1040 Quickfinder Handbook (2015 Tax Year) Updates for the Protecting Americans From Tax Hikes Act of 2015

Transcription

1 Quickfinder 040 Quickfinder Handbook (205 Tax Year) Updates for the Protecting Americans From Tax Hikes Act of 205 Instructions: This packet contains marked up changes to the pages in the 040 Quickfinder Handbook that were affected by the Protecting Americans From Tax Hikes Act of 205, which was enacted after the handbook was published. To update your handbook, you can make the same changes in your handbook or print the revised page and paste over the original page.

2 TAX PREPARATION 040 Quickfinder Handbook 205 Key Amounts Standard Deduction Earned Income Credit (Maximum) MFJ or QW... $ 2,600 No children... $ 503 Single ,300 child... 3,359 HOH ,250 2 children... 5,548 MFS... 6,300 >2 children... 6,242 Dependent 2...,050 3 Investment income limit... 3,400 Personal Exemption Kiddie Tax Threshold $4,000 $2,00 Gift Tax Annual Exclusion Elective Deferral Limits $4,000 SIMPLE IRA Plan Estate and Gift Tax Exclusion Amount < age $ 2,500 $5,430,000 4 age ,500 Standard Mileage Rates Business (k), 403(b) and 457 Plans Medical/moving < age $ 8,000 Charitable... 4 age ,000 Profit-Sharing Plan/SEP Contribution limit... $ 53,000 Compensation limit 5... $265,000 Health Savings Accounts (HSAs) Self-only coverage Contribution (deduction) limit... $ 3,350 Plan minimum deductible...,300 Plan out-of-pocket limit... 6,450 Family coverage Contribution (deduction) limit... $ 6,650 Plan minimum deductible... 2,600 Plan out-of-pocket limit... 2,900 Additional contribution amount if age 55 or older... $,000 Add $,250 for age 65 or older or blind, each. 2 Add $,550 for age 65 or older or blind, each. 3 If greater, amount of earned income plus $350 (but not to exceed $6,300). 4 Plus the amount, if any, of deceased spousal unused exclusion amount. 5 For computing employer contributions. Form Tax Year 205 Quick Tax Method MFJ or QW Taxable Income $ 0 $ 8, % minus $ 0.00 = Tax 8,45 74, minus = Tax 74,90 5, minus 8,42.50 = Tax 5,20 230, minus 2, = Tax 230,45 4, minus 24,47.00 = Tax 4,50 464, minus 32,70.00 = Tax 464,85 and over 39.6 minus 54,084.0 = Tax Single Taxable Income $ 0 $ 9, % minus $ 0.00 = Tax 9,226 37, minus = Tax 37,45 90, minus 4, = Tax 90,75 89, minus 6, = Tax 89,30 4, minus 6, = Tax 4,50 43, minus 24, = Tax 43,20 and over 39.6 minus 43, = Tax HOH Taxable Income $ 0 $ 3,50 0.0% minus $ 0.00 = Tax 3,5 50, minus = Tax 50,20 29, minus 5, = Tax 29,60 209, minus 9, = Tax 209,85 4, minus 20, = Tax 4,50 439, minus 28, = Tax 439,00 and over 39.6 minus 48, = Tax MFS Taxable Income $ 0 $ 9, % minus $ 0.00 = Tax 9,226 37, minus = Tax 37,45 75, minus 4, = Tax 75,60 5, minus 6, = Tax 5, , minus 2, = Tax 205,75 232, minus 6, = Tax 232,426 and over 39.6 minus 27, = Tax Note: Assumes taxable income is all ordinary income. High-income taxpayers may also be subject to the 3.8% tax on net investment income and/or the 0.9% additional Medicare tax on earned income. Caution: IRS Tax Tables must be used for taxable income under $00,000. To calculate the exact tax using the Quick Tax Method for taxable income under $00,000, round taxable income to the nearest $25 or $75 increment before using the formula. Round $50 or $00 increments up. 205 AGI Phase-Out Amounts/Ranges Filing Tuition and Fees Student Loan Interest Education Savings Lifetime Learning American Opportunity Education Savings Status Deduction Deduction Bond Interest Exclusion Credit Credit Account (ESA) MFJ $30,000 / $60,000 $30,000 $60,000 $5,750 $45,750 $0,000 $30,000 $60,000 $80,000 $90,000 $220,000 QW 65,000 / 80,000 65,000 80,000 5,750 45,750 55,000 65,000 80,000 90,000 95,000 0,000 Single 65,000 / 80,000 65,000 80,000 77,200 92,200 55,000 65,000 80,000 90,000 95,000 0,000 HOH 65,000 / 80,000 65,000 80,000 77,200 92,200 55,000 65,000 80,000 90,000 95,000 0,000 MFS Do Not Qualify Do Not Qualify Do Not Qualify Do Not Qualify Do Not Qualify 95,000 0,000 Child Tax Saver s Earned Income Credit 3 Traditional IRA Roth IRA Passive Loss in Active Credit 2 Credit 3 No Child Child 2 Children >2 Children Deduction 4 Contribution Rental Real Estate MFJ $ 0,000 $ 6,000 $ 20,330 $ 44,65 $ 49,974 $ 53,267 $ 98,000 $8,000 $83,000 $93,000 $00,000 $50,000 QW 75,000 30,500 4,820 39,3 44,454 47,747 98,000 8,000 83,000 93,000 00,000 50,000 Single 75,000 30,500 4,820 39,3 44,454 47,747 6,000 7,000 6,000 3,000 00,000 50,000 HOH 75,000 45,750 4,820 39,3 44,454 47,747 6,000 7,000 6,000 3,000 00,000 50,000 MFS 55,000 30,500 Do Not Qualify 0 5 0, ,000 50,000 75,000 Expired Provision Alert: The tuition and fees deduction expired on 2/3/204. It s possible Congress will extend the deduction to 205 but had not done so at the date of publication. 2 Amount at which phase-out begins. 3 Amount at which phase-out is complete. 4 Phase-out that applies if taxpayer is covered by an employer retirement plan. For MFJ, phase-out range for non-covered spouse is $83,000 $93, Married individuals filing MFS who live apart at all times during the year are treated as single.

3 Quick Facts Data Sheet (Continued) FICA/SE Taxes Maximum earnings subject to tax: Social Security tax $ 8,500 $ 8,500 $ 7,000 $ 3,700 $ 0,00 Medicare tax No Limit No Limit No Limit No Limit No Limit Maximum tax paid by: Employee Social Security $ 7, $ 7, $ 7, $ 7, $ 4, Self-employed Social Security 4, , , ,098.80, Employee or self-employed Medicare No Limit No Limit No Limit No Limit No Limit Additional Medicare tax begins at earnings of: MFJ $ 250,000 $ 250,000 $ 250,000 $ 250,000 N/A Single, HOH or QW 200, , , ,000 N/A MFS 25,000 25,000 25,000 25,000 N/A Business Deductions Section 79 deduction limit $ 500,000 3 $ 500,000 $ 500,000 $ 500,000 $ 500,000 Section 79 deduction SUV limit (per vehicle) 25,000 25,000 25,000 25,000 25,000 Section 79 deduction qualified real property limit N/A 250, , , ,000 Section 79 deduction qualifying property phase-out threshold 2,000, ,000,000 2,000,000 2,000,000 2,000,000 Depreciation limit autos (st year) 4, 5 3,60 5 3,60 5 3,60 5 3,60 5 Depreciation limit trucks and vans (st year) 4, 5 3, , , ,360 5 Standard mileage allowances: Business Charity work Medical/moving Health Care Deductions/Exclusions Health savings accounts (HSAs): Self-only coverage: Contribution limit $ 3,350 $ 3,350 $ 3,300 $ 3,250 $ 3,00 Plan minimum deductible,300,300,250,250,200 Plan out-of-pocket limit 6,550 6,450 6,350 6,250 6,050 Family coverage: Contribution limit 6,750 6,650 6,550 6,450 6,250 Plan minimum deductible 2,600 2,600 2,500 2,500 2,400 Plan out-of-pocket limit 3,00 2,900 2,700 2,500 2,00 Additional contribution limit age 55 or older,000,000,000,000,000 Long-term care insurance deduction limits: Age 40 and under $ 390 $ 380 $ 370 $ 360 $ 350 Age Age 5 60,460,430,400,360,30 Age ,900 3,800 3,720 3,640 3,500 Age 7 and older 4,870 4,750 4,660 4,550 4,370 Long-term care excludible per diem $ 340 $ 330 $ 330 $ 320 $ 30 Medical savings accounts (MSAs): Self-only coverage: Plan minimum deductible $ 2,250 $ 2,200 $ 2,200 $ 2,50 $ 2,00 Plan maximum deductible 3,350 3,300 3,250 3,200 3,50 Plan out-of-pocket limit 4,450 4,450 4,350 4,300 4,200 Family coverage: Plan minimum deductible 4,450 4,450 4,350 4,300 4,200 Plan maximum deductible 6,700 6,650 6,550 6,450 6,300 Plan out-of-pocket limit 8,50 8,50 8,000 7,850 7,650 Health flexible spending arrangement contribution limit $ 2,550 $ 2,550 $ 2,500 $ 2,500 N/A Education Tax Incentives Education savings accounts (ESAs) phase-out begins at AGI of: MFJ $ 90,000 $ 90,000 $ 90,000 $ 90,000 $ 90,000 Single, HOH, QW or MFS 95,000 95,000 95,000 95,000 95,000 Hope/American opportunity credit maximum credit (per student) $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 Lifetime learning credit (LLC) maximum credit (per return) $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000 Education credit phase-out begins at AGI of: MFJ: Hope/American opportunity $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000 LLC,000 0,000 08,000 07,000 04,000 Single, HOH or QW: Hope/American opportunity 80,000 80,000 80,000 80,000 80,000 LLC 55,000 55,000 54,000 53,000 52,000 MFS Not Allowed Not Allowed Not Allowed Not Allowed Not Allowed Student loan interest deduction limit $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 Student loan interest deduction phase-out begins at AGI of: MFJ $ 30,000 $ 30,000 $ 30,000 $ 25,000 $ 25,000 Single, HOH or QW 65,000 65,000 65,000 60,000 60,000 MFS Not Allowed Not Allowed Not Allowed Not Allowed Not Allowed Tax Year 040 Quickfinder Handbook

4 Quick Facts Data Sheet (Continued) Savings bonds income exclusion phase-out begins at AGI of: MFJ or QW $ 6,300 $ 5,750 $ 3,950 $ 2,050 $ 09,250 Single or HOH 77,550 77,200 76,000 74,700 72,850 MFS Not Allowed Not Allowed Not Allowed Not Allowed Not Allowed Tuition deduction phase-out begins at AGI of: MFJ $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 Single, HOH or QW 65,000 65,000 65,000 65,000 65,000 MFS Not Allowed Not Allowed Not Allowed Not Allowed Not Allowed Additional Taxes AMT exemption: MFJ or QW $ 83,800 $ 83,400 $ 82,00 $ 80,800 $ 78,750 Single or HOH 53,900 53,600 52,800 5,900 50,600 MFS 4,900 4,700 4,050 40,400 39,375 Child subject to kiddie tax earned income plus $ 7,400 $ 7,400 $ 7,250 $ 7,50 $ 6,950 Net investment income tax begins at AGI of: MFJ or QW $ 250,000 $ 250,000 $ 250,000 $ 250,000 N/A Single or HOH 200, , , ,000 N/A MFS 25,000 25,000 25,000 25,000 N/A Retirement Plans IRA contribution limits: Under age 50 at year end $ 5,500 $ 5,500 $ 5,500 $ 5,500 $ 5,000 Age 50 or older at year end 6,500 6,500 6,500 6,500 6,000 Traditional IRA deduction phase-out begins at AGI of (taxpayer or spouse covered by employer retirement plan): MFJ and QW (covered spouse) $ 98,000 $ 98,000 $ 96,000 $ 95,000 $ 92,000 MFJ (non-covered spouse) 84,000 83,000 8,000 78,000 73,000 Single and HOH 6,000 6,000 60,000 59,000 58,000 MFS Roth IRA contribution phase-out begins at AGI of: MFJ or QW $ 84,000 $ 83,000 $ 8,000 $ 78,000 $ 73,000 Single or HOH 7,000 6,000 4,000 2,000 0,000 MFS SIMPLE IRA plan elective deferral limits: Under age 50 at year end $ 2,500 $ 2,500 $ 2,000 $ 2,000 $,500 Age 50 or older at year end 5,500 5,500 4,500 4,500 4,000 40(k), 403(b), 457 and SARSEP elective deferral limits: Under age 50 at year end $ 8,000 $ 8,000 $ 7,500 $ 7,500 $ 7,000 Age 50 or older at year end 24,000 24,000 23,000 23,000 22,500 Profit-sharing plan/sep contribution limits $ 53,000 $ 53,000 $ 52,000 $ 5,000 $ 50,000 Compensation limit (for employer contributions to profit sharing plans) $ 265,000 $ 265,000 $ 260,000 $ 255,000 $ 250,000 Defined benefit plans annual benefit limit $ 20,000 $ 20,000 $ 20,000 $ 205,000 $ 200,000 Retirement saver s credit phased-out when AGI exceeds: MFJ $ 6,500 $ 6,000 $ 60,000 $ 59,000 $ 57,500 HOH 46,25 45,750 45,000 44,250 43,25 Single, MFS or QW 30,750 30,500 30,000 29,500 28,750 Key employee compensation threshold $ 70,000 $ 70,000 $ 70,000 $ 65,000 $ 65,000 Highly compensated threshold $ 20,000 $ 20,000 $ 5,000 $ 5,000 $ 5,000 Social Security Maximum earnings and still receive full Social Security benefits: Under full retirement age (FRA) at year-end, benefits reduced by $ for each $2 earned over Year FRA reached, benefits reduced $ for each $3 earned $ 5,720 $ 5,720 $ 5,480 $ 5,20 $ 4,640 4,880 4,880 4,400 40,080 38,880 over (months up to FRA only) Month FRA reached and later No Limit No Limit No Limit No Limit No Limit Estate and Gift Taxes Estate and gift tax exclusion $ 5,450,000 7 $ 5,430,000 7 $ 5,340,000 7 $ 5,250,000 7 $ 5,20,000 7 GST tax exemption $ 5,450,000 $ 5,430,000 $ 5,340,000 $ 5,250,000 $ 5,20,000 Gift tax annual exclusion $ 4,000 $ 4,000 $ 4,000 $ 4,000 $ 3,000 Phaseout amount for all other filers (except MFS) is amount shown reduced by: $5,550 in 206; $5,520 ($5,50 if no children) in 205; $5,430 in 204; $5,340 in 203; $5,20 in For single filing status, the amount is half of the amount shown. 3 Amount has been raised by Congress many times in the past. Watch for developments. As adjusted by IRS for inflation. 4 Amount not released by IRS at publication time. Tax professionals should watch for developments. 5 Add $8,000 if special depreciation claimed. See Special Depreciation Allowance on Page 0-8 for application to Caution: Deduction expired at the end of 204, but could be reinstated for 205 and 206. Watch for developments. 7 Plus the amount, if any, of deceased spousal unused exclusion amount. 205 Tax Year 040 Quickfinder Handbook 3-3

5 205 State and Local Sales Tax Deduction 205 For 204, taxpayers can elect to deduct state and local sales taxes instead of state and local income taxes (see Electing to Deduct Sales Tax on Page 5-5). Instead of deducting their actual expenses, taxpayers can use optional sales tax tables [based on the taxpayer s state(s) of residence] provided by the IRS. The election expired on December 3, 204. It is possible that Congress will extend the election to 205 but had not done so at the time of publication. If the election to deduct state and local sales taxes in lieu of income taxes is extended to 205, a deduction worksheet and any optional tables issued by the IRS will be posted to the Updates section of tax.thomsonreuters.com/quickfinder. The Health Coverage Exemptions For 205, individuals must have health care coverage, qualify for a health coverage exemption, or make a shared responsibility payment with their tax return. This chart shows all of the coverage exemptions available for 205, including information about where the coverage exemptions can be obtained and the code for the coverage exemption that is to be used on Form 8965, Health Insurance Exemptions, when claiming the exemption. See Health Care: Individual Responsibility on Page 4-2 for more information. Coverage Exemption Income below the filing threshold The individual s gross income or his household income was less than his applicable minimum threshold for filing a tax return. Granted By Marketplace Claimed on Tax Return Code for Exemption No Code See Part II Coverage considered unaffordable The minimum amount the individual would have paid for premiums is more than 8.05% of his household income. A Short coverage gap The individual went without coverage for less than 3 consecutive months during the year. B Citizens living abroad and certain noncitizens The individual was: A U.S. citizen or resident who spent at least 330 full days outside of the U.S. during a 2 month period; A U.S. citizen who was a bona fide resident of a foreign country or U.S. territory; A resident alien who was a citizen of a foreign country with which the U.S. has an income tax treaty with a nondiscrimination clause, and the individual was a bona fide resident of a foreign country for the tax year; Not lawfully present in the U.S and not a U.S. citizen or U.S. national or A nonresident alien, including () a dual-status alien in the first year of residency and (2) a nonresident alien or dual-status nonresident alien who elects to file a joint return with a spouse. C Members of a health care sharing ministry The individual was a member of a health care sharing ministry. D Members of Indian tribes The individual was either a member of a federally-recognized Indian tribe, including an Alaska Native Claims Settlement Act (ANCSA) Corporation Shareholder (regional or village) or he was otherwise eligible for services through an Indian health care provider or the Indian Health Service. E Incarceration The individual was in a jail, prison or similar penal institution or correctional facility after the disposition of charges. F Aggregate self-only coverage considered unaffordable Two or more family members aggregate cost of selfonly employer-sponsored coverage was more than 8.05% of household income, as was the cost of any available employer-sponsored coverage for the entire family. Resident of a state that did not expand Medicaid The individual s household income was below 38% of the federal poverty line for his family size and, at any time in 205, he resided in a state that didn t participate in the Medicaid expansion under the Affordable Care Act. Member of tax household born, adopted or died During 205, a child was added to the individual s tax household by birth or adoption, or a member of his tax household died during the year and he can t check the fullyear coverage checkbox on his tax return. Members of certain religious sects The individual is a member of a recognized religious sect. Determined ineligible for Medicaid in a state that didn t expand Medicaid coverage The individual was determined ineligible for Medicaid solely because the state in which he resided didn t participate in Medicaid expansion under the Affordable Care Act. General hardship The individual experienced a hardship that prevented him from obtaining coverage under a qualified health plan. Coverage considered unaffordable based on projected income The individual didn t have access to coverage that is considered affordable based on his projected household income. Unable to renew existing coverage The individual was notified that his health insurance policy was not renewable and he considered the other plans available unaffordable. Certain Medicaid programs that are not minimum essential coverage The individual was () enrolled in Medicaid coverage provided to a pregnant woman that is not recognized as minimum essential coverage; (2) enrolled in Medicaid coverage provided to a medically-needy individual (also known as Spend-down Medicaid or Share-of-Cost Medicaid) that is not recognized as minimum essential coverage or (3) enrolled in Medicaid, and received minimum essential coverage for one or more months of the year by meeting a spend-down, but not in other months because the spend-down had not been met. Of the instructions for Form 8965, Health Coverage Exemptions. G G H Need ECN See Part I Need ECN See Part I Need ECN See Part I Need ECN See Part I Need ECN See Part I Need ECN See Part I 205 Tax Year 040 Quickfinder Handbook 3-3

6 as a condition for the home s promise to provide lifetime care that includes medical care. Court Case: In Baker [22 TC 43 (2004)], the court allowed a percentage method for calculating the portion of monthly fees deductible as medical expenses. Skilled nursing facility costs and other medical costs of the entire retirement community were assumed to be a percentage portion of each resident s entry fee and monthly payments. See also Revenue Ruling U Caution: Payments made for future medical care and insurance premiums for benefits substantially beyond the current tax year are not deductible in the year paid unless they are purchased in connection with obtaining lifetime care. (Rev. Rul ) Charitable contribution deduction. Some continuing-care facilities are operated by qualified charitable organizations. If payments exceed regular monthly fees and no additional benefits are provided, the excess may be deductible as a charitable contribution. Imputed interest. Part of the entrance fee to a life-care facility may be considered a loan if a portion of the payment is a longterm refundable fee. However, an individual is exempt from the imputed interest rule if he (or his spouse) is age 62 or older before the end of the year, the facility provides an independent living unit, along with an assisted living or nursing facility, or both, and substantially all of the independent living unit residents are covered by continuing care contracts. [IRC 7872(h)] Insurance Reimbursements Deductible medical costs must be reduced by any insurance reimbursements received. Excess reimbursements are taxable only to the extent they were provided for under an employer plan and attributable to the employer s contribution that was not included in income. Taxes See also IRS Pubs. 523, 530 and 535 State and Local Income Taxes State and local income taxes are deductible on Schedule A in the year paid. The tax may be paid either through withholding, estimated payments or payments for prior year returns. The IRS may disallow deductions for large estimated state income tax payments made solely to increase itemized deductions (Rev. Rul ). The prepayment of estimated state income tax should be based on tax liability. Penalties and interest are not deductible. N Observation: State and local income taxes properly allocable to items included in net investment income (NII) offset NII when computing the 3.8% NII tax. See 3.8% Net Investment Income Tax on Page 2-5 for details. In determining whether to deduct state and local income taxes or state sales tax or general sales tax, the practitioner should consider the effect on NII tax. For can Electing to Deduct Sales Tax Expired Provision Alert: The election to deduct state and local sales tax expired December 3, 204. However, Congress has, on several occasions, extended the provision. This section is retained in the event the provision is extended to 205. Before 205, taxpayers could elect to deduct state and local sales tax rather than state and local income taxes. Taxpayers who made the election could deduct either: can ) Actual sales tax amounts (based on their records) or make 2) Predetermined deduction figures from IRS tables. To deduct actual amounts. Add up the nonbusiness general state and local sales taxes (including any compensating use taxes) paid during the year plus any selective sales taxes if the rate is the same as the general sales tax rate. Include selective sales taxes on food, clothing, medical supplies and motor vehicles even if the rate is lower than the general sales tax rate. If the selective sales tax rate on a motor vehicle is higher than the general rate, deduct only the amount that would have resulted from charging the lower general sales tax rate. To deduct amounts from IRS tables. The table amounts depend on the taxpayer s AGI plus nontaxable income (for example, taxexempt interest and nontaxable portion of Social Security benefits), the number of exemptions claimed on Form 040 and the state of residence. If the taxpayer lives in more than one state during the year, pro-rate the amount from the table for each state (based on the number of days spent there divided by 365), add up the prorated amounts and deduct the total. See the 205 State and Local Sales Tax Deduction Worksheet on Page 3-3. Also, a Sales Tax Deduction Calculator can be found at Note: In addition to the table amounts, the taxpayer can deduct additional actual sales tax amounts from purchases of motor vehicles (including leased vehicles). If the sales tax rate on a motor vehicle is higher than the general rate, deduct only the amount that would have resulted from charging the lower general sales tax rate. Also add sales taxes paid on boats, airplanes, homes (including mobile and prefabricated) or home building materials if the rate was the same as the general sales tax rate. Real Estate Taxes A real estate tax is deductible in the year it is paid to the taxing authority. Prepaid real estate taxes can generally be deducted in the year of the prepayment if the taxpayer is on the cash basis and does not live in an area in which the prepayment would be considered a deposit by the taxing authority. How prepaid taxes are treated varies among local jurisdictions. Taxes placed in escrow are deductible when actually paid to the taxing authority, not when paid to the escrow agent. Penalties and interest on late payments are not deductible. Also, see Electing to Capitalize Taxes and Interest on Page 5-8. Generally, real estate taxes can be deducted only by the owner of the property upon which the tax is imposed. Regulation Section.64-3(b) defines real property taxes as taxes imposed on interests in real property and levied for the general public welfare Because of the lack of a detailed definition, the issue has been the subject of several court cases and IRS rulings. For example, the tax imposed on renters by the New York Real Property Tax Law is not deductible for federal tax purposes. Taxes paid under this law are considered rent, not property taxes. (Rev. Rul ) In contrast, Revenue Ruling 7-49 stated that certain payments made to an educational construction fund by a cooperative housing corporation did qualify as real property taxes, and were deductible by the tenant-shareholders. More than one property. Real estate taxes are deductible for all property owned by a taxpayer. Sale of real estate. The buyer and the seller must divide real estate taxes according to the number of days that each owned the property during the year. Both are considered to have paid their share of taxes, even if one or the other paid the entire amount. Buyer-paid taxes. Deductible by the buyer only for the period he owned the property. The buyer cannot deduct the real estate taxes of the seller. The buyer must add these taxes to the basis of the property. The seller treats this as additional sales proceeds. Seller-paid taxes. If the seller pays real estate tax owed by the buyer (beginning on the date of sale), the buyer is considered to have paid the tax. The tax is deductible by the buyer. The buyer must reduce the basis in the property by the tax paid. The seller treats this as a reduced selling price. 205 Tax Year 040 Quickfinder Handbook 5-5

7 3) Loan proceeds must be directly traceable to home construction expenses, including the purchase of a lot. 4) Before construction begins, the loan does not qualify as acquisition debt and interest incurred during that period is treated generally as personal interest. 5) 90-day rule. A loan incurred within 90 days after construction is complete may also qualify to the extent of construction expenses made within the period starting 24 months before completion of the house and ending on the date of the loan. (Notice 88-74) Timeshares Homes owned under a time-sharing plan can be considered second homes for deducting interest expense. A time-sharing plan is an arrangement between two or more people that limits each person s interest in the home or right to use it to a certain part of the year. However, if any portion of the timeshare is rented to a third party, the ability to claim a deduction for the personal portion of the mortgage interest may be lost. Boats, Mobile Homes and House Trailers For the qualified residence interest deduction, a qualified home includes a boat, mobile home, house trailer or similar property that has sleeping, cooking and toilet facilities. However, local law must allow for such use. A houseboat would not qualify if moored at a marina where overnight sleeping is prohibited. Interest paid on a boat or mobile home used on a transient basis generally is not deductible for alternative minimum tax. See AMT for Individuals Adjustments and Preferences (205) on Page 2-4. Prepaid Mortgage Interest Mortgage interest prepaid in 205 that fully accrues by January 5, 206, may be included in Form 098, box. However, this prepaid interest is not deductible in 205; it should be deducted in 206. (Pub. 936) Note: Some lenders apply prepaid amounts to both interest and principal; others apply prepayments to principal only. Reverse Mortgages A reverse mortgage is used to convert home equity into cash. The homeowner receives payments (as a line of credit, a lump sum, monthly payments for a specified number of years, or payments over his life). The amount received is a loan, so it is tax-free and will not affect Social Security benefits. When a reverse mortgage comes due, the lender recovers the amount owed from the borrower (or the heirs). Mortgage interest deduction. Mortgage interest is added to the loan balance over the term of the loan, but is not deducted under the personal residence interest rules until the loan is repaid. 205 Mortgage Insurance Premiums Expired Provision Alert: The deduction for mortgage insurance premiums expired December 3, 204. Unless Congress extends this provision, it will not be available for mortgage insurance premiums paid after 204. This discussion is retained in the event the provision is extended to years after 204. For , mortgage insurance premiums paid or accrued during the year in connection with acquisition debt on a taxpayer s primary or second home are deductible as residence interest. The deduction phases out ratably by 0% for each $,000 (or portion thereof) by which the taxpayer s AGI exceeds $00,000. Phaseout amounts are halved for married filing separately. Thus, it is not available for taxpayers with AGI greater than $09,000 ($54,500 for MFS). Only amounts paid on mortgage insurance contracts issued after 2006 qualify. Charitable Contributions See also IRS Pubs. 526 and 56 and Donation Guides in Tab 3 Deductible Contributions Includes money or property given to: Churches, synagogues, temples, mosques and other religious organizations. Federal, state and local governments, if contribution is solely for public purposes. Nonprofit schools, hospitals and volunteer fire companies. Public parks and recreation facilities. Public charities such as Salvation Army, Red Cross, CARE, Goodwill Industries, United Way, Boy/Girl Scouts, Boys/Girls Clubs of America, etc. War veterans groups. Charitable travel. Travel expenses such as transportation, meals and lodging are deductible if there is not a significant element of personal pleasure, recreation or vacation in the travel. Car expenses can be deducted using actual cost or a standard mileage rate of 4 per mile. Court Case: Charitable deductions were allowed for the cost of lodging in deluxe hotels while traveling on behalf of a charitable organization. These costs were considered reasonable because the taxpayer was an important person in the organization and to effectively perform his job, he needed to stay at or near the hotel where the function was being held. (Cavalaris, TC Memo ) Volunteer out-of-pocket expenses when serving a qualified organization. For example, scout leaders can deduct the cost of uniforms (and cleaning) that are worn when performing donated services, but that are not suitable for everyday wear. Text message. Contributions made by text message are deductible in the year the text message is sent if the contribution is charged to the individual s telephone or wireless account. Credit card. Contributions charged to a bank credit card are deductible in the year the charge is made. (Rev. Rul ) Delegate to a church convention. Deduct the unreimbursed expenses of attending. A person must be a delegate and not merely attending on his own. Exchange students. Deduct up to $50 per school month for housing an exchange student (grade 2 or lower) sponsored by a qualified organization. The student does not have to be a foreign student as long as the student becomes a member of the taxpayer s household under a written agreement between the taxpayer and the charitable organization. Foster parents. If there is no profit or profit motive, deduct expenses exceeding payments received from a charitable organization for providing support for qualified foster care individuals placed in the home. Canadian, Mexican and Israeli charities. Donations to certain Canadian, Mexican and Israeli charities may be deductible under an income tax treaty with that country. Special rules or limits may apply. U.S. income tax treaties with these countries can be found on the IRS website. Slain Officer Family Support Act. Taxpayers who donated money between January, 205 and April 5, 205 for the families of two New York Police Department (NYPD) officers, Detectives Wenjian Liu or Rafael Ramos, killed in the line of duty will be deemed to have been made on December 3, 204. Nondeductible Contributions Money or property given to: Civic leagues, social and sports clubs, labor unions and chambers of commerce Tax Year 040 Quickfinder Handbook

8 Foreign organizations (other than certain Canadian, Mexican and Israeli 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 (secular or religious). Value of blood given to a blood bank. Value of time or services rendered by the taxpayer. Rental value of a right to use property donated to charity, such as the right to stay at a vacation home for one week. The entire ownership interest in the property must be donated to charity to make the contribution deductible. Charitable distribution from IRA. See Qualified Charitable Distributions (QCDs) on Page Limits on Charitable Contribution The deduction for charitable contributions cannot exceed 50% of the taxpayer s AGI. A reduced limit of 30% or 20% applies for certain contributions. æ Practice Tip: The deduction limit percentage for many charities is available online as part of the Exempt Organizations Select Check tool at Up to 50%-of-AGI limit. Donation of cash or property (other than capital gain property) to a publicly supported charity or foundation qualifying as a 50% limit organization. Examples of 50% limit organizations: Churches, educational organizations, hospitals, medical research organizations, publicly supported organizations that receive a substantial amount of support from the general public or governmental units, private operating foundations, private nonoperating foundations that distribute 00% of the contributions to qualified charities within 2/2 months after the end of the tax year, private foundations that pool contributions into a common fund and allow contributors to name the charities to receive their gifts if the income is distributed within 2/2 months after the end of the tax year. Up to 30% of AGI limit: Donation of capital gain property to a 50% limit organization. Property is capital gain property if its sale at FMV on the date of the contribution would have resulted in long-term capital gain. Exception: 30% limit does not apply if donor elects to deduct only the property s cost or other basis rather than its FMV. Donation of cash or property (other than capital gain property) to any qualified organizations other than 50% limit organizations (includes veterans organizations, fraternal societies, nonprofit cemeteries, certain private nonoperating foundations). Up to 20%-of-AGI limit. Donation of capital gain property to any qualified organizations other than 50% limit organizations. For multiple contributions subject to different limits, use the worksheet in IRS Publication 526 to compute the deduction. Five-Year Contribution Carryforward Contributions that exceed the AGI limit in the current year can be carried forward to each of the five succeeding years. Carryover contributions are subject to the original percentage limits in the carryover years, and are deducted after deducting allowable contributions for the current year. If there are carryovers from two or more years, use the earlier year carryover first. Contribution deductions disallowed due to NOL carryovers are added to the unused NOL as additional NOL and no longer treated as contributions [Reg..70A-0(d)] Standard deduction claimed. If the taxpayer claims the standard deduction in any of the carryover years (including the contribution year), the carryover amount is reduced by the amount that would have been deductible if itemizing. (Reg..70A-0) Deceased spouse. Carryovers allocable to the excess contributions of a deceased spouse may only be claimed on the final return of the deceased spouse, not by the surviving spouse. [Reg..70A-0(d)(4)(iii)] Qualified Conservation Contributions Expired Provision Alert: The special rule discussed below for qualified conservation contributions expired December 3, 204. Unless Congress extends this provision, it will not be available for donations after 204. This discussion is retained in the event the provision is extended to years after 204. For , the deduction for qualified conservation contributions is limited to 50% of AGI (00% of AGI for qualified farmers and ranchers) minus the deduction for all other charitable contributions. Any excess amount is carried forward 5 years. Contributions That Benefit the Taxpayer Contributions that are made partly for goods or services provided by the organization are deductible if: ) The amount of the payment exceeds the FMV of goods and services received and 2) The donor intends to make a payment in excess of the FMV of goods and services. Example: Anita makes a large contribution to a charity that has a history of sponsoring a dinner-dance for donors making substantial contributions. The charitable deduction is limited to amount of the donation less the FMV of the anticipated dinner-dance even if the dance takes place in the following year. Refused benefits. A donor can claim a full deduction if all benefits are actively refused (such as checking off a refusal box on a form sent by the charity). (Rev. Rul ) Gifts of more than $75. If the donor receives some benefit, the charity must provide a statement as to the deductible amount of the contribution. The charity must make a good faith estimate of the FMV of goods/services provided to the donor. Token benefits. A donor can disregard benefits if either: The benefits received do not exceed the lesser of 2% of the contribution or $05 (for 205) or The gift is $52.50 or more and the benefit received bears the charity s name or logo and has an aggregate cost not more than $0.50 (for 205). Membership benefits. Certain benefits can be disregarded if the annual payment is $75 or less. A payment of more than $75 can be made if the organization does not require a larger payment to receive these benefits. Disregarded benefits may include rights or privileges that members can exercise frequently (such as free or discounted admission and parking) or admission to member-only events if the cost is $0.50 (for 205) or less per person. Tickets to college games. A payment made to a college or university in exchange for a right to buy tickets to a sporting event qualifies for a charitable deduction of 80% of the amount paid. Any amount actually paid for tickets is not deductible. [Reg..70A-3(f)(4)] Cash Donations Substantiation No deduction is allowed unless the taxpayer has either () bank records (for example, a canceled check or account statement) 205 Tax Year 040 Quickfinder Handbook 5-3

9 Generally, cutting of timber results in no gain or loss until sold or exchanged. Exception: Under Section 63(a) taxpayers can elect to treat the cutting of timber as a sale under Section 23 in the year it is cut. To qualify for the Section 63(a) election, the timber must be cut for sale or for use in the taxpayer s trade or business, and the taxpayer must own or hold a right to cut timber for more than one year before the timber is cut. Timber depletion. The depletion deduction for timber must be calculated using cost depletion. The depletion is taken in the year of sale or other disposition of the products cut from the timber, unless the taxpayer elects to treat the cutting of timber as a sale or exchange. The depletion deduction is limited by the adjusted basis of the timber. The adjusted basis for depletion cannot include the residual value of land and improvements at the end of operations. [Reg..62-(b)()] Example: Samuel purchases a timber tract for $60,000. The residual value of the land at the time of purchase, assuming all timber has been cut, equals $00,000. The depletable basis of the timber for cost depletion is $60,000 ($60,000 $00,000). Samuel determines that the standing timber will produce,000 units when cut. Samuel s depletion per unit equals $60 ($60,000,000). If Samuel sold 300 units during the year, his depletion allowance would be $8,000 (300 $60). Domestic Producer Deduction (DPD) Form 8903 The DPD is 9% of the lesser of the business s: ) Qualified production activities income or 2) Taxable income (AGI for individual taxpayers) determined without regard to the DPD. The DPD cannot exceed 50% of the wages paid and reported on Form W-2 by the business for the year (and allocable to domestic production gross receipts). Oil and gas activities. Individuals with oil-related qualified production activities income must reduce their DPD by 3% of the least of their () oil-related qualified production activities income, (2) qualified production activities income or (3) AGI (determined without regard to the DPD). [IRC 99(d)(9)] Oil-related qualified production activities income is qualified production activities income attributable to the production, refining, processing, transportation or distribution of oil, gas or any primary product thereof. Qualified Production Activities Income To determine the net income that qualifies for the 9% deduction, the taxpayer s receipts must be divided into those from eligible activities (domestic production gross receipts or DPGR) and non- DPGR. Then, the taxpayer s expenses are allocated between the two categories of income. The DPGR less allocable expenses equals qualified production activities income. Eligible activities. The following activities generate DPGR if performed in the U.S.: [IRC 99(c)(4)] Manufacture, production, growth or extraction of: Tangible personal property (for example, clothing, goods, food, agricultural products). Computer software. Sound recordings. Certain film production. Production of electricity, natural gas or potable water. Construction or substantial renovation of residential and commercial buildings and infrastructure by taxpayers engaged in the construction business. Engineering and architectural services performed by a taxpayer engaged in the business of performing engineering or architecture. N Observation: While most U.S. farming activities will generate DPGR, income from custom farming if the farmer does not have the benefits and burden of ownership of the property is not DPGR. The IRS s Large Business and International (LB&I) division has issued a directive that lists several activities performed at the retail level that are generally not manufacture, production, growing or extraction (MPGE) and as such, receipts from these activities do not qualify for the domestic production activities deduction. (LB&I ) Some activities that generally are not MPGE include, but are not limited to: Cutting blank keys to a customer s specification, Mixing base paint and a paint coloring agent, Applying garnishments to cake that is not baked where sold, Applying gas to agricultural products to slow or expedite fruit ripening, Storing agricultural products in a controlled environment to extend shelf life and Maintaining plants and seedlings. 205 Expired Provision Alert: For , qualified production activities performed in Puerto Rico are included in the domestic production gross receipts calculation as long as the activity in Puerto Rico was subject to U.S. tax. This provision is not available for 205 unless Congress extends it. Allocating costs. There are three methods for allocating costs to DPGR (that is, income that qualifies for the DPD) and non-dpgr. (Reg..99-4) Small business simplified overall method. Allocate all deductions (including cost of goods sold) and losses between DPGR and non-dpgr based on relative gross receipts. Available to: Taxpayers with average gross receipts under $5 million. Taxpayers with average gross receipts of $0 million or less, if they qualify to use the cash method under Revenue Procedure Farmers not required to use the accrual method. Simplified deduction method. Use gross receipts to allocate all costs and expenses except cost of goods sold. Cost of goods sold must be specifically traced to DPGR and non-dpgr. Available to taxpayers with average annual gross receipts of $00 million or less or total assets of $0 million or less at the end of the year. Section 86 method. Deductions are allocated to DPGR using the rules under Section 86 for allocating deductions to foreign income. This is the most complex method because it requires tracing each cost to income. S Shareholders and Partners The DPD is determined at the shareholder or partner level so taxpayers should get the information from the S corporation or partnership Schedule K-. Eligible small S corporations and partnerships can choose to compute qualified production activities income and Form W-2 wages at the entity level and allocate those amounts to the shareholders or partners, who then report the amounts on lines 7 and 7 of Form End of Tab Tax Year 040 Quickfinder Handbook

10 28% Rate Gain Collectibles gain or loss. A collectibles gain (loss) is any longterm gain or deductible long-term loss from the sale or exchange of a collectible that is a capital asset. Collectibles include works of art, rugs, antiques, metals (such as gold, silver and platinum bullion), gems, stamps, coins, alcoholic beverages and certain other tangible property. Also include any gain (but not loss) from the sale or exchange of an interest in a partnership, S corporation or trust held for more than one year and attributable to unrealized appreciation of collectibles. Qualified small business stock. Generally, up to 50% (60% for certain empowerment zone business stock) of the gain from the sale of Section 202 qualified small business stock (QSBS) is excluded from gross income if held for more than five years. The taxable portion of the gain is included in income as long-term capital gain subject to the 28% rate. QSBS acquired February 8, 2009 September 27, 200. A 75% gain exclusion rate may apply to QSBS (including QSBS stock in certain empowerment zone businesses) acquired during this time period. If held for more than five years and sold after February 8, 204, such QSBS qualifies for the 75% exclusion. on or after QSBS acquired September 28, 200 December 3, 204. A 00% gain exclusion may apply to QSBS acquired during this time period. If held for more than five years and sold after September 28, 205, such QSBS qualifies for the 00% exclusion. Gain from the sale of QSBS held over six months may be rolled over by acquiring the stock of another qualified small business within 60 days. If a partnership or S corporation sells such stock and does not elect to defer the gain on the sale, a non-corporate partner or shareholder can purchase replacement stock within 60 days of the date of the sale and elect to defer his distributive share of the pass-through entity s gain. (IRC 045) See AMT for Individuals Adjustments and Preferences (205) on Page 2-4 for AMT rules on QSBS. Also see Small Business Stock in Tab C in the Small Business Quickfinder Handbook. Related-Party Transactions In general, a loss on the sale of property between related parties is not deductible (IRC 267). If the property is later sold to an unrelated party, gain is recognized only to the extent that it exceeds the loss not allowed from the previous transfer. Example: Colin sells stock with a cost basis of $0,000 to his brother Finn for $7,600. Colin s $2,400 loss is not deductible. Finn later sells the same stock to an unrelated person for $0,500. Although Finn has a gain of $2,900, his taxable gain is only $500, the amount the gain exceeds Colin s unallowed loss. If the property is later sold to an unrelated party at a loss, the loss disallowed to the related party cannot be recognized. Definition. A related party is a family member who is a brother or sister (whether by whole or half blood), spouse, ancestor (parent, grandparent, etc.) or lineal descendant (child, grandchild, etc.) of a taxpayer. A cousin, aunt, uncle, nephew, niece, stepchild, stepparent or in-law is not a related party for this purpose. jointly by decedent and surviving spouse or owned by a decedent and surviving spouse residing in a community property state at the time of decedent s death, the survivor would be entitled to half the loss carryforward. Schedule D/Form 8949 Reporting Tips ) Totals for short-term and long-term transactions reported on Form 099-B for which basis was reported to the IRS and for which the taxpayer has no adjustments can be reported directly on Schedule D, lines a (short-term) and 8a (long-term). Note: Taxpayers can choose to report these transactions on Form ) All other sales and dispositions of capital assets are reported on Form 8949 and the totals carried to Schedule D. 3) Report a sale of a principal residence only if required (see Sale of Residence on Page 7-5). 4) Stock ticker symbols and abbreviations can be used to describe property as long as they are based on the property description shown on Form 099-B or Form 099-S (or substitute statement). 5) Each capital gain transaction must be reported separately on Form Do not enter available upon request and summary totals. Broker-provided statements that include the detailed information may be attached instead of reporting each transaction. See the Form 8949 instructions. 6) If the taxpayer sells a block of stock (or similar property) purchased at various times, he may enter VARIOUS in the column for date acquired. 7) If the property sold was inherited, enter INHERITED in column b for the date acquired. However, if the property was inherited from someone who died in 200 and the executor elected carryover basis, enter INH-200 in column a with the property description and see Publication 4895 for additional instructions on how to report the sale. 8) If adjustments to gain or loss are required, report on Form 8949 the reason for and amount of the adjustment. See Reporting Capital Gains and Losses Form 8949 on Page ) Taxpayers with any net capital gains subject to the 25% or the 28% rates must use the Schedule D Tax Worksheets in the Schedule D instructions. The net gain subject to the 25% rate (unrecaptured Section 250 gain) is reported on line 9 of Schedule D. The net gain subject to the 28% rate is reported on line 8 of Schedule D. æ Practice Tip: Taxpayers who consent to paperless reporting from their broker may not get their Form 099-B in the mail but instead, must go to the broker s website to access their form. Tax preparers may need to remind clients of this option if they do not have their Form 099-B (or other Forms 099). Stocks and Other Securities See also IRS Pub. 550 Deceased Spouse s Capital Loss Carryover A surviving spouse cannot claim a deceased spouse s capital loss carryover from joint return years (Ltr. Rul ). The annual $3,000 net capital loss limitation applies to the final Form 040 of the deceased taxpayer (if a joint return is filed). Any remaining capital losses allocable to the deceased spouse are lost and cannot be carried over to the surviving spouse s Form 040, the Form 04 filed by the decedent s estate or to any other beneficiary s return. Strategy: In Letter Ruling , the property sold was the decedent spouse s separate property. If the property was owned Reporting Basis When Stock is Sold There are two methods for identifying shares of stock sold when taxpayers sell less than their entire holding in a particular stock: [Reg..02-(c)] First-In, First-Out (FIFO) method. Under the FIFO method, if the stock or securities have been acquired on different dates or at different prices and the taxpayer does not or cannot identify the specific shares sold, they are considered to be sold in the order they were purchased, beginning with the earliest. Continued on the next page 205 Tax Year 040 Quickfinder Handbook 7-5