1040 Quickfinder Handbook (2017 Tax Year) Updates for the Tax Cuts and Jobs Act of 2017 and Other Recent Guidance

Transcription

1 Quickfinder 040 Quickfinder Handbook (207 Tax Year) Updates for the Tax Cuts and Jobs Act of 207 and Other Recent Guidance Replacement Pages for Two-Sided (Duplex) Printing Instructions: This packet contains marked up changes to the pages in the 040 Quickfinder Handbook that were affected by the Tax Cuts and Jobs Act of 207, which was enacted after the Handbook was published. Additionally, changes were made based on other guidance issued after the Handbook was published. This is a specially designed update packet for owners of the 3-ring binder version of the Handbook who have access to a printer that prints two-sided (duplex). Simply print the entire PDF file (make sure to select two-sided or duplex printing), three-hole punch the pages, and then replace the pages in your Handbook. It s that easy.

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3 040 Quickfinder 207 Key Amounts Handbook Standard Deduction Earned Income Credit (Maximum) MFJ or QW... $ 2,700 No children...$ 50 Single ,350 child... 3,400 HOH ,350 2 children... 5,66 MFS... 6,350 >2 children... 6,38 Dependent 2...,050 3 Investment income limit... 3,450 Personal Exemption Kiddie Tax Threshold $4,050 $2,00 Gift Tax Annual Exclusion Elective Deferral Limits $4,000 SIMPLE IRA Plan Estate and Gift Tax Exclusion < age 50...$ 2,500 $5,490,000 4 age ,500 Standard Mileage Rates Business (k), 403(b) and 457 Plans Medical/moving... 7 < age 50...$ 8,000 Charitable... 4 age ,000 Profit-Sharing Plan/SEP Contribution limit... $ 54,000 Compensation limit ,000 Health Savings Accounts (HSAs) Self-only coverage Contribution (deduction) limit...$ 3,400 Plan minimum deductible...,300 Plan out-of-pocket limit... 6,550 Family coverage Contribution (deduction) limit...$ 6,750 Plan minimum deductible... 2,600 Plan out-of-pocket limit... 3,00 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 $6,350). 4 Plus the amount of any deceased spousal unused exclusion and/or any restored exclusion related to lifetime gifts to a same-sex spouse. 5 For computing employer contributions. 207 Tax Year TAX PREPARATION Form Quick Tax Method MFJ or QW Taxable Income $ 0 $ 8, % minus $ 0.00 = Tax 8,65 75, minus = Tax 75,90 53, minus 8, = Tax 53,0 233, minus 3,5.50 = Tax 233,35 46, minus 24, = Tax 46,70 470, minus 33,7.00 = Tax 470,70 and over 39.6 minus 54, = Tax Single Taxable Income $ 0 $ 9, % minus $ 0.00 = Tax 9,326 37, minus = Tax 37,95 9, minus 4,26.25 = Tax 9,90 9, minus 7,08.25 = Tax 9,65 46, minus 6, = Tax 46,70 48, minus 24, = Tax 48,40 and over 39.6 minus 44,8.5 = Tax HOH Taxable Income $ 0 $ 3, % minus $ 0.00 = Tax 3,35 50, minus = Tax 50,80 3, minus 5, = Tax 3,20 22, minus 9, = Tax 22,50 46, minus 20, = Tax 46,70 444, minus 28, = Tax 444,55 and over 39.6 minus 49,09.80 = Tax MFS Taxable Income $ 0 $ 9, % minus $ 0.00 = Tax 9,326 37, minus = Tax 37,95 76, minus 4,26.25 = Tax 76,55 6, minus 6, = Tax 6, , minus 2,39.50 = Tax 208,35 235, minus 6, = Tax 235,35 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. Patent Pending 207 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 $35,000 $65,000 $7,250 $47,250 $2,000 $32,000 $60,000 $80,000 $90,000 $220,000 QW 65,000 / 80,000 65,000 80,000 7,250 47,250 56,000 66,000 80,000 90,000 95,000 0,000 Single 65,000 / 80,000 65,000 80,000 78,50 93,50 56,000 66,000 80,000 90,000 95,000 0,000 HOH 65,000 / 80,000 65,000 80,000 78,50 93,50 56,000 66,000 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 $ 62,000 $ 20,600 $ 45,207 $ 50,597 $ 53,930 $ 99,000 $9,000 $86,000 $96,000 $00,000 $50,000 QW 75,000 3,000 5,00 39,67 45,007 48,340 99,000 9,000 86,000 96,000 00,000 50,000 Single 75,000 3,000 5,00 39,67 45,007 48,340 62,000 72,000 8,000 33,000 00,000 50,000 HOH 75,000 46,500 5,00 39,67 45,007 48,340 62,000 72,000 8,000 33,000 00,000 50,000 MFS 55,000 3,000 Do Not Qualify 0 5 0, ,000 50,000 75,000 Expired Provision Alert: The tuition and fees deduction expired at the end of 206. It is not available for 207 unless Congress enacts legislation extending it to 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 noncovered spouse is $86,000 $96, Married individuals filing MFS who live apart at all times during the year are treated as single.

4 040 Quickfinder Handbook 207 Thomson Reuters/Tax & Accounting. Thomson Reuters, Checkpoint, Quickfinder and the Kinesis logo are trademarks of Thomson Reuters and its affiliated companies. ISSN ISBN X P.O. Box 5008 Carrollton, TX Phone Fax tax.thomsonreuters.com The 040 Quickfinder Handbook is published by Thomson Reuters. Reproduction is prohibited without written permission of the publisher. Not assignable without consent. The 040 Quickfinder Handbook is to be used as a first-source, quick reference to basic tax principles used in preparing individual income tax returns. The focus of this handbook is to present often-needed reference information in a concise, easy-to-use format. The summaries, highlights, tax tips and other information included herein are intended to apply to the average individual taxpayer only. Information included is general in nature and we acknowledge the existence of many exceptions in the area of income tax. The information this handbook contains has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. The author/publisher is not engaged in rendering legal, accounting or other advice and will not be held liable for any actions or suit based on this handbook. For further information regarding a specific situation, see applicable IRS publications, rulings, regulations, court cases and Code sections. This handbook is not intended to be used as your only reference source. 208 Key Amounts Standard Deduction Earned Income Credit (Maximum) MFJ or QW... $ 24,000 No Children... $ 520 Single ,000 Child... 3,468 HOH ,000 2 Children... 5,728 MFS... 2,000 >2 Children... 6,444 Dependent 2...,050 3 Investment Income Limit...$ 3,500 Traditional IRA Deduction Phase-Out Begins at AGI of Elective Deferral Limits SIMPLE IRA MFJ, 4 QW 4... $0,000 < age 50...$ 2,500 MFJ ,000 age ,500 Single ,000 40(k), 403(b) and 457 Plans HOH ,000 < age 50...$ 8,500 MFS age ,500 Gift Tax Annual Exclusion Kiddie Tax Threshold $5,000 $2,00 Profit-Sharing Plan/SEP Contribution limit... $ 55,000 Compensation limit (for computing employer contributions) ,000 Add $,300 for age 65 or blind, each. 2 Add $,600 for age 65 or blind, each. 4 Covered by an employer retirement plan. 5 Noncovered spouse. 3 If greater, earned income plus $350, not to exceed $2,000. $2,000. Updates For supplemental information to the material in this handbook, please refer to the Handbook Updates section of our website: tax.thomsonreuters.com/quickfinder Join our Quickfinder Community Do you have a client-specific question? Visit tax.thomsonreuters. com/quickfinder. Click on Community to join. Post questions, comment on posts and share insights. You can also follow thought leaders, set community notifications, search for specific topics and even share files, links and videos. If you have any questions We welcome comments and questions from readers. However, our response is limited to verification of specific information presented in the Quickfinder Handbooks. We cannot give advice on a client s tax situation or provide information beyond the contents of this publication. Questions must be submitted in writing by mail, fax or online at tax. thomsonreuters.com/quickfinder (click on Content Questions). Research editors are not available to answer questions over the phone. 208 Quick Tax Method MFJ or QW Taxable Income $ 0 $ 9, % minus $ 0.00 = Tax 9,05 77, minus = Tax 77,40 65, minus 8,2.00 = Tax 65,00 35, minus,42.00 = Tax 35,00 400, minus 36,62.00 = Tax 400,00 600, minus 48,62.00 = Tax 600,00 and over 37.0 minus 60,62.00 = Tax Single Taxable Income $ 0 $ 9, % minus $ 0.00 = Tax 9,526 38, minus = Tax 38,70 82, minus 4, = Tax 82,50 57, minus 5,70.50 = Tax 57,50 200, minus 8,30.50 = Tax 200,00 500, minus 24,30.50 = Tax 500,00 and over 37.0 minus 34,30.50 = Tax HOH Taxable Income $ 0 $ 3, % minus $ 0.00 = Tax 3,60 5, minus = Tax 5,80 82, minus 5, = Tax 82,50 57, minus 7,02.00 = Tax 57,50 200, minus 9, = Tax 200,00 500, minus 25, = Tax 500,00 and over 37.0 minus 35, = Tax MFS Taxable Income $ 0 $ 9, % minus $ 0.00 = Tax 9,526 38, minus = Tax 38,70 82, minus 4, = Tax 82,50 57, minus 5,70.50 = Tax 57,50 200, minus 8,30.50 = Tax 200,00 300, minus 24,30.50 = Tax 300,00 and over 37.0 minus 30,30.50 = 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. Replacement Replacement Page Page /208 /208 Tax Rules By Age for 207 Age Rule 3 Cannot claim a child care credit for children age 3 or older. 7 Cannot claim $,000 child tax credit for children age 7 or older. 8 Children working for parents unincorporated business subject to FICA. Generally cannot contribute to an ESA for children age 8 or older. Adoption credit/exclusion generally unavailable for children age 8 or older. Qualifies for saver s credit (if not a dependent or a full-time student). Kiddie tax doesn t apply if child s earned income > than half his support. 9 Exemption for dependent children who are not full-time students expires. Kiddie tax generally no longer applies except to full-time students. 2 Children working for parents unincorporated business subject to FUTA. 24 Exemption for dependent children who are full-time-students expires. Can purchase savings bonds and exclude income used for education. Kiddie tax no longer applies. 25 Taxpayers with no children qualify for EIC. 27 Income exclusion for health insurance coverage and self-employed health insurance deduction for coverage of children age 26 and younger expires. 30 Generally must distribute ESA when beneficiary reaches age Eligible for catch-up contributions to IRAs, SIMPLE-IRAs, 40(k), 403(b) and 457 plans. Qualified public safety employees eligible for penalty-free withdrawals from a governmental defined benefit pension plan, if retired. 55 Eligible for penalty-free withdrawal from employer retirement plan (but not an IRA) if separated from service. Eligible for catch-up contributions to HSAs. 59½ Penalty for early withdrawal from retirement accounts expires. Roth IRA distributions are tax-free (if any Roth held for at least five years). 65 Non-itemizers become eligible for a higher standard deduction. Taxpayers with no children no longer qualify for EIC. HSA and MSA withdrawals not used for medical costs are taxed but no longer subject to a 20% penalty. Eligible for credit for the elderly. 70½ Contributions no longer allowed to traditional IRAs. RMDs from retirement plans (other than Roth IRAs) must begin.

5 Reciprocity agreements. Minnesota and Montana. Minnesota residents are not required to file a North Dakota return if only North Dakota source of income is compensation and the taxpayer maintains a home in Minnesota and returns to the home at least once each month. Montana residents are not required to file a North Dakota return if only North Dakota source of income is wages. Ohio Website: Tax assistance: Quick Tax Method For Taxable Income of: $ 0 0, % minus $ 0.00 = Tax 0,65 6, minus 3.79 = Tax 6,00 2, minus 2.5 = Tax 2,35 42, minus 36.4 = Tax 42,65 85, minus = Tax 85,30 06, minus = Tax All Filing 06,65 23, minus, = Tax Statuses 23,35 and over minus 2, = Tax Note: Taxpayers with taxable income of $0,650 or less owe no tax. Filing requirements. Residents and part-year residents are required to file if: Filing status: Federal AGI exceeds: Single... Filing status: Federal AGI $ exceeds: 2,250 MFJ... All filers... $ 4,500 2,950 Individuals are also required to file if they have any Ohio adjustments to federal AGI (reported on Form IT-040, Sch. A). Exceptions: Individuals are not required to file if: Their only source of income is retirement income eligible for the retirement income credit and the credit is the same or more than tax before credits. Their exemption amount equals or exceeds their Ohio adjusted gross income and they have no Ohio adjustments to federal AGI. Nonresidents are required to file if they have Ohio-sourced income. Ohio form to file: Resident, part-year and nonresident: Form IT 040 (Individual Income Tax Return). Part-year and nonresidents: Schedule D (Nonresident/Part-Year Resident Credit) (Form IT 040, page 4). Return due date: April 5 Extension form. Ohio does not have a separate extension form. Allowable extension. Ohio allows an extension based on the federal extension. Use Form IT 40P (Income Tax Payment Voucher) to make any payments by the original return due date. Reciprocity agreements. Residents of a border state (Indiana, Kentucky, West Virginia, Michigan and Pennsylvania) are not required to file Ohio return if only Ohio income is wages and salaries from an unrelated employer. Their Ohio AGI is less than or equal to $0. The total of their senior citizen credit, lump sum distribution credit and joint filing credit is equal to or exceeds their income tax liability and they are not liable for school district income tax. Their exemption amount is the same as or more than their Ohio AGI. Oklahoma Website: Tax assistance: Single, MFS MFJ, QW, HOH 207 Quick Tax Method For Taxable Income of: $ 0, % minus $ 0.00 = Tax,00 2, minus 5.00 = Tax 2,50 3, minus = Tax 3,75 4, minus = Tax 4,90 7, minus 6.50 = Tax 7,20 and over 5.00 minus = Tax $ 0 2, % minus $ 0.00 = Tax 2,00 5, minus 0.00 = Tax 5,00 7, minus = Tax 7,50 9, minus = Tax 9,80 2, minus = Tax 2,20 and over 5.00 minus = Tax Filing requirements. Residents must file a return if: Filing status: Gross income exceeds: Single...$ 7,350 MFJ... 4,700 MFS... 7,350 HOH... 0,350 QW with a Dependent Child... 3,700 Dependents must file if: Marital status: Gross income exceeds: Single dependents... $ 6,350 Married dependents... 6,350 Part-year residents are required to file if they meet resident filing requirements while a resident or receive $,000 or more Oklahomasource gross income while a nonresident. Nonresidents are required to file if they received $,000 or more Oklahoma-source gross income. Oklahoma form to file: Resident: Form 5 (Oklahoma Resident Income Tax Return). Part-year and nonresident: Form 5NR (Oklahoma Nonresident/ Part-Year Income Tax Return). Return due date: April 5 or April 20 if return is filed electronically. Extension form. Form 504-I (Application for Extension of Time to File an Oklahoma Income Tax Return For Individuals). Allowable extension. Oklahoma allows a six-month extension if the taxpayer attaches a copy of a valid federal extension. If the federal return is not extended or the taxpayer owes Oklahoma tax, Form 504-I must be filed. Use Form 504-I to remit any tax due. Replacement Page / Tax Year 040 Quickfinder Handbook 2-7

6 OREGON Website: Tax assistance: ; Single, MFS, RDP filing separate MFJ, HOH, QW, RDP filing joint 207 Quick Tax Method For Taxable Income of: $ 0 3, % minus $ 0 = Tax 3,40 8, minus 68 = Tax 8,50 25, minus 238 = Tax 25,00 and over 9.9 minus,363 = Tax $ 0 6, % minus $ 0 = Tax 6,80 7, minus 36 = Tax 7,00 250, minus 476 = Tax 250,00 and over 9.9 minus 2,726 = Tax Registered domestic partner. Filing requirements. Residents must file if they are required to file a federal income tax return or have $ or more of Oregon income tax withheld from wages. Also, residents, part-year and nonresidents are required to file if: Filing Status Age/ Blindness Residents Gross Income Exceeds Single Under $ 5, or older or blind... 7,65 65 or older and blind... 8,365 HOH Under $ 7,440 MFJ, RDP filing joint MFS, RDP filing separate 2 65 or older or blind... 8, or older and blind... 9,840 Both under $,892 One 65 or older or blind... 2,892 Both 65 or older or blind... 3,892 Both 65 or older and one blind... 4,892 Both 65 or older and blind... 5,892 Under $ 5, or older or blind... 6, or older and blind... 7,965 QW Under $ 8,290 Part-Year and Nonresidents Oregon Income Exceeds:,2 $ 2,75 $ 3,500 $ 4,350 $ 2,75 65 or older or blind... 9,290 $ 4, or older and blind... 0,290 Dependent Regardless of age or blindness... $,050 3 $,050 3 Part-year and nonresidents do not take age or blindness into account. 2 If spouse/rdp itemizes deductions, this amount is $0. 3 The greater of $,050 or earned income plus $350, but no more than standard deduction amount. Oregon form to file: Resident: Form OR-40 (Oregon Individual Income Tax Return for Full-year Residents). Part-year resident: Form OR-40-P (Oregon Individual Income Tax Return for Part-Year Residents). Nonresident: Form OR-40-N (Oregon Individual Income Tax Return for Nonresidents). Return due date: April 5 Extension form. Form OR-40-V (Oregon Individual Income Tax Payment Voucher). Allowable extension. Oregon allows the same extension allowed on the federal return. File Form OR-40-V and check the extension payment checkbox to make a tax payment or if no federal extension is filed. PENNSYLVANIA Website: Tax assistance: , Tax Rate Income tax rate % Filing requirements. Residents, part-year and nonresidents are required to file if they receive total Pennsylvania gross taxable income in excess of $33, or if they incurred a loss from any transaction as an individual, sole proprietor, partner or Pennsylvania S corporation shareholder. Pennsylvania form to file. Resident, part-year and nonresident: Form PA-40 (Pennsylvania Income Tax Return). Return due date: April 5 Allowable extension. Pennsylvania allows an extension for up to six months if the taxpayer: Does not owe any Pennsylvania tax and has a valid federal extension. Files Form REV-276 and pays any Pennsylvania tax due or Pays Pennsylvania tax due by credit card or electronic funds transfer from taxpayer s bank account at com or Do not file Form REV-276. Reciprocity agreements. Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia. Pennsylvania does not tax residents of these states on employee compensation that is subject to employer federal withholding. RHODE ISLAND Website: Tax assistance: , option #3 All Filing Statuses 207 Quick Tax Method For Taxable Income of: $ 0 6, % minus $ 0.00 = Tax 6,30 39, minus = Tax 39,40 and over 5.99 minus 2,34.56 = Tax Filing requirements. Residents must file if they are required to file a federal return or not required to file a federal return, but receive Rhode Island income in excess of the sum of their personal exemptions and applicable standard deduction. Part-year residents must file if they are required to file a federal return, or have Rhode Island modifications increasing federal AGI. Nonresidents must file if they received income from Rhode Island sources and are required to file a federal return or have Rhode Island modifications increasing federal AGI. Rhode Island form to file: Resident: Form RI-040 (Resident Individual Income Tax Return). Part-year and nonresident: Form RI-040NR (Nonresident Individual Income Tax Return). Return due date: April Tax Year 040 Quickfinder Handbook

7 Quick Facts, Worksheets, Where to File All worksheets included in Tab 3 may be copied and used in your tax practice. Quick Facts Data Sheet... Page 3- Business Use of Home Worksheet... Page 3-4 Capital Loss Carryover Worksheet (207)... Page 3-5 Child Tax Credit Worksheet (207)... Page 3-5 Donations Noncash... Page 3-6 Donated Goods Valuation Guide... Page 3-6 Donations Substantiation Guide... Page 3-7 Earned Income Credit (EIC) Worksheet (207)... Page 3-8 Net Operating Loss Worksheets... Page 3-9 Social Security Benefits Worksheet (207)... Page 3- Tab 3 Topics Form 8949 (Sales and Other Dispositions of Capital Assets) Gain/Loss Adjustment Codes... Page 3-2 Deduction for Exemptions Worksheet (207)... Page 3-2 Itemized Deductions Worksheet (207)... Page State and Local Sales Tax Deduction... Page 3-3 Health Coverage Exemptions... Page 3-3 Where to File 207 Form 040, 040A, 040EZ... Page 3-4 Where to File Form 040-ES for Page 3-4 Where to File Form 4868 for 207 Return... Page 3-4 Replacement Page /208 Quick Facts Data Sheet General Deductions and Credits Standard deduction: MFJ or QW $ 24,000 $ 2,700 $ 2,600 $ 2,600 $ 2,400 Single 2,000 6,350 6,300 6,300 6,200 HOH 8,000 9,350 9,300 9,250 9,00 MFS 2,000 6,350 6,300 6,300 6,200 Additional for age 65 or older or blind each (MFJ, QW, MFS),300,250,250,250,200 Additional for age 65 or older or blind each (Single, HOH),600,550,550,550,550 Personal exemption N/A $ 4,050 $ 4,050 $ 4,000 $ 3,950 Personal exemption and itemized deduction phase-out begins at AGI of: MFJ or QW N/A $ 33,800 $ 3,300 $ 309,900 $ 305,050 Single N/A 26, , , ,200 HOH N/A 287, , , ,650 MFS N/A 56,900 55,650 54,950 52,525 Earned income credit: Earned income and AGI must be less than (MFJ): No qualifying children $ 2,000 $ 20,600 $ 20,430 $ 20,330 $ 20,020 One qualifying child 46,02 45,207 44,846 44,65 43,94 Two qualifying children 5,598 50,597 50,98 49,974 49,86 Three or more qualifying children 54,998 53,930 53,505 53,267 52,427 Maximum amount of credit (all filers except MFS): No qualifying children $ 520 $ 50 $ 506 $ 503 $ 496 One qualifying child 3,468 3,400 3,373 3,359 3,305 Two qualifying children 5,728 5,66 5,572 5,548 5,460 Three or more qualifying children 6,444 6,38 6,269 6,242 6,43 Investment income limit 3,500 3,450 3,400 3,400 3,350 Child tax credit: Credit per child $ 2,000 $,000 $,000 $,000 $,000 Additional (refundable) credit earned income floor 2,500 3,000 3,000 3,000 3,000 Adoption credit/exclusion: Maximum credit/exclusion (and amount allowed for adoption of special needs child) $ 3,840 $ 3,570 $ 3,460 $ 3,400 $ 3,90 Credit/exclusion phase-out begins at AGI of: All taxpayers except MFS $ 207,580 $ 203,540 $ 20,920 $ 20,00 $ 97,880 MFS Not Allowed Not Allowed Not Allowed Not Allowed Not Allowed Kiddie tax unearned income threshold $ 2,00 $ 2,00 $ 2,00 $ 2,00 $ 2,000 Foreign earned income exclusion $ 04,00 $ 02,00 $ 0,300 $ 00,800 $ 99,200 FICA/SE Taxes Maximum earnings subject to tax: Social security tax $ 28,400 $ 27,200 $ 8,500 $ 8,500 $ 7,000 Medicare tax No Limit No Limit No Limit No Limit No Limit Maximum tax paid by: Employee social security $ 7, $ 7, $ 7, $ 7, $ 7, Self-employed social security 5, , , , , Employee or self-employed Medicare No Limit No Limit No Limit No Limit No Limit Table continued on the next page 207 Tax Year 040 Quickfinder Handbook 3-

8 Quick Facts Data Sheet (Continued) Additional Medicare tax begins at earnings of: MFJ $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 Single, HOH or QW 200, , , , ,000 MFS 25,000 25,000 25,000 25,000 25,000 Business Deductions Section 79 deduction limit $,000,000 $ 50,000 $ 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 N/A N/A 250, ,000 Section 79 deduction qualifying property phase-out threshold 2,500,000 2,030,000 2,00,000 2,000,000 2,000,000 Depreciation limit autos (st year) 0, ,60 3 3,60 3 3,60 3 3,60 3 Depreciation limit trucks and vans (st year) 0, , , , ,460 3 Standard mileage allowances: Business Charity work Medical/moving Health Care Deductions/Exclusions/Credits Health savings accounts (HSAs): Self-only coverage: Contribution limit $ 3,450 $ 3,400 $ 3,350 $ 3,350 $ 3,300 Plan minimum deductible,350,300,300,300,250 Plan out-of-pocket limit 6,650 6,550 6,550 6,450 6,350 Family coverage: Contribution limit 6,900 6,750 6,750 6,650 6,550 Plan minimum deductible 2,700 2,600 2,600 2,600 2,500 Plan out-of-pocket limit 3,300 3,00 3,00 2,900 2,700 Additional contribution limit age 55 or older,000,000,000,000,000 Long-term care insurance deduction limits: Age 40 and under $ 420 $ 40 $ 390 $ 380 $ 370 Age Age 5 60,560,530,460,430,400 Age ,60 4,090 3,900 3,800 3,720 Age 7 and older 5,200 5,0 4,870 4,750 4,660 Long-term care excludible per diem $ 360 $ 360 $ 340 $ 330 $ 330 Medical savings accounts (MSAs): Self-only coverage: Plan minimum deductible $ 2,300 $ 2,250 $ 2,250 $ 2,200 $ 2,200 Plan maximum deductible 3,450 3,350 3,350 3,300 3,250 Plan out-of-pocket limit 4,600 4,500 4,450 4,450 4,350 Family coverage: Plan minimum deductible 4,600 4,500 4,450 4,450 4,350 Plan maximum deductible 6,850 6,750 6,700 6,650 6,550 Plan out-of-pocket limit 8,400 8,250 8,50 8,50 8,000 Health flexible spending arrangement contribution limit $ 2,650 $ 2,600 $ 2,550 $ 2,550 $ 2,500 Advance payment of health insurance premium tax credit repayment limit: 4 Household income < 200% of federal poverty line (FPL) $ 600 $ 600 $ 600 $ 600 $ 600 Household income 200% of FPL, but < 300%,550,500,500,500,500 Household income 300% of FPL, but < 400% 2,600 2,550 2,550 2,500 2,500 Household income 400% of FPL No Limit No Limit No Limit No Limit No Limit Individual mandate penalty for failure to maintain coverage (per individual) $ 695 $ 695 $ 695 $ 325 $ 95 Qualified small employer HRA reimbursement limits: Employee only $ 5,050 $ 4,950 N/A N/A N/A Employee and family 0,250 0,000 N/A N/A N/A Small employer health insurance credit average wage limit $ 26,700 $ 26,200 $ 25,900 $ 25,800 $ 25,400 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 4,000 2,000,000 0,000 08,000 Single, HOH or QW: Hope/American opportunity 80,000 80,000 80,000 80,000 80,000 LLC 57,000 56,000 55,000 55,000 54,000 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 $ 35,000 $ 35,000 $ 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 Tax Year 040 Quickfinder Handbook Replacement Page /208

9 Quick Facts Data Sheet (Continued) Savings bonds income exclusion phase-out begins at AGI of: MFJ or QW $ 9,550 $ 7,250 $ 6,300 $ 5,750 $ 3,950 Single or HOH 79,700 78,50 77,550 77,200 76,000 MFS Not Allowed Not Allowed Not Allowed Not Allowed Not Allowed Tuition deduction phase-out begins at AGI of: MFJ N/A 5 N/A 5 $ 30,000 $ 30,000 $ 30,000 Single, HOH or QW N/A 5 N/A 5 65,000 65,000 65,000 MFS N/A 5 N/A 5 Not Allowed Not Allowed Not Allowed Additional Taxes AMT exemption: MFJ or QW $ 09,400 $ 84,500 $ 83,800 $ 83,400 $ 82,00 Single or HOH 70,300 54,300 53,900 53,600 52,800 MFS 54,700 42,250 4,900 4,700 4,050 Child subject to kiddie tax earned income plus $ 7,650 $ 7,500 $ 7,400 $ 7,400 $ 7,250 Net investment income tax begins at AGI of: MFJ or QW $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 250,000 Single or HOH 200, , , , ,000 MFS 25,000 25,000 25,000 25,000 25,000 Retirement Plans IRA contribution limits: Under age 50 at year end $ 5,500 $ 5,500 $ 5,500 $ 5,500 $ 5,500 Age 50 or older at year end 6,500 6,500 6,500 6,500 6,500 Traditional IRA deduction phase-out begins at AGI of (taxpayer or spouse covered by employer retirement plan): MFJ and QW (covered spouse) $ 0,000 $ 99,000 $ 98,000 $ 98,000 $ 96,000 MFJ (non-covered spouse) 89,000 86,000 84,000 83,000 8,000 Single and HOH 63,000 62,000 6,000 6,000 60,000 MFS Roth IRA contribution phase-out begins at AGI of: MFJ or QW $ 89,000 $ 86,000 $ 84,000 $ 83,000 $ 8,000 Single or HOH 20,000 8,000 7,000 6,000 4,000 MFS SIMPLE IRA plan elective deferral limits: Under age 50 at year end $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,000 Age 50 or older at year end 5,500 5,500 5,500 5,500 4,500 40(k), 403(b), 457 and SARSEP elective deferral limits: Under age 50 at year end $ 8,500 $ 8,000 $ 8,000 $ 8,000 $ 7,500 Age 50 or older at year end 24,500 24,000 24,000 24,000 23,000 Profit-sharing plan/sep contribution limits $ 55,000 $ 54,000 $ 53,000 $ 53,000 $ 52,000 Compensation limit (for employer contributions to profit sharing plans) $ 275,000 $ 270,000 $ 265,000 $ 265,000 $ 260,000 Defined benefit plans annual benefit limit $ 220,000 $ 25,000 $ 20,000 $ 20,000 $ 20,000 Retirement saver s credit phased-out when AGI exceeds: MFJ $ 63,000 $ 62,000 $ 6,500 $ 6,000 $ 60,000 HOH 47,250 46,500 46,25 45,750 45,000 Single, MFS or QW 3,500 3,000 30,750 30,500 30,000 Key employee compensation threshold $ 75,000 $ 75,000 $ 70,000 $ 70,000 $ 70,000 Highly compensated threshold $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 5,000 Social Security Maximum earnings and still receive full social security benefits: Under full retirement age (FRA) at year-end, benefits $ 7,040 $ 6,920 $ 5,720 $ 5,720 $ 5,480 reduced by $ for each $2 earned over Year FRA reached, benefits reduced $ for each $3 earned 45,360 44,880 4,880 4,880 4,400 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 $,200,000 6 $ 5,490,000 6 $ 5,450,000 6 $ 5,430,000 6 $ 5,340,000 6 GST tax exemption $,200,000 $ 5,490,000 $ 5,450,000 $ 5,430,000 $ 5,340,000 Gift tax annual exclusion $ 5,000 $ 4,000 $ 4,000 $ 4,000 $ 4,000 Phaseout amount for all other filers (except MFS) is amount shown reduced by: $5,700 ($5,690 if no children) in 208; $5,590 in 207; $5,550 in 206; $5,520 ($5,50 if no children) in 205; $5,430 in Amount not released by IRS at publication time. Tax professionals should watch for developments. 3 Add $8,000 if special depreciation claimed. 4 For single filing status, the amount is half of the amount shown. 5 Expired. Watch for developments. 6 Plus the amount of any deceased spousal unused exclusion and/or any restored exclusion related to lifetime gifts to a same-sex spouse. Replacement Page / Tax Year 040 Quickfinder Handbook 3-3

10 Business Use of Home Worksheet Caution: Schedule C filers must use Form 8829 (Expenses for Business Use of Your Home) or claim the deduction computed under the simplified method on Schedule C, line 30. Use this worksheet if Schedule F is filed or if the individual is an employee (result to Schedule A) or a partner (result to Schedule E). For daycare facilities not used exclusively for business, see Form Part Part of Home Used for Business: ) Area of home used for business... ) 2) Total area of home... 2) 3) Percentage of home used for business (divide line by line 2 and show result as percentage)... 3) % Part 2 Allowable Deductions: 4) Gross income from business... 4) (a) (b) Direct Expenses Indirect Expenses 5) Casualty loss... 5) 6) Deductible mortgage interest... 6) 7) Real estate taxes... 7) 8) Total of lines 5 through ) 9) Multiply column (b) of line 8 by line ) 0) Add column (a) of line 8 and line ) ) Business expenses not related to business use of home... ) 2) Add lines 0 and... 2) 3) Deduction limit. Subtract line 2 from line 4 (if zero or less, enter -0-)... 3) 4) Excess mortgage interest... 4) 5) Insurance... 5) 6) Rent... 6) 7) Repairs and maintenance... 7) 8) Utilities... 8) 9) Other expenses related to use of home... 9) 20) Add lines 4 through ) 2) Multiply column (b) of line 20 by line ) 22) Carryover of operating expenses from prior year... 22) 23) Add column (a) of line 20, line 2 and line ) 24) Allowable operating expenses. Enter the smaller of line 3 or line ) 25) Limit on excess casualty losses and depreciation. Subtract line 24 from line ) 26) Excess casualty losses... 26) 27) Depreciation of home from line 39 below... 27) 28) Carryover of excess casualty losses and depreciation from prior year... 28) 29) Add lines 26 through ) 30) Allowable excess casualty losses and depreciation. Enter the smaller of line 25 or line ) 3) Add lines 0, 24 and ) 32) Casualty losses included on lines 0 and ) 33) Allowable expenses for business use of home. (Subtract line 32 from line 3.)... 33) Part 3 Depreciation of Home: 34) Smaller of adjusted basis or fair market value of home when first used for business... 34) 35) Basis of land (or FMV, if FMV of home used on line 34)... 35) 36) Depreciable basis of building (subtract line 35 from line 34)... 36) 37) Business basis of building (multiply line 36 by line 3)... 37) 38) MACRS depreciation percentage... 38) 39) Depreciation allowable (multiply line 37 by line 38)... 39) Part 4 Carryover of Unallowed Expenses to Next Year: 40) Operating expenses. Subtract line 24 from line 23. If less than zero, enter ) 4) Excess casualty losses and depreciation. Subtract line 30 from line 29. If less than zero, enter ) Tax Year 040 Quickfinder Handbook

11 207 State and Local Sales Tax Deduction For 207, 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 deduction worksheet and any optional tables issued by the IRS will be posted to the Handbook Updates section of tax.thomsonreuters.com/quickfinder. Health Coverage Exemptions For 207, 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 207, 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 4-22 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 8.6% 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 2 Alaska Native Claims Settlement Act (ANCSA) Corporation Shareholder (regional or village) or he was otherwise E eligible for services through an Indian health care provider or the Indian Health Service. 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 8.6% of household income, as was the cost of any available G 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 207, he resided in a state that didn t participate in the G Medicaid expansion under the Affordable Care Act. Member of tax household born, adopted or died During 207, a child was added to the individual s tax household by birth or adoption, or a member of his tax household died and he can t check the full-year coverage checkbox on his tax return. H Members of certain religious sects The individual is a member of a recognized religious sect. Need ECN See Part I 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. 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). 2 Exemption no longer granted by the Marketplace (except in Connecticut). Need ECN See Part I Need ECN See Part I Need ECN See Part I Need ECN See Part I 207 Tax Year 040 Quickfinder Handbook 3-3

12 Taxpayer lives in: AL, GA, KY, NC, NJ, SC, TN, VA CT, DC, MD, PA, RI, WV DE, MA, ME, MO, NH, NY, VT FL, LA, MS, TX AK, AZ, CA, CO, HI, ID, NM, NV, OR, UT, WA, WY AR, IA, IL, IN, KS, MI, MN, MT, ND, NE, OH, OK, SD, WI A foreign country, U.S. possession or territory or uses an APO or FPO address or files Form 2555, 2555-EZ or 4563 or is a dual-status alien. (See also Pub 570.) Where to File 207 Form 040, 040A, 040EZ Due Date: April 7, 208 Without payment Form 040 Kansas City, MO Ogden, UT Kansas City, MO Austin, TX Fresno, CA Fresno, CA Austin, TX USA Address to: Department of the Treasury Internal Revenue Service Without payment Form 040EZ Kansas City, MO Ogden, UT Kansas City, MO Austin, TX Fresno, CA Fresno, CA Austin, TX USA Without payment Form 040A Kansas City, MO Ogden, UT Kansas City, MO Austin, TX Fresno, CA Fresno, CA Austin, TX USA Address to: Internal Revenue Service With payment Form 040, 040A, 040EZ P.O. Box Louisville, KY P.O. Box 3790 Hartford, CT P.O. Box Hartford, CT P.O. Box 24 Charlotte, NC P.O. Box 7704 San Francisco, CA P.O. Box Cincinnati, OH P.O. Box 303 Charlotte, NC USA Where to File Form 040-ES for 208 Where to File Form 040-ES for 208 Due Dates: See Due Dates: See Estimated Tax Payments Due Dates on Page 6-6. Address to: Internal Reven Estimated Tax Payments--ue Service Address to: Internal Revenue Service Taxpayer lives in: Send to: Taxpayer lives in: Send to: AL, GA, KY, NC, NJ, SC, TN, VA P.O. Box 9300 Louisville, KY AL, GA, KY, NC, NJ, SC, TN, VA P.O. Box 9300 Louisville, KY CT, DC, DE, MA, MD, ME, MO, NH, NY, PA, RI, VT, WV P.O. Box Hartford, CT CT, DC, DE, MA, MD, ME, MO, NH, NY, PA, RI, VT, WV P.O. Box Hartford, CT FL, LA, MS, TX P.O. Box 300 Charlotte, NC FL, LA, MS, TX P.O. Box 300 Charlotte, NC AK, AZ, CA, CO, HI, ID, NM, NV, OR, UT, WA, WY P.O. Box San Francisco, CA AK, AZ, CA, CO, HI, ID, NM, NV, OR, UT, WA, WY P.O. Box San Francisco, CA AR, IA, IL, IN, KS, MI, MN, MT, ND, NE, OH, OK, SD, WI P.O. Box Cincinnati, OH AR, IA, IL, IN, KS, MI, MN, MT, ND, NE, OH, OK, SD, WI P.O. Box Cincinnati, OH A foreign country, U.S. possession or territory or uses an APO or FPO address, or files Form 2555, 2555-EZ, or P.O. Box 300 Charlotte, NC , A foreign is country, a dual-status U.S. possession alien. If taxpayer or territory lives or in uses American APO Samoa, or FPO Puerto address, Rico, or Guam, files Form U.S. 2555, Virgin 2555-EZ, Islands or or the USA P.O. Box 300 Charlotte, NC Northern 4563, is Mariana a dual-status Islands, alien. see If Pub. taxpayer 570. lives in American Samoa, Puerto Rico, Guam, U.S. Virgin Islands or the USA Northern Mariana Islands, see Pub Where to File Form 4868 for 207 Return Due Date: April 7, 208 Address to: Department of the Treasury, Internal Revenue Service Center Address to: Internal Revenue Service Taxpayer lives in: Without payment With payment AL, GA, KY, NC, NJ, SC, TN, VA Kansas City, MO P.O. Box Louisville, KY CT, DC, DE, MA, MD, ME, MO, NH, NY, PA, RI, VT, WV Kansas City, MO P.O. Box Hartford, CT FL, LA, MS, TX Austin, TX P.O. Box 302 Charlotte, NC AK, AZ, CA, CO, HI, ID, NM, NV, OR, UT, WA, WY Fresno, CA P.O. Box 722 San Francisco, CA AR, IA, IL, IN, KS, MI, MN, MT, ND, NE, OH, OK, SD, WI Fresno, CA P.O. Box Cincinnati, OH A foreign country, American Samoa or Puerto Rico; or is excluding Austin, TX USA P.O. Box 302 Charlotte, NC USA income under IRC Sect. 933; or using an APO or FPO address; or filing Form 2555, 2555-EZ or 4563; or is a dual-status alien; or is a nonpermanent resident of Guam or the U.S. Virgin Islands All other Form 040NR, 040NR-EZ, 040-PR and 040-SS filers Austin, TX USA P.O. Box 302 Charlotte, NC USA End of Tab Tax Year 040 Quickfinder Handbook Replacement Page /208

13 Schedule B Interest and Dividends starts on Page Schedule A Itemized Deductions Related Information Auto Expenses Tab Contributions: Noncash Donations Tab 3 Home Mortgages Tab 5 Sales Tax Deduction Worksheet Tab 3 Itemized Deductions Worksheet Tab 3 Travel Expenses Tab 9 Adjusted Gross Income (AGI) Replacement Page /208 Tab 5 Schedule A Topics Phase-Out of Itemized Deductions... Page 5- Medical Deductions... Page 5- Taxes... Page 5-5 Interest Tracing... Page 5-6 Investment Interest Expense... Page 5-7 Interest Mortgages... Page 5-8 Points Mortgages... Page 5-9 Other Mortgage Interest Deduction Rules... Page 5- Charitable Contributions... Page 5-2 Casualty and Theft Losses... Page 5-5 Miscellaneous Itemized Deductions... Page 5-7 Miscellaneous Job Costs... Page 5-8 Work-Related Education Costs... Page 5-9 Investment Expenses... Page 5-20 Legal Fees... Page 5-2 Average Amount Claimed by Tax Filers for Various Tax Deductions 204 Home Mortgage Interest Charitable Gifts State & Local Taxes Real Estate Taxes Medical Expenses $ 0 20,000 $ 6,95 $,677 $ 87 $ 3,776 $ 0,06 $ 20,000 50,000 6,335 2,557,54 2,998,35 $ 50,000 00,000 7,296 3,62 3,26 3,494 5,989 $00, ,000 9,270 4,30 6,46 4,883 22,426 $200, ,000 3,80 7,424 4,977 8,078 47,323 $500,000 million 8,775 8,65 39,620 3,99 9,57 Over $ million 22,088 72, ,582 28,37 275,89 Source: Derived from data included in Internal Revenue Service s Statistics of Income 204 Individual Income Tax Returns. (IRS Pub. 304) Note: Claimed amounts are as reported before limits were applied. Phase-Out of Itemized Deductions If an individual s adjusted gross income (AGI) in 207 exceeds $26,500 Single, $33,800 MFJ or QW, $56,900 MFS or $287,650 HOH, the total of certain otherwise allowable itemized deductions is reduced by the lesser of: 3% of the excess of AGI over the threshold amounts shown above or 80% of the itemized deductions subject to the limit and otherwise allowable for the tax year. The reduction does not apply to deductions for medical expenses, investment interest, nonbusiness casualty losses and gambling losses. See Itemized Deductions Worksheet (207) on Page 3-2. Medical Deductions See also IRS Pub % Deduction Threshold Medical expenses in excess of 0.0% of AGI are deductible as itemized deductions [IRC Sec. 23(a)]. This AGI limit applies for both regular tax and AMT. [IRC Sec. 56(b)()] Expired Provision Alert: Before 207, a temporary 7.5%-of- AGI floor applied to taxpayers who were age 65 or older at the end of the year. Tax professionals Law Change should Alert: The watch Tax for Cuts developments and Jobs Act in case this provision of 207 is reinstated. reduced the deduction floor from 0%-of- AGI to 7.5%-of-AGI for all taxpayers for 207. When to Deduct Medical expenses are deductible in the year paid, regardless of when the expenses were incurred and regardless of the taxpayer s accounting method. [Reg..23-(a)] Exceptions: Credit card charge. If paid with a bank credit card, the medical expense is deductible when charged, not when the credit card company is paid. (Rev. Rul ) Decedents. An election can be made to deduct medical expenses paid by a decedent s estate within one year after the date of death on the decedent s final Form 040, as if the expenses were paid when the medical services were provided. Thus, in some cases, an amended Form 040 is filed. See Itemized Deductions on Page 5-2 for more information. Medical Expenses Paid for Others Deductible medical expenses include expenses paid for the taxpayer s spouse and for any person who qualifies as the taxpayer s dependent (for claiming an exemption), except that some of the tests required to claim an exemption do not have to be met to deduct an individual s medical expenses. Dependents, for deducting medical expenses, must be U.S. citizens or nationals or residents of the U.S., Canada or Mexico and the taxpayer s: Child, foster child, stepchild, sibling, half-sibling, step-sibling and any of their descendants, if that person met the following tests for 207: Was under age 9 (or under age 24 and a full-time student) at the end of 207 or permanently and totally disabled, Lived with the taxpayer for more than half the year and Did not provide more than half of his own support. Child, stepchild, foster child, a descendant of any of them (for example, grandchild), sibling or half-sibling (or a child of theirs), parent or an ancestor or sibling of either of them (for example, grandparent, aunt or uncle), step-sibling, stepparent, son-in-law, daughter-in-law, father-in-law, mother-in-law, brotherin-law or sister-in-law or any other person if that person lived as a member of the taxpayer s household all year (provided the relationship does not violate local law) and for whom the taxpayer provided more than half the support for the year. Former spouse, if the marriage existed either when the bills were incurred or at the time of payment. Adopted child before adoption, if child qualified as a dependent when the medical expenses were incurred or paid. After an adoption is final, an adopted child is treated as the taxpayer s own Continued on the next page 207 Tax Year 040 Quickfinder Handbook 5-

14 child. Note that an adopted child does not have to be a U.S. citizen or national, or a resident of the U.S., Canada or Mexico if the parent claiming the medical expense deduction is a U.S. citizen or national with whom the adopted child lived as a member of the household during the year the medical expenses were paid. Observation: Taxpayers can deduct medical expenses paid for some individuals who don t qualify as their dependent, such as a parent for whom the taxpayer provides over half the support, but the parent s gross income exceeds $4,050 (for 207) [IRC Sec. 23(a)]. Likewise, medical expenses for a married child who doesn t qualify for the dependency exemption only because he files a joint return are deductible. Medical expenses a taxpayer pays for a dependent he claims under a multiple support agreement are also deductible [Reg..23-(a) (3)]. But, medical expenses paid by others who joined the taxpayer in the agreement are not deductible. Example: Leon and his three brothers each provide one-fourth of their mother s total support. Under a multiple support agreement, Leon claims his mother as a dependent. Leon paid all of her medical expenses, but was reimbursed by his brothers for three-fourths of the amount. Leon can only deduct one-fourth of his mother s medical expenses. His brothers cannot deduct any part of the expenses that they repaid to Leon. Variation: Assume Leon and his brothers share the nonmedical support items equally, but Leon separately pays all of his mother s medical expenses. Now, he can deduct the unreimbursed amount he paid for her medical expenses. Divorced parents. A divorced (or separated) parent can deduct medical expenses paid for a child (regardless of which parent claims the child s dependency exemption) if the two parents together provide more than half of the child s support and the child is in the custody of one or both parents for more than half the year [IRC Sec. 23(d)(5); Rev. Proc ]. This does not apply if the child s exemption is being claimed under a multiple support agreement. Deductible Medical Expenses The following items are deductible medical expenses unless stated otherwise: Abortion, legal abortion. Acupuncture. Air conditioning device installed (but moveable) in a room for relief from allergies or other respiratory ailments. (Rev. Rul ) Alcoholism. Treatment, meals and lodging at therapeutic center for alcohol addiction. Transportation to Alcoholics Anonymous meetings if attendance is pursuant to medical advice. Alternative medical care. Nontraditional medical care, therapy, services, etc., not performed by medical professionals may be deductible. Generally, the deductibility of alternative therapies or services that aren t performed by or under the direct supervision of a medical professional is a matter of establishing that they aren t personal expenses and/or general health expenditures. There must be a direct or proximate relation between the expenses and the diagnosis, cure, mitigation, treatment or prevention of disease. [Malev, Docket No S (Tax Ct.)] Ambulance service. Artificial limbs and artificial teeth. Attendant for blind or deaf student. Banking umbilical cord blood to treat an existing or imminently probable disease. Nondeductible: Banking cord blood as a precaution to treat a disease that might possibly develop in the future. (INFO ) Birth control pills and other contraceptives prescribed by a doctor. Body scan. Electronic body scan. (Rev. Rul ) Braille books/magazines for use by a visually impaired person. Deduct the cost that is more than the regular printed editions. Breast pumps. Breast pump purchase or rental and related supplies that assist lactation. (Ann. 20-4) Breast reconstruction after a mastectomy to treat cancer. (Rev. Rul ) Tax Year 040 Quickfinder Handbook Camp. Tuition for YMCA day camp program designed for children with disabilities. (Emanuel, TC Summary Opinion ) Capital expenses. Special equipment installed in the home, or improvements that provide a medical benefit. See Capital Expenditures on Page 5-4. Cars. Cost of hand controls and other special equipment installed in a car used by a disabled person or the extra cost of a car or van specially designed to hold a wheelchair. Childbirth preparation classes. If they prepare a woman for an active role in the childbirth process. Nondeductible: Classes that are merely beneficial to general heath, such as learning about babies and changes to expect during pregnancy. (Ltr. Rul ) Chiropractor. Christian Science practitioner. Fees paid for medical care. Contact lenses, including equipment and materials for using contacts, such as saline solution and enzyme cleaner. Cosmetic surgery if necessary to improve a deformity related to a congenital abnormality, accident or disease, including obesity (Ltr. Rul ). Nondeductible: Face lifts, hair transplants, hair removal, liposuction and other unnecessary cosmetic surgery. Crutches. Dancing lessons. Nondeductible, even if recommended by a doctor. Dental treatment, including cost of braces, dentures, fluoride devices advised by dentist, etc. (but not teeth whitening). Diagnostic devices. Diaper service. Nondeductible, unless needed to relieve the effects of a particular disease. Diet, special. Tax Court has allowed the extra cost of special food over the cost of a normal diet when prescribed by a doctor to alleviate a specific medical condition. Nondeductible: Special food that merely replaces food normally consumed. [Massa, 85 AFTR 2d (0th Cir. 2000)] Doctor or physician. Legal medical services provided by medical doctors, surgeons, osteopathic doctors, dentists, eye doctors, chiropractors, podiatrists, psychiatrists, psychologists, physical therapists, acupuncturists, psychoanalysts (medical care only) and authorized Christian Science practitioners. Drug addiction. Treatment, meals and lodging at therapeutic center for drug addiction. Dyslexia language training. (Rev. Rul ) Exercise program if doctor recommended as treatment for a specific condition. Nondeductible: Program to improve general health, even if doctor recommended. Eye exams and eyeglasses. Eyeglasses if needed for medical reasons. Eye surgery for nearsightedness (such as LASIK and radial keratotomy). (Rev. Rul ) Fertility enhancement. In vitro fertilization or surgery, including surgery that reverses prior surgery. Expenses to obtain an egg donor including agency fees, donor fees, the donor s medical and psychological testing fees, insurance paid for post-procedure donor assistance and the legal fees for preparation of the contract with the donor (Ltr. Rul ). Nondeductible: Taxpayer had no medical condition or defect, such as infertility, that required such treatment (Magdalin, TC Memo ). Taxpayer and same-sex partner s IVF expenses with an unrelated gestational surrogate were disallowed. IVF costs were not deductible medical expenses for the same-sex couple because they were not incurred for the medical care of the taxpayer, his spouse or a dependent. Furthermore, the IVF costs didn t qualify as medical care because they were neither for diagnosis, cure, mitigation, treatment or prevention of disease, nor to affect any bodily structure or function of the taxpayer. [Morrissey, 9 AFTR 2d (D.C. FL)] Funeral expenses. Nondeductible. Deductible on decedent s federal estate tax return (Form 706). Guide dog or other animal to be used by visually impaired, hearingimpaired or other physically disabled persons. Include costs such as food, grooming and veterinary care incurred to maintain the animal s health and vitality so that it may perform its duties.

15 Exceptions: FMV must be reduced by any amount that would have been long-term capital gain if the property were sold for FMV if: The property (other than qualified appreciated stock) is contributed to a private nonoperating foundation, The property is tangible personal property that is put to an unrelated use by the charity or The taxpayer elects to apply the 50%-of-AGI limit rather than the 30%-of-AGI limit that normally applies to donations of capital gain property. Qualified appreciated stock is corporate stock that is long-term capital gain property for which market quotations are readily available on an established securities market. Quotations from a brokerage firm do not meet this test (Ltr. Rul ). Qualified appreciated stock does not include any stock if the taxpayer and his family have contributed (considering all prior contributions) more than 0% of the value of all the corporation s outstanding stock. [IRC Sec. 70(e)(5)(C)] Note: Shares in open-ended mutual funds are treated as qualified appreciated stock if quotations are readily available in general circulation newspapers. (Ltr. Rul ) Unrelated-use property. If tangible personal property is put to an unrelated use by the charity, such as donating a painting to a church that then sells it, the deduction is limited to the property s adjusted basis. Fair market value would be allowed for the deduction if the taxpayer obtains a letter from the charity stating its intention to use the gift in a way that is related to the organization s charitable purpose. If the deduction for the property is more than $5,000, the charity must agree in writing on Form 8283 to notify the IRS if the property is sold within two years of the donation. Donating Appreciated Property Examples of Ordinary Income Property Deduct Basis Inventory. Donor s creative works. Stocks and other capital assets held one year or less. Business-use property to the extent it would generate ordinary income if sold (such as depreciation recapture). Examples of Capital Gain Property Deduct FMV Land held more than a year. Stocks and other capital assets held more than a year. Jewelry, artwork, etc. held more than one year. Strategy: Capital gain property. Donate property and deduct FMV (reduced by any allowable depreciation). Even though appreciation of the property is not reported as income, a deduction for FMV is allowed. Strategy: Devalued business or investment property. Sell the asset and donate the proceeds. This generates a deductible loss from the sale and a deduction for a charitable contribution. If the property itself is donated, the deduction is limited to its FMV and no capital loss is allowed. Gifts of Remainder Interests A remainder interest is the legal right to own property at the end of a fixed period of time or at the death of another person. The right to own the property in the interim is an estate for a term of years or a life estate. To qualify for a charitable deduction, a remainder interest donated to charity must be one of the following. ) Personal residence or farm [IRC Sec. 70(f)(3)(B)]. The taxpayer retains rights to own and use the property until death. 2) Qualified conservation contribution [IRC Sec. 70(h)]. A contribution of real property interests exclusively for conservation purposes, including remainder interests and use restrictions granted in perpetuity. 3) Charitable remainder trusts and pooled-income funds [IRC Sec. 70(f)(2), 664 and 642(c)(5)]. Generally, a charitable remainder trust is required to make annual payments to noncharitable beneficiaries for life or for a term of years and to pay the remainder to charity. A pooled-income fund functions like a charitable remainder trust but holds assets from multiple donors. Because these transfers are irrevocable, a charitable deduction is allowed in the year of the transfer even though the charity does not receive the property until a later time. The amount of the deduction is generally the present value of the remainder interest on the date of the gift. Gifts of remainder interests are subject to the AGI limitations and other restrictions on charitable deductions. Taxpayer must file Form 8283 to report the gift. See Charitable Gifts and Bequests on Page 5- for more information on partial interests. See IRS Pub. 56 for information on valuing partial interests. CASUALTY AND THEFT LOSSES Form 4684; See also IRS Pubs. 547, 544 and 584 Casualty Losses A casualty is the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. Accidents. Shipwrecks. Certain corrosive drywall Sonic booms. (see Pub. 547 for details). Storms. Earthquakes. Terrorist attacks. Fires. Thefts. Floods. Tornadoes. Hurricanes. Vandalism. Mine cave-ins. Volcanic eruptions. Nondeductible Losses Accidental breakage or damage done by a pet. Car accident if caused by willful negligence or willful act. Disease or insect damage to trees, shrubs or other plants. Fire willfully set by taxpayer or paid to be set by taxpayer. Lost property. Progressive deterioration. Termite or moth damage. Deductible Casualty Losses A casualty loss equals: ) The lesser of: Adjusted basis in the property before the casualty or theft or Decrease in FMV of the property as a result of the casualty or theft, 2) Minus any insurance or other reimbursement received or that is expected to be received. Limits: Personal use property [Form 4684 (Casualties and Thefts) Section A]. $00 per casualty: Reduction applies to each event that causes the casualty or theft. For example, a hailstorm damages the house, garage and car. There is only one $00 reduction, not three. 0% of AGI: Reduce the total of all casualty or theft losses on personal-use property by 0% of AGI. Apply this reduction after the $00 per casualty reduction. Disaster Relief Alert: Special rules apply to victims of Hurricanes Harvey, Irma and Maria. See Disaster Tax Relief Act on Page 7-2. Business and income-producing property (Form 4684, Section B). Losses on business property (including employee business-use property) and income-producing property are not subject to the $00 per casualty and 0%-of-AGI limits. If property was completely destroyed, the loss is generally the cost of the property minus accumulated depreciation. If property was damaged but not destroyed, the loss is generally the decrease in the property s FMV up to the adjusted basis. 207 Tax Year 040 Quickfinder Handbook 5-5

16 206 federally declared disasters. For 206 and 207, the Tax Cuts and Jobs Act provides special tax relief for victims of 206 federally declared disasters similar to that available to 207 hurricane victims. (Act Sec. 028) Employee business-use property. Casualty losses on employee business-use property (property used in performing services as an employee) are miscellaneous itemized deductions subject to the 2%-of-AGI limitation. Insurance reimbursement. Reduce the casualty loss amount by actual insurance reimbursement and by any expected reimbursement. If the property is covered by insurance, an insurance claim must be filed otherwise, the casualty loss is not allowed. If the reimbursement exceeds the casualty amount (recovery is more than tax basis), the profit is currently taxable. Exception: If the insurance reimbursement is reinvested in similar-use property, tax is postponed until the replacement property is sold. See Involuntary Conversions on Page 7-4. Reinvestment generally must be made by the end of the second year following the insurance reimbursement. Taxpayers have four years to replace a main home in a federally declared disaster area. Insurance reimbursement in following year. If a casualty loss is deducted in one year based on an expected insurance reimbursement, and the actual reimbursement in a following year turns out to be more or less than expected, an adjustment may be required. More than expected. If the reimbursement is more than expected, the excess amount is treated as ordinary income in the year received. Exception: The amount is not included in income to the extent the prior year s deduction did not reduce tax liability. (IRC Sec. ) Less than expected. If the reimbursement is less than expected, the difference is treated as a casualty loss in the year the taxpayer can reasonably expect no more reimbursement. The prior year s tax return is not amended. The loss is combined with other casualty losses for that year. [Reg..65-(d)(2)] Rule for real estate. Measure the decrease in FMV of the property and improvements as a whole, not as separate items. Example: Elroy paid $50,000 for his home ($0,000 for the land and $40,000 for the house) and spent an additional $2,000 for landscaping. A fire destroyed his home and damaged the shrubbery and trees in the yard. An appraiser valued the property as a whole at $75,000 before the fire, but only $50,000 after the fire. Therefore, the starting point for determining Elroy s casualty loss deduction is $25,000. Court Case: A couple claimed a casualty loss deduction for two tornado damaged parcels of land they owned. The IRS issued a deficiency notice, disallowing the entire deduction and assessing an accuracy-related penalty. At trial, the couple established, to the Tax Court s satisfaction, the decline in the land s value caused by the tornado, but couldn t prove that they had basis in one of the parcels. Although the husband claimed that he bought the property from his mother, he didn t show how much he paid her or when the purchase took place. Therefore, the Tax Court denied the loss deduction on that parcel. However, the Court didn t uphold the accuracy-related penalty because the couple correctly valued the properties and didn t act negligently. (Coates, TC Memo ) Net operating loss. If the deductible casualty loss exceeds income, the casualty loss may create an NOL. See Net Operating Loss (NOL) on Page 6-2 for NOL rules. Federally Declared Disasters Taxpayers affected by a federally declared disaster are eligible for special tax relief provisions. See the table Federally Declared Disasters Quick Summary of Special Tax Relief Provisions below for an overview. Federally Declared Disasters Quick Summary of Special Tax Relief Provisions Item Special Relief IRC Sec. Casualty loss Can elect to claim losses in year before 65(i)() deduction year of the disaster. Disaster relief payments Payments are nontaxable. See Disaster relief payments in the next column. 39 Federally Declared Disasters Quick Summary of Special Tax Relief Provisions Item Special Relief IRC Sec. Involuntary conversion business or incomeproducing property Any tangible replacement property acquired for use in any business is treated as similar or related in service or use to the destroyed property. 033(h)(2) Involuntary conversions principal residence Tax deadlines Replacement period is four years rather than two years. Special rules for avoiding gain on receipt of insurance proceeds. Deadlines for filing and paying taxes and making IRA contributions are often postponed for certain federally declared disasters. 033(h)() Tax Year 040 Quickfinder Handbook Replacement Page / A Federally declared disaster. A federally declared disaster is a disaster that occurred in an area directed by the President to be eligible for federal assistance. [IRC Sec. 65(i)(5)] An ongoing list of disaster areas is available on the Federal Emergency Management Agency (FEMA) website at Disaster relief payments. Gross income does not include qualified disaster relief payments received by individuals (IRC Sec. 39). A qualified disaster is a federally declared disaster or one determined by an applicable government authority to warrant assistance from the government. The government, a charity or an employer can make payments (Rev. Rul ). Qualified payments include amounts to reimburse or pay any reasonable and necessary expense for: Personal, family living or funeral expenses. Repair of personal residence or its contents. Temporary housing. Transportation. Medical. Hurricanes Harvey, Irma and Maria. Special rules apply to victims of Hurricanes Harvey, Irma and Maria. See Disaster Tax Relief Act on Page 7-2. Droughts as Casualty Losses In general, most losses of property caused by droughts are not deductible as casualty losses because the loss is due to progressive deterioration rather than from a sudden event. But, see Income Deferral Livestock Sales on Page 6-6 for rules when livestock are sold due to drought. Court Case: Casualty losses due to drought were allowed for damage to trees and shrubs as well as damage to the foundation of a residence when the soil shrinkage and damage occurred over a short period of time. (Stevens, TC Memo ) Theft Losses A theft loss is deductible in the year the theft loss is discovered, regardless of when the theft actually occurred. [IRC Sec. 65(e)] Situations that have qualified as theft losses: A taxpayer bet on races that turned out to be fixed. A taxpayer relied on tax advice from an attorney that turned out to be fraudulent. [Nichols, 43 TC 842 (965)] Money paid a lawyer for a divorce decree that turned out to be a forgery. Money loaned to a second party based on advice that turned out to be false financial representation. Investment in stock based upon false or illegal representations. [Vietzke, 37 TC 504 (96)] Ponzi-type investment schemes (see Ponzi scheme losses on Page 5-7). Losses that are not theft losses. Theft losses are deductible as casualty losses if they result from acts illegal under state law and

17 Straight line (SL) method. When the MACRS tables are not used, a different depreciation rate is applied each year to the property s adjusted basis. The SL rate is determined by dividing the number one by the years remaining in the recovery period at the beginning of the year, considering the convention used in the placed-in-service year. If the number of remaining years is less than one, the depreciation rate for that tax year is 00%. Land Preparation Land is not depreciable. The cost of grading, excavating, soil removal, ditching, landscaping, demolishing existing structures, etc., is generally considered part of the land cost and not depreciable. However, if these activities bear a direct association with depreciable property, the costs are depreciable. For example, landscaping so close to a building that it would be destroyed if the building were replaced can be depreciated. (Rev. Rul ) Idle Assets If an asset is usually used for business purposes but is temporarily idle, it is still depreciated. [P. Dougherty Co., 35 AFTR 669 (4th Cir. 946)] Abandonment Depreciation ends when an asset is retired from service. Depreciation is allowed in the final year based on the applicable convention. If there is any remaining basis in the asset, a loss may be deducted if the asset is scrapped or abandoned. To deduct a loss from abandonment, the taxpayer must intend to irrevocably discard the asset so that it will neither be used nor retrieved by the taxpayer for sale, exchange or other disposition [Reg..67(a)-8]. Losses on assets used in a business are reported on Form General Asset Account Depreciation Taxpayers can elect to group similar assets and depreciate them as one asset. See Tab J in the Small Business Quickfinder Handbook. Expensing Policy De Minimis Safe Harbor Taxpayers without an applicable financial statement (AFS). Taxpayers who have accounting procedures in effect at the beginning of the year (under which they expense for non-tax purposes amounts paid for property costing less than a specific dollar amount or that has a useful life of 2 months or less) can elect a de minimis safe harbor for tax. If property that costs up to $2,500 (per item) is expensed on the taxpayer s books and records under the accounting procedures, its cost can be expensed for tax. [Reg..263(a)-(f); Notice ] Taxpayers with an AFS. A different de minimis rule applies to taxpayers with an AFS. Generally, these are taxpayers required to file Form 0-K with the Securities and Exchange Commission (SEC), or who have audited financial statements. In addition to an AFS, taxpayers must have written accounting procedures in effect at the beginning of the tax year for expensing amounts paid under a certain dollar amount, and treat the amounts as expenses on their AFS in accordance with the policy. If they qualify for the safe harbor, these taxpayers can expense items costing up to $5,000. Making the election. To make the election, attach a statement titled Section.263(a)-(f) de minimis safe harbor election to the return for the tax year for which the amounts are paid. The statement should include the taxpayer s name, address, and tax ID number, as well as a statement that the taxpayer is making the de minimis safe harbor election. The election must be applied to all amounts that qualify. Repairs vs. Capitalized Improvements Generally, costs that result in an improvement to property must be capitalized. Amounts paid for activities that result in any of the following result in an improvement: [Reg..263(a)-3(d)] ) A betterment to the property. 2) A restoration of the property. 3) An adaptation of the property to a new or different use. Amounts that do not result in an improvement generally can be expensed as a repair. (Reg..62-4) Unit of property. Whether an expenditure results in an improvement is determined by looking at how it affects the unit of property. For property other than buildings, a unit of property is a grouping of functionally interdependent components that must be placed in service together and at the same time in order to perform their intended function. [Reg..263(a)-3(e)(3)] For buildings, a building and its structural components are a unit of property. But, the improvement test (capitalization required) is met if an expenditure results in an improvement to either ) The building and its structural components (excluding structural components designated as building systems) or 2) Any of the following building systems: a) Heating, ventilation and air conditioning (HVAC) systems; b) Plumbing systems; c) Electrical systems; d) Escalators; e) Elevators; f) Fire protection and alarm systems; g) Security systems; h) Gas distribution systems or i) Other systems identified in published IRS guidance. [Reg..263(a)-3(e)(2)] Example: Asta LLC owns an office building with an HVAC system that incorporates four roof-mounted units servicing different parts of the building. The units are unconnected and have separate controls and duct work that distribute the heated or cooled air to different spaces in the building. Asta pays for work on the roof-mounted units. The entire HVAC system, including all of the roof-mounted units and their components, make up a building system. So, if the amount Asta paid results in an improvement (for example, a betterment) to the HVAC system, Asta must treat this amount as an improvement to the building and the expenditure is capitalized. Variation: If the work on the roof-mounted units was for routine maintenance that did not result in a betterment to the HVAC system, the expenditure would not be capitalized. Safe harbor for routine maintenance. Costs of regularly scheduled, routine maintenance do not have to be capitalized. Routine maintenance includes: () inspection, (2) cleaning, (3) testing, (4) replacing parts and (5) other recurring maintenance that keeps property in its ordinarily efficient operating condition. [Reg..263(a)-3(i)] Safe harbor for small taxpayers. Taxpayers with average annual gross receipts for the last three tax years of $0 million or less can elect not to capitalize improvements to an eligible building property if the total amount paid during the year for repairs, maintenance, improvements and similar activities performed on the building does not exceed the lesser of: [Reg..263(a)-3(h)] ) $0,000 or 2) 2% of the building s unadjusted basis. Eligible building property includes buildings that the taxpayer owns or leases if their unadjusted basis is $ million or less. For leased eligible building property, the $ million refers to the total amount of (undiscounted) rent paid or expected to be paid. Safe harbor for retailers and restaurants. The IRS has provided a safe harbor accounting method that taxpayers in the retail and restaurant industries can use to determine whether costs paid to refresh or remodel a qualified building are deductible repair and 207 Tax Year 040 Quickfinder Handbook 0-3

18 maintenance expenses under IRC Sec. 62(a), or if they must be capitalized as improvements under IRC Sec. 263(a) or as property produced for use in the taxpayer s trade or business under IRC Sec. 263A. The safe harbor method minimizes the need to perform a detailed factual analysis to determine whether each remodel-refresh cost is for repairs and maintenance or for an improvement. Under the safe harbor, a qualified taxpayer deducts 75% of its qualified costs as repairs and maintenance and capitalizes the remaining 25%. (Rev. Proc ) Depreciating Additions or Improvements The depreciation deduction for an addition or improvement to an asset is computed in the same manner as the deduction for the underlying property would be if that property were placed in service at the same time as the addition or improvement. The MACRS class for the addition or improvement is determined by the MACRS class of the property to which the addition or improvement is made. Depreciation begins in the year the addition or improvement is placed in service. Straight-Line Percentages See MACRS tables on Page 0-2. Alternative depreciation system (use ADS recovery period for regular tax and AMT). See When ADS Must Be Used on Page 0-5. SL MACRS depreciation (use GDS recovery period for regular tax and AMT). Year Half-Year Convention Mid-Quarter Convention Quarter in Which Acquired Year Property % 29.7% 20.83% 2.50% 4.7% Year Property % 7.50% 2.50% 7.50% 2.50% Year Property % 2.50% 8.93% 5.36%.79% Year Property % 8.75% 6.25% 3.75%.25% Cost Segregation Taxpayers can identify the cost of personal property included in the cost of buying or constructing a building and take faster depreciation deductions on the personal property. The IRS has issued guidelines to help determine whether an item is a structural component of a building (which must be depreciated as part of the building) or is tangible personal property. (CCA ) Factors to consider: ) Is the property capable of being moved, and has it in fact been moved? 2) Is the property designed or constructed to remain permanently in place? 3) Are there circumstances showing that the property may have to be moved? 4) How substantial and time-consuming a job is removing the property? 5) How much damage will occur upon removal? 6) How is the property affixed to the land? The IRS Cost Segregation Audit Techniques Guide (ATG) helps agents examine cost segregation studies to determine whether the IRS will accept or challenge their conclusions. While the ATG cannot be cited as authority, it does show the IRS s views on specific assets. It is available at Reclassifying property. Personal (Section 245) property that might be included in the cost of real property, but could be identified and depreciated under a shorter recovery period, includes: Cabinetry and counters. Carpet and padding. Decorative accent lighting. Decorative millwork. Draperies and blinds. Emergency generators. Emergency/security systems. Lockers. Movable partitions. Music systems. Portable fire extinguishers. Public address systems. Refrigerators and stoves. Shelving and related millwork. Special exhaust systems. Special purpose enclosures. Washing machines and dryers. Window air conditioning units. Special (Bonus) Depreciation IRC Sec. 68(k) The 205 PATH Act retroactively extended the special depreciation allowance for assets placed in service through 209. However, the percentage For 207, a allowed special (bonus) will decrease depreciation from 50% allowance to 40% equal in 208 to 50% and 30% of depreciable in 209. The basis IRS (cost issued or other guidance basis on less applying Section these 79 deduction changes effective and credits) April is 20, available 207. (Rev. for qualified Proc ) property acquired or placed in service before September 28, 207. For qualified property acquired For 207, and a placed special in (bonus) service depreciation after September allowance 27, 207, equal the to bonus 50% of depreciation the qualified allowance property s is 00% depreciable (or electively basis (cost 50%). or other basis less Section 79 deduction and credits) is available. The amount of the special depreciation allowance is not affected by a short tax year or by the applicable convention. (See Conventions on Page 0-2.) But, assets for which the special depreciation allowance is claimed are still counted for determining whether the mid-quarter convention applies for the normal MACRS deduction. If the special depreciation allowance is taken, there are no AMT adjustments for depreciation for that asset for the year placed in service or any later year. Qualified Property To qualify for the special depreciation allowance in 207, the property must be a new asset (see Original use on Page 0-5) that is either: MACRS property with a recovery period of 20 years or less, Computer software (other than computer software covered by IRC Sec. 97), Water utility property or Qualified improvement property. Qualified improvement property must be () an improvement to an interior portion of a building that is nonresidential real property and (2) placed in service after the date the building was first placed in service [IRC Sec. 68(k)(3)]. It does not include expenditures for improvements attributable to enlarging the building, elevators or escalators or the internal structural framework of the building. [IRC Sec. 68(k)(3)(B)] The 205 PATH Act, as implemented by Rev. Proc , expands the definition of real property eligible for bonus depreciation by replacing the pre-act term of qualified leasehold improvement property with qualified improvement property. Accordingly, after 205, bonus depreciation is available for eligible property without regard to whether the improvements are subject to a lease, and If acquired or placed in service before September 28, 207, the property also must be new Tax Year 040 Quickfinder Handbook Replacement Page /208 to qualify (see Original use on Page 0-5).

19 , if acquired or placed in service before September 28, 207 the requirement that the improvement must be placed in service more than three years after the date the building was first placed in service is removed. Business vehicles. The Section 280F limit on depreciation that applies to many vehicles is increased in 207 by $8,000 for vehicles for which special depreciation is allowed. See the Business Vehicles Quick Facts table on Page -. Original use. To qualify for special depreciation, the asset must generally be new, rather than used. However, new property that a taxpayer acquired for personal use and later converted to business use meets the original-use requirement. [Reg..68(k)-(b)(3)] Electing Out Taxpayers can elect not to claim special depreciation for any class of property by attaching a statement to the tax return. The election out applies to all additions to an asset class (for example, five-year property) for the year [IRC Sec. 68(k)(7)]. Taxpayers elect out by attaching a statement to their timely filed (including extensions) return indicating the class of property for which they are making the election and that, for such class, they are electing not to claim any special depreciation allowance. Election Out of Special Depreciation Allowance Taxpayer elects under IRC Sec. 68(k)(7) not to claim the special depreciation allowance for the following classes of property placed in service during the tax year ended [insert year-end] : [List property classes for which election is made.] Replacement Page /208 Alternative Minimum Tax Adjustments For alternative minimum tax (AMT), depreciation must be computed using the AMT method. For assets placed in service after 998, the GDS recovery period is used for both regular tax and AMT. So for these assets, there is an AMT depreciation adjustment only if the AMT and regular tax depreciation methods differ. AMT Depreciation Adjustment Required Type of Property Depreciation Method Regular Tax AMT 3-, 5-, 7- and 0-yr property 200% DB 50% DB Certain Section 250 property 50% DB SL Note: For property place in service after 986 and before 999, the ADS recovery period generally applied for AMT. Then, the AMT adjustment is the result of differences in both the depreciation method and recovery period. See MACRS Recovery Periods (207) on Page 0- for ADS recovery periods. Property with no AMT adjustment required. For assets placed in service after 998, no AMT adjustment is required for assets depreciated SL for regular tax. Common examples are: [IRC Sec. 68(b)(3)] Nonresidential real property. Residential rental property. Qualified leasehold improvement, restaurant and retail improvement property. Trees and vines bearing fruit or nuts. Other property without AMT adjustment: Property (other than Section 250 property) placed in service after 998 that is depreciated for regular tax using the 50% DB method or the SL method. Property depreciated using ADS for regular tax. Property for which the special depreciation allowance under Section 68(k) is claimed. See Special (Bonus) Depreciation on Page 0-4. Property to the extent a Section 79 election is made. Qualified disaster assistance property for which a special depreciation allowance under IRC Sec. 68(n) was claimed. Motion picture films, videotapes or sound recordings. Property depreciated under the unit-of-production method or any other method not expressed in a term of years. Qualified Indian reservation property. Qualified revitalization expenditures for a building for which an election is made to claim the commercial revitalization deduction under IRC Sec. 400I. AMT Taxable Income Adjustment The AMT taxable income adjustment is the difference between the depreciation computed for AMT purposes and the depreciation claimed for regular tax. If the AMT depreciation is less than the depreciation claimed for regular tax, the difference is added to AMT taxable income. If the AMT depreciation is greater than the depreciation claimed for regular tax (which usually occurs in the later years of the recovery period), the difference is subtracted from AMT taxable income. Note: See Tab 2 for more information on AMT. Alternative Depreciation System The alternative depreciation system (ADS) applies SL depreciation over the ADS recovery period. The ADS method may be elected for most property, but is mandatory in some situations. See MACRS Recovery Periods (207) on Page 0- for ADS recovery periods for commonly used assets. See the Straight-Line Percentages table on Page 0-4 for the MACRS table that can be used to compute depreciation under the SL method. Electing ADS Method Election is irrevocable, and applies to all property in that class that is placed in service during the tax year of the election. Exception: The election for residential rental and nonresidential real property is made on a property-by-property basis. Election must be made by completing Part III, Section C of Form 4562 by the due date (including extensions) of the return for the year in which the property is placed in service. The half-year, mid-quarter and mid-month conventions apply. When ADS Must Be Used Listed property with 50% or less qualified business use. See Listed Property on Page -9. Tangible property used predominantly outside the U.S. Tax-exempt use property. Tax-exempt bond financed property. Imported property covered by an executive order of the President of the U.S. Property used predominantly in a farming business and placed in service during any tax year in which the taxpayer elects out of the Section 263A uniform capitalization (UNICAP) rules. Section 79 Deduction Section 79 allows a taxpayer to expense certain property in the year placed in service. To qualify, property must be used more than 50% in a trade or business and be acquired by purchase from an unrelated party. 207 Tax Year 040 Quickfinder Handbook 0-5

20 Section 79 Property (207) Qualifying Property Tangible personal property (such as machines, equipment, furniture). Certain other tangible property used for specified purposes. Qualified real property. Single-purpose agricultural or horticultural structures. Certain storage facilities. Off-the-shelf computer software. Nonqualifying Property Property not used in a trade or business (investment property, most rentals). Buildings and their structural components (except qualified real property). Property used in connection with furnishing lodging, except for hotel/motel operations. Property used 50% or less in a trade or business. Property acquired by gift, inheritance or trade. Property purchased from certain related parties. Property used outside the U.S. Property used by tax-exempt organizations, governmental units. Property used by foreign persons or entities. Property held by an estate or trust. Intangible property, except for certain computer software. Property rented to others generally doesn t qualify unless the taxpayer purchases it, the lease term is less than 50% of the property s class life and for the first 2 months of the lease, business deductions on the property exceed 5% of its rental income. Property Eligible for Section 79 Expense (207) Not an Exhaustive List Air-conditioning and heating units. Airplanes. Automobiles. Billboards (if movable). Computers. Drain tiles used to improve the drainage of a pasture. Fences used in farming business. Gasoline storage tanks and pumps and retail service stations. Helicopters. House trailers (movable, wheels attached). Livestock (including horses, cattle, hogs, sheep, goats, mink and other fur-bearing animals). Machinery and equipment. Office equipment copiers, typewriters, fax machines, etc. Office furniture desks, chairs, file cabinets, book shelves, etc. Off-the-shelf computer software. See Section 79 Deduction Farm Property on Page 6-9. Oil and gas well and drilling equipment. Paved barnyards to keep livestock out of mud and load them onto trucks. (Rev. Rul ) Qualified real property. Signs (if movable). Single-purpose agricultural or horticultural structures. Storage facility with no additional workspace (such as grain bins, corn cribs or silos). Store counters. Testing equipment. Tractors. Trucks. Vineyards (not including nondepreciable land improvements). (CCA ) Water wells that provide water for raising livestock. Property Not Eligible for Section 79 Expense (207) Not an Exhaustive List Barns. Billboards (if not movable). Bridges. Buildings. Exception: Qualified real property. Car washes. Docks. Elevators. Escalators. Fences (not used in farming business). Investment property. Land. Landscaping. Property used outside the U.S. Roads. Shrubbery. Sidewalks. Stables. Swimming pools. Trailers (nonmobile). Warehouses. Wharves. Property eligible for the Section 79 deduction does not include that part of the property s basis that is determined by reference to the basis of other property held at any time by the person acquiring the property. [Reg..79-4(d)] Example: Arnold trades a copier (used in his business) for a new copier that costs $20,000. Arnold is granted a trade-in allowance of $2,000 on his old copier. Arnold s adjusted basis in his old copier was $,200. The basis of the new copier is $9,200 ($,200 basis of old copier plus $8,000 cash expended). Only $8,000 of the basis of the new copier qualifies for Section 79 deduction; the remaining $,200 is basis determined by reference to other property. Election The Section 79 election is made on an item-by-item basis for qualifying property by completing Part I of Form A taxpayer can irrevocably revoke the expensing election and any specification in the election on a timely filed amended return. Dollar Limit on Section 79 Deduction The total cost of property that can be expensed any year is limited to a maximum deduction. In addition, for each dollar of Section 79 property placed in service during the year over the qualifying property threshold, the maximum deduction is reduced (but not below zero) by one dollar. A married couple, whether filing joint or separate returns, are treated as one taxpayer for the maximum deduction and the qualifying property threshold. The maximum deduction (after any reduction for qualifying property additions over the threshold) is divided equally between the spouses, unless they agree to a different allocation. Year Section 79 Annual Limits Maximum Deduction Qualifying Property Threshold $ 50, $ 2,030,000 Example: James placed $2,050,000 of Section 79-eligible property in service in his business in 207. The maximum amount he can elect to expense under Section 79 is $490,000 ($50,000 $20,000 qualifying property over the $2,030,000 threshold). Section 79 Expensing Qualified Real Property For tax years beginning in 207, qualified real property, which is () qualified leasehold improvement property, (2) qualified restaurant property and (3) qualified retail improvement property is eligible for up to $50,000 of Section 79 expensing. See Qualified Real Property on Page 0-9 for definitions. Taxpayers can elect to treat qualified real property as Section 79 property by attaching a statement to their original or amended return. Business Taxable Income Limit The Section 79 deduction is limited to the taxpayer s total taxable income from the active conduct of any trade or business. Taxable income is computed without regard to any Section 79 deduction, net operating losses (NOLs), the deduction for self-employment (SE) taxes or any unreimbursed employee business expenses. Active trade or business income includes: (Reg..79-2) Wages, salaries, tips and other compensation; Proprietorship (Schedule C or F) net income; Tax Year 040 Quickfinder Handbook

21 After December 22, 207, rollovers from qualified tuition programs to ABLE accounts are allowed. Beneficiaries The designated beneficiary of an ABLE account is an eligible individual who established the account and is its owner. The program must limit a designated beneficiary to one ABLE account. An individual is eligible to establish an account if, during the tax year: () the individual is entitled to benefits based on blindness or disability under the social security disability insurance program or the Supplemental Security Income (SSI) program, and that blindness or disability occurred before the date on which the individual reached age 26, or (2) a disability certification for the individual has been filed with IRS for the tax year. [IRC Sec. 529A(e)()] Contributions Any person may make contributions to an ABLE account. Contributions to an ABLE account aren t deductible for income tax purposes. Noncash contributions are not allowed. Annual contributions from all contributors to a designated beneficiary s ABLE account are limited to that year s annual gift tax exclusion amount ($4,000 for 207) [IRC Sec. 529A(b)(2)]. A 6% excise tax is imposed on excess contributions. [IRC Sec. 4973(a)(6)] Distributions Distributions from ABLE accounts are tax-free to the extent they don t exceed the designated beneficiary s qualified disability expenses for the year [IRC Sec. 529A(c)()(B)]. Qualified disability expenses are any expenses related to the designated beneficiary s blindness or disability and include: Education. Housing. Transportation. Employment training and support. Assistive technology and personal support services. Health, prevention and wellness services. Financial management and administrative services. Legal fees. Expenses for oversight and monitoring. Funeral and burial expenses. Other qualified expenses. Distributions that exceed the qualified disability expenses for the year are included in taxable income (reported on line 2 of Form 040 with the word ABLE entered on the dotted line) to the extent of the earnings portion of the distribution, and that amount is generally subject to a 0% penalty tax (see Form 5329). [IRC Sec. 529A(c)(3)(A)] Rollovers. Distributions can be rolled over tax-free within 60 days to another ABLE account for the benefit of the designated beneficiary or an eligible individual who s a family member of the designated beneficiary. Similarly, an ABLE account s designated beneficiary can be changed, as long as the new beneficiary is an eligible individual who s a family member of the designated beneficiary. [IRC Sec. 529A(c)()(C)] Death of beneficiary. Amounts remaining in the account after the designated beneficiary s death go to the deceased s estate or to a designated beneficiary. They are subject to income tax on investment earnings, but not to the 0% penalty. [IRC Sec. 529A(c)(3)(B)] Replacement Page /208 Family Loans A loan to a family member to finance a first home, start a new business or pay personal expenses should be made in a businesslike manner. The lender should have an enforceable note that shows: () fixed loan amount, (2) definite payment date, (3) stated rate of interest and (4) collateral or security, if applicable. Interest on loans between related parties. As a lender, it is best to charge the family member interest at the market rate. On loans between related parties, the IRS establishes minimum interest rates (called the applicable federal rates, or AFRs) that change monthly. If the interest on the loan is less than the AFR, see Imputed Interest on Below Market Loans on Page Interest paid by the borrower is: Deductible if the loan is for business, investments or is a qualified home mortgage (subject to investment interest expense and mortgage interest expense limits). Not deductible if the loan is for personal purposes or used to pay personal expenses, including qualified education expenses (see Restrictions on Page 3-4). Advantages to a lender of a bona fide loan: May deduct a bad-debt loss if loan is not repaid. (See Nonbusiness Bad Debt on Page 7-0.) Principal not subject to gift tax rules. Family loans safe from below-market loan rules: Loans of $0,000 or less that are not used for buying incomeproducing assets (for example, stocks). [IRC Sec. 7872(c)(2)] Loans of $00,000 or less if the borrower s net investment income (as defined in Section 63) does not exceed $,000. [IRC Sec. 7872(d)()] Example: Chester makes an interest-free loan to his daughter, Sally, to start a business, forgoing $3,500 in interest each year (based on AFR). The IRS treats the forgone interest as a $3,500 gift. There are no gift tax consequences in 207 since the forgone interest plus Chester s other gifts to Sally total less than $4,000. No income tax is owed on the forgone interest if Sally has $,000 or less of net investment income. However, if her net investment income is $2,500 (more than $,000), Chester must include $2,500 as income (the lesser of Sally s net investment income or the $3,500 of forgone interest). Custodial Accounts Uniform Gifts to Minors Act (UGMA) Uniform Transfers to Minors Act (UTMA) Generally, minors are not legally allowed to own money or property. For this reason, each state has a uniform gifts to minors or uniform transfers to minors act, which is used to facilitate ownership of assets by children. A custodial account created under a state s UGMA or UTMA is similar to a trust, except terms are set in statute instead of requiring a separate trust document. Most banks, brokers and other financial institutions will set up UGMA or UTMA accounts for minor beneficiaries. Under a state s UGMA or UTMA, legal title to money or property is held in a custodial account. The custodian, often a parent, has a fiduciary responsibility to manage the account in a prudent manner for benefit of the child. When the child reaches the age of majority (usually 8 or 2, depending on the state) control of the account transfers to the child. Some states allow the custodian to retain control over UTMA accounts until the child reaches age 25. Income tax. An UGMA or UTMA account is set up using the child s social security number and income is taxed to the child. Exception: Income used by the parent to pay for support of the minor child is taxable to the parent if the parent has a legal obligation to make such payments. (Rev. Ruls and ) Gift and estate tax. A gift in trust generally does not qualify for the $4,000 (for 207) annual gift exclusion because the gift represents a future interest. However, gifts made to UGMA and UTMA accounts are considered gifts of present interests and therefore qualify for the annual gift exclusion. 207 Tax Year 040 Quickfinder Handbook 3-3

22 SAVINGS BONDS INTEREST EXCLUSION Form 885; See also IRC Sec. 35 and IRS Pub. 970 All or part of the interest earned on Series EE bonds issued after December 3, 989 or on Series I bonds, is excluded from income for certain taxpayers if the bonds are used for qualified educational expenses. (IRC Sec. 35) Requirements Bond owner must be at least 24 years old before bond s issue date. Interest is tax-free if the amount of bonds redeemed (principal plus interest) is less than qualified educational expenses in year of redemption. If redemption amount is more than expenses, the excludable amount is based on the ratio of expenses to redemption amount. Qualified educational expenses are tuition and fees for the bond owner or his dependent or spouse at a qualifying educational institution (college, university or vocational education school). Room, board and books do not qualify. Qualified expenses include contributions to a qualified tuition program (QTP) or an education savings account (ESA). Qualified expenses do not include those paid with tax-free scholarships, tax-free withdrawals from ESAs and QTPs, nontaxable veterans educational assistance benefits, tax-free employerprovided educational assistance or any expenses used in computing education credits. Exclusion not available to married taxpayers filing separately. Exclusion phases out for 207 when modified AGI is between $78,50 $93,50 ($7,250 $47,250 MFJ or QW). Modified AGI is AGI (before the savings bond interest exclusion) increased by: () foreign earned income and housing exclusion, (2) foreign housing deduction, (3) exclusion for income from certain U.S. possessions and Puerto Rico, (4) exclusion for employer adoption benefits, (5) student loan interest deduction, (6) domestic production activities deduction and (7) tuition and fees deduction. The AGI phase-out applies to the year the bonds are redeemed and interest is excluded from income. STUDENT LOAN INTEREST DEDUCTION See also IRC Sec. 22 and IRS Pub. 970 Taxpayers can deduct up to $2,500 of interest paid on qualified education loans for college or vocational school expenses as an adjustment to income (above-the-line) (IRC Sec. 22). The deduction is available for interest on qualifying loans for the benefit of the taxpayer or the taxpayer s spouse or dependent at the time that the debt was incurred. For 207, the deduction is phased out when modified AGI is between $65,000 and $80,000 ($35,000 and $65,000 MFJ). Modified AGI is AGI (before the student loan interest deduction) increased by: () foreign earned income or housing, (2) foreign housing deduction, (3) income from certain U.S. possessions or Puerto Rico, (4) domestic production activities deduction and (5) tuition and fees deduction. Qualified Loans Qualified education loans are loans taken out solely to pay qualified education expenses, including tuition, fees, room and board, books, equipment and transportation for an eligible student to attend an eligible educational institution. Coordination with other education benefits. Qualified education expenses must be reduced by amounts paid with nontaxable education benefits received, such as employer-provided educational assistance, nontaxable distributions from an ESA or QTP, savings bond interest education exclusion or veterans educational benefits Tax Year 040 Quickfinder Handbook Eligible educational institutions include colleges, vocational schools and other post-secondary institutions that are eligible to participate in Department of Education student aid programs. Eligible student. Students must take at least one half the normal full-time load in a degree, certificate or other qualified program at an eligible institution. Restrictions ) Not available to taxpayers who are claimed as dependents (listed on line 6c of Form 040) on another taxpayer s return. 2) Not available to married taxpayers filing separately. 3) The taxpayer must be legally obligated to repay the loan and actually pay the interest during the tax year to deduct the interest. 4) Interest on a loan from a related person does not qualify. Related persons include: siblings, spouses, ancestors (parents, grandparents, etc.) and lineal descendants, as well as certain corporations, partnerships, trusts and exempt organizations. 5) Loans from a qualified employer plan [for example, 40(k) plan] do not qualify. Observation: Because of restrictions and 3, a student loan interest deduction often will not be allowed when the student takes out the loan and his parents claim a dependency deduction for the student/child. Reason: If the parents are not legally obligated to repay, they cannot deduct any interest they pay. Alternatively, if the student pays interest on the loan, he cannot deduct the interest if his parents claim a dependency exemption deduction for him. But, even if a dependency exemption deduction is claimed by the parents for the student/child, it may make sense for the student/ child to take out the loan when payments will not be due until after graduation, at which point the child will likely no longer be claimed as a dependent and can, therefore, deduct the interest on his return. If parents make payments on the student/child s loan as a gift after the child graduates, the child is eligible to deduct the interest on his tax return. TUITION AND FEES DEDUCTION Form 897; See also IRC Sec. 222 and IRS Pub. 970 Expired Provision Alert: The tuition and fees deduction expired on December 3, 206. Unless Congress extends it, the deduction will not be available in 207. This discussion is retained in the event the deduction is extended to 207. For 206, taxpayers are allowed to claim an above-the-line tuition and fees deduction for qualified higher education expenses paid. The deduction is limited based on the taxpayer s modified AGI. The deduction is not allowed for MFS filers or for any taxpayer who qualifies as a dependent (whether or not claimed) on another taxpayer s return. Tuition and Fees Deduction Limit Deduction If Modified AGI is: Limit Single, HOH, QW MFJ $ 4,000 $ 0 $ 65,000 $ 0 $30,000 2,000 65,00 80,000 30,00 60,000 0 Over $ 80,000 Over $60,000 Deduction equals qualified higher education expenses, if less. Note: There is no AGI phase-out range. Thus married taxpayers with $4,000 of qualifying educational expenses and modified AGI of $30,000 or less would be entitled to deduct the full $4,000. Modified AGI is AGI before the tuition and fees deduction, increased by: () foreign earned income and housing exclusion, (2) foreign housing deduction, (3) exclusion for income from certain U.S. possessions and Puerto Rico and (4) domestic production activities deduction. Continued on Page 3-6

23 3) After December 22, 207, an amount in a QTP can be rolled over to an ABLE account for the benefit of the same beneficiary or the beneficiary s family. Coordination With Other Education Benefits ) Contributions may be made to a QTP and an ESA for the same beneficiary during the same year. 2) An education credit can be claimed in the same year that a tax-free distribution is received from a QTP if the distribution from the QTP is not used for the same expenses for which the credit is claimed. 3) To determine the taxable portion of a QTP distribution, qualified expenses are reduced in the following order: (a) amounts paid with nontaxable income, such as scholarships and employerprovided education assistance, then (b) amounts used to claim education credits. If a student receives distributions from both a QTP and an ESA that total more than the reduced expenses, the expenses must be allocated between the distributions. Rollover Rules QTPs ) Benefits may be transferred from one beneficiary to another in the same family with no adverse tax consequences. See the Family Members ESA and QTP Rollovers table on Page 3-8 for a list of family members. 2) Rollovers are allowed from one QTP to another for the same beneficiary once per 2-month period. For information about specific QTPs, contact the state or agency that maintains the program: State plan links: Plan ratings and investment returns: com. Education Savings Accounts Replacement Page /208 See also IRC Sec. 530 and IRS Pub. 970 The education savings account (ESA) is a trust established to pay qualified education expenses of a designated beneficiary. Contributions to an ESA are nondeductible. Earnings in the account are tax-free if used for qualified educational expenses. Contributions Total contribution limit to all ESAs set up for any one beneficiary from all contributors is $2,000 per year. Any individual (including the beneficiary) may contribute to an ESA. Modified AGI phase-out ranges for contributors: MFJ, $90,000 to $220,000; all others, $95,000 to $0,000. Modified AGI is AGI (before ESA contributions) plus any exclusion for foreign earned income or housing, any foreign housing deduction and exclusions, and for income from certain U.S. possessions and Puerto Rico. Contributions are not allowed for a beneficiary over age 7, unless the beneficiary has special needs. A 6% excise tax is imposed on the account beneficiary for excess contributions (including earnings) not withdrawn by June of the following year [IRC Sec. 530(d)(4)(C)]. Form 5329 is used to compute the tax. Contributions for the year must be made by the return due date (not including extensions). So, 207 contributions must be made by April 7, 208. Entities such as corporations or tax-exempt organizations can make contributions (not subject to the AGI-based phase-out). Withdrawals ESA withdrawals are tax-free up to the amount of the beneficiary s qualified education expenses for the year. If the withdrawal is more than the beneficiary s qualified education expenses for the year, a portion of a withdrawal is taxable to the beneficiary. This excess withdrawal is allocated to accumulated earnings (taxable) and return of basis (nontaxable). The taxable portion is reported on line 2 of Form 040. Use the worksheet in IRS Pub. 970 to calculate the taxable portion of the withdrawal. Taxable withdrawals are also subject to a 0% penalty (computed on Form 5329) unless an exception applies the same exceptions apply to both QTPs and ESAs (see The 0% penalty does not apply on Page 3-6). Generally, the balance remaining in an ESA that is not used for education expenses must be distributed within 30 days after a beneficiary reaches age 30. The beneficiary is then taxed on the earnings portion of the distribution and a 0% penalty applies. This rule does not apply to a special-needs beneficiary. Also, rollovers to ESAs for the benefit of certain members of the beneficiary s family are allowed. See Rollover Rules on Page 3-8. Qualified Education Expenses Qualified post-secondary expenses: Tuition, fees, books, supplies and equipment required for attending an eligible school. Expenses for special-needs services to attend an eligible school. Contributions to a qualified tuition program (QTP). Room and board if student is enrolled at least half-time (but limited to what the school uses in calculating the financial aid cost of attendance or, if greater, the actual invoice amount charged to the student if living in housing owned and operated by the school). The cost of computer or peripheral equipment, computer software, internet access and related services, if these items are primarily used by the beneficiary during any of the years the beneficiary is enrolled at an eligible institution. Qualified elementary and secondary expenses (K 2th grade): Tuition, fees, academic tutoring, books, supplies and other equipment needed for enrollment at a public, private or religious school. Special-needs services for a special-needs beneficiary. Room and board, uniforms, transportation and supplementary items and services (including extended day programs) that are required or provided by the school. The cost of computer technology or equipment or internet access and related services, if the equipment or services are to be used by the beneficiary and the beneficiary s family while the beneficiary is in school. Any software must be predominantly educational in nature. Coordination With Other Education Benefits Contributions may be made to an ESA and a QTP for the same beneficiary during the same year. A student who excludes some or all of an ESA distribution from income may also claim an education credit as long as the same education expenses counted to figure the exclusion are not used to claim the credit. To determine how much of an ESA distribution is excluded from income, qualified expenses are reduced in the following order. ) Amounts excluded from income (such as scholarships and employer-provided education assistance), then 2) Amounts used to claim education credits. If a student receives distributions from both an ESA and a QTP that total more than the reduced expenses, the expenses must be allocated between the distributions. 207 Tax Year 040 Quickfinder Handbook 3-7

24 Rollover Rules Tax-free rollovers are allowed into another ESA for the same beneficiary or for certain family members. Generally, family members must be under age 30 at the time of the rollover. However, a special-needs beneficiary is not required to be under age 30. Only one rollover is allowed per 2-month period, and it must be completed within 60 days after the date of withdrawal. Family Members ESA and QTP Rollovers Members of the beneficiary s family for rollover purposes include the beneficiary s: Spouse. Children and their descendants. Stepchildren. Siblings (including stepbrothers and stepsisters). Parents and grandparents. Stepparents. Nieces and nephews. Aunts and uncles. In-laws. First cousins. Spouses of any individual listed except first cousins. SCHOLARSHIPS AND FELLOWSHIPS See also IRC Sec. 7 and IRS Pub. 970 Scholarship and Fellowship Exclusion Qualified scholarship and fellowship amounts that are received by a degree candidate and used for tuition, enrollment fees, books, supplies and equipment that are required for the course by the educational institution are excluded from income. (Generally, payments received by a student who is not a degree candidate are taxable.) Note: Scholarships include Pell Grants and other Title IV needbased education grants. Degree candidate is any of the following: ) A primary or secondary school student. 2) A college undergraduate or graduate student. 3) A full-time or part-time student at an accredited educational institution that provides a program that is acceptable for full credit toward a bachelor s or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation. Tax Treatment of Scholarship and Fellowship Payments Degree Candidate Not a Degree Candidate Payment used for... Tax-free 2 Taxable Tax-free 2 Taxable Tuition X X Fees X 3 X Books X 3 X Supplies X 3 X Equipment X 3 X Room X X Board X X Travel X X Does not include payments received for past, present or future services. 2 Payments used for any expenses indicated in this column are tax-free only if the terms of the scholarship or fellowship do not prohibit the expense. 3 If required of all students in the course. Payments for services. Any part of a scholarship that represents payment for past, current or future services required as a condition of the scholarship must be included in income. Exception: Scholarships received from the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program may be excluded from income without regard to service obligation provided the recipient is a degree candidate and the scholarship is used for qualified education expenses. Taxable Scholarship and Fellowship Income Worksheet ) Enter 207 scholarship or fellowship income:... ) Caution: If not a degree candidate at an eligible educational institution, stop here. The entire amount is taxable. 2) Enter the amount from line that was for teaching, research, or any other services. (Do not include amounts listed in the Exception under Payments for services in the previous column.)... 2) 3) Subtract line 2 from line... 3) 4) Enter the amount from line 3 that the scholarship or fellowship requires the recipient to use for expenses other than qualified education expenses.... 4) 5) Subtract line 4 from line ) 6) Enter the amount from line 5 that was used for qualified education expenses required for study at an eligible educational institution ) 7) Subtract line 6 from line ) 8) Taxable part. Add lines 2, 4 and ) Qualified education expenses include tuition and required enrollment fees as well as certain required course-related expenses. 2 This is the tax-free part of the scholarship or fellowship. If the recipient qualifies for other education tax benefits, he may have to reduce the amount of education expenses qualifying for those benefits by this amount. Note: The taxable amount of a scholarship is reported on the wages and salaries line (line 7 of Form 040) with the notation SCH to the left on the dotted line. Choosing Not to Use Exclusion When a scholarship is excludable under Section 7, it reduces the amount of qualified expenses for other education benefits (including education credits). If the terms of a scholarship allow it to be used for other expenses, such as room and board, it may be advantageous to do so. Although this makes the scholarship taxable, the taxable scholarship does not reduce qualifying expenses for the other education benefits. Even if the educational institution applies the scholarship to qualified education expenses, the student can choose to apply it to other expenses. Observation: The choice is only available in the case of unrestricted scholarships that may be used to pay expenses other than qualifying expenses. For a restricted scholarship, where the terms require payment of qualifying tuition and fees, qualified educational expenses must be reduced by the scholarship (tax-free) amount. Example: Josh receives a $7,000 unrestricted scholarship. His parents do not claim him as a dependent so he is eligible to claim the American Opportunity credit. His tuition for 207 is $5,000 and his room and board is $5,000. Josh also earned $9,000 in wages. How Josh applies his scholarship affects his education credit. In this case, he is better off applying his scholarship to nonqualified expenses such as room and board. This allows him to use the credit to offset the tax on his taxable scholarship and his wages. Scholarship Tuition $ 5,000 $ 2,000 Applied To: Room and Board $ 2,000 $ 5,000 Wage income... $ 9,000 $ 9,000 Taxable scholarship... 2,000 5,000 AGI... $,000 $ 4,000 Exemption /standard deduction... ( 6,350) ( 6,350) Taxable income... $ 4,650 $ 7,650 Tax before credits American Opportunity credit... ( 0) ( 765) Tax after credits... $ 465 $ 0 No exemption deduction allowed since Josh could be claimed as a dependent Tax Year 040 Quickfinder Handbook

25 Qualified Retirement Plans Some qualified retirement plans allow employees to make after-tax contributions to the plan. These after-tax contributions are referred to as the plan participant s cost in the plan. A loss deduction is allowed if the plan participant receives a lump-sum distribution that is less than his cost. The distribution must be received entirely in cash or worthless securities. The amount deductible is the difference between the participant s cost and the amount of cash distribution, if any. The loss is claimed as a miscellaneous itemized deduction on Schedule A, subject to the 2%-of-AGI limitation. A loss is not deductible if the taxpayer receives securities that are not worthless, even if the total value of the distribution is less than his cost in the plan. Gain or loss is recognized when the securities are eventually sold. ANNUITY DISTRIBUTIONS Qualified Annuities When a taxpayer makes nondeductible contributions to a qualified annuity, a portion of each distribution received at retirement is considered a nontaxable return of basis. A qualified annuity is an annuity paid under a qualified employee plan, qualified employee annuity or tax-sheltered annuity plan. The tax-free portion of the distribution is figured using one of the following methods: ) Three-year rule. Repealed for annuities starting after July, 986. This method allowed the taxpayer to recover the taxfree basis in the first three years of receiving distributions. 2) Simplified method. For qualified annuity payouts starting after 997 to individuals under age 75 or who are entitled to less than five years of guaranteed payments, the simplified method below must be used to calculate the tax-free portion of a distribution. [IRC Sec. 72(d)(); Notice 98-2] Simplified Method Annuities Starting After 997 ) Total investment in contract... $ 2) Number of expected payments... 3) Nontaxable portion of each annuity payment received. (Divide line by line 2)... $ Line. Total after-tax contributions to the plan minus any nontaxable amount received before the annuity starting date. Line 2. Total number of expected payments under the plan. Use the number from the tables below. If payments are based on the joint lives of the annuitant and account beneficiary, use the numbers from the Multiple Lives Annuity table (use youngest survivor annuitant if there is more than one). If the annuity does not depend on anyone s life expectancy, use the total number of monthly annuity payments under the contract. Single Life Annuity Multiple Lives Annuity Age at annuity starting date Line 2 amount Combined age at starting date Line 2 amount 55 or under and under or older or older Note: Different expected payment factors apply to annuities with start dates before 998. See IRS Pub. 575 for the amounts. 3) General rule. The so-called General Rule must be used to compute the tax-free part of each annuity payment if the annuitant is age 75 or older and if the annuity payments are guaranteed for at least five years. See IRS Pub. 939 for details on the General Rule. Nonqualified (Commercial) Annuities Annuity payments. A portion of each annuity payment from a nonqualified commercial annuity (an annuity purchased directly from an insurance company) is allocated to the taxpayer s cost and recovered tax-free using the General Rule described in Pub The remaining amount is taxable as ordinary income. For a variable annuity, a special computation under the General Rule must be used. Taxable payments from a nonqualified annuity are also included in net investment income (see 3.8% Net Investment Income Tax on Page 2-6). These should be reported on Form 099-R with code D in box 7. Partial annuitization of a contract is allowed for tax purposes. Any portion of an annuity from which annuity payments are received for at least ten years (or during one or more lives) is treated as a separate contract for annuity taxation purposes. [IRC Sec. 72(a)(2)] Nonperiodic payments. A nonperiodic (nonannuity) payment from a commercial annuity is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). Note: If the annuity contract was purchased before August 4, 982, withdrawals are allocated first to the cost (tax-free part) before that date. Caution: The taxable portion of a nonannuity payment is subject to the 0% early withdrawal penalty if received before age 59½ (unless an exception applies). [IRC Sec. 72(q); Pub. 575] Deduction for Unrecovered Cost If an individual s cost (basis) in his annuity has not been fully recovered at his (or his survivor annuitant s) death, a deduction is allowed for the unrecovered cost [IRC Sec. 72(b)(3)(A)]. The deduction is claimed on the decedent s (or, if applicable, the survivor s) final tax return as a miscellaneous itemized deduction not subject to the 2%-of-AGI limit. However, no deduction is allowed if the annuity starting date was before July 2, 986. RAILROAD RETIREMENT See also IRS Pubs. 575 and 95 Benefits paid under the Railroad Retirement Act fall into two categories, treated differently for income tax purposes. ) Social security equivalent benefit. Reported to taxpayer on Form RRB-099, the portion of tier railroad retirement benefits that equals the social security benefits a railroad employee would have received under the social security system. Treat the same as social security benefits. 2) Railroad retirement annuities or pensions. Reported to taxpayer on Form RRB-099-R. Includes: Contributory Amount Paid. Tier non-social security equivalent benefit and tier 2 benefits received by taxpayer. Employee contributions can be recovered using the simplified method for qualified annuities. See the Simplified Method Annuities Starting After 997 table in the previous column. Vested Dual Benefit and Supplement Annuity. Fully taxable as pension and annuity income. Repayments by taxpayer for prior year(s). Amounts previously included in income can be deducted on Schedule A. See Repayments of Income on Page Tax Year 040 Quickfinder Handbook 4-2

26 Social Security Social Security Topics Social Security and Medicare Highlights... Page 4-22 Social Security Benefits... Page 4-22 Social Security Quick Chart Retirement Benefits (208)... Page 4-23 Social Security Quick Chart Family, Survivor and Disability Benefits (208)... Page 4-24 Retirement Benefits... Page 4-25 Family and Survivor Benefits... Page 4-26 Disability Benefits... Page 4-26 Medicare... Page 4-27 Medigap Insurance... Page 4-29 Medicaid... Page 4-30 Supplemental Security Income... Page 4-30 Social Security and Medicare Highlights Cost-of-living (COLA) adjustment 2.00% 0.03% 0.00% Maximum earnings and still receive full social security benefits: Under full retirement age (FRA) at year-end... $ 7,040 $ 6,920 $ 5,720 Year FRA reached... 45,360 44,880 4,880 Month FRA reached and later... No Limit No Limit No Limit Maximum earnings subject to: Social security tax... $ 28,400 $ 27,200 $ 8,500 Medicare tax... No Limit No Limit No Limit Tax Rates Employee: Social security % 6.20% 6.20% Medicare Employer: Social security % 6.20% 6.20% Medicare Self-Employed: Social security % 2.40% 2.40% Medicare Earnings needed to earn one quarter of social security coverage $,320 $,300 $,260 Medicare: Part A monthly premium 3... $ $ $ 4.00 Part B monthly premium Hospital deductible...,340.00,36.00, Medical deductible Limit applies only to months before attaining FRA. See Earnings May Reduce Benefits on Page Plus 0.9% additional Medicare tax on earned income exceeding $200,000 ($250,000 combined earned income if MFJ; $25,000 if MFS). 3 Applies if less than 40 quarters of covered employment. Lower premium if quarters of covered employment. See Medicare Part A Premiums (208) on Page Beneficiaries with higher incomes pay a higher premium. See Medicare Part B Premiums (208) on Page Amount for most beneficiaries. Amount for beneficiaries not subject to the hold harmless provision is $34.00 (207) or $2.80 (206). 6 Amount not available at time of publication. Social Security Benefits ) Retirement. Monthly benefits paid to retired workers as early as age 62. 2) Family. Monthly benefits paid to spouse, children (including dependent adults who have been disabled since childhood), and some ex-spouses of retired and disabled workers. 3) Survivor. Monthly benefits paid to the widow(er), children (including dependent adults who have been disabled since childhood), some ex-spouses and dependent parents of a deceased worker. 4) Disability. Monthly benefits paid to workers under age 65 with a qualifying disability. 5) Supplemental Security Income (SSI). Monthly benefits to disabled adults and children who have limited income and resources and to people age 65 and older without disabilities who meet the financial limits. See Supplemental Security Income on Page Social Security Statement An individual s social security statement is available at gov/myaccount. To access the statement, individuals must create a my social security account. The statement includes estimates of the individual s retirement and disability benefits, lifetime earnings according to social security s records and the estimated social security and Medicare taxes the individual has paid. Estimating Social Security Benefits An estimate of social security benefits can be found on the social security statement or online at There are calculators that estimate potential benefit amounts using assumptions about retirement dates and different levels of future earnings. The calculators show retirement benefits as well as disability and survivor benefit amounts. Tax on Social Security Benefits A portion of social security benefits is taxed if income above a base amount (based on filing status) is received in addition to social security benefits (IRC Sec. 86). Form SSA-099 is received each January showing the amount of benefits received in the previous year. See the Social Security Benefits Worksheet (207) on Page 3-. Single and HOH returns. If combined income is over $25,000 (base amount) and under $34,00, up to 50% of benefits are taxable. If combined income is above $34,000, up to 85% of benefits are taxable. Joint returns. If combined income is over $32,000 (base amount) and under $44,00, up to 50% of benefits are taxable. If combined income is above $44,000, up to 85% of benefits are taxable. Married filing separate returns. If the taxpayer lived apart from his spouse all year, benefits are taxed the same as for a single person. If the taxpayer lived with his spouse at any time during the year, the base amount is $0 and the taxpayer will generally pay tax on up to 85% of benefits regardless of income. Continued on Page Tax Year 040 Quickfinder Handbook Replacement Page /208

27 Eligibility for Benefits Age and Benefit Payments Earnings Limit/Benefits Reduction Social Security Credits Needed for Coverage Note: The same number of credits is required regardless of retirement date. Social Security Quick Chart Retirement Benefits (208) Early Retirement (Permanently Reduced Benefits) Workers are eligible for early retirement benefits at age 62. Note: If retirement is disability-related, apply for disability benefits, which generally equal full retirement benefits. Receiving benefits before FRA permanently reduces monthly benefits based on number of months benefits received before FRA. Spousal benefits based on the worker s coverage are also reduced. % of Full Benefits if Worker Receives Benefits at Age 62 Worker Born Full Retirement (Full Benefits) Full retirement age (FRA) (see below) is when a worker can retire and collect full retirement benefits. Delayed Retirement (Permanently Increased Benefits) Delayed retirement is available for a worker over the FRA. At age 70, workers automatically receive benefits. FRA depends on the year the worker was born. Delaying benefits past FRA increases benefits as follows: Full Retirement Age Worker Born Increase in Benefits Each Year After FRA Worker Born Worker Spouse yrs, 0 months % % % yrs, 2 months yrs, 4 months yrs, 6 months yrs, 8 months yrs,0 months After yrs, 0 months After After Years before individual reaches full retirement age, benefits are reduced by $ for each $2 earned over $7,040. Workers can earn up to four credits per year. For 208, a credit is earned for each $,320 of earnings. So, workers earning at least $5,280 in 208 earn four credits. In year FRA is reached (months up to FRA only) benefits are reduced by $ for each $3 earned above $44,880. Month FRA reached and later, there is no limit on earnings. General Rule Special-Rule Certain Nonprofit Employees Worker Born Credits Needed Age on //84 Credits Needed 929 or later or over or Medicare Quick Chart (208) Part Description Premiums Deductible/Coinsurance A Hospital Insurance. Covers inpatient hospital care, care in a skilled nursing facility following a hospital stay, hospice and home health care and blood. B Medical Insurance. Covers doctors services and other medical services and supplies. None if 40 or more quarters of Medicare coverage. $ 232 / mo if quarters of Medicare coverage. $ 422 / mo for other eligible individuals. Hospital stay: $,340 for days 60. $ 335 / day for days $ 670 / day for days All costs beyond 50 days. $ / mo., depending on income. Deductible: $ 83 Coinsurance: 20% of Medicare-approved amount. Eligibility Workers are not eligible for Medicare until they are age 65, are disabled or have permanent kidney failure. Receiving social security benefits before FRA has no impact. Skilled nursing facility: $ / day for days Amounts not available at time of publication. Replacement Page / Tax Year 040 Quickfinder Handbook 4-23

28 Eligibility for Benefits Ex-Spouse (Divorced) Benefits Note: These benefits do not affect benefits received by the worker s family. Credits Needed for Benefits Social Security Quick Chart Family, Survivor and Disability Benefits (208) Family Benefits (Worker Living) Survivor Benefits (Worker Deceased) Disability Benefits (Worker Disabled) Family members who may be eligible for benefits when worker retires: Spouse, if age 62 or older, unless spouse s own social security benefit is greater than half the worker s benefit. Spouse at any age, if caring for the worker s child who is under age 6 or is disabled and receiving social security benefits. Unmarried children, if they are: Under age 8, Age 8 or 9 if a full-time elementary or secondary school student or Age 8 or older and disabled, if the disability started before age 22. An ex-spouse (even if remarried) can receive benefits if he: Was married to the worker for at least 0 years, Is unmarried and at least age 62, Has been divorced at least two years and Is not individually entitled to a retirement or disability benefit over half the worker s benefit. The same number of credits needed for workers to receive retirement benefits is needed for their families to receive family benefits. See Social Security Quick Chart Retirement Benefits (208) on Page Family members of a deceased worker who may be eligible for benefits: Widow(er) age 60 or older. Widow(er) age 50 or older and disabled. Widow(er) at any age if caring for the worker s child who is under age 6 or is disabled and receiving social security benefits. Unmarried children if they are: Under age 8, Age 8 or 9 if a and full-time elementary or secondary students or Age 8 or older and disabled, if the disability started before age 22. Dependent parents age 62 or older. One-time death benefit of $255 is payable to the widow(er) or to minor children. An ex-spouse (even if remarried) can receive benefits if he: Was married to the worker for at least 0 years, Is unmarried and at least age 60 (age 50 if disabled), Is not entitled to a widow(er) s benefits, Is not entitled to a retirement benefit over half the worker s full benefit or Is caring for the deceased worker s child (who is entitled to child s benefits and is under age 6 or disabled). Worker Born Workers can receive disability benefits at any age. At FRA, benefits become retirement benefits, but amount is the same. Family members who may be eligible for benefits when worker receives disability benefits: Spouse if age 62 or older unless spouse s own social security benefit is greater than half the worker s benefit. Spouse at any age if caring for the worker s child and the child is under age 6 or is disabled and receiving social security benefits. Unmarried children, if they are: Under age 8, Age 8 or 9 if a full-time elementary or secondary school students or Age 8 or older and disabled, if the disability started before age 22. An ex-spouse (even if remarried) can receive benefits if he: Was married to the worker at least 0 years, Is unmarried and at least age 62 and Is not individually entitled to a retirement or disability benefit over half the worker s full benefit. Credits Needed Disabled at Age: Credits Needed Worker Dies Before Age or earlier One credit for each year after 950 and before the year of death After 929 One credit for each year after age 2 and before the year of death. Worker Dies After Reaching Age 62 One credit for each year after 950 and before reaching age 62. One credit needed for each year after age 2 and before reaching age 62 Note: Workers never need more than 40 credits for their family to receive survivor benefits. Also, survivor benefits can be paid to the worker s children, and the worker s spouse who is caring for the children, if the worker has six credits in the three years before death. Before age Six credits in the three years before the disability began. Age Credits for working half the time between age 2 and the time of disability Age 3 or older... Number of credits needed depends on age (see below), and the worker must have earned 20 credits in the 0 years immediately before the disability began (unless the worker is blind). Disabled at Age: Credits Needed Disabled at Age: Credits Needed or older Note: This table does not cover all situations Tax Year 040 Quickfinder Handbook

29 in which the disabled individual s earnings are over $850. The trial work period continues until the individual has worked nine months within a 60-month period. Extended eligibility period. For at least 36 months after a successful trial work period, if a person is still disabled, he will be eligible to receive a monthly benefit without a new application for any month his earnings drop below $,80 ($,970 if blind) (for 208). Expedited reinstatement. If benefits stop due to substantial earnings, a person who is unable to continue working due to his disability has five years to request that his benefits resume without reapplying or waiting for a review of the medical condition. Deductions for impairment-related expenses. Work expenses related to the disability may be deducted from earnings in determining whether they constitute substantial work. Medicare continuation. If an individual has premium-free Medicare hospital insurance and starts working, he may have at least 8½ years of extended coverage (including the nine-month trial work period if he is still disabled). After that, the individual may purchase Medicare Part A coverage by paying a monthly premium. Other Payments Impact on Disability Benefits Workers compensation or certain other government disability benefits may reduce social security disability benefits, or social security disability benefits may reduce other disability payments. The sum of all social security disability benefits paid to the worker and to his family cannot exceed 80% of the worker s earnings averaged over a period of time shortly before the disability. Disabled After Age 62 If a worker becomes disabled after age 62 and has received a reduced retirement benefit before becoming entitled to disability payments, the disability benefit will be reduced for the number of months he received the early retirement benefit. Replacement Page /208 Medicare Medicare is a national health insurance program for: Persons age 65 and older. Certain disabled persons. Person of any age with permanent kidney failure or Lou Gehrig s disease. Medicare is four programs: Part A: Hospital insurance. For most Medicare beneficiaries, there is no premium for Medicare Part A. Individuals who are ineligible for free Part A can still enroll, but must pay a premium. See the Medicare Part A Premiums (208) table in the next column. Part B: Medical insurance. See the Medicare Part B Premiums (208) table on Page Part C: Combined Part A and Part B. Private insurance companies approved by Medicare provide this combined coverage through Medicare Advantage Plans like HMOs and PPOs. Part D: Prescription drug coverage. Optional coverage see Medicare Drug Plans (Part D) on Page Note: See 208 Medicare Benefits table on Page 4-29 for a listing of covered services. Medicare premium assistance. If a Medicare recipient has limited income and assets, programs are available to help pay medical costs. State rules vary. Contact the applicable state medical assistance (Medicaid) office. Contact information for each state is available at Choose What Medicare Covers, use Find someone to talk to and select your state. ) Qualified Medicare Beneficiary (QMB). Pays Medicare premiums, deductibles and coinsurance for certain elderly and disabled persons entitled to Medicare Part A. 2) Specified Low-Income Medicare Beneficiary (SLMB). Pays the medical insurance (Part B) premium for persons with incomes up to 20% over the national poverty level. 3) Qualifying Individual (QI). Pays the Part B premiums only. 4) Qualified Disabled & Working Individuals (QDWI). Pays Part A premiums only. Eligibility for Hospital Insurance (Part A) Age 65 and older. A person is eligible for Medicare Part A if he: ) Is receiving social security or railroad retirement benefits, 2) Is not receiving social security or railroad retirement benefits, but has worked long enough to be eligible for them, 3) Is entitled to social security benefits based on his spouse s (or divorced spouse s) work record, and that spouse is at least age 65 (the spouse does not have to apply for benefits in order for the person to be eligible based on the spouse s work) or 4) Has worked long enough in federal, state or local government to be insured for Medicare. Under age 65. A person is eligible for Medicare Part A if he: Has been entitled to social security disability benefits for at least 24 months, Has received a disability pension from the railroad retirement board and meets certain conditions or Has Lou Gehrig s disease. Family members: ) Under certain conditions, a spouse, divorced spouse, widow(er) and dependent parent may be eligible for hospital insurance at age 65. 2) Disabled widow(er) under age 65, disabled divorced widow(er) under age 65 and disabled children may be eligible, usually after a 24-month qualifying period. Permanent kidney failure. People with end-stage renal disease are eligible for Medicare Part A at any age if they receive maintenance dialysis or a kidney transplant and: Are insured or are getting monthly benefits under social security or the railroad retirement system or Have worked long enough in government for Medicare insurance. Notes: A spouse or child with this condition may be eligible for coverage based on another s work record. There may be a three-month waiting period after dialysis treatments begin for coverage to commence. Medicare Part A Premiums (208) Quarters of Covered Employment Monthly Premium $ 232 Less than Applies only if ineligible for premium-free Part A. Part A is generally free when individual (or spouse) has at least 40 quarters of coverage. 2 Amount not available at time of publication. Eligibility for Medical Insurance (Part B) ) A person age 65 or older, or a person entitled to Part A hospital insurance benefits, can enroll in Part B plan by paying a monthly premium. No social security or government work quarters of coverage are needed. 2) Aliens age 65 or older not eligible for hospital insurance must be lawfully admitted permanent residents and live in the United States for five years before they can enroll in Medicare Part B. Higher Part B premiums for higher income individuals. Certain Medicare Part B enrollees pay a higher Part B premium based on their income. 207 Tax Year 040 Quickfinder Handbook 4-27

30 Medicare Part B Premiums (208) Annual Income Single, HOH, QW MFJ MFS Monthly Premium $85,000 $70,000 $85,000 $ $85,00 07,000 $70,00 24,000 N/A $07,00 35,500 $24,00 267,000 N/A $35,50 60,000 $267,00 320,000 N/A > $60,000 > $320,000 > $85, AGI plus tax-exempt interest and exclusions for U.S. savings bond interest and foreign earned income and housing. 2 Amount not available at time of publication. The Medicare Access and CHIP Reauthorization Act (MACRA) increases the amount that Medicare beneficiaries will pay for Medicare Part B premiums based on modified adjusted gross income (MAGI) levels for years beginning in 208. The income threshold levels will be frozen through 209 and indexed for inflation beginning in Medicare Options Most Medicare beneficiaries can choose to receive all Medicare benefits either through the original fee-for-service program (Parts A and B) or through a variety of managed care and other programs under Medicare Advantage (Part C). ) Fee-for-service (Parts A & B). Medicare pays a set percentage of hospital, doctor and other health care expenses, and the beneficiary is responsible for certain deductibles and coinsurance payments. Beneficiaries choose Medicare-approved licensed physicians, hospitals, health care providers or facilities. Note: A Medigap policy can supplement fee-for-service coverage. 2) Medicare Advantage Plans (Part C). Health maintenance organizations (HMOs), preferred provider organizations (PPOs) and provider-sponsored organizations (PSOs) have contracts with the Medicare program and provide all hospital and medical benefits covered by Medicare. Generally, services must be obtained from the provider s network unless for an emergency inside/outside the service area. The organization receives a monthly payment from Medicare and the beneficiary must be enrolled in and pay the monthly premium for Medicare Part B. A monthly premium and a co-payment each time a service is used is typically charged. In addition, some benefits beyond Medicare may be provided, including preventative care, prescription drugs, dental care, hearing aids and eyeglasses. Note: A Medigap policy is usually not needed with an advantage plan. Medicare Drug Plans (Part D) Everyone with Medicare can join a Medicare prescription drug plan (Part D) in their area. Individuals may sign up when they first become eligible for Medicare (three months before the month they turn age 65 until three months after the month they turn age 65). Individuals who receive Medicare due to a disability can join from three months before to three months after their 25th month of cash disability payments. Individuals can also join, switch or drop Medicare Part D coverage during the open enrollment period, which runs from October 5 December 7. The change will take effect the following January. But, individuals who don t sign up when first eligible may pay a penalty (premiums increase by % for every month enrollment is delayed). U Caution: If an individual who is enrolled in a Medicare Advantage Plan that includes prescription drug coverage joins a Medicare prescription drug (Part D) plan, he will be disenrolled from his Medicare Advantage Plan and returned to Original Medicare. Medicare Drug Coverage Cost Components The actual dollar amounts vary depending on the plan chosen and the drugs purchased. Component Additional Cost Monthly Premium Paid in addition to Part B premium Yearly Deductible Amount paid before the plan pays Copayments Individual per-prescription share of cost Source: Income-related premium adjustment. An individual s monthly Medicare Part D premium is increased when his annual income reaches a certain level. This applies to Part D coverage he gets from a Medicare prescription drug plan, a Medicare Advantage Plan with prescription drug coverage (like an HMO or PPO), or a Medicare cost plan that includes Medicare prescription drug coverage. Medicare Part D Premium Adjustment (208) Annual Income Premium Adjustment 2 Single, HOH, QW MFJ MFS $85,000 $70,000 $85,000 $ 0 $85,00 07,000 $70,00 24,000 N/A 3.00 $07,00 33,500 $24,00 267,000 N/A $33,50 60,000 $267,00 320,000 N/A > $60,000 > $320,000 > $85, AGI plus tax-exempt interest and exclusions for U.S. savings bond interest and foreign earned income and housing. 2 This amount is paid in addition to the plan s premium. Individuals will be notified by social security if they have to pay the additional Part D premium. The MACRA increases the amount that Medicare beneficiaries will pay for Medicare Part D premiums based on MAGI levels for years beginning in 208. The income threshold levels will be frozen through 209 and indexed for inflation beginning in Coverage gap. Most Medicare drug plans have a coverage gap (also called the donut hole). This is a temporary limit on what the drug plan will pay for drugs. Not everyone will enter the coverage gap, which begins after the individual and the drug plan have spent a certain amount for covered drugs. It ends when the individual has spent a certain amount, including his annual deductible, coinsurance, copayments and payments while in the coverage gap. In 208, if an individual reaches the coverage gap, he will receive a 65% discount when buying Part D- covered brand-name prescription drugs. Even though he will only pay 35% of the price for a brand-name drug, 85% of the price will count as out-of-pocket spending. In addition, a 56% discount will be received on generic drugs until the end of the coverage gap is reached. Note: The discount rate in the coverage gap for brand-name and generic drugs increases through 2020, when it reaches 75% for both. Extra Help. Individuals who meet certain income and resource limits may qualify for Extra Help from Medicare to pay the costs of Medicare prescription drug coverage. Individuals automatically qualify if they have Medicare and meet any of these conditions: Have full Medicaid coverage. Get help from their state Medicaid program paying their Part B premiums (in a Medicare savings program). Get Supplemental Security Income (SSI) benefits Tax Year 040 Quickfinder Handbook Replacement Page /208

31 208 Medicare Benefits (Not All-Inclusive) Hospital Insurance (Medicare Part A) 208 Benefits per Benefit Period Service Benefit Medicare Pays Recipient Pays First 60 days All but $,340 $,340 6st 90th day All but $ 335 per day $ 335 per day Hospitalization. Semi-private room and board, drugs as part of inpatient treatment, general nursing and other hospital services and supplies (includes mental health care). Skilled nursing facility care (following a hospital stay). Semi-private room and board, skilled nursing and rehabilitative services, and other services and supplies. 3 Home health services. Medically-necessary part-time or intermittent skilled nursing care and/or physical therapy, speech-language pathology services and/ or services for people with a continuing need for occupational therapy. The patient must be homebound. Hospice care. Pain relief, symptom management and support services for the terminally ill. Inpatient respite care (up to five days per stay) so usual caregiver can rest. Medical expenses. Doctors services, inpatient and outpatient medical and surgical services and supplies, physical and speech therapy, durable medical equipment and other services. Laboratory services. Blood tests, urinalysis, diagnostic x-ray tests, some screening tests and more. Home health services. Medically-necessary part-time or intermittent skilled nursing care and/or physical therapy, speech-language pathology services and/ or services for people with a continuing need for occupational therapy. The patient must be homebound. Outpatient hospital services. Services for the diagnosis or treatment of illness or injury. Mental health care (outpatient). Counseling, psychotherapy. 9st 50th day 2 All but $ 670 per day $ 670 per day Beyond 50 days Nothing All costs First 20 days 00% of approved amount Nothing 2st 00th day All but $ per day Up to $ per day Beyond 00 days Nothing All costs As long as medically necessary. 00% of approved amount; 80% of approved amount for durable medical equipment. For as long as doctor certifies need. Amounts over $5 for outpatient drugs; 95% of Medicare-approved amount for inpatient respite care. Nothing for services; 20% of approved amount for durable medical equipment. Up to $5 for outpatient drugs and 5% of approved amount for inpatient respite care. Medical Insurance (Medicare Part B) 208 Benefits per Calendar Year Service Benefit Medicare Pays 4 Recipient Pays, 4 Unlimited if medically necessary. 80% of approved amount. 20% of approved amount and limited charges above approved amount. Unlimited if medically necessary. Generally, 00% of approved amount. Unlimited if medically necessary. 00% of approved amount; 80% of approved amount for durable medical equipment. Nothing for services. Nothing for services; 20% of approved amount for durable medical equipment. Unlimited if medically necessary. 80% of approved amount. 20% of approved amount, plus copay for other than doctor s services. Unlimited if medically necessary. 80% of approved amount. 20% of approved amount. Ambulatory surgical services Unlimited if medically necessary. Generally, 80% of approved amount. 20% of approved amount. Preventative services. Certain services, including flu Unlimited if medically necessary. Generally, 00% of approved Nothing. May have to pay 20% of and pneumonia vaccines, mammograms, pap smears amount. the charge for a doctor s visit. and pelvic exams. Either the recipient or the recipient s insurance company is responsible for paying the amounts listed in the Recipient Pays column. 2 Sixty reserve days may be used only once in a lifetime. 3 Must be after a three-day minimum medically-necessary inpatient hospital stay. 4 Must meet the Part B deductible before Medicare pays. For 208, the Part B deductible is $83. 5 Amount not available at time of publication. Replacement Page /208 Medigap Insurance Medicare supplemental insurance policies (Medigap) are private insurance policies designed to cover all or part of the deductible and coinsurance amounts not covered by the original fee-forservice Medicare plan. Medigap policies may also cover certain things that Medicare doesn t cover. Enrollment. After the effective date of Medicare Part B, there is a six-month open enrollment period for Medigap policies. During this period, a person age 65 or older cannot be denied or charged a higher premium due to poor health. Pre-existing conditions. Policies may exclude coverage for preexisting conditions during the first six months the policy is in effect. Pre-existing conditions are conditions diagnosed or treated during the six-month period before the effective date of the Medigap policy. Standard Medigap Policies Insurance companies can only sell standardized Medigap policies. Each standardized policy must have specific benefits. There are 4 different standardized Medigap policies (Medigap Plans A through N). Each plan has a different combination of basic and extra benefits. Exception: In Massachusetts, Minnesota and Wisconsin, Medigap policies are standardized in a different way. See Supplements and Other Insurance at for details on all the standardized plans. Note: Starting June, 200, plans E, H, I and J are no longer available to buy. But, individuals who already have those plans (or who buy them before June, 200) can keep them. Every Medigap policy must follow federal and state laws and must be clearly identified as Medicare Supplement Insurance. Insurance companies can sell only standardized Medigap policies. All plans offer the same basic benefits but some offer additional benefits. Insurance companies decide which Medigap policies they want to offer. Although the plans are standardized, insurance companies can charge different premiums for them. 207 Tax Year 040 Quickfinder Handbook 4-29

32 Practice Tip: Married individuals must each buy their own Medigap policy. A Medigap policy won t cover any health care costs for the insured s spouse. MEDICAID Medicaid is a program of medical assistance for people with low income and limited assets. It is a joint venture between the federal and state governments. States are required by the federal government to provide coverage to certain categories of individuals, including most persons who receive federal low-income assistance such as Supplemental Security Income (SSI), as well as individuals with income below a specified percentage of the federal poverty level (FPL). Starting in 204, the Affordable Care Act expanded the Medicaid program in every state to cover people under age 65 with incomes below 33% of the FPL. However, individual states have the opportunity to opt out of providing the expanded Medicaid coverage. Note: The actual threshold is 38%, not 33%, of FPL because of the way the amount is computed. For 207, an individual with income of up to $6,643 and a family of four with income of up to $33,948 generally qualify for Medicaid coverage. Mandatory Coverage Categorically needy. States must provide coverage for the categorically needy. Individuals qualifying as categorically needy include: Families who meet the state s Aid to Families With Dependent Children (AFDC) eligibility requirements in effect on July 6, 996. Pregnant women and children under age six whose family income is at or below 33% of the FPL. Children ages six to 9 with family income up to 00% of the FPL. Caretakers [relatives or legal guardians who take care of children under age 8 (or 9 if still in high school)]. SSI recipients (or, in certain states, aged, blind or disabled individuals who meet requirements that are more restrictive than those of the SSI program). Individuals and couples who are living in medical institutions and who have monthly income up to 300% of the SSI income standard (federal benefit rate). Medicare beneficiaries. Medicaid pays Medicare premiums, deductibles and coinsurance for qualified Medicare beneficiaries (QMBs) individuals whose income is at or below 00% of the FPL and whose resources are at or below three times the standard allowed under SSI. There are additional groups for whom Medicarerelated expenses are paid by Medicaid Medicare beneficiaries with income greater than 00%, but less than 35%, of the FPL. Medicaid mandatory benefits: Inpatient and outpatient hospital services. Early and periodic screening, diagnostic and treatment (EPSDT) services. Nursing facility services. Home health services. Physician services. Rural health clinic services. Federally qualified health center services. Laboratory and x-ray services. Family planning services. Nurse midwife services. Certified pediatric and family nurse practitioner services. Licensed freestanding birth center services. Transportation to medical care. Tobacco cessation counselling for pregnant women. Tobacco cessation medications. Long-term care. Medicaid also pays for some long-term care services at home and in the community. Eligibility and services covered vary from state to state. Most often, eligibility is based on an individual s income and personal resources. Caution: Medicaid rules vary by state but are subject to some federal regulation. This section provides general information that will vary by state. SUPPLEMENTAL SECURITY INCOME See also SSA Pubs and 05-0 Supplemental Security Income (SSI) is a program run by social security that pays monthly benefits to adults and children in financial need who are: Age 65 or older, Disabled (physical or mental problem that is expected to last at least a year or result in death) or Blind (totally blind or with very poor eyesight). Disability requirements for SSI are the same as for social security (see Social Security Benefits on Page 4-22); however, no work quarters of coverage are needed. There are certain limits for income and assets for SSI eligibility. Income. Money coming in such as earnings, social security benefits, pensions and noncash benefits received (food and shelter). The income limit increases if the recipient works. Note: Some states supplement SSI payments, which in turn affects income limitations. Contact the state social security office to determine if a person qualifies. Assets. Cash, bank accounts, stocks and bonds are all counted. Asset exemptions include the following: Personal residence and land it is on. Household goods and personal effects, such as clothing and jewelry. Burial spaces and funds up to $,500. Life insurance policies with a combined face value of $,500 or less. One vehicle, regardless of value, if used for personal transportation of the taxpayer or member of his household. Retroactive SSI or social security benefits for up to nine months after received (including payments received in installments). Grants, scholarships, fellowships, or gifts set aside to pay educational expenses for nine months after receipt. Asset Limit and Monthly Federal SSI Payment Asset Limit SSI Payment Individuals $2,000 $ 750 $ 735 $ 733 Couples 3,000,25,03,00 Children and SSI Children can qualify for SSI if they meet social security s definition of disability (see Social Security Benefits on Page 4-22), and their income and assets fall within eligibility limits. Children under age 8 who live at home must include the parent s income and assets for computing whether they are over the limits for receiving SSI. Children age 8 and over are considered adults; the parent s income and assets are not included for limitation purposes Tax Year 040 Quickfinder Handbook End of Tab 4

33 Tax Cuts and Jobs Act of 207 Enacted on December 22, 207, the Act makes significant changes to individual and business taxes. Most provisions are effective beginning after 207. See the Handbook Updates section of the Quickfinder website (tax.thomsonreuters.com/quickfinder) for a table summarizing the Act s key provisions. Inflation-Adjusted Amounts For a complete summary of the inflation-adjusted amounts for 207 (plus 208 and 206 and prior years) see the Quick Facts Data Sheet on Page 3-. Replacement Page /208 Tab 7 Topics Inflation-Adjusted Amounts... Page 7- Tax Legislation... Page 7- Additional Tax Relief for Hurricane Victims... Page 7- Disaster Tax Relief Act... Page 7-2 Expired Tax Breaks... Page 7-4 Key 207 IRS Rulings and Tax Cases... Page 7-5 Identity Theft Safeguarding Client Information... Page 7-5 Quick List of Key 207 IRS Rulings and Tax Cases... Page 7-5 Responding to a Security Breach of Client Data... Page 7-6 Tax Legislation Cures Act Enacted on December 3, 206, the 2st Century Cures Act (Cures Act) was designed to help accelerate medical product development and bring new innovations and advances to patients who need them faster and more efficiently. But it also included a provision that is good news for small employers wanting to help employees with medical expenses. It added IRC Sec. 983(d) exempting qualified small employer health reimbursement arrangements (QSEHRAs) from the Affordable Care Act s market reform penalty, effective for tax years after 206. See Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) on Page 6-6 for details. Disaster Tax Relief Act Enacted on September 29, 207, the Disaster Tax Relief and Airport and Airway Extension Act of 207 (Disaster Tax Relief Act) provides tax relief related to Hurricanes Harvey, Irma and Maria. Most of these tax provisions apply to hurricane victims and taxpayers located or doing business in the related disaster areas. However, the charitable contribution relief provisions benefit any taxpayer (including both individuals and corporations) that makes a qualifying charitable contribution for Hurricanes Harvey, Irma and Maria relief. Disaster relief provisions. See the table Disaster Tax Relief Act on Page 7-2 for the specific provisions. Disaster zones and disaster areas. The Disaster Tax Relief Act uses two terms when defining which taxpayers are eligible for the special provisions. Disaster area. The area with respect to which a major disaster has been declared by the President before September 2, 207, under section 40 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of the hurricane. Disaster zone. That portion of the hurricane disaster area determined by the President to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of the hurricane. What s New U Caution: In many cases, an eligible individual not only has to reside in the designated area or zone but also have sustained an economic loss or hardship because of the hurricane. Hurricane Harvey Disaster Zone Hurricane Harvey Disaster Area Hurricane Irma Disaster Zone Hurricane Irma Disaster Area Hurricanes Harvey and Irma Federally Declared Disaster Areas and Zones Texas counties: Aransas, Austin, Bastrop, Bee, Brazoria, Caldwell, Calhoun, Chambers, Colorado, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tyler, Victoria, Walker, Waller and Wharton. Above counties plus the following: Bexar, Burleson, Comal, Dallas, Guadalupe, Jim Wells, Madison, Milam, San Augustine, Tarrant, Travis and Washington. Florida counties: Alachua, Baker, Bradford, Brevard, Broward, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Flagler, Gilchrist, Glades, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lafayette, Lake, Lee, Levy, Manatee, Marion, Martin, Miami-Dade, Monroe, Nassau, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Suwannee, Union and Volusia. Georgia counties: Camden, Charlton, Chatham, Coffee, Glynn, Liberty and McIntosh. Above counties plus the following: Florida counties: All remaining counties. Georgia counties: All remaining counties. Note: Counties shown are as of the date of publication. See disasters for Hurricane Maria disaster areas as well as locations in Puerto Rico and the U.S. Virgin Islands included in the Hurricane Irma disaster area. Additional Tax Relief for Hurricane Victims In addition to the Disaster Tax Relief Act enacted by Congress, the IRS provided various relief provisions that may be available to taxpayers affected by Hurricanes Harvey, Irma and Maria. In general, the IRS is providing some relief to individuals and businesses anywhere in Florida, Georgia, Puerto Rico and the Virgin Islands, as well as in parts of Texas, Louisiana and South Carolina. For some of the IRS relief provisions, eligible taxpayers include individuals residing in and businesses located in counties qualifying for individual assistance. Other IRS relief provisions are less restrictive, with eligible taxpayers including individuals residing in, and businesses located in, counties qualifying for either individual assistance or public assistance (this includes all counties in Florida and Georgia and certain counties in Texas see Hurricane Harvey Disaster Area in the table above). Because this relief that applies with regard to both individual and public assistance counties includes postponement of various tax deadlines, individuals residing in and businesses located in such counties have until January 3, 208 to file any returns and pay any taxes due. Those eligible for the extra time include: (IR ) Individual filers whose tax-filing extension ran out on October 6, 207. Because tax payments related to these 206 returns were originally due on April 8, 207, those payments are not eligible for this relief. Business filers, such as calendar-year partnerships, whose extensions ran out on September 5, 207. Continued on the next page 207 Tax Year 040 Quickfinder Handbook 7-

34 Filers of quarterly estimated tax payments due on September 5, 207 and January 6, 208. Filers of quarterly payroll and excise tax returns due on October 3, 207. Calendar-year tax-exempt organizations whose 206 extensions ran out on November 5, 207. A variety of other returns, payments and tax-related actions also qualify for additional time. See TX (Texas), FL (Florida), GA (Georgia), LA (Louisiana) and SC (South Carolina) and the disaster relief page at www. irs.gov for details. Besides extra time to file and pay, the IRS offers other special assistance to disaster-area taxpayers. This includes the following: (IR ) Special relief helps employer-sponsored leave-based donation programs aid hurricane victims. Under these programs, employees may forgo their vacation, sick or personal leave in exchange for cash payments the employer makes, before January, 209, to charities providing relief. Donated leave is not included in the employee s income, and employers may deduct these cash payments to charity as a business expense. (Notices , and ) 40(k) plans and similar employer-sponsored retirement plans can make loans and hardship distributions to hurricane victims and members of their families. Under this broad-based relief, a retirement plan can allow a hurricane victim to take a hardship distribution or borrow up to the specified statutory limits from the victim s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or dependent who lived or worked in the disaster area. Hardship withdrawals must be made by January 3, 208. (See Anns and 207-3, which specifically provide that these relief provisions apply only with regard to individuals whose principal residence or place of employment was located in a county identified for individual assistance by FEMA.) The IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due during the first 5 days of the disaster period. Check the IRS disaster relief page for the time periods that apply to each jurisdiction. The IRS is waiving the usual fees and expediting requests for copies of previously filed tax returns for disaster area taxpayers. This relief can be especially helpful to anyone whose copies of these documents were lost or destroyed by the hurricane. If disaster-area taxpayers are contacted by the IRS on a collection or examination matter, they should be sure to explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case. Note: For special rules that apply to casualty losses claimed by victims of federally declared disasters, see Federally Declared Disasters on Page 5-6. Disaster Tax Relief Act Act Sec. General Rule Disaster Act Relief Provision Retirement Plans and IRAs 502(a) Distributions from qualified retirement plans The following tax relief is provided for qualified hurricane distributions: and IRAs are generally taxable unless they Up to $00,000 of such distributions are exempted from the early withdrawal penalty. are rolled over to an eligible retirement plan or IRA within 60 days after the funds are All or a part of a distribution can be recontributed tax-free (rolled over) to received. [IRC Secs. 402(c)(3)(A) and eligible retirement plans or IRAs any time during the three-year period 408(d)(3)(A)] beginning on the day after the distribution is received. 502(b) Unless an exception applies, taxable distributions from qualified retirement plans and IRAs before the taxpayer reaches age 59/2 are subject to an early withdrawal penalty. [IRC Sec. 72(t)] Mandatory 20% federal income tax (FIT) withholding is normally required on the taxable portion of a distribution from a qualified retirement plan, unless the distribution is rolled over tax-free via a direct trustee-totrustee transfer. [IRC Sec. 3405(c)] If the plan permits, 40(k) and 403(b) plans can distribute elective deferrals on account of hardship before the participant reaches age 59/2 or terminates employment. Hardship distributions are taxable and cannot be rolled over. [IRC Sec. 402(c)(4)] A qualified first-time homebuyer distribution is an IRA distribution of up to $0,000 that is used within 20 days to buy, build or rebuild the first home of a first-time homebuyer. Such distributions are taxable, but not subject to the early withdrawal penalty. [IRC Sec. 72(t)(8)] To the extent a distribution is not recontributed, the taxable amount is taken into gross income ratably over three years beginning with the year in which the distribution is received unless the taxpayer elects out of this treatment. Such distributions are not subject to the mandatory 20% FIT withholding requirement. A qualified hurricane distribution is a distribution from most types of tax-favored retirement plans, including IRAs, made during the following periods to individuals whose principal residence was in the applicable hurricane disaster area at the beginning of such periods and who sustained economic loss due to the hurricane: Hurricane Harvey: August 23, 207 December 3, 208. Hurricane Irma: September 4, 207 December 3, 208. Hurricane Maria: September 6, 207 December 3, 208. Any individual who received a qualified distribution to buy or build a home can roll the money back into an eligible retirement plan (including an IRA) from August 23, 207 through February 28, 208 tax free. A qualified distribution is a hardship distribution from a 40(k) or 403(b) plan or a qualified first-time homebuyer distribution from an IRA that was: () received after February 28, 207 and before September 2, 207 and (2) intended for the purchase or construction of a principal residence within the Hurricane Harvey, Irma or Maria disaster area that didn t take place due to the hurricane Tax Year 040 Quickfinder Handbook