de-
tails, see Pub. 555, Community Property.
Conservation Reserve Program (CRP) pay
ments. If you were receiving social security re-
tirement benefits or social security disability
benefits at the time you received any CRP pay-
ments, your CRP payments aren't earned in-
come for the EIC.
Nontaxable military pay. Nontaxable pay for
members of the Armed Forces isn't considered
earned income for the EIC. Examples of non-
taxable military pay are combat pay, the Basic
Allowance for Housing (BAH), and the Basic Al-
lowance for Subsistence (BAS). See Pub. 3,
Armed Forces' Tax Guide, for more information.
Combat pay. You can elect to include
your nontaxable combat pay in earned
income for the EIC. See Nontaxable
combat pay election, earlier.
Part B. Rules
If You Have a
Qualifying Child
If you have met all of the rules in Part A, read
Part B to see if you have a qualifying child.
Part B discusses Rules 8 through 10. You
must meet all three of these rules, in addition to
the rules in Parts A and D, to qualify for the
earned income credit with a qualifying child.
You must file Form 1040 or Form 1040A to
claim the EIC with a qualifying child. (You can-
not file Form 1040EZ.) You also must complete
Schedule EIC and attach it to your return. If you
meet all the rules in Part A and this part, read
Part D to find out what to do next.TIP
If you don't meet Rule 8, you don't have
a qualifying child. Read Part C to find
out if you can get the earned income
credit without a qualifying child.
Rule 8. Your Child Must
Meet the Relationship,
Age, Residency, and Joint
Return Tests
Your child is a qualifying child if your child
meets four tests. The four tests are:
1. Relationship,
2. Age,
3. Residency, and
4. Joint return.
The four tests are illustrated in Figure 36–1.
The paragraphs that follow contain more infor-
mation about each test.
Relationship Test
To be your qualifying child, a child must be
your:
Son, daughter, stepchild, foster child, or a
descendant of any of them (for example,
your grandchild), or
Brother, sister, half brother, half sister,
stepbrother, stepsister, or a descendant of
any of them (for example, your niece or
nephew).
The following definitions clarify the relationship
test.
Adopted child. An adopted child is always
treated as your own child. The term “adopted
child” includes a child who was lawfully placed
with you for legal adoption.
Foster child. For the EIC, a person is your fos-
ter child if the child is placed with you by an au-
thorized placement agency or by judgement,
decree, or other order of any court of competent
jurisdiction. An authorized placement agency
includes:
A state or local government agency,
A tax-exempt organization licensed by a
state, and
An Indian tribal government or an organi-
zation authorized by an Indian tribal gov-
ernment to place Indian children.
Example. Debbie, who is 12 years old, was
placed in your care 2 years ago by an author-
ized agency responsible for placing children in
foster homes. Debbie is your foster child.
Age Test
Your child must be:
1. Under age 19 at the end of 2016 and
younger than you (or your spouse, if filing
jointly),
2. Under age 24 at the end of 2016, a stu-
dent, and younger than you (or your
spouse, if filing jointly), orCAUTION
!
3. Permanently and totally disabled at any
time during 2016, regardless of age.
The following examples and definitions clarify
the age test.
Example 1—child not under age 19.
Your son turned 19 on December 10. Unless he
was permanently and totally disabled or a stu-
dent, he isn't a qualifying child because, at the
end of the year, he wasn't under age 19.
Example 2—child not younger than you
or your spouse. Your 23-year-old brother,
who is a full-time student and unmarried, lives
with you and your spouse. He isn't disabled.
Both you and your spouse are 21 years old and
you file a joint return. Your brother isn't your
qualifying child because he isn't younger than
you or your spouse.
Example 3—child younger than your
spouse but not younger than you. The facts
are the same as in Example 2 except that your
spouse is 25 years old. Because your brother is
younger than your spouse, he is your qualifying
child even though he isn't younger than you.
Student defined. To qualify as a student, your
child must be, during some part of each of any 5
calendar months during the calendar year:
1. A full-time student at a school that has a
regular teaching staff, course of study, and
regular student body at the school, or
2. A student taking a full-time, on-farm train-
ing course given by a school described in
(1), or a state, county, or local govern-
ment.
The 5 calendar months need not be consecu-
tive.
A full-time student is a student who is enrol-
led for the number of hours or courses the
school considers to be full-time attendance.
School defined. A school can be an ele-
mentary school, junior or senior high school,
college, university, or technical, trade, or me-
chanical school. However, on-the-job training
courses, correspondence schools, and schools
offering courses only through the Internet do not
count as schools for the EIC.
Vocational high school students. Stu-
dents who work in co-op jobs in private industry
as a part of a school's regular course of class-
room and practical training are considered
full-time students.
Permanently and totally disabled. Your child
is permanently and totally disabled if both of the
following apply.
1. He or she cannot engage in any substan-
tial gainful activity because of a physical or
mental condition.
2. A doctor determines the condition has las-
ted or can be expected to last continu-
ously for at least a year or can lead to
death.
Page 234 Chapter 36 Earned Income Credit (EIC)
Residency Test
Your child must have lived with you in the Uni-
ted States for more than half of 2016.
You can't claim the EIC for a child who
didn't live with you for more than half of
the year, even if you paid most of the
child's living expenses. The IRS may ask you
for documents to show you lived with each
qualifying child. Documents you might want to
keep for this purpose include school and child
care records and other records that show your
child's address.
The following paragraphs clarify the resi-
dency test.
United States. This means the 50 states and
the District of Columbia. It doesn't include Pu-
erto Rico or U.S. possessions such as Guam.
Homeless shelter. Your home can be any lo-
cation where you regularly live. You don't need
a traditional home. For example, if your child
lived with you for more than half the year in one
or more homeless shelters, your child meets the
residency test.
Military personnel stationed outside the
United States. U.S. military personnel sta-
tioned outside the United States on extended
active duty are considered to live in the United
States during that duty period for purposes of
the EIC.
Extended active duty. Extended active
duty means you are called or ordered to duty for
an indefinite period or for a period of more than
90 days. Once you begin serving your extended
active duty, you are still considered to have
been on extended active duty even if you don't
serve more than 90 days.
Birth or death of a child. A child who was
born or died in 2016 is treated as having lived
with you for more than half of 2016 if your home
was the child's home for more than half the time
he or she was alive in 2016.
Temporary absences. Count time that you or
your child is away from home on a temporary
absence due to a special circumstance as time
the child lived with you. Examples of a special
circumstance include illness, school attend-
ance, business, vacation, military service, and
detention in a juvenile facility.
Kidnapped child. A kidnapped child is treated
as living with you for more than half of the year if
the child lived with you for more than half the
part of the year before the date of the kidnap-
ping. The child must be presumed by law en-
forcement authorities to have been kidnapped
by someone who isn't a member of your family
or your child's family. This treatment applies for
all years until the child is returned. However, the
last year this treatment can apply is the earlier
of:
1. The year there is a determination that the
child is dead, or
2. The year the child would have reached
age 18.
If your qualifying child has been kidnapped
and meets these requirements, enter “KC,” in-
stead of a number, on line 6 of Schedule EIC.CAUTION
!
Joint Return Test
To meet this test, the child cannot file a joint re-
turn for the year.
Exception. An exception to the joint return test
applies if your child and his or her spouse file a
joint return only to claim a refund of income tax
withheld or estimated tax paid.
Example 1—child files joint return. You
supported your 18-year-old daughter, and she
lived with you all year while her husband was in
the Armed Forces. He earned $25,000 for the
year. The couple files a joint return. Because
your daughter and her husband filed a joint re-
turn, she isn't your qualifying child.
Example 2—child files joint return only
to claim a refund of withheld tax. Your
18-year-old son and his 17-year-old wife had
$800 of wages from part-time jobs and no other
income. They don't have a child. Neither is re-
quired to file a tax return. Taxes were taken out
of their pay, so they filed a joint return only to
get a refund of the withheld taxes. The excep-
tion to the joint return test applies, so your son
may be your qualifying child if all the other tests
are met.
Example 3—child files joint return to
claim American opportunity credit. The
facts are the same as in Example 2 except no
taxes were taken out of your son's pay. He and
his wife aren't required to file a tax return, but
they file a joint return to claim an American op-
portunity credit of $124 and get a refund of that
amount. Because claiming the American oppor-
tunity credit is their reason for filing the return,
they aren't filing it only to get a refund of income
tax withheld or estimated tax paid. The excep-
tion to the joint return test doesn't apply, so your
son isn't your qualifying child.
Married child. Even if your child doesn't file a
joint return, if your child was married at the end
of the year, he or she cannot be your qualifying
child unless:
1. You can claim an exemption for the child,
or
2. The reason you cannot claim an exemp-
tion for the child is that you let the child's
other parent claim the exemption under
the Special rule for divorced or separated
parents (or parents who live apart), descri-
bed later.
Social security number. The qualifying child
must have a valid social security number (SSN)
by the due date of your 2016 return (including
extensions) unless the child was born and died
in 2016 and you attach to your return a copy of
the child's birth certificate, death certificate, or
hospital records showing a live birth. You can-
not claim the EIC on the basis of a qualifying
child if:
1. The qualifying child's SSN is missing from
your tax return or is incorrect,
2. The qualifying child's social security card
says “Not valid for employment” and was
issued for use in getting a federally funded
benefit, or
3. Instead of an SSN, the qualifying child
has:
a. An individual taxpayer identification
number (ITIN), which is issued to a
noncitizen who cannot get an SSN, or
b. An adoption taxpayer identification
number (ATIN), which is issued to
adopting parents who cannot get an
SSN for the child being adopted until
the adoption is final.
If you have more than one qualifying child
and only one has a valid SSN, you can use only
that child to claim the EIC. For more information
about SSNs, see Rule 2.
Rule 9. Your Qualifying
Child Cannot Be Used By
More Than One Person To
Claim the EIC
Sometimes a child meets the tests to be a quali-
fying child of more than one person. However,
only one of these persons can actually treat the
child as a qualifying child. Only that person can
use the child as a qualifying child to take all of
the following tax benefits (provided the person
is eligible for each benefit).
1. The exemption for the child.
2. The child tax credit.
3. Head of household filing status.
4. The credit for child and dependent care
expenses.
5. The exclusion for dependent care bene-
fits.
6. The EIC.
The other person cannot take any of these
benefits based on this qualifying child. In other
words, you and the other person cannot agree
to divide these tax benefits between you. The
other person cannot take any of these tax bene-
fits unless he or she has a different qualifying
child.
The tiebreaker rules explained next explain
who, if anyone, can claim the EIC when more
than one person has the same qualifying child.
However, the tiebreaker rules don't apply if the
other person is your spouse and you file a joint
return.
Tiebreaker rules. To determine which person
can treat the child as a qualifying child to claim
the six tax benefits just listed, the following tie-
breaker rules apply.
If only one of the persons is the child's pa-
rent, the child is treated as the qualifying
child of the parent.
If the parents file a joint return together and
can claim the child as a qualifying child,
the child is treated as the qualifying child of
the parents.
If the parents don't file a joint return to-
gether but both parents claim the child as a
qualifying child, the IRS will treat the child
as the qualifying child of the parent with
whom the child lived for the longer period
of time during the year. If the child lived
Chapter 36 Earned Income Credit (EIC) Page 235
Figure 361. Tests for Qualifying ChildAND
AND
A qualifying child is a child who is your . . .
was . . .
Under age 19 at the end of 2016 and younger than you
(or your spouse, if filing jointly)
OR
Under age 24 at the end of 2016, a student, and younger than you
(or your spouse, if filing jointly)
Permanently and totally disabled at any time during the year,
regardless of age
Who lived with you in the United States for more than
half of 2016.
OR
Relationship
Age
Residency
AND
Who is not filing a joint return for 2016 (or is filing a
joint return for 2016 only to claim a refund of income tax withheld
or estimated tax paid)
Joint Return
Son, daughter, stepchild, foster child, or a descendant of
any of them (for example, your grandchild)
▲!
CAUTION
You can’t claim the EIC for a child who didn’t live with you
for more than half of the year, even if you paid most of the
child’s living expenses. The IRS may ask you for documents to
show you lived with each qualifying child. Documents you might want
to keep for this purpose include school and child care records and
other records that show your child’s address.
TIP
If the child didn’t live with you for more than half of the year
because of a temporary absence, birth, death, or kidnapping,
see Temporary absences, Birth or death of child, or
OR
Brother, sister, half brother, half sister, stepbrother,
stepsister, or a descendant of any of them (for example, your
niece or nephew)
Caution: Figure 36-1 is an overview of the tests to claim a qualifying child. For details, see the rest of this chapter.
Kidnapped child in this chapter.
Page 236 Chapter 36 Earned Income Credit (EIC)
with each parent for the same amount of
time, the IRS will treat the child as the qual-
ifying child of the parent who had the
higher adjusted gross income (AGI) for the
year.
If no parent can claim the child as a quali-
fying child, the child is treated as the quali-
fying child of the person who had the high-
est AGI for the year.
If a parent can claim the child as a qualify-
ing child but no parent does so claim the
child, the child is treated as the qualifying
child of the person who had the highest
AGI for the year, but only if that person's
AGI is higher than the highest AGI of any of
the child's parents who can claim the child.
If the child's parents file a joint return with
each other, this rule can be applied by
treating the parents' total AGI as divided
evenly between them. See Example 8.
Subject to these tiebreaker rules, you and
the other person may be able to choose which
of you claims the child as a qualifying child. See
Examples 1 through 13.
If you cannot claim the EIC because your
qualifying child is treated under the tiebreaker
rules as the qualifying child of another person
for 2016, you may be able to take the EIC using
a different qualifying child, but you cannot take
the EIC using the rules in Part C for people who
don't have a qualifying child.
If the other person cannot claim the EIC. If
you and someone else have the same qualify-
ing child but the other person cannot claim the
EIC because he or she isn't eligible or his or her
earned income or AGI is too high, you may be
able to treat the child as a qualifying child. See
Examples 6 and 7. But you cannot treat the
child as a qualifying child to claim the EIC if the
other person uses the child to claim any of the
other six tax benefits listed earlier.
Examples. The following examples may
help you in determining whether you can claim
the EIC when you and someone else have the
same qualifying child.
Example 1—child lived with parent and
grandparent. You and your 2-year-old son
Jimmy lived with your mother all year. You are
25 years old, unmarried, and your AGI is
$9,000. Your only income was $9,000 from a
part-time job. Your mother's only income was
$20,000 from her job, and her AGI is $20,000.
Jimmy's father didn't live with you or Jimmy.
The special rule explained later for divorced or
separated parents (or parents who live apart)
doesn't apply. Jimmy is a qualifying child of
both you and your mother because he meets
the relationship, age, residency, and joint return
tests for both you and your mother. However,
only one of you can treat him as a qualifying
child to claim the EIC (and the other tax benefits
listed earlier for which that person qualifies). He
isn't a qualifying child of anyone else, including
his father. If you don't claim Jimmy as a qualify-
ing child for the EIC or any of the other tax ben-
efits listed earlier, your mother can treat him as
a qualifying child to claim the EIC (and any of
the other tax benefits listed earlier for which she
qualifies).
Example 2—parent has higher AGI than
grandparent. The facts are the same as in Ex-
ample 1 except your AGI is $25,000. Because
your mother's AGI isn't higher than yours, she
cannot claim Jimmy as a qualifying child. Only
you can claim him.
Example 3—two persons claim same
child. The facts are the same as in Example 1
except that you and your mother both claim
Jimmy as a qualifying child. In this case, you as
the child's parent will be the only one allowed to
claim Jimmy as a qualifying child for the EIC
and the other tax benefits listed earlier for which
you qualify. The IRS will disallow your mother's
claim to the EIC and any of the other tax bene-
fits listed earlier unless she has another qualify-
ing child.
Example 4—qualifying children split be-
tween two persons. The facts are the same
as in Example 1 except that you also have two
other young children who are qualifying children
of both you and your mother. Only one of you
can claim each child. However, if your mother's
AGI is higher than yours, you can allow your
mother to claim one or more of the children. For
example, if you claim one child, your mother
can claim the other two.
Example 5—taxpayer who is a qualifying
child. The facts are the same as in Example 1
except that you are only 18 years old. This
means you are a qualifying child of your mother.
Because of Rule 10, discussed next, you can-
not claim the EIC and cannot claim Jimmy as a
qualifying child. Only your mother may be able
to treat Jimmy as a qualifying child to claim the
EIC. If your mother meets all the other require-
ments for claiming the EIC and you don't claim
Jimmy as a qualifying child for any of the other
tax benefits listed earlier, your mother can claim
both you and Jimmy as qualifying children for
the EIC.
Example 6—grandparent with too much
earned income to claim EIC. The facts are
the same as in Example 1 except that your
mother earned $50,000 from her job. Because
your mother's earned income is too high for her
to claim the EIC, only you can claim the EIC us-
ing your son.
Example 7—parent with too much
earned income to claim EIC. The facts are
the same as in Example 1 except that you
earned $50,000 from your job and your AGI is
$50,500. Your earned income is too high for
you to claim the EIC. But your mother cannot
claim the EIC either, because her AGI isn't
higher than yours.
Example 8—child lived with both pa-
rents and grandparent. The facts are the
same as in Example 1 except that you and Jim-
my's father are married to each other, live with
Jimmy and your mother, and have an AGI of
$30,000 on a joint return. If you and your hus-
band don't claim Jimmy as a qualifying child for
the EIC or any of the other tax benefits listed
earlier, your mother can claim him instead.
Even though the AGI on your joint return,
$30,000, is more than your mother's AGI of
$20,000, for this purpose half of the joint AGI
can be treated as yours and half as your hus-
band's. In other words, each parent's AGI can
be treated as $15,000.
Example 9—separated parents. You,
your husband, and your 10-year-old son Joey
lived together until August 1, 2016, when your
husband moved out of the household. In August
and September, Joey lived with you. For the
rest of the year, Joey lived with your husband,
who is Joey's father. Joey is a qualifying child of
both you and your husband because he lived
with each of you for more than half the year and
because he met the relationship, age, and joint
return tests for both of you. At the end of the
year, you and your husband still were not di-
vorced, legally separated, or separated under a
written separation agreement, so the special
rule for divorced or separated parents (or pa-
rents who live apart) doesn't apply.
You and your husband will file separate re-
turns. Your husband agrees to let you treat Joey
as a qualifying child. This means, if your hus-
band doesn't claim Joey as a qualifying child for
any of the tax benefits listed earlier, you can
claim him as a qualifying child for any tax bene-
fit listed earlier for which you qualify. However,
your filing status is married filing separately, so
you cannot claim the EIC or the credit for child
and dependent care expenses. See Rule 3.
Example 10—separated parents claim
same child. The facts are the same as in Ex-
ample 9 except that you and your husband both
claim Joey as a qualifying child. In this case,
only your husband will be allowed to treat Joey
as a qualifying child. This is because, during
2016, the boy lived with him longer than with
you. You cannot claim the EIC (either with or
without a qualifying child). However, your hus-
band's filing status is married filing separately,
so he cannot claim the EIC or the credit for child
and dependent care expenses. See Rule 3.
Example 11—unmarried parents. You,
your 5-year-old son and your son's father lived
together all year. You and your son's father
aren't married. Your son is a qualifying child of
both you and his father because he meets the
relationship, age, residency, and joint return
tests for both you and his father. Your earned
income and AGI are $12,000, and your son's fa-
ther's earned income and AGI are $14,000. Nei-
ther of you had any other income. Your son's fa-
ther agrees to let you treat the child as a
qualifying child. This means, if your son's father
doesn't claim your son as a qualifying child for
the EIC or any of the other tax benefits listed
earlier, you can claim him as a qualifying child
for the EIC and any of the other tax benefits lis-
ted earlier for which you qualify.
Example 12—unmarried parents claim
same child. The facts are the same as in Ex-
ample 11 except that you and your son's father
both claim your son as a qualifying child. In this
case, only your son's father will be allowed to
treat your son as a qualifying child. This is be-
cause his AGI, $14,000, is more than your AGI,
$12,000. You cannot claim the EIC (either with
or without a qualifying child).
Chapter 36 Earned Income Credit (EIC) Page 237
Example 13—child did not live with a pa-
rent. You and your 7-year-old niece, your si-
ster's child, lived with your mother all year. You
are 25 years old, and your AGI is $9,300. Your
only income was from a part-time job. Your
mother's AGI is $15,000. Her only income was
from her job. Your niece's parents file jointly,
have an AGI of less than $9,000, and don't live
with you or their child. Your niece is a qualifying
child of both you and your mother because she
meets the relationship, age, residency, and joint
return tests for both you and your mother. How-
ever, only your mother can treat her as a quali-
fying child. This is because your mother's AGI,
$15,000, is more than your AGI, $9,300.
Special rule for divorced or separated pa
rents (or parents who live apart). A child will
be treated as the qualifying child of his or her
noncustodial parent (for purposes of claiming
an exemption and the child tax credit, but not
for the EIC) if all of the following statements are
true.
1. The parents:
a. Are divorced or legally separated un-
der a decree of divorce or separate
maintenance,
b. Are separated under a written separa-
tion agreement, or
c. Lived apart at all times during the last
6 months of 2016, whether or not they
are or were married.
2. The child received over half of his or her
support for the year from the parents.
3. The child is in the custody of one or both
parents for more than half of 2016.
4. Either of the following statements is true.
a. The custodial parent signs Form 8332
or a substantially similar statement
that he or she will not claim the child
as a dependent for the year, and the
noncustodial parent attaches the form
or statement to his or her return. If the
divorce decree or separation agree-
ment went into effect after 1984 and
before 2009, the noncustodial parent
may be able to attach certain pages
from the decree or agreement instead
of Form 8332.
b. A pre-1985 decree of divorce or sepa-
rate maintenance or written separa-
tion agreement that applies to 2016
provides that the noncustodial parent
can claim the child as a dependent,
and the noncustodial parent provides
at least $600 for support of the child
during 2016.
For details, see chapter 3. If a child is treated as
the qualifying child of the noncustodial parent
under this special rule for children of divorced
or separated parents (or parents who live
apart), only the noncustodial parent can claim
an exemption and the child tax credit for the
child. However, only the custodial parent, if eli-
gible, or another eligible taxpayer can claim the
child as a qualifying child for the EIC. For details
and examples, see Applying the tiebreaker
rules to divorced or separated parents (or pa-
rents who live apart) in chapter 3.
Rule 10. You Cannot Be a
Qualifying Child of
Another Taxpayer
You are a qualifying child of another taxpayer
(such as your parent, guardian, or foster parent)
if all of the following statements are true.
1. You are that person's son, daughter, step-
child, foster child, or a descendant of any
of them. Or, you are that person's brother,
sister, half brother, half sister, stepbrother,
or stepsister (or a descendant of any of
them).
2. You were:
a. Under age 19 at the end of the year
and younger than that person (or that
person's spouse, if the person files
jointly),
b. Under age 24 at the end of the year, a
student, and younger than that person
(or that person's spouse, if the person
files jointly), or
c. Permanently and totally disabled, re-
gardless of age.
3. You lived with that person in the United
States for more than half of the year.
4. You aren't filing a joint return for the year
(or are filing a joint return only to claim a
refund of withheld income tax or estimated
tax paid).
For more details about the tests to be a qualify-
ing child, see Rule 8.
If you are a qualifying child of another tax-
payer, you cannot claim the EIC. This is true
even if the person for whom you are a qualifying
child doesn't claim the EIC or meet all of the
rules to claim the EIC. Put “No” beside line 66a
(Form 1040) or line 42a (Form 1040A).
Example. You and your daughter lived with
your mother all year. You are 22 years old, un-
married, and attended a trade school full time.
You had a part-time job and earned $5,700.
You had no other income. Because you meet
the relationship, age, residency, and joint return
tests, you are a qualifying child of your mother.
She can claim the EIC if she meets all the other
requirements. Because you are your mother's
qualifying child, you cannot claim the EIC. This
is so even if your mother cannot or doesn't
claim the EIC.
Child of person not required to file a return.
You aren't the qualifying child of another tax-
payer (and so may qualify to claim the EIC) if
the person for whom you meet the relationship,
age, residency, and joint return tests isn't re-
quired to file an income tax return and either:
Doesn't file an income tax return, or
Files a return only to get a refund of in-
come tax withheld or estimated tax paid.
Example. The facts are the same as in the
last example except your mother had no gross
income, isn't required to file a 2016 tax return,
and doesn't file a 2016 tax return. As a result,
you aren't your mother's qualifying child. You
can claim the EIC if you meet all the other re-
quirements to do so.
See Rule 10 in Pub. 596 for additional ex-
amples.
Part C. Rules
If You Don't Have
a Qualifying Child
Read this part if you:
1. Don't have a qualifying child, and
2. Have met all the rules in Part A.
Part C discusses Rules 11 through 14. You
must meet all four of these rules, in addition to
the rules in Parts A and D, to qualify for the
earned income credit without a qualifying child.
If you have a qualifying child, the rules
in this part don't apply to you. You can
claim the credit only if you meet all the
rules in Parts A, B, and D. See Rule 8 to find out
if you have a qualifying child.
Rule 11. You Must Be at
Least Age 25 but Under
Age 65
You must be at least age 25 but under age 65 at
the end of 2016. If you are married filing a joint
return, either you or your spouse must be at
least age 25 but under age 65 at the end of
2016. It doesn't matter which spouse meets the
age test, as long as one of the spouses does.
You meet the age test if you were born after
December 31, 1951, and before January 2,
1992. If you are married filing a joint return, you
meet the age test if either you or your spouse
was born after December 31, 1951, and before
January 2, 1992.
If neither you nor your spouse meets the age
test, you cannot claim the EIC. Put “No” next to
line 66a (Form 1040), line 42a (Form 1040A), or
line 8a (Form 1040EZ).
Example 1. You are age 28 and unmarried.
You meet the age test.
Example 2—spouse meets age test. You
are married and filing a joint return. You are age
23 and your spouse is age 27. You meet the
age test because your spouse is at least age 25
but under age 65.
Death of spouse. If you are filing a joint return
with your spouse who died in 2016, you meet
the age test if your spouse was at least age 25
but under age 65 at the time of death.
Your spouse is considered to reach age 25
on the day before his or her 25th birthday. How-
ever, the rule for reaching age 65 is different;
your spouse reaches age 65 on his or her 65th
birthday.
Even if your spouse was born before Janu-
ary 2, 1992, he or she isn't considered at least
age 25 at the end of 2016 unless he or she was
at least age 25 at the time of death.
Example 1. You are married and filing a
joint return with your spouse who died in AugustCAUTION
!
Page 238 Chapter 36 Earned Income Credit (EIC)
2016. You are age 67. Your spouse would have
become age 65 in November 2016. Because
your spouse was under age 65 when she died,
you meet the age test.
Example 2. Your spouse was born on Feb-
ruary 14, 1991, and died on February 13, 2016.
Your spouse is considered age 25 at the time of
death. However, if your spouse died on Febru-
ary 12, 2016, your spouse isn't considered age
25 at the time of death and is not at least age 25
at the end of 2016.
Death of taxpayer. If you are preparing a re-
turn for someone who died in 2016, see Death
of taxpayer in Pub. 596 to determine whether
the age test in Rule 11 is met.
Rule 12. You Cannot Be
the Dependent of Another
Person
If you aren't filing a joint return, you meet this
rule if:
You checked box 6a on Form 1040 or
1040A, or
You did not check the “You” box on line 5
of Form 1040EZ, and you entered $10,350
on that line.
If you are filing a joint return, you meet this
rule if:
You checked both box 6a and box 6b on
Form 1040 or 1040A, or
You and your spouse didn't check either
the “You” box or the “Spouse” box on line 5
of Form 1040EZ, and you entered $20,700
on that line.
If you aren't sure whether someone else can
claim you (or your spouse, if filing a joint return)
as a dependent, read the rules for claiming a
dependent in chapter 3.
If someone else can claim you (or your
spouse, if filing a joint return) as a dependent on
his or her return, but doesn't, you still cannot
claim the credit.
Example 1. In 2016, you were age 25, sin-
gle, and living at home with your parents. You
worked and were not a student. You earned
$7,500. Your parents cannot claim you as a de-
pendent. When you file your return, you claim
an exemption for yourself by not checking the
“You” box on line 5 of your Form 1040EZ and
by entering $10,350 on that line. You meet this
rule. You can claim the EIC if you meet all the
other requirements.
Example 2. The facts are the same as in
Example 1, except that you earned $2,000.
Your parents can claim you as a dependent but
decide not to. You don't meet this rule. You can-
not claim the credit because your parents could
have claimed you as a dependent.
Joint returns. You generally cannot be
claimed as a dependent by another person if
you are married and file a joint return.
However, another person may be able to
claim you as a dependent if you and your
spouse file a joint return only to get a refund of
income tax withheld or estimated tax paid. But
neither you nor your spouse can be claimed as
a dependent by another person if you claim the
EIC on your joint return.
Example 1. You are 26 years old. You and
your wife live with your parents and had $800 of
wages from part-time jobs and no other income.
Neither you nor your wife is required to file a tax
return. You don't have a child. Taxes were
taken out of your pay, so you file a joint return
only to get a refund of the withheld taxes. Your
parents aren't disqualified from claiming an ex-
emption for you just because you filed a joint re-
turn. They can claim exemptions for you and
your wife if all the other tests to do so are met.
Example 2. The facts are the same as in
Example 1 except no taxes were taken out of
your pay. Also, you and your wife aren't re-
quired to file a tax return, but you file a joint re-
turn to claim an EIC of $63 and get a refund of
that amount. Because claiming the EIC is your
reason for filing the return, you aren't filing it
only to get a refund of income tax withheld or
estimated tax paid. Your parents cannot claim
an exemption for either you or your wife.
Rule 13. You Cannot Be a
Qualifying Child of
Another Taxpayer
You are a qualifying child of another taxpayer
(your parent, guardian, foster parent, etc.) if all
of the following statements are true.
1. You are that person's son, daughter, step-
child, foster child, or a descendant of any
of them. Or, you are that person's brother,
sister, half brother, half sister, stepbrother,
or stepsister (or a descendant of any of
them).
2. You were:
a. Under age 19 at the end of the year
and younger than that person (or that
person's spouse, if the person files
jointly),
b. Under age 24 at the end of the year, a
student (as defined in Rule 8), and
younger than that person (or that per-
son's spouse, if the person files
jointly), or
c. Permanently and totally disabled, re-
gardless of age.
3. You lived with that person in the United
States for more than half of the year.
4. You aren't filing a joint return for the year
(or are filing a joint return only to claim a
refund of withheld income tax or estimated
tax paid).
For more details about the tests to be a
qualifying child, see Rule 8.
If you are a qualifying child of another tax-
payer, you cannot claim the EIC. This is true
even if the person for whom you are a qualifying
child doesn't claim the EIC or meet all of the
rules to claim the EIC. Put “No” next to line 66a
(Form 1040), line 42a (Form 1040A), or line 8a
(Form 1040EZ).
Example. You lived with your mother all
year. You are age 26, unmarried, and perma-
nently and totally disabled. Your only income
was from a community center where you went
three days a week to answer telephones. You
earned $5,000 for the year and provided more
than half of your own support. Because you
meet the relationship, age, residency, and joint
return tests, you are a qualifying child of your
mother for the EIC. She can claim the EIC if she
meets all the other requirements. Because you
are a qualifying child of your mother, you cannot
claim the EIC. This is so even if your mother
cannot or does not claim the EIC.
Joint returns. You generally cannot be a qual-
ifying child of another taxpayer if you are mar-
ried and file a joint return.
However, you may be a qualifying child of
another taxpayer if you and your spouse file a
joint return for the year only to get a refund of in-
come tax withheld or estimated tax paid. But
neither you nor your spouse can be a qualifying
child of another taxpayer if you claim the EIC on
your joint return.
Child of person not required to file a return.
You aren't the qualifying child of another tax-
payer (and so may qualify to claim the EIC) if
the person for whom you meet the relationship,
age, residency, and joint return tests isn't re-
quired to file an income tax return and either:
Doesn't file an income tax return, or
Files a return only to get a refund of in-
come tax withheld or estimated tax paid.
Example. You lived all year with your fa-
ther. You are 27 years old, unmarried, perma-
nently and totally disabled, and earned
$13,000. You have no other income, no chil-
dren, and provided more than half of your own
support. Your father had no gross income, isn't
required to file a 2016 tax return, and doesn't
file a 2016 tax return. As a result, you aren't
your father's qualifying child. You can claim the
EIC if you meet all the other requirements to do
so.
See Rule 13 in Pub. 596 for additional ex-
amples.
Rule 14. You Must Have
Lived in the United States
More Than Half of the Year
Your home (and your spouse's, if filing a joint
return) must have been in the United States for
more than half the year.
If it wasn't, put “No” next to line 66a (Form
1040), line 42a (Form 1040A), or line 8a (Form
1040EZ).
United States. This means the 50 states and
the District of Columbia. It doesn't include Pu-
erto Rico or U.S. possessions such as Guam.
Homeless shelter. Your home can be any lo-
cation where you regularly live. You don't need
a traditional home. If you lived in one or more
homeless shelters in the United States for more
than half the year, you meet this rule.
Military personnel stationed outside the
United States. U.S. military personnel sta-
tioned outside the United States on extended
Chapter 36 Earned Income Credit (EIC) Page 239
active duty (defined in Rule 8) are considered to
live in the United States during that duty period
for purposes of the EIC.
Part D. Figuring and
Claiming the EIC
Read this part if you have met all the rules in
Parts A and B, or all the rules in Parts A and C.
Part D discusses Rule 15. You must meet
this rule, in addition to the rules in Parts A and
B, or Parts A and C, to qualify for the earned in-
come credit.
This part of the chapter also explains how to
figure the amount of your credit. You have two
choices.
1. Have the IRS figure the EIC for you. If you
want to do this, see IRS Will Figure the
EIC for You.
2. Figure the EIC yourself. If you want to do
this, see How To Figure the EIC Yourself.
Rule 15. Your Earned
Income Must Be Less
Than:
$47,955 ($53,505 for married filing jointly)
if you have three or more qualifying chil-
dren,
$44,648 ($50,198 for married filing jointly)
if you have two qualifying children,
$39,296 ($44,846 for married filing jointly)
if you have one qualifying child, or
$14,880 ($20,430 for married filing jointly)
if you don't have a qualifying child.
Earned income generally means wages, sal-
aries, tips, other taxable employee pay, and net
earnings from self-employment. Employee pay
is earned income only if it is taxable. Nontaxa-
ble employee pay, such as certain dependent
care benefits and adoption benefits, isn't
earned income. But there is an exception for
nontaxable combat pay, which you can choose
to include in earned income. Earned income is
explained in detail in Rule 7.
Figuring earned income. If you are self-em-
ployed, a statutory employee, or a member of
the clergy or a church employee who files
Schedule SE (Form 1040), you will figure your
earned income when you fill out Part 4 of EIC
Worksheet B in the Form 1040 instructions.
Otherwise, figure your earned income by us-
ing the worksheet in Step 5 of the Form 1040 in-
structions for lines 66a and 66b or the Form
1040A instructions for lines 42a and 42b, or the
worksheet in Step 2 of the Form 1040EZ in-
structions for lines 8a and 8b.
When using one of those worksheets to fig-
ure your earned income, you will start with the
amount on line 7 (Form 1040 or Form 1040A) or
line 1 (Form 1040EZ). You will then reduce that
amount by any amount included on that line and
described in the following list:
Scholarship or fellowship grants not repor-
ted on a Form W-2,
Inmate's income,
Pension or annuity from deferred compen-
sation plans, and
Certain Medicaid waiver payments.
Scholarship or fellowship grants not repor
ted on a Form W2. A scholarship or fellow-
ship grant that wasn't reported to you on a Form
W-2 isn't considered earned income for the
earned income credit.
Inmate's income. Amounts received for work
performed while an inmate in a penal institution
aren't earned income for the earned income
credit. This includes amounts received for work
performed while in a work release program or
while in a halfway house. If you received any
amount for work done while an inmate in a pe-
nal institution and that amount is included in the
total on line 7 (Form 1040 or Form 1040A) or
line 1 (Form 1040EZ), put “PRI” and the amount
on the dotted line next to line 7 (Form 1040), in
the space to the left of the entry space for line 7
(Form 1040A), or in the space to the left of
line 1 (Form 1040EZ).
Pension or annuity from deferred compen
sation plans. A pension or annuity from a non-
qualified deferred compensation plan or a non-
governmental section 457 plan isn't considered
earned income for the earned income credit. If
you received such an amount and it was inclu-
ded in the total on line 7 (Form 1040 or Form
1040A) or line 1 (Form 1040EZ), put “DFC” and
the amount on the dotted line next to line 7
(Form 1040), in the space to the left of the entry
space for line 7 (Form 1040A), or in the space
to the left of line 1 (Form 1040EZ). This amount
may be reported in box 11 of your Form W-2. If
you received such an amount but box 11 is
blank, contact your employer for the amount re-
ceived as a pension or annuity.
Medicaid waiver payments. Medicaid waiver
payments you exclude from income aren't
earned income for the earned income credit.
These are payments received for providing non-
medical support services under a plan of care
to someone in your home. If these payments
were incorrectly reported to you in box 1 of
Form(s) W-2 and you included them in the total
on line 7 of Form 1040 because you could not
get a corrected Form W-2, report them as de-
scribed in the instructions for Form 1040,
line 21. For more information about these pay-
ments, see chapter 12 or Pub. 525.
Clergy. If you are a member of the clergy who
files Schedule SE and the amount on line 2 of
that schedule includes an amount that was also
reported on line 7 (Form 1040), subtract that
amount from the amount on line 7 (Form 1040)
and enter the result on line 1 of the worksheet in
Step 5 of the Form 1040 instructions for lines
66a and 66b. Put “Clergy” on the dotted line
next to line 66a (Form 1040).
Church employees. A church employee
means an employee (other than a minister or
member of a religious order) of a church or
qualified church-controlled organization that is
exempt from employer social security and Med-
icare taxes. If you received wages as a church
employee and included any amount on both
line 5a of Schedule SE and line 7 (Form 1040),
subtract that amount from the amount on line 7
(Form 1040) and enter the result on line 1 of the
worksheet in Step 5 of the Form 1040 instruc-
tions for lines 66a and 66b.
IRS Will Figure
the EIC for You
If you want the IRS to figure the amount
of your EIC, see chapter 30.
How To Figure the
EIC Yourself
To figure the EIC yourself, use the EIC Work-
sheet in the instructions for the form you are us-
ing (Form 1040, Form 1040A, or Form 1040EZ).
If you have a qualifying child, complete Sched-
ule EIC and attach it to your return.
Special Instructions for Form 1040
Filers
If you file Form 1040, you will need to decide
whether to use EIC Worksheet A or EIC Work-
sheet B to figure the amount of your EIC. This
section explains how to use these worksheets
and how to report the EIC on your return.
EIC Worksheet A. Use EIC Worksheet A if
you were not self-employed at any time in 2016
and aren't a member of the clergy, a church em-
ployee who files Schedule SE, or a statutory
employee filing Schedule C or C-EZ.
EIC Worksheet B. Use EIC Worksheet B if
you were self-employed at any time in 2016 or
are a member of the clergy, a church employee
who files Schedule SE, or a statutory employee
filing Schedule C or C-EZ. If any of the following
situations apply to you, read the paragraph and
then complete EIC Worksheet B.
Net earnings from selfemployment $400 or
more. If your net earnings from self-employ-
ment are $400 or more, be sure to correctly fill
out Schedule SE (Form 1040) and pay the
proper amount of self-employment tax. If you
don't, you may not get all the EIC you are enti-
tled to.
When figuring your net earnings from
self-employment, you must claim all
your allowable business expenses.
When to use the optional methods of figur
ing net earnings. Using the optional methods
on Schedule SE to figure your net earnings from
self-employment may qualify you for the EIC or
give you a larger credit. If your net earnings
(without using the optional methods) are less
than $5,040, see the instructions for Sched-
ule SE for details about the optional methods.
More information. If you and your spouse
both have self-employment income or either of
you is a statutory employee, see How To Figure
the EIC Yourself in Pub. 596.
Examples
The following two comprehensive examples
(complete with filled-in forms) may be helpful.TIPCAUTION
!
Page 240 Chapter 36 Earned Income Credit (EIC)
1. John and Janet Smith, a married couple
with one qualifying child and using Form
1040A.
2. Kelly Green, age 30, a student, with no
qualifying child and using Form 1040EZ.
Example 1. John and Janet
Smith (Form 1040A)
John and Janet Smith are married and will file a
joint return. They have one child, Amy, who is 3
years old. Amy lived with John and Janet for all
of 2016. John worked and earned $9,500. Ja-
net worked part of the year and earned $1,500.
Their earned income and AGI are $11,000.
John and Janet qualify for the earned income
credit and fill out the EIC Worksheet and
Schedule EIC. The Smiths will attach Sched-
ule EIC to Form 1040A when they send their
completed return to the IRS.
They took the following steps to complete
Schedule EIC and the EIC Worksheet.
Completing Schedule EIC
The Smiths complete Schedule EIC because
they have a qualifying child.
Completing the EIC Worksheet
Next, the Smiths will complete the EIC Work-
sheet to figure their earned income credit.
Line 1. The Smiths enter $11,000 (their
earned income).
Line 2. The Smiths go to the Earned Income
Credit Table in the Form 1040A instructions.
The Smiths find their income of $11,000 within
the range of $11,000 to $11,050. They follow
this line across to the column that describes
their filing status and number of children and
find $3,373. They enter $3,373 on line 2.
Line 3. The Smiths enter their AGI of
$11,000.
Line 4. The Smiths check the “Yes” box be-
cause lines 1 and 3 are the same ($11,000).
They skip line 5 and enter the amount from
line 2 ($3,373) on line 6.
Line 6. The Smiths' EIC is $3,373.
Chapter 36 Earned Income Credit (EIC) Page 241
SCHEDULE EIC
(Form 1040A or 1040)
2016
Department of the Treasury
Internal Revenue Service (99)
Earned Income Credit
Qualifying Child Information
▶ Complete and attach to Form 1040A or 1040 only if you have a qualifying child.
▶ Information about Schedule EIC (Form 1040A or 1040) and its instructions is at www.irs.gov/scheduleeic.
1040A
. . . . . . . . . .
1040
EIC
◀ OMB No. 1545-0074
Attachment
Sequence No. 43
Name(s) shown on return Your social security number
Before you begin: • See the instructions for Form 1040A, lines 42a and 42b, or Form 1040, lines 66a and 66b, to make
sure that (a) you can take the EIC, and (b) you have a qualifying child.
• Be sure the child’s name on line 1 and social security number (SSN) on line 2 agree with the child’s social security card.
Otherwise, at the time we process your return, we may reduce or disallow your EIC. If the name or SSN on the child’s
social security card is not correct, call the Social Security Administration at 1-800-772-1213.
▲!CAUTION
• You can't claim the EIC for a child who didn't live with you for more than half of the year.
• It will take us longer to process your return and issue your refund if you do not fill in all lines that apply for each qualifying child.
Qualifying Child Information Child 1 Child 2 Child 3
1 Child’s name
If you have more than three qualifying
children, you have to list only three to get
the maximum credit.
• If you take the EIC even though you are not eligible, you may not be allowed to take the credit for up to 10 years. See the instructions for details.
First name Last name First name Last name First name Last name
2 Child’s SSN
The child must have an SSN as defined in
the instructions for Form 1040A, lines 42a
and 42b, or Form 1040, lines 66a and 66b,
unless the child was born and died in
2016. If your child was born and died in
2016 and did not have an SSN, enter
“Died” on this line and attach a copy of
the child’s birth certificate, death
certificate, or hospital medical records.
3 Child’s year of birth Year
If born after 1997 and the child is
younger than you (or your spouse, if
filing jointly), skip lines 4a and 4b;
go to line 5.
Year
If born after 1997 and the child is
younger than you (or your spouse, if
filing jointly), skip lines 4a and 4b;
go to line 5.
Year
If born after 1997 and the child is
younger than you (or your spouse, if
filing jointly), skip lines 4a and 4b;
go to line 5.
4 a Was the child under age 24 at the end of
2016, a student, and younger than you (or
your spouse, if filing jointly)?
Yes.
Go to
line 5.
No.
Go to line 4b.
Yes.
Go to
line 5.
No.
Go to line 4b.
Yes.
Go to
line 5.
No.
Go to line 4b.
b Was the child permanently and totally
disabled during any part of 2016? Yes.
Go to
line 5.
No.
The child is not a
qualifying child.
Yes.
Go to
line 5.
No.
The child is not a
qualifying child.
Yes.
Go to
line 5.
No.
The child is not a
qualifying child.
5 Child’s relationship to you
(for example, son, daughter, grandchild,
niece, nephew, foster child, etc.)
6 Number of months child lived
with you in the United States
during 2016
• If the child lived with you for more than
half of 2016 but less than 7 months,
enter “7.”
• If the child was born or died in 2016 and
your home was the child’s home for more
than half the time he or she was alive
during 2016, enter “12.”
months
Do not enter more than 12
months.
months
Do not enter more than 12
months.
months
Do not enter more than 12
months.
For Paperwork Reduction Act Notice, see your tax
return instructions. Cat. No. 13339M Schedule EIC (Form 1040A or 1040) 2016
John and Janet Smith
Amy Smith
000-00-2223
2 0 1 3
daughter
222-00-2222Page 242 Chapter 36 Earned Income Credit (EIC)
If line 2 is zero, You can’t take the credit.
Enter “No” to the left of the entry space for line 42a.
Filled-In EIC Worksheet—John and Janet Smith
1040A
Skip line 5; enter the amount from line 2 on line 6.Yes.
STOP
Keep for Your Records
1.
2.
3.
4.
5.
1Enter your earned income from Step 5.
Look up the amount on line 1 in the EIC Table to find the credit.
Be sure you use the correct column for your filing status and the
number of children you have. Enter the credit here.
Enter the amount from Form 1040A, line 22.
Are the amounts on lines 3 and 1 the same?
Go to line 5.No.
If you have:
Leave line 5 blank; enter the amount from line 2 on line 6.Yes.
No. Look up the amount on line 3 in the EIC Table to find
the credit. Be sure you use the correct column for your filing
status and the number of children you have. Enter the credit here.
Enter this amount on
Form 1040A, line 42a.
6Part 3
Part 1
Part 2
All Filers
Filers Who
Answered
“No” on
Line 4
Your Earned
Income Credit
• No qualifying children, is the amount on line 3 less than $8,300
($13,850 if married filing jointly)?
• 1 or more qualifying children, is the amount on line 3 less than $18,200
($23,750 if married filing jointly)?
Look at the amounts on lines 5 and 2.
Then, enter the smaller amount on line 6.
6. This is your earned income credit.
Reminder—
If you have a qualifying child, complete and attach
Schedule EIC.
If your EIC for a year after 1996 was reduced or disallowed, see
Form 8862, who must file, earlier to find out if you must file
Form 8862 to take the credit for 2016.
EIC
1040A
CAUTION
◀
◀
$11,000
$3,373
$11,000
$3,373
✓Chapter 36 Earned Income Credit (EIC) Page 243
Example 2. Kelly Green
(Form 1040EZ)
Kelly Green is age 30 and a full-time student.
She lived with her parents in the United States
for all of 2016. She had a part-time job and
earned $6,240. She earned $20 interest on a
savings account. She is not eligible to be
claimed as a dependent on her parents' return.
Although she lived with her parents, she is not
their qualifying child because she does not
meet the age test. She does not have any chil-
dren.
Kelly qualifies for the earned income credit.
Kelly will file Form 1040EZ and complete the
EIC Worksheet.
Completing the EIC Worksheet
Kelly figures the amount of her earned income
credit on the EIC Worksheet as follows.
Line 1. She enters $6,240 (her earned in-
come).
Line 2. Kelly goes to the Earned Income
Credit Table in the Form 1040EZ instructions.
She finds her earned income of $6,240 in the
range of $6,200 to $6,250. Kelly follows this line
across to the column that describes her filing
status and finds $476. She enters $476 on
line 2.
Line 3. Kelly enters $6,260 (her AGI).
Line 4. Kelly checks the “No” box because
lines 1 and 3 are not the same.
Line 5. Kelly checks the “Yes” box because
the amount on line 3 ($6,260) is less than
$8,300. She leaves line 5 blank and enters the
amount from line 2, $476, on line 6.
Line 6. She enters $476 here and on Form
1040EZ, line 8a. Kelly's earned income credit is
$476.
Filledin EIC Worksheet–Kelly Green Keep for Your Records
1. Enter your earned income from Step 2, earlier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 6,240
2. Look up the amount on line 1 above in the EIC Table, later, to find the credit. Be sure you use the correct column for your filing status (Single or
Married filing jointly).
Enter the credit here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 476
If line 2 is zero,STOP You cannot take the credit. Enter “No” in the space to the left of line 8a.
3. Enter the amount from Form 1040EZ, line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 6,260
4. Are the amounts on lines 3 and 1 the same?
Yes. Skip line 5; enter the amount from line 2 on line 6.
No. Go to line 5.
5. Is the amount on line 3 less than $8,300 ($13,850 if married filing jointly)?
Yes. Leave line 5 blank; enter the amount from line 2 on line 6.
No. Look up the amount on line 3 in the EIC Table, later, to find the credit. Be sure you use the correct column for your filing status
(Single or Married filing jointly).
Enter the credit here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
Look at the amounts on lines 5 and 2. Then, enter the smaller amount on line 6.
6. Earned income credit. Enter this amount on Form 1040EZ, line 8a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 476CAUTION
!
If your EIC for a year after 1996 was reduced or disallowed, see Form 8862, Who Must File under Definitions and Special Rules,
later, to find out if you must file Form 8862 to take the credit for 2016.
Page 244 Chapter 36 Earned Income Credit (EIC)
EIC Eligibility Checklist Keep for Your Records
You may claim the EIC if you answer “Yes” to all the following questions.*
Yes No
1. Is your AGI less than:
$14,880 ($20,430 for married filing jointly) if you don't have a qualifying child,
$39,296 ($44,846 for married filing jointly) if you have one qualifying child,
$44,648 ($50,198 for married filing jointly) if you have two qualifying children, or
$47,955 ($53,505 for married filing jointly) if you have more than two qualifying children?
(See Rule 1.)
2. Do you, your spouse, and your qualifying child each have a valid SSN that you got by the due date of your
2016 return (including extensions)? (See Rule 2.)
3. Is your filing status married filing jointly, head of household, qualifying widow(er), or single?
(See Rule 3.)
Caution: If you or your spouse is a nonresident alien, answer “Yes” only if your filing status is married filing
jointly. (See Rule 4.)
4. Answer “Yes” if you are not filing Form 2555 or Form 2555-EZ. Otherwise, answer “No.”
(See Rule 5.)
5. Is your investment income $3,400 or less? (See Rule 6.)
6. Is your total earned income at least $1 but less than:
$14,880 ($20,430 for married filing jointly) if you don't have a qualifying child,
$39,296 ($44,846 for married filing jointly) if you have one qualifying child,
$44,648 ($50,198 for married filing jointly) if you have two qualifying children, or
$47,955 ($53,505 for married filing jointly) if you have more than two qualifying children?
(See Rules 7 and 15.)
7. Answer “Yes” if (a) you aren't a qualifying child of another taxpayer or (b) you are filing a joint return.
Otherwise, answer “No.” (See Rules 10 and 13.)
STOP: If you have a qualifying child, answer questions 8 and 9 and skip 10 – 12. If you don't
have a qualifying child, skip questions 8 and 9 and answer 10 – 12.*
8. Does your child meet the relationship, age, residency, and joint return tests for a qualifying child?
(See Rule 8.)
9. Is your child a qualifying child only for you? Answer “Yes” if (a) your qualifying child doesn't meet the tests
to be a qualifying child of any other person or (b) your qualifying child meets the tests to be a qualifying
child of another person but you are the person entitled to treat the child as a qualifying child under the
tiebreaker rules explained in Rule 9. Answer “No” if the other person is the one entitled to treat the child as
a qualifying child under the tiebreaker rules.
10. Were you (or your spouse, if filing a joint return) at least age 25 but under 65 at the end of 2016?
(See Rule 11.)
11. Answer “Yes” if (a) you cannot be claimed as a dependent on anyone else's return or (b) you are filing a
joint return. Otherwise answer “No.” (See Rule 12.)
12. Was your main home (and your spouse's, if filing a joint return) in the United States for more than half the
year? (See Rule 14.)
* PERSONS WITH A QUALIFYING CHILD: If you answered “Yes” to questions 1 through 9, you can claim the EIC.
Remember to fill out Schedule EIC and attach it to your Form 1040 or Form 1040A. You cannot use Form 1040EZ. If you
answered “Yes” to questions 1 through 7 and “No” to question 8, answer questions 10 through 12 to see if you can claim
the EIC without a qualifying child.
PERSONS WITHOUT A QUALIFYING CHILD: If you answered “Yes” to questions 1 through 7, and 10 through 12, you
can claim the EIC.
If you answered “No” to any question that applies to you: You cannot claim the EIC.
Chapter 36 Earned Income Credit (EIC) Page 245
37.
Premium Tax
Credit (PTC)
Reminders
Report changes in circumstances when you
reenroll in coverage and during the year. If
advance payments of the premium tax credit
(APTC) are being paid in 2017 for an individual
in your tax family (described later) and you have
had certain changes in circumstances (see the
examples below), it is important that you
promptly report them to the Marketplace where
you enrolled in coverage. Reporting changes in
circumstances promptly will allow the Market-
place to adjust your APTC to reflect the pre-
mium tax credit (PTC) you are estimated to be
able to take on your tax return. Adjusting your
APTC when you re-enroll in coverage and dur-
ing the year can help you avoid owing tax when
you file your tax return. Changes that you
should report to the Marketplace include the fol-
lowing.
Changes in household income.
Moving to a different address.
Gaining or losing eligibility for other health
care coverage.
Gaining, losing, or other changes to em-
ployment.
Birth or adoption.
Marriage or divorce.
Other changes affecting the composition of
your tax family.
For more information on how to report a
change in circumstances to the Marketplace,
see healthcare.gov or your State Marketplace
website.
Health coverage tax credit (HCTC). The
HCTC is a tax credit that pays a percentage of
health insurance premiums for certain eligible
taxpayers and their qualified family members.
The HCTC and the PTC are different tax credits
that have different eligibility rules. If you think
you may be eligible for the HCTC, see Form
8885 and its instructions or visit IRS.gov/HCTC
before completing Form 8962.
Health insurance options. If you need
health coverage, visit healthcare.gov to learn
about health insurance options that are availa-
ble for you and your family, how to purchase
health insurance, and how you might qualify to
get financial assistance with the cost of insur-
ance.
Introduction
You may be able to take the PTC only for health
insurance coverage in a qualified health plan
purchased through a Health Insurance
Marketplace (also known as an Exchange).
This includes a qualified health plan purchased
on healthcare.gov or through a State Market-
place.
This chapter provides an overview of the fol-
lowing.
What is the PTC.
Who can take the PTC.
Terms you may need to know.
How to take the PTC.
Useful Items
You may want to see:
Publication
Premium Tax Credit (PTC)
Form (and Instructions)
Health Insurance Marketplace
Statement
Premium Tax Credit (PTC)
What is the Premium
Tax Credit (PTC)?
Premium tax credit (PTC). The PTC is a tax
credit for certain people who enroll, or whose
family member enrolls, in a qualified health
plan. The credit provides financial assistance to
pay the premiums for the qualified health plan
offered through a Marketplace by reducing the
amount of tax you owe, giving you a refund, or
increasing your refund amount. You must file
Form 8962 to compute and take the PTC on
your tax return.
Advance payment of the premium tax credit
(APTC). APTC is a payment during the year to
your insurance provider that pays for part or all
of the premiums for a qualified health plan cov-
ering you or another individual in your tax fam-
ily. Your APTC eligibility is based on the Mar-
ketplace’s estimate of the PTC you will be able
to take on your tax return. If APTC was paid for
you or another individual in your tax family, you
must file Form 8962 to reconcile (compare) this
APTC with your PTC. If the APTC is more than
your PTC, you have excess APTC and you
must repay the excess, subject to certain limita-
tions (provided in Table 5 in the Instructions for
Form 8962). See Alternative calculation for year
of marriage next for a special rule that may re-
duce your excess APTC if you got married in
2016. If your PTC is more than the APTC, you
can take the difference as a tax credit on your
tax return, which will reduce your tax payment
or increase your refund.
Note. The Marketplace determined your eli-
gibility for and the amount of your 2016 APTC
using projections of your income and your num-
ber of personal exemptions when you enrolled
in a qualified health plan. If this information
changed during 2016 and you did not promptly
report it to the Marketplace, the amount of
APTC paid may be substantially different from
the amount of PTC you can take on your tax re-
turn. See Report changes in circumstances
when you re-enroll in coverage and during the
year, earlier, for changes that can affect the
amount of your PTC.
1095A
8962
Alternative calculation for year of mar-
riage. If you got married during 2016 and
APTC was paid for an individual in your tax fam-
ily, you may want to use the alternative calcula-
tion for year of marriage, an optional calculation
that may allow you to repay less excess APTC
than you would under the general rules. You will
determine your eligibility using the Instructions
for Form 8962 and compute the alternative cal-
culation using Pub. 974.
Who Can Take the
PTC?
You can take the PTC for 2016 if you meet all
the conditions under (1) and (2) below.
1. For at least one month of the year, all of
the following were true.
a. An individual in your tax family was
enrolled in a qualified health plan of-
fered through the Marketplace on the
first day of the month.
b. That individual was not eligible for
minimum essential coverage for the
month, other than coverage in the in-
dividual market. An individual is con-
sidered eligible for minimum coverage
for the month only if he or she was eli-
gible for every day of the month (see
Minimum essential coverage, later).
c. The portion of the enrollment premi-
ums for the month for which you are
responsible was paid by the due date
of your tax return (not including ex-
tensions). However, if you became el-
igible for APTC because of a success-
ful eligibility appeal, see Enrollment
premiums, later, for the date by which
your portion of the enrollment premi-
ums must be paid.
2. You are an applicable taxpayer for 2016.
To be an applicable taxpayer, you must
meet all of the following requirements.
a. Your household income for 2016 is at
least 100% but no more than 400% of
the Federal poverty line for your family
size (provided in Tables 1-1, 1-2, and
1-3, in the Instructions for Form 8962).
See the Instructions for Form 8962 for
exceptions when household income is
below 100% of the Federal poverty
line.
b. No one can claim you as a dependent
on a tax return for 2016.
c. If you were married at the end of
2016, generally you must file a joint
return. However, filing a separate re-
turn from your spouse will not disqual-
ify you from being an applicable tax-
payer if you meet certain
requirements described under Mar-
ried taxpayers in the Instructions for
Form 8962.
For more information on taking the PTC and
the requirements to be an applicable taxpayer,
see the Instructions for Form 8962.
Page 246 Chapter 37 Premium Tax Credit (PTC)
Terms You May Need to
Know
Tax family. For purposes of the PTC, your tax
family consists of the individuals for whom you
claim a personal exemption on your tax return
(generally you, your spouse with whom you are
filing a joint return, and your dependents). Your
personal exemptions are reported on your Form
1040 or Form 1040A, line 6d. Your family size
equals the number of individuals in your tax
family. If no one, including you, claims a per-
sonal exemption for you and you indicated to
the Marketplace when you enrolled that you
would claim your own personal exemption, see
Pub. 974.
Household income. For purposes of the PTC,
household income is the modified adjusted
gross income (modified AGI) of you and your
spouse (if filing a joint return) plus the modified
AGI of each individual in your tax family whom
you claim as a dependent and who is required
to file a tax return because his or her income
meets the income tax return filing threshold.
Household income does not include the modi-
fied AGI for those individuals whom you claim
as dependents and who are filing a 2016 return
only to claim a refund of withheld income tax or
estimated tax. See the Instructions for Form
8962 to determine your household income.
Modified AGI. For purposes of the PTC,
modified AGI is the AGI on your tax return plus
certain income that is not subject to tax (foreign
earned income, tax-exempt interest, and the
portion of social security benefits that is not tax-
able). Use Worksheet 1-1 and Worksheet 1-2 in
the Form 8962 instructions to determine your
modified AGI.
Qualified health plan. For purposes of the
PTC, a qualified health plan is a health insur-
ance plan or policy purchased through a Mar-
ketplace at the bronze, silver, gold, or platinum
level. Catastrophic health plans and
stand-alone dental plans purchased through the
Marketplace, and all plans purchased through
the Small Business Health Options Program
(SHOP), are not qualified health plans for pur-
poses of the PTC. Therefore, they do not qualify
a taxpayer to take the PTC.
Minimum essential coverage. A separate tax
provision requires most individuals to have
qualifying health coverage, qualify for a cover-
age exemption, or make a payment with their
tax return. Health coverage that satisfies this re-
quirement is called minimum essential cover-
age. An individual in your tax family who is eligi-
ble for minimum essential coverage (except
coverage in the individual market) for a month is
not in your coverage family for that month.
Therefore, you cannot take the PTC for that in-
dividual’s coverage for the months that individ-
ual is eligible for minimum essential coverage.
In addition to qualified health plans and other
coverage in the individual market, minimum es-
sential coverage includes:
Most coverage through government-spon-
sored programs (including Medicaid cover-
age, Medicare parts A or C, the Children’s
Health Insurance Program (CHIP), certain
benefits for veterans and their families,
TRICARE, and health coverage for Peace
Corps volunteers);
Most types of employer-sponsored cover-
age; and
Other health coverage the Department of
Health and Human Services designates as
minimum essential coverage.
In most cases you are eligible for minimum
essential coverage if the coverage is available
to you whether or not you enroll in it. However,
special rules apply to certain types of minimum
essential coverage as explained in the Form
8962 instructions.
While coverage purchased in the individual
market outside the Marketplace is minimum es-
sential coverage, eligibility for this type of cover-
age does not prevent you from being eligible for
the PTC for Marketplace coverage. Coverage
purchased in the individual market outside the
Marketplace does not qualify for the PTC.
For more details on minimum essential cov-
erage, see Pub. 974. You can also check
IRS.gov/uac/Individual-Shared-Responsibility-
Provision for future updates about types of cov-
erage that are recognized as minimum essential
coverage.
Enrollment premiums. The enrollment premi-
ums are the total amount of the premiums for
the month for one or more qualified health plans
in which any individual in your tax family enrol-
led. Form 1095-A, Part III, column A, reports the
enrollment premiums.
You are generally not allowed a monthly
credit amount for the month if any part of the en-
rollment premiums for which you are responsi-
ble that month has not been paid by the due
date of your tax return (not including exten-
sions). However, if you became eligible for
APTC because of a successful eligibility appeal
and you retroactively enrolled in the plan, the
portion of the enrollment premium for which you
are responsible must be paid on or before the
120th day following the date of the appeals de-
cision. Premiums another person pays on your
behalf are treated as paid by you.
How To Take the PTC
You must file Form 8962 with your income tax
return if any of the following apply to you.
You are taking the PTC.
APTC was paid for you or another individ-
ual in your tax family.
APTC was paid for an individual (including
you) for whom you told the Marketplace
you would claim a personal exemption and
neither you nor anyone else claims a per-
sonal exemption for that individual. See In-
dividual you enrolled for whom no taxpayer
will claim a personal exemption under
Lines 12 through 23—Monthly Calculation
in the Instructions for Form 8962.
If any of the circumstances above apply to
you, you must file an income tax return and at-
tach Form 8962 even if you aren't otherwise re-
quired to file. You must file Form 1040 or Form
1040A. You cannot file Form 1040EZ. For help
in determining which of these forms to file, see
chapter 1.
Form 1095A. You will need Form 1095-A to
complete Form 8962. The Marketplace uses
Form 1095-A to report certain information to the
IRS about individuals who enrolled in a qualified
health plan through the Marketplace. The Mar-
ketplace sends copies to individuals to allow
them to accurately file a tax return taking the
PTC and reconciling APTC. For coverage in
2016, the Marketplace is required to provide or
send Form 1095-A to the individual(s) identified
in the Marketplace enrollment application by
January 31, 2017. If you are expecting to re-
ceive Form 1095-A for a qualified health plan
and you do not receive it by early February,
contact the Marketplace.
Under certain circumstances (for example,
where two spouses enroll in a qualified health
plan and divorce during the year), the Market-
place will provide Form 1095-A to one taxpayer,
but another taxpayer will also need the informa-
tion from that form to complete Form 8962. The
recipient of Form 1095-A should provide a copy
to other taxpayers as needed.
Allocating policy amounts. You need to
allocate policy amounts (enrollment premiums,
SLCSP premiums, and/or APTC) on a Form
1095-A between your tax family and another tax
family if:
1. The policy covered at least one individual
in your tax family and at least one individ-
ual in another tax family, and
2. Either:
a. You received a Form 1095-A for the
policy that does not accurately repre-
sent the members of your tax family
who were enrolled in the policy
(meaning that it either lists someone
who is not in your tax family or does
not list a member of your tax family
who was enrolled in the policy), or
b. The other tax family received a Form
1095-A for the policy that includes a
member of your tax family.
If both 1 and 2 above apply to you, check
the “Yes” box on line 9 of Form 8962. For each
policy to which 1 and 2 above apply, follow the
instructions in Table 3. Allocation of Policy
Amounts—Line 9, in the Form 8962 instruc-
tions, to determine which allocation rule applies
for that qualified health plan.
A qualified health plan may have covered at
least one individual in your tax family and one
individual not in your tax family if:
You got divorced during the year,
You are married but filing a separate return
from your spouse,
You or an individual in your tax family was
enrolled in a qualified health plan by some-
one who is not part of your tax family (for
example, your ex-spouse enrolled a child
whom you are claiming as a dependent),
or
You or an individual in your tax family en-
rolled someone not part of your tax family
in a qualified health plan (for example, you
enrolled a child whom your ex-spouse is
claiming as a dependent).
Chapter 37 Premium Tax Credit (PTC) Page 247
38.
Other Credits
What's New
Adoption credit. The maximum adoption
credit is $13,460 for 2016. See Adoption Credit.
Excess withholding of social security and
railroad retirement tax. Social security tax
and tier 1 railroad retirement (RRTA) tax were
both withheld during 2016 at a rate of 6.2% of
wages up to $118,500. If you worked for more
than one employer and had too much social se-
curity or RRTA tax withheld during 2016, you
may be entitled to a credit for the excess with-
holding. See Credit for Excess Social Security
Tax or Railroad Retirement Tax Withheld.
Alternative fuel vehicle refueling property
credit. The credit for alternative fuel vehicle re-
fueling property was extended. You may be
able to claim this credit if you placed qualified
property in service during 2016.
Alternative motor vehicle credit. The alter-
native motor vehicle credit was extended. You
may be able to claim this credit if you pur-
chased a qualified fuel cell motor vehicle during
2016.
Residential energy credits. Residential en-
ergy credits are available for nonbusiness en-
ergy property and residential energy efficient
property placed in service during 2016.
Plugin electric drive motor vehicle credit.
The credit for qualified two-wheeled plug-in
electric drive motor vehicles was extended. You
may be able to claim this credit if you pur-
chased a qualified two-wheeled vehicle in 2015
or 2016 and placed it in service during 2016.
Health coverage tax credit (HCTC). You can
elect to take the HCTC for 2016 if you were an
eligible trade adjustment assistance (TAA) re-
cipient, alternative TAA (ATAA) recipient, reem-
ployment TAA (RTAA) recipient, or Pension
Benefit Guarantee Corporation (PBGC) payee
in 2016; or you were the qualifying family mem-
ber of an eligible TAA, ATAA, or RTAA recipient
or PBGC payee who passed away or finalized a
divorce with you and you meet certain other
conditions. See Health Coverage Tax Credit,
later, for more information.
Marketplace coverage. For 2016, you
can't take the HCTC for coverage under a quali-
fied health plan offered through a Health Insur-
ance Marketplace (also known as an Ex-
change). However, you may be able to take the
premium tax credit (PTC) for Marketplace cov-
erage on Form 8962, Premium Tax Credit
(PTC). See the instructions for Forms 8962 and
8885 for special rules if, during 2016, you or
your family members were enrolled in a quali-
fied health plan offered through a Marketplace
for part of the year and qualified health insur-
ance coverage for the HCTC for another part of
the year.
Introduction
This chapter discusses the following nonrefund-
able credits.
Adoption credit.
Alternative motor vehicle credit.
Alternative fuel vehicle refueling property
credit.
Credit to holders of tax credit bonds.
Foreign tax credit.
Mortgage interest credit.
Nonrefundable credit for prior year mini-
mum tax.
Plug-in electric drive motor vehicle credit.
Residential energy credits.
Retirement savings contributions credit.
This chapter also discusses the following re-
fundable credits.
Credit for tax on undistributed capital gain.
Health coverage tax credit.
Credit for excess social security tax or rail-
road retirement tax withheld.
Several other credits are discussed in other
chapters in this publication.
Child and dependent care credit (chap-
ter 32).
Credit for the elderly or the disabled (chap-
ter 33).
Child tax credit (chapter 34).
Education credits (chapter 35).
Earned income credit (chapter 36).
Premium tax credit (chapter 37).
Nonrefundable credits. The first part of this
chapter, Nonrefundable Credits, covers ten
credits that you subtract from your tax. These
credits may reduce your tax to zero. If these
credits are more than your tax, the excess isn't
refunded to you.
Refundable credits. The second part of this
chapter, Refundable Credits, covers three cred-
its that are treated as payments and are refund-
able to you. These credits are added to the fed-
eral income tax withheld and any estimated tax
payments you made. If this total is more than
your total tax, the excess may be refunded to
you.
Useful Items
You may want to see:
Publication
Medical and Dental Expenses
Foreign Tax Credit for
Individuals
Tax Information for Homeowners
Contributions to Individual
Retirement Arrangements (IRAs)
590A
Distributions from Individual
Retirement Arrangements (IRAs)
Form (and Instructions)
Foreign Tax Credit
Notice to Shareholder of
Undistributed Long-Term Capital
Gains
Residential Energy Credits
Mortgage Interest Credit
Credit For Prior Year Minimum
Tax — Individuals, Estates, and
Trusts
Recapture of Federal Mortgage
Subsidy
Qualified Adoption Expenses
Credit for Qualified Retirement
Savings Contributions
Health Coverage Tax Credit
Alternative Motor Vehicle Credit
Alternative Fuel Vehicle Refueling
Property Credit
Credit to Holders of Tax Credit
Bonds
Qualified Plug-in Electric Drive
Motor Vehicle Credit
Nonrefundable Credits
The credits discussed in this part of the chapter
can reduce your tax. However, if the total of
these credits is more than your tax, the excess
isn't refunded to you.
Adoption Credit
You may be able to take a tax credit of up to
$13,460 for qualified expenses paid to adopt an
eligible child. The credit may be allowed for the
adoption of a child with special needs even if
you don't have any qualified expenses.
If your modified adjusted gross income
(AGI) is more than $201,920, your credit is re-
duced. If your modified AGI is $241,920 or
more, you can't take the credit.
Qualified adoption expenses. Qualified
adoption expenses are reasonable and neces-
sary expenses directly related to, and whose
principal purpose is for, the legal adoption of an
eligible child. These expenses include:
Adoption fees,
Court costs,
Attorney fees,
Travel expenses (including amounts spent
for meals and lodging) while away from
home, and
Re-adoption expenses to adopt a foreign
child.
Nonqualified expenses. Qualified adoption
expenses don't include expenses:
That violate state or federal law,
For carrying out any surrogate parenting
arrangement,
590B
1116
2439
5695
8396
8801
8828
8839
8880
8885
8910
8911
8912
8936
Page 248 Chapter 38 Other Credits
For the adoption of your spouse's child,
For which you received funds under any
federal, state, or local program,
Allowed as a credit or deduction under any
other federal income tax rule, or
Paid or reimbursed by your employer or
any other person or organization.
Eligible child. The term “eligible child” means
any individual:
Under 18 years old, or
Physically or mentally incapable of caring
for himself or herself.
Child with special needs. An eligible child
is a child with special needs if all three of the
following apply.
1. The child was a citizen or resident of the
United States (including U.S. posses-
sions) at the time the adoption process be-
gan.
2. A state (including the District of Columbia)
has determined that the child can't or
shouldn't be returned to his or her parents'
home.
3. The state has determined that the child
won't be adopted unless assistance is pro-
vided to the adoptive parents. Factors
used by states to make this determination
include:
a. The child's ethnic background,
b. The child's age,
c. Whether the child is a member of a
minority or sibling group, and
d. Whether the child has a medical con-
dition or a physical, mental, or emo-
tional handicap.
When to take the credit. Generally, until the
adoption becomes final, you take the credit in
the year after your qualified expenses were paid
or incurred. If the adoption becomes final, you
take the credit in the year your expenses were
paid or incurred. See the Instructions for Form
8839 for more specific information on when to
take the credit.
Foreign child. If the child isn't a U.S. citizen
or resident at the time the adoption process be-
gan, you can't take the credit unless the adop-
tion becomes final. You treat all adoption ex-
penses paid or incurred in years before the
adoption becomes final as paid or incurred in
the year it becomes final.
How to take the credit. Figure your 2016 non-
refundable credit and any carryforward to 2017
on Form 8839 and attach it to your Form 1040.
Include the credit in your total for Form 1040,
line 54. Check box c and enter “8839” on the
line next to that box.
More information. For more information, see
the Instructions for Form 8839.
Alternative Motor Vehicle
Credit
An alternative motor vehicle is a vehicle with at
least four wheels that qualifies as a qualified
fuel cell vehicle. You may be able to take this
credit if you are the owner of a qualified fuel cell
vehicle and placed it in service in 2016.
Qualified fuel cell vehicle. A qualified fuel
cell vehicle is a new vehicle propelled by power
derived from one or more cells that convert
chemical energy directly into electricity by com-
bining oxygen with hydrogen fuel, and that
meets certain additional requirements.
Amount of credit. Generally, you can rely on
the manufacturer's certification to the IRS that a
specific make, model, and model year vehicle
qualifies for the credit and the amount of the
credit for which it qualifies. In the case of a for-
eign manufacturer, you generally can rely on its
domestic distributor's certification to the IRS.
Ordinarily the amount of the credit is 100%
of the manufacturer's (or domestic distributor's)
certification to the IRS of the maximum credit al-
lowable.
How to take the credit. To take the credit, you
must complete Form 8910 and attach it to your
Form 1040. Include the credit in your total for
Form 1040, line 54. Check box c and enter
“8910” on the line next to that box.
More information. For more information on
the credit, see the Instructions for Form 8910.
Alternative Fuel Vehicle
Refueling Property Credit
The credit for alternative fuel vehicle refueling
property was extended. You may be able to
claim the credit if you placed qualified alterna-
tive fuel vehicle refueling property in service
during 2016.
Qualified alternative fuel vehicle refueling
property. Qualified alternative fuel vehicle re-
fueling property is any property (other than a
building or its structural components) used to
store or dispense alternative fuel into the fuel
tank of a motor vehicle propelled by the fuel, but
only if the storage or dispensing is at the point
where the fuel is delivered into that tank.
An alternative fuel is a fuel at least 85% of
the volume of which consists of hydrogen.
Amount of the credit. For business use prop-
erty, the credit is generally the smaller of 30% of
the property's cost or $30,000. For all other
property, the credit is generally the smaller of
30% of the property's cost or $1,000.
How to take the credit. To take the credit, you
must complete Form 8911 and attach it to your
Form 1040. Include the credit in your total for
Form 1040, line 54. Check box c and enter
“8911” on the line next to that box.
Recipients of these credits that are partner-
ships or S corporations must report these
amounts on line 8 of Form 8911.
More information. For more information on
the credit, see the Instructions for Form 8911.
Credit to Holders of Tax
Credit Bonds
Tax credit bonds are bonds in which the holder
receives a tax credit in lieu of some or all of the
interest on the bond.
You may be able to take a credit if you are a
holder of one of the following bonds.
Clean renewable energy bonds (issued
before 2010).
New clean renewable energy bonds.
Qualified energy conservation bonds.
Qualified school construction bonds.
Qualified zone academy bonds.
Build America bonds.
In some instances, an issuer may elect to re-
ceive a credit for interest paid on the bond. If
the issuer makes this election, you can't also
claim a credit.
Interest income. The amount of any tax credit
allowed (figured before applying tax liability lim-
its) must be included as interest income on your
tax return.
How to take the credit. Complete Form 8912
and attach it to your Form 1040. Include the
credit in your total for Form 1040, line 54. Check
box c and enter “8912” on the line next to that
box.
More information. For more information, see
the Instructions for Form 8912.
Foreign Tax Credit
You generally can choose to take income taxes
you paid or accrued during the year to a foreign
country or U.S. possession as a credit against
your U.S. income tax. Or, you can deduct them
as an itemized deduction (see chapter 22).
You can't take a credit (or deduction) for for-
eign income taxes paid on income that you ex-
clude from U.S. tax under any of the following.
1. Foreign earned income exclusion.
2. Foreign housing exclusion.
3. Income from Puerto Rico exempt from
U.S. tax.
4. Possession exclusion.
Limit on the credit. Unless you can elect not
to file Form 1116 (see Exception), your foreign
tax credit can't be more than your U.S. tax liabil-
ity (the total of lines 44 and 46), multiplied by a
fraction. The numerator of the fraction is your
taxable income from sources outside the United
States. The denominator is your total taxable in-
come from U.S. and foreign sources. See Pub.
514 for more information.
How to take the credit. Complete Form 1116
and attach it to your Form 1040. Enter the credit
on Form 1040, line 48.
Exception. You don't have to complete
Form 1116 to take the credit if all of the follow-
ing apply.
1. All of your gross foreign source income
was from interest and dividends and all of
that income and the foreign tax paid on it
Chapter 38 Other Credits Page 249
were reported to you on Form 1099-INT,
Form 1099-DIV, or Schedule K-1 (or sub-
stitute statement).
2. You held the stock or bonds on which the
dividends and interest were paid for at
least 16 days and weren't obligated to pay
these amounts to someone else.
3. You aren't filing Form 4563 or excluding
income from sources within Puerto Rico.
4. The total of your foreign taxes wasn't more
than $300 (not more than $600 if married
filing jointly).
5. All of your foreign taxes were:
a. Legally owed and not eligible for a re-
fund or reduced tax rate under a tax
treaty, and
b. Paid to countries that are recognized
by the United States and don't sup-
port terrorism.
More information. For more information on
the credit and these requirements, see the In-
structions for Form 1116.
Mortgage Interest Credit
The mortgage interest credit is intended to help
lower-income individuals own a home. If you
qualify, you can take the credit each year for
part of the home mortgage interest you pay.
Who qualifies. You may be eligible for the
credit if you were issued a qualified Mortgage
Credit Certificate (MCC) from your state or local
government. Generally, an MCC is issued only
in connection with a new mortgage for the pur-
chase of your main home.
Amount of credit. Figure your credit on Form
8396. If your mortgage loan amount is equal to
(or smaller than) the certified indebtedness
(loan) amount shown on your MCC, enter on
Form 8396, line 1, all the interest you paid on
your mortgage during the year.
If your mortgage loan amount is larger than
the certified indebtedness amount shown on
your MCC, you can figure the credit on only part
of the interest you paid. To find the amount to
enter on line 1, multiply the total interest you
paid during the year on your mortgage by the
following fraction.
Certified indebtedness amount
on your MCC
Original amount of your
mortgage
Limit based on credit rate. If the certificate
credit rate is more than 20%, the credit you are
allowed can't be more than $2,000. If two or
more persons (other than a married couple filing
a joint return) hold an interest in the home to
which the MCC relates, this $2,000 limit must
be divided based on the interest held by each
person. See Pub. 530 for more information.
Carryforward. Your credit (after applying the
limit based on the credit rate) is also subject to
a limit based on your tax that is figured using
Form 8396. If your allowable credit is reduced
because of this tax liability limit, you can carry
forward the unused portion of the credit to the
next 3 years or until used, whichever comes
first.
If you are subject to the $2,000 limit be-
cause your certificate credit rate is more than
20%, you can't carry forward any amount more
than $2,000 (or your share of the $2,000 if you
must divide the credit).
How to take the credit. Figure your 2016
credit and any carryforward to 2017 on Form
8396, and attach it to your Form 1040. Be sure
to include any credit carryforward from 2013,
2014, and 2015.
Include the credit in your total for Form
1040, line 54. Check box c and enter “8396” on
the line next to that box.
Reduced home mortgage interest deduc
tion. If you itemize your deductions on Sched-
ule A (Form 1040), you must reduce your home
mortgage interest deduction by the amount of
the mortgage interest credit shown on Form
8396, line 3. You must do this even if part of
that amount is to be carried forward to 2017.
For more information about the home mortgage
interest deduction, see chapter 23.
Recapture of federal mortgage subsidy. If
you received an MCC with your mortgage loan,
you may have to recapture (pay back) all or part
of the benefit you received from that program.
The recapture may be required if you sell or dis-
pose of your home at a gain during the first 9
years after the date you closed your mortgage
loan. See the Instructions for Form 8828 and
chapter 15 for more information.
More information. For more information on
the credit, see the Instructions for Form 8396.
Nonrefundable Credit for
Prior Year Minimum Tax
The tax laws give special treatment to some
kinds of income and allow special deductions
and credits for some kinds of expenses. If you
benefit from these laws, you may have to pay at
least a minimum amount of tax in addition to
any other tax on these items. This is called the
alternative minimum tax.
The special treatment of some items of in-
come and expenses only allows you to post-
pone paying tax until a later year. If in prior
years you paid alternative minimum tax be-
cause of these tax postponement items, you
may be able to take a credit for prior year mini-
mum tax against your current year's regular tax.
You may be able to take a credit against
your regular tax if for 2015 you had:
An alternative minimum tax liability and ad-
justments or preferences other than exclu-
sion items,
A minimum tax credit that you are carrying
forward to 2016, or
An unallowed qualified electric vehicle
credit.
How to take the credit. Figure your 2016 non-
refundable credit (if any), and any carryforward
to 2017 on Form 8801, and attach it to your
Form 1040. Include the credit in your total for
Form 1040, line 54, and check box b. You can
carry forward any unused credit for prior year
minimum tax to later years until it is completely
used.
More information. For more information on
the credit, see the Instructions for Form 8801.
Plugin Electric Drive
Motor Vehicle Credit
You may be able to take this credit if you placed
in service for business or personal use a quali-
fied plug-in electric drive motor vehicle in 2016
and you meet some other requirements.
Qualified plugin electric drive motor vehi
cle. This is a new vehicle with at least four
wheels that:
Is propelled to a significant extent by an
electric motor that draws electricity from a
battery that has a capacity of not less than
4 kilowatt hours and is capable of being re-
charged from an external source of elec-
tricity, and
Has a gross vehicle weight of less than
14,000 pounds.
Certification and other requirements. Gen-
erally, you can rely on the manufacturer's (or, in
the case of a foreign manufacturer, its domestic
distributor's) certification to the IRS that a spe-
cific make, model, and model year vehicle
qualifies for the credit and, if applicable, the
amount of the credit for which it qualifies. How-
ever, if the IRS publishes an announcement
that the certification for any specific make,
model, and model year vehicle has been with-
drawn, you can't rely on the certification for
such a vehicle purchased after the date of pub-
lication of the withdrawal announcement.
The following requirements must also be
met to qualify for the credit.
You are the owner of the vehicle. If the ve-
hicle is leased, only the lessor, and not the
lessee, is entitled to the credit.
You placed the vehicle in service during
2016.
The vehicle is manufactured primarily for
use on public streets, roads, and high-
ways.
The original use of the vehicle began with
you.
You acquired the vehicle for your use or to
lease to others, and not for resale.
You use the vehicle primarily in the United
States.
How to take the credit. To take the credit, you
must complete Form 8936 and attach it to your
Form 1040. Include the credit in your total for
Form 1040, line 54. Check box c and enter
“8936” on the line next to that box.
More information. For more information on
the credit, see the Instructions for Form 8936.
Page 250 Chapter 38 Other Credits
Residential Energy Credits
You may be able to claim one or both of the fol-
lowing credits if you made energy saving im-
provements to your home located in the United
States in 2016.
The nonbusiness energy property credit.
The residential energy efficient property
credit.
If you are a member of a condominium man-
agement association for a condominium you
own or a tenant-stockholder in a cooperative
housing corporation, you are treated as having
paid your proportionate share of any costs of
the association or corporation.
Nonbusiness energy property credit. You
may be able to take a credit equal to the sum of:
1. 10% of the amount paid or incurred for
qualified energy efficiency improvements
installed during 2016, and
2. Any residential energy property costs paid
or incurred in 2016.
However, this credit is limited as follows.
A total combined credit limit of $500 for all
tax years after 2005.
A combined credit limit (for all years after
2005) of $200 for certain windows that are
qualified energy efficiency improvements.
A credit limit for residential energy property
costs for 2016 of $50 for any advanced
main air circulating fan; $150 for any quali-
fied natural gas, propane, or oil furnace or
hot water boiler; and $300 for any item of
energy efficient building property.
If the total nonbusiness energy prop-
erty credits you have been allowed in
previous years (after 2005) is more
than $500, you generally can’t take the credit in
2016.
Subsidized energy financing. Any
amounts provided for by subsidized energy fi-
nancing can’t be used to figure the nonbusiness
energy property credit. This is financing provi-
ded under a federal, state, or local program, the
principal purpose of which is to provide subsi-
dized financing for projects designed to con-
serve or produce energy.
Qualified energy efficiency improve-
ments. Qualified energy efficiency improve-
ments are the following improvements that are
new, can be expected to remain in use for at
least 5 years, and meet certain requirements for
energy efficiency.
Any insulation material or system that is
specifically and primarily designed to re-
duce heat loss or gain of a home when in-
stalled.
Exterior windows (including skylights).
Exterior doors.
Any metal or asphalt roof that has appro-
priate pigmented coatings or cooling gran-
ules specifically and primarily designed to
reduce heat gain of the home.
Residential energy property costs. Resi-
dential energy property costs are costs of newCAUTION
!
qualified energy property that is installed on or
in connection with your main home that you
owned during 2016 located in the United
States. Include any labor costs properly alloca-
ble to the onsite preparation, assembly, or origi-
nal installation of the energy property.
Qualified residential energy property is any
of the following.
Certain electric heat pump water heaters;
electric heat pumps; central air condition-
ers; natural gas, propane, or oil water heat-
ers; and stoves that use biomass fuel.
Qualified natural gas, propane, or oil furna-
ces; and qualified natural gas, propane, or
oil hot water boilers.
Certain advanced main air circulating fans
used in natural gas, propane, or oil furna-
ces.
Residential energy efficient property credit.
You may be able to take a credit of 30% of your
costs of qualified solar electric property, solar
water heating property, fuel cell property, small
wind energy property, and geothermal heat
pump property. The credit amount for costs
paid for qualified fuel cell property is limited to
$500 for each one-half kilowatt of capacity of
the property.
Basis reduction. You must reduce the basis
of your home by the amount of any credit al-
lowed.
How to take the credit. Complete Form 5695
and attach it to your Form 1040. Enter the credit
on Form 1040, line 53.
More information. For more information on
the credit, see the Instructions for Form 5695.
Retirement Savings
Contributions Credit
(Saver's Credit)
You may be able to take this credit if you, or
your spouse if filing jointly, made:
Contributions (other than rollover contribu-
tions) to a traditional or Roth IRA (including
a myRA),
Elective deferrals to a 401(k) or 403(b)
plan (including designated Roth contribu-
tions) or to a governmental 457, SEP, or
SIMPLE plan,
Voluntary employee contributions to a
qualified retirement plan (including the fed-
eral Thrift Savings Plan), or
Contributions to a 501(c)(18)(D) plan.
However, you can't take the credit if either of
the following applies.
1. The amount on Form 1040, line 38, or
Form 1040A, line 22, is more than $30,750
($46,125 if head of household; $61,500 if
married filing jointly).
2. The person(s) who made the qualified
contribution or elective deferral: (a) was
born after January 1, 1999, (b) is claimed
as a dependent on someone else's 2016
tax return, or (c) was a student (defined
next).
Student. You were a student if during any part
of five calendar months of 2016 you:
Were enrolled as a full-time student at a
school, or
Took a full-time, on-farm training course
given by a school or a state, county, or lo-
cal government agency.
School. A school includes a technical,
trade, or mechanical school. It doesn't include
an on-the-job training course, correspondence
school, or school offering courses only through
the Internet.
How to take the credit. Figure the credit on
Form 8880. Enter the credit on your Form 1040,
line 51, or your Form 1040A, line 34, and attach
Form 8880 to your return.
More information. For more information on
the credit, see the Instructions for Form 8880.
Refundable Credits
The credits discussed in this part of the chapter
are treated as payments of tax. If the total of
these credits, withheld federal income tax, and
estimated tax payments is more than your total
tax, the excess can be refunded to you.
Credit for Tax on
Undistributed Capital Gain
You must include in your income any amounts
that regulated investment companies (com-
monly called mutual funds) or real estate invest-
ment trusts (REITs) allocated to you as capital
gain distributions, even if you didn't actually re-
ceive them. If the mutual fund or REIT paid a tax
on the capital gain, you are allowed a credit for
the tax since it is considered paid by you. The
mutual fund or REIT will send you Form 2439
showing your share of the undistributed capital
gains and the tax paid, if any.
How to take the credit. To take the credit, at-
tach Copy B of Form 2439 to your Form 1040.
Include the amount from box 2 of your Form
2439 in the total for Form 1040, line 73, and
check box a.
More information. See Capital Gain Distribu-
tions in chapter 8 for more information on undis-
tributed capital gains.
Health Coverage Tax
Credit
You can elect to take the health coverage tax
credit only if (a) you were an eligible trade ad-
justment assistance (TAA) recipient, alternative
TAA (ATAA) recipient, reemployment TAA
(RTAA) recipient, or Pension Benefit Guaranty
Corporation (PBGC) payee (defined later); or
you were a qualified family member of one of
these individuals who passed away or finalized
a divorce with you, (b) you can't be claimed as a
dependent on someone else's 2016 tax return,
and (c) you have met all of the conditions listed
on line 1 of Form 8885. If you can’t be claimed
as a dependent on someone else's 2016 tax re-
turn, complete Form 8885, Part I, to see if you
are eligible to take this credit.
Chapter 38 Other Credits Page 251
Even if you can’t claim the HCTC on
your income tax return, you must still
file Form 8885 to elect the HCTC for
any months you participated in the advance
monthly payment program.
TAA recipient. You were an eligible TAA re-
cipient as of the first day of the month if, for any
day in that month or the prior month, you:
Received a trade readjustment allowance,
or
Would have been entitled to receive such
an allowance except that you had not ex-
hausted all rights to any unemployment in-
surance (except additional compensation
that is funded by a state and isn’t reim-
bursed from any federal funds) to which
you were entitled (or would be entitled if
you applied).
Example. You received a trade readjust-
ment allowance for January 2016. You were an
eligible TAA recipient as of the first day of Janu-
ary and February.
ATAA recipient. You were an eligible ATAA
recipient as of the first day of the month if, for
that month or the prior month, you received
benefits under an ATAA program for older
workers established by the Department of La-
bor.
Example. You received benefits under an
ATAA program for older workers for October
2016. The program was established by the De-
partment of Labor. You were an eligible ATAA
recipient as of the first day of October and No-
vember.
RTAA recipient. You were an eligible RTAA
recipient as of the first day of the month if, for
that month or the prior month, you received
benefits under a RTAA program for older work-
ers established by the Department of Labor.
PBGC payee. You were an eligible PBGC
payee as of the first day of the month, if both of
the following apply.
1. You were age 55 to 65 and not enrolled in
Medicare as of the first day of the month.
2. You received a benefit for that month paid
by the PBGC under title IV of the Em-
ployee Retirement Income Security Act of
1974 (ERISA).
If you received a lump-sum payment from
the PBGC after August 5, 2002, you meet item
(2) above for any month that you would have re-
ceived a PBGC benefit if you had not received
the lump-sum payment.
How to take the credit. The HCTC is an elec-
tion. If you are eligible for the credit, you must
elect the HCTC to receive the benefit of the
HCTC. You make your election by checking the
box on line 1 of Form 8885 for the first eligible
coverage month you are electing to take the
HCTC and all boxes on line 1 for each eligible
coverage month after the election month. Once
you elect to take the HCTC for a month in 2016,
the election to take the HCTC applies to all sub-
sequent eligible coverage months in 2016. The
election doesn't apply to any month for which
you aren't eligible to take the HCTC.CAUTION
!
Once you have completed Form 8885, at-
tach it to your Form 1040. Include your credit in
the total for Form 1040, line 73, and check box
c.
In addition to other required documentation,
you must, for each month you are claiming the
credit, attach health insurance bills (or COBRA
payment coupons) and proof of payment for
any amounts you include on Form 8885, line 2.
For details, see Pub. 502 or the Instructions for
Form 8885.
A qualified health plan purchased
through a Health Insurance Market-
place isn’t qualified health insurance
coverage for the HCTC in 2016. And, you can't
take the Premium Tax Credit (PTC) for any
months checked on line 1 of Form 8885. How-
ever, subject to the general eligibility and elec-
tion rules for the HCTC and the PTC, you may
be able to claim the HCTC and the PTC for dif-
ferent months of the year. See chapter 37 and
the instructions for Forms 8962 and 8885 for
special rules if, during 2016, you or your family
members were enrolled in a qualified health
plan offered through a Marketplace for part of
the year and qualified health insurance cover-
age for the HCTC for another part of the year.
More information. For definitions and special
rules, including those relating to qualified health
insurance plans, qualifying family members, the
effect of certain life events, and employer-spon-
sored health insurance plans, see Pub. 502 and
the Instructions for Form 8885.
Credit for Excess Social
Security Tax or Railroad
Retirement Tax Withheld
Most employers must withhold social security
tax from your wages. If you work for a railroad
employer, that employer must withhold tier 1
railroad retirement (RRTA) tax and tier 2 RRTA
tax.
If you worked for two or more employers in
2016, you may have had too much social secur-
ity tax withheld from your pay. If one or more of
those employers was a railroad employer, too
much tier 1 RRTA tax may also have been with-
held at the 6.2% rate. You can claim the excess
social security or tier 1 RRTA tax as a credit
against your income tax when you file your re-
turn. For the tier 1 RRTA tax, only use the por-
tion of the tier 1 RRTA tax that was taxed at the
6.2% rate when figuring if excess tier 1 RRTA
tax was withheld; don't include any portion of
the tier 1 RRTA tax that was withheld at the
Medicare tax rate (1.45%) or the Additional
Medicare Tax rate (0.9%). The following table
shows the maximum amount of wages subject
to tax and the maximum amount of tax that
should have been withheld for 2016.
Type of tax
Maximum
wages
subject to tax
Maximum tax
that should
have been
withheld
Social security
or RRTA tier 1 $118,500 $7,347.00
RRTA tier 2 $ 88,200 $4,321.80CAUTION
!
All wages are subject to Medicare tax
withholding.
Use Form 843, Claim for Refund and
Request for Abatement, to claim a re-
fund of excess tier 2 RRTA tax. Be sure
to attach a copy of all of your W-2 forms. Use
Worksheet 3-3 in Pub. 505, Tax Withholding
and Estimated Tax, to help you figure the ex-
cess amount.
Employer's error. If any one employer with-
held too much social security or tier 1 RRTA
tax, you can't take the excess as a credit
against your income tax. The employer should
adjust the tax for you. If the employer doesn't
adjust the overcollection, you can file a claim for
refund using Form 843.
Joint return. If you are filing a joint return, you
can't add the social security or tier 1 RRTA tax
withheld from your spouse's wages to the
amount withheld from your wages. Figure the
withholding separately for you and your spouse
to determine if either of you has excess with-
holding.
How to figure the credit if you didn't work
for a railroad. If you didn't work for a railroad
during 2016, figure the credit as follows:
1. Add all social security tax
withheld (but not more than
$7,347 for each employer). Enter
the total here . . . . . . . . . . . .
2. Enter any uncollected social
security tax on tips or group-term
life insurance included in the total
on Form 1040, line 62, identified
by “UT” . . . . . . . . . . . . . . .
3. Add lines 1 and 2. If $7,347 or
less, stop here. You can't take
the credit . . . . . . . . . . . . . .
4. Social security tax limit . . . . . . 7,347
5. Credit. Subtract line 4 from line 3.
Enter the result here and on Form
1040, line 71 (or Form 1040A,
line 46) . . . . . . . . . . . . . . . $
Example. You are married and file a joint
return with your spouse who had no gross in-
come in 2016. During 2016, you worked for the
Brown Technology Company and earned
$66,500 in wages. Social security tax of $4,123
was withheld. You also worked for another em-
ployer in 2016 and earned $55,000 in wages.
$3,410 of social security tax was withheld from
these wages. Because you worked for more
than one employer and your total wages were
more than $118,500, you can take a credit of
$186 for the excess social security tax withheld.CAUTION
!TIP
Page 252 Chapter 38 Other Credits
1. Add all social security tax
withheld (but not more than
$7,347 for each employer). Enter
the total here . . . . . . . . . . . . $7,533
2. Enter any uncollected social
security tax on tips or group-term
life insurance included in the total
on Form 1040, line 62, identified
by “UT” . . . . . . . . . . . . . . . -0-
3. Add lines 1 and 2. If $7,347 or
less, stop here. You can't take the
credit . . . . . . . . . . . . . . . . 7,533
4. Social security tax limit . . . . . . 7,347
5. Credit. Subtract line 4 from line 3.
Enter the result here and on Form
1040, line 71 (or Form 1040A,
line 46) . . . . . . . . . . . . . . . $186
How to figure the credit if you worked for a
railroad. If you were a railroad employee at
any time during 2016, figure the credit as fol-
lows:
1. Add all social security and tier 1
RRTA tax withheld at the 6.2%
rate (but not more than $7,347 for
each employer). Enter the total
here . . . . . . . . . . . . . . . . .
2. Enter any uncollected social
security and tier 1 RRTA tax on
tips or group-term life insurance
included in the total on Form
1040, line 62, identified by
“UT” . . . . . . . . . . . . . . . . .
3. Add lines 1 and 2. If $7,347 or
less, stop here. You can't take
the credit . . . . . . . . . . . . . .
4. Social security and tier 1 RRTA
tax limit . . . . . . . . . . . . . . . 7,347
5. Credit. Subtract line 4 from line 3.
Enter the result here and on Form
1040, line 71 (or Form 1040A,
line 46) . . . . . . . . . . . . . . . . $
How to take the credit. Enter the credit on
Form 1040, line 71, or include it in the total for
Form 1040A, line 46.
More information. For more information on
the credit, see Pub. 505.
Chapter 38 Other Credits Page 253
2016
Tax TableCAUTION
!
See the instructions for line 44 in the Instructions for Form 1040 to see if
you must use the Tax Table below to figure your tax.At
least
But
less
than
Single Married
filing
jointly*
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
25,200
25,250
25,300
25,350
3,320
3,328
3,335
3,343
Sample Table
25,250
25,300
25,350
25,400
2,856
2,864
2,871
2,879
3,320
3,328
3,335
3,343
3,121
3,129
3,136
3,144
Example. Mr. and Mrs. Brown are filing a joint return. Their taxable income on Form
1040, line 43, is $25,300. First, they find the $25,300–25,350 taxable income line.
Next, they find the column for married filing jointly and read down the column. The
amount shown where the taxable income line and filing status column meet is
$2,871. This is the tax amount they should enter on Form 1040, line 44.
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
0 5 0 0 0 0
5 15 1 1 1 1
15 25 2 2 2 2
25 50 4 4 4 4
50 75 6 6 6 6
75 100 9 9 9 9
100 125 11 11 11 11
125 150 14 14 14 14
150 175 16 16 16 16
175 200 19 19 19 19
200 225 21 21 21 21
225 250 24 24 24 24
250 275 26 26 26 26
275 300 29 29 29 29
300 325 31 31 31 31
325 350 34 34 34 34
350 375 36 36 36 36
375 400 39 39 39 39
400 425 41 41 41 41
425 450 44 44 44 44
450 475 46 46 46 46
475 500 49 49 49 49
500 525 51 51 51 51
525 550 54 54 54 54
550 575 56 56 56 56
575 600 59 59 59 59
600 625 61 61 61 61
625 650 64 64 64 64
650 675 66 66 66 66
675 700 69 69 69 69
700 725 71 71 71 71
725 750 74 74 74 74
750 775 76 76 76 76
775 800 79 79 79 79
800 825 81 81 81 81
825 850 84 84 84 84
850 875 86 86 86 86
875 900 89 89 89 89
900 925 91 91 91 91
925 950 94 94 94 94
950 975 96 96 96 96
975 1,000 99 99 99 99
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
1,000
1,000 1,025 101 101 101 101
1,025 1,050 104 104 104 104
1,050 1,075 106 106 106 106
1,075 1,100 109 109 109 109
1,100 1,125 111 111 111 111
1,125 1,150 114 114 114 114
1,150 1,175 116 116 116 116
1,175 1,200 119 119 119 119
1,200 1,225 121 121 121 121
1,225 1,250 124 124 124 124
1,250 1,275 126 126 126 126
1,275 1,300 129 129 129 129
1,300 1,325 131 131 131 131
1,325 1,350 134 134 134 134
1,350 1,375 136 136 136 136
1,375 1,400 139 139 139 139
1,400 1,425 141 141 141 141
1,425 1,450 144 144 144 144
1,450 1,475 146 146 146 146
1,475 1,500 149 149 149 149
1,500 1,525 151 151 151 151
1,525 1,550 154 154 154 154
1,550 1,575 156 156 156 156
1,575 1,600 159 159 159 159
1,600 1,625 161 161 161 161
1,625 1,650 164 164 164 164
1,650 1,675 166 166 166 166
1,675 1,700 169 169 169 169
1,700 1,725 171 171 171 171
1,725 1,750 174 174 174 174
1,750 1,775 176 176 176 176
1,775 1,800 179 179 179 179
1,800 1,825 181 181 181 181
1,825 1,850 184 184 184 184
1,850 1,875 186 186 186 186
1,875 1,900 189 189 189 189
1,900 1,925 191 191 191 191
1,925 1,950 194 194 194 194
1,950 1,975 196 196 196 196
1,975 2,000 199 199 199 199
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
2,000
2,000 2,025 201 201 201 201
2,025 2,050 204 204 204 204
2,050 2,075 206 206 206 206
2,075 2,100 209 209 209 209
2,100 2,125 211 211 211 211
2,125 2,150 214 214 214 214
2,150 2,175 216 216 216 216
2,175 2,200 219 219 219 219
2,200 2,225 221 221 221 221
2,225 2,250 224 224 224 224
2,250 2,275 226 226 226 226
2,275 2,300 229 229 229 229
2,300 2,325 231 231 231 231
2,325 2,350 234 234 234 234
2,350 2,375 236 236 236 236
2,375 2,400 239 239 239 239
2,400 2,425 241 241 241 241
2,425 2,450 244 244 244 244
2,450 2,475 246 246 246 246
2,475 2,500 249 249 249 249
2,500 2,525 251 251 251 251
2,525 2,550 254 254 254 254
2,550 2,575 256 256 256 256
2,575 2,600 259 259 259 259
2,600 2,625 261 261 261 261
2,625 2,650 264 264 264 264
2,650 2,675 266 266 266 266
2,675 2,700 269 269 269 269
2,700 2,725 271 271 271 271
2,725 2,750 274 274 274 274
2,750 2,775 276 276 276 276
2,775 2,800 279 279 279 279
2,800 2,825 281 281 281 281
2,825 2,850 284 284 284 284
2,850 2,875 286 286 286 286
2,875 2,900 289 289 289 289
2,900 2,925 291 291 291 291
2,925 2,950 294 294 294 294
2,950 2,975 296 296 296 296
2,975 3,000 299 299 299 299
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
3,000
3,000 3,050 303 303 303 303
3,050 3,100 308 308 308 308
3,100 3,150 313 313 313 313
3,150 3,200 318 318 318 318
3,200 3,250 323 323 323 323
3,250 3,300 328 328 328 328
3,300 3,350 333 333 333 333
3,350 3,400 338 338 338 338
3,400 3,450 343 343 343 343
3,450 3,500 348 348 348 348
3,500 3,550 353 353 353 353
3,550 3,600 358 358 358 358
3,600 3,650 363 363 363 363
3,650 3,700 368 368 368 368
3,700 3,750 373 373 373 373
3,750 3,800 378 378 378 378
3,800 3,850 383 383 383 383
3,850 3,900 388 388 388 388
3,900 3,950 393 393 393 393
3,950 4,000 398 398 398 398
4,000
4,000 4,050 403 403 403 403
4,050 4,100 408 408 408 408
4,100 4,150 413 413 413 413
4,150 4,200 418 418 418 418
4,200 4,250 423 423 423 423
4,250 4,300 428 428 428 428
4,300 4,350 433 433 433 433
4,350 4,400 438 438 438 438
4,400 4,450 443 443 443 443
4,450 4,500 448 448 448 448
4,500 4,550 453 453 453 453
4,550 4,600 458 458 458 458
4,600 4,650 463 463 463 463
4,650 4,700 468 468 468 468
4,700 4,750 473 473 473 473
4,750 4,800 478 478 478 478
4,800 4,850 483 483 483 483
4,850 4,900 488 488 488 488
4,900 4,950 493 493 493 493
4,950 5,000 498 498 498 498
5,000
5,000 5,050 503 503 503 503
5,050 5,100 508 508 508 508
5,100 5,150 513 513 513 513
5,150 5,200 518 518 518 518
5,200 5,250 523 523 523 523
5,250 5,300 528 528 528 528
5,300 5,350 533 533 533 533
5,350 5,400 538 538 538 538
5,400 5,450 543 543 543 543
5,450 5,500 548 548 548 548
5,500 5,550 553 553 553 553
5,550 5,600 558 558 558 558
5,600 5,650 563 563 563 563
5,650 5,700 568 568 568 568
5,700 5,750 573 573 573 573
5,750 5,800 578 578 578 578
5,800 5,850 583 583 583 583
5,850 5,900 588 588 588 588
5,900 5,950 593 593 593 593
5,950 6,000 598 598 598 598
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
6,000
6,000 6,050 603 603 603 603
6,050 6,100 608 608 608 608
6,100 6,150 613 613 613 613
6,150 6,200 618 618 618 618
6,200 6,250 623 623 623 623
6,250 6,300 628 628 628 628
6,300 6,350 633 633 633 633
6,350 6,400 638 638 638 638
6,400 6,450 643 643 643 643
6,450 6,500 648 648 648 648
6,500 6,550 653 653 653 653
6,550 6,600 658 658 658 658
6,600 6,650 663 663 663 663
6,650 6,700 668 668 668 668
6,700 6,750 673 673 673 673
6,750 6,800 678 678 678 678
6,800 6,850 683 683 683 683
6,850 6,900 688 688 688 688
6,900 6,950 693 693 693 693
6,950 7,000 698 698 698 698
7,000
7,000 7,050 703 703 703 703
7,050 7,100 708 708 708 708
7,100 7,150 713 713 713 713
7,150 7,200 718 718 718 718
7,200 7,250 723 723 723 723
7,250 7,300 728 728 728 728
7,300 7,350 733 733 733 733
7,350 7,400 738 738 738 738
7,400 7,450 743 743 743 743
7,450 7,500 748 748 748 748
7,500 7,550 753 753 753 753
7,550 7,600 758 758 758 758
7,600 7,650 763 763 763 763
7,650 7,700 768 768 768 768
7,700 7,750 773 773 773 773
7,750 7,800 778 778 778 778
7,800 7,850 783 783 783 783
7,850 7,900 788 788 788 788
7,900 7,950 793 793 793 793
7,950 8,000 798 798 798 798
8,000
8,000 8,050 803 803 803 803
8,050 8,100 808 808 808 808
8,100 8,150 813 813 813 813
8,150 8,200 818 818 818 818
8,200 8,250 823 823 823 823
8,250 8,300 828 828 828 828
8,300 8,350 833 833 833 833
8,350 8,400 838 838 838 838
8,400 8,450 843 843 843 843
8,450 8,500 848 848 848 848
8,500 8,550 853 853 853 853
8,550 8,600 858 858 858 858
8,600 8,650 863 863 863 863
8,650 8,700 868 868 868 868
8,700 8,750 873 873 873 873
8,750 8,800 878 878 878 878
8,800 8,850 883 883 883 883
8,850 8,900 888 888 888 888
8,900 8,950 893 893 893 893
8,950 9,000 898 898 898 898
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
9,000
9,000 9,050 903 903 903 903
9,050 9,100 908 908 908 908
9,100 9,150 913 913 913 913
9,150 9,200 918 918 918 918
9,200 9,250 923 923 923 923
9,250 9,300 928 928 928 928
9,300 9,350 935 933 935 933
9,350 9,400 943 938 943 938
9,400 9,450 950 943 950 943
9,450 9,500 958 948 958 948
9,500 9,550 965 953 965 953
9,550 9,600 973 958 973 958
9,600 9,650 980 963 980 963
9,650 9,700 988 968 988 968
9,700 9,750 995 973 995 973
9,750 9,800 1,003 978 1,003 978
9,800 9,850 1,010 983 1,010 983
9,850 9,900 1,018 988 1,018 988
9,900 9,950 1,025 993 1,025 993
9,950 10,000 1,033 998 1,033 998
10,000
10,000 10,050 1,040 1,003 1,040 1,003
10,050 10,100 1,048 1,008 1,048 1,008
10,100 10,150 1,055 1,013 1,055 1,013
10,150 10,200 1,063 1,018 1,063 1,018
10,200 10,250 1,070 1,023 1,070 1,023
10,250 10,300 1,078 1,028 1,078 1,028
10,300 10,350 1,085 1,033 1,085 1,033
10,350 10,400 1,093 1,038 1,093 1,038
10,400 10,450 1,100 1,043 1,100 1,043
10,450 10,500 1,108 1,048 1,108 1,048
10,500 10,550 1,115 1,053 1,115 1,053
10,550 10,600 1,123 1,058 1,123 1,058
10,600 10,650 1,130 1,063 1,130 1,063
10,650 10,700 1,138 1,068 1,138 1,068
10,700 10,750 1,145 1,073 1,145 1,073
10,750 10,800 1,153 1,078 1,153 1,078
10,800 10,850 1,160 1,083 1,160 1,083
10,850 10,900 1,168 1,088 1,168 1,088
10,900 10,950 1,175 1,093 1,175 1,093
10,950 11,000 1,183 1,098 1,183 1,098
11,000
11,000 11,050 1,190 1,103 1,190 1,103
11,050 11,100 1,198 1,108 1,198 1,108
11,100 11,150 1,205 1,113 1,205 1,113
11,150 11,200 1,213 1,118 1,213 1,118
11,200 11,250 1,220 1,123 1,220 1,123
11,250 11,300 1,228 1,128 1,228 1,128
11,300 11,350 1,235 1,133 1,235 1,133
11,350 11,400 1,243 1,138 1,243 1,138
11,400 11,450 1,250 1,143 1,250 1,143
11,450 11,500 1,258 1,148 1,258 1,148
11,500 11,550 1,265 1,153 1,265 1,153
11,550 11,600 1,273 1,158 1,273 1,158
11,600 11,650 1,280 1,163 1,280 1,163
11,650 11,700 1,288 1,168 1,288 1,168
11,700 11,750 1,295 1,173 1,295 1,173
11,750 11,800 1,303 1,178 1,303 1,178
11,800 11,850 1,310 1,183 1,310 1,183
11,850 11,900 1,318 1,188 1,318 1,188
11,900 11,950 1,325 1,193 1,325 1,193
11,950 12,000 1,333 1,198 1,333 1,198
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
12,000
12,000 12,050 1,340 1,203 1,340 1,203
12,050 12,100 1,348 1,208 1,348 1,208
12,100 12,150 1,355 1,213 1,355 1,213
12,150 12,200 1,363 1,218 1,363 1,218
12,200 12,250 1,370 1,223 1,370 1,223
12,250 12,300 1,378 1,228 1,378 1,228
12,300 12,350 1,385 1,233 1,385 1,233
12,350 12,400 1,393 1,238 1,393 1,238
12,400 12,450 1,400 1,243 1,400 1,243
12,450 12,500 1,408 1,248 1,408 1,248
12,500 12,550 1,415 1,253 1,415 1,253
12,550 12,600 1,423 1,258 1,423 1,258
12,600 12,650 1,430 1,263 1,430 1,263
12,650 12,700 1,438 1,268 1,438 1,268
12,700 12,750 1,445 1,273 1,445 1,273
12,750 12,800 1,453 1,278 1,453 1,278
12,800 12,850 1,460 1,283 1,460 1,283
12,850 12,900 1,468 1,288 1,468 1,288
12,900 12,950 1,475 1,293 1,475 1,293
12,950 13,000 1,483 1,298 1,483 1,298
13,000
13,000 13,050 1,490 1,303 1,490 1,303
13,050 13,100 1,498 1,308 1,498 1,308
13,100 13,150 1,505 1,313 1,505 1,313
13,150 13,200 1,513 1,318 1,513 1,318
13,200 13,250 1,520 1,323 1,520 1,323
13,250 13,300 1,528 1,328 1,528 1,329
13,300 13,350 1,535 1,333 1,535 1,336
13,350 13,400 1,543 1,338 1,543 1,344
13,400 13,450 1,550 1,343 1,550 1,351
13,450 13,500 1,558 1,348 1,558 1,359
13,500 13,550 1,565 1,353 1,565 1,366
13,550 13,600 1,573 1,358 1,573 1,374
13,600 13,650 1,580 1,363 1,580 1,381
13,650 13,700 1,588 1,368 1,588 1,389
13,700 13,750 1,595 1,373 1,595 1,396
13,750 13,800 1,603 1,378 1,603 1,404
13,800 13,850 1,610 1,383 1,610 1,411
13,850 13,900 1,618 1,388 1,618 1,419
13,900 13,950 1,625 1,393 1,625 1,426
13,950 14,000 1,633 1,398 1,633 1,434
14,000
14,000 14,050 1,640 1,403 1,640 1,441
14,050 14,100 1,648 1,408 1,648 1,449
14,100 14,150 1,655 1,413 1,655 1,456
14,150 14,200 1,663 1,418 1,663 1,464
14,200 14,250 1,670 1,423 1,670 1,471
14,250 14,300 1,678 1,428 1,678 1,479
14,300 14,350 1,685 1,433 1,685 1,486
14,350 14,400 1,693 1,438 1,693 1,494
14,400 14,450 1,700 1,443 1,700 1,501
14,450 14,500 1,708 1,448 1,708 1,509
14,500 14,550 1,715 1,453 1,715 1,516
14,550 14,600 1,723 1,458 1,723 1,524
14,600 14,650 1,730 1,463 1,730 1,531
14,650 14,700 1,738 1,468 1,738 1,539
14,700 14,750 1,745 1,473 1,745 1,546
14,750 14,800 1,753 1,478 1,753 1,554
14,800 14,850 1,760 1,483 1,760 1,561
14,850 14,900 1,768 1,488 1,768 1,569
14,900 14,950 1,775 1,493 1,775 1,576
14,950 15,000 1,783 1,498 1,783 1,584
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
15,000
15,000 15,050 1,790 1,503 1,790 1,591
15,050 15,100 1,798 1,508 1,798 1,599
15,100 15,150 1,805 1,513 1,805 1,606
15,150 15,200 1,813 1,518 1,813 1,614
15,200 15,250 1,820 1,523 1,820 1,621
15,250 15,300 1,828 1,528 1,828 1,629
15,300 15,350 1,835 1,533 1,835 1,636
15,350 15,400 1,843 1,538 1,843 1,644
15,400 15,450 1,850 1,543 1,850 1,651
15,450 15,500 1,858 1,548 1,858 1,659
15,500 15,550 1,865 1,553 1,865 1,666
15,550 15,600 1,873 1,558 1,873 1,674
15,600 15,650 1,880 1,563 1,880 1,681
15,650 15,700 1,888 1,568 1,888 1,689
15,700 15,750 1,895 1,573 1,895 1,696
15,750 15,800 1,903 1,578 1,903 1,704
15,800 15,850 1,910 1,583 1,910 1,711
15,850 15,900 1,918 1,588 1,918 1,719
15,900 15,950 1,925 1,593 1,925 1,726
15,950 16,000 1,933 1,598 1,933 1,734
16,000
16,000 16,050 1,940 1,603 1,940 1,741
16,050 16,100 1,948 1,608 1,948 1,749
16,100 16,150 1,955 1,613 1,955 1,756
16,150 16,200 1,963 1,618 1,963 1,764
16,200 16,250 1,970 1,623 1,970 1,771
16,250 16,300 1,978 1,628 1,978 1,779
16,300 16,350 1,985 1,633 1,985 1,786
16,350 16,400 1,993 1,638 1,993 1,794
16,400 16,450 2,000 1,643 2,000 1,801
16,450 16,500 2,008 1,648 2,008 1,809
16,500 16,550 2,015 1,653 2,015 1,816
16,550 16,600 2,023 1,658 2,023 1,824
16,600 16,650 2,030 1,663 2,030 1,831
16,650 16,700 2,038 1,668 2,038 1,839
16,700 16,750 2,045 1,673 2,045 1,846
16,750 16,800 2,053 1,678 2,053 1,854
16,800 16,850 2,060 1,683 2,060 1,861
16,850 16,900 2,068 1,688 2,068 1,869
16,900 16,950 2,075 1,693 2,075 1,876
16,950 17,000 2,083 1,698 2,083 1,884
17,000
17,000 17,050 2,090 1,703 2,090 1,891
17,050 17,100 2,098 1,708 2,098 1,899
17,100 17,150 2,105 1,713 2,105 1,906
17,150 17,200 2,113 1,718 2,113 1,914
17,200 17,250 2,120 1,723 2,120 1,921
17,250 17,300 2,128 1,728 2,128 1,929
17,300 17,350 2,135 1,733 2,135 1,936
17,350 17,400 2,143 1,738 2,143 1,944
17,400 17,450 2,150 1,743 2,150 1,951
17,450 17,500 2,158 1,748 2,158 1,959
17,500 17,550 2,165 1,753 2,165 1,966
17,550 17,600 2,173 1,758 2,173 1,974
17,600 17,650 2,180 1,763 2,180 1,981
17,650 17,700 2,188 1,768 2,188 1,989
17,700 17,750 2,195 1,773 2,195 1,996
17,750 17,800 2,203 1,778 2,203 2,004
17,800 17,850 2,210 1,783 2,210 2,011
17,850 17,900 2,218 1,788 2,218 2,019
17,900 17,950 2,225 1,793 2,225 2,026
17,950 18,000 2,233 1,798 2,233 2,034
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
18,000
18,000 18,050 2,240 1,803 2,240 2,041
18,050 18,100 2,248 1,808 2,248 2,049
18,100 18,150 2,255 1,813 2,255 2,056
18,150 18,200 2,263 1,818 2,263 2,064
18,200 18,250 2,270 1,823 2,270 2,071
18,250 18,300 2,278 1,828 2,278 2,079
18,300 18,350 2,285 1,833 2,285 2,086
18,350 18,400 2,293 1,838 2,293 2,094
18,400 18,450 2,300 1,843 2,300 2,101
18,450 18,500 2,308 1,848 2,308 2,109
18,500 18,550 2,315 1,853 2,315 2,116
18,550 18,600 2,323 1,859 2,323 2,124
18,600 18,650 2,330 1,866 2,330 2,131
18,650 18,700 2,338 1,874 2,338 2,139
18,700 18,750 2,345 1,881 2,345 2,146
18,750 18,800 2,353 1,889 2,353 2,154
18,800 18,850 2,360 1,896 2,360 2,161
18,850 18,900 2,368 1,904 2,368 2,169
18,900 18,950 2,375 1,911 2,375 2,176
18,950 19,000 2,383 1,919 2,383 2,184
19,000
19,000 19,050 2,390 1,926 2,390 2,191
19,050 19,100 2,398 1,934 2,398 2,199
19,100 19,150 2,405 1,941 2,405 2,206
19,150 19,200 2,413 1,949 2,413 2,214
19,200 19,250 2,420 1,956 2,420 2,221
19,250 19,300 2,428 1,964 2,428 2,229
19,300 19,350 2,435 1,971 2,435 2,236
19,350 19,400 2,443 1,979 2,443 2,244
19,400 19,450 2,450 1,986 2,450 2,251
19,450 19,500 2,458 1,994 2,458 2,259
19,500 19,550 2,465 2,001 2,465 2,266
19,550 19,600 2,473 2,009 2,473 2,274
19,600 19,650 2,480 2,016 2,480 2,281
19,650 19,700 2,488 2,024 2,488 2,289
19,700 19,750 2,495 2,031 2,495 2,296
19,750 19,800 2,503 2,039 2,503 2,304
19,800 19,850 2,510 2,046 2,510 2,311
19,850 19,900 2,518 2,054 2,518 2,319
19,900 19,950 2,525 2,061 2,525 2,326
19,950 20,000 2,533 2,069 2,533 2,334
20,000
20,000 20,050 2,540 2,076 2,540 2,341
20,050 20,100 2,548 2,084 2,548 2,349
20,100 20,150 2,555 2,091 2,555 2,356
20,150 20,200 2,563 2,099 2,563 2,364
20,200 20,250 2,570 2,106 2,570 2,371
20,250 20,300 2,578 2,114 2,578 2,379
20,300 20,350 2,585 2,121 2,585 2,386
20,350 20,400 2,593 2,129 2,593 2,394
20,400 20,450 2,600 2,136 2,600 2,401
20,450 20,500 2,608 2,144 2,608 2,409
20,500 20,550 2,615 2,151 2,615 2,416
20,550 20,600 2,623 2,159 2,623 2,424
20,600 20,650 2,630 2,166 2,630 2,431
20,650 20,700 2,638 2,174 2,638 2,439
20,700 20,750 2,645 2,181 2,645 2,446
20,750 20,800 2,653 2,189 2,653 2,454
20,800 20,850 2,660 2,196 2,660 2,461
20,850 20,900 2,668 2,204 2,668 2,469
20,900 20,950 2,675 2,211 2,675 2,476
20,950 21,000 2,683 2,219 2,683 2,484
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
21,000
21,000 21,050 2,690 2,226 2,690 2,491
21,050 21,100 2,698 2,234 2,698 2,499
21,100 21,150 2,705 2,241 2,705 2,506
21,150 21,200 2,713 2,249 2,713 2,514
21,200 21,250 2,720 2,256 2,720 2,521
21,250 21,300 2,728 2,264 2,728 2,529
21,300 21,350 2,735 2,271 2,735 2,536
21,350 21,400 2,743 2,279 2,743 2,544
21,400 21,450 2,750 2,286 2,750 2,551
21,450 21,500 2,758 2,294 2,758 2,559
21,500 21,550 2,765 2,301 2,765 2,566
21,550 21,600 2,773 2,309 2,773 2,574
21,600 21,650 2,780 2,316 2,780 2,581
21,650 21,700 2,788 2,324 2,788 2,589
21,700 21,750 2,795 2,331 2,795 2,596
21,750 21,800 2,803 2,339 2,803 2,604
21,800 21,850 2,810 2,346 2,810 2,611
21,850 21,900 2,818 2,354 2,818 2,619
21,900 21,950 2,825 2,361 2,825 2,626
21,950 22,000 2,833 2,369 2,833 2,634
22,000
22,000 22,050 2,840 2,376 2,840 2,641
22,050 22,100 2,848 2,384 2,848 2,649
22,100 22,150 2,855 2,391 2,855 2,656
22,150 22,200 2,863 2,399 2,863 2,664
22,200 22,250 2,870 2,406 2,870 2,671
22,250 22,300 2,878 2,414 2,878 2,679
22,300 22,350 2,885 2,421 2,885 2,686
22,350 22,400 2,893 2,429 2,893 2,694
22,400 22,450 2,900 2,436 2,900 2,701
22,450 22,500 2,908 2,444 2,908 2,709
22,500 22,550 2,915 2,451 2,915 2,716
22,550 22,600 2,923 2,459 2,923 2,724
22,600 22,650 2,930 2,466 2,930 2,731
22,650 22,700 2,938 2,474 2,938 2,739
22,700 22,750 2,945 2,481 2,945 2,746
22,750 22,800 2,953 2,489 2,953 2,754
22,800 22,850 2,960 2,496 2,960 2,761
22,850 22,900 2,968 2,504 2,968 2,769
22,900 22,950 2,975 2,511 2,975 2,776
22,950 23,000 2,983 2,519 2,983 2,784
23,000
23,000 23,050 2,990 2,526 2,990 2,791
23,050 23,100 2,998 2,534 2,998 2,799
23,100 23,150 3,005 2,541 3,005 2,806
23,150 23,200 3,013 2,549 3,013 2,814
23,200 23,250 3,020 2,556 3,020 2,821
23,250 23,300 3,028 2,564 3,028 2,829
23,300 23,350 3,035 2,571 3,035 2,836
23,350 23,400 3,043 2,579 3,043 2,844
23,400 23,450 3,050 2,586 3,050 2,851
23,450 23,500 3,058 2,594 3,058 2,859
23,500 23,550 3,065 2,601 3,065 2,866
23,550 23,600 3,073 2,609 3,073 2,874
23,600 23,650 3,080 2,616 3,080 2,881
23,650 23,700 3,088 2,624 3,088 2,889
23,700 23,750 3,095 2,631 3,095 2,896
23,750 23,800 3,103 2,639 3,103 2,904
23,800 23,850 3,110 2,646 3,110 2,911
23,850 23,900 3,118 2,654 3,118 2,919
23,900 23,950 3,125 2,661 3,125 2,926
23,950 24,000 3,133 2,669 3,133 2,934
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
24,000
24,000 24,050 3,140 2,676 3,140 2,941
24,050 24,100 3,148 2,684 3,148 2,949
24,100 24,150 3,155 2,691 3,155 2,956
24,150 24,200 3,163 2,699 3,163 2,964
24,200 24,250 3,170 2,706 3,170 2,971
24,250 24,300 3,178 2,714 3,178 2,979
24,300 24,350 3,185 2,721 3,185 2,986
24,350 24,400 3,193 2,729 3,193 2,994
24,400 24,450 3,200 2,736 3,200 3,001
24,450 24,500 3,208 2,744 3,208 3,009
24,500 24,550 3,215 2,751 3,215 3,016
24,550 24,600 3,223 2,759 3,223 3,024
24,600 24,650 3,230 2,766 3,230 3,031
24,650 24,700 3,238 2,774 3,238 3,039
24,700 24,750 3,245 2,781 3,245 3,046
24,750 24,800 3,253 2,789 3,253 3,054
24,800 24,850 3,260 2,796 3,260 3,061
24,850 24,900 3,268 2,804 3,268 3,069
24,900 24,950 3,275 2,811 3,275 3,076
24,950 25,000 3,283 2,819 3,283 3,084
25,000
25,000 25,050 3,290 2,826 3,290 3,091
25,050 25,100 3,298 2,834 3,298 3,099
25,100 25,150 3,305 2,841 3,305 3,106
25,150 25,200 3,313 2,849 3,313 3,114
25,200 25,250 3,320 2,856 3,320 3,121
25,250 25,300 3,328 2,864 3,328 3,129
25,300 25,350 3,335 2,871 3,335 3,136
25,350 25,400 3,343 2,879 3,343 3,144
25,400 25,450 3,350 2,886 3,350 3,151
25,450 25,500 3,358 2,894 3,358 3,159
25,500 25,550 3,365 2,901 3,365 3,166
25,550 25,600 3,373 2,909 3,373 3,174
25,600 25,650 3,380 2,916 3,380 3,181
25,650 25,700 3,388 2,924 3,388 3,189
25,700 25,750 3,395 2,931 3,395 3,196
25,750 25,800 3,403 2,939 3,403 3,204
25,800 25,850 3,410 2,946 3,410 3,211
25,850 25,900 3,418 2,954 3,418 3,219
25,900 25,950 3,425 2,961 3,425 3,226
25,950 26,000 3,433 2,969 3,433 3,234
26,000
26,000 26,050 3,440 2,976 3,440 3,241
26,050 26,100 3,448 2,984 3,448 3,249
26,100 26,150 3,455 2,991 3,455 3,256
26,150 26,200 3,463 2,999 3,463 3,264
26,200 26,250 3,470 3,006 3,470 3,271
26,250 26,300 3,478 3,014 3,478 3,279
26,300 26,350 3,485 3,021 3,485 3,286
26,350 26,400 3,493 3,029 3,493 3,294
26,400 26,450 3,500 3,036 3,500 3,301
26,450 26,500 3,508 3,044 3,508 3,309
26,500 26,550 3,515 3,051 3,515 3,316
26,550 26,600 3,523 3,059 3,523 3,324
26,600 26,650 3,530 3,066 3,530 3,331
26,650 26,700 3,538 3,074 3,538 3,339
26,700 26,750 3,545 3,081 3,545 3,346
26,750 26,800 3,553 3,089 3,553 3,354
26,800 26,850 3,560 3,096 3,560 3,361
26,850 26,900 3,568 3,104 3,568 3,369
26,900 26,950 3,575 3,111 3,575 3,376
26,950 27,000 3,583 3,119 3,583 3,384
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
27,000
27,000 27,050 3,590 3,126 3,590 3,391
27,050 27,100 3,598 3,134 3,598 3,399
27,100 27,150 3,605 3,141 3,605 3,406
27,150 27,200 3,613 3,149 3,613 3,414
27,200 27,250 3,620 3,156 3,620 3,421
27,250 27,300 3,628 3,164 3,628 3,429
27,300 27,350 3,635 3,171 3,635 3,436
27,350 27,400 3,643 3,179 3,643 3,444
27,400 27,450 3,650 3,186 3,650 3,451
27,450 27,500 3,658 3,194 3,658 3,459
27,500 27,550 3,665 3,201 3,665 3,466
27,550 27,600 3,673 3,209 3,673 3,474
27,600 27,650 3,680 3,216 3,680 3,481
27,650 27,700 3,688 3,224 3,688 3,489
27,700 27,750 3,695 3,231 3,695 3,496
27,750 27,800 3,703 3,239 3,703 3,504
27,800 27,850 3,710 3,246 3,710 3,511
27,850 27,900 3,718 3,254 3,718 3,519
27,900 27,950 3,725 3,261 3,725 3,526
27,950 28,000 3,733 3,269 3,733 3,534
28,000
28,000 28,050 3,740 3,276 3,740 3,541
28,050 28,100 3,748 3,284 3,748 3,549
28,100 28,150 3,755 3,291 3,755 3,556
28,150 28,200 3,763 3,299 3,763 3,564
28,200 28,250 3,770 3,306 3,770 3,571
28,250 28,300 3,778 3,314 3,778 3,579
28,300 28,350 3,785 3,321 3,785 3,586
28,350 28,400 3,793 3,329 3,793 3,594
28,400 28,450 3,800 3,336 3,800 3,601
28,450 28,500 3,808 3,344 3,808 3,609
28,500 28,550 3,815 3,351 3,815 3,616
28,550 28,600 3,823 3,359 3,823 3,624
28,600 28,650 3,830 3,366 3,830 3,631
28,650 28,700 3,838 3,374 3,838 3,639
28,700 28,750 3,845 3,381 3,845 3,646
28,750 28,800 3,853 3,389 3,853 3,654
28,800 28,850 3,860 3,396 3,860 3,661
28,850 28,900 3,868 3,404 3,868 3,669
28,900 28,950 3,875 3,411 3,875 3,676
28,950 29,000 3,883 3,419 3,883 3,684
29,000
29,000 29,050 3,890 3,426 3,890 3,691
29,050 29,100 3,898 3,434 3,898 3,699
29,100 29,150 3,905 3,441 3,905 3,706
29,150 29,200 3,913 3,449 3,913 3,714
29,200 29,250 3,920 3,456 3,920 3,721
29,250 29,300 3,928 3,464 3,928 3,729
29,300 29,350 3,935 3,471 3,935 3,736
29,350 29,400 3,943 3,479 3,943 3,744
29,400 29,450 3,950 3,486 3,950 3,751
29,450 29,500 3,958 3,494 3,958 3,759
29,500 29,550 3,965 3,501 3,965 3,766
29,550 29,600 3,973 3,509 3,973 3,774
29,600 29,650 3,980 3,516 3,980 3,781
29,650 29,700 3,988 3,524 3,988 3,789
29,700 29,750 3,995 3,531 3,995 3,796
29,750 29,800 4,003 3,539 4,003 3,804
29,800 29,850 4,010 3,546 4,010 3,811
29,850 29,900 4,018 3,554 4,018 3,819
29,900 29,950 4,025 3,561 4,025 3,826
29,950 30,000 4,033 3,569 4,033 3,834
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
30,000
30,000 30,050 4,040 3,576 4,040 3,841
30,050 30,100 4,048 3,584 4,048 3,849
30,100 30,150 4,055 3,591 4,055 3,856
30,150 30,200 4,063 3,599 4,063 3,864
30,200 30,250 4,070 3,606 4,070 3,871
30,250 30,300 4,078 3,614 4,078 3,879
30,300 30,350 4,085 3,621 4,085 3,886
30,350 30,400 4,093 3,629 4,093 3,894
30,400 30,450 4,100 3,636 4,100 3,901
30,450 30,500 4,108 3,644 4,108 3,909
30,500 30,550 4,115 3,651 4,115 3,916
30,550 30,600 4,123 3,659 4,123 3,924
30,600 30,650 4,130 3,666 4,130 3,931
30,650 30,700 4,138 3,674 4,138 3,939
30,700 30,750 4,145 3,681 4,145 3,946
30,750 30,800 4,153 3,689 4,153 3,954
30,800 30,850 4,160 3,696 4,160 3,961
30,850 30,900 4,168 3,704 4,168 3,969
30,900 30,950 4,175 3,711 4,175 3,976
30,950 31,000 4,183 3,719 4,183 3,984
31,000
31,000 31,050 4,190 3,726 4,190 3,991
31,050 31,100 4,198 3,734 4,198 3,999
31,100 31,150 4,205 3,741 4,205 4,006
31,150 31,200 4,213 3,749 4,213 4,014
31,200 31,250 4,220 3,756 4,220 4,021
31,250 31,300 4,228 3,764 4,228 4,029
31,300 31,350 4,235 3,771 4,235 4,036
31,350 31,400 4,243 3,779 4,243 4,044
31,400 31,450 4,250 3,786 4,250 4,051
31,450 31,500 4,258 3,794 4,258 4,059
31,500 31,550 4,265 3,801 4,265 4,066
31,550 31,600 4,273 3,809 4,273 4,074
31,600 31,650 4,280 3,816 4,280 4,081
31,650 31,700 4,288 3,824 4,288 4,089
31,700 31,750 4,295 3,831 4,295 4,096
31,750 31,800 4,303 3,839 4,303 4,104
31,800 31,850 4,310 3,846 4,310 4,111
31,850 31,900 4,318 3,854 4,318 4,119
31,900 31,950 4,325 3,861 4,325 4,126
31,950 32,000 4,333 3,869 4,333 4,134
32,000
32,000 32,050 4,340 3,876 4,340 4,141
32,050 32,100 4,348 3,884 4,348 4,149
32,100 32,150 4,355 3,891 4,355 4,156
32,150 32,200 4,363 3,899 4,363 4,164
32,200 32,250 4,370 3,906 4,370 4,171
32,250 32,300 4,378 3,914 4,378 4,179
32,300 32,350 4,385 3,921 4,385 4,186
32,350 32,400 4,393 3,929 4,393 4,194
32,400 32,450 4,400 3,936 4,400 4,201
32,450 32,500 4,408 3,944 4,408 4,209
32,500 32,550 4,415 3,951 4,415 4,216
32,550 32,600 4,423 3,959 4,423 4,224
32,600 32,650 4,430 3,966 4,430 4,231
32,650 32,700 4,438 3,974 4,438 4,239
32,700 32,750 4,445 3,981 4,445 4,246
32,750 32,800 4,453 3,989 4,453 4,254
32,800 32,850 4,460 3,996 4,460 4,261
32,850 32,900 4,468 4,004 4,468 4,269
32,900 32,950 4,475 4,011 4,475 4,276
32,950 33,000 4,483 4,019 4,483 4,284
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
33,000
33,000 33,050 4,490 4,026 4,490 4,291
33,050 33,100 4,498 4,034 4,498 4,299
33,100 33,150 4,505 4,041 4,505 4,306
33,150 33,200 4,513 4,049 4,513 4,314
33,200 33,250 4,520 4,056 4,520 4,321
33,250 33,300 4,528 4,064 4,528 4,329
33,300 33,350 4,535 4,071 4,535 4,336
33,350 33,400 4,543 4,079 4,543 4,344
33,400 33,450 4,550 4,086 4,550 4,351
33,450 33,500 4,558 4,094 4,558 4,359
33,500 33,550 4,565 4,101 4,565 4,366
33,550 33,600 4,573 4,109 4,573 4,374
33,600 33,650 4,580 4,116 4,580 4,381
33,650 33,700 4,588 4,124 4,588 4,389
33,700 33,750 4,595 4,131 4,595 4,396
33,750 33,800 4,603 4,139 4,603 4,404
33,800 33,850 4,610 4,146 4,610 4,411
33,850 33,900 4,618 4,154 4,618 4,419
33,900 33,950 4,625 4,161 4,625 4,426
33,950 34,000 4,633 4,169 4,633 4,434
34,000
34,000 34,050 4,640 4,176 4,640 4,441
34,050 34,100 4,648 4,184 4,648 4,449
34,100 34,150 4,655 4,191 4,655 4,456
34,150 34,200 4,663 4,199 4,663 4,464
34,200 34,250 4,670 4,206 4,670 4,471
34,250 34,300 4,678 4,214 4,678 4,479
34,300 34,350 4,685 4,221 4,685 4,486
34,350 34,400 4,693 4,229 4,693 4,494
34,400 34,450 4,700 4,236 4,700 4,501
34,450 34,500 4,708 4,244 4,708 4,509
34,500 34,550 4,715 4,251 4,715 4,516
34,550 34,600 4,723 4,259 4,723 4,524
34,600 34,650 4,730 4,266 4,730 4,531
34,650 34,700 4,738 4,274 4,738 4,539
34,700 34,750 4,745 4,281 4,745 4,546
34,750 34,800 4,753 4,289 4,753 4,554
34,800 34,850 4,760 4,296 4,760 4,561
34,850 34,900 4,768 4,304 4,768 4,569
34,900 34,950 4,775 4,311 4,775 4,576
34,950 35,000 4,783 4,319 4,783 4,584
35,000
35,000 35,050 4,790 4,326 4,790 4,591
35,050 35,100 4,798 4,334 4,798 4,599
35,100 35,150 4,805 4,341 4,805 4,606
35,150 35,200 4,813 4,349 4,813 4,614
35,200 35,250 4,820 4,356 4,820 4,621
35,250 35,300 4,828 4,364 4,828 4,629
35,300 35,350 4,835 4,371 4,835 4,636
35,350 35,400 4,843 4,379 4,843 4,644
35,400 35,450 4,850 4,386 4,850 4,651
35,450 35,500 4,858 4,394 4,858 4,659
35,500 35,550 4,865 4,401 4,865 4,666
35,550 35,600 4,873 4,409 4,873 4,674
35,600 35,650 4,880 4,416 4,880 4,681
35,650 35,700 4,888 4,424 4,888 4,689
35,700 35,750 4,895 4,431 4,895 4,696
35,750 35,800 4,903 4,439 4,903 4,704
35,800 35,850 4,910 4,446 4,910 4,711
35,850 35,900 4,918 4,454 4,918 4,719
35,900 35,950 4,925 4,461 4,925 4,726
35,950 36,000 4,933 4,469 4,933 4,734
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
36,000
36,000 36,050 4,940 4,476 4,940 4,741
36,050 36,100 4,948 4,484 4,948 4,749
36,100 36,150 4,955 4,491 4,955 4,756
36,150 36,200 4,963 4,499 4,963 4,764
36,200 36,250 4,970 4,506 4,970 4,771
36,250 36,300 4,978 4,514 4,978 4,779
36,300 36,350 4,985 4,521 4,985 4,786
36,350 36,400 4,993 4,529 4,993 4,794
36,400 36,450 5,000 4,536 5,000 4,801
36,450 36,500 5,008 4,544 5,008 4,809
36,500 36,550 5,015 4,551 5,015 4,816
36,550 36,600 5,023 4,559 5,023 4,824
36,600 36,650 5,030 4,566 5,030 4,831
36,650 36,700 5,038 4,574 5,038 4,839
36,700 36,750 5,045 4,581 5,045 4,846
36,750 36,800 5,053 4,589 5,053 4,854
36,800 36,850 5,060 4,596 5,060 4,861
36,850 36,900 5,068 4,604 5,068 4,869
36,900 36,950 5,075 4,611 5,075 4,876
36,950 37,000 5,083 4,619 5,083 4,884
37,000
37,000 37,050 5,090 4,626 5,090 4,891
37,050 37,100 5,098 4,634 5,098 4,899
37,100 37,150 5,105 4,641 5,105 4,906
37,150 37,200 5,113 4,649 5,113 4,914
37,200 37,250 5,120 4,656 5,120 4,921
37,250 37,300 5,128 4,664 5,128 4,929
37,300 37,350 5,135 4,671 5,135 4,936
37,350 37,400 5,143 4,679 5,143 4,944
37,400 37,450 5,150 4,686 5,150 4,951
37,450 37,500 5,158 4,694 5,158 4,959
37,500 37,550 5,165 4,701 5,165 4,966
37,550 37,600 5,173 4,709 5,173 4,974
37,600 37,650 5,180 4,716 5,180 4,981
37,650 37,700 5,190 4,724 5,190 4,989
37,700 37,750 5,203 4,731 5,203 4,996
37,750 37,800 5,215 4,739 5,215 5,004
37,800 37,850 5,228 4,746 5,228 5,011
37,850 37,900 5,240 4,754 5,240 5,019
37,900 37,950 5,253 4,761 5,253 5,026
37,950 38,000 5,265 4,769 5,265 5,034
38,000
38,000 38,050 5,278 4,776 5,278 5,041
38,050 38,100 5,290 4,784 5,290 5,049
38,100 38,150 5,303 4,791 5,303 5,056
38,150 38,200 5,315 4,799 5,315 5,064
38,200 38,250 5,328 4,806 5,328 5,071
38,250 38,300 5,340 4,814 5,340 5,079
38,300 38,350 5,353 4,821 5,353 5,086
38,350 38,400 5,365 4,829 5,365 5,094
38,400 38,450 5,378 4,836 5,378 5,101
38,450 38,500 5,390 4,844 5,390 5,109
38,500 38,550 5,403 4,851 5,403 5,116
38,550 38,600 5,415 4,859 5,415 5,124
38,600 38,650 5,428 4,866 5,428 5,131
38,650 38,700 5,440 4,874 5,440 5,139
38,700 38,750 5,453 4,881 5,453 5,146
38,750 38,800 5,465 4,889 5,465 5,154
38,800 38,850 5,478 4,896 5,478 5,161
38,850 38,900 5,490 4,904 5,490 5,169
38,900 38,950 5,503 4,911 5,503 5,176
38,950 39,000 5,515 4,919 5,515 5,184
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
39,000
39,000 39,050 5,528 4,926 5,528 5,191
39,050 39,100 5,540 4,934 5,540 5,199
39,100 39,150 5,553 4,941 5,553 5,206
39,150 39,200 5,565 4,949 5,565 5,214
39,200 39,250 5,578 4,956 5,578 5,221
39,250 39,300 5,590 4,964 5,590 5,229
39,300 39,350 5,603 4,971 5,603 5,236
39,350 39,400 5,615 4,979 5,615 5,244
39,400 39,450 5,628 4,986 5,628 5,251
39,450 39,500 5,640 4,994 5,640 5,259
39,500 39,550 5,653 5,001 5,653 5,266
39,550 39,600 5,665 5,009 5,665 5,274
39,600 39,650 5,678 5,016 5,678 5,281
39,650 39,700 5,690 5,024 5,690 5,289
39,700 39,750 5,703 5,031 5,703 5,296
39,750 39,800 5,715 5,039 5,715 5,304
39,800 39,850 5,728 5,046 5,728 5,311
39,850 39,900 5,740 5,054 5,740 5,319
39,900 39,950 5,753 5,061 5,753 5,326
39,950 40,000 5,765 5,069 5,765 5,334
40,000
40,000 40,050 5,778 5,076 5,778 5,341
40,050 40,100 5,790 5,084 5,790 5,349
40,100 40,150 5,803 5,091 5,803 5,356
40,150 40,200 5,815 5,099 5,815 5,364
40,200 40,250 5,828 5,106 5,828 5,371
40,250 40,300 5,840 5,114 5,840 5,379
40,300 40,350 5,853 5,121 5,853 5,386
40,350 40,400 5,865 5,129 5,865 5,394
40,400 40,450 5,878 5,136 5,878 5,401
40,450 40,500 5,890 5,144 5,890 5,409
40,500 40,550 5,903 5,151 5,903 5,416
40,550 40,600 5,915 5,159 5,915 5,424
40,600 40,650 5,928 5,166 5,928 5,431
40,650 40,700 5,940 5,174 5,940 5,439
40,700 40,750 5,953 5,181 5,953 5,446
40,750 40,800 5,965 5,189 5,965 5,454
40,800 40,850 5,978 5,196 5,978 5,461
40,850 40,900 5,990 5,204 5,990 5,469
40,900 40,950 6,003 5,211 6,003 5,476
40,950 41,000 6,015 5,219 6,015 5,484
41,000
41,000 41,050 6,028 5,226 6,028 5,491
41,050 41,100 6,040 5,234 6,040 5,499
41,100 41,150 6,053 5,241 6,053 5,506
41,150 41,200 6,065 5,249 6,065 5,514
41,200 41,250 6,078 5,256 6,078 5,521
41,250 41,300 6,090 5,264 6,090 5,529
41,300 41,350 6,103 5,271 6,103 5,536
41,350 41,400 6,115 5,279 6,115 5,544
41,400 41,450 6,128 5,286 6,128 5,551
41,450 41,500 6,140 5,294 6,140 5,559
41,500 41,550 6,153 5,301 6,153 5,566
41,550 41,600 6,165 5,309 6,165 5,574
41,600 41,650 6,178 5,316 6,178 5,581
41,650 41,700 6,190 5,324 6,190 5,589
41,700 41,750 6,203 5,331 6,203 5,596
41,750 41,800 6,215 5,339 6,215 5,604
41,800 41,850 6,228 5,346 6,228 5,611
41,850 41,900 6,240 5,354 6,240 5,619
41,900 41,950 6,253 5,361 6,253 5,626
41,950 42,000 6,265 5,369 6,265 5,634
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
42,000
42,000 42,050 6,278 5,376 6,278 5,641
42,050 42,100 6,290 5,384 6,290 5,649
42,100 42,150 6,303 5,391 6,303 5,656
42,150 42,200 6,315 5,399 6,315 5,664
42,200 42,250 6,328 5,406 6,328 5,671
42,250 42,300 6,340 5,414 6,340 5,679
42,300 42,350 6,353 5,421 6,353 5,686
42,350 42,400 6,365 5,429 6,365 5,694
42,400 42,450 6,378 5,436 6,378 5,701
42,450 42,500 6,390 5,444 6,390 5,709
42,500 42,550 6,403 5,451 6,403 5,716
42,550 42,600 6,415 5,459 6,415 5,724
42,600 42,650 6,428 5,466 6,428 5,731
42,650 42,700 6,440 5,474 6,440 5,739
42,700 42,750 6,453 5,481 6,453 5,746
42,750 42,800 6,465 5,489 6,465 5,754
42,800 42,850 6,478 5,496 6,478 5,761
42,850 42,900 6,490 5,504 6,490 5,769
42,900 42,950 6,503 5,511 6,503 5,776
42,950 43,000 6,515 5,519 6,515 5,784
43,000
43,000 43,050 6,528 5,526 6,528 5,791
43,050 43,100 6,540 5,534 6,540 5,799
43,100 43,150 6,553 5,541 6,553 5,806
43,150 43,200 6,565 5,549 6,565 5,814
43,200 43,250 6,578 5,556 6,578 5,821
43,250 43,300 6,590 5,564 6,590 5,829
43,300 43,350 6,603 5,571 6,603 5,836
43,350 43,400 6,615 5,579 6,615 5,844
43,400 43,450 6,628 5,586 6,628 5,851
43,450 43,500 6,640 5,594 6,640 5,859
43,500 43,550 6,653 5,601 6,653 5,866
43,550 43,600 6,665 5,609 6,665 5,874
43,600 43,650 6,678 5,616 6,678 5,881
43,650 43,700 6,690 5,624 6,690 5,889
43,700 43,750 6,703 5,631 6,703 5,896
43,750 43,800 6,715 5,639 6,715 5,904
43,800 43,850 6,728 5,646 6,728 5,911
43,850 43,900 6,740 5,654 6,740 5,919
43,900 43,950 6,753 5,661 6,753 5,926
43,950 44,000 6,765 5,669 6,765 5,934
44,000
44,000 44,050 6,778 5,676 6,778 5,941
44,050 44,100 6,790 5,684 6,790 5,949
44,100 44,150 6,803 5,691 6,803 5,956
44,150 44,200 6,815 5,699 6,815 5,964
44,200 44,250 6,828 5,706 6,828 5,971
44,250 44,300 6,840 5,714 6,840 5,979
44,300 44,350 6,853 5,721 6,853 5,986
44,350 44,400 6,865 5,729 6,865 5,994
44,400 44,450 6,878 5,736 6,878 6,001
44,450 44,500 6,890 5,744 6,890 6,009
44,500 44,550 6,903 5,751 6,903 6,016
44,550 44,600 6,915 5,759 6,915 6,024
44,600 44,650 6,928 5,766 6,928 6,031
44,650 44,700 6,940 5,774 6,940 6,039
44,700 44,750 6,953 5,781 6,953 6,046
44,750 44,800 6,965 5,789 6,965 6,054
44,800 44,850 6,978 5,796 6,978 6,061
44,850 44,900 6,990 5,804 6,990 6,069
44,900 44,950 7,003 5,811 7,003 6,076
44,950 45,000 7,015 5,819 7,015 6,084
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
45,000
45,000 45,050 7,028 5,826 7,028 6,091
45,050 45,100 7,040 5,834 7,040 6,099
45,100 45,150 7,053 5,841 7,053 6,106
45,150 45,200 7,065 5,849 7,065 6,114
45,200 45,250 7,078 5,856 7,078 6,121
45,250 45,300 7,090 5,864 7,090 6,129
45,300 45,350 7,103 5,871 7,103 6,136
45,350 45,400 7,115 5,879 7,115 6,144
45,400 45,450 7,128 5,886 7,128 6,151
45,450 45,500 7,140 5,894 7,140 6,159
45,500 45,550 7,153 5,901 7,153 6,166
45,550 45,600 7,165 5,909 7,165 6,174
45,600 45,650 7,178 5,916 7,178 6,181
45,650 45,700 7,190 5,924 7,190 6,189
45,700 45,750 7,203 5,931 7,203 6,196
45,750 45,800 7,215 5,939 7,215 6,204
45,800 45,850 7,228 5,946 7,228 6,211
45,850 45,900 7,240 5,954 7,240 6,219
45,900 45,950 7,253 5,961 7,253 6,226
45,950 46,000 7,265 5,969 7,265 6,234
46,000
46,000 46,050 7,278 5,976 7,278 6,241
46,050 46,100 7,290 5,984 7,290 6,249
46,100 46,150 7,303 5,991 7,303 6,256
46,150 46,200 7,315 5,999 7,315 6,264
46,200 46,250 7,328 6,006 7,328 6,271
46,250 46,300 7,340 6,014 7,340 6,279
46,300 46,350 7,353 6,021 7,353 6,286
46,350 46,400 7,365 6,029 7,365 6,294
46,400 46,450 7,378 6,036 7,378 6,301
46,450 46,500 7,390 6,044 7,390 6,309
46,500 46,550 7,403 6,051 7,403 6,316
46,550 46,600 7,415 6,059 7,415 6,324
46,600 46,650 7,428 6,066 7,428 6,331
46,650 46,700 7,440 6,074 7,440 6,339
46,700 46,750 7,453 6,081 7,453 6,346
46,750 46,800 7,465 6,089 7,465 6,354
46,800 46,850 7,478 6,096 7,478 6,361
46,850 46,900 7,490 6,104 7,490 6,369
46,900 46,950 7,503 6,111 7,503 6,376
46,950 47,000 7,515 6,119 7,515 6,384
47,000
47,000 47,050 7,528 6,126 7,528 6,391
47,050 47,100 7,540 6,134 7,540 6,399
47,100 47,150 7,553 6,141 7,553 6,406
47,150 47,200 7,565 6,149 7,565 6,414
47,200 47,250 7,578 6,156 7,578 6,421
47,250 47,300 7,590 6,164 7,590 6,429
47,300 47,350 7,603 6,171 7,603 6,436
47,350 47,400 7,615 6,179 7,615 6,444
47,400 47,450 7,628 6,186 7,628 6,451
47,450 47,500 7,640 6,194 7,640 6,459
47,500 47,550 7,653 6,201 7,653 6,466
47,550 47,600 7,665 6,209 7,665 6,474
47,600 47,650 7,678 6,216 7,678 6,481
47,650 47,700 7,690 6,224 7,690 6,489
47,700 47,750 7,703 6,231 7,703 6,496
47,750 47,800 7,715 6,239 7,715 6,504
47,800 47,850 7,728 6,246 7,728 6,511
47,850 47,900 7,740 6,254 7,740 6,519
47,900 47,950 7,753 6,261 7,753 6,526
47,950 48,000 7,765 6,269 7,765 6,534
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
48,000
48,000 48,050 7,778 6,276 7,778 6,541
48,050 48,100 7,790 6,284 7,790 6,549
48,100 48,150 7,803 6,291 7,803 6,556
48,150 48,200 7,815 6,299 7,815 6,564
48,200 48,250 7,828 6,306 7,828 6,571
48,250 48,300 7,840 6,314 7,840 6,579
48,300 48,350 7,853 6,321 7,853 6,586
48,350 48,400 7,865 6,329 7,865 6,594
48,400 48,450 7,878 6,336 7,878 6,601
48,450 48,500 7,890 6,344 7,890 6,609
48,500 48,550 7,903 6,351 7,903 6,616
48,550 48,600 7,915 6,359 7,915 6,624
48,600 48,650 7,928 6,366 7,928 6,631
48,650 48,700 7,940 6,374 7,940 6,639
48,700 48,750 7,953 6,381 7,953 6,646
48,750 48,800 7,965 6,389 7,965 6,654
48,800 48,850 7,978 6,396 7,978 6,661
48,850 48,900 7,990 6,404 7,990 6,669
48,900 48,950 8,003 6,411 8,003 6,676
48,950 49,000 8,015 6,419 8,015 6,684
49,000
49,000 49,050 8,028 6,426 8,028 6,691
49,050 49,100 8,040 6,434 8,040 6,699
49,100 49,150 8,053 6,441 8,053 6,706
49,150 49,200 8,065 6,449 8,065 6,714
49,200 49,250 8,078 6,456 8,078 6,721
49,250 49,300 8,090 6,464 8,090 6,729
49,300 49,350 8,103 6,471 8,103 6,736
49,350 49,400 8,115 6,479 8,115 6,744
49,400 49,450 8,128 6,486 8,128 6,751
49,450 49,500 8,140 6,494 8,140 6,759
49,500 49,550 8,153 6,501 8,153 6,766
49,550 49,600 8,165 6,509 8,165 6,774
49,600 49,650 8,178 6,516 8,178 6,781
49,650 49,700 8,190 6,524 8,190 6,789
49,700 49,750 8,203 6,531 8,203 6,796
49,750 49,800 8,215 6,539 8,215 6,804
49,800 49,850 8,228 6,546 8,228 6,811
49,850 49,900 8,240 6,554 8,240 6,819
49,900 49,950 8,253 6,561 8,253 6,826
49,950 50,000 8,265 6,569 8,265 6,834
50,000
50,000 50,050 8,278 6,576 8,278 6,841
50,050 50,100 8,290 6,584 8,290 6,849
50,100 50,150 8,303 6,591 8,303 6,856
50,150 50,200 8,315 6,599 8,315 6,864
50,200 50,250 8,328 6,606 8,328 6,871
50,250 50,300 8,340 6,614 8,340 6,879
50,300 50,350 8,353 6,621 8,353 6,886
50,350 50,400 8,365 6,629 8,365 6,894
50,400 50,450 8,378 6,636 8,378 6,904
50,450 50,500 8,390 6,644 8,390 6,916
50,500 50,550 8,403 6,651 8,403 6,929
50,550 50,600 8,415 6,659 8,415 6,941
50,600 50,650 8,428 6,666 8,428 6,954
50,650 50,700 8,440 6,674 8,440 6,966
50,700 50,750 8,453 6,681 8,453 6,979
50,750 50,800 8,465 6,689 8,465 6,991
50,800 50,850 8,478 6,696 8,478 7,004
50,850 50,900 8,490 6,704 8,490 7,016
50,900 50,950 8,503 6,711 8,503 7,029
50,950 51,000 8,515 6,719 8,515 7,041
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
51,000
51,000 51,050 8,528 6,726 8,528 7,054
51,050 51,100 8,540 6,734 8,540 7,066
51,100 51,150 8,553 6,741 8,553 7,079
51,150 51,200 8,565 6,749 8,565 7,091
51,200 51,250 8,578 6,756 8,578 7,104
51,250 51,300 8,590 6,764 8,590 7,116
51,300 51,350 8,603 6,771 8,603 7,129
51,350 51,400 8,615 6,779 8,615 7,141
51,400 51,450 8,628 6,786 8,628 7,154
51,450 51,500 8,640 6,794 8,640 7,166
51,500 51,550 8,653 6,801 8,653 7,179
51,550 51,600 8,665 6,809 8,665 7,191
51,600 51,650 8,678 6,816 8,678 7,204
51,650 51,700 8,690 6,824 8,690 7,216
51,700 51,750 8,703 6,831 8,703 7,229
51,750 51,800 8,715 6,839 8,715 7,241
51,800 51,850 8,728 6,846 8,728 7,254
51,850 51,900 8,740 6,854 8,740 7,266
51,900 51,950 8,753 6,861 8,753 7,279
51,950 52,000 8,765 6,869 8,765 7,291
52,000
52,000 52,050 8,778 6,876 8,778 7,304
52,050 52,100 8,790 6,884 8,790 7,316
52,100 52,150 8,803 6,891 8,803 7,329
52,150 52,200 8,815 6,899 8,815 7,341
52,200 52,250 8,828 6,906 8,828 7,354
52,250 52,300 8,840 6,914 8,840 7,366
52,300 52,350 8,853 6,921 8,853 7,379
52,350 52,400 8,865 6,929 8,865 7,391
52,400 52,450 8,878 6,936 8,878 7,404
52,450 52,500 8,890 6,944 8,890 7,416
52,500 52,550 8,903 6,951 8,903 7,429
52,550 52,600 8,915 6,959 8,915 7,441
52,600 52,650 8,928 6,966 8,928 7,454
52,650 52,700 8,940 6,974 8,940 7,466
52,700 52,750 8,953 6,981 8,953 7,479
52,750 52,800 8,965 6,989 8,965 7,491
52,800 52,850 8,978 6,996 8,978 7,504
52,850 52,900 8,990 7,004 8,990 7,516
52,900 52,950 9,003 7,011 9,003 7,529
52,950 53,000 9,015 7,019 9,015 7,541
53,000
53,000 53,050 9,028 7,026 9,028 7,554
53,050 53,100 9,040 7,034 9,040 7,566
53,100 53,150 9,053 7,041 9,053 7,579
53,150 53,200 9,065 7,049 9,065 7,591
53,200 53,250 9,078 7,056 9,078 7,604
53,250 53,300 9,090 7,064 9,090 7,616
53,300 53,350 9,103 7,071 9,103 7,629
53,350 53,400 9,115 7,079 9,115 7,641
53,400 53,450 9,128 7,086 9,128 7,654
53,450 53,500 9,140 7,094 9,140 7,666
53,500 53,550 9,153 7,101 9,153 7,679
53,550 53,600 9,165 7,109 9,165 7,691
53,600 53,650 9,178 7,116 9,178 7,704
53,650 53,700 9,190 7,124 9,190 7,716
53,700 53,750 9,203 7,131 9,203 7,729
53,750 53,800 9,215 7,139 9,215 7,741
53,800 53,850 9,228 7,146 9,228 7,754
53,850 53,900 9,240 7,154 9,240 7,766
53,900 53,950 9,253 7,161 9,253 7,779
53,950 54,000 9,265 7,169 9,265 7,791
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
54,000
54,000 54,050 9,278 7,176 9,278 7,804
54,050 54,100 9,290 7,184 9,290 7,816
54,100 54,150 9,303 7,191 9,303 7,829
54,150 54,200 9,315 7,199 9,315 7,841
54,200 54,250 9,328 7,206 9,328 7,854
54,250 54,300 9,340 7,214 9,340 7,866
54,300 54,350 9,353 7,221 9,353 7,879
54,350 54,400 9,365 7,229 9,365 7,891
54,400 54,450 9,378 7,236 9,378 7,904
54,450 54,500 9,390 7,244 9,390 7,916
54,500 54,550 9,403 7,251 9,403 7,929
54,550 54,600 9,415 7,259 9,415 7,941
54,600 54,650 9,428 7,266 9,428 7,954
54,650 54,700 9,440 7,274 9,440 7,966
54,700 54,750 9,453 7,281 9,453 7,979
54,750 54,800 9,465 7,289 9,465 7,991
54,800 54,850 9,478 7,296 9,478 8,004
54,850 54,900 9,490 7,304 9,490 8,016
54,900 54,950 9,503 7,311 9,503 8,029
54,950 55,000 9,515 7,319 9,515 8,041
55,000
55,000 55,050 9,528 7,326 9,528 8,054
55,050 55,100 9,540 7,334 9,540 8,066
55,100 55,150 9,553 7,341 9,553 8,079
55,150 55,200 9,565 7,349 9,565 8,091
55,200 55,250 9,578 7,356 9,578 8,104
55,250 55,300 9,590 7,364 9,590 8,116
55,300 55,350 9,603 7,371 9,603 8,129
55,350 55,400 9,615 7,379 9,615 8,141
55,400 55,450 9,628 7,386 9,628 8,154
55,450 55,500 9,640 7,394 9,640 8,166
55,500 55,550 9,653 7,401 9,653 8,179
55,550 55,600 9,665 7,409 9,665 8,191
55,600 55,650 9,678 7,416 9,678 8,204
55,650 55,700 9,690 7,424 9,690 8,216
55,700 55,750 9,703 7,431 9,703 8,229
55,750 55,800 9,715 7,439 9,715 8,241
55,800 55,850 9,728 7,446 9,728 8,254
55,850 55,900 9,740 7,454 9,740 8,266
55,900 55,950 9,753 7,461 9,753 8,279
55,950 56,000 9,765 7,469 9,765 8,291
56,000
56,000 56,050 9,778 7,476 9,778 8,304
56,050 56,100 9,790 7,484 9,790 8,316
56,100 56,150 9,803 7,491 9,803 8,329
56,150 56,200 9,815 7,499 9,815 8,341
56,200 56,250 9,828 7,506 9,828 8,354
56,250 56,300 9,840 7,514 9,840 8,366
56,300 56,350 9,853 7,521 9,853 8,379
56,350 56,400 9,865 7,529 9,865 8,391
56,400 56,450 9,878 7,536 9,878 8,404
56,450 56,500 9,890 7,544 9,890 8,416
56,500 56,550 9,903 7,551 9,903 8,429
56,550 56,600 9,915 7,559 9,915 8,441
56,600 56,650 9,928 7,566 9,928 8,454
56,650 56,700 9,940 7,574 9,940 8,466
56,700 56,750 9,953 7,581 9,953 8,479
56,750 56,800 9,965 7,589 9,965 8,491
56,800 56,850 9,978 7,596 9,978 8,504
56,850 56,900 9,990 7,604 9,990 8,516
56,900 56,950 10,003 7,611 10,003 8,529
56,950 57,000 10,015 7,619 10,015 8,541
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
57,000
57,000 57,050 10,028 7,626 10,028 8,554
57,050 57,100 10,040 7,634 10,040 8,566
57,100 57,150 10,053 7,641 10,053 8,579
57,150 57,200 10,065 7,649 10,065 8,591
57,200 57,250 10,078 7,656 10,078 8,604
57,250 57,300 10,090 7,664 10,090 8,616
57,300 57,350 10,103 7,671 10,103 8,629
57,350 57,400 10,115 7,679 10,115 8,641
57,400 57,450 10,128 7,686 10,128 8,654
57,450 57,500 10,140 7,694 10,140 8,666
57,500 57,550 10,153 7,701 10,153 8,679
57,550 57,600 10,165 7,709 10,165 8,691
57,600 57,650 10,178 7,716 10,178 8,704
57,650 57,700 10,190 7,724 10,190 8,716
57,700 57,750 10,203 7,731 10,203 8,729
57,750 57,800 10,215 7,739 10,215 8,741
57,800 57,850 10,228 7,746 10,228 8,754
57,850 57,900 10,240 7,754 10,240 8,766
57,900 57,950 10,253 7,761 10,253 8,779
57,950 58,000 10,265 7,769 10,265 8,791
58,000
58,000 58,050 10,278 7,776 10,278 8,804
58,050 58,100 10,290 7,784 10,290 8,816
58,100 58,150 10,303 7,791 10,303 8,829
58,150 58,200 10,315 7,799 10,315 8,841
58,200 58,250 10,328 7,806 10,328 8,854
58,250 58,300 10,340 7,814 10,340 8,866
58,300 58,350 10,353 7,821 10,353 8,879
58,350 58,400 10,365 7,829 10,365 8,891
58,400 58,450 10,378 7,836 10,378 8,904
58,450 58,500 10,390 7,844 10,390 8,916
58,500 58,550 10,403 7,851 10,403 8,929
58,550 58,600 10,415 7,859 10,415 8,941
58,600 58,650 10,428 7,866 10,428 8,954
58,650 58,700 10,440 7,874 10,440 8,966
58,700 58,750 10,453 7,881 10,453 8,979
58,750 58,800 10,465 7,889 10,465 8,991
58,800 58,850 10,478 7,896 10,478 9,004
58,850 58,900 10,490 7,904 10,490 9,016
58,900 58,950 10,503 7,911 10,503 9,029
58,950 59,000 10,515 7,919 10,515 9,041
59,000
59,000 59,050 10,528 7,926 10,528 9,054
59,050 59,100 10,540 7,934 10,540 9,066
59,100 59,150 10,553 7,941 10,553 9,079
59,150 59,200 10,565 7,949 10,565 9,091
59,200 59,250 10,578 7,956 10,578 9,104
59,250 59,300 10,590 7,964 10,590 9,116
59,300 59,350 10,603 7,971 10,603 9,129
59,350 59,400 10,615 7,979 10,615 9,141
59,400 59,450 10,628 7,986 10,628 9,154
59,450 59,500 10,640 7,994 10,640 9,166
59,500 59,550 10,653 8,001 10,653 9,179
59,550 59,600 10,665 8,009 10,665 9,191
59,600 59,650 10,678 8,016 10,678 9,204
59,650 59,700 10,690 8,024 10,690 9,216
59,700 59,750 10,703 8,031 10,703 9,229
59,750 59,800 10,715 8,039 10,715 9,241
59,800 59,850 10,728 8,046 10,728 9,254
59,850 59,900 10,740 8,054 10,740 9,266
59,900 59,950 10,753 8,061 10,753 9,279
59,950 60,000 10,765 8,069 10,765 9,291
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
60,000
60,000 60,050 10,778 8,076 10,778 9,304
60,050 60,100 10,790 8,084 10,790 9,316
60,100 60,150 10,803 8,091 10,803 9,329
60,150 60,200 10,815 8,099 10,815 9,341
60,200 60,250 10,828 8,106 10,828 9,354
60,250 60,300 10,840 8,114 10,840 9,366
60,300 60,350 10,853 8,121 10,853 9,379
60,350 60,400 10,865 8,129 10,865 9,391
60,400 60,450 10,878 8,136 10,878 9,404
60,450 60,500 10,890 8,144 10,890 9,416
60,500 60,550 10,903 8,151 10,903 9,429
60,550 60,600 10,915 8,159 10,915 9,441
60,600 60,650 10,928 8,166 10,928 9,454
60,650 60,700 10,940 8,174 10,940 9,466
60,700 60,750 10,953 8,181 10,953 9,479
60,750 60,800 10,965 8,189 10,965 9,491
60,800 60,850 10,978 8,196 10,978 9,504
60,850 60,900 10,990 8,204 10,990 9,516
60,900 60,950 11,003 8,211 11,003 9,529
60,950 61,000 11,015 8,219 11,015 9,541
61,000
61,000 61,050 11,028 8,226 11,028 9,554
61,050 61,100 11,040 8,234 11,040 9,566
61,100 61,150 11,053 8,241 11,053 9,579
61,150 61,200 11,065 8,249 11,065 9,591
61,200 61,250 11,078 8,256 11,078 9,604
61,250 61,300 11,090 8,264 11,090 9,616
61,300 61,350 11,103 8,271 11,103 9,629
61,350 61,400 11,115 8,279 11,115 9,641
61,400 61,450 11,128 8,286 11,128 9,654
61,450 61,500 11,140 8,294 11,140 9,666
61,500 61,550 11,153 8,301 11,153 9,679
61,550 61,600 11,165 8,309 11,165 9,691
61,600 61,650 11,178 8,316 11,178 9,704
61,650 61,700 11,190 8,324 11,190 9,716
61,700 61,750 11,203 8,331 11,203 9,729
61,750 61,800 11,215 8,339 11,215 9,741
61,800 61,850 11,228 8,346 11,228 9,754
61,850 61,900 11,240 8,354 11,240 9,766
61,900 61,950 11,253 8,361 11,253 9,779
61,950 62,000 11,265 8,369 11,265 9,791
62,000
62,000 62,050 11,278 8,376 11,278 9,804
62,050 62,100 11,290 8,384 11,290 9,816
62,100 62,150 11,303 8,391 11,303 9,829
62,150 62,200 11,315 8,399 11,315 9,841
62,200 62,250 11,328 8,406 11,328 9,854
62,250 62,300 11,340 8,414 11,340 9,866
62,300 62,350 11,353 8,421 11,353 9,879
62,350 62,400 11,365 8,429 11,365 9,891
62,400 62,450 11,378 8,436 11,378 9,904
62,450 62,500 11,390 8,444 11,390 9,916
62,500 62,550 11,403 8,451 11,403 9,929
62,550 62,600 11,415 8,459 11,415 9,941
62,600 62,650 11,428 8,466 11,428 9,954
62,650 62,700 11,440 8,474 11,440 9,966
62,700 62,750 11,453 8,481 11,453 9,979
62,750 62,800 11,465 8,489 11,465 9,991
62,800 62,850 11,478 8,496 11,478 10,004
62,850 62,900 11,490 8,504 11,490 10,016
62,900 62,950 11,503 8,511 11,503 10,029
62,950 63,000 11,515 8,519 11,515 10,041
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
63,000
63,000 63,050 11,528 8,526 11,528 10,054
63,050 63,100 11,540 8,534 11,540 10,066
63,100 63,150 11,553 8,541 11,553 10,079
63,150 63,200 11,565 8,549 11,565 10,091
63,200 63,250 11,578 8,556 11,578 10,104
63,250 63,300 11,590 8,564 11,590 10,116
63,300 63,350 11,603 8,571 11,603 10,129
63,350 63,400 11,615 8,579 11,615 10,141
63,400 63,450 11,628 8,586 11,628 10,154
63,450 63,500 11,640 8,594 11,640 10,166
63,500 63,550 11,653 8,601 11,653 10,179
63,550 63,600 11,665 8,609 11,665 10,191
63,600 63,650 11,678 8,616 11,678 10,204
63,650 63,700 11,690 8,624 11,690 10,216
63,700 63,750 11,703 8,631 11,703 10,229
63,750 63,800 11,715 8,639 11,715 10,241
63,800 63,850 11,728 8,646 11,728 10,254
63,850 63,900 11,740 8,654 11,740 10,266
63,900 63,950 11,753 8,661 11,753 10,279
63,950 64,000 11,765 8,669 11,765 10,291
64,000
64,000 64,050 11,778 8,676 11,778 10,304
64,050 64,100 11,790 8,684 11,790 10,316
64,100 64,150 11,803 8,691 11,803 10,329
64,150 64,200 11,815 8,699 11,815 10,341
64,200 64,250 11,828 8,706 11,828 10,354
64,250 64,300 11,840 8,714 11,840 10,366
64,300 64,350 11,853 8,721 11,853 10,379
64,350 64,400 11,865 8,729 11,865 10,391
64,400 64,450 11,878 8,736 11,878 10,404
64,450 64,500 11,890 8,744 11,890 10,416
64,500 64,550 11,903 8,751 11,903 10,429
64,550 64,600 11,915 8,759 11,915 10,441
64,600 64,650 11,928 8,766 11,928 10,454
64,650 64,700 11,940 8,774 11,940 10,466
64,700 64,750 11,953 8,781 11,953 10,479
64,750 64,800 11,965 8,789 11,965 10,491
64,800 64,850 11,978 8,796 11,978 10,504
64,850 64,900 11,990 8,804 11,990 10,516
64,900 64,950 12,003 8,811 12,003 10,529
64,950 65,000 12,015 8,819 12,015 10,541
65,000
65,000 65,050 12,028 8,826 12,028 10,554
65,050 65,100 12,040 8,834 12,040 10,566
65,100 65,150 12,053 8,841 12,053 10,579
65,150 65,200 12,065 8,849 12,065 10,591
65,200 65,250 12,078 8,856 12,078 10,604
65,250 65,300 12,090 8,864 12,090 10,616
65,300 65,350 12,103 8,871 12,103 10,629
65,350 65,400 12,115 8,879 12,115 10,641
65,400 65,450 12,128 8,886 12,128 10,654
65,450 65,500 12,140 8,894 12,140 10,666
65,500 65,550 12,153 8,901 12,153 10,679
65,550 65,600 12,165 8,909 12,165 10,691
65,600 65,650 12,178 8,916 12,178 10,704
65,650 65,700 12,190 8,924 12,190 10,716
65,700 65,750 12,203 8,931 12,203 10,729
65,750 65,800 12,215 8,939 12,215 10,741
65,800 65,850 12,228 8,946 12,228 10,754
65,850 65,900 12,240 8,954 12,240 10,766
65,900 65,950 12,253 8,961 12,253 10,779
65,950 66,000 12,265 8,969 12,265 10,791
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
66,000
66,000 66,050 12,278 8,976 12,278 10,804
66,050 66,100 12,290 8,984 12,290 10,816
66,100 66,150 12,303 8,991 12,303 10,829
66,150 66,200 12,315 8,999 12,315 10,841
66,200 66,250 12,328 9,006 12,328 10,854
66,250 66,300 12,340 9,014 12,340 10,866
66,300 66,350 12,353 9,021 12,353 10,879
66,350 66,400 12,365 9,029 12,365 10,891
66,400 66,450 12,378 9,036 12,378 10,904
66,450 66,500 12,390 9,044 12,390 10,916
66,500 66,550 12,403 9,051 12,403 10,929
66,550 66,600 12,415 9,059 12,415 10,941
66,600 66,650 12,428 9,066 12,428 10,954
66,650 66,700 12,440 9,074 12,440 10,966
66,700 66,750 12,453 9,081 12,453 10,979
66,750 66,800 12,465 9,089 12,465 10,991
66,800 66,850 12,478 9,096 12,478 11,004
66,850 66,900 12,490 9,104 12,490 11,016
66,900 66,950 12,503 9,111 12,503 11,029
66,950 67,000 12,515 9,119 12,515 11,041
67,000
67,000 67,050 12,528 9,126 12,528 11,054
67,050 67,100 12,540 9,134 12,540 11,066
67,100 67,150 12,553 9,141 12,553 11,079
67,150 67,200 12,565 9,149 12,565 11,091
67,200 67,250 12,578 9,156 12,578 11,104
67,250 67,300 12,590 9,164 12,590 11,116
67,300 67,350 12,603 9,171 12,603 11,129
67,350 67,400 12,615 9,179 12,615 11,141
67,400 67,450 12,628 9,186 12,628 11,154
67,450 67,500 12,640 9,194 12,640 11,166
67,500 67,550 12,653 9,201 12,653 11,179
67,550 67,600 12,665 9,209 12,665 11,191
67,600 67,650 12,678 9,216 12,678 11,204
67,650 67,700 12,690 9,224 12,690 11,216
67,700 67,750 12,703 9,231 12,703 11,229
67,750 67,800 12,715 9,239 12,715 11,241
67,800 67,850 12,728 9,246 12,728 11,254
67,850 67,900 12,740 9,254 12,740 11,266
67,900 67,950 12,753 9,261 12,753 11,279
67,950 68,000 12,765 9,269 12,765 11,291
68,000
68,000 68,050 12,778 9,276 12,778 11,304
68,050 68,100 12,790 9,284 12,790 11,316
68,100 68,150 12,803 9,291 12,803 11,329
68,150 68,200 12,815 9,299 12,815 11,341
68,200 68,250 12,828 9,306 12,828 11,354
68,250 68,300 12,840 9,314 12,840 11,366
68,300 68,350 12,853 9,321 12,853 11,379
68,350 68,400 12,865 9,329 12,865 11,391
68,400 68,450 12,878 9,336 12,878 11,404
68,450 68,500 12,890 9,344 12,890 11,416
68,500 68,550 12,903 9,351 12,903 11,429
68,550 68,600 12,915 9,359 12,915 11,441
68,600 68,650 12,928 9,366 12,928 11,454
68,650 68,700 12,940 9,374 12,940 11,466
68,700 68,750 12,953 9,381 12,953 11,479
68,750 68,800 12,965 9,389 12,965 11,491
68,800 68,850 12,978 9,396 12,978 11,504
68,850 68,900 12,990 9,404 12,990 11,516
68,900 68,950 13,003 9,411 13,003 11,529
68,950 69,000 13,015 9,419 13,015 11,541
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
69,000
69,000 69,050 13,028 9,426 13,028 11,554
69,050 69,100 13,040 9,434 13,040 11,566
69,100 69,150 13,053 9,441 13,053 11,579
69,150 69,200 13,065 9,449 13,065 11,591
69,200 69,250 13,078 9,456 13,078 11,604
69,250 69,300 13,090 9,464 13,090 11,616
69,300 69,350 13,103 9,471 13,103 11,629
69,350 69,400 13,115 9,479 13,115 11,641
69,400 69,450 13,128 9,486 13,128 11,654
69,450 69,500 13,140 9,494 13,140 11,666
69,500 69,550 13,153 9,501 13,153 11,679
69,550 69,600 13,165 9,509 13,165 11,691
69,600 69,650 13,178 9,516 13,178 11,704
69,650 69,700 13,190 9,524 13,190 11,716
69,700 69,750 13,203 9,531 13,203 11,729
69,750 69,800 13,215 9,539 13,215 11,741
69,800 69,850 13,228 9,546 13,228 11,754
69,850 69,900 13,240 9,554 13,240 11,766
69,900 69,950 13,253 9,561 13,253 11,779
69,950 70,000 13,265 9,569 13,265 11,791
70,000
70,000 70,050 13,278 9,576 13,278 11,804
70,050 70,100 13,290 9,584 13,290 11,816
70,100 70,150 13,303 9,591 13,303 11,829
70,150 70,200 13,315 9,599 13,315 11,841
70,200 70,250 13,328 9,606 13,328 11,854
70,250 70,300 13,340 9,614 13,340 11,866
70,300 70,350 13,353 9,621 13,353 11,879
70,350 70,400 13,365 9,629 13,365 11,891
70,400 70,450 13,378 9,636 13,378 11,904
70,450 70,500 13,390 9,644 13,390 11,916
70,500 70,550 13,403 9,651 13,403 11,929
70,550 70,600 13,415 9,659 13,415 11,941
70,600 70,650 13,428 9,666 13,428 11,954
70,650 70,700 13,440 9,674 13,440 11,966
70,700 70,750 13,453 9,681 13,453 11,979
70,750 70,800 13,465 9,689 13,465 11,991
70,800 70,850 13,478 9,696 13,478 12,004
70,850 70,900 13,490 9,704 13,490 12,016
70,900 70,950 13,503 9,711 13,503 12,029
70,950 71,000 13,515 9,719 13,515 12,041
71,000
71,000 71,050 13,528 9,726 13,528 12,054
71,050 71,100 13,540 9,734 13,540 12,066
71,100 71,150 13,553 9,741 13,553 12,079
71,150 71,200 13,565 9,749 13,565 12,091
71,200 71,250 13,578 9,756 13,578 12,104
71,250 71,300 13,590 9,764 13,590 12,116
71,300 71,350 13,603 9,771 13,603 12,129
71,350 71,400 13,615 9,779 13,615 12,141
71,400 71,450 13,628 9,786 13,628 12,154
71,450 71,500 13,640 9,794 13,640 12,166
71,500 71,550 13,653 9,801 13,653 12,179
71,550 71,600 13,665 9,809 13,665 12,191
71,600 71,650 13,678 9,816 13,678 12,204
71,650 71,700 13,690 9,824 13,690 12,216
71,700 71,750 13,703 9,831 13,703 12,229
71,750 71,800 13,715 9,839 13,715 12,241
71,800 71,850 13,728 9,846 13,728 12,254
71,850 71,900 13,740 9,854 13,740 12,266
71,900 71,950 13,753 9,861 13,753 12,279
71,950 72,000 13,765 9,869 13,765 12,291
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
72,000
72,000 72,050 13,778 9,876 13,778 12,304
72,050 72,100 13,790 9,884 13,790 12,316
72,100 72,150 13,803 9,891 13,803 12,329
72,150 72,200 13,815 9,899 13,815 12,341
72,200 72,250 13,828 9,906 13,828 12,354
72,250 72,300 13,840 9,914 13,840 12,366
72,300 72,350 13,853 9,921 13,853 12,379
72,350 72,400 13,865 9,929 13,865 12,391
72,400 72,450 13,878 9,936 13,878 12,404
72,450 72,500 13,890 9,944 13,890 12,416
72,500 72,550 13,903 9,951 13,903 12,429
72,550 72,600 13,915 9,959 13,915 12,441
72,600 72,650 13,928 9,966 13,928 12,454
72,650 72,700 13,940 9,974 13,940 12,466
72,700 72,750 13,953 9,981 13,953 12,479
72,750 72,800 13,965 9,989 13,965 12,491
72,800 72,850 13,978 9,996 13,978 12,504
72,850 72,900 13,990 10,004 13,990 12,516
72,900 72,950 14,003 10,011 14,003 12,529
72,950 73,000 14,015 10,019 14,015 12,541
73,000
73,000 73,050 14,028 10,026 14,028 12,554
73,050 73,100 14,040 10,034 14,040 12,566
73,100 73,150 14,053 10,041 14,053 12,579
73,150 73,200 14,065 10,049 14,065 12,591
73,200 73,250 14,078 10,056 14,078 12,604
73,250 73,300 14,090 10,064 14,090 12,616
73,300 73,350 14,103 10,071 14,103 12,629
73,350 73,400 14,115 10,079 14,115 12,641
73,400 73,450 14,128 10,086 14,128 12,654
73,450 73,500 14,140 10,094 14,140 12,666
73,500 73,550 14,153 10,101 14,153 12,679
73,550 73,600 14,165 10,109 14,165 12,691
73,600 73,650 14,178 10,116 14,178 12,704
73,650 73,700 14,190 10,124 14,190 12,716
73,700 73,750 14,203 10,131 14,203 12,729
73,750 73,800 14,215 10,139 14,215 12,741
73,800 73,850 14,228 10,146 14,228 12,754
73,850 73,900 14,240 10,154 14,240 12,766
73,900 73,950 14,253 10,161 14,253 12,779
73,950 74,000 14,265 10,169 14,265 12,791
74,000
74,000 74,050 14,278 10,176 14,278 12,804
74,050 74,100 14,290 10,184 14,290 12,816
74,100 74,150 14,303 10,191 14,303 12,829
74,150 74,200 14,315 10,199 14,315 12,841
74,200 74,250 14,328 10,206 14,328 12,854
74,250 74,300 14,340 10,214 14,340 12,866
74,300 74,350 14,353 10,221 14,353 12,879
74,350 74,400 14,365 10,229 14,365 12,891
74,400 74,450 14,378 10,236 14,378 12,904
74,450 74,500 14,390 10,244 14,390 12,916
74,500 74,550 14,403 10,251 14,403 12,929
74,550 74,600 14,415 10,259 14,415 12,941
74,600 74,650 14,428 10,266 14,428 12,954
74,650 74,700 14,440 10,274 14,440 12,966
74,700 74,750 14,453 10,281 14,453 12,979
74,750 74,800 14,465 10,289 14,465 12,991
74,800 74,850 14,478 10,296 14,478 13,004
74,850 74,900 14,490 10,304 14,490 13,016
74,900 74,950 14,503 10,311 14,503 13,029
74,950 75,000 14,515 10,319 14,515 13,041
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
75,000
75,000 75,050 14,528 10,326 14,528 13,054
75,050 75,100 14,540 10,334 14,540 13,066
75,100 75,150 14,553 10,341 14,553 13,079
75,150 75,200 14,565 10,349 14,565 13,091
75,200 75,250 14,578 10,356 14,578 13,104
75,250 75,300 14,590 10,364 14,590 13,116
75,300 75,350 14,603 10,374 14,603 13,129
75,350 75,400 14,615 10,386 14,615 13,141
75,400 75,450 14,628 10,399 14,628 13,154
75,450 75,500 14,640 10,411 14,640 13,166
75,500 75,550 14,653 10,424 14,653 13,179
75,550 75,600 14,665 10,436 14,665 13,191
75,600 75,650 14,678 10,449 14,678 13,204
75,650 75,700 14,690 10,461 14,690 13,216
75,700 75,750 14,703 10,474 14,703 13,229
75,750 75,800 14,715 10,486 14,715 13,241
75,800 75,850 14,728 10,499 14,728 13,254
75,850 75,900 14,740 10,511 14,740 13,266
75,900 75,950 14,753 10,524 14,753 13,279
75,950 76,000 14,765 10,536 14,766 13,291
76,000
76,000 76,050 14,778 10,549 14,780 13,304
76,050 76,100 14,790 10,561 14,794 13,316
76,100 76,150 14,803 10,574 14,808 13,329
76,150 76,200 14,815 10,586 14,822 13,341
76,200 76,250 14,828 10,599 14,836 13,354
76,250 76,300 14,840 10,611 14,850 13,366
76,300 76,350 14,853 10,624 14,864 13,379
76,350 76,400 14,865 10,636 14,878 13,391
76,400 76,450 14,878 10,649 14,892 13,404
76,450 76,500 14,890 10,661 14,906 13,416
76,500 76,550 14,903 10,674 14,920 13,429
76,550 76,600 14,915 10,686 14,934 13,441
76,600 76,650 14,928 10,699 14,948 13,454
76,650 76,700 14,940 10,711 14,962 13,466
76,700 76,750 14,953 10,724 14,976 13,479
76,750 76,800 14,965 10,736 14,990 13,491
76,800 76,850 14,978 10,749 15,004 13,504
76,850 76,900 14,990 10,761 15,018 13,516
76,900 76,950 15,003 10,774 15,032 13,529
76,950 77,000 15,015 10,786 15,046 13,541
77,000
77,000 77,050 15,028 10,799 15,060 13,554
77,050 77,100 15,040 10,811 15,074 13,566
77,100 77,150 15,053 10,824 15,088 13,579
77,150 77,200 15,065 10,836 15,102 13,591
77,200 77,250 15,078 10,849 15,116 13,604
77,250 77,300 15,090 10,861 15,130 13,616
77,300 77,350 15,103 10,874 15,144 13,629
77,350 77,400 15,115 10,886 15,158 13,641
77,400 77,450 15,128 10,899 15,172 13,654
77,450 77,500 15,140 10,911 15,186 13,666
77,500 77,550 15,153 10,924 15,200 13,679
77,550 77,600 15,165 10,936 15,214 13,691
77,600 77,650 15,178 10,949 15,228 13,704
77,650 77,700 15,190 10,961 15,242 13,716
77,700 77,750 15,203 10,974 15,256 13,729
77,750 77,800 15,215 10,986 15,270 13,741
77,800 77,850 15,228 10,999 15,284 13,754
77,850 77,900 15,240 11,011 15,298 13,766
77,900 77,950 15,253 11,024 15,312 13,779
77,950 78,000 15,265 11,036 15,326 13,791
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
78,000
78,000 78,050 15,278 11,049 15,340 13,804
78,050 78,100 15,290 11,061 15,354 13,816
78,100 78,150 15,303 11,074 15,368 13,829
78,150 78,200 15,315 11,086 15,382 13,841
78,200 78,250 15,328 11,099 15,396 13,854
78,250 78,300 15,340 11,111 15,410 13,866
78,300 78,350 15,353 11,124 15,424 13,879
78,350 78,400 15,365 11,136 15,438 13,891
78,400 78,450 15,378 11,149 15,452 13,904
78,450 78,500 15,390 11,161 15,466 13,916
78,500 78,550 15,403 11,174 15,480 13,929
78,550 78,600 15,415 11,186 15,494 13,941
78,600 78,650 15,428 11,199 15,508 13,954
78,650 78,700 15,440 11,211 15,522 13,966
78,700 78,750 15,453 11,224 15,536 13,979
78,750 78,800 15,465 11,236 15,550 13,991
78,800 78,850 15,478 11,249 15,564 14,004
78,850 78,900 15,490 11,261 15,578 14,016
78,900 78,950 15,503 11,274 15,592 14,029
78,950 79,000 15,515 11,286 15,606 14,041
79,000
79,000 79,050 15,528 11,299 15,620 14,054
79,050 79,100 15,540 11,311 15,634 14,066
79,100 79,150 15,553 11,324 15,648 14,079
79,150 79,200 15,565 11,336 15,662 14,091
79,200 79,250 15,578 11,349 15,676 14,104
79,250 79,300 15,590 11,361 15,690 14,116
79,300 79,350 15,603 11,374 15,704 14,129
79,350 79,400 15,615 11,386 15,718 14,141
79,400 79,450 15,628 11,399 15,732 14,154
79,450 79,500 15,640 11,411 15,746 14,166
79,500 79,550 15,653 11,424 15,760 14,179
79,550 79,600 15,665 11,436 15,774 14,191
79,600 79,650 15,678 11,449 15,788 14,204
79,650 79,700 15,690 11,461 15,802 14,216
79,700 79,750 15,703 11,474 15,816 14,229
79,750 79,800 15,715 11,486 15,830 14,241
79,800 79,850 15,728 11,499 15,844 14,254
79,850 79,900 15,740 11,511 15,858 14,266
79,900 79,950 15,753 11,524 15,872 14,279
79,950 80,000 15,765 11,536 15,886 14,291
80,000
80,000 80,050 15,778 11,549 15,900 14,304
80,050 80,100 15,790 11,561 15,914 14,316
80,100 80,150 15,803 11,574 15,928 14,329
80,150 80,200 15,815 11,586 15,942 14,341
80,200 80,250 15,828 11,599 15,956 14,354
80,250 80,300 15,840 11,611 15,970 14,366
80,300 80,350 15,853 11,624 15,984 14,379
80,350 80,400 15,865 11,636 15,998 14,391
80,400 80,450 15,878 11,649 16,012 14,404
80,450 80,500 15,890 11,661 16,026 14,416
80,500 80,550 15,903 11,674 16,040 14,429
80,550 80,600 15,915 11,686 16,054 14,441
80,600 80,650 15,928 11,699 16,068 14,454
80,650 80,700 15,940 11,711 16,082 14,466
80,700 80,750 15,953 11,724 16,096 14,479
80,750 80,800 15,965 11,736 16,110 14,491
80,800 80,850 15,978 11,749 16,124 14,504
80,850 80,900 15,990 11,761 16,138 14,516
80,900 80,950 16,003 11,774 16,152 14,529
80,950 81,000 16,015 11,786 16,166 14,541
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
81,000
81,000 81,050 16,028 11,799 16,180 14,554
81,050 81,100 16,040 11,811 16,194 14,566
81,100 81,150 16,053 11,824 16,208 14,579
81,150 81,200 16,065 11,836 16,222 14,591
81,200 81,250 16,078 11,849 16,236 14,604
81,250 81,300 16,090 11,861 16,250 14,616
81,300 81,350 16,103 11,874 16,264 14,629
81,350 81,400 16,115 11,886 16,278 14,641
81,400 81,450 16,128 11,899 16,292 14,654
81,450 81,500 16,140 11,911 16,306 14,666
81,500 81,550 16,153 11,924 16,320 14,679
81,550 81,600 16,165 11,936 16,334 14,691
81,600 81,650 16,178 11,949 16,348 14,704
81,650 81,700 16,190 11,961 16,362 14,716
81,700 81,750 16,203 11,974 16,376 14,729
81,750 81,800 16,215 11,986 16,390 14,741
81,800 81,850 16,228 11,999 16,404 14,754
81,850 81,900 16,240 12,011 16,418 14,766
81,900 81,950 16,253 12,024 16,432 14,779
81,950 82,000 16,265 12,036 16,446 14,791
82,000
82,000 82,050 16,278 12,049 16,460 14,804
82,050 82,100 16,290 12,061 16,474 14,816
82,100 82,150 16,303 12,074 16,488 14,829
82,150 82,200 16,315 12,086 16,502 14,841
82,200 82,250 16,328 12,099 16,516 14,854
82,250 82,300 16,340 12,111 16,530 14,866
82,300 82,350 16,353 12,124 16,544 14,879
82,350 82,400 16,365 12,136 16,558 14,891
82,400 82,450 16,378 12,149 16,572 14,904
82,450 82,500 16,390 12,161 16,586 14,916
82,500 82,550 16,403 12,174 16,600 14,929
82,550 82,600 16,415 12,186 16,614 14,941
82,600 82,650 16,428 12,199 16,628 14,954
82,650 82,700 16,440 12,211 16,642 14,966
82,700 82,750 16,453 12,224 16,656 14,979
82,750 82,800 16,465 12,236 16,670 14,991
82,800 82,850 16,478 12,249 16,684 15,004
82,850 82,900 16,490 12,261 16,698 15,016
82,900 82,950 16,503 12,274 16,712 15,029
82,950 83,000 16,515 12,286 16,726 15,041
83,000
83,000 83,050 16,528 12,299 16,740 15,054
83,050 83,100 16,540 12,311 16,754 15,066
83,100 83,150 16,553 12,324 16,768 15,079
83,150 83,200 16,565 12,336 16,782 15,091
83,200 83,250 16,578 12,349 16,796 15,104
83,250 83,300 16,590 12,361 16,810 15,116
83,300 83,350 16,603 12,374 16,824 15,129
83,350 83,400 16,615 12,386 16,838 15,141
83,400 83,450 16,628 12,399 16,852 15,154
83,450 83,500 16,640 12,411 16,866 15,166
83,500 83,550 16,653 12,424 16,880 15,179
83,550 83,600 16,665 12,436 16,894 15,191
83,600 83,650 16,678 12,449 16,908 15,204
83,650 83,700 16,690 12,461 16,922 15,216
83,700 83,750 16,703 12,474 16,936 15,229
83,750 83,800 16,715 12,486 16,950 15,241
83,800 83,850 16,728 12,499 16,964 15,254
83,850 83,900 16,740 12,511 16,978 15,266
83,900 83,950 16,753 12,524 16,992 15,279
83,950 84,000 16,765 12,536 17,006 15,291
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
84,000
84,000 84,050 16,778 12,549 17,020 15,304
84,050 84,100 16,790 12,561 17,034 15,316
84,100 84,150 16,803 12,574 17,048 15,329
84,150 84,200 16,815 12,586 17,062 15,341
84,200 84,250 16,828 12,599 17,076 15,354
84,250 84,300 16,840 12,611 17,090 15,366
84,300 84,350 16,853 12,624 17,104 15,379
84,350 84,400 16,865 12,636 17,118 15,391
84,400 84,450 16,878 12,649 17,132 15,404
84,450 84,500 16,890 12,661 17,146 15,416
84,500 84,550 16,903 12,674 17,160 15,429
84,550 84,600 16,915 12,686 17,174 15,441
84,600 84,650 16,928 12,699 17,188 15,454
84,650 84,700 16,940 12,711 17,202 15,466
84,700 84,750 16,953 12,724 17,216 15,479
84,750 84,800 16,965 12,736 17,230 15,491
84,800 84,850 16,978 12,749 17,244 15,504
84,850 84,900 16,990 12,761 17,258 15,516
84,900 84,950 17,003 12,774 17,272 15,529
84,950 85,000 17,015 12,786 17,286 15,541
85,000
85,000 85,050 17,028 12,799 17,300 15,554
85,050 85,100 17,040 12,811 17,314 15,566
85,100 85,150 17,053 12,824 17,328 15,579
85,150 85,200 17,065 12,836 17,342 15,591
85,200 85,250 17,078 12,849 17,356 15,604
85,250 85,300 17,090 12,861 17,370 15,616
85,300 85,350 17,103 12,874 17,384 15,629
85,350 85,400 17,115 12,886 17,398 15,641
85,400 85,450 17,128 12,899 17,412 15,654
85,450 85,500 17,140 12,911 17,426 15,666
85,500 85,550 17,153 12,924 17,440 15,679
85,550 85,600 17,165 12,936 17,454 15,691
85,600 85,650 17,178 12,949 17,468 15,704
85,650 85,700 17,190 12,961 17,482 15,716
85,700 85,750 17,203 12,974 17,496 15,729
85,750 85,800 17,215 12,986 17,510 15,741
85,800 85,850 17,228 12,999 17,524 15,754
85,850 85,900 17,240 13,011 17,538 15,766
85,900 85,950 17,253 13,024 17,552 15,779
85,950 86,000 17,265 13,036 17,566 15,791
86,000
86,000 86,050 17,278 13,049 17,580 15,804
86,050 86,100 17,290 13,061 17,594 15,816
86,100 86,150 17,303 13,074 17,608 15,829
86,150 86,200 17,315 13,086 17,622 15,841
86,200 86,250 17,328 13,099 17,636 15,854
86,250 86,300 17,340 13,111 17,650 15,866
86,300 86,350 17,353 13,124 17,664 15,879
86,350 86,400 17,365 13,136 17,678 15,891
86,400 86,450 17,378 13,149 17,692 15,904
86,450 86,500 17,390 13,161 17,706 15,916
86,500 86,550 17,403 13,174 17,720 15,929
86,550 86,600 17,415 13,186 17,734 15,941
86,600 86,650 17,428 13,199 17,748 15,954
86,650 86,700 17,440 13,211 17,762 15,966
86,700 86,750 17,453 13,224 17,776 15,979
86,750 86,800 17,465 13,236 17,790 15,991
86,800 86,850 17,478 13,249 17,804 16,004
86,850 86,900 17,490 13,261 17,818 16,016
86,900 86,950 17,503 13,274 17,832 16,029
86,950 87,000 17,515 13,286 17,846 16,041
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
87,000
87,000 87,050 17,528 13,299 17,860 16,054
87,050 87,100 17,540 13,311 17,874 16,066
87,100 87,150 17,553 13,324 17,888 16,079
87,150 87,200 17,565 13,336 17,902 16,091
87,200 87,250 17,578 13,349 17,916 16,104
87,250 87,300 17,590 13,361 17,930 16,116
87,300 87,350 17,603 13,374 17,944 16,129
87,350 87,400 17,615 13,386 17,958 16,141
87,400 87,450 17,628 13,399 17,972 16,154
87,450 87,500 17,640 13,411 17,986 16,166
87,500 87,550 17,653 13,424 18,000 16,179
87,550 87,600 17,665 13,436 18,014 16,191
87,600 87,650 17,678 13,449 18,028 16,204
87,650 87,700 17,690 13,461 18,042 16,216
87,700 87,750 17,703 13,474 18,056 16,229
87,750 87,800 17,715 13,486 18,070 16,241
87,800 87,850 17,728 13,499 18,084 16,254
87,850 87,900 17,740 13,511 18,098 16,266
87,900 87,950 17,753 13,524 18,112 16,279
87,950 88,000 17,765 13,536 18,126 16,291
88,000
88,000 88,050 17,778 13,549 18,140 16,304
88,050 88,100 17,790 13,561 18,154 16,316
88,100 88,150 17,803 13,574 18,168 16,329
88,150 88,200 17,815 13,586 18,182 16,341
88,200 88,250 17,828 13,599 18,196 16,354
88,250 88,300 17,840 13,611 18,210 16,366
88,300 88,350 17,853 13,624 18,224 16,379
88,350 88,400 17,865 13,636 18,238 16,391
88,400 88,450 17,878 13,649 18,252 16,404
88,450 88,500 17,890 13,661 18,266 16,416
88,500 88,550 17,903 13,674 18,280 16,429
88,550 88,600 17,915 13,686 18,294 16,441
88,600 88,650 17,928 13,699 18,308 16,454
88,650 88,700 17,940 13,711 18,322 16,466
88,700 88,750 17,953 13,724 18,336 16,479
88,750 88,800 17,965 13,736 18,350 16,491
88,800 88,850 17,978 13,749 18,364 16,504
88,850 88,900 17,990 13,761 18,378 16,516
88,900 88,950 18,003 13,774 18,392 16,529
88,950 89,000 18,015 13,786 18,406 16,541
89,000
89,000 89,050 18,028 13,799 18,420 16,554
89,050 89,100 18,040 13,811 18,434 16,566
89,100 89,150 18,053 13,824 18,448 16,579
89,150 89,200 18,065 13,836 18,462 16,591
89,200 89,250 18,078 13,849 18,476 16,604
89,250 89,300 18,090 13,861 18,490 16,616
89,300 89,350 18,103 13,874 18,504 16,629
89,350 89,400 18,115 13,886 18,518 16,641
89,400 89,450 18,128 13,899 18,532 16,654
89,450 89,500 18,140 13,911 18,546 16,666
89,500 89,550 18,153 13,924 18,560 16,679
89,550 89,600 18,165 13,936 18,574 16,691
89,600 89,650 18,178 13,949 18,588 16,704
89,650 89,700 18,190 13,961 18,602 16,716
89,700 89,750 18,203 13,974 18,616 16,729
89,750 89,800 18,215 13,986 18,630 16,741
89,800 89,850 18,228 13,999 18,644 16,754
89,850 89,900 18,240 14,011 18,658 16,766
89,900 89,950 18,253 14,024 18,672 16,779
89,950 90,000 18,265 14,036 18,686 16,791
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
90,000
90,000 90,050 18,278 14,049 18,700 16,804
90,050 90,100 18,290 14,061 18,714 16,816
90,100 90,150 18,303 14,074 18,728 16,829
90,150 90,200 18,315 14,086 18,742 16,841
90,200 90,250 18,328 14,099 18,756 16,854
90,250 90,300 18,340 14,111 18,770 16,866
90,300 90,350 18,353 14,124 18,784 16,879
90,350 90,400 18,365 14,136 18,798 16,891
90,400 90,450 18,378 14,149 18,812 16,904
90,450 90,500 18,390 14,161 18,826 16,916
90,500 90,550 18,403 14,174 18,840 16,929
90,550 90,600 18,415 14,186 18,854 16,941
90,600 90,650 18,428 14,199 18,868 16,954
90,650 90,700 18,440 14,211 18,882 16,966
90,700 90,750 18,453 14,224 18,896 16,979
90,750 90,800 18,465 14,236 18,910 16,991
90,800 90,850 18,478 14,249 18,924 17,004
90,850 90,900 18,490 14,261 18,938 17,016
90,900 90,950 18,503 14,274 18,952 17,029
90,950 91,000 18,515 14,286 18,966 17,041
91,000
91,000 91,050 18,528 14,299 18,980 17,054
91,050 91,100 18,540 14,311 18,994 17,066
91,100 91,150 18,553 14,324 19,008 17,079
91,150 91,200 18,566 14,336 19,022 17,091
91,200 91,250 18,580 14,349 19,036 17,104
91,250 91,300 18,594 14,361 19,050 17,116
91,300 91,350 18,608 14,374 19,064 17,129
91,350 91,400 18,622 14,386 19,078 17,141
91,400 91,450 18,636 14,399 19,092 17,154
91,450 91,500 18,650 14,411 19,106 17,166
91,500 91,550 18,664 14,424 19,120 17,179
91,550 91,600 18,678 14,436 19,134 17,191
91,600 91,650 18,692 14,449 19,148 17,204
91,650 91,700 18,706 14,461 19,162 17,216
91,700 91,750 18,720 14,474 19,176 17,229
91,750 91,800 18,734 14,486 19,190 17,241
91,800 91,850 18,748 14,499 19,204 17,254
91,850 91,900 18,762 14,511 19,218 17,266
91,900 91,950 18,776 14,524 19,232 17,279
91,950 92,000 18,790 14,536 19,246 17,291
92,000
92,000 92,050 18,804 14,549 19,260 17,304
92,050 92,100 18,818 14,561 19,274 17,316
92,100 92,150 18,832 14,574 19,288 17,329
92,150 92,200 18,846 14,586 19,302 17,341
92,200 92,250 18,860 14,599 19,316 17,354
92,250 92,300 18,874 14,611 19,330 17,366
92,300 92,350 18,888 14,624 19,344 17,379
92,350 92,400 18,902 14,636 19,358 17,391
92,400 92,450 18,916 14,649 19,372 17,404
92,450 92,500 18,930 14,661 19,386 17,416
92,500 92,550 18,944 14,674 19,400 17,429
92,550 92,600 18,958 14,686 19,414 17,441
92,600 92,650 18,972 14,699 19,428 17,454
92,650 92,700 18,986 14,711 19,442 17,466
92,700 92,750 19,000 14,724 19,456 17,479
92,750 92,800 19,014 14,736 19,470 17,491
92,800 92,850 19,028 14,749 19,484 17,504
92,850 92,900 19,042 14,761 19,498 17,516
92,900 92,950 19,056 14,774 19,512 17,529
92,950 93,000 19,070 14,786 19,526 17,541
(Continued)
* This column must also be used by a qualifying widow(er).
2016 Tax Table — Continued
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
93,000
93,000 93,050 19,084 14,799 19,540 17,554
93,050 93,100 19,098 14,811 19,554 17,566
93,100 93,150 19,112 14,824 19,568 17,579
93,150 93,200 19,126 14,836 19,582 17,591
93,200 93,250 19,140 14,849 19,596 17,604
93,250 93,300 19,154 14,861 19,610 17,616
93,300 93,350 19,168 14,874 19,624 17,629
93,350 93,400 19,182 14,886 19,638 17,641
93,400 93,450 19,196 14,899 19,652 17,654
93,450 93,500 19,210 14,911 19,666 17,666
93,500 93,550 19,224 14,924 19,680 17,679
93,550 93,600 19,238 14,936 19,694 17,691
93,600 93,650 19,252 14,949 19,708 17,704
93,650 93,700 19,266 14,961 19,722 17,716
93,700 93,750 19,280 14,974 19,736 17,729
93,750 93,800 19,294 14,986 19,750 17,741
93,800 93,850 19,308 14,999 19,764 17,754
93,850 93,900 19,322 15,011 19,778 17,766
93,900 93,950 19,336 15,024 19,792 17,779
93,950 94,000 19,350 15,036 19,806 17,791
94,000
94,000 94,050 19,364 15,049 19,820 17,804
94,050 94,100 19,378 15,061 19,834 17,816
94,100 94,150 19,392 15,074 19,848 17,829
94,150 94,200 19,406 15,086 19,862 17,841
94,200 94,250 19,420 15,099 19,876 17,854
94,250 94,300 19,434 15,111 19,890 17,866
94,300 94,350 19,448 15,124 19,904 17,879
94,350 94,400 19,462 15,136 19,918 17,891
94,400 94,450 19,476 15,149 19,932 17,904
94,450 94,500 19,490 15,161 19,946 17,916
94,500 94,550 19,504 15,174 19,960 17,929
94,550 94,600 19,518 15,186 19,974 17,941
94,600 94,650 19,532 15,199 19,988 17,954
94,650 94,700 19,546 15,211 20,002 17,966
94,700 94,750 19,560 15,224 20,016 17,979
94,750 94,800 19,574 15,236 20,030 17,991
94,800 94,850 19,588 15,249 20,044 18,004
94,850 94,900 19,602 15,261 20,058 18,016
94,900 94,950 19,616 15,274 20,072 18,029
94,950 95,000 19,630 15,286 20,086 18,041
95,000
95,000 95,050 19,644 15,299 20,100 18,054
95,050 95,100 19,658 15,311 20,114 18,066
95,100 95,150 19,672 15,324 20,128 18,079
95,150 95,200 19,686 15,336 20,142 18,091
95,200 95,250 19,700 15,349 20,156 18,104
95,250 95,300 19,714 15,361 20,170 18,116
95,300 95,350 19,728 15,374 20,184 18,129
95,350 95,400 19,742 15,386 20,198 18,141
95,400 95,450 19,756 15,399 20,212 18,154
95,450 95,500 19,770 15,411 20,226 18,166
95,500 95,550 19,784 15,424 20,240 18,179
95,550 95,600 19,798 15,436 20,254 18,191
95,600 95,650 19,812 15,449 20,268 18,204
95,650 95,700 19,826 15,461 20,282 18,216
95,700 95,750 19,840 15,474 20,296 18,229
95,750 95,800 19,854 15,486 20,310 18,241
95,800 95,850 19,868 15,499 20,324 18,254
95,850 95,900 19,882 15,511 20,338 18,266
95,900 95,950 19,896 15,524 20,352 18,279
95,950 96,000 19,910 15,536 20,366 18,291
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
96,000
96,000 96,050 19,924 15,549 20,380 18,304
96,050 96,100 19,938 15,561 20,394 18,316
96,100 96,150 19,952 15,574 20,408 18,329
96,150 96,200 19,966 15,586 20,422 18,341
96,200 96,250 19,980 15,599 20,436 18,354
96,250 96,300 19,994 15,611 20,450 18,366
96,300 96,350 20,008 15,624 20,464 18,379
96,350 96,400 20,022 15,636 20,478 18,391
96,400 96,450 20,036 15,649 20,492 18,404
96,450 96,500 20,050 15,661 20,506 18,416
96,500 96,550 20,064 15,674 20,520 18,429
96,550 96,600 20,078 15,686 20,534 18,441
96,600 96,650 20,092 15,699 20,548 18,454
96,650 96,700 20,106 15,711 20,562 18,466
96,700 96,750 20,120 15,724 20,576 18,479
96,750 96,800 20,134 15,736 20,590 18,491
96,800 96,850 20,148 15,749 20,604 18,504
96,850 96,900 20,162 15,761 20,618 18,516
96,900 96,950 20,176 15,774 20,632 18,529
96,950 97,000 20,190 15,786 20,646 18,541
97,000
97,000 97,050 20,204 15,799 20,660 18,554
97,050 97,100 20,218 15,811 20,674 18,566
97,100 97,150 20,232 15,824 20,688 18,579
97,150 97,200 20,246 15,836 20,702 18,591
97,200 97,250 20,260 15,849 20,716 18,604
97,250 97,300 20,274 15,861 20,730 18,616
97,300 97,350 20,288 15,874 20,744 18,629
97,350 97,400 20,302 15,886 20,758 18,641
97,400 97,450 20,316 15,899 20,772 18,654
97,450 97,500 20,330 15,911 20,786 18,666
97,500 97,550 20,344 15,924 20,800 18,679
97,550 97,600 20,358 15,936 20,814 18,691
97,600 97,650 20,372 15,949 20,828 18,704
97,650 97,700 20,386 15,961 20,842 18,716
97,700 97,750 20,400 15,974 20,856 18,729
97,750 97,800 20,414 15,986 20,870 18,741
97,800 97,850 20,428 15,999 20,884 18,754
97,850 97,900 20,442 16,011 20,898 18,766
97,900 97,950 20,456 16,024 20,912 18,779
97,950 98,000 20,470 16,036 20,926 18,791
98,000
98,000 98,050 20,484 16,049 20,940 18,804
98,050 98,100 20,498 16,061 20,954 18,816
98,100 98,150 20,512 16,074 20,968 18,829
98,150 98,200 20,526 16,086 20,982 18,841
98,200 98,250 20,540 16,099 20,996 18,854
98,250 98,300 20,554 16,111 21,010 18,866
98,300 98,350 20,568 16,124 21,024 18,879
98,350 98,400 20,582 16,136 21,038 18,891
98,400 98,450 20,596 16,149 21,052 18,904
98,450 98,500 20,610 16,161 21,066 18,916
98,500 98,550 20,624 16,174 21,080 18,929
98,550 98,600 20,638 16,186 21,094 18,941
98,600 98,650 20,652 16,199 21,108 18,954
98,650 98,700 20,666 16,211 21,122 18,966
98,700 98,750 20,680 16,224 21,136 18,979
98,750 98,800 20,694 16,236 21,150 18,991
98,800 98,850 20,708 16,249 21,164 19,004
98,850 98,900 20,722 16,261 21,178 19,016
98,900 98,950 20,736 16,274 21,192 19,029
98,950 99,000 20,750 16,286 21,206 19,041
If line 43
(taxable income)
is—
And you are—
At
least
But
less
than
Single Married
filing
jointly *
Married
filing
sepa-
rately
Head of
a
house-
hold
Your tax is—
99,000
99,000 99,050 20,764 16,299 21,220 19,054
99,050 99,100 20,778 16,311 21,234 19,066
99,100 99,150 20,792 16,324 21,248 19,079
99,150 99,200 20,806 16,336 21,262 19,091
99,200 99,250 20,820 16,349 21,276 19,104
99,250 99,300 20,834 16,361 21,290 19,116
99,300 99,350 20,848 16,374 21,304 19,129
99,350 99,400 20,862 16,386 21,318 19,141
99,400 99,450 20,876 16,399 21,332 19,154
99,450 99,500 20,890 16,411 21,346 19,166
99,500 99,550 20,904 16,424 21,360 19,179
99,550 99,600 20,918 16,436 21,374 19,191
99,600 99,650 20,932 16,449 21,388 19,204
99,650 99,700 20,946 16,461 21,402 19,216
99,700 99,750 20,960 16,474 21,416 19,229
99,750 99,800 20,974 16,486 21,430 19,241
99,800 99,850 20,988 16,499 21,444 19,254
99,850 99,900 21,002 16,511 21,458 19,266
99,900 99,950 21,016 16,524 21,472 19,279
99,950 100,000 21,030 16,536 21,486 19,291
$100,000
or over
use the Tax
Computation
Worksheet
* This column must also be used by a qualifying widow(er).
2016 Tax Computation Worksheet—Line 44CAUTION
!
See the instructions for line 44 in the Instructions for Form 1040 to see if you must use the worksheet below to figure your tax.
Note. If you are required to use this worksheet to figure the tax on an amount from another form or worksheet, such as the Qualified
Dividends and Capital Gain Tax Worksheet, the Schedule D Tax Worksheet, Schedule J, Form 8615, or the Foreign Earned Income Tax
Worksheet, enter the amount from that form or worksheet in column (a) of the row that applies to the amount you are looking up. Enter the
result on the appropriate line of the form or worksheet that you are completing.
Section A—Use if your filing status is Single. Complete the row below that applies to you.
Taxable income.
If line 43 is—
(a)
Enter the amount from
line 43
(b)
Multiplication
amount
(c)
Multiply
(a) by (b)
(d)
Subtraction amount
Tax.
Subtract (d) from (c).
Enter the result here and
on Form 1040, line 44
At least $100,000 but not over $190,150 $ × 28% (0.28) $ $ 6,963.25 $
Over $190,150 but not over $413,350 $ × 33% (0.33) $ $ 16,470.75 $
Over $413,350 but not over $415,050 $ × 35% (0.35) $ $ 24,737.75 $
Over $415,050 $ × 39.6% (0.396) $ $ 43,830.05 $
Section B—Use if your filing status is Married filing jointly or Qualifying widow(er). Complete the row below that applies to you.
Taxable income.
If line 43 is—
(a)
Enter the amount
from line 43
(b)
Multiplication
amount
(c)
Multiply
(a) by (b)
(d)
Subtraction amount
Tax.
Subtract (d) from (c).
Enter the result here and
on Form 1040, line 44
At least $100,000 but not over $151,900 $ × 25% (0.25) $ $ 8,457.50 $
Over $151,900 but not over $231,450 $ × 28% (0.28) $ $ 13,014.50 $
Over $231,450 but not over $413,350 $ × 33% (0.33) $ $ 24,587.00 $
Over $413,350 but not over $466,950 $ × 35% (0.35) $ $ 32,854.00 $
Over $466,950 $ × 39.6% (0.396) $ $ 54,333.70 $
Section C—Use if your filing status is Married filing separately. Complete the row below that applies to you.
Taxable income.
If line 43 is—
(a)
Enter the amount from
line 43
(b)
Multiplication
amount
(c)
Multiply
(a) by (b)
(d)
Subtraction amount
Tax.
Subtract (d) from (c).
Enter the result here and
on Form 1040, line 44
At least $100,000 but not over $115,725 $ × 28% (0.28) $ $ 6,507.25 $
Over $115,725 but not over $206,675 $ × 33% (0.33) $ $ 12,293.50 $
Over $206,675 but not over $233,475 $ × 35% (0.35) $ $ 16,427.50 $
Over $233,475 $ × 39.6% (0.396) $ $ 27,166.85 $
Section D—Use if your filing status is Head of household. Complete the row below that applies to you.
Taxable income.
If line 43 is—
(a)
Enter the amount
from line 43
(b)
Multiplication amount
(c)
Multiply
(a) by (b)
(d)
Subtraction amount
Tax.
Subtract (d) from (c).
Enter the result here and
on Form 1040, line 44
At least $100,000 but not over $130,150 $ × 25% (0.25) $ $ 5,702.50 $
Over $130,150 but not over $210,800 $ × 28% (0.28) $ $ 9,607.00 $
Over $210,800 but not over $413,350 $ × 33% (0.33) $ $ 20,147.00 $
Over $413,350 but not over $441,000 $ × 35% (0.35) $ $ 28,414.00 $
Over $441,000 $ × 39.6% (0.396) $ $ 48,700.00 $
Page 266 Publication 17 (2016)
2016 Tax Rate Schedules .CAUTION
!
The Tax Rate Schedules are shown so you can see the tax rate that applies to all levels of taxable income. Do not use them to figure your
tax. Instead, see chapter 30.Schedule Z—If your filing status is Head of household
Schedule X—If your filing status is Single
The tax is:If your taxable
income is: of the
amount
over—
But not
over—Over—
Schedule Y-2—If your filing status is Married filing separately
Schedule Y-1—If your filing status is Married filing jointly or Qualifying widow(er)
The tax is:If your taxable
income is: of the
amount
over—
But not
over—Over—
The tax is:If your taxable
income is: of the
amount
over—
But not
over—Over—
The tax is:If your taxable
income is: of the
amount
over—
But not
over—Over—
$0
9,275
37,650
91,150
190,150
$9,275
37,650
91,150
190,150
413,350
$0
9,275
37,650
91,150
190,150
$0
18,550
75,300
151,900
231,450
$0
9,275
37,650
75,950
115,725
$0
13,250
50,400
130,150
210,800
$18,550
75,300
151,900
231,450
413,350
$9,275
37,650
75,950
115,725
206,675
$13,250
50,400
130,150
210,800
413,350
$0
18,550
75,300
151,900
231,450
$0
9,275
37,650
75,950
115,725
$0
13,250
50,400
130,150
210,800
10%
$927.50 + 15%
5,183.75 + 25%
18,558.75 + 28%
46,278.75 + 33%
10%
$1,855.00 + 15%
10,367.50 + 25%
29,517.50 + 28%
51,791.50 + 33%
10%
$927.50 + 15%
5,183.75 + 25%
14,758.75 + 28%
25,895.75 + 33%
10%
$1,325.00 + 15%
6,897.50 + 25%
26,835.00 + 28%
49,417.00 + 33%
413,350 466,950 413,350111,818.50 + 35%
466,950 466,950130,578.50 + 39.6%
413,350 415,050 413,350
415,050
119,934.75 + 35%
120,529.75 + 39.6%415,050
206,675
233,475
233,475 206,675
233,475
55,909.25 + 35%
65,289.25 + 39.6%
413,350
441,000
441,000 413,350
441,000
116,258.50 + 35%
125,936.00 + 39.6%
Publication 17 (2016) Page 267
Your Rights as a Taxpayer
This section explains your rights as
a taxpayer and the processes for
examination, appeal, collection,
and refunds.
The Taxpayer Bill
of Rights
1. The Right to Be Informed.
Taxpayers have the right to know
what they need to do to comply
with the tax laws. They are entitled
to clear explanations of the laws
and IRS procedures in all tax
forms, instructions, publications,
notices, and correspondence.
They have the right to be informed
of IRS decisions about their tax ac-
counts and to receive clear explan-
ations of the outcomes.
2. The Right to Quality Service.
Taxpayers have the right to receive
prompt, courteous, and professio-
nal assistance in their dealings with
the IRS, to be spoken to in a way
they can easily understand, to re-
ceive clear and easily understand-
able communications from the IRS,
and to speak to a supervisor about
inadequate service.
3. The Right to Pay No More
than the Correct Amount of Tax.
Taxpayers have the right to pay
only the amount of tax legally due,
including interest and penalties,
and to have the IRS apply all tax
payments properly.
4. The Right to Challenge the
IRS’s Position and Be Heard.
Taxpayers have the right to raise
objections and provide additional
documentation in response to for-
mal IRS actions or proposed ac-
tions, to expect that the IRS will
consider their timely objections
and documentation promptly and
fairly, and to receive a response if
the IRS does not agree with their
position.
5. The Right to Appeal an IRS
Decision in an Independent Fo
rum. Taxpayers are entitled to a
fair and impartial administrative ap-
peal of most IRS decisions, includ-
ing many penalties, and have the
right to receive a written response
regarding the Office of Appeals'
decision. Taxpayers generally
have the right to take their cases to
court.
6. The Right to Finality. Taxpay-
ers have the right to know the max-
imum amount of time they have to
challenge the IRS’s position as well
as the maximum amount of time
the IRS has to audit a particular tax
year or collect a tax debt. Taxpay-
ers have the right to know when
the IRS has finished an audit.
7. The Right to Privacy. Taxpay-
ers have the right to expect that
any IRS inquiry, examination, or
enforcement action will comply
with the law and be no more intru-
sive than necessary, and will re-
spect all due process rights, in-
cluding search and seizure
protections and will provide, where
applicable, a collection due proc-
ess hearing.
8. The Right to Confidentiality.
Taxpayers have the right to expect
that any information they provide to
the IRS will not be disclosed unless
authorized by the taxpayer or by
law. Taxpayers have the right to
expect appropriate action will be
taken against employees, return
preparers, and others who wrong-
fully use or disclose taxpayer re-
turn information.
9. The Right to Retain Repre
sentation. Taxpayers have the
right to retain an authorized repre-
sentative of their choice to repre-
sent them in their dealings with the
IRS. Taxpayers have the right to
seek assistance from a Low In-
come Taxpayer Clinic if they can-
not afford representation.
10. The Right to a Fair and Just
Tax System. Taxpayers have the
right to expect the tax system to
consider facts and circumstances
that might affect their underlying li-
abilities, ability to pay, or ability to
provide information timely. Taxpay-
ers have the right to receive assis-
tance from the Taxpayer Advocate
Service if they are experiencing fi-
nancial difficulty or if the IRS has
not resolved their tax issues prop-
erly and timely through its normal
channels.
Examinations
(Audits)
We accept most taxpayers' returns
as filed. If we inquire about your re-
turn or select it for examination, it
does not suggest that you are dis-
honest. The inquiry or examination
may or may not result in more tax.
We may close your case without
change; or, you may receive a re-
fund.
The process of selecting a re-
turn for examination usually begins
in one of two ways. First, we use
computer programs to identify re-
turns that may have incorrect
amounts. These programs may be
based on information returns, such
as Forms 1099 and W-2, on stud-
ies of past examinations, or on cer-
tain issues identified by compli-
ance projects. Second, we use
information from outside sources
that indicates that a return may
have incorrect amounts. These
sources may include newspapers,
public records, and individuals. If
we determine that the information
is accurate and reliable, we may
use it to select a return for exami-
nation.
Publication 556, Examination of
Returns, Appeal Rights, and
Claims for Refund, explains the
rules and procedures that we fol-
low in examinations. The following
sections give an overview of how
we conduct examinations.
By mail. We handle many exami-
nations and inquiries by mail. We
will send you a letter with either a
request for more information or a
reason why we believe a change to
your return may be needed. You
can respond by mail or you can re-
quest a personal interview with an
examiner. If you mail us the re-
quested information or provide an
explanation, we may or may not
agree with you, and we will explain
the reasons for any changes.
Please do not hesitate to write to
us about anything you do not un-
derstand.
By interview. If we notify you that
we will conduct your examination
through a personal interview, or
you request such an interview, you
have the right to ask that the ex-
amination take place at a reasona-
ble time and place that is conven-
ient for both you and the IRS. If our
examiner proposes any changes to
your return, he or she will explain
the reasons for the changes. If you
do not agree with these changes,
you can meet with the examiner's
supervisor.
Repeat examinations. If we ex-
amined your return for the same
items in either of the 2 previous
years and proposed no change to
your tax liability, please contact us
as soon as possible so we can see
if we should discontinue the exami-
nation.
Appeals
If you do not agree with the exam-
iner's proposed changes, you can
appeal them to the Appeals Office
of IRS. Most differences can be
settled without expensive and
time-consuming court trials. Your
appeal rights are explained in de-
tail in both Publication 5, Your Ap-
peal Rights and How To Prepare a
Protest If You Don't Agree, and
Publication 556, Examination of
Returns, Appeal Rights, and
Claims for Refund.
If you do not wish to use the
Appeals Office or disagree with its
findings, you may be able to take
your case to the U.S. Tax Court,
U.S. Court of Federal Claims, or
the U.S. District Court where you
live. If you take your case to court,
the IRS will have the burden of
proving certain facts if you kept ad-
equate records to show your tax li-
ability, cooperated with the IRS,
and meet certain other conditions.
If the court agrees with you on
most issues in your case and finds
that our position was largely unjus-
tified, you may be able to recover
some of your administrative and lit-
igation costs. You will not be eligi-
ble to recover these costs unless
you tried to resolve your case ad-
ministratively, including going
through the appeals system, and
you gave us the information neces-
sary to resolve the case.
Collections
Publication 594, The IRS Collec-
tion Process, explains your rights
and responsibilities regarding pay-
ment of federal taxes. It describes:
What to do when you owe
taxes. It describes what to do
if you get a tax bill and what to
do if you think your bill is
wrong. It also covers making
installment payments, delay-
ing collection action, and sub-
mitting an offer in compro-
mise.
IRS collection actions. It cov-
ers liens, releasing a lien, lev-
ies, releasing a levy, seizures
and sales, and release of
property.
Your collection appeal rights
are explained in detail in Publica-
tion 1660, Collection Appeal
Rights.
Innocent spouse relief. Gener-
ally, both you and your spouse are
each responsible for paying the full
amount of tax, interest, and penal-
ties due on your joint return. How-
ever, if you qualify for innocent
spouse relief, you may be relieved
of part or all of the joint liability. To
request relief, you must file Form
8857, Request for Innocent
Spouse Relief. For more informa-
tion on innocent spouse relief, see
Page 268 Publication 17 (2016)
Publication 971, Innocent Spouse
Relief, and Form 8857.
Potential third party contacts.
Generally, the IRS will deal directly
with you or your duly authorized
representative. However, we
sometimes talk with other persons
if we need information that you
have been unable to provide, or to
verify information we have re-
ceived. If we do contact other per-
sons, such as a neighbor, bank,
employer, or employees, we will
generally need to tell them limited
information, such as your name.
The law prohibits us from disclos-
ing any more information than is
necessary to obtain or verify the in-
formation we are seeking. Our
need to contact other persons may
continue as long as there is activity
in your case. If we do contact other
persons, you have a right to re-
quest a list of those contacted.
Refunds
You may file a claim for refund if
you think you paid too much tax.
You must generally file the claim
within 3 years from the date you
filed your original return or 2 years
from the date you paid the tax,
whichever is later. The law gener-
ally provides for interest on your re-
fund if it is not paid within 45 days
of the date you filed your return or
claim for refund. Publication 556,
Examination of Returns, Appeal
Rights, and Claims for Refund, has
more information on refunds.
If you were due a refund but
you did not file a return, you gener-
ally must file your return within 3
years from the date the return was
due (including extensions) to get
that refund.
Taxpayer Advocate
Service
TAS is an independent organiza-
tion within the IRS that can help
protect your taxpayer rights. We
can offer you help if your tax prob-
lem is causing a hardship, or
you've tried but haven't been able
to resolve your problem with the
IRS. If you qualify for our assis-
tance, which is always free, we will
do everything possible to help you.
Visit taxpayeradvocate.irs.gov or
call 1-877-777-4778.
Tax Information
The IRS provides the following
sources for forms, publications,
and additional information.
Internet: IRS.gov.
Tax Questions:
IRS.gov/uac/Tax-Law-
Questions and
How To Get Tax Help.
Forms and Publications:
IRS.gov/forms and
IRS.gov/orderforms.
Small Business Ombudsman:
A small business entity can
participate in the regulatory
process and comment on en-
forcement actions of IRS by
calling 1-888-REG-FAIR.
Treasury Inspector General
for Tax Administration: You
can confidentially report mis-
conduct, waste, fraud, or
abuse by an IRS employee by
calling 1-800-366-4484. Peo-
ple who are deaf, hard of
hearing, or have a speech dis-
ability and who have access
to TTY/TDD equipment can
call 1-800-877-8339. You can
remain anonymous.
Publication 17 (2016) Page 269
How To Get Tax Help
If you have questions about a tax
issue, need help preparing your tax
return, or want to download free
publications, forms, or instructions,
go to IRS.gov and find resources
that can help you right away.
Preparing and filing your tax re
turn. Find free options to prepare
and file your return on IRS.gov or in
your local community if you qualify.
The Volunteer Income Tax As-
sistance (VITA) program offers free
tax help to people who generally
make $54,000 or less, persons
with disabilities, the elderly, and
limited-English-speaking taxpayers
who need help preparing their own
tax returns. The Tax Counseling for
the Elderly (TCE) program offers
free tax help for all taxpayers, par-
ticularly those who are 60 years of
age and older. TCE volunteers
specialize in answering questions
about pensions and retirement-re-
lated issues unique to seniors.
You can go to IRS.gov and click
on the Filing tab to see your op-
tions for preparing and filing your
return which include the following.
Free File. Go to IRS.gov/
freefile. See if you qualify to
use brand-name software to
prepare and e-file your federal
tax return for free.
VITA. Go to IRS.gov/vita,
download the free IRS2Go
app, or call 1-800-906-9887 to
find the nearest VITA location
for free tax preparation.
TCE. Go to IRS.gov/tce,
download the free IRS2Go
app, or call 1-888-227-7669 to
find the nearest TCE location
for free tax preparation.
Getting answers to your
tax law questions. On
IRS.gov get answers to
your tax questions anytime, any-
where.
Go to IRS.gov/help or
IRS.gov/letushelp pages for a
variety of tools that will help
you get answers to some of
the most common tax ques-
tions.
Go to IRS.gov/ita for the Inter-
active Tax Assistant, a tool
that will ask you questions on
a number of tax law topics
and provide answers. You can
print the entire interview and
the final response for your re-
cords.
You may also be able to ac-
cess tax law information in
your electronic filing software.
Getting tax forms and publica
tions. Go to IRS.gov/forms to
view, download, or print all of the
forms and publications you may
need. You can also download and
view popular tax publications and
instructions (including the 1040 in-
structions) on mobile devices as an
eBook at no charge. Or, you can
go to IRS.gov/orderforms to place
an order and have forms mailed to
you within 10 business days.
Using direct deposit. The fastest
way to receive a tax refund is to
combine direct deposit and IRS
e-file. Direct deposit securely and
electronically transfers your refund
directly into your financial account.
Eight in 10 taxpayers use direct de-
posit to receive their refund. IRS is-
sues more than 90% of refunds in
less than 21 days.
Delayed refund for returns
claiming certain credits. Due to
changes in the law, the IRS can’t
issue refunds before February 15,
2017, for returns that claim the
earned income credit (EIC) or the
additional child tax credit (ACTC).
This applies to the entire refund,
not just the portion associated with
these credits.
Getting a transcript or copy of a
return. The quickest way to get a
copy of your tax transcript is to go
to IRS.gov/transcripts. Click on ei-
ther "Get Transcript Online" or "Get
Transcript by Mail" to order a copy
of your transcript. If you prefer, you
can:
Order your transcript by call-
ing 1-800-908-9946.
Mail Form 4506-T or Form
4506T-EZ (both available on
IRS.gov).
Using online tools to help pre
pare your return. Go to IRS.gov/
tools for the following.
The Earned Income Tax
Credit Assistant (IRS.gov/eic)
determines if you are eligible
for the EIC.
The Online EIN Application
(IRS.gov/ein) helps you get an
employer identification num-
ber.
The IRS Withholding
Calculator (IRS.gov/w4app)
estimates the amount you
should have withheld from
your paycheck for federal in-
come tax purposes.
The First Time Homebuyer
Credit Account Look-up
(IRS.gov/homebuyer) tool pro-
vides information on your re-
payments and account bal-
ance.
The Sales Tax Deduction
Calculator (IRS.gov/salestax)
figures the amount you can
claim if you itemize deduc-
tions on Schedule A (Form
1040), choose not to claim
state and local income taxes,
and you didn’t save your re-
ceipts showing the sales tax
you paid.
Resolving taxrelated identity
theft issues.
The IRS doesn’t initiate con-
tact with taxpayers by email or
telephone to request personal
or financial information. This
includes any type of electronic
communication, such as text
messages and social media
channels.
Go to IRS.gov/idprotection for
information and videos.
If your SSN has been lost or
stolen or you suspect you are
a victim of tax-related identity
theft, visit IRS.gov/id to learn
what steps you should take.
Checking on the status of your
refund.
Go to IRS.gov/refunds.
Due to changes in the law, the
IRS can’t issue refunds before
February 15, 2017, for returns
that claim the EIC or the
ACTC. This applies to the en-
tire refund, not just the portion
associated with these credits.
Download the official IRS2Go
app to your mobile device to
check your refund status.
Call the automated refund hot-
line at 1-800-829-1954.
Making a tax payment. The IRS
uses the latest encryption technol-
ogy to ensure your electronic pay-
ments are safe and secure. You
can make electronic payments on-
line, by phone, and from a mobile
device using the IRS2Go app. Pay-
ing electronically is quick, easy,
and faster than mailing in a check
or money order. Go to IRS.gov/
payments to make a payment us-
ing any of the following options.
IRS Direct Pay: Pay your indi-
vidual tax bill or estimated tax
payment directly from your
checking or savings account
at no cost to you.
Debit or credit card: Choose
an approved payment pro-
cessor to pay online, by
phone, and by mobile device.
Electronic Funds With
drawal: Offered only when fil-
ing your federal taxes using
tax preparation software or
through a tax professional.
Electronic Federal Tax Pay
ment System: Best option for
businesses. Enrollment is re-
quired.
Check or money order: Mail
your payment to the address
listed on the notice or instruc-
tions.
Cash: If cash is your only op-
tion, you may be able to pay
your taxes at a participating
retail store.
What if I can’t pay now? Go to
IRS.gov/payments for more infor-
mation about your options.
Apply for an online payment
agreement (IRS.gov/opa) to
meet your tax obligation in
monthly installments if you
can’t pay your taxes in full to-
day. Once you complete the
online process, you will re-
ceive immediate notification of
whether your agreement has
been approved.
Use the Offer in Compromise
Pre-Qualifier (IRS.gov/oic) to
see if you can settle your tax
debt for less than the full
amount you owe.
Checking the status of an amen
ded return. Go to IRS.gov and
click on Where’s My Amended
Return? (IRS.gov/wmar) under the
“Tools” bar to track the status of
Form 1040X amended returns.
Please note that it can take up to 3
weeks from the date you mailed
your amended return for it to show
up in our system and processing it
can take up to 16 weeks.
Understanding an IRS notice or
letter. Go to IRS.gov/notices to
find additional information about
responding to an IRS notice or let-
ter.
Contacting your local IRS office.
Keep in mind, many questions can
be resolved on IRS.gov without vis-
iting an IRS Tax Assistance Center
(TAC). Go to IRS.gov/letushelp for
the topics people ask about most.
If you still need help, IRS TACs
provide tax help when a tax issue
Page 270 Publication 17 (2016)
can’t be handled online or by
phone. All TACs now provide serv-
ice by appointment so you’ll know
in advance that you can get the
service you need without waiting.
Before you visit, go to IRS.gov/
taclocator to find the nearest TAC,
check hours, available services,
and appointment options. Or, on
the IRS2Go app, under the Stay
Connected tab, choose the Con-
tact Us option and click on “Local
Offices.”
Watching IRS videos. The IRS
Video portal (IRSvideos.gov) con-
tains video and audio presenta-
tions for individuals, small busi-
nesses, and tax professionals.
Getting tax information in other
languages. For taxpayers whose
native language isn’t English, we
have the following resources avail-
able. Taxpayers can find informa-
tion on IRS.gov in the following lan-
guages.
Spanish (IRS.gov/spanish).
Chinese (IRS.gov/chinese).
Vietnamese (IRS.gov/
vietnamese).
Korean (IRS.gov/korean).
Russian (IRS.gov/russian).
The IRS TACs provide
over-the-phone interpreter service
in over 170 languages, and the
service is available free to taxpay-
ers.
The Taxpayer
Advocate Service
Is Here To Help You
What is the Taxpayer
Advocate Service?
The Taxpayer Advocate Service
(TAS) is an independent organi-
zation within the IRS that helps tax-
payers and protects taxpayer
rights. Our job is to ensure that ev-
ery taxpayer is treated fairly and
that you know and understand your
rights under the Taxpayer Bill of
Rights.
What Can the Taxpayer
Advocate Service Do For
You?
We can help you resolve problems
that you can’t resolve with the IRS.
And our service is free. If you qual-
ify for our assistance, you will be
assigned to one advocate who will
work with you throughout the proc-
ess and will do everything possible
to resolve your issue. TAS can
help you if:
Your problem is causing finan-
cial difficulty for you, your fam-
ily, or your business,
You face (or your business is
facing) an immediate threat of
adverse action, or
You’ve tried repeatedly to
contact the IRS but no one
has responded, or the IRS
hasn’t responded by the date
promised.
How Can You Reach Us?
We have offices in every state, the
District of Columbia, and Puerto
Rico. Your local advocate’s num-
ber is in your local directory and at
taxpayeradvocate.irs.gov. You can
also call us at 1-877-777-4778.
How Can You Learn
About Your Taxpayer
Rights?
The Taxpayer Bill of Rights de-
scribes 10 basic rights that all tax-
payers have when dealing with the
IRS. Our Tax Toolkit at
taxpayeradvocate.irs.gov can help
you understand what these rights
mean to you and how they apply.
These are your rights. Know them.
Use them.
How Else Does the
Taxpayer Advocate
Service Help Taxpayers?
TAS works to resolve large-scale
problems that affect many taxpay-
ers. If you know of one of these
broad issues, please report it to us
at IRS.gov/sams.
Low Income
Taxpayer Clinics
Low Income Taxpayer Clinics
(LITCs) serve individuals whose in-
come is below a certain level and
need to resolve tax problems such
as audits, appeals, and tax collec-
tion disputes. Some clinics can
provide information about taxpayer
rights and responsibilities in differ-
ent languages for individuals who
speak English as a second lan-
guage. To find a clinic near you,
visit IRS.gov/litc or see IRS Publi-
cation 4134, Low Income Taxpayer
Clinic List.
To help us develop a more useful index, please let us know if you have ideas for index entries.
See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.Index
10% tax for early withdrawal from
IRA or retirement
plan (See Early withdrawal from
deferred interest account,
subheading: Tax on)
10year tax option 80
401(k) plans:
Tax treatment of contributions 50
403(b) plans:
Rollovers 81, 125, 132
457 plans (See Section 457 deferred
compensation plans)
529 plans (See Qualified tuition
programs)
59 1/2 rule 129
60day rule 125
70 1/2 rule 121
A
Abandonment of home 110
Abortion:
Deductibility as medical
expense 149
Abroad, citizens traveling or
working 6, 51, 182
(See also Foreign employment)
(See also Citizens outside U.S.)
Absence, temporary 28, 33
Accelerated death benefits 90
Accidental death benefits 48
Accident insurance 48
Cafeteria plans 52
Long-term care 48, 53
Accidents, car 172
Value determination 174
Willful negligence or intentional
act as cause 172
Accountable plans for employee
reimbursements 189, 191
Accountants:
Basis to include fees of 98
CPA review courses 197
Accounting methods 11
Accrual method (See Accrual
method taxpayers)
Cash method (See Cash method
taxpayers)
Change of:
Depreciation, to deduct
unclaimed amount 72
Accounting periods 11
Calendar year 9, 11, 47
Change in, standard deduction
not allowed 142
Fiscal year 11, 42, 44
Fringe benefits 47
Accrual method taxpayers 11
Taxes paid during tax year,
deduction of 152
Accumulation distribution of
trusts:
Tax on 207
Accuracyrelated penalties 19
Acknowledgment 170
Activities not for profit 94
Address 15
Change of 17
Foreign 15
P.O. box 15
Adjusted basis 99, 100
Decreases to basis 99
Depreciation 99
Easements 100
Energy conservation subsidies
exclusion 100
Examples (Table 13-1) 99
Gifts 101
Home sale (See Sale of home)
Improvements 99
Increases to basis 99
Local assessments 99
Sales of property 103
Section 179 deduction 99
Adjusted gross income (AGI):
Medical and dental expenses and
limit of deduction 146
Modified (See Modified adjusted
gross income (MAGI))
Retirement savings contribution
credit 22
Adjustments 207
Administrators,
estate (See Executors and
administrators)
Adopted child 27, 33, 36
Earned income credit 234
Adoption 248, 249
ATIN 12, 216
Child tax credit 224
Credits:
Married filing separately 22
Taking 249
Employer assistance 48
Exception for adopted child 147
Exemption for child 168
Expenses not deductible:
Foster care prior to, no
charitable deduction 166
No charitable deduction
for 168
Foreign child 249
Medical and dental expenses of
adopted child 147
Taxpayer identification
number 12, 36
Taxpayer identification number
(TIN) 216
Advance payment of the premium
tax credit (APTC) 246
Age:
Children's
investments (See Children,
subheading: Investment
income of child under age 18)
Form 1040EZ, taxpayer under 65
may use 6
Gross income and filing
requirements (Table 1-1) 4
IRAs:
Contribution cutoff at age
70 1/2 121
Distribution prior to age
59 1/2 129
Distribution required at age
70 1/2 127, 129
Pension distributions required at
age 70 1/2 83
Retirement plan recipients over
age 75 79
Roth IRAs 130, 132
Standard deduction for age 65 or
older 142
Agents 105
(See also Fiduciaries)
Income paid to 11
Signing return 13
Age test 27
AGI (See Adjusted gross income
(AGI))
Agricultural workers (See Farmers)
Agriculture (See Farming)
Aircraft:
Charitable gift of, deduction for
fair market value 169
Airline club dues:
Not entertainment expenses 184
Airplanes, donations of 168
Airport transportation:
Business-related travel
expense 181
Alaska:
Standard meal allowance 181
Alaska Permanent Fund
dividends 94
Child's dividends 161
Income from 6, 7, 67
Publication 17 (2016) Page 271
Alaska Permanent Fund dividends (Cont.)
Investment income not to
include 161
Alaska Unemployment
Compensation Fund 152
Alcoholic beverages:
IRA prohibited transactions
in 128
Alcohol rehabilitation centers:
Deductibility of medical
expense 149
Aliens 216
Dual-status (See Dual-status
taxpayers)
Filing required 6
Nonresident (See Nonresident
aliens)
Resident (See Resident aliens)
Alimony 132–135
Definition of 133
Mortgage payments:
Interest deduction 158
Reporting of income 94
Alternative calculation for year of
marriage 246
Alternative filing methods:
Electronic (See E-file)
Alternative fuel vehicle refueling
property credit 249
Alternative minimum tax
(AMT) 207
Child's tax, figuring of 213
Exempt-interest dividends 67
Filing requirements (Table 1-3) 7
Incentive stock option 7
Nonrefundable credit for prior
year tax 250
Alternative motor vehicle
credit 249
Ambulance service personnel:
Life insurance proceeds when
death in line of duty 90
Amended returns 17
(See also Form 1040X)
Itemized deduction, change to
standard deduction 143
Standard deduction, change to
itemized deductions 143
American citizens abroad 5
(See also Citizens outside U.S.)
Employment (See Foreign
employment)
American Indians (See Indians)
American Samoa:
Income from 6
Amortization:
Bond premiums, treatment
of 162
AMT (See Alternative minimum tax
(AMT))
Annuities 81
(See also Rollovers)
Cost computation 77
Decedent's unrecovered
investment in 13
Early distributions from 82
Deferred annuity
contracts 82
Estimated tax 77
Exclusion limit 77
General Rule:
Annuity starting before
November 19, 1996 79
Nonqualified plans and
qualified plans for
recipients over 75
years 79
Purchased annuities 77
Survivor's annuity 83
Guaranteed payments 78
IRAs as 121
Joint return 77
Worksheet 79
Loans from plan 77
Lump-sum distributions 80
Multiple plan benefits 76, 77
Partly taxable payments 77
Purchased annuities 77
Reporting of 77
Retirement annuities 76
Rollovers 81
Sale of:
Gain as ordinary income 77
Simplified method to calculate
tax-free part of annuity
payment 78
Survivor's annuity 83
Worksheet for
computation 78
Survivor annuities 83
Trade of insurance policies and
annuities 104
Unrecovered investment 203
Withholding 13, 40, 77
Annulled marriages:
Filing status 20
Anthrax incidents (See Terrorist
attacks)
Antiques (See Collectibles)
Appliances:
Deterioration and damage, not
casualty loss 172
Appraisal fees 201
Donated property 168
Not deductible as interest 160
Real estate transactions, when
required by lender 99
Appraisals:
Casualty or theft losses 174
Archer MSAs 96
Contributions 48
Medical expenses paid for
decedent from 147
Not deductible as medical
expense 149
Armed Forces 164, 165, 185
(See also Veterans benefits)
(See also Veterans' organizations)
(See also Reservists)
Armed forces:
Combat zone:
Extension to file return 10
Signing return for spouse 21
Dependency allotments 34
Disability pay 51
Disability pensions 52
GI Bill benefits 35
Military 201
Military quarters allotments 34
Naval officers on permanent duty
aboard ship 179
Permanent duty overseas 178
Real estate taxes when receiving
housing allowance 154, 156
Rehabilitative program
payments 51
Reserves 194
Retiree's pay withholding 37
Retirees' pay:
Taxable income 51
Uniforms 201
Wages 51
Artists, performing (See Performing
artists)
Art works:
As capital assets 106
Capital gains or losses from sale
or trade of 117
Assessments, local (See Local
assessments)
Assistance (See Tax help)
Assistance, tax (See Tax help)
Assumption of mortgage 98
Fees not included in basis 99
Athletic events:
Charitable contributions, amount
deductible 165
ATIN (Adoption taxpayer
identification number) 12
Atrisk rules:
Rental property 72
Attachment of wages 11
Attachments to return 13
Attorneys:
Bar review courses 197
Attorneys' fees 202, 204
Basis to include 98
Social security and railroad
retirement benefits,
deductions for 87
Title to property, for preparation,
filing, etc. 98
Audits:
Travel expense records 189
Auto insurance:
Medical expenses covered by,
not deductible 149
Automatic extension of time to
file 10
Form 4868 10
Automatic investment services:
Holding period, determination
of 108
Awards (See Prizes and awards)
Awayfromhome
travel (See Travel and
transportation expenses)
B
Babysitting 46
Back pay, award for 46
Emotional distress damages
under title VII of Civil Rights
Act of 1964 94
Backup withholding 40, 44, 56
Dividend income 64
Penalties 40
Bad debts:
Bank deposit, loss due to bank's
insolvency or bankruptcy 173
Reporting on Schedule D
(Form 1040) 173
Claim for refund 18, 108
Nonbusiness 108
Recovery 91
Reporting of 108
Short-term capital loss 108
When deductible 108
Baggage:
Business-related travel
expense 181
Balance due 207
Bankruptcy:
Canceled debt not deemed to be
income 89
Financial institution's bankruptcy
causing deductible loss 173
Reporting of 177
Banks:
Automatic investment service,
determination of holding
period 108
IRAs with 121
Losses on deposits, when
casualty losses 107, 173
Reporting of 177
Money market accounts 66
Bar associations:
Charitable contributions to 167
Bar employees:
Tips (See Tip income)
Bargain sales:
As charitable contributions 169
Basis of purchase 100
Bar review courses 197
Barter income 88
Definition of bartering 88
Form 1099-B 88
Basis:
Adjusted basis 99
Allocation between business and
personal use 98
Bad debts 108
Bargain purchases 100
Bonds 102
Cost basis 98
IRAs for nondeductible
contributions 124, 127
Definition of 98
Gifts 101
Home sales (See Sale of home)
Improvements to real estate 99
Like-kind exchanges 104
Other than cost 100–102, 104
Points not to be included 99
Property received for
services 100
Real estate 98
Restricted property 100
Stock or stock rights 66
Tax-exempt obligations:
Bonds 102
Transfers between
spouses 101, 105
Beetles:
Damage or destruction to trees
and plants, when casualty
loss 172
Beneficiaries 64, 81, 95
(See also Estate beneficiaries)
(See also Trust beneficiaries)
Bequests 95, 96, 211
(See also Estate beneficiaries)
(See also Inheritance)
(See also Gifts)
Bicycle:
Fringe benefit 50
Bingo 165, 167
Birth control pills 149
Birth of child 28
Head of household, qualifying
person to file as 23, 24
Social security number to be
obtained 36
Birth of dependent 33
Blackmail:
Losses due to 172
Blind persons:
Exemption from withholding 39
Guide dogs, deductible as
medical expense 149
Impairment-related work
expenses, deduction for 150
Standard deduction for 142
Blood banks:
No charitable deduction for blood
donations to 165, 168
Blue books to determine fair
market value 169
Boats:
Charitable gift of, deduction for
fair market value 169
Donations of 168
Body scan 149
Bona fide business purpose:
Travel expenses 180
Work-related education 195
Bonds:
Adjusted basis for 102
Amortization of premium 162,
As capital assets 106
Convertible bonds 104
Discounted:
Capital gain or loss 106
Issued at discount 61
Market discount bonds 107
Original issue discount 61
Redemption of 103
Retirement of 81, 103
Sale of 61
Savings 58
Sold at premium, computation of
adjusted basis 102
State or local government,
tax-exempt 107
Tax-exempt 61
Bonuses 39, 47, 96
Bookkeeping (See Recordkeeping
requirements)
Books to determine fair market
value 174
Borrowed funds 77, 162
(See also Loans)
Used for charitable contributions,
deduction for 170
Bottled water 149
Boy Scouts:
Charitable contributions to 164,
Braille books 149
Breach of contract:
Damages as income 94
employment 200
Breast pump and supplies 149
Bribes 94, 203
Brokers:
Form 1099-B 103
IRAs with 121
Commissions 121, 122
Receiving dividends, reporting on
Form 1099-MISC 64
Burglary:
Losses due to 172
Burial expenses (See Funerals)
Business associates 180, 183
(See also Entertainment expenses)
Business travel to meet 185
Travel expenses of, paying
for 180
Business expenses 180, 183
(See also Entertainment expenses)
Job search expenses 96
Meal expenses (See Meal and
lodging expenses)
Reimbursements 39, 46
Returning excess for business
expenses 192
Returning excess business
expenses 39
Travel (See Travel and
transportation expenses)
Work-related education 197
Page 272 Publication 17 (2016)
Business organizations:
Charitable contributions to 167
Business property:
As gift, adjusted basis for 101
Basis for depreciation 102
Property use changed to,
adjusted basis for 102
Sales or exchanges:
Like-kind exchanges 104
Business tax credits:
Claim for refund 18
Business use of home 200
C
Cafeteria plans 52
Calendar year taxpayers:
Accounting periods 9, 11, 47
Filing due date 9
California Nonoccupational
Disability Benefit Fund 152
Campaign contributions 94, 165,
Presidential Election Campaign
Fund 12
Campaign expenses 203
Canada:
Resident of 27, 32
Cancellation of debt 89
Exceptions to treatment as
income 89
Candidates for public office:
Contributions to, no charitable
deduction for 165, 167
Capital assets:
Coal and iron ore 92
Definition of 106
Capital expenses 35
Capital gains or losses 106, 109,
Bad debts as short-term capital
loss 108
Carryover of 117
Worksheet 117
Character of gain 106
Character of loss 106
Child's distributions and
dividends, reporting of 162
Collectibles 117
Deductions 117
Limit on 117
Distributions 66
Form 1040 or 1040A to be
used 7, 67
Form 8949 115
Hobbies, sales from
collections 96
Holding period, determination
of 107
How to report 116
Installment sales and 116
Lump-sum distributions from
pensions and annuities 80
Mutual funds paying 66
Net capital gain 106, 117
Included as investment
income 161
Net long-term capital loss 117
Sale of personal items 97
Sale or trade of property held
more than 1 year 107, 117
Schedule D 115, 116
Section 1250 gains from sale of
real property 106, 117
State or local government bonds,
tax-exempt 107
Tax rates 117
Maximum capital gain rates
(Table 16-1) 118
Total net gain 117
Total net loss 117
Undistributed gains:
Credit for tax on 66, 251
Car expenses 171
Car pools 94, 186
Carrybacks:
Business tax credit
carrybacks 18
Carryovers:
Capital loss 117
Worksheet 117
Investment interest 161
Cars 49, 97, 178, 186
(See also Travel and transportation)
(See also Standard mileage rates)
Accidents resulting in casualty
loss 172
Value determination 174
Willful negligence or
intentional act as
cause 172
Actual expenses 186, 187
Advertising displays on 186
Allowances from employers 191
As capital assets 106
Blue book to determine fair
market value 169
Books to determine fair market
value 174
Business and personal use,
allocation between 187, 188
Business-related travel
expenses 181
Car pools 186
Charitable gift of, deduction for
fair market value 169
Charitable organization service,
use for 166
Depreciation 187
Donations of 168
Fixed and variable rate
(FAVR) 191
Form 2106 or 2106-EZ, how to fill
out 193
Hauling tools or instruments 186
Interest on loans, not
deductible 162
Leased vehicles 187
Medical transportation 148, 149
Parking (See Parking fees)
Personal property taxes on,
deduction of 155
Reporting of 189
Table 26-3 showing forms to
be used 192
Sale, trade-in, or other
disposition 188
Section 179 deductions 187
Work-related education,
transportation for 197
Cash:
Dividends paid as 64
Rebates 94
Sales of property for 104
Cash contributions, records to
keep 170
Cash method taxpayers 11
Bad debts 108
Points, deduction of 158
Real estate transactions, tax
allocation 153
Taxes paid during tax year,
deduction of 151
Worthless securities and
negotiable promissory
notes 103
Cash rebates 94
Casualties 115
Casualty insurance:
Premiums not in property
basis 98
Reimbursements from 94
Casualty losses 172, 201, 203
Adjusted basis in property 99,
174, 178
Amount of loss 173
Appraisals 174
Bank deposit, loss due to bank's
insolvency or bankruptcy 173
Costs:
Cleaning up or making
repairs 174
Photographs and
appraisals 174
Deductible losses 172
$100 rule 176
When to take
(Table 25-2) 177
Deduction limits:
For personal property
(Table 25-1) 175
Definition of casualty 172
Disasters 174, 175
(See also Disaster relief)
Employer's emergency disaster
fund 174
Fair market value of
property 173
Form 4684 to be filed 172
Insurance proceeds, treatment
of 174
Net operating losses 178
Nondeductible losses 172
Proof of loss 173
Property used partly for business
and partly for personal
purposes 176
Reimbursement 174
Reporting of gain or loss 177
Single casualty on multiple
properties 176
Cemeteries:
Charitable contributions to 164
Certificate, mortgage credit 250
Certificates of deposit (CDs) 62,
(See also Individual retirement
arrangements (IRAs))
Chambers of commerce:
Charitable contributions to 165,
Entertainment expenses for
attending meetings 184
Change of address 17
Change of name 12, 44
Chaplains:
Life insurance proceeds when
death in line of duty 90
Charitable contributions 164–171
Gifts to reduce public debt 15
Charitable distributions,
qualified 127
Charity benefit events:
Deduction amount for charitable
contributions 165
Checklists:
Medical and dental expense
deductions (Table 21-1) 148
Checks:
As charitable contributions 169
Canceled checks as evidence of
travel expenses 188
Constructive receipt of 11
Checkwriting fees 203
Child, qualifying 27
Child:
Foster child 238, 239
Married child 235
Child and dependent care
credit 7
Due diligence 218
Earned income 216
Full-time student 216
Married filing separately 22
Payments to relatives 218
Child born alive 28
Childcare:
Child care 7
Babysitting 46
Care providers 46
Credit 214
Expenses 35
Nursing care for healthy baby, not
deductible as medical
expense 149
Provider:
Taxpayer identification
number 218
Child custody 28
Children 48, 168
(See also Adoption)
Additional child tax credit 225
Adoption (See Adopted child)
Babysitters 46
Birth of child:
Head of household, qualifying
person to file as 23, 24
Social security number to be
obtained 36
Care providers 46
Child's tax, figuring of:
Alternative minimum tax 213
Credit for 6, 7
(See also Child tax credit)
(See also Child and dependent
care credit)
Custody of 28
Death of child:
Head of household, qualifying
person to file as 23, 24
Dividends of (See this heading:
Investment income of child
under age 18)
Earnings of 6
Filing requirements:
As dependents (Table 1-2) 5
Gifts to 57, 211
Inclusion of child's income on
parent's return (Figure
31-A) 210
Investment income of 64
Investment income of child under
age 18:
Dependent filing requirements
(Table 1-2) 5
Interest and dividends 6
Parents' election to report on
Form 1040 6, 161
Kidnapped 28, 32
Nontaxable income 211
Property received as gift, income
from 211
Signing return, parent for
child 13
Standard deduction for 142, 143
Stillborn 28
Support of (See Child support)
Tax credit (See Child tax credit)
Transporting school children 97
Unearned income of 56
Unearned income of certain
children 209
Form 8615, use of (Figure
31-B) 212
Parents' election to report on
Form 1040 209
Trust income 212
Unearned income
defined 211
Child support 94
Alimony, difference from 133,
Child tax credit 6, 7, 26, 224, 225
Limits 22, 224
Married filing separately 22
Chronic illness:
Accelerated payment of life
insurance
proceeds (See Accelerated
death benefits)
Long-term care (See Long-term
care insurance contracts)
Church employees:
Filing requirements (Table 1-3) 7
Churches, temples, etc.:
Charitable contributions to 164,
Convention delegates, deduction
of unreimbursed
expenses 166
Citizen or resident test 27
Citizens outside U.S.:
Business travel outside U.S.:
Self-employed persons 182
Standard meal
allowance 181
Earned income exclusion 2
Employment (See Foreign
employment)
Extension of time to file 10
Filing requirements 5
Withholding from IRA
distributions 128
Civic associations:
Charitable contributions to 167
Contributions to, no charitable
deduction for 165
Civil defense organizations:
Charitable contributions to 164
Civil service retirement
benefits 76
Civil suits 94
(See also Damages from lawsuits)
Civil tax penalties (See Penalties)
Clergy 6
Contributions that can be spent
as individual wishes, not
deductible charitable
contribution 167
Housing 50
Real estate taxes when
receiving housing
allowance 154, 156
Life insurance proceeds when
chaplain died in line of
duty 90
Pensions 51
Special income rules 50
Clerical help, deductibility of 201
Clients 180, 183
(See also Entertainment expenses)
Business travel to meet 185
Publication 17 (2016) Page 273
Clients (Cont.)
Travel expenses of, paying
for 180
Closing costs:
Real property transactions 98
Sale of home 111
Clothing:
Military 201
Moth damage, not casualty
loss 172
Uniforms:
Charitable organization
requiring, deduction for
cost and upkeep of 166
Used clothing, charitable
deduction for fair market
value 169
work 201
Club dues and membership fees:
Entertainment expenses 184
Coal and iron ore 92
Coins (See Collectibles)
Collectibles:
As capital assets 106
Gains or losses from sale or trade
of 117
IRA investment in 128
College professor:
Research expenses 201
Colleges and universities:
Charitable contributions to 164,
Athletic events, amount
deductible 165
Education costs 96
(See also Qualified tuition
programs)
Employer-provided
educational
assistance 137
(See also Educational
assistance)
Combat zone:
Extension to file return 10
Signing return for spouse 21
Commission drivers:
Deduction of expenses 189
Commissions 39
Advance 46
IRAs with brokers 121, 122
Property basis to include when
buyer pays 98
Sharing of (kickbacks) 96
Unearned, deduction for
repayment of 46
Commodities:
Derivative financial
instruments 106
Common law marriage 20
Communist organizations:
Charitable contributions to 167
Community property 5, 59
Alimony, difference from 133
IRAs 121
Married filing separately 22
Medical and dental
expenses 146
Commuting expenses 186, 203
Employer-provided commuter
vehicle 49
Compensation 46
(See also Wages and salaries)
Defined for IRA purposes 120
Defined for Roth IRA
purposes 130
Employee 46
Miscellaneous compensation 46
Nonemployee 95
Unemployment 92
Computation of tax 12
Equal amounts 12
Negative amounts 12
Rounding off dollars 12
Computer 200
Condemnation of property 115,
Disaster areas,
government-ordered
demolition of unsafe
home 172
Period of ownership and use 112
Confidential information:
Privacy Act and paperwork
reduction information 2
Travel expenses and 188
Constructive receipt of
income 11, 62
Contributions 15, 94, 164, 165,
(See also Charitable contributions)
(See also Campaign contributions)
Nontaxable combat pay 121
Political 204
Reservist repayments 121
Retirement (See specific type of
plan)
Controlled corporations:
Nontaxable stock purchase
of 104
Related party transactions 105
Convenience fees 201
Conventions:
Delegates:
Deduction of unreimbursed
expenses 166
Travel expenses 183
Travel expenses 183
Work-related education,
deduction of travel expenses
for overseas
conventions 198
Conversion (See specific retirement
or IRA plan)
Convertible stocks and
bonds 104
Cooperative housing:
Dwelling unit used as home 68
Mortgage interest
statements 161
Real estate taxes, deduction
of 153
Taxes that are deductible
(Table 22-1) 154
Sale or trade of:
Form 1099-S to report 116
Period of ownership and
use 112
Cooperatives:
Patronage dividends 67
Coowners:
Dwelling unit used as home by
co-owner, rental income and
expense allocation 70
Copyrights 106
Infringement damages 94
Royalties 92
Corporations 90
(See also S corporations)
Controlled corporations 104, 105
Director fees as self-employment
income 95
Reorganizations and nontaxable
trade of stock 104
Corrections (See Errors)
Cosmetics:
Not deductible as medical
expense 149
Cosmetic surgery:
Not deductible as medical
expense 149
Cost basis 98
IRAs for nondeductible
contributions 124, 127
Costofliving allowances 47
Country clubs:
Charitable contributions to 167
Dues:
Charitable deduction not
allowed 165
Entertainment expense
deduction not
allowed 184
Coupon bonds 62
Court awards and
damages (See Damages from
lawsuits)
Cousin 33
Coverdell ESAs:
Additional tax on 207
CPAs (See Accountants)
Credit cards:
Annual fees, not deductible 162
Benefits, taxability of
insurance 95
Charitable contributions charged
to 169
Finance charges, not
deductible 162
Payment of taxes 2
Credit for child and dependent
care expenses 208, 209
Credit for prior year minimum tax:
Nonrefundable 250
Credit for the elderly or the
disabled 208, 209
Credit or debit cards:
Payment of taxes 10
Credit reports:
Costs not included in property
basis 99
Fees for, not deductible 162
Credits 206, 208, 209
Alternative fuel vehicle refueling
property credit 249
Alternative motor vehicle 249
American opportunity 22
Build America bonds (See Credit
to holders of tax credit bonds)
Capital gains, undistributed,
credit for tax on 66, 251
Child and dependent
care (See Child and
dependent care credit)
Child tax (See Child tax credit)
Clean renewable energy
bonds (See Credit to holders
of tax credit bonds)
Earned income (See Earned
income credit)
Elderly or the disabled 221
Excess withholding 252
Foreign tax 249
Health coverage 251
Lifetime learning (See Lifetime
learning credit)
Mortgage interest 250
Nonrefundable credits 248
Plug-in electric drive motor
vehicle 250
Premium tax credit 246
Prior year minimum tax
(AMT) 250
Qualified energy conservation
bonds (See Credit to holders
of tax credit bonds)
Qualified school construction
bonds (See Credit to holders
of tax credit bonds)
Qualified zone academy
bonds (See Credit to holders
of tax credit bonds)
Refundable credits 251
Residential energy 251
Retirement savings
contribution 251
Credit to holders of tax credit
bonds 249
Cremation:
Not deductible as medical
expense 149
Criminal prosecutions:
Travel expenses for federal
staff 179
Cruises:
Travel expenses when incidental
business activities 182
Work-related education,
deduction of expenses 198
Custodial fees 202
Custody of child 28
Customers 180, 183
(See also Entertainment expenses)
Business travel to meet 185
Travel expenses of, paying
for 180
D
Daily allowance (See Per diem)
Damages 200
Damages from lawsuits 94
Medical expenses as part of
settlement 150
Damage to property 172
(See also Casualty losses)
Disasters 174, 175
(See also Disaster relief)
Dating your return 13
Daycare centers 7, 46, 217
(See also Child and dependent care
credit)
(See also Child care)
Deadlines (See Due dates)
Death (See Decedents)
Death benefits:
Accelerated 90
Life insurance proceeds (See Life
insurance)
Public safety officers who died or
were killed in line of duty, tax
exclusion 90
Death of child 28
Death of dependent 33
Debt instruments (See Bonds or
Notes)
Debts 18, 91
(See also Bad debts)
Canceled (See Cancellation of
debt)
Nonrecourse 89
Paid by another 11
Payoff of debt included in sales
transaction 103
Public, gifts to reduce 15
Recourse 89
Refund offset against 9, 14
Deceased
taxpayers (See Decedents)
Decedents 5
(See also Executors and
administrators)
Capital loss of 117
Deceased spouse 5
Personal exemption 25
Due dates 10
Earned income credit 239
Filing requirements 5
Funeral expenses 167
Medical and dental
expenses 147
Savings bonds 60
Spouse's death 20, 21
Standard deduction 142
Transfer of property at death 102
Declaration of rights of taxpayers:
IRS request for information 2
Deductions 22, 25, 91, 108, 117,
133, 142, 158, 160, 180, 183
(See also Personal exemption)
(See also Recovery of amounts
previously deducted)
(See also Bad debts)
(See also Capital losses)
(See also Points)
(See also Entertainment expenses)
Alimony, deductible by
payer 135
Casualty losses (See Capital
losses)
Changing claim after filing, need
to amend 17
Charitable contributions 164
Dental expenses (See Medical
and dental expenses)
Depreciation 99
Educator expenses 141
Estate 201
Fee-basis government
officials 194
Impairment-related work
expenses 150, 194
Interest (See Interest payments)
Investment expenses 162
IRA contributions (See Individual
retirement arrangements
(IRAs))
Itemizing (See Itemized
deductions)
Long-term care insurance
contracts 149
Medical expenses (See Medical
and dental expenses)
Mortgage
interest (See Mortgages)
Not itemizing, use of Form
1040A 7
Pass-through entities 202
Penalties, no deduction
permitted 162
Performing artists' expenses 194
Prepaid insurance
premiums 148
Prescription medicines 149
Rental expenses 68
Repayments 92
Section 179 deductions:
Adjustment to basis for 99
Car expenses 187
Self-employed persons:
Health insurance
premiums 151
Social security and railroad
retirement benefits 87
Standard deduction 142, 143
Page 274 Publication 17 (2016)
Deductions (Cont.)
Stop-smoking programs 149
Student loan interest
deduction (See Student
loans)
Theft loss 203
Transportation
expenses (See Travel and
transportation expenses)
Tuition and fees 137
Union dues (See Labor unions)
Work-related education 197
Deeds:
Preparation costs for 160
Recording fees, basis to
include 99
Deferred annuity
contracts (See Annuities)
Deferred compensation:
Limit 50
Nonqualified plans 47
Deferred compensation
plans (See Retirement plans)
Delinquent taxes:
Real estate transactions, tax
allocation 153
Delivery services 9
Business-related travel
expense 181
De minimis benefits 48
Demutualization of life insurance
companies 105
Dental expenses (See Medical and
dental expenses)
Dentures:
Deductibility as medical
expense 149
Dependent care:
Benefits 214, 219
Center 217
Credit for 214
Dependents 6, 7, 147, 224
(See also Child tax credit)
Birth of 33
Born and died within year 12, 36
Death of 33
Deceased dependent's medical
and dental expenses 147
Disabled dependent care
expenses, deduction for 149
Exemption for 25
Filing requirements:
Earned income, unearned
income, and gross income
levels (Table 1-2) 5
Married, filing joint return 27, 29
Medical and dental
expenses 146
Qualifying child 27, 147
Qualifying relative 32, 147
Social security number 12
Adoption taxpayer
identification number 12,
Alien dependents 36
Standard deduction for 143
Travel expenses for 180
Tuition deduction for 140
Dependents not allowed to claim
dependents 26
Dependent taxpayer test 26
Depletion allowance 92
Deposits 217
Losses on 107, 173
Reporting of 177
Loss on 202
Depreciation:
Adjustment to basis for 99
Cars 187
Change of use of property 102
Computer 200
Correcting amount claimed 72
Form 4562:
Rental property
depreciation 72
Home computer 201
Property used in trade or
business, as noncapital
assets 106
Real property:
Gain from disposition of
property 114
Land, no depreciation of 72
Rental property 68, 72
Designated Roth account 77, 81
Designated Roth Account:
Defined 76
Destroyed records 188
Diaper service 149
Differential wage payments 47
Differential wages:
Wages for reservists:
Military reserves 51
Direct deposit of refunds 13
Directors' fees 95
Disabilities, persons with 216,
(See also Elderly or the disabled)
Accrued leave payment 52
Armed forces 51
Blind (See Blind persons)
Cafeteria plans 52
Credit for (See Elderly or
disabled, credit for)
Dependent who is disabled,
deduction for care
expenses 149
Guide dogs, deductible as
medical expense 149
Impairment-related work
expenses of 150, 194
Work-related education 199
Insurance costs 52
Military and government
pensions 52
Public assistance benefits 93
Reporting of disability pension
income 52
Retirement, pensions, and
profit-sharing plans 52
Signing of return by
court-appointed
representative 13
Social security and railroad
retirement benefits,
deductions for 87
Special school or home for,
deductibility of medical
expense 149
Terrorist attack as cause of injury,
disability payments excluded
from taxation 76
Workers' compensation 53
Disability, permanent and total
disability 221
Disability:
Income 222
Disability benefits:
Earned income credit 233
Disability insurance payments:
Earned income credit 233
Disabled:
Child 27
Dependent 33
Disaster Assistance Act of 1988:
Withholding 40
Disaster relief 53, 93, 175
(See also Terrorist attacks)
Cash gifts to victims 175
Disaster Relief and Emergency
Assistance Act:
Grants 93
Unemployment
assistance 93
Employer's emergency disaster
fund 174
Government-ordered demolition
or relocation of home that is
unsafe due to 172
Grants or payments 93
Replacement of lost or destroyed
property 175
Discharge of qualified principal
residence indebtedness 111
Disclosure statement 19
Discount, bonds and notes issued
at 61
Discounted debt instruments:
Capital gain or loss 106
Discounts:
Employee discounts, effect on
basis 100
Distributions 81
(See also Rollovers)
Early (See Early withdrawal from
deferred interest account)
Liquidating distributions 66
Lump sum (See Lump-sum
distributions)
Nondividend distributions 66
Qualified charitable 127
Qualified reservist 82
Required minimum
distributions 83, 125, 127
(See also Pensions)
(See also Individual retirement
arrangements (IRAs))
Return of capital 66
District of Columbia:
First-time homebuyer credit 111
Dividends 64–68
(See also Form 1099-DIV)
Alaska Permanent
Fund (See Alaska Permanent
Fund dividends)
As stock dividends and stock
rights 66
Backup withholding 64
Beneficiary of estate or trust
receiving 64
Buying more stock with 65
Defined 64
Exempt-interest dividends 67
Expenses related to, deduction
of 68
Fees to collect 201
Foreign income 64
Holding period, determination
of 108
Insurance dividends 67
Money market funds 66
Nominees receiving on behalf of
another 64
Nondividend distributions 66
Ordinary dividends 64
Patronage dividends 67
Qualified 64, 67
Real estate investment trusts
(REITs) paying 66
Redemption treated as 103
Reinvestment plans 65
Reporting of:
As interest 64
Scrip dividends 67
Sold stock 64
Stockholder debts when canceled
as 89
Veterans' insurance 67
Divorced parents 28, 32
Divorced taxpayers 94
(See also Alimony)
Child and dependent care
credit 216
Child custody 28
Definition of divorce instrument
for purposes of alimony 133
Estimated tax payments 45
Filing status 20, 21
IRAs 122, 126
Medical and dental expenses of
children of 147
Mortgage interest, payment as
alimony 158
Personal exemption 25
Real estate taxes, allocation
of 154
Transfers between
spouses 101, 105
Use of home after divorce 113
Doctors' bills (See Medical and
dental expenses)
Documentary evidence:
Recordkeeping
requirements 188
Domestic help, no exemption
for 26
Domestic help:
Withholding 37
Domestic relations orders,
qualified (QDROs):
Rollover of retirement plan
distribution 81
Donations (See Charitable
contributions)
Down payment assistance 95
Droughts:
Losses of property due to 172
Drug or alcohol rehabilitation
centers:
Deductibility of medical
expense 149
Drugs:
As medical expenses:
Over-the-counter drugs, not
deductible 149
Prescription medicines,
deductibility 149
Dry cleaning:
Business-related travel
expense 180, 181
Dualstatus taxpayers 6
Joint returns not available 21
Standard deduction 142
Due dates 9
2016 dates (Table 1-5) 9
Disaster areas, postponed
deadlines 177
Extension (See Extension of time
to file)
Nonresident aliens' returns 10
Due diligence:
Child and dependent care
credit 218
Dues:
Chamber of Commerce 200
Club 203
Union 201
Dwelling units 70, 71
(See also Vacation homes)
Cooperative (See Cooperative
housing)
Defined 70
Renting (See Rental income and
expenses)
E
Early withdrawal from deferred
interest account:
Annuities 82
Form 1099-R
reporting (See Form 1099-R)
Form 5329 reporting (See Form
5329)
Higher education expenses,
exception from penalty 120
IRAs:
Early distributions,
defined 129
Penalties 127, 129
Section 457 deferred
compensation plans 82
Tax on 81, 82
Earned income 240
Child and dependent care
credit 216
Defined:
For purposes of standard
deduction 143
Dependent filing requirements
(Table 1-2) 5
Employee 233
Self-employed 233
Earned income credit 208, 209,
Disability benefits 233
Disability insurance
payments 233
Filing claim 6
Foster child 234
Married filing separately 22
Military personnel 235
Social security card 235
Social security number 235
Earthquakes 175
(See also Disaster relief)
Casualty loss caused by 172
Easements:
Adjustment to basis for 100
Education:
Savings bond program 60
Educational assistance:
Employer-provided 48
Tuition deduction, effect
on 139
Scholarships (See Scholarships
and fellowships)
Tuition (See Qualified tuition
programs)
Educational
institution (See Eligible
educational institution)
Educational organizations:
As related party in
transactions 105
Charitable contributions to 164,
Education credits 7, 225
Academic period 226
Eligible educational
institution 227
Married filing separately 22
Publication 17 (2016) Page 275
Education expenses:
Employer-provided (See Educatio
nal assistance)
Teacher's out-of-pocket
expenses 141
Tuition (See Qualified tuition
programs)
Work-related education,
deduction of expenses 198
Educator outofpocket
expenses 141
EE series bonds (See U.S. savings
bonds)
Efile 2, 4, 8
Extensions of time to file 10
On time filing 10
EIC (See Earned income credit)
Elderly or disabled, credit for 7
Married filing separately 22
Elderly persons 76
(See also Pensions)
Credit for (See Elderly or
disabled, credit for)
Exemption from withholding 39
Home for the aged 34
Long-term care (See Long-term
care insurance contracts)
Nutrition Program for the
Elderly 94
Standard deduction for age 65 or
older 142
Tax Counseling for the Elderly 9
Election precinct officials:
Fees, reporting of 95
Election to include child's income
on parent's return 209
Inclusion of child's income on
parent's return (Figure
31-A) 210
Elective deferrals 76
(See also Retirement plans)
Limits 50
Elective surgery:
Not deductible as medical
expense 149
Electronic filing (See E-file)
Electronic payment options 2
Electronic reporting:
Returns (See E-file)
Tip statement from employees to
employers 55
Eligible educational institution:
Education credits 227
Foreign schools 137, 138
Student loan interest
deduction 137
Tuition and fees deduction 138
Eligible student:
Student loan interest
deduction 136
Tuition and fees deduction 140
Embezzlement:
Losses due to 172
Reporting embezzled funds 96
Emergency Homeowners' Loan
Program 156
Emergency medical service
personnel:
Life insurance proceeds when
death in line of duty 90
Emotional distress damages 94
Employee benefits 47, 48
(See also Fringe benefits)
Employee business
expenses 178
Commuting expenses 186
Deductions for 178
Form 2106 for deducting 189
Impairment-related work
expenses, deduction
for 150, 194
Meals (See Meal and lodging
expenses)
Reimbursements 39, 46, 189,
Returning excess 192
Returning excess 39
Travel (See Travel and
transportation expenses)
Work-related education 195, 199
Employee expenses 200
Home computer 200, 201
Miscellaneous 200
Employees 39, 47, 48
(See also Fringe benefits)
Awards for service 47
Business
expenses (See Employee
business expenses)
Discounts for, effect on
basis 100
Form W-4 to be filled out when
starting new job 38
Fringe benefits 39
Jury duty pay 96
Overseas
employment (See Foreign
employment)
Employees of the intelligence
community 112
Employers:
Educational assistance
from (See Educational
assistance)
E-file options 9
Form W-4, having new
employees fill out 38
Overseas
employment (See Foreign
employment)
Withholding rules 38
Employment:
Agency fees 95, 200
Résumé expenses 200
Taxes:
FICA withholding 11
(See also Withholding)
Tip income 7, 54
Employment taxes 37, 43, 44,
214, 218, 220
(See also Social security and
Medicare taxes)
Endowment proceeds 90
Energy assistance 94
Energy conservation:
Measures and modifications 95
Subsidies 95
Exclusion as adjustment to
basis 100
Utility rebates 97
Entertainers and musicians 201
Entertainment expenses 180, 183
50% limit 183
Figure 26-A summary of
rules 184
Allocation of costs 184, 188
Business-related gifts vs. 185
Form 2106 or 2106-EZ, how to fill
out 193
Meal expenses included 184
Proof of expenses 188
Table 26-2 summary 188
Recordkeeping
requirements 188
Reporting of 189
Table 26-3 showing forms to
be used 192
Taking turns paying for meals or
entertainment 184
Tickets:
Face-value as deductible
amount 183
Gift vs. entertainment
deduction 185
Entertainment facilities:
Expenses for use of 184
Equipment 186
(See also Tools)
Rental for rental property 69
Equitable relief (See Innocent
spouse relief)
Errors:
Corrected wage and tax
statement 44
Depreciation, correcting amount
on Form 1040X 72
Discovery after filing, need to
amend return 17
Form 1099 showing incorrect
amount 64
Refunds 17
Escrow:
Taxes placed in, when
deductible 154
Estate beneficiaries 101
(See also Inheritance)
Dividends received by 64
IRAs (See Individual retirement
arrangements (IRAs))
Losses of estate 95
Receiving income from estate 95
Rollover restrictions 81
Estates 95
(See also Estate beneficiaries)
Income 95
Investment interest 161
Tax:
Survivor's annuity 83
Estate tax:
Deduction 155
Estimated:
Credit for 44
Payment vouchers 43
Estimated tax 37
Amount to pay to avoid
penalty 42
Avoiding 41
Change in estimated tax 42
Credit for 37, 43
Definition 37
Divorced taxpayers 45
Figuring amount of tax 42
First period, no income subject to
estimated tax in 42
Fiscal year taxpayers 42
Married taxpayers 41
Name change 44
Not required 41
Overpayment applied to 13
Payments 15, 43
Figuring amount of each
payment 42
Schedule 42
When to start 42
Who must make 41
Payment vouchers 43
Penalty for underpayment 37,
42, 45, 210
Pension payments 77
Saturday, Sunday, holiday
rule 42
Separate returns 44
Social security or railroad
retirement benefits 85
State and local income taxes,
deduction of 152
Unemployment
compensation 93
Estimates:
Travel expenses 188
Excess benefits tax (See Section
72(m)(5))
Excess reimbursements:
Business expense
reimbursements 192
Medical expenses 150
Excess reimbursement
flowchart (Figure
21-A) 150
Excess withholding credit 252
How to take 253
Joint returns 252
Exchanges 103, 104
(See also Trade of property)
Like-kind exchanges 100, 104
Partially nontaxable
exchange 101, 104
Taxable exchange, defined 100
Tax-free:
Definition of 100
Holding period, determination
of 108
Exchange students:
Expenses paid for, deductible
when under agreement with
qualified organization 166
Excise taxes 127
(See also Penalties)
Basis to include 98
Deductibility (Table 22-1) 154
IRAs for failure to take minimum
distributions 127
Roth IRAs 131
Exclusions from gross income:
Accelerated death benefits 90
Annuities 77
Canceled debt 89
Capital gains from home
sale (See Sale of home)
Commuting benefits for
employees 49
De minimis benefits 48
Disability pensions of federal
employees and military 52
Educational assistance from
employer 48
Education Savings Bond
Program 96
Elective deferrals, limit on
exclusion 50
Employee awards 47
Energy conservation
subsidies 95, 97
Foreign earned income 2
Frozen deposit interest 96
Group-term life insurance 49
Long-term care insurance
contracts 53
Parking fees,
employer-provided 49
Public safety officers who died or
were killed in line of duty,
death benefits 90
Sale of home 97
Scholarships 97
Strike benefits 97
Terrorist attack as cause of injury,
disability payments 76
Executors and administrators 5
Related party transactions 105
Exemptinterest dividends 57
Alternative minimum tax 67
Dividend reporting 67
Information-reporting
requirement 67
Exemption from foreign tax credit
limit 249
Exemptions:
Dependents 25
From withholding 39
Personal (See Personal
exemption)
Phaseout 22
Securities,
tax-exempt (See Securities)
State or local government bonds,
tax-exempt 107
Expatriates 115
Expenses paid by another 95
Extension of time to file 10
Automatic 10
Citizens outside U.S. 10
E-file options 10
Inclusion on return 10
Extortion:
Losses due to 172
Extravagant expenses 184
Eyeglasses:
As medical expense 149
Eye surgery:
Deductibility as medical
expense 149
F
Failure to comply with tax
laws (See Penalties)
Fair market value (FMV):
Casualty loss 173
Definition of 98
Sales of property 103
Stolen property 173
Fair rental price 70
Fair rental value 34
Family 6, 105, 224
(See also Children)
(See also Related party
transactions)
(See also Child tax credit)
Adoption credit (See Adoption)
Standard meal allowance not
allowed if related to
employer 191
Farmers:
Estimated tax 41
Withholding 37
Farming:
Activity not for profit 94
Canceled debt, treatment of 89
Patronage dividends 67
Federal crime investigations or
prosecutions:
Travel expenses 179
Federal employees:
Accrued leave payment 47
Cost-of-living allowances 47
Disability pensions 52
Based on years of service 53
Exclusion, conditions for 52
Terrorist attack 53
FECA payments 53
Page 276 Publication 17 (2016)
Federal Employees'
Compensation Act (FECA)
payments 53
Federal government:
Charitable contributions to 164,
Employees (See Federal
employees)
Federal income tax:
Interest on, not deductible 162
Not deductible:
Deductibility
(Table 22-1) 154
Federal judges:
Employer retirement plan
coverage 122
Feebasis officials:
Business expenses of 194
Work-related education
expenses 199
Fees 95, 217
(See also specific types of
deductions and income)
Professional license 204
Fellowships (See Scholarships and
fellowships)
Fertility enhancement procedures:
Deductibility as medical
expense 149
FICA withholding 11, 37, 47
(See also Withholding)
(See also Social security and
Medicare taxes)
Fiduciaries 5, 121, 122
(See also Executors and
administrators)
(See also Trustees)
Fees for services 95
Prohibited transactions 128
Related party transactions 105
Figures (See Tables and figures)
Figuring taxes and credits 84,
137, 206, 252
(See also Worksheets)
Filing requirements 4–19, 21
(See also Married filing separately)
Calendar year filers 9
Citizens outside U.S. 5
Dependents 5, 6
Electronic (See E-file)
Extensions 10
Gross income levels
(Table 1-1) 4
Individual taxpayers 5
Joint filing 21
(See also Joint returns)
Late filing
penalties (See Penalties)
Most taxpayers (Table 1-1) 4
Other situations requiring filing
(Table 1-3) 7
Unmarried persons (See Single
taxpayers)
When to file 9
Where to file 15
Who must file 4, 6
Filing status 5, 20–24
Annulled marriages 20
Change to, after time of filing 17
Divorced taxpayers 20
Head of household 20, 22
Qualifying person to file
as 23
Joint returns 21
Married filing a joint return 232
Married filing separately 21, 232
Surviving spouse 20
Unmarried persons 5, 20
(See also Single taxpayers)
Final return for decedent:
Capital loss deduction on 117
Medical expenses 147
Standard deduction 142
Finance charges:
Credit cards, retail installment
contracts, etc., not
deductible 162
Financial institutions 107, 121
(See also Banks)
Financially disabled persons 18
Fines 10, 18, 19
(See also Penalties)
Deductibility 204
Firefighters:
Life insurance proceeds when
death in line of duty 90
Volunteer firefighters:
Charitable contributions
to 164
IRAs 122
Fires:
Arson, no casualty loss for 172
Casualty loss caused by 172,
Firsttime homebuyer credit 111
Firstyear expensing (See Section
179 deductions)
Fiscal year 11, 42, 44
Fishermen:
Estimated tax 41
Indian fishing rights 96
Fleet operations:
Standard mileage rate not
allowed 187
Flexible spending account or
arrangement 148, 149
Floods 175
(See also Disaster relief)
Casualty loss caused by 172
FMV (See Fair market value)
Food benefits:
Nutrition program for the
elderly 94
Food stamps 34
Foreclosure 110, 160
Foreign charitable organizations:
Canadian charities contributions
to 164
Other foreign charities
contributions to 164
Foreign children:
Adoption credit 249
Foreign employment 6, 51
Employment abroad 51
Pension plan contributions 77
Social security and Medicare
taxes 51
U.S. citizen 51
Waiver of alien status 51
Foreign governments, employees
of 51
Foreign income:
Dividends 64
Earned income exclusion 2
Reporting of 1
Foreign income taxes:
Deduction of 152
Form 1116 to claim
credit 155
Schedule A or Form 1040
reporting 155
Definition of 151
Foreign nationals (See Resident
aliens)
Foreign organizations:
Charitable contributions to 165,
Foreign schools 137, 138
Foreign Service 112
Foreign students 27
Expenses paid for, deductible
when under agreement with
qualified organization 166
Foreign tax credit 249
How to take 249
Limit on 249
Forgiveness of
debt (See Cancellation of debt)
Form 7, 84
1040:
1040, Schedule A:
Charitable contributions 15,
164, 171
Employee business expense
deduction 194
Federal employees buying
back sick leave 53
Gifts, deduction of 189
Investment expenses
deduction 162
Investment interest
deduction 162
Itemized deduction limit 143
Loss of deposits due to bank's
insolvency or bankruptcy
cause 173
Medical and dental
expenses 150
Outplacement services,
deduction 47
Travel expenses, deduction
of 192
Unearned commission,
deduction for repayment
of 46
1040, Schedule B:
Dividends 67
1040, Schedule C:
Barter income 88
Child care providers 46
Corporate director fees 95
Forgiveness of debts 89
Foster-care providers 96
Kickbacks 96
Notary fees 95
Oil, gas, or mineral interest
royalties 92
Rental income and
expenses 73, 91
Statutory employees 189
Work-related education
expenses 198
1040, Schedule C-EZ:
Child care providers 46
Corporate director fees 95
Foster-care providers 96
Kickbacks 96
Notary fees 95
Oil, gas, or mineral interest
royalties 92
Rental income and
expenses 73, 91
Statutory employees 189
Work-related education
expenses 198
1040, Schedule D:
Business property sales 104
Capital gains or losses 115,
Child's capital gain
distributions 162
Form 8949 115
Fractional shares, sale of 66
Nonbusiness bad debts, loss
of deposits due to bank's
insolvency or
bankruptcy 173
Sale expenses 116
Undistributed long-term
capital gains 117
Worthless securities 103
1040, Schedule E:
Income-producing property,
deduction of interest on
loan for 162
Rental income and
expenses 73
Royalties 92
1040, Schedule F:
Self-employed persons 189
Work-related education
expenses 198
1040, Schedule SE 6, 51
Address 15
Adoption expenses 249
Alaska Permanent Fund
dividends 67
Alien taxpayer identification
numbers 36
Alternative minimum tax,
nonrefundable credit for
prior year tax 250
Armed forces' retirement
pay 51
Attachments to 13
Capital gains 67
Charitable contributions,
deduction to be
itemized 164
Child's capital gain
distributions 162
Clergy pension 51
Deduction for alimony
paid 135
Disability retirement pay 52
Dividends 67
Educator expenses 141
Excess withholding
credit 253
FECA benefits 53
Foreign tax credit 249
Health Coverage Tax
Credit 251
Insurance distributions 67
IRAs 128, 129
Mortgage interest credit 250
Personal exemption 25
Presidential Election
Campaign Fund 12
Railroad retirement benefits,
reporting on 85
Recapture of alimony 135
Reporting of alimony
received 135
Reporting taxes on tips not
reported to employer 55
Reporting uncollected taxes
on tips 55
Schedule A:, Mortgage
interest deduction 250
Social security benefits,
reporting on 85
Student loan interest
deduction 137
Tip income reporting 55
Undistributed long-term
capital gains 251
Use of 7, 20–22
Wages and salary
reporting 46
Workers' compensation 53
1040A:
Address 15
Adoption expenses 249
Alaska Permanent Fund
dividends 67
Alien taxpayer identification
numbers 36
Armed forces' retirement
pay 51
Attachments to return 13
Capital gains 67
Clergy pension 51
Disability retirement pay 52
Dividends 67
Educator expenses 141
Excess withholding
credit 253
FECA benefits 53
Insurance distributions 67
IRA distributions 128
Personal exemption 25
Presidential Election
Campaign Fund 12
Railroad retirement benefits,
reporting on 85
Reporting pay 46
Social security benefits,
reporting on 85
Student loan interest
deduction 137
Tip income reporting 55
Use of 7, 20–22
Workers' compensation 53
1040EZ:
Address 15
Alaska Permanent Fund
dividends 67
FECA benefits 53
No attachments 13
Personal exemption 25
Presidential Election
Campaign Fund 12
Reporting pay 46
Tip income reporting 55
Use of 6, 20, 21
Workers' compensation 53
1040NR:
Nonresident alien return 10
1040NR-EZ:
Nonresident alien easy
return 10
1040X:
Amended individual
return 17
Annulled marriages 20
Bad debts, claim for
refund 108
Change of filing status 22
Completing 17
Depreciation| Correcting
amount of 72
Filing 17
Itemized deduction, change to
standard deduction 143
Standard deduction, change
to itemized
deductions 143
Worthless securities, claim for
refund 103
1065:
Partnership income 90
1096 116
Publication 17 (2016) Page 277
Form (Cont.)
1098:
More than one borrower (not
spouse), reporting of
mortgage interest
deduction by attaching
of 162
Mortgage insurance
premiums reported
on 161
Mortgage interest overpaid in
earlier year 158
Mortgage interest
statement 73, 91, 161
Points reported on 161
Prepaid interest reported
on 161
Refund of interest reported
on 161
1098-C:
Contributions of Motor
Vehicles, Boats, and
Airplanes 168
1098-E 137
1099:
Taxable income report 11, 46
1099-B:
Barter income 88
Broker to report sales of
stocks, bonds, or
commodities 103, 116
1099-C:
Cancellation of debt 89
1099-CAP:
Change in control or capital
structure 116
1099-DIV:
Dividend income
statement 50, 64, 67
Return of capital 66
1099-G:
State tax refunds 91
1099-INT 57, 63
1099-MISC:
Brokers receiving
dividends 64
Nonemployee
compensation 95
1099-OID 62
1099-R:
Early distributions of pension
funds 81, 82
IRA distributions 127, 129
Life insurance policy
surrendered for cash 90
Retirement plan
distributions 13
1099-S:
Real estate transactions
proceeds 110, 116
1116:
Foreign tax credit 249
1120S:
S corporation income 90
2106:
Business-related
expenses 189, 192
Performing artists 194
Travel expenses 192
Work-related education
expenses 199
2106-EZ:
Business-related
expenses 192
Performing artists 194
Work-related education
expenses 199
2119:
Postponement of gain from
sale of home 111
2439:
Notice to shareholder on
undistributed long-term
capital gains 66, 251
2441 220
2555 225, 233
2555-EZ 233
2848:
Power of attorney and
declaration of
representative 13, 21
3115 59
3800:
General business credit 18
4029 233
4070:
Reporting tips to
employer 54
4070A:
Daily record of tips 54
4137:
Social security and Medicare
taxes on tips not reported
to employer 55
4361 233
4506 16
4506-T:
Tax return transcript
request 16
4562:
Depreciation of rental
property 72
4684:
Bank deposit, loss due to
bank's insolvency or
bankruptcy 173
Casualty or theft loss 172,
4797:
Sales of business
property 104, 114
Small business stock
losses 107
4868 10, 36
Automatic extension of time to
file 10, 36
Filing electronic form 10
Filing paper form 10
4952:
Investment interest expense
deduction 162
Net capital gain, election to
include as investment
income 161
4972:
Lump-sum distributions 80
5329:
Early distributions of sheltered
funds 81, 82
Required minimum
distributions, failure to
take 83, 129
56: Notice Concerning Fiduciary
Relationship 13
5695:
Residential energy
credits 251
6251 207
Alternative minimum tax 213
6252:
Installment sale income 114
8275:
Disclosure statement 19
8275-R:
Regulation disclosure
statement 19
8283:
Charitable noncash
contribution of more than
$500 value 171
8379:
Injured spouse claim 14
8396:
Mortgage interest credit 156,
843:
Claim for refund and request
for abatement 252
8582:
Passive activity gains or
losses 72, 116
8606:
IRA contributions,
Nondeductible 120, 124,
IRA contributions,
Recharacterization
of 126
8615 56
Certain children with
unearned income 211,
8801:
Alternative minimum tax 250
8814 56
Parents' election to report
child's interest and
dividends 64, 161
Reduced deductions or
credits 210
8815 60
8818 61
8822:
Change of address 17
8824:
Like-kind exchanges 104
8828:
Recapture of federal
mortgage subsidy 115
8839:
Qualified adoption
expenses 48, 249
8853:
Accelerated death
benefits 90
Archer MSAs and long-term
care insurance
contracts 48
8857:
Innocent spouse relief 21
8862 231
8879:
Authorization for E-file
provider to use
self-selected PIN 9
8880:
Credit for Qualified
Retirement Savings
Contributions 251
8885:
Health Coverage Tax
Credit 251
8910:
Alternative motor vehicle
credit 249
8911:
Alternative fuel vehicle
refueling property
credit 249
8912:
Credit to Holders of Tax
Credit Bonds 249
8936:
Plug-in electric drive motor
vehicle credit 250
8949:
Sales and other dispositions
of capital assets 115
9465:
Installment agreement
request 15
982:
Reduction of tax attributes
due to discharge of
indebtedness (and section
1082 basis
adjustment) 111
Form 8919:
Uncollected social security
and Medicare tax on
wages 46
Requiring Form 1040 to be used
when filing 7
RRB-1042S:
Railroad retirement benefits
for nonresident aliens 84
RRB-1099:
Railroad retirement
benefits 83, 84
Schedule 8812:
Child tax credit 225
SS-5:
Social security number
request 12, 36
SSA-1042S:
Social security benefits for
nonresident aliens 84
SSA-1099:
Social security benefits 83
W-10 218
W-2:
Box 12 with code L 178,
192, 193
Election precinct officials'
fees 95
Employer-reported income
statement 11, 13, 46, 47,
Employer retirement plan
participation
indicated 122
Fringe benefits 48
Reimbursements reported as
part of income 178, 189,
190, 192
Statutory employees 189
Uncollected taxes 55
W-2G:
Gambling winnings
withholding statement 96
W-4P:
Rollover distributions, election
not to have tax
withheld 77
W-4V:
Voluntary withholding
request 93
W-7:
Individual taxpayer
identification number
request 36
W-7A:
Adoption taxpayer
identification number
request 12, 36
W-9:
TIN of home seller and
purchaser 162
Form: 1098: Mortgage insurance
premiums on 161
Form(s) 1099 44
Form 1040, Schedule A 156
Form 1040, Schedule D:
Form 8949 115
Reporting capital gains and
losses 115
Form 1040:
Estimated tax payments 44
Foreign income taxes, deduction
of 155
Gambling winnings 40
Overpayment offset against next
year's tax 43
Schedule A:
State and local income taxes,
deduction of 155
State benefit funds,
mandatory contributions
to 152
Taxes, deduction of 156
Schedule C:
Real estate or personal
property taxes on property
used in business,
deduction of 156
Schedule D:
Capital gains or losses 115
Form 8949 115
Schedule E:
Real estate or personal
property taxes on rental
property, deduction
of 156
Schedule F:
Real estate or personal
property taxes on property
used in business,
deduction of 156
Self-employment tax, deduction
of 156
Form 1040A:
Estimated tax payments 44
Overpayment offset against next
year's tax 43
Form 1040ES:
Estimated tax 42, 43
Form 1095A 247
Form 1098:
Mortgage interest 156
Form 1099MISC:
Withheld state and local
taxes 152
Form 1099R:
Withheld state and local taxes
shown on 152
Form 1099S:
Real estate transactions
proceeds 154
Form 1116:
Foreign tax credit 155
Form 8332:
Release of exemption to
noncustodial parent 29
Form W2:
Employer-reported income
statement 44
Filing with return 44
Separate form from each
employer 44
Withheld state and local
taxes 152
Page 278 Publication 17 (2016)
Form W2c:
Corrected wage and tax
statement 44
Form W2G:
Gambling winnings withholding
statement 40, 44
Withheld state and local taxes
shown on 152
Form W4:
Employee withholding allowance
certificate 37, 38, 41
Form W4S:
Sick pay withholding request 40
Form W4V 40
Unemployment compensation,
voluntary withholding
request 40
Foster care:
Adoption as motive for, no
charitable deduction 166
Care providers' payments 95
Charitable deduction for nonprofit
care 166
Child tax credit 224
Difficulty-of-care payments 95
Emergency foster care,
maintaining space in home
for 96
Expenses unreimbursed and not
deductible as charitable
contributions 166
Foster care payments and
expenses 29, 34
Foster child 27, 29, 33, 34, 238,
Earned income credit 234
Foster Grandparent Program 52
Found property 96
Fractional shares:
Payment for 66
Fraternal societies:
Charitable contributions to 164
Dues, no charitable
deduction 165, 167
Fraud:
Losses due to 172
Penalties 18, 39
Reporting anonymously to IRS 2
Freight:
Basis to include 98
Fringe benefits:
Accident and health
insurance 48
Accounting period 47
Adoption, employer
assistance 48
Archer MSA contributions 48
De minimis benefits 48
Education assistance 48
Form W-2 48
Group-term life insurance
premiums 48
Holiday gifts 48
Retirement planning services 49
Taxable income 47
Transportation 49
Withholding 39
Frozen deposits:
Interest on 96
IRA rollover period
extension 125
Fulltime student:
Child and dependent care
credit 216
Fundraising events:
Charitable contributions, amount
deductible 165
Rental of dwelling unit used as a
home 71
Funeral expenses 35
Funerals:
Clergy, payment for 50
Expenses:
Contributions to cover, not
deductible as charitable
donations 167
Not deductible 149
Future interests:
Definition of 169
Tangible personal property,
charitable deduction for 169
G
Gains and losses 7, 22, 115
(See also Capital gains)
(See also Losses)
(See also Capital gains or losses)
Casualty 172
(See also Casualty losses)
Claim for refund for loss 18
Collectibles 117
Financial institution's bankruptcy
causing deductible loss 173
Reporting of 177
Gambling (See Gambling
winnings and losses)
Hobby losses 96
Ordinary gain and loss 106
Bank deposit, loss due to
bank's insolvency or
bankruptcy 173
Ordinary loss 106
Passive activity 22, 72, 116
(See also Passive activity)
Related party sale or trade of
depreciable property 105
Short-term 106, 116
Priority in deducting 117
Sale or trade of property held
1 year or less 107
Theft 172
(See also Theft losses)
Total net gain 117
Gambling winnings and
losses 96, 203
Withholding 40, 44
Garbage pickup:
Deductibility (Table 22-1) 154
Garnishment and attachment 11
Gas royalties 92
Gems:
As capital assets 106
IRA prohibited transactions
in 128
General business credit 206
General Rule (See Annuities)
GI Bill benefits 35
Gifts:
$25 limit on business-related
expenses 185
$4 or less for business-related
expenses 185
Adjusted basis for 101
Business-related expenses 184,
Children, income from property
given to 211
Disaster victims receiving cash
gifts 175
Holding period, determination
of 108
Holiday gifts 48
Incidental costs of
business-related
expenses 185
Not taxed 96
Proof of expenses (Table 26-2
summary) 188
Recordkeeping
requirements 188
Reporting of expenses 189
Table 26-3 showing forms to
be used 192
Schedule A (Form 1040) for
deduction 189
To reduce the public debt 15
Gift taxes:
Not deductible 155
Girl Scouts:
Charitable contributions to 164,
Glasses:
As medical expense 149
Gold and silver:
As capital assets 106
Capital gains or losses from sale
or trade of 117
IRA investments in 128
Golden parachute payments:
Tax on 207
Golf clubs (See Country clubs)
Goodwill Industries (See Charitable
contributions)
Government employees:
Federal (See Federal employees)
State (See State or local
governments)
Graduate school 137
(See also Educational assistance)
Grants (See Scholarships and
fellowships)
Grants, disaster relief 93
Gratuities (See Tip income)
Gross income:
Adjustments other than on Form
1040A, Form 1040 to be
used 7
Age, higher filing threshold after
65 5
Defined:
Filing requirements
(Table 1-1) 4
Dependent filing requirements
(Table 1-2) 5
Rental income 68
Gross income test 33
Groupterm life insurance:
Accidental death benefits 48
Definition 48
Exclusion from income:
Limitation on 48
Permanent benefits 48
Taxable cost, calculation of 48
Uncollected social security/
Medicare taxes:
Reporting of (Table 1-3) 7
Uncollected tax 207
Guam:
Income from 6
Guide dogs:
Deductibility as medical
expense 149
H
H.R. 10 plans 77
HAMP:
Home affordable modification:
Pay-for-performance 94
Handicapped
persons (See Disabilities,
persons with)
Hardest Hit Fund Program 156
Hawaii:
Standard meal allowance 181
Head of household 20, 22
Health:
Flexible spending
arrangement 48
Health insurance 48
(See also Accident insurance)
Reimbursement arrangement 48
Savings account 48
Health coverage tax credit 6
Health insurance:
Auto insurance policy covering,
not deductible as medical
expense 149
Premiums:
Deductible as medical
expense 149
Self-employed persons,
deductible expenses 151
Reimbursement 149
Health insurance premiums 35
Health savings account 149
Health Spa 204
Hearing aids:
As medical expense 149
Hedging transactions 106
Help (See Tax help)
Higher education (See Colleges
and universities)
High income taxpayers:
Estimated tax 41
Highlow rate method to compute
per diem 191
Hobbies 202
Activity not for profit 94
Losses 96
Holding period, repossessed 108
Holding period:
Determination of 107
Holiday, deadline falling on 42
Holiday gifts 48
Home 70, 71, 156, 160, 172
(See also Vacation homes)
(See also Mortgages)
(See also Refinancing)
(See also Casualty losses)
Abandonment of 110
Acquisition debt 156
Aged, home for 34
As capital asset 106
Basis (See Sale of home)
Business use of 200
Closing costs 111
Cost of keeping up 23
Worksheet 23
Damage to 172
(See also Casualty losses)
Foreclosure 110
Improvements:
For medical care,
deductibility 149
Loans for 158
Jointly owned:
Mortgage payments as
alimony 133
Separate residences in and
alimony payments 134
Taxes and insurance
premiums as alimony 133
Main home, defined 109
Office 200
Points 99
Possession before final
settlement, rent not deductible
as interest 158
Repossession 110
Security system 204
Settlement fees 111
Tax home, determination for
travel-related business
expenses 179
Tenants in common, taxes and
insurance premiums as
alimony 133
Home equity loans:
Car purchased by 187
Interest deduction 156
Proceeds invested in tax-exempt
securities, interest not
deductible 158
Home improvement loans 158
Home office:
Capital gains exclusion 113
Travel to another work
location 186
Homeowners' associations:
Charges:
Deductibility
(Table 22-1) 154
Charitable contributions to 165,
Homeworkers:
Deduction of expenses 189
Hope credit:
Married filing separately 22
Hospitals:
Charitable contributions to
nonprofits 164, 165
Meals and lodging provided for
patients, deductibility 149
Payments for services for specific
patient, not deductible as
charitable contributions 167
Services fees, deductibility of
medical expense 149
Host or hostess 89
Hotels:
Club dues:
Not entertainment
expenses 184
Not considered dwelling units 70
Household employees 220
Household furnishings:
Antiques (See Collectibles)
As capital assets 106
Household items, charitable
deduction for 168
Household members 20
(See also Head of household)
Alimony payments, spouses
cannot be members of same
household 134
Household services 217, 218
Household workers (See Domestic
help)
Household workers, no exemption
for 26
Housing 23, 70, 71
(See also Home)
(See also Vacation homes)
Alimony payments made to
cover 133
Publication 17 (2016) Page 279
Housing (Cont.)
Clergy 50
Cooperative (See Cooperative
housing)
Rental property (See Rental
income and expenses)
Hurricanes 175
(See also Disaster relief)
Casualty loss due to 172
I
Icons, use of 2
Identification number, qualifying
person 216
Identity theft 1, 19, 270
Illegal activities:
Reporting of 96
Impairment (See Disabilities,
persons with)
Impairmentrelated work
expenses 199
Improvements:
Real estate, adjustments to basis
for 99
Rental property (See Rental
income and expenses)
Incidental expenses:
Business-related gifts 185
Travel-related 180
Income 46, 88, 94
(See also Wages and salaries)
(See also Alimony)
Bartering 88
Canceled debts 89
Constructive receipt of 11, 62
Excess reimbursement of medical
expenses 150
Gross 33
Illegal activities 97
Interest 56
Jury duty pay 96
Life insurance proceeds 89
Nonemployee compensation 95
Paid to agent 11
Paid to third party 11
Partnership 90
Prepaid 12
Recovery 91
Rental (See Rental income and
expenses)
Royalties 92
S corporation 90
Taxable income in excess of
$100,000 7
Taxable income less than
$100,000 6, 7
Tax exempt 34
Tips (See Tip income)
Underreported 17
Unearned income 211
Income aid payment 200
Income from nonqualified
deferred compensation plans:
Additional tax on 207
Incomeproducing expenses 201
Incomeproducing property:
Deduction of interest on loan
for 162
Income taxes:
Federal (See Federal income tax)
Foreign (See Foreign income
taxes)
State or local (See State or local
income taxes)
Indefinite absence from job:
Work-related education
during 195
Independent contractors:
Homeworkers, deduction of
expenses 189
Indians:
Fishing rights 96
Taxes collected by tribal
governments, deduction
of 151
Individual retirement
arrangements (IRAs) 7, 81,
120, 125, 129
(See also Rollovers)
(See also Roth IRAs)
Administrative fees 121, 122,
Age 59 1/2 for distribution 129
Exception to rule 129
Age 70 1/2:
Contributions cut off at 121
Distributions required
at 127, 129
Compensation, defined 120
Contribution limits 121
Age 50 or older, 121
Under age 50, 121
Contributions 6, 22
Designating year for which
contribution is made 121
Excess 128
Filing before contribution is
made 121
Nondeductible 124
Not required annually 121
Roth IRA contribution for
same year 131
Time of 121
Withdrawal before filing due
date 126
Cost basis 124, 127
Deduction for 7, 121
Participant covered by
employer retirement plan
(Table 17-1) 123
Participant not covered by
employer retirement plan
(Table 17-2) 123
Phaseout 123
Definition of 120
Distributions:
At age 59 1/2 129
Required minimum
distributions (See this
heading: Required
distributions)
Divorced taxpayers 126
Early distributions (See Early
withdrawal from deferred
interest account)
Employer retirement plan
participants 122
Establishing account 120
Time of 121
Where to open account 121
Excess contributions 128
Figuring modified AGI
(Worksheet 17-1) 124
Forms to use:
Form 1099-R for reporting
distributions 127
Form 8606 for nondeductible
contributions 120
Inherited IRAs 96, 124, 125
Required distributions 127
Interest on, treatment of 120
Kay Bailey Hutchison Spousal
IRAs 121–123
Married couples (See this
heading: Kay Bailey
Hutchison Spousal IRAs)
Modified adjusted gross income
(MAGI):
Computation of 123
Effect on deduction if covered
by employer retirement
plan (Table 17-1) 123
Effect on deduction if not
covered by employer
retirement plan
(Table 17-2) 123
Worksheet 17-1 124
Nondeductible contributions 124
Early withdrawal 129
Tax on earnings on 124
Ordinary income, distributions
as 127
Penalties:
Early distributions (See Early
withdrawal from deferred
interest account)
Excess contributions 128
Form 8606 not filed for
nondeductible
contributions 120, 124
Overstatement of
nondeductible
contributions 124
Prohibited transactions 128
Required distributions, failure
to take 127, 129
Prohibited transactions 128
Recharacterization of
contribution 126
Reporting of:
Distributions 128
Recharacterization of
contributions 126
Required distributions 125, 127
Excess accumulations 129
Retirement savings contribution
credit 22, 251
Self-employed persons 121
Taxability:
Distributions 127
Time of taxation 120
Transfers permitted 125
To Roth IRAs 125, 126
Trustee administrative fees 202
Trustee-to-trustee transfers 125
IRA to Roth IRA 132
Types of 121
Withdrawals:
Early (See Early withdrawal
from deferred interest
account)
Required (See this heading:
Required distributions)
Withholding 13, 40, 127
Individual taxpayer identification
number (ITIN) 12, 36, 224
Individual taxpayers (See Single
taxpayers)
Information returns 11, 13, 46, 47,
(See also Form W-2)
(See also Form 1099)
Partnerships to provide 90
Inheritance 95, 101
(See also Estate beneficiaries)
Adjusted basis for 101
IRAs (See Individual retirement
arrangements (IRAs))
Not taxed 96
Inheritance tax:
Deductibility of 155
Deduction 155
Injured spouse 14
Claim for refund 14
Inmate 216
Innocent spouse relief:
Form 8857 21
Joint returns 21
Insider stock compensation from
expatriated corporation:
Tax on 207
Insolvency:
Canceled debt not deemed to be
income 89
Financial institution's insolvency
causing deductible loss 107
Reporting of 177
Installment agreements 15
Installment sales 102
Capital gains and 116
Home sale 114
Insulin:
Deductibility as medical
expense 149
Insurance:
Accident (See Accident
insurance)
Alimony deduction for, when
home owned as tenants in
common 133
Casualty or theft loss,
reimbursement to adjust
loss 174
Distributions from, reporting
of 67
Dividends:
Interest on 67
Life 40, 48
(See also Life insurance)
(See also Group-term life
insurance)
Living expenses paid by, possible
income from 175
Reimbursements:
From casualty insurance 94
State insurer delinquency
proceedings preventing
minimum pension
distributions 83
Trade of policies and
annuities 104
Insurance agents:
Deduction of expenses 189
Insurance companies:
State delinquency proceedings,
IRA distributions not made
due to 129
Insurance premiums:
Alimony when spouse owns life
insurance policy 133
Casualty insurance 98
Health insurance:
Deductible as medical
expense 149
Self-employed persons,
deductible 151
Liability 200
Life 35, 204
Life insurance:
Alimony 133
Medical 35
Paid in advance 58
Public safety officers 76
Rental expenses, deduction of
premiums paid in
advance 69
Insurance proceeds:
Dividends, interest on 58
Installment payments 61
Life 61
Interest:
Fees to collect 201
Frozen deposits 58
Usurious 58
Interest income 56
Children:
Gifts to children 211
Dividends as 64
Form 1099-INT 11
Frozen deposits, from 96
Property purchase financed
without adequate stated
interest, treatment of 103
Recovery of income, on 91
Reporting on Forms 1040, 1040A,
or 1040EZ:
Form 1040EZ filing
threshold 6
Savings bonds 96
Securities, Form 1040 to be
used 7
Tax refunds, from 17
Interest payments 73, 91, 156–163
(See also Mortgages)
Allocation of interest according to
use of loan 162
Canceled debt including 89
Car loans 187
Deductions:
Forms to use
(Table 23-1) 162, 163
Not allowed 162
Reporting of 162
Investment interest 161
Limit on deduction 161
Personal interest not
deductible 162
Reporting of deductions 162
Student loan interest
deduction 136
Student loans deduction 6, 7,
22, 162
Unstated interest 98, 103
Interference with business
operations:
Damages as income 94
Internal Revenue Service (IRS):
Fraud or misconduct of
employee, reporting
anonymously 2
Mission of 2
International
employment (See Foreign
employment)
International organizations,
employees of 51
Internet:
Electronic filing over (See E-file)
Inventory, retail 106
Investment income:
Children 64
Investment property:
Rental property (See Rental
income and expenses)
Investments:
Classes as travel expenses 183
Expenses 162
Fees 202
Property:
As capital asset 106
Definition 161
Like-kind exchanges 104
Seminars 204
Page 280 Publication 17 (2016)
Involuntary conversion 172
(See also Condemnation of property)
Basis for depreciation 100
IRAs (See Individual retirement
arrangements (IRAs))
Itemized deductions:
Changing from standard to
itemized deduction (or vice
versa) 143
Choosing to itemize 143
Form 1040 to be used 7, 91
Limit on 205
Married filing separately 22, 143
One spouse has
itemized 142
Recovery 91
Standard deduction to be
compared with 143
State tax, for 143
ITIN (See Individual taxpayer
identification number (ITIN))
Itinerant workers:
Deduction of expenses 189
Tax home, determination of 179
ITINs (See Individual taxpayer
identification number (ITIN))
J
Jewelry:
As capital assets 106
Job 178
(See also headings starting with
"Employee" or "Employer")
Search:
Expenses 200
Job search:
Deduction of expenses for
Interviews 96
Joint accounts 57
Dividends, reporting of 64
Joint return of parents:
Unearned income of certain
children 209
Joint returns:
Accounting period 21
After separate return 22
Carryover of capital loss 117
Deceased spouse 21
Dependents on 33
Divorced taxpayers 21
Estimated tax 41
Excess social security/railroad
retirement tax withholding
credit 252
Extension for citizens outside
U.S. 10
Filing status 21
Form 1040EZ, use of 6
Fraud penalty 19
Guardian of spouse, signing
as 21
Injured spouse 14
Innocent spouse 21
Nonresident or dual-status alien
spouse 21
Pensions or annuities 77
Worksheet 79
Personal exemption 25
Responsibility for 21
Separate return after joint 22
Signing 13, 21
Social security and railroad
retirement benefits 88
State and local income taxes,
deduction of 152
Joint return test 27, 29
Judges, federal:
Employer retirement plan
coverage 122
Jury duty pay 96
K
Keogh plans 76, 77
(See also Retirement plans)
Kickbacks 96
Kiddie tax (See Children,
subheading: Unearned income
of)
Kidnapped children 235
Losses due to ransom 172
Qualifying child 28
Qualifying relative 32
L
Labor unions 40
Contributions to, no charitable
deduction for 165
Dues and fees 97, 167
Sick pay withholding under union
agreements 40
Strike and lockout benefits 97
Trips from union hall to place of
work 186
Unemployment compensation
payments from 93
Land 98
(See also Real estate)
Depreciation not allowed for 72
Landlords (See Rental income and
expenses)
Landscaping:
Cost of, when casualty or theft
loss involved 172, 174
Larceny:
Losses due to 172
Late filing 2
Penalties 10, 18
Late payment:
Penalties on tax payments 18
Public utility charges, not
deductible 162
Laundry:
Business-related travel
expense 180, 181
Lavish or extravagant
expenses 184
Law enforcement officers:
Life insurance proceeds when
death in line of duty 90
Leadbased paint removal:
Deductibility as medical
expense 149
Leased property:
Casualty or theft loss 173
Leased vehicles:
Car expenses 187
Leases (See Rental income and
expenses)
Legal expenses 202, 204
Liability insurance:
Reimbursements from 94
License fees:
Deductibility of 155
Nondeductibility of 203
Lifecare fees:
Paid to retirement home and
designated for medical care,
deductibility 149
Life insurance 7, 48, 90
(See also Group-term life insurance)
(See also Accelerated death
benefits)
Alimony, premiums when spouse
owns policy 133
Demutualization of
companies 105
Form 1099-R for surrender of
policy for cash 90
Premiums:
Not deductible 149
Proceeds 61
As income 89
Public safety officers who died or
were killed in line of duty, tax
exclusion 90
Surrender of policy for cash 90
Withholding 40
Life insurance premiums 35
Lifetime learning credit:
Married filing separately 22
Likekind exchanges 104
Basis for depreciation 101
Qualifications 100
Sale of home 114
Limit on itemized deductions 205
Limits:
Deductibility of mortgage
insurance premiums 161
Miscellaneous deductions 199
Rental losses 72
Line of credit for home:
Interest 156
Liquidating distributions 66
Living expenses:
Insurance paying, possible
income from 175
Loans 6, 18, 136, 162
(See also Student loans)
(See also Debts)
Fees for, not deductible 162
Home improvement loans 158
Home
mortgages (See Mortgages)
Origination fees (See Points)
Retirement plans, from 77
Lobbying:
Contributions for, not charitable
deductions 165, 167
Lobbying expenses 204
Local assessments:
Adjusted basis for 99
Deductibility of 155
Rental property, deductions
for 69
Local government employees:
Section 457 plans for
employees (See Section 457
deferred compensation plans)
Local income taxes, itemized
deductions 143
Local law violated 33
Lockout benefits 97
Lodges (See Social clubs)
Lodging 34
Longterm care insurance
contracts 53
Chronically ill individual 53, 90
Deductibility of medical
expense 149
Exclusion, limit of 53
Qualified services defined 53
Longterm debt instruments 107
Longterm gains and
losses (See Capital gains or
losses)
Losses 18, 22, 72
(See also Gains and losses)
(See also Passive activity)
Capital 22
Casualty 172, 201, 203
(See also Casualty losses)
Gambling (See Gambling
winnings and losses)
Records of 173
Theft 172, 201, 203
(See also Theft losses)
Lost property 204
When deemed casualty loss 172
Lotteries and raffles 96
(See also Gambling winnings and
losses)
No charitable deduction for
tickets 165, 167
Lumpsum distributions 80
10-year tax option 80
Capital gain treatment 80
Cost calculation 80
Election of 80
Form 4972 80
Net unrealized appreciation
(NUA) 80
Rollovers of 80
Taxable and tax-free parts 80
Luxury travel:
Travel expenses when incidental
business activities 182
Work-related education,
deduction of expenses 198
M
M&IE (Meals and incidental
expenses) 180, 181, 188, 191
(See also Meal and lodging
expenses)
(See also Incidental expenses)
Machinery 186
(See also Tools)
Rental for rental property 69
MAGI (See Modified adjusted gross
income (MAGI))
Mailing returns (See Tax returns)
Maintenance of rental
property (See Rental income
and expenses)
Mandatory retirement age 222
Market discount bonds 107
Married child 235
Married dependents, filing joint
return 27, 29
Married filing a joint return 232
Married filing separately 21, 232
Carryover of capital loss 117
Community property states 22
Credits, treatment of 22
Deductions:
Changing method from or to
itemized deductions 143
Treatment of 22
Earned income credit 22
How to file 22
Itemized deductions 22, 143
One spouse has itemized so
other must as well 142
Joint state and local income taxes
filed, but separate federal
returns 152
Medical and dental
expenses 146
Rollovers 22
Social security and railroad
retirement benefits 85
State and local income
taxes 152
Student loan interest deduction
and 137
Tenants by the entirety, allocation
of real estate taxes 154
Married taxpayers 6, 21, 22, 64, 77
(See also Joint returns)
(See also Married filing separately)
(See also Tenants by the entirety)
(See also Spouse)
Age 65 or older spouse:
Standard deduction 142
Blind spouse:
Standard deduction 142
Child and dependent care
credit 218
Deceased spouse 4, 5, 20, 21
(See also Surviving spouse)
Definition of spouse for purposes
of alimony 133
Dual-status alien spouse 21
Educator expenses 141
Estimated tax 41, 42
Filing status 4, 5, 20
Form 1040EZ, use of 6
IRAs 121, 122
Spouse covered by employer
plan 121, 123
Living apart 20
Medical and dental
expenses 146
Deceased spouse's
expenses 147
Nonresident alien spouse 12, 21
Performing artists 194
Roth IRAs 130
Signatures when spouse unable
to sign 13
Social security or railroad
retirement benefits,
taxability 84
Transfer of home to spouse 110
Transfers between
spouses 101, 105
Travel expenses for spouse 180
Mass transit passes,
employerprovided 50
Maternity clothes:
Not deductible as medical
expense 149
MCC (Mortgage credit
certificate) 250
Meal and lodging expenses 180
50% deduction for
business-related meals 180,
Figure 26-A summary of
rules 184
Work-related education 198
Business-related entertainment
including 180, 184
Business-related travel expense
including 180, 181
Form 2106 or 2106-EZ, how to fill
out 193, 194
Lodging 181
Proof of expenses 188
Table 26-2 summary 188
Recordkeeping
requirements 180, 188
Reporting of 189
Table 26-3 showing forms to
be used 192
Restaurant receipts 188
Publication 17 (2016) Page 281
Meal and lodging expenses (Cont.)
Standard meal allowance 180,
181, 191
Amount of 181
Areas outside continental
U.S. 181
Prorating on partial days of
travel 191
Taking turns paying for meals or
entertainment 184
Transportation workers 181
Deduction limits 183
Medicaid waiver payments 240
Medical and dental
expenses 146–151
Adjusted gross income and limit
of deduction 146
Adopted child 147
Alimony payments made to
cover 133
Contributions to cover, not
deductible as charitable
donations 167
Damages including 150
Decedent's expenses 147
Deduction 146
Checklist for deductible
expenses
(Table 21-1) 148
Dependent's expenses 146
Determination of date paid 146
Doctor 146
Form 1040, Schedule A, for
reporting 150
Future expenses, settlement
including 150
Health insurance
premiums (See Health
insurance)
Included expenses:
Individuals covered 146
Meals and lodging related to
receiving medical care 148,
Medical care, defined 146
Physician 146
Purpose of expenses 146
Reimbursements, treatment
of 54, 149
Work-related 219
Medical devices:
Deductibility of 149
Medical insurance (See Accident
insurance)
Medical insurance premiums 35
Medical research organizations:
Charitable contributions to 164
Medical savings accounts
(MSAs) 48, 96
(See also Archer MSAs)
Medical Savings Accounts
(MSAs):
Additional tax on 207
Medicare Advantage MSA 96
Medical expenses paid for
decedent from 147
Medicare 7, 47, 51
(See also Social security and
Medicare taxes)
Benefits 94
Medicare A, when deductible as
medical expense 148
Medicare Advantage
MSA (See Medical savings
accounts (MSAs))
Medicare B, when deductible as
medical expense 148
Medicare D, when deductible as
medical expense 148
Medicare tax 207
Medicare taxes, not support 35
Medications:
Deductibility as medical
expense 149
Member of household or
relationship test 33
Membership fees (See specific type
of organization)
Members of the uniformed
services or Foreign
Service 112
Mentally incompetent persons 7,
52, 76
(See also Disabilities, persons with)
(See also Elderly or disabled, credit
for)
Signing of return by
court-appointed
representative 13
Metals, precious (See Gold and
silver)
Mexico:
Resident of 27, 32
Mileage deduction for
workrelated education 195
Mileage rates (See Standard
medical mileage rates)
Military (See Armed forces)
Military personnel:
Earned income credit 235
Mineral royalties 92
Minimum essential coverage 247
Ministers (See Clergy)
Miscellaneous deductions 199
Federal employees buying back
sick leave 53
Outplacement agency fees 47
Missing children:
Photographs of, included in IRS
publications 2
Mistakes (See Errors)
Modified adjusted gross income
(MAGI) 135
(See also Deductions)
Child tax credit limits 225
IRAs, computation for:
Effect on deduction if covered
by employer retirement
plan (Table 17-1) 123,
Effect on deduction if not
covered by employer
retirement plan
(Table 17-2) 123
Worksheet 17-1 124
Roth IRAs, computation for:
Phaseout (Table 17-3) 129
Worksheet 17-2 129
Money market certificates 57
Money market funds 66
Mortgage:
Relief 89
Mortgage credit certificate
(MCC) 250
Mortgage insurance
premiums 160
Mortgage Insurance Premiums:
Basis in property not to
include 99
Form 1098 reporting 161
Mortgage interest:
Home mortgage interest 156
Mortgage interest credit 250
Carryforward 250
Form 8396 156
How to take 250
Recapture 250
Reduced deduction 250
Mortgages 158, 162
(See also Points)
Alimony, payments as 133
Assistance payments 94
Assistance payments (under sec.
235 of National Housing
Act) 158
Assumption of 98
Fees not included in basis 99
Credit certificate (MCC) from
state or local
government 156
Discounted mortgage loan 89
Ending early, treatment of
points 160
Federally subsidized mortgage:
Recapture of tax paid on
home purchased
with 250
Interest:
Definition 156
Form 1098 (interest
statement) 73, 161
Refund of 91
Interest credit (See Mortgage
interest credit)
Interest deduction:
Sale of home 156
Schedule A (Form 1040) to
deduct 162
Late payment charges, deduction
of 156
Lender's charges for
services 160
More than one borrower (not
spouse), reporting of interest
deduction 162
Preparation costs for notes or
deeds of trust 160
Prepayment:
Allocation of deduction 156
Penalty for, deduction of 156
Points 158
Reported on Form 1098 161
Proceeds used for business or
investment, deduction of 162
Refinancing 160
Refund of interest:
Reported on Form 1098 161
Treatment of 158
Reverse 158
Seller-financed 114
Mosques (See Churches, temples,
etc.)
Motels (See Hotels)
Moth damage:
Not casualty losses 172
Motor vehicles, donations of 168
MSAs (See Medical savings
accounts (MSAs))
Multiple support agreement 35
Municipal bonds 61
Museums:
Charitable contributions to 164
Musicians and entertainers 201
Mutual funds 202
Adjusted basis of shares 102
Allocated expenses 202
Capital gains 66
Dividends from 66
Exempt-interest dividends 67
Nonpublicly offered 202
Publicly offered 202
Undistributed capital gains 117
Credit for tax on 251
N
Name change 12, 44
National Housing Act:
Mortgage assistance 94, 158
National of the United States 27
Native Americans (See Indians)
Negligence penalties 19
Net investment income 161
Net operating losses:
Casualty or theft losses 178
Refund of carryback 18
New Jersey Nonoccupational
Disability Benefit Fund 152
New Jersey Unemployment
Compensation Fund 152
New job, trade, or business:
Employment agency fees 200
Job search expenses 200
Travel expenses 200
Work-related education
expenses 197
New York Nonoccupational
Disability Benefit Fund 152
Nightclubs:
Cover charges, 50% limit on
deduction 183
Nobel Prize 96
Nominees 57, 62
Dividends that belong to
someone else 64
Nonaccountable plans for
employee
reimbursements 191, 192
Noncapital assets 106
Nonemployee compensation 95
Nonrefundable credits 248
Nonresident alien 216, 232
Nonresident aliens 6
Due dates 10
Estimated tax 41
Form 1040EZ, use of 6
Individual taxpayer identification
number (ITIN) 12
Spouse 12
Joint returns not available 21
Separated 23
Transfers between spouses
when one spouse is
nonresident alien 105
Standard deduction 142
Taxpayer identification
number 36
Waiver of alien status 51
Nontaxable trades (See Tax-free
exchanges)
Northern Mariana Islands:
Income from 6
Notary fees 95
Not deductible as interest 160
Notes:
As obligations of individuals 107
Discounted 47, 61
Received for services 47
Notforprofit activities 94
Nursery schools (See Child and
dependent care credit)
Nursing care:
Employment taxes for worker
providing medical care,
deductibility of 149
For healthy baby, not deductible
as medical expense 149
Wages for, deductibility as
medical expense 149
Nursing homes:
Insurance for care
in (See Long-term care
insurance contracts)
Meals and lodging, deductible as
medical expense 148
Nursing services 149
Nutritional supplements:
Not deductible as medical
expense 149
Nutrition Program for the
Elderly 94
O
OASDI 94
Occupational taxes 200
Deduction of:
Taxes that are deductible
(Table 22-1) 154
Office, use of home as 200
Office rent, deductibility of 201
Offset against debts 9, 14
Oil, gas, and minerals:
Future production sold 92
Royalties from:
Schedule C or C-EZ 92
Sale of property interest 92
Older taxpayers:
Credit for the elderly 221
Options 50, 66
Charitable contributions, date
of 170
Ordinary
dividends (See Dividends)
Ordinary gain 106
Ordinary gain and loss (See Gains
and losses)
Organ donors:
Deductibility of medical
expense 149
Original issue discount (OID) 61
Adjusted basis and 102
Discounted debt
instruments 107
Origination fees (See Points)
Other taxes 206
Out of work 221
Outplacement services 47
Deduction of agency fees 47
Overpayment of tax 13
(See also Tax refunds)
Overseas work (See Foreign
employment)
Overthecounter drugs:
Not deductible as medical
expense 149
Overtime pay 39
Oxygen equipment and oxygen:
Deductibility as medical
expense 149
P
Paper vs. electronic
return (See E-file)
Paperwork Reduction Act of
1980 2
Parental
responsibility (See Children)
Page 282 Publication 17 (2016)
Parents, divorced or
separated 28, 238
Divorced parents 238
Parents who never married 29
Parking fees:
Business-related travel 187
Commuting expense 186
Employer-provided fringe benefit:
Exclusion from income 49
Medical-related travel 148
Sports arena, business-related
entertainment subject to 50%
limit 183
Parks and recreation facilities:
Charitable contributions to 164
Parochial school tuition:
No charitable deduction 167
Partners and partnerships 202
Capital gains or losses from 117
Income 90
Investment interest 161
Related party transactions 105
Passive activity 103
Losses 22, 162
Exception for real estate
professionals 72
Investment interest and 161
Rental property 72
Reporting of gains or losses 116
Passthrough entities 202
Patents:
Infringement damages 94
Royalties 92
Patronage dividends 67
Payment of estimated tax 43
By check or money order 43
Credit an overpayment 43
Payment of tax 2, 9, 14, 15, 17, 43
By credit or debit card 10
Delivery services 9
Estimated tax 15
Installment
agreements (See Installment
agreements)
Late payment penalties 18
Payments 207–209
Disaster relief 93
Payroll deductions 155, 170
Payroll taxes 47
(See also Social security and
Medicare taxes)
Peace Corps allowances 52
Penalties 42, 45
Accuracy-related 19
Alimony deduction, failure to
provide social security
number (SSN) or individual
taxpayer identification number
(ITIN) of recipient 135
Backup withholding 40
Civil penalties 18
Criminal 19
Deductibility 162, 204
Defenses 19
Estimated tax (See this heading:
Underpayment of estimated
tax)
Failure to include social security
number 12, 19
Failure to pay tax 18
Failure to provide social security
number (SSN) or individual
taxpayer identification number
(ITIN):
Alimony deduction 135
Failure to provide social security
number or TIN:
Home seller and
purchaser 162
To dividend payers 64
Form 8606 not filed for
nondeductible IRA
contributions 120, 124
Fraud 18, 19
Frivolous tax submission 19
Interest on 15
IRAs:
Early distributions 129
Excess contributions 128
Form 8606 not filed for
nondeductible
contributions 120, 124
Overstatement of
nondeductible
contributions 124
Required distributions, failure
to take 127
Late filing 10, 18
Exception 18
Late payment 18
Negligence 19
Reportable transaction
understatements 19
Roth IRAs:
Conversion contributions
withdrawn in 5-year
period 132
Excess contributions 131
Substantial understatement of
income tax 19
Tax evasion 19
Tips, failure to report 55
Underpayment of estimated
tax 37, 42, 45, 210
Willful failure to file 19
Withholding 39, 40
Pennsylvania Unemployment
Compensation Fund 152
Pensions 37, 76–83
(See also Annuities)
(See also Railroad retirement
benefits)
(See also Rollovers)
457 plans (See Section 457
deferred compensation plans)
Clergy 51
Contributions:
Retirement savings
contribution credit 22,
Taxation of 50
Cost computation 77
Decedent's unrecovered
investment in 13
Definition of 82, 83
Disability pensions 52
Early distributions:
Exceptions to tax on 82
Qualified retirement plans,
exceptions for 82
Tax on 81, 82
Elective deferral limitation 50
Employer plans:
Benefits from previous
employer's plan 122
Rollover to IRA 125, 132
Situations in which no
coverage 122
Estimated tax 77
Excess accumulation, tax
on 81–83
Foreign employment
contributions 77
General Rule for nonqualified
plans and qualified plans for
recipients over 75 years 79
Inherited pensions 96
Joint returns 77
Loans from plan 77
Lump-sum distributions 80
(See also Lump-sum
distributions)
Military (See Armed Forces)
Multiple pension plan
benefits 76, 77
Partly taxable payments 77
Reporting of 77
Required distributions:
At age 70 1/2 83
Excise tax for failure to take
minimum distributions 82
Form 5329 for failure to
receive required
minimum, 83
State insurer delinquency
proceedings preventing
minimum distributions 83
State and local government
employees (See Section 457
deferred compensation plans)
Unrecovered investment in 203
Withholding 13, 40, 77, 81
Pentagon attacks (See Terrorist
attacks)
Per capita taxes:
Deductibility of 155
Per diem:
Allowance or
reimbursement 189, 191
Charitable organization service,
for 167
Federal rate 191
High-low rate method to
compute 191
Performing artists:
Business expenses 194
Work-related education
expenses 199
Permanent and total
disability 221
Personal exemption 22, 25–36
Joint return 25
Spouse's exemption 25
Personal injury suits:
Damages from 94
Personal interest:
Not deductible 162
Personal property 176
(See also Casualty losses)
As capital assets 106
Rental income from 91
Taxes (See Personal property
taxes)
Theft of (See Theft losses)
Personal property taxes:
Car taxes 187
Deduction of 155
Schedule A, C, E, or F (Form
1040) 156
Taxes (See Personal property
taxes)
Personal
representatives (See Fiduciarie
s)
Persons with
disabilities (See Disabilities,
persons with)
Photographs:
Casualty or theft loss claims 174
Physical examination 149
Physician's statement 222
Veterans 222
Physician certification 221
Place for filing 15
Plants and trees:
Cost of, when casualty or theft
loss involved 172, 174
Plastic surgery:
Not deductible as medical
expense when cosmetic 149
Plugin electric drive motor
vehicle credit 250
Points 158
Basis in property not to
include 99
Definition 158
Excess points 160
Form 1098 reporting 161
Limits on deduction 160
Main home purchase, special
treatment of 99
Mortgage ending early 160
Paid by seller 160
Refinancing 160
Schedule A (Form 1040) to
deduct 162
Second home 160
Settlement statement shows as
charged for mortgage 158
Political campaign
expenses 203, 204
Political
contributions (See Campaign
contributions)
Political conventions:
Travel expenses 183
Ponzitype investment
schemes 173
Post office employees:
Rural mail carriers 187
Postponed tax deadlines:
Disaster areas 177
Postponement of gain:
Sale of home:
Adjusted basis 100
Power of attorney 13, 21
Preferred stock:
Redeemable at a premium 66
Pregnancy test kit 149
Premature distributions (See Early
withdrawal from deferred interest
account)
Premium tax credit 246
Figure credit 247
Prepaid:
Insurance 58
Preparer's fee:
Deductible amount 201
Preparers of tax returns 13
Prepayment:
Insurance premiums:
Deductibility as medical
expense 148
Mortgage
interest (See Mortgages)
Rent paid in advance 68
Prescription medicines:
Deductibility as medical
expense 149
Presidential Election Campaign
Fund 12
Presidentially declared
disasters (See Disaster relief)
Price reduced after purchase 89
Principal residence (See Home)
Prisoner 216
Privacy Act and paperwork
reduction information 2
Private delivery services 9
Private schools:
Charitable deduction for
tuition 167
Prizes and awards 47, 96
(See also Bonuses)
Exclusion from income 47
Pulitzer, Nobel, and similar
prizes 96
Scholarship prizes 97
Probationary work periods:
Travel expenses during 180
Professional license fees 204
Professional Reputation 204
Professionals:
Entertainment expenses for
attending association
meetings 184
Profitsharing plans:
Lump sums (See Lump-sum
distributions)
Withholding 13, 40
Promissory notes:
Charitable contributions, date
of 169
Proof of business expense 188
Table 26-2 summary 188
Proof of loss 173
Property 98, 108
(See also Real estate)
(See also Real Estate)
Found 96
Stolen 97
Prostheses:
Deductibility of medical
expense 149
Protective clothing 201
Psychiatric care:
Specially equipped medical
centers, deductibility of
expense 149
Public assistance benefits 93
Publication 1244:
Daily record of tips (Form
4070A) 54
Reporting tips to employer 54
Publication 584:
Casualty and theft losses,
workbook for 172
Publications (See Tax help)
Public debt:
Gifts to reduce 15
Public parks and recreation
facilities:
Charitable contributions to 164
Public safety officers insurance
premiums 76
Public transportation passes,
employerprovided 50
Public utilities (See Utilities)
Puerto Rico:
Residents of 5
Pulitzer Prize 96
Punitive damages:
As income 94
Q
Qualified dividends 64, 67
Qualified domestic relations
orders (QDROs):
Rollover of retirement plan
distribution 81
Publication 17 (2016) Page 283
Qualified education expenses:
Work-related education, business
deduction 197
Qualified health plan 247
Qualified individuals:
Under age 65 and retired on
permanent and total
disability 221
Qualified joint venture 73
Qualified plans 76, 81, 125
(See also Retirement plans)
(See also Rollovers)
Qualified student
loan (See Student loan interest
deduction)
Qualified tuition programs 96
Additional tax on 207
Qualifying child 27
Age test 234
Joint return test 234, 235
Of another person 238
Relationship test 234
Residency test 234
Qualifying person:
Child and dependent care
credit 216
Qualifying relative 32
Qualifying widow(er) filing
status 24
R
Raffles 96
No charitable deduction for
tickets 165, 167
Railroad retirement benefits 76,
83–88, 97
Deductions related to 87
Employer retirement plans
different from 122
Equivalent tier 1 (social security
equivalent benefit
(SSEB)) 83, 97
Estimated tax 85
Form RRB-1042S for nonresident
aliens 84
Form RRB-1099 83
Income 7
Joint returns 88
Lump-sum election 85
Married filing separately 22, 85
Repayment of benefits 85
Reporting of 85
Taxability of 84, 85
Withholding 40
Not tax deductible 155
Withholding for 85
Railroad Unemployment
Insurance Act 53
Real estate 70, 71, 108, 156
(See also Vacation homes)
(See also Mortgages)
As noncapital assets 106
Basis 98
Canceled business debt,
treatment of 89
Casualty loss 176
Closing costs 98
Definition of 98
Division of real estate taxes 153
Fair market value (FMV) 98
Form 1099-S to report sale
proceeds 116, 154
Holding period, determination
of 108
Itemized charges for services not
deductible 155
Points 158
Progressive deterioration, not
casualty loss 172
Real estate-related items not
deductible 155
Rental (See Rental income and
expenses)
Settlement fees 98
Transfer taxes 155
Real estate investment trusts
(REITs):
Dividends from 66
Undistributed capital gains:
Credit for tax on 66, 251
Real estate taxes:
Alimony deduction for, when
home owned as tenants in
common 133
Assessments (See Local
assessments)
Basis of property and 98
When not reimbursed by
property seller 99
Cooperative
housing (See Cooperative
housing)
deduction of 153
Deduction of:
List of deductible taxes
(Table 22-1) 154
Schedule A, C, E, or F (Form
1040) 156
Refund, treatment of 154
Rebates (See Refunds)
Recapture:
Alimony 135
Reporting on Form 1040 135
Taxes 207
Recharacterization:
IRA contributions 126
Recording fees:
Basis to include 98
Recordkeeping:
Gambling 203
Sale of home 111
Savings bonds used for
education 61
Recordkeeping requirements 15
Basic records 16
Business travel expenses 180,
Copies of returns 16
Destroyed records 188
Documentary evidence 188
Electronic records 16
Electronic records of tips 54
Gambling 96
Incomplete records 188
Meal expenses:
Actual cost 180
Standard meal
allowance 180
Period of retention 16, 189
Proof of payments 16
Tip income 54
Travel expenses 180, 188
Why keep records 15
Work-related education
expenses 199
Records of loss 173
Records to keep 170
Recovery of amounts previously
deducted 91
Itemized deductions 91
Mortgage interest refund 91
Over multiple years 91
Stolen property, adjustment of
theft loss 173
Tax refunds 91
Red Cross:
Blood donations not
deductible 165, 168
Charitable contributions to 164,
Redeemable ground rents:
Deduction as mortgage
interest 158
Redemption of bonds 103
State and local bonds, before
maturity 107
Redemption of stock 103
Refinancing:
Fees for, not part of property
basis 99
Points 160
Refundable credits 251
Refunds 207
Mortgage interest, treatment
of 158
State tax 91
Taxes (See Tax refunds)
Regulated investment companies:
Undistributed capital gains:
Credit for tax on 251
Rehabilitative program
payments 51
Reimbursement 91, 189, 191, 193
(See also Recovery of amounts
previously deducted)
(See also Per diem)
Accountable plans, definition
of 189
Allocation of 193
Casualty losses 174
Employee business
expenses 46
Gain from casualty or theft
loss 173
Health insurance, reimbursement
in later year 150
Medical and dental
expenses 149
Excess reimbursement
flowchart (Figure
21-A) 150
Mileage (See Standard mileage
rates)
Personal expenses 189
Received after deducting
loss 175
Returning excess for business
expenses 192
Tax year of inclusion for
insurance
reimbursement 175
Theft losses 174
Travel advances 192
Types of 174
Unclaimed 198
Work-related education
expenses 198
Reinvestment plans:
Dividends used for 65
Related party transactions 105
Indirect transactions 105
Like-kind exchanges 104, 105
Multiple property sales or
trades 105
Relationship test 27, 33
Relative, qualifying 32
Relief fund contributions 204
Relief funds 175
(See also Disaster relief)
Religious organizations 6, 50, 51,
164–166
(See also Clergy)
(See also Churches, temples, etc.)
Charitable contributions to 164,
Written statement not
needed 165
Remainder interest, sale of 115
Rental income:
Uncollected rent 68
Rental income and
expenses 68–76
Advance rent 68
Canceling lease, payments
for 68
Capitalized costs 69
Change of property to rental
use 69, 102
Deductions 68
Losses that exceed passive
income 72
Depreciation 68, 72
Dwelling unit used as a home:
Days used for repairs and
maintenance 71
Donation of use of
property 71
Main home determination 70
Rented for fewer than 15
days 68
Dwelling unit used as home:
Capital gains exclusion 113
Determining if used as
home 71
Division of expenses 70
Figuring days of personal
use 70
Rented for fewer than 15
days 71
Shared equity financing
agreement 70
Equipment rental for rental
property 69
Expenses paid by tenant 68
Fair rental price 70
Home possession before final
settlement, rent not deductible
as interest 158
Improvements 69
Defined 69
Increase due to higher real estate
taxes:
Deductibility
(Table 22-1) 154
Insurance premiums paid in
advance 69
Local assessments 69
Losses from rental real estate
activities 22, 72
Not-rented-for-profit property 70
Part interest 68
Part of property rented 69
Personal property rental 91
Personal use of property
including vacation home:
Allocation of expenses 68
Pre-rental expenses 68
Property or services received
instead of money 68
Purchaser's payment of rent, not
included in property basis 99
Repairs 69
Reporting of 73
Sale of rental property 68
Schedule E for reporting of 73
Security deposits 68
Self-employment tax, when
applicable 73
Tax return preparation 69
Time to report 68
Travel expenses associated with
management and
maintenance 69
Vacant rental property 68
Reorganizations, corporate:
Nontaxable trade of stock 104
Repairs:
Basis, effect on 98, 99
Cost of, when casualty or theft
loss involved 174
Rental expenses 69
Repayments 92
Amount previously included in
income 203
Railroad retirement benefits 85
Social security benefits 85, 92
Unemployment
compensation 93
Reporting:
Rollovers 126
Repossession of home 110
Required minimum
distributions 83, 125, 127
(See also Pensions)
(See also Individual retirement
arrangements (IRAs))
Rescue squad members:
Life insurance proceeds when
death in line of duty 90
Research expenses:
College professor 201
Reservists:
Deduction for transportation
expense 185
IRAs 122
Repayments 121
Residency:
Home outside U.S. (See Citizens
outside U.S.)
Main home, defined 109
Residency test 28
Resident aliens:
Earned income credit 232
Estimated tax 41
IRA distributions, withholding
from 128
Social security number (SSN) 12
Spouse treated as 23
Residential energy credits 251
Resorts:
Travel expenses when incidental
business activities 182
Restaurant employees:
Tips (See Tip income)
Retail installment contracts:
Finance charges, not
deductible 162
Retail inventory 106
Retention of
records (See Recordkeeping
requirements)
Retired Senior Volunteer
Program 52
Retirees 76
(See also Retirement plans)
Armed forces:
Taxable income 51
Retirement of bonds 103, 107
Rollover of amount redeemed 81
Retirement planning services 49
Retirement plans 22, 37, 76, 81, 83
(See also Roth IRAs)
Page 284 Publication 17 (2016)
Retirement plans (Cont.)
(See also Annuities)
(See also Railroad retirement
benefits)
(See also Rollovers)
457 plans (See Section 457
deferred compensation plans)
Clergy 51
Contributions:
Credit for (See Retirement
savings contribution
credit)
Taxation of 50
Cost computation 77
Decedent's unrecovered
investment in 13
Definition of 82, 83
Disability pensions 52
Early distributions:
Exceptions to tax on 82
Tax on 81, 82
Elective deferral limitation 50
Employer plans:
Benefits from previous
employer's plan 122
Rollover to IRA 125, 132
Situations in which no
coverage 122
Estimated tax 77
Excess accumulation, tax
on 81–83
Foreign employment
contributions 77
General Rule for nonqualified and
qualified plans for recipients
over 75 years 79
Inherited pensions 96
IRAs (See Individual retirement
arrangements (IRAs))
Joint return 77
Keogh plans 77
Loans from plan 77
Lump-sum distributions 80
Military (See Armed Forces)
Multiple pension plan
benefits 76, 77
Partly taxable payments 77
Reporting of 77
Required distributions:
At age 70 1/2 83
Excise tax for failure to take
minimum distributions 82
Form 5329 for failure to
receive required minimum
retirement plan
distributions 83
State insurer delinquency
proceedings preventing
minimum distributions 83
Section 457 plans (See Section
457 deferred compensation
plans)
State and local government
employees (See Section 457
deferred compensation plans)
Withholding 13, 40, 77, 81
Retirement savings contribution
credit 251
Adjusted gross income limit 22
Returns, tax (See Tax returns)
Revenue stamps:
Basis to include 98
Reverse Mortgages 158
Revolving charge accounts:
Finance charges, not
deductible 162
Rewards 97
Rhode Island Temporary
Disability Benefit Fund 152
Robbery:
Losses due to 172
Rollovers 81, 125
Beneficiaries, restrictions 81
Definition of 125
Designated Roth account 81
Direct rollovers 81
Eligible distributions 81
Excess due to incorrect rollover
information 129
From 403 plan to IRA 125
From employer's plan to IRA 125
From IRA to IRA 125
From IRA to Roth IRA 132
From Roth IRA to Roth IRA 132
From section 457 plan to
IRA 125
From SIMPLE IRA to Roth
IRA 132
Gain from publicly traded
securities 109
Inherited IRAs 125
Lump-sum distributions 80
Married filing separately 22
Nonspouse beneficiary 81
Nontaxable amounts 81
Partial rollovers 125
Qualified domestic relations
orders for distribution of
retirement plan funds 81
Reporting:
From employer's plan to
IRA 126
IRA to IRA 125
Retirement bond redemption 81
Roth IRAs 81
Surviving spouse 81
Taxability 125, 129
Time limits (60-day rule) 125
Treatment of 125
Waiting period between 125
Withholding tax 81
Roth IRAs 129–132
(See also Rollovers)
Age:
Distributions after age
59 1/2 132
No limit for contributions 130
No required distribution
age 132
Compensation, defined 130
Contribution limits 131
Age 50 or older, 131
Under age 50, 131
Contributions:
No deduction for 130
Roth IRA only 131
Time to make 131
To traditional IRA for same
year 131
Conversion 132
Definition of 130
Distributions:
Qualified distributions 132
Effect of modified AGI on
contributions
(Table 17-3) 129
Establishing account 130
Excess contributions 131
IRA transfer to 125, 126
Modified adjusted gross income
(MAGI):
Computation (Worksheet
17-2) 129
Phaseout (Table 17-3) 129
Penalties:
Conversion contributions
withdrawn in 5-year
period 132
Excess contributions 131
Recharacterizations 126
Spousal contributions 130
Taxability 132
Withdrawals:
Excess contributions 131
Not taxable 132
Rounding off dollars 12
Royalties 92
Rural mail carriers 187
S
Safe deposit box 202
Salaries (See Wages and salaries)
Sale of home 72, 97, 109–115
(See also Real estate)
Abandonment 110
Adjusted basis 110, 111
Amount realized 110
Basis 110
Capital gains exclusion 111
Division of real estate taxes 153
Employer, payment by 110
Federal subsidy, recapture
of 115
Foreclosure or repossession 110
Form 1099-S 110
Gain or loss, figuring of 110
Interest deduction for
mortgage 156
Interest paid to seller, reporting
of 162
Jointly owned home 110
Land 109
Main home, defined 109
More than one home 109
Option to buy 110
Period of ownership and use 112
Points paid by seller 160
Postponed gain from 100
Recordkeeping 111
Reporting of gain 114
Seller-financed mortgage 114
Selling price 110
Settlement fees or closing
costs 111
Trading homes 110
Transfer to spouse 110, 113
Undeducted points 109
Sale of property 102–109
Adjusted basis 103
Amount realized 103
Basis other than cost 104
Business property that has
undergone change of
use 102
Cash payment 104
Debt payoff included in 103
Definition of 103
Fair market value (FMV) 103
Figuring gain or loss 103
Form 1099-B 103
Like-kind exchanges 104
Personal items 97
Redemption of stock 103
Rental property that has
undergone change of
use 102
Transfers between spouses 105
Sales and exchanges:
Bonds 61
Sales tax:
Basis to include 98
Car purchase 187
Sales to related persons,
exception 115
Salvation Army (See Charitable
contributions)
Samesex marriage 20
Saturday, deadline falling on 42
Savings:
Bonds 58, 63
Bonds used for education 60
Certificate 57, 62
Schedule 15, 46, 47, 51, 53
(See also Form 1040)
Form 1040, A-F, R, SE (See Form
1040)
K-1:
K-1, Form 1041 56
Beneficiaries receiving
income from estate or
trust 64
Partnership income 90
S corporation income 90
Schedule 8812 225
Schedules A–F, R, SE (Form
1040) (See Form 1040)
Scholarships 29, 33, 35
Scholarships and fellowships 6, 7
Earned income including 143
Exclusion from gross income 97
Teaching or research
fellowships 97
Tuition deduction, effect on 139
S corporations 202
Capital gains or losses from 117
Related party transactions 105
Shareholders 90
Investment interest 161
Scrip dividends 67
Second homes (See Vacation
homes)
Second mortgages:
Interest 156
Section 1202 exclusion:
Capital gains or losses
under 117
Section 1244 stock:
Losses on 107
Section 1250 gains:
Sale of real property subject
to 117
Section 179 deductions:
Adjustment to basis for 99
Car expenses 187
Section 457 deferred
compensation plans 76
Early distributions from 82
Required distributions 83
Rollovers:
To IRAs 125, 132
Section 72(m)(5) 207
Securities 64, 115
(See also Dividends)
(See also Capital gains)
Adjusted basis for 102
As capital assets 106
Bought at various times, how to
indicate 116
Claim for refund 18
Constructive ownership of stock,
determination of 105
Convertible stocks and
bonds 104
Fractional shares 66
Holding period, determination
of 108
Joint owners, reporting of
dividends 64
Nontaxable trades 104
Options 50, 66
Preferred stock, redeemable at a
premium 66
Redemption of stock 103
Reinvestment plan, dividends
used for 65
Rollover of gain from publicly
traded securities 109
Sale expenses, how to adjust
for 116
Short-term gains and losses 116
Stock appreciation rights 47
Stock rights:
As capital assets 106
Dividends as 66
Holding period, determination
of 108
Worthless 103
Surrender of stock 103
Tax-exempt:
Home equity loan proceeds
invested in 158
Interest incurred to produce
income from 161
Interest to purchase or carry,
not deductible 162
Tenants by the entirety owning,
reporting of dividends 64
Tenants in common owning,
reporting of dividends 64
Worthless securities 103
Security deposits:
Rental property, for 68
Selfemployed persons 156
(See also Self-employment tax)
Corporate directors as 95
Definition 6
Filing requirements (Table 1-3) 7
Foreign government or
international organizations,
U.S. citizens employed by 6
Gross income 5
Health insurance costs,
deductible as medical
expense 151
Homeworkers, deduction of
expenses 189
IRAs 121
Meal allowance not permitted
when more than 10%
ownership of corporation 191
Ministers 6
Nonemployee compensation 95
Qualified retirement plans for 77
Travel outside U.S. 182
Work-related education
expenses 198
Selfemployment tax 206
Deduction of:
List of deductible taxes
(Table 22-1) 154
Rental income 73
Sellerfinanced mortgages 114
Seminars:
Investment-related 204
Senior Companion Program 52
Separated parents 28, 32, 238
Separated taxpayers 20
Filing status 21, 22
IRAs 122
Publication 17 (2016) Page 285
Separated taxpayers (Cont.)
Medical and dental expenses of
children of 147
Mortgage interest 158
Nonresident alien spouse 23
Personal exemption 25
Separate returns (See Married filing
separately)
Separation agreements:
Defined for purposes of
alimony 133
SEPs (See Simplified employee
pensions (SEPs))
Series EE and E savings
bonds 58
Series HH and H savings
bonds 58
Series I savings bonds 58
Service charges 202
Deductibility of 162
Employer treating as wages for tip
income 54
Service Corps of Retired
Executives (SCORE) 52
Services:
No charitable deduction for value
of 165
Property received for 100
Settlement date of securities
transaction 108
Settlement fees:
Real property transactions 98
Sale of home 111
Severance pay 47
Accrued leave payment 47
Outplacement services 47
Shipping:
Business-related travel
expense 181
Shipwrecks:
Casualty loss due to 172
Short tax year:
Change in annual accounting
period 142
Shortterm debt instruments:
Government obligations 106
Ordinary gain 106
Shortterm gains and losses 106,
Priority in deducting 117
Sale or trade of property held 1
year or less 107
Sick leave:
Cash payments for unused
leave 148
Federal employees buying
back 53
Sick pay:
Collective bargaining
agreements 39
FECA payments 53
Income 47
Railroad Unemployment
Insurance Act 53
Withholding 39
Signatures 13
Agent, use of 13
Joint returns 21
Mentally incompetent 13
Parent for child 13
Physically disabled 13
Signing your return 8
Silver (See Gold and silver)
SIMPLE plans:
Rollover to Roth IRA 132
Simplified employee pensions
(SEPs):
IRAs as 121
Simplified Method:
Computation of taxable annuity:
Worksheet 78
Single taxpayers 20
Charitable contributions to, no
deduction for 165, 167
Filing requirements 5
Filing status 5, 20
Form 1040EZ, use of 6, 20
Gross income filing requirements
(Table 1-1) 4
Small businesses:
Capital gains or losses from stock
of 117
Keogh plans 77
Losses on stock of 107
Smoking cessation programs:
Deductibility as medical
expense 149
Social clubs:
Contributions to, no charitable
deduction for 165
Dues:
Not entertainment
expenses 184
Social security and Medicare
taxes 207, 220
Allocated tips 56
Reporting of (Table 1-3) 7
Support, not included in 35
Social security benefits 34, 83, 88
Deductions related to 87
Employer retirement plans
different from 122
Estimated tax 85
Foreign employer 51
Form SSA-1042S for nonresident
aliens 84
Form SSA-1099 83
Group-term life insurance, taxes
owed on 7
Income 7
IRAs for recipients of
benefits 122
Joint returns 88
Lump-sum election 85
Married filing separately 22, 85
Paid by employer 47
Repayment of benefits 85, 92
Repayments 202
Reporting of 85
Taxability of 84, 85
Tips, taxes owed on 7
Withholding 40
Withholding for 85
Not deductible 155
Social security number (SSN) 12,
Alimony recipient's number
required 135
Child's 1
Number to be obtained at
birth 36
Correspondence with IRS,
include SSN 12
Dependents 1, 12
Exception 12
Dividend payers to use 64
Earned income credit 232, 235
Failure to include penalty 12
Form SS-5 to request number 12
Nonresident alien spouse 12
Penalty for failure to provide:
To dividend payers 64
Resident aliens 12
Social security card 232
Sonic booms:
Casualty loss due to 172
Special needs children:
Adoption credit 249
Spouse 5, 12, 13, 20, 21, 81, 90
(See also Married taxpayers)
(See also Surviving spouse)
Disabled, qualifying for
dependent care credit 216
Student 216
Spouse's death 142
SSN (See Social security number
(SSN))
Stamps (See Collectibles)
Stamp taxes:
Real estate transactions and 155
Standard deduction 142, 143
Standard meal allowance 180,
181, 191
Amount of 181
Areas outside continental
U.S. 181
Prorating on partial days of
travel 191
Standard medical mileage
rates 146
Medical reasons for use of
car 148
Standard mileage rates 187
Business-related miles 178,
186, 187
Car expenses 186
Charitable organization service,
auto use for 166
Not allowed 187
Work-related education 195, 197
State:
Obligations, interest on 61
State bar associations:
Bar review courses 197
Charitable contributions to 167
State or local governments:
Bonds, tax-exempt 107
Charitable contributions to 164,
Employees:
Section 457 plans
for (See Section 457
deferred compensation
plans)
Unemployment
compensation 93
Fee-basis officials:
Business expenses of 194
Work-related education
expenses 199
State or local income taxes 143
Deduction of 151, 152
List of deductible taxes
(Table 22-1) 154
Schedule A (Form 1040) 155
Electronic returns filed with
federal 9
Exception to deduction 152
Federal changes, effect on 18
Form W-2 to show withheld
taxes 152
Interest on, not deductible 162
Joint state and local returns but
federal returns filed
separately 152
Married filing separately 152
Refunds, treatment of 152
State or local taxes:
Refunds 91
Statute of limitations:
Claim for refund 14
Claim for refunds 17
Statutory employees 189
Stillborn child 28
Stock appreciation rights 47
Stock bonus plans 40
Stock certificates:
Charitable contributions, date
of 169
Stockholders 18
(See also Securities)
Debts 89
Stockholders' meeting
expenses 204
Stock options 50, 66
Stocks 18
(See also Securities)
Stolen funds:
Reporting of 97
Stolen property 97
Stopsmoking programs:
Deductibility as medical
expense 149
Storms 175
(See also Disaster relief)
Casualty loss due to 172
Straddles:
Interest from 161
Strike benefits 97
Student loan interest deduction:
Loan repayment assistance 137
Student loans:
Cancellation of debt 89
Interest, defined 136
Interest deduction 6, 7, 136, 162
Academic period 136
Amount of deduction 137
Claiming 137
Double deduction not
allowed 137
Eligible educational
institution 137
Eligible student 136
Features of (Table 19-1) 136
Married filing separately 22
Qualified student loan 136
Worksheet 137
Student claimed as exemption on
tax return of another
person 137
Students:
Credit (See Education credits)
Defined 27
Exemption from withholding 39
Foreign 27
Foreign students 166
Loans (See Student loans)
Scholarships (See Scholarships
and fellowships)
Tuition programs,
qualified (See Qualified tuition
programs)
Work-related
education (See Work-related
education)
Substantial gainful activity 221
Substitute forms 11
Sunday, deadline falling on 42
Supplemental wages 39
Supplies:
Regularly used or consumed in
ordinary course of trade or
business 106
Support test:
Qualifying child 29
Qualifying relative 33
Surveys:
Property basis to include 98
Surviving spouse:
Annuity 83
Filing status 20
With dependent child 24
Gross income filing requirements
(Table 1-1) 4
Life insurance proceeds paid
to 90
Rollovers by 81
Single filing status 20
Tax (See Estate tax)
Synagogues (See Churches,
temples, etc.)
T
Tables and figures:
Adjusted basis, examples of
(Table 13-1) 99
Alimony requirements
(instruments executed after
1984) (Table 18-1) 134
Capital gain rates
(Table 16-1) 118
Car expenses, reporting of
(Table 26-3) 192
Casualty and theft losses:
Deduction limits for personal
property (Table 25-1) 175
Deduction of loss, when to
take (Table 25-2) 177
Charitable contributions,
deductibility of
(Table 24-1) 164
Children's income:
Inclusion on parent's return
(Figure 31-A) 210
Unearned income, reporting
of (Figure 31-B) 212
Entertainment expenses:
50% limit (Figure 26-A) 184
Proof of (Table 26-2) 188
Reporting of
(Table 26-3) 192
Estimated tax, who must make
payments (Figure 4-A) 42
Filing requirements:
Dependents (Table 1-2) 5
Gross income levels
(Table 1-1) 4
Other situations requiring
filing (Table 1-3) 7
Gift expenses:
Proof of (Table 26-2) 188
Reporting of
(Table 26-3) 192
Head of household, qualifying
person (Table 2-1) 23
Individual retirement
arrangements (IRAs):
Figuring modified AGI
(Worksheet 17-1) 124
Modified AGI, effect on
deduction if covered by
retirement plan at work
(Table 17-1) 123
Modified AGI, effect on
deduction if not covered
by retirement plan at work
(Table 17-2) 123
Roth IRAs, effect of modified
AGI on contributions
(Table 17-3) 129
Page 286 Publication 17 (2016)
Tables and figures (Cont.)
Roth IRAs, modified AGI
(Worksheet 17-2) 129
Interest deductions, forms to use
(Table 23-1) 162, 163
Meal expenses and 50% limit
(Figure 26-A) 184
Medical and dental expenses:
Checklist for deductible
expense
(Table 21-1) 148
Reimbursement, excess
algorithm (Figure
21-A) 150
Roth IRA and modified adjusted
gross income (MAGI)
phaseout (Table 17-3) 129
Standard deduction tables 144
Student loan interest deduction
(Table 19-1) 136
Taxes that are deductible
(Table 22-1) 154
Tax returns:
Due dates (Table 1-5) 9
Steps to prepare
(Table 1-6) 11
Travel and transportation
expenses:
Examples of deductible
expenses
(Table 26-1) 181
Local transportation (Figure
26-B) 185
Proof of (Table 26-2) 188
Reporting of
(Table 26-3) 192
Tuition deduction
(Table 19-2) 138
Volunteers, deductibility of
contributions
(Table 24-2) 166
Work-related education (Figure
27-A) 196
Taxable exchanges:
Definition of 100
Tax computation worksheet 266
Tax counsel fees 201
Tax Counseling for the Elderly 9
Tax credits (See Credits)
Taxes, not support 35
Taxes 37, 151–156, 187, 206
(See also Sales tax)
Alternative minimum 207
Business taxes, deduction
of 151
Deduction of 151
Schedules to use 155
Types of taxes deductible
(Table 22-1) 154
Estate (See Estate tax)
Excise (See Excise taxes)
Federal income taxes, not
deductible 155
Foreign taxes 151
Income tax. deduction of 152
Gift taxes 155
How to figure 206
Income taxes, deduction of 152
Indian tribal government taxes,
deduction of 151
Inheritance tax 155
Kiddie tax (See Children,
subheading: Unearned
income of)
Not deductible 155
Personal property taxes:
Car taxes 187
Deduction of 155
Real estate taxes (See Real
estate taxes)
Sales tax 98
Tax evasion 19
Taxexempt:
Bonds and other obligations 61
Income 204
Interest 61
Obligations:
Adjusted basis 102
Organizations:
Related party
transactions 105
Section 457 deferred
compensation plans 76
Taxexempt income 34
Taxexempt obligations:
Adjusted basis for 102
Tax figured by IRS 208
Taxfree exchanges:
Definition of 100
Holding period, determination
of 108
Tax help 2, 9, 270
Tax Counseling for the Elderly 9
Volunteer counseling (Volunteer
Income Tax Assistance
program) 9, 52
Taxis:
Business-related travel
expense 181
Standard mileage rate not
allowed 187
Taxpayer identification number
(TIN) 214, 216
Adoption (ATIN) 12
Child and dependent care
credit 218
Childcare provider 218
Individual (ITIN) 12, 36
Social security
number (See Social security
number (SSN))
Tax preference items 207
Tax rates 20
Married filing separately
(Schedule Y-2) 22
Tax refunds:
Agreement with IRS extending
assessment period, claim
based on 18
Bad debts 18
Business tax credit
carrybacks 18
Cashing check 14
Check's expiration date 14
Claim for 17, 18
Limitations period 17
Litigation 18
Direct deposit 13
Erroneous refunds 17
Federal income tax refunds 91
Financially disabled 18
Foreign tax paid or accrued 18
General rules 9
Inquiries 9
Interest on 17, 18, 58
Late filed returns 2
Limits 17, 18
Exceptions 18
More or less than expected 14
Net operating loss carryback 18
Offset:
Against debts 9, 14
Against next year's tax 13
Offset against next year's tax 43
Past-due 9, 17
Real estate taxes, treatment
of 154
Reduced 18
State and local income tax
refunds 152
State liability, effect on 18
Under $1 14
Withholding 6
Worthless securities 18
Claim for refund 103
Tax return preparation:
Rental expenses 69
Tax returns 9, 13, 21
(See also Due dates)
(See also Signatures)
(See also Joint Returns)
Tax Returns:
Aliens 6
Amended 17, 143
Attachments to returns 13
Child 13
Copies of 16
Dating of 13
Filing of 4
(See also Filing requirements)
Forms to use 6
Free preparation help 9
How to file 11
Joint returns (See Joint Returns)
Mailing of 15
Paid preparer 13
Payment with 14
Phone number to be included 2
Preparation fees 201
Private delivery services 9
Steps to prepare (Table 1-6) 11
Third party designee 13
Transcript of 16
Who must file 4, 6
Tax table 254–265
Tax year 9, 11
(See also Accounting periods)
Teachers:
Expenses, deduction of 141
Work-related education 196, 197
Telephones 204
Business-related travel
expense 181
Fraud or misconduct of IRS
employee, number for
reporting anonymously 2
Tax return to include phone
number 2
Temples (See Churches, temples,
etc.)
Temporary absence from job:
Work-related education
during 195
Temporary absences 28, 33
Temporary job assignments:
Travel expenses 179
Tenants 68
(See also Rental income and
expenses)
By the entirety 57
In common 57
Tenants by the entirety:
Alimony, no deduction for taxes
and insurance paid on home
owned as 133
Dividends, reporting of 64
Real estate taxes, allocation
when filing separately 154
Tenants in common:
Alimony deduction for taxes and
insurance paid on home
owned as 133
Dividends, reporting of 64
Terminal illness:
Accelerated payment of life
insurance
proceeds (See Accelerated
death benefits)
Viatical settlements 90
Termite damage:
Not casualty losses 172
Terrorist attacks:
Casualty loss due to 172
Disability payments for injuries
from, tax exclusion 76
Disability pensions for federal
employees 53
Theft losses 172, 201, 203
$100 Rule 176
Adjusted basis in property 99,
Amount of loss 173
Appraisals 174
Cost of cleaning up or making
repairs 174
Costs of photographs and
appraisals 174
Deduction of loss:
When to take
(Table 25-2) 177
Definition of theft 172
Fair market value of stolen
property 173
Form 4684 to be filed 172
Insurance proceeds, treatment
of 174
Net operating losses 178
Proof of loss 173
Property used partly for business
and partly for personal
purposes 176
Recovered stolen property 173
Reimbursement 174
Reporting of gain or loss 177
Third parties:
Alimony payments made to 133,
Designee for IRS to discuss
return with 13
Income from taxpayer's property
paid to 11
Threats:
Losses due to 172
Tickets (See Entertainment
expenses)
Tiebreaker rules 31, 235
Tip expense:
Business meal or entertainment
activity, 50% deduction
limit 183
Business travel expense 180,
Tip income 54–56
Allocated tips 39, 55
Daily record of tips 54
Electronic tip record 54
Form 4070A for daily records 54
Noncash tips 54, 55
Penalty for failure to report 55
Reporting on tax return 55
Reporting tips to employer:
Failure to report to
employer 7, 55
Form 4070 for 54
Service charges paid by
employer as wages 54
Social security and Medicare tax:
Employer reporting for
purposes of 54
Filing requirements
(Table 1-3) 7
Uncollected 7
Tip-splitting or tip-pooling
arrangements 54
Uncollected taxes 55
Withholding 39, 54
Employee contributing to 55
Underwithholding 39, 55
Title insurance:
Property basis to include 98
Title to property:
Abstract fees, property basis to
include 98
Attorneys' fees:
Property basis to include 98
Tolls:
Business-related travel 187
Tools 201
Hauling to and from work 186
Rental for use on rental
property 69
Tornadoes 175
(See also Disaster relief)
Casualty loss due to 172
Total support 34
Tour guides:
Free tour for organizing tour 96
Trade Act of 1974:
Trade readjustment allowances
under 93
Trade associations:
Meetings and entertainment
expenses 184
Tradein of car 188
Trade of property 102
(See also Sale of property)
Definition of 103
Form 8824 for reporting 104
Like-kind exchanges 100, 104
Like property and money
transferred 101, 104
Nontaxable exchanges 100, 104
Holding period, determination
of 108
Partially nontaxable
exchange 101, 104
Reporting of 104
Taxable exchange, defined 100
Trading date of securities
transaction 108
Traditional IRAs (See Individual
retirement arrangements (IRAs))
Traffic violations:
Fines not deductible 187
Transfer taxes:
Property basis to include 98
Real estate transactions and 155
Transit passes 50
Transportation 217
Transportation
expenses (See Travel and
transportation expenses)
Transportation workers:
Meal expenses 181
Deduction limits 183
Form 2106 or 2106-EZ, how
to complete 193
Travel and transportation
expenses 178, 185
Advances 189, 192
Allocation of types of costs 180,
Publication 17 (2016) Page 287
Travel and transportation expenses (Cont.)
Bona fide business purpose 180
Business associates 180
Business travel:
$75 or less 188
Confidential information
and 188
Employees' expenses 180
Incidental expenses 180
Proof of business
purpose 188
Receipt not readily available
to prove 188
Spouse or dependents 180
Trip outside U.S. 182, 183
Trip primarily for
business 182
Trip primarily for personal
reasons 182
U.S. travel 182
Unproved amounts 192
Visiting clients or
customers 185
Charitable organization service,
deduction for 166, 167
Commuting expenses:
Employer-provided commuter
vehicle 49
Conventions:
Delegates, deduction of
unreimbursed
amount 166
Deductible expenses 180
Examples of
(Table 26-1) 181
Definition of 178
Estimates of 188
Expenses paid for others 204
Federal crime investigators or
prosecutors 179
Form 2106 or 2106-EZ, how to fill
out 193
Fringe benefits 49
Getting from home to temporary
workplace when multiple
regular workplaces 185
Going home on days off from
temporary assignment 180
Going to business meeting away
from regular workplace 185
Going to family home 179
Indefinite assignment 179
Job search expenses 96
Medical purposes, for 148, 149
Mileage rates (See Standard
medical mileage rates)
New employment 200
No main place of business or
work 179
Nonaccountable plans, definition
of 192
Parking fees:
Business-related travel 187
Commuting expense 186
Employer-provided fringe
benefit 50
Medical-related travel 148
Probationary work periods 180
Proof of expenses 188
Summary (Table 26-2) 188
Recordkeeping
requirements 180, 188
Rental property maintenance and
management, for 69
Reporting of 189
Table 26-3 showing forms to
be used 192
Resorts or cruise ships 182
School children, transporting
of 97
Summary of rules (Figure
26-B) 185
Tax home, determination of 179
Temporary assignment or
job 179
Temporary work location 185
Tips 180, 181
Transit pass 50
Work-related education 197, 198
Traveling salespersons:
Deduction of expenses 189
Tax home, determination of 179
Treasury bills, notes, and
bonds 61
Treasury Inspector General:
Telephone number to report
anonymously fraud or
misconduct of IRS
employee 2
Treasury notes 58
Trees and plants:
Cost of, when casualty or theft
loss involved 172, 174
Trust beneficiaries:
Dividends received by 64
Losses of trust 95
Receiving income from trust 95,
Rollover restrictions 81
Trustees:
Administrative fees 202
IRA 202
IRAs:
Fees 121, 122
Notification of
recharacterization 126
Transfer from trustee to
trustee 125, 132
Trusts 64, 95, 207
(See also Trust beneficiaries)
Grantor trusts 95
Income 95
Child beneficiary 211
Investment interest 161
Related party transactions with
fiduciaries 105
TTY/TDD information 269
Tubal ligation:
Deductibility as medical
expense 149
Tuition, benefits under GI Bill 35
Tuition 138
Alimony payments made to
cover 133
Charitable deduction not allowed
for paying 165, 167
Deduction for:
Claiming for dependent 140
Eligible educational institution,
defined 138
Expenses that don't qualify 139
Qualified
programs (See Qualified
tuition programs)
Related expenses, defined 138
Tuition and fees deduction 137
Tuition programs,
qualified (See Qualified tuition
programs)
U
U.S. citizen:
Earned income credit 232
U.S. citizen or resident 27
U.S. national 27
U.S. obligations, interest 58
U.S. possessions:
Charitable contributions to 164
Deduction of income tax paid
to 152
Income from 6
U.S. Postal Service (See Post office
employees)
U.S. savings bonds:
Education, used for 22
Interest on 96
Transfer between spouses 101
U.S. Treasury bills, notes, and
bonds 61
U.S. Treasury bills or notes:
Trade of 105
U.S. Virgin Islands:
Income from 6
Unclaimed reimbursement 197
Uncollected rent:
Income 68
Underpayment penalties 37, 42,
IRS computation 45
Undistributed capital gains 66,
117, 251
Unearned income:
Children 56
Unearned income of
child (See Children, subheading:
Unearned income of)
Unemployment compensation 6,
7, 92
Credit card insurance paying 95
Mandatory contributions to state
funds, deduction of 152
Private fund, from 93
Repayment of benefits 93
Reporting on Forms 1040, 1040A,
or 1040EZ 93
Supplemental benefits 93
Voluntary benefit fund
contributions 205
Withholding 40, 93
Unemployment tax:
State employment taxes 220
Uniformed services 112
Uniforms 201
Charitable organization requiring,
deduction for cost and
upkeep of 166
Uniform Settlement Statement
(Form HUD1):
Points shown on 158
Unions 40, 93, 97
(See also Labor unions)
Assessments 201
Dues 201
United States (See headings
starting with “Federal” or “U.S.”)
United Way (See Charitable
contributions)
Universities (See Colleges and
universities)
Unmarried persons (See Single
taxpayers)
Unrecaptured Section 1250
gain 106, 117
Unstated interest 98, 103
Unused sick leave:
Cash payments for 148
Used clothing and household
goods:
Charitable deduction for 168
Used clothing and household
items:
Charitable deduction for fair
market value 169
Use of home in business 200
Usurious interest 58
Utilities:
Charges for installing included in
property basis 98
Emergency energy programs,
charitable contributions
to 164
Energy conservation
subsidies 95, 97
Late payment charges, not
deductible 162
Rebates 97
V
Vacation homes:
Determining if used as home 71
Points 160
Rental expenses 70
Valuations 98, 174
(See also Fair market value (FMV))
(See also Appraisals)
Value of time or services:
No charitable deduction for 165,
166, 168
Vandalism:
Casualty loss due to 172
Vasectomy:
Deductibility as medical
expense 149
Veterans' benefits:
Educational assistance 97
Tuition deduction, effect
on 139
Veterans' insurance:
Dividends on 67
Veterans' organizations:
Charitable contributions to 164,
Veterans benefits 51
Retroactive determination 53
Special statute of limitations. 53
Viatical settlements 90
Victims of terrorism (See Terrorist
attacks)
VISTA volunteers 52
Vitamins:
Not deductible as medical
expense 149
Volunteer firefighters:
Charitable contributions to 164
IRAs 122
Volunteer work 52, 217
Deductibility of contributions
(Table 24-2) 166
Out-of-pocket expenses,
deductible when serving for
qualified organization 164,
Tax counseling (Volunteer
Income Tax Assistance
program) 9, 52
Value of income lost by, not
deductible 168
Vouchers for payment of tax 43
W
W2 form (See Form W-2)
Wages and salaries 11, 46–54
(See also Form W-2)
Accident and health
insurance 48
Accrued leave payment 47
Adoption, employer
assistance 48
Advance commissions 46
Allowances and
reimbursements 39, 46
Archer MSA contributions 48
Awards and prizes 47
Babysitting 46
Back pay awards 46
Bonuses 47
Child care providers 46
Children's earnings 6
Clergy 50
De minimis benefits 48
Elective deferrals 50
Employee achievement
award 47
Employee compensation 46
Farmworkers 37
Foreign employer 51
Form W-2 (See Form W-2)
Fringe benefits 47
Garnisheed 11
Government cost-of-living
allowances 47
Household workers 37
Income 6, 7
Foreign 46
Long-term care coverage 48
Military retirees 37, 51
Military service 51
Miscellaneous compensation 46
Note for services 47
Outplacement services 47
Religious orders 51
Restricted property 50
Dividends on restricted
stock 50
Retirement plan contributions by
employer 50
Severance pay 47
Sick pay 47, 53
Social security and Medicare
taxes paid by employer 47
Stock appreciation rights 47
Stock options 50
Supplemental 39
Volunteer work 52
Withholding (See Withholding)
Waiters and waitresses:
Tips (See Tip income)
War veterans'
organizations (See Veterans'
organizations)
War zone (See Combat zone)
Washington State Supplemental
Workmen's Compensation
Fund 152
Wash sales 103, 105, 108
Welfare benefits 34, 93
What's new 1
Wheelchairs:
As medical expense 149
Where to file 15
Widow/widower (See Surviving
spouse)
Winter energy payments 95
Withholding 11, 37
(See also Form W-2)
Agricultural Act of 1949
payments 40
Changing amount withheld 38
For 2018 38
Page 288 Publication 17 (2016)
Withholding (Cont.)
Checking amount of 38
Claim for refund 6
Commodity credit loans 40
Credit for 37, 43
Cumulative wage method 38
Definition 37
Determining amount to
withhold 37, 38
Disaster Assistance Act of 1988
payments 40
Dividend income 64
Employers, rules for 38
Exemption from 39
Federal income taxes, not
deductible 155
Fiscal years 44
Form W-4:
Provided by employer 38
Fringe benefits 39
Gambling winnings 40, 44
General rules 37
Highest rate, employer must
withhold at if no W-4 39
Incorrect form 44
IRA distributions 127
New job 38
Penalties 37, 39, 40
Pensions and annuities 13, 40,
77, 81
Railroad retirement benefits 40,
Repaying withheld tax 39
Rollovers 81
Salaries and wages 37
Separate returns 44
Sick pay 39
Social security benefits 40, 85
State and local income taxes,
deduction for 152
Supplemental wages 39
Tips (See Tip income)
Unemployment
compensation 40, 93
Work clothes 201
Workers' compensation 53
Mandatory contributions to state
funds, deduction of 152
Return to work 53
Workrelated education 195
Business deduction:
Qualified expenses 197
Reimbursements 198
Tax benefit of 195
Education required by employer
or by law 195
Education that qualifies for new
trade or business 197
Education to maintain or improve
skills 195
Education to meet minimum
requirements 195
Indefinite absence from
work 195
Meal expenses 198
Qualifying education (Figure
27-A) 196
Recordkeeping
requirements 199
Reimbursement for 198
Teachers 196, 197
Temporary absence from
work 195
Travel expenses for 198
Unclaimed reimbursement 197
Worksheets:
Capital loss carryover 117
Casualty and theft losses 172
Excess withholding credit 252
Exemption Phaseout 36
Head of household status and
cost of keeping up home 23
Individual retirement
arrangements (IRAs),
modified AGI computation
(Worksheet 17-1) 124
Pensions or annuities, joint
returns 79
Roth IRA modified adjusted gross
income (MAGI), computation
(Worksheet 17-2) 129
Simplified Method computation of
taxable annuity 78
Social security or railroad
retirement benefits, to figure
taxability 84, 85
Student loan interest
deduction 137
Support test 30
World Trade Center
attacks (See Terrorist attacks)
Worthless securities 103
Wristwatch 205
Writeoffs (See Cancellation of debt)
Y
Youth groups:
Troop leader's travel
expenses 167
Publication 17 (2016) Page 289
Where To File
Mail your return to the address shown below that applies to you. If you want to use a private delivery service, see Private
delivery services in chapter 1.TIP
Envelopes without enough postage will be returned to you by the post office. Your envelope may need
additional postage if it contains more than five pages or is oversized (for example, it is over 1/4 inch thick). Also, include
your complete return address.
AND use the zip code below according to the form you are filing and
whether you are enclosing payment
Form 1040 Form 1040A Form 1040EZ
IF you live in...
THEN send your
return to the
address below if
you are
requesting a
refund or are
NOT enclosing a
payment...
OR send your
return to the
address below
if you ARE
enclosing a
payment
(check or
money order)...
No
payment
enclosed Payment
enclosed
No
payment
enclosed Payment
enclosed
No
payment
enclosed Payment
enclosed
Florida, Louisiana,
Mississippi, Texas Department of the
Treasury
Internal Revenue
Service
Austin, TX
Internal
Revenue
Service
P.O. Box 1214
Charlotte, NC
73301–
0002 28201–
1214 73301–
0015 28201–
1214 73301–
0014 28201–
1214
Alaska, Arizona,
California, Colorado,
Hawaii, Idaho, Nevada,
New Mexico, Oregon,
Utah, Washington,
Wyoming
Department of the
Treasury
Internal Revenue
Service
Fresno, CA
Internal
Revenue
Service
P.O. Box 7704
San Francisco,
CA
93888–
0002 94120–
7704 93888–
0015 94120–
7704 93888–
0014 94120–
7704
Arkansas, Illinois,
Indiana, Iowa, Kansas,
Michigan, Minnesota,
Montana, Nebraska,
North Dakota, Ohio,
Oklahoma, South
Dakota, Wisconsin
Department of the
Treasury
Internal Revenue
Service
Fresno, CA
Internal
Revenue
Service
P.O. Box
802501
Cincinnati, OH
93888–
0002 45280–
2501 93888–
0015 45280–
2501 93888–
0014 45280–
2501
Alabama, Georgia,
Kentucky, New Jersey,
North Carolina, South
Carolina, Tennessee,
Virginia
Department of the
Treasury
Internal Revenue
Service
Kansas City, MO
Internal
Revenue
Service
P.O. Box
931000
Louisville, KY
64999–
0002 40293–
1000 64999–
0015 40293–
1000 64999–
0014 40293–
1000
Connecticut, Delaware,
District of Columbia,
Maine, Maryland,
Massachusetts,
Missouri, New
Hampshire, New York,
Pennsylvania, Rhode
Island, Vermont, West
Virginia
Department of the
Treasury
Internal Revenue
Service
Kansas City, MO
Internal
Revenue
Service
P.O. Box 37008
Hartford, CT
64999–
0002 06176–
7008 64999–
0015 06176–
7008 64999–
0014 06176–
7008
A foreign country, U.S.
possession or territory*,
or use an APO or FPO
address, or file Form
2555, 2555-EZ, or 4563,
or are a dual-status alien
Department of the
Treasury
Internal Revenue
Service
Austin, TX
Internal
Revenue
Service
P.O. Box 1303
Charlotte, NC
73301–
0215 28201–
1303 73301–
0215 28201–
1303 73301–
0215 28201–
1303
* If you live in American Samoa, Puerto Rico, Guam, the U.S. Virgin Islands, or the Northern Mariana Islands, see Pub. 570.
Page 290 Publication 17 (2016)
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for Forms and
Publications
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Schedule R
(1040A or
1040)
2106
1040
1040A
Schedule SE
(1040)
Pub. 590-A
8829
Schedule A
(1040)
1040EZ
Pub. 1
Schedule 8812
(1040A or
1040)
Pub. 523
Schedule C
(1040)
1040-V
4506
Pub. 526
Schedule D
(1040)
1040X
Pub. 334
Pub. 527
4562
Schedule E
(1040)
5405
Pub. 463
Pub. 529
Schedule F
(1040) Pub. 505
Schedule EIC
(1040A or
1040)
Pub. 596
8822
Schedule
C-EZ (1040)
6251
8283
Pub. 501
Pub. 502 Pub. 550
Pub. 575
Pub. 554
Schedule H
(1040)
Pub. 915
1040-ES
(2017)
Schedule J
(1040)
8606
8863
Pub. 972
Form 8949
8917
2441
Pub. 5354506-T
Pub. 525
Pub. 547
3903 Pub. 587
Pub. 551
Pub. 583
Pub. 9464868
4684
Pub. 4681
Schedule B
(1040A or
1040)
Pub. 970
8959
8960
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IRS address shown next. You should receive
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receive your request.
Pub. 590-B
8962
8965
You can view and download the tax forms and publications you need at
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