J.K. Lasser's Your Income Tax 2019: For Preparing Your 2018 Tax Return (Paperback)

What’s New for 2018 xxvii

Tax News for 2018 xxvii

Key Tax Numbers for 2018 xxxi

Tax-Saving Opportunities for 2018 xxxiv

PART 1 • FILING BASICS 1

Do You Have to File a 2018 Tax Return? 2

Filing Tests for Dependents: 2018 Returns 4

Where to File Your 2018 Form 1040 5

Filing Deadlines (on or before) 6

The New Form 1040 and 1040 Schedules 8

Filing Status 9

1.1 Which Filing Status Should You Use? 10

1.2 Tax Rates Based on Filing Status 11

1.3 Filing Separately Instead of Jointly 12

1.4 Filing a Joint Return 14

1.5 Nonresident Alien Spouse 15

1.6 Community Property Rules 16

1.7 Innocent Spouse Rules 17

1.8 Separate Liability Relief for Former Spouses 18

1.9 Equitable Relief 22

1.10 Death of Your Spouse in 2018 23

1.11 Qualifying Widow/Widower Status for 2018 If Your Spouse Died in 2017 or 2016 24

1.12 Qualifying as Head of Household 24

1.13 Filing for Your Child 26

1.14 Return for Deceased 27

1.15 Return for an Incompetent Person 29

1.16 How a Nonresident Alien Is Taxed 29

1.17 How a Resident Alien Is Taxed 29

1.18 Who Is a Resident Alien? 30

1.19 Certificate of Tax Compliance for Alien Leaving the United States 32

1.20 Expatriation Tax 33

PART 2 • REPORTING YOUR INCOME 35

Wages, Salary, and Other Compensation 37

Salary and Wage Income 38

2.1 Salary and Wage Income 40

2.2 Constructive Receipt of Year-End Paychecks 41

2.3 Pay Received in Property Is Taxed 42

2.4 Commissions Taxable When Credited 42

2.5 Unemployment Benefits 43

2.6 Strike Pay Benefits and Penalties 43

2.7 Nonqualified Deferred Compensation 44

2.8 Did You Return Wages Received in a Prior Year? 45

2.9 Waiver of Executor’s and Trustee’s Commissions 46

2.10 Life Insurance Benefits 46

2.11 Educational Benefits for Employees’ Children 47

2.12 Sick Pay Is Taxable 48

2.13 Workers’ Compensation Is Tax Free 48

2.14 Disability Pay and Pensions 49

2.15 Stock Appreciation Rights (SARs) 50

2.16 Stock Options 51

2.17 Restricted Stock 53

Fringe Benefits 55

Tax-Free Health and Accident Coverage Under Employer Plans 56

3.1 Tax-Free Health and Accident Coverage Under Employer Plans 57

3.2 Health Savings Accounts (HSAs) and Archer MSAs 57

3.3 Reimbursements and Other Tax-Free Payments From Employer Health and Accident Plans 60

3.4 Group-Term Life Insurance Premiums 63

3.5 Dependent Care Assistance 65

3.6 Adoption Benefits 65

3.7 Education Assistance Plans 66

3.8 Company Cars, Parking, and Transit Passes 66

3.9 Working Condition Fringe Benefits 69

3.10 De Minimis Fringe Benefits 69

3.11 Employer-Provided Retirement Advice 70

3.12 Employee Achievement Awards 70

3.13 Employer-Furnished Meals or Lodging 71

3.14 Minister’s Housing or Housing Allowance 73

3.15 Cafeteria Plans Provide Choice of Benefits 74

3.16 Flexible Spending Arrangements 75

3.17 Company Services Provided at No Additional Cost 78

3.18 Discounts on Company Products or Services 78

Dividend and Interest Income 79

4.1 Reporting Dividends and Mutual Fund Distributions 80

4.2 Qualified Corporate Dividends Taxed at Favorable Capital Gain Rates 81

4.3 Dividends From a Partnership, S Corporation, Estate, or Trust 82

4.4 Real Estate Investment Trust (REIT) Dividends 82

4.5 Taxable Dividends of Earnings and Profits 83

4.6 Stock Dividends on Common Stock 83

4.7 Dividends Paid in Property 84

4.8 Taxable Stock Dividends 84

4.9 Who Reports the Dividends 84

4.10 Year Dividends Are Reported 85

4.11 Distribution Not Out of Earnings: Return of Capital 86

4.12 Reporting Interest on Your Tax Return 86

4.13 Interest on Frozen Accounts Not Taxed 87

4.14 Interest Income on Debts Owed to You 88

4.15 Reporting Interest on Bonds Bought or Sold 88

4.16 Forfeiture of Interest on Premature Withdrawals 89

4.17 Amortization of Bond Premium 89

4.18 Discount on Bonds 91

4.19 Reporting Original Issue Discount on Your Return 92

4.20 Reporting Income on Market Discount Bonds 93

4.21 Discount on Short-Term Obligations 95

4.22 Stripped Coupon Bonds and Stock 96

4.23 Sale or Retirement of Bonds and Notes 96

4.24 State and City Interest Generally Tax Exempt 97

4.25 Taxable State and City Interest 97

4.26 Tax-Exempt Bonds Bought at a Discount 98

4.27 Treasury Bills, Notes, and Bonds 98

4.28 Interest on United States Savings Bonds 99

4.29 Deferring United States Savings Bond Interest 100

4.30 Minimum Interest Rules 102

4.31 Interest-Free or Below-Market-Interest Loans 102

4.32 Minimum Interest on Seller-Financed Sales 104

Reporting Property Sales 107

5.1 General Tax Rules for Property Sales 108

5.2 How Property Sales Are Classified and Taxed 108

5.3 Capital Gains Rates and Holding Periods 110

5.4 Capital Losses and Carryovers 114

5.5 Capital Losses of Married Couples 114

5.6 Losses May Be Disallowed on Sales to Related Persons 115

5.7 Special Treatment of Gain on Sale of Small Business Stock or Qualified Opportunity Zone Investment 116

5.8 Reporting Capital Asset Sales on Form 8949 and on Schedule D 118

5.9 Counting the Months in Your Holding Period 127

5.10 Holding Period for Securities 127

5.11 Holding Period for Real Estate 128

5.12 Holding Period: Gifts, Inheritances, and Other Property 128

5.13 Calculating Gain or Loss 129

5.14 Amount Realized Is the Total Selling Price 130

5.15 Finding Your Cost 130

5.16 Unadjusted Basis of Your Property 130

5.17 Basis of Property You Inherited or Received as a Gift 132

5.18 Joint Tenancy Basis Rules for Surviving Tenants 136

5.19 Allocating Cost Among Several Assets 138

5.20 How To Find Adjusted Basis 139

5.21 Tax Advantage of Installment Sales 140

5.22 Figuring the Taxable Part of Installment Payments 141

5.23 Electing Not To Report on the Installment Method 144

5.24 Restriction on Installment Sales to Relatives 144

5.25 Contingent Payment Sales 146

5.26 Using Escrow and Other Security Arrangements 147

5.27 Minimum Interest on Deferred Payment Sales 148

5.28 Dispositions of Installment Notes 148

5.29 Repossession of Personal Property Sold on Installment 149

5.30 Boot in Like-Kind Exchange Payable in Installments 150

5.31 “Interest” Tax if Sales Price Exceeds $150,000 With Over $5 Million Debt 150

5.32 Worthless Securities 151

5.33 Tax Consequences of Bad Debts 152

5.34 Four Rules To Prove a Bad Debt Deduction 154

5.35 Family Bad Debts 155

Tax-Free Exchanges of Property 156

6.1 Like-Kind Exchanges of Real Property 157

6.2 Receipt of Cash and Other Property—“Boot” 158

6.3 Time Limits and Security Arrangements for Deferred Exchanges 161

6.4 Qualified Exchange Accommodation Arrangements (QEAAs) for Reverse Exchanges 163

6.5 Exchanges Between Related Parties 164

6.6 Property Transfers Between Spouses and Ex-Spouses 164

6.7 Tax-Free Exchanges of Stock in Same Corporation 167

6.8 Joint Ownership Interests 168

6.9 Setting up Closely Held Corporations 168

6.10 Tax-Free Exchanges of Insurance Policies 168

Retirement and Annuity Income 170

Retirement Distributions on Form 1099-R 171

7.1 Retirement Distributions on Form 1099-R 172

7.2 Lump-Sum Distributions 174

7.3 Lump-Sum Options If You Were Born Before January 2, 1936 174

7.4 Lump-Sum Payments Received by Beneficiary 177

7.5 Tax-Free Rollovers from Qualified Plans 178

7.6 Direct Rollover or Personal Rollover 179

7.7 Rollover of Proceeds from Sale of Property 183

7.8 Distribution of Employer Stock or Other Securities 183

7.9 Survivor Annuity for Spouse 184

7.10 Court Distributions to Former Spouse under a QDRO 185

7.11 When You Must Begin Receiving Required Minimum Distributions (RMDs) 186

7.12 Payouts to Beneficiaries 186

7.13 Penalty for Distributions before Age 59½ 187

7.14 Restrictions on Loans from Company Plans 189

7.15 Tax Benefits of 401(k) Plans 191

7.16 Limit on Salary-Reduction Deferrals 192

7.17 Withdrawals from 401(k) Plans Restricted 193

7.18 Designated Roth Account within 401(k), 403(b), or Governmental 457 Plans 194

7.19 Annuities for Employees of Tax-Exempts and Schools (403(b) Plans) 196

7.20 Government and Exempt Organization Deferred Pay Plans 197

7.21 Figuring the Taxable Part of Commercial Annuities 199

7.22 Life Expectancy Tables 204

7.23 When You Convert Your Endowment Policy 205

7.24 Reporting Employee Annuities 205

7.25 Simplified Method for Calculating Taxable Employee Annuity 206

7.26 Employee’s Cost in Annuity 208

7.27 Withdrawals From Employer’s Qualified Retirement Plan Before Annuity Starting Date 208

7.28 Special Rules for Victims of Hurricanes Harvey, Irma, Maria, and California Wildfires 209

IRAs 210

8.1 Starting a Traditional IRA 211

8.2 Contribution Limit for Traditional IRAs 212

8.3 Contributions to a Traditional IRA If You Are Married 214

8.4 Restrictions on Traditional IRA Deduction for Active Participants in Employer Plans 215

8.5 Active Participation in Employer Plan 220

8.6 Nondeductible Contributions to Traditional IRAs 221

8.7 Penalty for Excess Contributions to Traditional IRAs 222

8.8 Distributions From Traditional IRAs 223

8.9 Partially Tax-Free Traditional IRA Distributions Allocable to Nondeductible Contributions 225

8.10 Tax-Free Direct Transfer or Rollover From One Traditional IRA to Another 226

8.11 Transfer of Traditional IRA to Spouse at Divorce 230

8.12 Penalty for Traditional IRA Withdrawals Before Age 59½ 230

8.13 Mandatory Distributions From a Traditional IRA After Age 70½ 235

8.14 Inherited Traditional IRAs 238

8.15 SEP Basics 246

8.16 Salary-Reduction SEP Set Up Before 1997 246

8.17 Who Is Eligible for a SIMPLE IRA? 247

8.18 SIMPLE IRA Contributions and Distributions 248

8.19 Roth IRA Advantages 249

8.20 Annual Contributions to a Roth IRA 249

8.21 Recharacterizing a Traditional IRA Contribution to a Roth IRA and Vice Versa 253

8.22 Converting a Traditional IRA to a Roth IRA 254

8.23 Conversions Made After 2017 to a Roth IRA Cannot Be Recharacterized 254

8.24 Distributions From a Roth IRA 255

8.25 Distributions to Roth IRA Beneficiaries 258

8.26 Special IRA Rules for Victims of Hurricanes

Harvey, Irma, Maria, and California Wildfires 259

Income From Real Estate Rentals and Royalties 261

9.1 Reporting Rental Real Estate Income and Expenses 262

9.2 Checklist of Rental Deductions 263

9.3 Distinguishing Between a Repair and an Improvement 264

9.4 Reporting Rents From a Multi-Unit Residence 266

9.5 Depreciation on Converting a Home to Rental Property 267

9.6 Renting a Residence to a Relative 269

9.7 Personal Use and Rental of a Residence During the Year 269

9.8 Counting Personal-Use Days and Rental Days for a Residence 271

9.9 Allocating Expenses of a Residence to Rental Days 272

9.10 IRS May Challenge Loss Claimed on Temporary Rental of Residence Before Sale 274

9.11 Reporting Royalty Income 275

9.12 Production Costs of Books and Creative Properties 275

9.13 Deducting the Cost of Patents or Copyrights 276

9.14 Intangible Drilling Costs 276

9.15 Depletion Deduction 277

9.16 Oil and Gas Percentage Depletion 278

9.17 Qualified Business Income Deduction for Real Estate Activities 279

Loss Restrictions: Passive Activities and At-Risk Limits 280

10.1 Rental Activities Generally Treated as Passive 281

10.2 Rental Real Estate Loss Allowance of up to $25,000 283

10.3 Real Estate Professionals 286

10.4 Participation May Avoid Passive Loss Restrictions 289

10.5 Classifying Business Activities as One or Several 289

10.6 Material Participation Tests for Business 290

10.7 Tax Credits of Passive Activities Limited 292

10.8 Determining Passive or Nonpassive Income and Loss 293

10.9 Passive Income Recharacterized as Nonpassive Income 295

10.10 Working Interests in Oil and Gas Wells 297

10.11 Partners and Members of LLCs and LLPs 298

10.12 Form 8582 and Other Tax Forms 299

10.13 Suspended Losses Allowed on Disposition of Your Interest 300

10.14 Suspended Tax Credits 302

10.15 Personal Service and Closely Held Corporations 303

10.16 Sales of Property and of Passive Activity Interests 304

10.17 At-Risk Limits 305

10.18 What Is At Risk? 306

10.19 Amounts Not At Risk 307

10.20 At-Risk Investment in Several Activities 308

10.21 Carryover of Disallowed Losses 309

10.22 Recapture of Losses Where At Risk Is Less Than Zero 309

Other Income 310

11.1 Prizes and Awards 311

11.2 Lottery and Sweepstake Winnings 311

11.3 Gambling Winnings and Losses 311

11.4 Gifts and Inheritances 313

11.5 Refunds of State and Local Income Tax Deductions 314

11.6 Other Recovered Deductions 317

11.7 How Legal Damages Are Taxed 318

11.8 Cancellation of Debts You Owe 321

11.9 Schedule K-1 325

11.10 How Partners Report Partnership Profit and Loss 325

11.11 When a Partner Reports Income or Loss 326

11.12 Partnership Loss Limitations 326

11.13 Tax Audits of Partnerships 327

11.14 Stockholder Reporting of S Corporation Income or Loss 327

11.15 How Beneficiaries Report Estate or Trust Income 328

11.16 Reporting Income in Respect of a Decedent (IRD) 329

11.17 Deduction for Estate Tax Attributable to IRD 329

11.18 How Life Insurance Proceeds Are Taxed to a Beneficiary 329

11.19 A Policy with a Family Income Rider 331

11.20 Selling or Surrendering Life Insurance Policy 331

11.21 Jury Duty Fees 332

11.22 Foster Care Payments 332

PART 3 • CLAIMING DEDUCTIONS 333

Deductions Allowed in Figuring Adjusted Gross Income 335

12.1 Figuring Adjusted Gross Income (AGI) 336

12.2 Claiming Deductions from Gross Income 336

12.3 Moving Costs Are Deductible Only by Qualifying Members of the U.S. Armed Forces 340

Claiming the Standard Deduction or Itemized Deductions 341

New Law Increases the Standard Deduction for 2018 and Cuts Back Itemized Deductions 342

13.1 New Law Increases the Standard Deduction for 2018 and Cuts Back Itemized Deductions 343

13.2 Can You Itemize Your Deductions? 344

13.3 Spouses Filing Separate Returns 344

13.4 Standard Deduction If 65 or Older or Blind 345

13.5 Standard Deduction for Dependents 346

13.6 Prepaying or Postponing Itemized Expenses 347

13.7 Itemized Deductions No Longer Reduced for Higher-Income Taxpayers 347

Charitable Contribution Deductions 348

14.1 Deductible Contributions 349

14.2 Nondeductible Contributions 350

14.3 Contributions That Provide You With Benefits 351

14.4 Unreimbursed Expenses of Volunteer Workers 353

14.5 Support of a Student in Your Home 355

14.6 What Kind of Property Are You Donating? 355

14.7 Cars, Clothing, and Other Property Valued Below Cost 359

14.8 Bargain Sales of Appreciated Property 360

14.9 Art Objects 361

14.10 Interests in Real Estate 363

14.11 Life Insurance 365

14.12 Business Inventory 365

14.13 Donations Through Trusts 365

14.14 Records Needed To Substantiate Your Contributions 366

14.15 Form 8283 and Written Appraisal Requirements for Property Donations 368

14.16 Penalty for Substantial Overvaluation of Property 368

14.17 Ceiling on Charitable Contributions 370

14.18 Carryover for Excess Donations 372

14.19 Election To Reduce Fair Market Value by Appreciation 372

Itemized Deduction for Interest Expenses 373

15.1 Deduction for Home Mortgage Interest 374

15.2 Home Acquisition Loans 375

15.3 Home Equity Loans 378

15.4 Home Construction Loans 380

15.5 Mortgage Insurance Premiums and Other Payment Rules 381

15.6 Interest on Refinanced Loans 383

15.7 “Points” 384

15.8 Cooperative and Condominium Apartments 385

15.9 Investment Interest Limitations 385

15.10 Debts To Carry Tax-Exempt Obligations 387

15.11 Earmarking Use of Loan Proceeds For Investment or Business 387

15.12 Year To Claim an Interest Deduction 389

15.13 Prepaid Interest 390

Deductions for Taxes 391

16.1 Overall Limit on Deduction for State and Local Taxes 392

16.2 Nondeductible Taxes 392

16.3 State and Local Income Taxes or General Sales Taxes 392

16.4 Deducting Real Estate Taxes 395

16.5 Assessments 396

16.6 Tenants’ Payment of Taxes 396

16.7 Allocating Taxes When You Sell or Buy Realty 396

16.8 Automobile License Fees 398

16.9 Taxes Deductible as Business Expenses 398

16.10 Foreign Taxes 398

Medical and Dental Expense Deductions 399

17.1 Medical and Dental Expenses Must Exceed AGI Threshold 400

17.2 Allowable Medical and Dental Care Costs 400

17.3 Nondeductible Medical Expenses 404

17.4 Reimbursements Reduce Deductible Expenses 405

17.5 Expenses of Your Spouse 407

17.6 Expenses of Your Dependents 407

17.7 Decedent’s Medical Expenses 409

17.8 Premiums for Health Insurance 409

17.9 Travel Costs May Be Medical Deductions 410

17.10 Schooling for the Mentally or Physically Disabled 412

17.11 Nursing Homes 412

17.12 Nurses’ Wages 413

17.13 Home Improvements as Medical Expenses 414

17.14 Costs Deductible as Business Expenses 415

17.15 Long-Term Care Premiums and Services 416

17.16 Life Insurance Used by Chronically ill or Terminally ill Person 417

Casualty and Theft Losses and Involuntary Conversions 418

18.1 Casualty or Theft Losses for Personal-Use Property Must be Due to a Federally Declared Disaster 419

18.2 When To Deduct a Disaster Loss 420

18.3 Prior-Year Election for Disaster Losses 421

18.4 Gain Realized From Insurance Proceeds for Damaged or Destroyed Principal Residence 422

18.5 Who May Deduct a Disaster Loss 423

18.6 Proving a Casualty Loss 424

18.7 Theft Losses 424

18.8 Floors for Personal-Use Property Losses 426

18.9 Figuring Your Loss on Form 4684 427

18.10 Personal and Business Use of Property 430

18.11 Repairs May Be a “Measure of Loss” 431

18.12 Excess Living Costs Paid by Insurance Are Not Taxable 431

18.13 Do Your Casualty or Theft Losses Exceed Your Income? 432

18.14 Defer Gain from Involuntary Conversion by Replacing Property 432

18.15 Involuntary Conversions Qualifying for Tax Deferral 434

18.16 How to Elect to Defer Gain 435

18.17 Types of Qualifying Replacement Property 435

18.18 Time Period for Buying Replacement Property 436

18.19 Cost of Replacement Property Determines Postponed Gain 438

18.20 Special Assessments and Severance Damages from Condemnation 438

Other Itemized Deductions 440

19.1 Only a Few Expenses Are Allowed as “Other” Itemized Deductions 441

19.2 Deductions for Job Costs and Other Miscellaneous Expenses No Longer Allowed 442

Travel and Meal Expense Deductions 443

20.1 Who May Deduct Travel and Transportation Expenses 444

20.2 Commuting Expenses 444

20.3 Overnight-Sleep Test Limits Deduction of Meal Costs 445

20.4 IRS Meal Allowance 446

20.5 Business Trip Deductions 447

20.6 When Are You Away From Home? 448

20.7 Tax Home of Married Couple Working in Different Cities 450

20.8 Deducting Living Costs on Temporary Assignment 450

20.9 Business-Vacation Trips Within the United States 451

20.10 Business-Vacation Trips Outside the United States 452

20.11 Deducting Expenses of Business Conventions 453

20.12 Restrictions on Foreign Conventions and Cruises 454

20.13 Entertainment Expenses No Longer Deductible 455

20.14 Client Business Meals Still Generally Deductible 455

20.15 50% Cost Limitation on Most Deductible Meals 456

20.16 Substantiating Travel Expenses 457

20.17 Employee Reporting of Unreimbursed Expenses 458

20.18 Are You Reimbursed Under an Accountable Plan? 458

20.19 Per Diem Travel Allowance Under Accountable Plans 459

20.20 Automobile Mileage Allowance 461

20.21 Reimbursements Under Non-Accountable Plans 462

PART 4 • PERSONAL TAX COMPUTATIONS 463

Dependents 465

21.1 New Law Suspends Exemption Deductions for You, Your Spouse, and Your Dependents 466

21.2 How Many Dependents Do You Have? 466

21.3 Qualifying Children 467

21.4 Qualifying Relatives 469

21.5 Meeting the Support Test for a Qualifying Relative 471

21.6 Multiple Support Agreements 475

21.7 Special Rule for Divorced or Separated Parents 475

21.8 Reporting Social Security Numbers of Dependents 477

Figuring Your Regular Income Tax Liability 478

22.1 Taxable Income and Regular Income Tax Liability 479

22.2 Using the Tax Table 479

22.3 Tax Computation Worksheet 480

22.4 Tax Calculation If You Have Net Capital Gain or Qualified Dividends 481

22.5 Foreign Earned Income Tax Worksheet 481

22.6 Income Averaging for Farmers and Fishermen 481

22.7 Tax Credits 481

22.8 Additional Medicare Tax and Net Investment Income Tax 482

Alternative Minimum Tax (AMT) 483

Computing Alternative Minimum Tax on Form 6251 484

23.1 Computing Alternative Minimum Tax on Form 6251 485

23.2 Adjustments and Preferences for AMT 486

23.3 Tax Credits Allowed Against AMT 489

23.4 Regular Tax Credit for Prior-Year AMT 489

23.5 Avoiding AMT 489

Computing the “Kiddie Tax” on Your Child’s Unearned Income 491

24.1 Filing Your Child’s Return 492

24.2 Children Subject to “Kiddie Tax” for 2018 493

24.3 Computing “Kiddie Tax” on Child’s Return 494

24.4 Parent’s Election To Report Child’s Dividends and Interest 495

Personal Tax Credits Reduce Your Tax Liability 497

25.1 Overview of Personal Tax Credits 498

25.2 Child Tax Credit for Children Under Age 17 498

25.3 Figuring the Child Tax Credit and Additional Child Tax Credit 499

25.4 New Credit for Other Dependents 501

25.5 Qualifying for the Child and Dependent Care Credit 501

25.6 Figuring the Child and Dependent Care Credit 503

25.7 Qualifying Tests for EIC 506

25.8 Income Tests for Earned Income Credit (EIC) 509

25.9 Qualifying for the Adoption Credit 510

25.10 Claiming the Adoption Credit on Form 8839 510

25.11 Eligibility for the Saver’s Credit 512

25.12 Figuring the Saver’s Credit 512

25.13 Premium Tax Credit 513

25.14 Health Coverage Credit 515

25.15 Mortgage Interest Credit 516

25.16 Residential Energy Credits 516

25.17 Credit for Qualified Plug-in Electric and Fuel Cell Vehicles 519

25.18 Repayment of the First-Time Homebuyer Credit 519

Tax Withholdings 521

26.1 Withholdings Should Cover Estimated Tax 522

26.2 Income Taxes Withheld on Wages 522

26.3 Low Earners May Be Exempt From Withholding 523

26.4 Are You Withholding the Right Amount? 523

26.5 Voluntary Withholding on Government Payments 524

26.6 When Tips Are Subject to Withholding 524

26.7 Withholding on Gambling Winnings 525

26.8 FICA Withholdings 526

26.9 Withholding on Distributions from Retirement Plans and Commercial Annuities 526

26.10 Backup Withholding 527

Estimated Tax Payments 528

27.1 Do You Owe an Estimated Tax Penalty for 2018? 529

27.2 Planning Estimated Tax Payments for 2019 531

27.3 Dates for Paying Estimated Tax Installments for 2019 532

27.4 Estimates by Married Taxpayers 532

27.5 Adjusting Your Payments During the Year 533

Additional Medicare Tax and Net Investment Income Tax 534

28.1 Higher-Income Taxpayers May be Subject to Additional Taxes 535

28.2 Additional 0.9% Medicare Tax on Earnings 535

28.3 Additional 3.8% Tax on Net Investment Income 537

PART 5 • TAX PLANNING 541

Tax Savings for Residence Sales 543

29.1 Avoiding Tax on Sale of Principal Residence 544

29.2 Meeting the Ownership and Use Tests for Exclusion 545

29.3 Home Sales by Married Persons 549

29.4 Reduced Maximum Exclusion 550

29.5 Figuring Gain or Loss 553

29.6 Figuring Adjusted Basis 554

29.7 Personal and Business Use of a Home 555

29.8 No Loss Allowed on Personal Residence 556

29.9 Loss on Residence Converted to Rental Property 557

29.10 Loss on Residence Acquired by Gift or Inheritance 558

Tax Rules for Investors in Securities 560

30.1 Planning Year-End Securities Transactions 561

30.2 Earmarking Stock Lots 561

30.3 Sale of Stock Dividends 562

30.4 Stock Rights 563

30.5 Short Sales of Stock 563

30.6 Wash Sales 565

30.7 Convertible Stocks and Bonds 567

30.8 Stock Options 568

30.9 Sophisticated Financial Transactions 569

30.10 Investing in Tax-Exempts 570

30.11 Ordinary Loss for Small Business Stock (Section 1244) 571

30.12 Series EE Bonds 571

30.13 I Bonds 573

30.14 Trader, Dealer, or Investor? 573

30.15 Mark-to-Market Election for Traders 574

Tax Savings for Investors in Real Estate 577

31.1 Real Estate Ventures 578

31.2 Sales of Subdivided Land—Dealer or Investor? 579

31.3 Exchanging Real Estate Without Tax 580

31.4 Timing Your Real Property Sales 582

31.5 Cancellation of a Lease 582

31.6 Sale of an Option 582

31.7 Granting of an Easement 582

31.8 Special Tax Credits for Real Estate Investments 583

31.9 Foreclosures, Repossessions, Short Sales, and

Voluntary Conveyances to Creditors 584

31.10 Restructuring Mortgage Debt 585

31.11 Abandonments 586

31.12 Seller’s Repossession After Buyer’s Default on Mortgage 587

31.13 Foreclosure on Mortgages Other Than Purchase Money 589

31.14 Foreclosure Sale to Third Party 589

31.15 Transferring Mortgaged Realty 590

31.16 QBI Deduction for REIT Dividends 590

Tax Rules for Investors in Mutual Funds 591

32.1 Timing of Your Investment Can Affect Your Taxes 592

32.2 Reinvestment Plans 592

32.3 Mutual Fund Distributions Reported on Form 1099-DIV 592

32.4 Tax-Exempt Bond Funds 593

32.5 Fund Expenses 593

32.6 Tax Credits From Mutual Funds 594

32.7 How to Report Mutual Fund Distributions 594

32.8 Redemptions and Exchanges of Fund Shares 594

32.9 Basis of Redeemed Shares 596

32.10 Comparison of Basis Methods 598

32.11 Mutual Funds Compared to Exchange-Traded Funds 599

Educational Tax Benefits 600

33.1 Scholarships and Grants 601

33.2 Tuition Reductions for College Employees 601

33.3 How Fulbright Awards Are Taxed 601

33.4 United States Savings Bond Tuition Plans 601

33.5 Contributing to a Qualified Tuition Program (Section 529 Plan) 603

33.6 Distributions from Qualified Tuition Programs (Section 529 Plans) 604

33.7 Education Tax Credits 605

33.8 American Opportunity Credit 607

33.9 Lifetime Learning Credit 609

33.10 Contributing to a Coverdell Education Savings Account (ESA) 610

33.11 Distributions from Coverdell ESAs 610

33.12 Tuition and Fees Deduction 612

33.13 Student Loan Interest Deduction 613

33.14 Types of Deductible Work-Related Costs 615

33.15 Work-Related Tests for Education Costs 616

33.16 Local Transportation and Travel Away From Home To Take Courses 617

Special Tax Rules for Senior Citizens and the Disabled 619

34.1 Senior Citizens Get Certain Filing Breaks 620

34.2 Social Security Benefits Subject to Tax 620

34.3 Computing Taxable Social Security Benefits 621

34.4 Election for Lump-Sum Social Security Benefit Payment 626

34.5 Retiring on Social Security Benefits 626

34.6 How Tax on Social Security Reduces Your Earnings 627

34.7 Eligibility for the Credit for the Elderly or the Disabled 628

34.8 Figuring the Credit for the Elderly or Disabled 628

34.9 Tax Effects of Moving to a Continuing Care Facility 629

34.10 Medicare Part B and Part D Premiums for 2019 630

34.11 Special Tax Rules for the Disabled 631

34.12 ABLE Accounts 631

Members of the Armed Forces 633

35.1 Taxable Armed Forces Pay and Benefits 634

35.2 Tax Breaks for Armed Forces Members 634

35.3 Deductions for Armed Forces Personnel 636

35.4 Tax-Free Pay for Service in Combat Zone 636

35.5 Tax Deadlines Extended for Combat Zone or Contingency Operation Service 638

35.6 Tax Forgiveness for Combat Zone or Terrorist or Military Action Deaths 638

35.7 Extension To Pay Your Tax When Entering the Service 639

35.8 Tax Information for Reservists 639

How To Treat Foreign Earned Income 641

36.1 Claiming the Foreign Earned Income Exclusion 642

36.2 What Is Foreign Earned Income? 642

36.3 Qualifying for the Foreign Earned Income Exclusion 644

36.4 How To Treat Housing Costs 645

36.5 Meeting the Foreign Residence or Physical Presence Test 646

36.6 Claiming Deductions 648

36.7 Exclusion Not Established When Your Return Is Due 648

36.8 Tax-Free Meals and Lodging for Workers in Camps 649

36.9 U. S. Virgin Islands, Samoa, Guam, and Northern Marianas 649

36.10 Earnings in Puerto Rico 649

36.11 Tax Treaties With Foreign Countries 650

36.12 Exchange Rates and Blocked Currency 650

36.13 Foreign Tax Credit or Deduction for Foreign Taxes Paid 650

Planning Alimony and Marital Settlements 652

37.1 Rules for Pre-2019 Alimony Agreements 653

37.2 Decree or Agreement Required 654

37.3 Cash Payments Required 654

37.4 Payments Must Stop at Death 655

37.5 Child Support Payments Are Not Alimony 656

37.6 No Minimum Payment Period for Alimony 656

37.7 3rd Year Recapture If Alimony Drops by More Than $15,000 657

37.8 Legal Fees of Marital Settlements 658

37.9 Alimony Rules for 2019 658

Other Taxes 659

38.1 Overview of Household Employment Taxes 660

38.2 Social Security and Medicare (FICA) Taxes for Household Employees 661

38.3 Filing Schedule H To Report Household Employment Taxes 662

38.4 Federal Unemployment Taxes (FUTA) for Household Employees 664

38.5 Individual Responsibility Penalty 664

38.6 Exemption from Individual Responsibility Payment 666

Gift and Estate Tax Planning Basics 667

39.1 Gifts of Appreciated Property 668

39.2 Gift Tax Basics 668

39.3 Filing a Gift Tax Return 669

39.4 Gift Tax Credit 669

39.5 Custodial Accounts for Minors 669

39.6 Trusts in Family Planning 670

39.7 What is the Estate Tax? 671

39.8 Take Inventory and Estimate the Value of Your Potential Estate 671

39.9 Estate Tax for 2018 672

39.10 Planning for a Potential Estate Tax 673

PART 6 • BUSINESS TAX PLANNING 675

Income or Loss from Your Business or Profession 677

40.1 Forms of Doing Business 678

40.2 Reporting Self-Employed Income 678

40.3 Accounting Methods for Reporting Business Income 680

40.4 Tax Reporting Year for Self-Employed 681

40.5 Reporting Certain Payments and Receipts to the IRS 682

40.6 Filing Schedule C 683

40.7 Deductions for Professionals 689

40.8 Nondeductible Expense Items 690

40.9 How Authors and Artists May Write Off Expenses 690

40.10 Deducting Expenses of a Sideline Business or Hobby 691

40.11 Deducting Expenses of Looking for a New Business 691

40.12 Home Office Deduction 693

40.13 Write-Off Methods for Home Office Expenses 695

40.14 Allocating Expenses to Business Use 696

40.15 Business Income May Limit Home Office Deductions 697

40.16 Home Office for Sideline Business 698

40.17 Depreciation of Office in Cooperative Apartment 699

40.18 Net Operating Losses (NOLs) 699

40.19 How To Report a Net Operating Loss 701

40.20 Excess Business Losses 702

40.21 Business Credits 703

40.22 Filing Schedule F 704

40.23 Farming Expenses 704

40.24 Qualified Business Income Deduction 705

Retirement and Medical Plans for Self-Employed 707

41.1 Overview of Retirement and Medical Plans 708

41.2 Choosing a Qualified Retirement Plan 708

41.3 Choosing a SEP 709

41.4 Deductible Contributions 709

41.5 How To Claim the Deduction for Contributions 712

41.6 How To Qualify a Retirement Plan or SEP Plan 713

41.7 Annual Qualified Retirement Plan Reporting 713

41.8 How Qualified Retirement Plan Distributions Are Taxed 713

41.9 SIMPLE IRA Plans 714

41.10 Health Savings Account (HSA) Basics 714

41.11 Limits on Deductible HSA Contributions 714

41.12 Distributions From HSAs 715

41.13 Archer MSAs 716

41.14 Small Employer Health Insurance Credit 717

Claiming Depreciation Deductions 718

42.1 What Property May Be Depreciated? 719

42.2 Claiming Depreciation on Your Tax Return 720

42.3 First-Year Expensing Deduction 720

42.4 MACRS Recovery Periods 722

42.5 MACRS Rates 723

42.6 Half-Year Convention for MACRS 724

42.7 Last Quarter Placements—Mid-Quarter Convention 725

42.8 150% Rate Election 726

42.9 Straight-Line Depreciation 727

42.10 Listed Property 728

42.11 Assets in Service Before 1987 729

42.12 MACRS for Real Estate Placed in Service After 1986 729

42.13 Demolishing a Building 731

42.14 Qualified Improvement Property 732

42.15 Depreciating Real Estate Placed in Service After 1980 and Before 1987 732

42.16 Amortizing Goodwill and Other Intangibles (Section 197) 732

42.17 Amortizing Research and Experimentation Costs 734

42.18 Bonus Depreciation 734

Deducting Car and Truck Expenses 735

43.1 Standard Mileage Rate 736

43.2 Expense Allocations 737

43.3 Depreciation Restrictions on Cars, Trucks, and Vans 738

43.4 Annual Ceilings on Depreciation 739

43.5 MACRS Rates for Cars, Trucks, and Vans 740

43.6 Straight-Line Method 745

43.7 Depreciation for Year Vehicle Is Disposed of 746

43.8 Depreciation after Recovery Period Ends 746

43.9 Trade-in of Business Vehicle 747

43.10 Recapture of Deductions on Business Car, Truck, or Van 747

43.11 Keeping Records of Business Use 749

43.12 Leased Business Vehicles: Deductions and Income 749

Sales of Business Property 750

44.1 Depreciation Recaptured as Ordinary Income on Sale of Personal Property 751

44.2 Depreciation Recaptured as Ordinary Income on Sale of Real Estate 751

44.3 Recapture of First-Year Expensing 752

44.4 Gifts and Inheritances of Depreciable Property 753

44.5 Involuntary Conversions and Tax-Free Exchanges 753

44.6 Installment Sale of Depreciable Property 753

44.7 Sale of a Proprietorship 753

44.8 Property Used in a Business (Section 1231 Assets) 754

44.9 Sale of Property Used for Business and Personal Purposes 755

44.10 Should You Trade in Business Equipment? 755

44.11 Corporate Liquidation 755

44.12 Additional Taxes on Higher-Income Taxpayers 756

Figuring Self-Employment Tax 757

45.1 What Is Self-Employment Income? 758

45.2 Partners Pay Self-Employment Tax 759

45.3 Schedule SE 760

45.4 How Wages Affect Self-Employment Tax 761

45.5 Optional Method If 2018 Was a Low-Income or Loss Year 762

45.6 Self-Employment Tax Rules for Certain Positions 763

PART 7 • FILING YOUR RETURN AND WHAT HAPPENS AFTER YOU FILE 765

Filing Your Return 767

46.1 Keeping Tax Records 768

46.2 Getting Ready To File Your Return 768

46.3 Applying for an Extension 769

46.4 Getting Your Refund 770

46.5 Paying Taxes Due 771

46.6 Handling Identity Theft 773

46.7 Notify the IRS of Address Changes 773

46.8 Interest on Tax Underpayments 774

46.9 Tax Penalties for Late Filing and Late Payment 774

Filing Refund Claims, and Amended Returns 776

47.1 Filing An Amended Return 777

47.2 When To File a Refund Claim 777

47.3 Stating the Reasons for Refund Claim 778

47.4 Quick Refund Claims 778

47.5 Interest Paid on Refund Claims 778

47.6 Refunds Withheld To Cover Debts 779

47.7 Amended Returns Showing Additional Tax 779

47.8 Penalty for Filing Excessive Refund Claim 779

If the IRS Examines Your Return 780

48.1 Odds of Being Audited 781

48.2 When the IRS Can Assess Additional Taxes 782

48.3 Audit Overview 783

48.4 Preparing for the Audit 784

48.5 Handling the Audit 785

48.6 Tax Penalties for Inaccurate Returns 785

48.7 Penalties for Not Reporting Foreign Financial Accounts 788

48.8 Agreeing to the Audit Changes 789

48.9 Disputing the Audit Changes 789

48.10 Offer in Compromise 790

48.11 Recovering Costs of a Tax Dispute 791

48.12 Suing the IRS for Unauthorized Collection 792

PART 8 • 2018 TAX FORMS 793

Form 1040 795

Schedule 1 797

Schedule 2 797

Schedule 3 798

Schedule 4 798

Schedule 5 799

Schedule 6 799

Schedule A 800

Schedule B 801

Schedule C 802

Schedule D 804

Schedule E 806

Schedule SE 808

2018 Child Tax Credit and Credit for Other Dependents Worksheet 810

2018 Tax Table 812

2018 Tax Computation Worksheet 824

GLOSSARY 825

INDEX 831