Publication 17 (2016), Your Federal Income Tax

For Individuals

For use in preparing 2016 Returns


Publication 17 - Introductory Material

All material in this publication may be reprinted freely. A citation to Your Federal Income Tax (2016) would be appropriate.

The explanations and examples in this publication reflect the interpretation by the Internal Revenue Service (IRS) of:

  • Tax laws enacted by Congress,

  • Treasury regulations, and

  • Court decisions.

However, the information given does not cover every situation and is not intended to replace the law or change its meaning.

This publication covers some subjects on which a court may have made a decision more favorable to taxpayers than the interpretation by the IRS. Until these differing interpretations are resolved by higher court decisions or in some other way, this publication will continue to present the interpretations by the IRS.

All taxpayers have important rights when working with the IRS. These rights are described in Your Rights as a Taxpayer in the back of this publication.

What's New

This section summarizes important tax changes that took effect in 2016. Most of these changes are discussed in more detail throughout this publication.

Future developments. For the latest information about the tax law topics covered in this publication, such as legislation enacted after it was published, go to IRS.gov/pub17.

Due date of return. File your tax return by April 18, 2017. The due date is April 18, instead of April 15, because of the Emancipation Day holiday in the District of Columbia—even if you do not live in the District of Columbia. See chapter 1.

Service at local IRS offices by appointment. Many issues can be resolved conveniently on IRS.gov with no waiting. However, if you need help from an IRS Taxpayer Assistance Center (TAC), you need to call to schedule an appointment. Go to IRS.gov/taclocator to find the location and telephone number of your local TAC.

Delayed refunds for returns claiming certain credits. Due to changes in the law, the IRS can't issue refunds before February 15, 2017, for returns that claim the earned income credit or the additional child tax credit. This delay applies to the entire refund, not just the portion associated with these credits. Although the IRS will begin releasing refunds for returns that claim these credits on February 15, because of the time it generally takes banking or financial systems to process deposits, it is unlikely that your refund will arrive in your bank account or on a debit card before the week of February 27 (assuming your return has no processing issues and you elect direct deposit).If you filed your return before February 15, you can check Where's My Refund on IRS.gov (IRS.gov/refunds) a few days after February 15 for your projected deposit date. Where's My Refund and the IRS2Go phone app remain the best ways to check the status of any refund.

Delivery services. Eight delivery services have been added to the list of designated private delivery services. For the complete list, see chapter 1.

Cash payment option. There is a new option for taxpayers who want to pay their taxes in cash. For details, see chapter 1.

Educator expenses. You may be able to deduct certain expenses for professional development courses you have taken related to the curriculum you teach or to the students you teach. See chapter 19.

Olympic and Paralympic medals and USOC prize money. If you receive Olympic and Paralympic medals and United States Olympic Committee prize money, the value of the medals and the amount of the prize money may be nontaxable. See the instructions for Form 1040, line 21, for more information.

Child tax credit and additional child tax credit may be disallowed. If you take the child tax credit or the additional child tax credit even though you aren’t eligible, you may not be able to take these credits for up to 10 years. For more information, see chapter 34.

American opportunity credit may be disallowed. If you take the American opportunity credit even though you aren’t eligible, you may not be able to take this credit for up to 10 years. For more information, see chapter 35.

Health coverage tax credit (HCTC). The HCTC is a tax credit that pays a percentage of health insurance premiums for certain eligible taxpayers and their qualifying family members. The HCTC is a separate tax credit with different eligibility rules than the premium tax credit. You may have received monthly advance payments of the HCTC beginning in July 2016. For information on how to report these payments or on the HCTC generally, see the Instructions for Form 8885.

Get Transcript Online. The Get Transcript Online tool on IRS.gov is available again to get a copy of your tax transcripts and similar documents. To guard against fraud, you will now need to go through a two-step authentication process in order to use the online tool. For more information, go to IRS.gov/transcripts.

Electronic Filing PIN. Electronic Filing PIN, an IRS-generated PIN used to verify your signature on your self-prepared, electronic tax return, is no longer available. To validate your signature, you must use your prior-year adjusted gross income or prior-year self-select PIN. See chapter 1.

Individual taxpayer identification number (ITIN) renewal. If you were assigned an ITIN before January 1, 2013, or if you have an ITIN that you haven't included on a tax return in the last 3 consecutive years, you may need to renew it. For more information, see chapter 1 and the Instructions for Form W-7.

Personal exemption amount increased for certain taxpayers. Your personal exemption is increased to $4,050. But the amount is reduced if your adjusted gross income is more than:

  • $155,650 if married filing separately,

  • $259,400 if single,

  • $285,350 if head of household, or

  • $311,300 if married filing jointly or qualifying widow(er).

See chapter 3.

Limit on itemized deductions. You may not be able to deduct all of your itemized deductions if your adjusted gross income is more than:

  • $155,650 if married filing separately,

  • $259,400 if single,

  • $285,350 if head of household, or

  • $311,300 if married filing jointly or qualifying widow(er).

See chapter 29.

Standard mileage rates. The 2016 rate for business use of your vehicle is 54 cents a mile. The 2016 rate for use of your vehicle to get medical care or to move is 19 cents a mile.

Adoption credit. The adoption credit and the exclusion for employer-provided adoption benefits have both increased to $13,460 per eligible child in 2016. The amount begins to phase out if you have modified adjusted gross income (MAGI) in excess of $201,920 and is completely phased out if your MAGI is $241,920 or more.

Exemption amount for alternative minimum tax (AMT). The exemption amount for the AMT has increased to $53,900 ($83,800 if married filing jointly or qualifying widow(er); $41,900 if married filing separately).

Standard deduction for head of household filing status. For 2016, the standard deduction for head of household filing status has increased to $9,300. The other standard deduction amounts are unchanged.

Secure access. To combat identity fraud, the IRS has upgraded its identity verification process for certain self-help tools on IRS.gov. To find out what types of information new users will need, go to IRS.gov/secureaccess.

Reminders

Listed below are important reminders and other items that may help you file your 2016 tax return. Many of these items are explained in more detail later in this publication.

Enter your social security number (SSN). Enter your SSN in the space provided on your tax form. If you filed a joint return for 2015 and are filing a joint return for 2016 with the same spouse, enter your names and SSNs in the same order as on your 2015 return. See chapter 1.

Secure your tax records from identity theft. Identity theft occurs when someone uses your personal information, such as your name, SSN, or other identifying information, without your permission, to commit fraud or other crimes. An identity thief may use your SSN to get a job or may file a tax return using your SSN to receive a refund. For more information about identity theft and how to reduce your risk from it, see Identity Theft in chapter 1.

Taxpayer identification numbers. You must provide the taxpayer identification number for each person for whom you claim certain tax benefits. This applies even if the person was born in 2016. Generally, this number is the person's social security number (SSN). See chapter 1.

Foreign source income. If you are a U.S. citizen with income from sources outside the United States (foreign income), you must report all such income on your tax return unless it is exempt by law or a tax treaty. This is true whether you live inside or outside the United States and whether or not you receive a Form W-2 or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). If you live outside the United States, you may be able to exclude part or all of your foreign earned income. For details, see Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Foreign financial assets. If you had foreign financial assets in 2016, you may have to file Form 8938 with your return. Check Form 8938 and its instructions or IRS.gov/form8938 for details.

Automatic 6-month extension to file tax return. You can get an automatic 6-month extension of time to file your tax return. See chapter 1.

Include your phone number on your return. To promptly resolve any questions we have in processing your tax return, we would like to be able to call you. Please enter your daytime telephone number on your tax form next to your signature and occupation. If you are filing a joint return, you can enter either your or your spouse's daytime phone number.

Payment of taxes. You can pay your taxes online, by phone, or by check or money order. You can make a direct transfer from your bank account or use a credit or debit card. See chapter 1.

Faster ways to file your return. The IRS offers fast, accurate ways to file your tax return information without filing a paper tax return. You can use IRS e-file (electronic filing). See chapter 1.

Free electronic filing. You may be able to file your 2016 taxes online for free. See chapter 1.

Change of address. If you change your address, notify the IRS. See Change of Address in chapter 1.

Refund on a late filed return. If you were due a refund but you did not file a return, you generally must file your return within 3 years from the date the return was due (including extensions) to get that refund. See chapter 1.

Frivolous tax returns. The IRS has published a list of positions that are identified as frivolous. The penalty for filing a frivolous tax return is $5,000. See chapter 1.

Filing erroneous claim for refund or credit. You may have to pay a penalty if you file an erroneous claim for refund or credit. See chapter 1.

Privacy Act and paperwork reduction information. The IRS Restructuring and Reform Act of 1998, the Privacy Act of 1974, and the Paperwork Reduction Act of 1980 require that when we ask you for information we must first tell you what our legal right is to ask for the information, why we are asking for it, how it will be used, what could happen if we do not receive it, and whether your response is voluntary, required to obtain a benefit, or mandatory under the law. A complete statement on this subject can be found in your tax form instructions.

Preparer e-file mandate. Most paid preparers must e-file returns they prepare and file. Your preparer may make you aware of this requirement and the options available to you.

Treasury Inspector General for Tax Administration. If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (call 1-800-877-8339 if you are deaf, hard of hearing, or have a speech disability, and are using TTY/TDD equipment). You can remain anonymous.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication covers the general rules for filing a federal income tax return. It supplements the information contained in your tax form instructions. It explains the tax law to make sure you pay only the tax you owe and no more.

How this publication is arranged.

This publication closely follows Form 1040, U.S. Individual Income Tax Return. It is divided into six parts which cover different sections of Form 1040. Each part is further divided into chapters which generally discuss one line of the form. Do not worry if you file Form 1040A or Form 1040EZ. Anything included on a line of either of these forms is also included on Form 1040.

The table of contents inside the front cover and the index in the back of the publication are useful tools to help you find the information you need.



What is in this publication.

The publication begins with the rules for filing a tax return. It explains:

  1. Who must file a return,

  2. Which tax form to use,

  3. When the return is due,

  4. How to e-file your return, and

  5. Other general information.

It will help you identify which filing status you qualify for, whether you can claim any dependents, and whether the income you receive is taxable. The publication goes on to explain the standard deduction, the kinds of expenses you may be able to deduct, and the various kinds of credits you may be able to take to reduce your tax.

Throughout the publication are examples showing how the tax law applies in typical situations. Also throughout the publication are flowcharts and tables that present tax information in an easy-to-understand manner.

Many of the subjects discussed in this publication are discussed in greater detail in other IRS publications. References to those other publications are provided for your information.



Icons.

Small graphic symbols, or icons, are used to draw your attention to special information. See Table 1 for an explanation of each icon used in this publication.



What is not covered in this publication.

Some material that you may find helpful is not included in this publication but can be found in your tax form instruction booklet. This includes lists of:

  • Where to report certain items shown on information documents, and

  • Tax Topics you can read at IRS.gov/taxtopics.

If you operate your own business or have other self-employment income, such as from babysitting or selling crafts, see the following publications for more information.

  • Pub. 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ).

  • Pub. 535, Business Expenses.

  • Pub. 587, Business Use of Your Home (Including Use by Daycare Providers).



Help from the IRS.

There are many ways you can get help from the IRS. These are explained under How To Get Tax Help in the back of this publication.



Comments and suggestions.

We welcome your comments about this publication and your suggestions for future editions.

You can send us comments from IRS.gov/forms. Click on "More Information" and then on "Give us feedback."

Or you can write to:

Internal Revenue Service
Tax Forms and Publications
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.



Ordering forms and publications.

Visit IRS.gov/forms to download forms and publications. Otherwise, you can go to IRS.gov/orderforms to order current and prior-year forms and instructions. Your order should arrive within 10 business days.



Tax questions.

If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication.



IRS mission.

Provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.



Table 1. Legend of Icons

Icon Explanation
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Items that may cause you particular problems, or an alert about pending legislation that may be enacted after this publication goes to print.
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An Internet site or an email address.
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An address you may need.
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Items you should keep in your personal records.
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Items you may need to figure or a worksheet you may need to complete and keep for your records.
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An important phone number.
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Helpful information you may need.


The Income Tax Return

The four chapters in this part provide basic information on the tax system. They take you through the first steps of filling out a tax return—such as deciding what your filing status is, how many exemptions you can take, and what form to file. They also discuss recordkeeping requirements, IRS e-file (electronic filing), certain penalties, and the two methods used to pay tax during the year: withholding and estimated tax.

1. Filing Information

What's New

Due date of return. The due date to file your tax return is April 18, 2017. The due date is April 18, instead of April 15, because of the Emancipation Day holiday in the District of Columbia—even if you do not live in the District of Columbia.

Cash payment option. There is a new option for taxpayers whose only option is to pay their taxes in cash. For details see Pay by cash under How To Pay.

Get transcript online. The Get Transcript Online tool on IRS.gov is available again to get a copy of your tax transcript and similar documents. To guard against fraud, you will now need to go through a two-step authentication process in order to use the online tool. For more information, go to IRS.gov/transcript.

Electronic Filing PIN request. Electronic Filing PIN request, an IRS-generated PIN used to verify your signature on your self-prepared, electronic tax return, is no longer available. To validate your signature, you must use your prior-year adjusted gross income or prior-year self-select PIN.

Individual taxpayer identification number (ITIN) renewal. If you were assigned an ITIN before January 1, 2013, or if you have an ITIN that you haven’t included on a tax return in the last three consecutive years, you may need to renew it. For more information, see the instructions for Form W-7.

Delivery services. Eight delivery services have been added to the list of designated private delivery services. For the complete list, see Private delivery services , later, under When Do I Have To File.

Who must file. Generally, the amount of income you can receive before you must file a return has been increased. See Table 1-1, Table 1-2, and Table 1-3 for the specific amounts.

Reminders

File online. Rather than filing a return on paper, you may be able to file electronically using IRS e-file. For more information, see Why Should I File Electronically , later.

Change of address. If you change your address, you should notify the IRS. You can use Form 8822 to notify the IRS of the change. See Change of Address , later, under What Happens After I File.

Enter your social security number. You must enter your social security number (SSN) in the spaces provided on your tax return. If you file a joint return, enter the SSNs in the same order as the names.

Direct deposit of refund. Instead of getting a paper check, you may be able to have your refund deposited directly into your account at a bank or other financial institution. See Direct Deposit under Refunds, later. If you choose direct deposit of your refund, you may be able to split the refund among two or three accounts.

Pay online or by phone. If you owe additional tax, you may be able to pay online or by phone. See How To Pay , later.

Installment agreement. If you can’t pay the full amount due with your return, you may ask to make monthly installment payments. See Installment Agreement , later, under Amount You Owe. You may be able to apply online for a payment agreement if you owe federal tax, interest, and penalties.

Automatic 6-month extension. You can get an automatic 6-month extension to file your tax return if, no later than the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. See Automatic Extension , later.

Service in combat zone. You are allowed extra time to take care of your tax matters if you are a member of the Armed Forces who served in a combat zone, or if you served in the combat zone in support of the Armed Forces. See Individuals Serving in Combat Zone , later, under When Do I Have To File.

Adoption taxpayer identification number. If a child has been placed in your home for purposes of legal adoption and you won't be able to get a social security number for the child in time to file your return, you may be able to get an adoption taxpayer identification number (ATIN). For more information, see Social Security Number (SSN) , later.

Taxpayer identification number for aliens. If you or your dependent is a nonresident or resident alien who doesn't have and isn't eligible to get a social security number, file Form W-7, Application for IRS Individual Taxpayer Identification Number, with the IRS. For more information, see Social Security Number (SSN) , later.

Frivolous tax submissions. The IRS has published a list of positions that are identified as frivolous. The penalty for filing a frivolous tax return is $5,000. Also, the $5,000 penalty will apply to other specified frivolous submissions. For more information, see Civil Penalties , later.

Introduction

This chapter discusses the following topics.

  • Whether you have to file a return.

  • Which form to use.

  • How to file electronically.

  • How to file for free.

  • When, how, and where to file your return.

  • What happens if you pay too little or too much tax.

  • What records you should keep and how long you should keep them.

  • How you can change a return you have already filed.

Do I Have To File a Return?

You must file a federal income tax return if you are a citizen or resident of the United States or a resident of Puerto Rico and you meet the filing requirements for any of the following categories that apply to you.

  1. Individuals in general. (There are special rules for surviving spouses, executors, administrators, legal representatives, U.S. citizens and residents living outside the United States, residents of Puerto Rico, and individuals with income from U.S. possessions.)

  2. Dependents.

  3. Certain children under age 19 or full-time students.

  4. Self-employed persons.

  5. Aliens.

The filing requirements for each category are explained in this chapter.

The filing requirements apply even if you don't owe tax.

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Even if you don't have to file a return, it may be to your advantage to do so. See Who Should File, later.

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File only one federal income tax return for the year regardless of how many jobs you had, how many Forms W-2 you received, or how many states you lived in during the year. Don't file more than one original return for the same year, even if you have not gotten your refund or have not heard from the IRS since you filed.

Individuals—In General

If you are a U.S. citizen or resident, whether you must file a return depends on three factors.

  1. Your gross income.

  2. Your filing status.

  3. Your age.

To find out whether you must file, see Table 1-1, Table 1-2, and Table 1-3. Even if no table shows that you must file, you may need to file to get money back. See Who Should File , later.

Gross income.

This includes all income you receive in the form of money, goods, property, and services that isn't exempt from tax. It also includes income from sources outside the United States or from the sale of your main home (even if you can exclude all or part of it). Include part of your social security benefits if:

  1. You were married, filing a separate return, and you lived with your spouse at any time during 2016; or

  2. Half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly).

If either (1) or (2) applies, see the instructions for Form 1040 or 1040A, or Pub. 915, Social Security and Equivalent Railroad Retirement Benefits, to figure the social security benefits you must include in gross income.

Common types of income are discussed in Part Two of this publication.



Community income.

If you are married and your permanent home is in a community property state, half of any income described by state law as community income may be considered yours. This affects your federal taxes, including whether you must file if you don't file a joint return with your spouse. See Pub. 555 for more information.



Nevada, Washington, and California domestic partners.

A registered domestic partner in Nevada, Washington, or California generally must report half the combined community income of the individual and his or her domestic partner. See Pub. 555.



Self-employed individuals.

If you are self-employed, your gross income includes the amount on line 7 of Schedule C (Form 1040), Profit or Loss From Business; line 1 of Schedule C-EZ (Form 1040), Net Profit From Business; and line 9 of Schedule F (Form 1040), Profit or Loss From Farming. See Self-Employed Persons , later, for more information about your filing requirements.

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If you don't report all of your self-employment income, your social security benefits may be lower when you retire.



Filing status.

Your filing status depends on whether you are single or married and on your family situation. Your filing status is determined on the last day of your tax year, which is December 31 for most taxpayers. See chapter 2 for an explanation of each filing status.



Age.

If you are 65 or older at the end of the year, you generally can have a higher amount of gross income than other taxpayers before you must file. See Table 1-1. You are considered 65 on the day before your 65th birthday. For example, if your 65th birthday is on January 1, 2017, you are considered 65 for 2016.

Table 1-1. 2016 Filing Requirements for Most Taxpayers
IF your filing status is... AND at the end of 2016 you
were...*
THEN file a return if
your gross income
was at least...**
single under 65 $10,350
65 or older $11,900
married filing jointly*** under 65 (both spouses) $20,700
65 or older (one spouse) $21,950
65 or older (both spouses) $23,200
married filing separately any age $ 4,050
head of household under 65 $13,350
65 or older $14,900
qualifying widow(er) with dependent child under 65 $16,650
65 or older $17,900
* If you were born on January 1, 1952, you are considered to be age 65 at the end of 2016. (If your spouse died in 2016 or if you are preparing a return for someone who died in 2016, see Pub. 501.)
** Gross income means all income you received in the form of money, goods, property, and services that isn't exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Don't include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time during 2016 or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the instructions for Form 1040 or 1040A or Pub. 915 to figure the taxable part of social security benefits you must include in gross income. Gross income includes gains, but not losses, reported on Form 8949 or Schedule D. Gross income from a business means, for example, the amount on Schedule C, line 7, or Schedule F, line 9. But, in figuring gross income, don't reduce your income by any losses, including any loss on Schedule C, line 7, or Schedule F, line 9.
*** If you didn't live with your spouse at the end of 2016 (or on the date your spouse died) and your gross income was at least $4,050, you must file a return regardless of your age.



Surviving Spouses, Executors, Administrators, and Legal Representatives

You must file a final return for a decedent (a person who died) if both of the following are true.

  • You are the surviving spouse, executor, administrator, or legal representative.

  • The decedent met the filing requirements at the date of death.

For more information on rules for filing a decedent's final return, see Pub. 559.

U.S. Citizens and Resident Aliens Living Abroad

To determine whether you must file a return, include in your gross income any income you received abroad, including any income you can exclude under the foreign earned income exclusion. For information on special tax rules that may apply to you, see Pub. 54. It is available online and at most U.S. embassies and consulates. See How To Get Tax Help in the back of this publication.

Residents of Puerto Rico

If you are a U.S. citizen and also a bona fide resident of Puerto Rico, you generally must file a U.S. income tax return for any year in which you meet the income requirements. This is in addition to any legal requirement you may have to file an income tax return with Puerto Rico.

If you are a bona fide resident of Puerto Rico for the entire year, your U.S. gross income doesn't include income from sources within Puerto Rico. It does, however, include any income you received for your services as an employee of the United States or a U.S. agency. If you receive income from Puerto Rican sources that isn't subject to U.S. tax, you must reduce your standard deduction. As a result, the amount of income you must have before you are required to file a U.S. income tax return is lower than the applicable amount in Table 1-1 or Table 1-2. For more information, see Pub. 570.

Individuals With Income From U.S. Possessions

If you had income from Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, or the U.S. Virgin Islands, special rules may apply when determining whether you must file a U.S. federal income tax return. In addition, you may have to file a return with the individual island government. See Pub. 570 for more information.

Dependents

If you are a dependent (one who meets the dependency tests in chapter 3), see Table 1-2 to find out whether you must file a return. You also must file if your situation is described in Table 1-3.

Responsibility of parent.

Generally, a child is responsible for filing his or her own tax return and for paying any tax on the return. If a dependent child must file an income tax return but can’t file due to age or any other reason, then a parent, guardian, or other legally responsible person must file it for the child. If the child can’t sign the return, the parent or guardian must sign the child's name followed by the words "By (your signature), parent for minor child."



Child's earnings.

Amounts a child earns by performing services are included in his or her gross income and not the gross income of the parent. This is true even if under local law the child's parent has the right to the earnings and may actually have received them. But if the child doesn't pay the tax due on this income, the parent is liable for the tax.



Certain Children Under Age 19 or Full-Time Students

If a child's only income is interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends), the child was under age 19 at the end of 2016 or was a full-time student under age 24 at the end of 2016, and certain other conditions are met, a parent can elect to include the child's income on the parent's return. If this election is made, the child doesn't have to file a return. See Parent's Election To Report Child's Interest and Dividends in chapter 31.

Self-Employed Persons

You are self-employed if you:

  • Carry on a trade or business as a sole proprietor,

  • Are an independent contractor,

  • Are a member of a partnership, or

  • Are in business for yourself in any other way.

Self-employment can include work in addition to your regular full-time business activities, such as certain part-time work you do at home or in addition to your regular job.

You must file a return if your gross income is at least as much as the filing requirement amount for your filing status and age (shown in Table 1-1). Also, you must file Form 1040 and Schedule SE (Form 1040), Self-Employment Tax, if:

  1. Your net earnings from self-employment (excluding church employee income) were $400 or more, or

  2. You had church employee income of $108.28 or more. (See Table 1-3.)

Use Schedule SE (Form 1040) to figure your self-employment tax. Self-employment tax is comparable to the social security and Medicare tax withheld from an employee's wages. For more information about this tax, see Pub. 334, Tax Guide for Small Business.

Employees of foreign governments or international organizations.

If you are a U.S. citizen who works in the United States for an international organization, a foreign government, or a wholly owned instrumentality of a foreign government, and your employer isn't required to withhold social security and Medicare taxes from your wages, you must include your earnings from services performed in the United States when figuring your net earnings from self-employment.



Ministers.

You must include income from services you performed as a minister when figuring your net earnings from self-employment, unless you have an exemption from self-employment tax. This also applies to Christian Science practitioners and members of a religious order who have not taken a vow of poverty. For more information, see Pub. 517, Social Security and Other Information for Members of the Clergy and Religious Workers.



Table 1-2. 2016 Filing Requirements for Dependents

See chapter 3 to find out if someone can claim you as a dependent.

If your parents (or someone else) can claim you as a dependent, use this table to see if you must file a return. (See Table 1-3 for other situations when you must file.)
In this table, unearned income includes taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, and distributions of unearned income from a trust. Earned income includes salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. (See Scholarships and fellowships in chapter 12.) Gross income is the total of your earned and unearned income.
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If your gross income was $4,050 or more, you usually can’t be claimed as a dependent unless you are a qualifying child. For details, see Exemptions for Dependents, in chapter 3.
Single dependents—Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
Your unearned income was more than $1,050.
Your earned income was more than $6,300.
Your gross income was more than the larger of:
$1,050, or
Your earned income (up to $5,950) plus $350.
Yes. You must file a return if any of the following apply.
Your unearned income was more than $2,600 ($4,150 if 65 or older and blind).
Your earned income was more than $7,850 ($9,400 if 65 or older and blind).
Your gross income was more than the larger of:
$2,600 ($4,150 if 65 or older and blind), or
Your earned income (up to $5,950) plus $1,900 ($3,450 if 65 or older and blind).
Married dependents—Were you either age 65 or older or blind?
No. You must file a return if any of the following apply.
Your unearned income was more than $1,050.
Your earned income was more than $6,300.
Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
Your gross income was more than the larger of:
$1,050, or
Your earned income (up to $5,950) plus $350.
Yes. You must file a return if any of the following apply.
Your unearned income was more than $2,300 ($3,550 if 65 or older and blind).
Your earned income was more than $7,550 ($8,800 if 65 or older and blind).
Your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
Your gross income was more than the larger of:
$2,300 ($3,550 if 65 or older and blind), or
Your earned income (up to $5,950) plus $1,600 ($2,850 if 65 or older and blind).

Aliens

Your status as an alien (resident, nonresident, or dual-status) determines whether and how you must file an income tax return.

The rules used to determine your alien status are discussed in Pub. 519, U.S. Tax Guide for Aliens.

Resident alien.

If you are a resident alien for the entire year, you must file a tax return following the same rules that apply to U.S. citizens. Use the forms discussed in this publication.



Nonresident alien.

If you are a nonresident alien, the rules and tax forms that apply to you are different from those that apply to U.S. citizens and resident aliens. See Pub. 519 to find out if U.S. income tax laws apply to you and which forms you should file.



Dual-status taxpayer.

If you are a resident alien for part of the tax year and a nonresident alien for the rest of the year, you are a dual-status taxpayer. Different rules apply for each part of the year. For information on dual-status taxpayers, see Pub. 519.

Table 1-3. Other Situations When You Must File a 2016 Return

You must file a return if any of the five conditions below apply for 2016.
1. You owe any special taxes, including any of the following.
a. Alternative minimum tax.
b. Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. But if you are filing a return only because you owe this tax, you can file Form 5329 by itself.
c. Household employment taxes. But if you are filing a return only because you owe this tax, you can file Schedule H by itself.
d. Social security and Medicare tax on tips you didn't report to your employer or on wages you received from an employer who didn't withhold these taxes.
e. Recapture of first-time homebuyer credit.
f. Write-in taxes, including uncollected social security and Medicare or RRTA tax on tips you reported to your employer or on group-term life insurance and additional taxes on health savings accounts.
g. Recapture taxes.
2. You (or your spouse, if filing jointly) received health savings account, Archer MSA, or Medicare Advantage MSA distributions.
3. You had net earnings from self-employment of at least $400.
4. You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes.
5. Advance payments of the premium tax credit were made for you, your spouse, or a dependent who enrolled in coverage through the Marketplace. You or whoever enrolled you should have received Form(s) 1095-A showing the amount of the advance payments.




Who Should File

Even if you don't have to file, you should file a federal income tax return to get money back if any of the following conditions apply.

  1. You had federal income tax withheld or made estimated tax payments.

  2. You qualify for the earned income credit. See chapter 36 for more information.

  3. You qualify for the additional child tax credit. See chapter 34 for more information.

  4. You qualify for the premium tax credit. See chapter 37 for more information.

  5. You qualify for the health coverage tax credit. See chapter 38 for more information.

  6. You qualify for the American opportunity credit. See chapter 35 for more information.

  7. You qualify for the credit for federal tax on fuels. See chapter 38 for more information.

Which Form Should I Use?

You must use one of three forms to file your return: Form 1040EZ, Form 1040A, or Form 1040. (But also see Why Should I File Electronically , later.)

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See the discussion under Form 1040 for when you must use that form.

Form 1040EZ

Form 1040EZ is the simplest form to use.

You can use Form 1040EZ if all of the following apply.

  1. Your filing status is single or married filing jointly. If you were a nonresident alien at any time in 2016, your filing status must be married filing jointly.

  2. You (and your spouse if married filing a joint return) were under age 65 and not blind at the end of 2016. If you were born on January 1, 1952, you are considered to be age 65 at the end of 2016.

  3. You don't claim any dependents.

  4. Your taxable income is less than $100,000.

  5. Your income is only from wages, salaries, tips, unemployment compensation, Alaska Permanent Fund dividends, taxable scholarship and fellowship grants, and taxable interest of $1,500 or less.

  6. You don't claim any adjustments to income, such as a deduction for IRA contributions or student loan interest.

  7. You don't claim any credits other than the earned income credit.

  8. You don't owe any household employment taxes on wages you paid to a household employee.

  9. If you earned tips, they are included in boxes 5 and 7 of your Form W-2.

  10. You are not a debtor in a chapter 11 bankruptcy case filed after October 16, 2005.

You must meet all of these requirements to use Form 1040EZ. If you don't, you must use Form 1040A or Form 1040.



Figuring tax.

On Form 1040EZ, you can use only the tax table to figure your income tax. You can find the tax table in the Instructions for Form 1040EZ. You can’t use Form 1040EZ to report any other tax.



Form 1040A

If you don't qualify to use Form 1040EZ, you may be able to use Form 1040A.

You can use Form 1040A if all of the following apply.

  1. Your income is only from:

    1. Wages, salaries, and tips,

    2. Interest,

    3. Ordinary dividends (including Alaska Permanent Fund dividends),

    4. Capital gain distributions,

    5. IRA distributions,

    6. Pensions and annuities,

    7. Unemployment compensation,

    8. Taxable social security and railroad retirement benefits, and

    9. Taxable scholarship and fellowship grants.

    If you receive a capital gain distribution that includes unrecaptured section 1250 gain, section 1202 gain, or collectibles (28%) gain, you can’t use Form 1040A. You must use Form 1040.

  2. Your taxable income is less than $100,000.

  3. Your adjustments to income are for only the following items.

    1. Educator expenses.

    2. IRA deduction.

    3. Student loan interest deduction.

    4. Tuition and fees.

  4. You don't itemize your deductions.

  5. You claim only the following tax credits.

    1. The credit for child and dependent care expenses. (See chapter 32.)

    2. The credit for the elderly or the disabled. (See chapter 33.)

    3. The education credits. (See chapter 35.)

    4. The retirement savings contributions credit. (See chapter 38.)

    5. The child tax credit. (See chapter 34.)

    6. The earned income credit. (See chapter 36.)

    7. The additional child tax credit. (See chapter 34.)

    8. The premium tax credit. (See chapter 37.)

  6. You didn't have an alternative minimum tax adjustment on stock you acquired from the exercise of an incentive stock option. (See Pub. 525.)

You can also use Form 1040A if you received employer-provided dependent care benefits or if you owe tax from the recapture of an education credit or the alternative minimum tax.

You must meet all these requirements to use Form 1040A. If you don't, you must use Form 1040.



Form 1040

If you can’t use Form 1040EZ or Form 1040A, you must use Form 1040. You can use Form 1040 to report all types of income, deductions, and credits.

You may pay less tax by filing Form 1040 because you can take itemized deductions, some adjustments to income, and credits you can’t take on Form 1040A or Form 1040EZ.

You must use Form 1040 if any of the following apply.

  1. Your taxable income is $100,000 or more.

  2. You itemize your deductions on Schedule A.

  3. You had income that can’t be reported on Form 1040EZ or Form 1040A, including tax-exempt interest from private activity bonds issued after August 7, 1986.

  4. You claim any adjustments to gross income other than the adjustments listed earlier under Form 1040A.

  5. Your Form W-2, box 12, shows uncollected employee tax (social security and Medicare tax) on tips (see chapter 6) or group-term life insurance (see chapter 5).

  6. You received $20 or more in tips in any 1 month and didn't report all of them to your employer. (See chapter 6.)

  7. You were a bona fide resident of Puerto Rico and exclude income from sources in Puerto Rico.

  8. You claim any credits other than the credits listed earlier under Form 1040A.

  9. You owe the excise tax on insider stock compensation from an expatriated corporation.

  10. Your Form W-2 shows an amount in box 12 with a code Z.

  11. You had a qualified health savings account funding distribution from your IRA.

  12. You are an employee and your employer didn't withhold social security and Medicare tax.

  13. You have to file other forms with your return to report certain exclusions, taxes, or transactions, such as Form 8959 or Form 8960.

  14. You are a debtor in a bankruptcy case filed after October 16, 2005.

  15. You must repay the first-time homebuyer credit.

  16. You have adjusted gross income of more than $155,650 and must reduce the dollar amount of your exemptions.

  17. You received a Form W-2 that incorrectly includes in box 1 amounts that are payments under a Medicaid waiver program, and you can’t get a corrected Form W-2.



Why Should I File Electronically?

Electronic Filing

If your adjusted gross income (AGI) is less than a certain amount, you are eligible for Free File, a free tax software service offered by IRS partners, to prepare and e-file your return for free. If your income is over the amount, you are still eligible for Free File Fillable Forms, an electronic version of IRS paper forms. Table 1-4 lists the free ways to electronically file your return.

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IRS e-file uses automation to replace most of the manual steps needed to process paper returns. As a result, the processing of e-file returns is faster and more accurate than the processing of paper returns. However, as with a paper return, you are responsible for making sure your return contains accurate information and is filed on time.

If your return is filed with IRS e-file, you will receive an acknowledgment that your return was received and accepted. If you owe tax, you can e-file and pay electronically. The IRS has processed more than one billion e-filed returns safely and securely. Using e-file doesn't affect your chances of an IRS examination of your return.

Electronic return signatures.

To file your return electronically, you must sign the return electronically using a personal identification number (PIN). If you are filing online, you must use a Self-Select PIN. If you are filing electronically using a tax practitioner, you can use a Self-Select PIN or a Practitioner PIN.



Self-Select PIN.

The Self-Select PIN method allows you to create your own PIN. If you are married filing jointly, you and your spouse will each need to create a PIN and enter these PINs as your electronic signatures.

A PIN is any combination of five digits you choose except five zeros. If you use a PIN, there is nothing to sign and nothing to mail—not even your Forms W-2.

To verify your identity, you will be prompted to enter your adjusted gross income (AGI) from your originally filed 2015 federal income tax return, if applicable. Don't use your AGI from an amended return (Form 1040X) or a math error correction made by the IRS. AGI is the amount shown on your 2015 Form 1040, line 38; Form 1040A, line 22; or Form 1040EZ, line 4. If you don't have your 2015 income tax return, you can request a transcript by using our automated self-service tool. Go to IRS.gov/transcript. (If you filed electronically last year, you may use your prior year PIN to verify your identity instead of your prior year AGI. The prior year PIN is the five-digit PIN you used to electronically sign your 2015 return.) You will also be prompted to enter your date of birth.



Table 1-4. Free Ways To e-file

Use Free File for free tax software and free e-file.
IRS partners offer name-brand products for free.
Many taxpayers are eligible for Free File software.
Everyone is eligible for Free File Fillable Forms, electronic version of IRS paper forms.
Free File software and Free File Fillable Forms are available only at IRS.gov/freefile.
Use VITA/TCE for free tax help from volunteers and free e-file.
Volunteers prepare your return and e-file it for free.
Some sites also offer do-it-yourself software.
You are eligible based either on your income or age.
Sites are located nationwide. Find one near you by visiting IRS.gov/vita.

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You can’t use the Self-Select PIN method if you are a first-time filer under age 16 at the end of 2016.

Practitioner PIN.

The Practitioner PIN method allows you to authorize your tax practitioner to enter or generate your PIN. The practitioner can provide you with details.



Form 8453.

You must send in a paper Form 8453 if you have to attach certain forms or other documents that can’t be electronically filed. For details, see Form 8453.



For more details, visit IRS.gov/efile.

Identity Protection PIN.

If the IRS gave you an identity protection personal identification number (IP PIN) because you were a victim of identity theft, enter it in the spaces provided on your tax form. If the IRS hasn’t given you this type of number, leave these spaces blank. For more information, see the instructions for Form 1040A or Form 1040.



Power of attorney.

If an agent is signing your return for you, a power of attorney (POA) must be filed. Attach the POA to Form 8453 and file it using that form's instructions. See Signatures , later, for more information on POAs.



State returns.

In most states, you can file an electronic state return simultaneously with your federal return. For more information, check with your local IRS office, state tax agency, tax professional, or the IRS website at
IRS.gov/efile.



Refunds.

You can have a refund check mailed to you, or you can have your refund deposited directly to your checking or savings account or split among two or three accounts. With e-file, your refund will be issued faster than if you filed on paper.

As with a paper return, you may not get all of your refund if you owe certain past-due amounts, such as federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or certain other federal nontax debts, such as student loans. See Offset against debts under Refunds, later.



Refund inquiries.

Information about your return will generally be available within 24 hours after the IRS receives your e-filed return. See Refund Information , later.



Amount you owe.

To avoid late-payment penalties and interest, pay your taxes in full by April 18, 2017. The due date is April 18, instead of April 15, because of the Emancipation Day holiday in the District of Columbia—even if you don't live in the District of Columbia. See How To Pay , later, for information on how to pay the amount you owe.



Using Your Personal Computer

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You can file your tax return in a fast, easy, and convenient way using your personal computer. A computer with Internet access and tax preparation software are all you need. Best of all, you can e-file from the comfort of your home 24 hours a day, 7 days a week.

IRS approved tax preparation software is available for online use on the Internet, for download from the Internet, and in retail stores.

For information, visit IRS.gov/efile.

Through Employers and Financial Institutions

Some businesses offer free e-file to their employees, members, or customers. Others offer it for a fee. Ask your employer or financial institution if they offer IRS e-file as an employee, member, or customer benefit.

Free Help With Your Return

Free help in preparing your return is available nationwide from IRS-trained volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-to-moderate income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 or older with their tax returns. Many VITA sites offer free electronic filing and all volunteers will let you know about the credits and deductions you may be entitled to claim. To find a site near you, call 1-800-906-9887. Or to find the nearest AARP TaxAide site, visit AARP's website at www.aarp.org/taxaide or call 1-888-227-7669. For more information on these programs, go to IRS.gov and enter keyword "VITA" in the search box.

Using a Tax Professional

Many tax professionals electronically file tax returns for their clients. You may personally enter your PIN or complete Form 8879, IRS e-file Signature Authorization, to authorize the tax professional to enter your PIN on your return.

Note.

Tax professionals may charge a fee for IRS e-file. Fees can vary depending on the professional and the specific services rendered.

When Do I Have To File?

April 18, 2017, is the due date for filing your 2016 income tax return if you use the calendar year. For a quick view of due dates for filing a return with or without an extension of time to file (discussed later), see Table 1-5.

Table 1-5. When To File Your 2016 Return

For U.S. citizens and residents who file returns on a calendar year.

For Most Taxpayers For Certain Taxpayers
Outside the U.S.
No extension requested April 18, 2017 June 15, 2017
Automatic extension October 16, 2017 October 16, 2017

If you use a fiscal year (a year ending on the last day of any month except December, or a 52-53-week year), your income tax return is due by the 15th day of the 4th month after the close of your fiscal year.

When the due date for doing any act for tax purposes—filing a return, paying taxes, etc.—falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.

Filing paper returns on time.

Your paper return is filed on time if it is mailed in an envelope that is properly addressed, has enough postage, and is postmarked by the due date. If you send your return by registered mail, the date of the registration is the postmark date. The registration is evidence that the return was delivered. If you send a return by certified mail and have your receipt postmarked by a postal employee, the date on the receipt is the postmark date. The postmarked certified mail receipt is evidence that the return was delivered.



Private delivery services.

If you use a private delivery service designated by the IRS to send your return, the postmark date generally is the date the private delivery service records in its database or marks on the mailing label. The private delivery service can tell you how to get written proof of this date.

The following are designated private delivery services.

  • DHL Express 9:00, DHL Express 10:30, DHL Express 12:00, DHL Express Worldwide, DHL Express Envelope, DHL Import Express 10:30, DHL Import Express 12:00, and DHL Import Express Worldwide.

  • United Parcel Service (UPS): UPS Next Day Air Early AM, UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

  • Federal Express (FedEx): FedEx First Overnight, FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International Next Flight Out, FedEx International Priority, FedEx International First, and FedEx International Economy.

For more information, go to IRS.gov and enter "private delivery service" in the search box. The search results will direct you to the IRS mailing address to use if you are using a private delivery service. You will also find any updates to the list of designated private delivery services.

The private delivery service can tell you how to get written proof of the mailing date.



Filing electronic returns on time.

If you use IRS e-file, your return is considered filed on time if the authorized electronic return transmitter postmarks the transmission by the due date. An authorized electronic return transmitter is a participant in the IRS e-file program that transmits electronic tax return information directly to the IRS.

The electronic postmark is a record of when the authorized electronic return transmitter received the transmission of your electronically filed return on its host system. The date and time in your time zone controls whether your electronically filed return is timely.



Filing late.

If you don't file your return by the due date, you may have to pay a failure-to-file penalty and interest. For more information, see Penalties , later. Also see Interest under Amount You Owe.

If you were due a refund but you didn't file a return, you generally must file within 3 years from the date the return was due (including extensions) to get that refund.



Nonresident alien.

If you are a nonresident alien and earn wages subject to U.S. income tax withholding, your 2016 U.S. income tax return (Form 1040NR or Form 1040NR-EZ) is due by:

  • April 18, 2017, if you use a calendar year, or

  • The 15th day of the 4th month after the end of your fiscal year if you use a fiscal year.

If you don't earn wages subject to U.S. income tax withholding, your return is due by:

  • June 15, 2017, if you use a calendar year, or

  • The 15th day of the 6th month after the end of your fiscal year, if you use a fiscal year.

See Pub. 519 for more filing information.



Filing for a decedent.

If you must file a final income tax return for a taxpayer who died during the year (a decedent), the return is due by the 15th day of the 4th month after the end of the decedent's normal tax year. See Pub. 559.



Extensions of Time To File

You may be able to get an extension of time to file your return. There are three types of situations where you may qualify for an extension:

  • Automatic extensions,

  • You are outside the United States, or

  • You are serving in a combat zone.

Automatic Extension

If you can’t file your 2016 return by the due date, you may be able to get an automatic 6-month extension of time to file.

Example.

If your return is due on April 18, 2017, you will have until October 16, 2017, to file.

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If you don't pay the tax due by the regular due date (generally, April 15), you will owe interest. You may also be charged penalties, discussed later.

How to get the automatic extension.

You can get the automatic extension by:

  1. Using IRS e-file (electronic filing), or

  2. Filing a paper form.



E-file options.

There are two ways you can use e-file to get an extension of time to file. Complete Form 4868, to use as a worksheet. If you think you may owe tax when you file your return, use Part II of the form to estimate your balance due. If you e-file Form 4868 to the IRS, don't also send a paper Form 4868.



E-file using your personal computer or a tax professional.

You can use a tax software package with your personal computer or a tax professional to file Form 4868 electronically. Free File and Free File Fillable Forms, both available at IRS.gov, allows you to prepare and e-file Form 4868 for free. You will need to provide certain information from your 2015 tax return. If you wish to make a payment by direct transfer from your bank account, see Pay online , under How To Pay, later in this chapter.



E-file and pay by credit or debit card or by direct transfer from your bank account.

You can get an extension by paying part or all of your estimate of tax due by using a credit or debit card or by direct transfer from your bank account. You can do this by phone or over the Internet. You don't file Form 4868. See Pay online , under How To Pay, later in this chapter.



Filing a paper Form 4868.

You can get an extension of time to file by filing a paper Form 4868. Mail it to the address shown in the form instructions.

If you want to make a payment with the form, make your check or money order payable to "United States Treasury." Write your SSN, daytime phone number, and "2016 Form 4868" on your check or money order.



When to file.

You must request the automatic extension by the due date for your return. You can file your return any time before the 6-month extension period ends.



When you file your return.

Enter any payment you made related to the extension of time to file on Form 1040, line 70. If you file Form 1040EZ or Form 1040A, include that payment in your total payments on Form 1040EZ, line 9, or Form 1040A, line 46. Also enter "Form 4868" and the amount paid in the space to the left of line 9 or line 46.



Individuals Outside the United States

You are allowed an automatic 2-month extension, without filing Form 4868 (until June 15, 2017, if you use the calendar year), to file your 2016 return and pay any federal income tax due if:

  1. You are a U.S. citizen or resident, and

  2. On the due date of your return:

    1. You are living outside the United States and Puerto Rico, and your main place of business or post of duty is outside the United States and Puerto Rico, or

    2. You are in military or naval service on duty outside the United States and
      Puerto Rico.

However, if you pay the tax due after the regular due date (generally, April 15), interest will be charged from that date until the date the tax is paid.

If you served in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file. See Individuals Serving in Combat Zone , later, for special rules that apply to you.

Married taxpayers.

If you file a joint return, only one spouse has to qualify for this automatic extension. If you and your spouse file separate returns, this automatic extension applies only to the spouse who qualifies.



How to get the extension.

To use this automatic extension, you must attach a statement to your return explaining what situation qualified you for the extension. (See the situations listed under (2), earlier.)



Extensions beyond 2 months.

If you can’t file your return within the automatic 2-month extension period, you may be able to get an additional 4-month extension, for a total of 6 months. File Form 4868 and check the box on line 8.



No further extension.

An extension of more than 6 months will generally not be granted. However, if you are outside the United States and meet certain tests, you may be granted a longer extension. For more information, see When To File and Pay in Pub. 54.



Individuals Serving in Combat Zone

The deadline for filing your tax return, paying any tax you may owe, and filing a claim for refund is automatically extended if you serve in a combat zone. This applies to members of the Armed Forces, as well as merchant marines serving aboard vessels under the operational control of the Department of Defense, Red Cross personnel, accredited correspondents, and civilians under the direction of the Armed Forces in support of the Armed Forces.

Combat zone.

For purposes of the automatic extension, the term "combat zone" includes the following areas.

  1. The Arabian peninsula area, effective January 17, 1991.

  2. The Kosovo area, effective March 24, 1999.

  3. Afghanistan area, effective September 19, 2001.

See Pub. 3 for more detailed information on the locations comprising each combat zone. The publication also has information about other tax benefits available to military personnel serving in a combat zone.



Extension period.

The deadline for filing your return, paying any tax due, and filing a claim for refund is extended for at least 180 days after the later of:

  1. The last day you are in a combat zone or the last day the area qualifies as a combat zone, or

  2. The last day of any continuous qualified hospitalization for injury from service in the combat zone.

In addition to the 180 days, your deadline is also extended by the number of days you had left to take action with the IRS when you entered the combat zone. For example, you have 3½ months (January 1 – April 15) to file your tax return. Any days left in this period when you entered the combat zone (or the entire 3½ months if you entered it before the beginning of the year) are added to the 180 days. See Extension of Deadlines in Pub. 3 for more information.

The rules on the extension for filing your return also apply when you are deployed outside the United States (away from your permanent duty station) while participating in a designated contingency operation.



How Do I Prepare My Return?

This section explains how to get ready to fill in your tax return and when to report your income and expenses. It also explains how to complete certain sections of the form. You may find Table 1-6 helpful when you prepare your paper return.

Table 1-6. Six Steps for Preparing Your Paper Return

1 Get your records together for income and expenses.
2 Get the forms, schedules, and publications you need.
3 Fill in your return.
4 Check your return to make sure it is correct.
5 Sign and date your return.
6 Attach all required forms and schedules.

Electronic returns.

For information you may find useful in preparing an electronic return, see Why Should I File Electronically , earlier.



Substitute tax forms.

You can’t use your own version of a tax form unless it meets the requirements explained in Pub. 1167.



Form W-2.

If you were an employee, you should receive Form W-2 from your employer. You will need the information from this form to prepare your return. See Form W-2 under Credit for Withholding and Estimated Tax in chapter 4.

Your employer is required to provide or send Form W-2 to you no later than January 31, 2017. If it is mailed, you should allow adequate time to receive it before contacting your employer. If you still don't get the form by February 15, the IRS can help you by requesting the form from your employer. When you request IRS help, be prepared to provide the following information.

  • Your name, address (including ZIP code), and phone number.

  • Your SSN.

  • Your dates of employment.

  • Your employer's name, address (including ZIP code), and phone number.



Form 1099.

If you received certain types of income, you may receive a Form 1099. For example, if you received taxable interest of $10 or more, the payer is required to provide or send Form 1099 to you no later than January 31, 2017 (or by February 15, 2017, if furnished by a broker). If it is mailed, you should allow adequate time to receive it before contacting the payer. If you still don't get the form by February 15 (or by March 1, 2017, if furnished by a broker), call the IRS for help.



When Do I Report My Income and Expenses?

You must figure your taxable income on the basis of a tax year. A "tax year" is an annual accounting period used for keeping records and reporting income and expenses. You must account for your income and expenses in a way that clearly shows your taxable income. The way you do this is called an accounting method. This section explains which accounting periods and methods you can use.

Accounting Periods

Most individual tax returns cover a calendar year—the 12 months from January 1 through December 31. If you don't use a calendar year, your accounting period is a fiscal year. A regular fiscal year is a 12-month period that ends on the last day of any month except December. A 52-53-week fiscal year varies from 52 to 53 weeks and always ends on the same day of the week.

You choose your accounting period (tax year) when you file your first income tax return. It can’t be longer than 12 months.

More information.

For more information on accounting periods, including how to change your accounting period, see Pub. 538.



Accounting Methods

Your accounting method is the way you account for your income and expenses. Most taxpayers use either the cash method or an accrual method. You choose a method when you file your first income tax return. If you want to change your accounting method after that, you generally must get IRS approval. Use Form 3115 to request an accounting method change.

Cash method.

If you use this method, report all items of income in the year in which you actually or constructively receive them. Generally, you deduct all expenses in the year you actually pay them. This is the method most individual taxpayers use.



Constructive receipt.

Generally, you constructively receive income when it is credited to your account or set apart in any way that makes it available to you. You don't need to have physical possession of it. For example, interest credited to your bank account on December 31, 2016, is taxable income to you in 2016 if you could have withdrawn it in 2016 (even if the amount isn't entered in your records or withdrawn until 2017).



Garnisheed wages.

If your employer uses your wages to pay your debts, or if your wages are attached or garnisheed, the full amount is constructively received by you. You must include these wages in income for the year you would have received them.



Debts paid for you.

If another person cancels or pays your debts (but not as a gift or loan), you have constructively received the amount and generally must include it in your gross income for the year. See Canceled Debts in chapter 12 for more information.



Payment to third party.

If a third party is paid income from property you own, you have constructively received the income. It is the same as if you had actually received the income and paid it to the third party.



Payment to an agent.

Income an agent receives for you is income you constructively received in the year the agent receives it. If you indicate in a contract that your income is to be paid to another person, you must include the amount in your gross income when the other person receives it.



Check received or available.

A valid check that was made available to you before the end of the tax year is constructively received by you in that year. A check that was "made available to you" includes a check you have already received, but not cashed or deposited. It also includes, for example, your last paycheck of the year that your employer made available for you to pick up at the office before the end of the year. It is constructively received by you in that year whether or not you pick it up before the end of the year or wait to receive it by mail after the end of the year.



No constructive receipt.

There may be facts to show that you didn't constructively receive income.

Example.

Alice Johnson, a teacher, agreed to her school board's condition that, in her absence, she would receive only the difference between her regular salary and the salary of a substitute teacher hired by the school board. Therefore, Alice didn't constructively receive the amount by which her salary was reduced to pay the substitute teacher.



Accrual method.

If you use an accrual method, you generally report income when you earn it, rather than when you receive it. You generally deduct your expenses when you incur them, rather than when you pay them.



Income paid in advance.

An advance payment of income is generally included in gross income in the year you receive it. Your method of accounting doesn't matter as long as the income is available to you. An advance payment may include rent or interest you receive in advance and pay for services you will perform later.

A limited deferral until the next tax year may be allowed for certain advance payments. See Pub. 538 for specific information.



Additional information.

For more information on accounting methods, including how to change your accounting method, see Pub. 538.



Social Security Number (SSN)

You must enter your SSN on your return. If you are married, enter the SSNs for both you and your spouse, whether you file jointly or separately.

If you are filing a joint return, include the SSNs in the same order as the names. Use this same order in submitting other forms and documents to the IRS.

Check that both the name and SSN on your Form 1040, W-2, and 1099 agree with your social security card. If they don't, certain deductions and credits on your Form 1040 may be reduced or disallowed and you may not receive credit for your social security earnings. If your Form W-2 shows an incorrect SSN or name, notify your employer or the form-issuing agent as soon as possible to make sure your earnings are credited to your social security record. If the name or SSN on your social security card is incorrect, call the SSA at 1-800-772-1213.

Name change.

If you changed your name because of marriage, divorce, etc., be sure to report the change to your local Social Security Administration (SSA) office before filing your return. This prevents delays in processing your return and issuing refunds. It also safeguards your future social security benefits.



Dependent's SSN.

You must provide the SSN of each dependent you claim, regardless of the dependent's age. This requirement applies to all dependents (not just your children) claimed on your tax return.



Exception.

If your child was born and died in 2016 and didn't have an SSN, enter "DIED" in column (2) of line 6c (Form 1040 or 1040A) and include a copy of the child's birth certificate, death certificate, or hospital records. The document must show that the child was born alive.



No SSN.

File Form SS-5, Application for a Social Security Card, with your local SSA office to get an SSN for yourself or your dependent. It usually takes about 2 weeks to get an SSN. If you or your dependent isn't eligible for an SSN, see Individual taxpayer identification number (ITIN) , later.

If you are a U.S. citizen or resident alien, you must show proof of age, identity, and citizenship or alien status with your Form SS-5. If you are 12 or older and have never been assigned an SSN, you must appear in person with this proof at an SSA office.

Form SS-5 is available at any SSA office, on the Internet at www.socialsecurity.gov, or by calling 1-800-772-1213. If you have any questions about which documents you can use as proof of age, identity, or citizenship, contact your SSA office.

If your dependent doesn't have an SSN by the time your return is due, you may want to ask for an extension of time to file, as explained earlier under When Do I Have To File .

If you don't provide a required SSN or if you provide an incorrect SSN, your tax may be increased and any refund may be reduced.



Adoption taxpayer identification number (ATIN).

If you are in the process of adopting a child who is a U.S. citizen or resident and can’t get an SSN for the child until the adoption is final, you can apply for an ATIN to use instead of an SSN.

File Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS to get an ATIN if all of the following are true.

  • You have a child living with you who was placed in your home for legal adoption.

  • You can’t get the child's existing SSN even though you have made a reasonable attempt to get it from the birth parents, the placement agency, and other persons.

  • You can’t get an SSN for the child from the SSA because, for example, the adoption isn't final.

  • You are eligible to claim the child as a dependent on your tax return.

After the adoption is final, you must apply for an SSN for the child. You can’t continue using the ATIN.

See Form W-7A for more information.



Nonresident alien spouse.

If your spouse is a nonresident alien, your spouse must have either an SSN or an ITIN if:

  • You file a joint return,

  • You file a separate return and claim an exemption for your spouse, or

  • Your spouse is filing a separate return.

If your spouse isn't eligible for an SSN, see the following discussion on ITINs.



Individual taxpayer identification number (ITIN).

The IRS will issue you an ITIN if you are a nonresident or resident alien and you don't have and aren’t eligible to get an SSN. This also applies to an alien spouse or dependent. To apply for an ITIN, file Form W-7 with the IRS. It usually takes about 7 weeks to get an ITIN. Enter the ITIN on your tax return wherever an SSN is requested.

Make sure your ITIN has not expired. ITINs that have not been included on a U.S. federal tax return at least once in the last three consecutive years will expire. In addition, ITINs that were assigned before 2013 will expire according to an annual schedule, regardless of use. Expired ITINs must be renewed in order to avoid delays in processing your return.

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If you are applying for an ITIN for yourself, your spouse, or a dependent in order to file your tax return, attach your completed tax return to your Form W-7. See the Form W-7 instructions for how and where to file.



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You can’t e-file a return using an ITIN in the calendar year the ITIN is issued; however, you can e-file returns in the following years.

ITIN for tax use only.

An ITIN is for federal tax use only. It doesn't entitle you to social security benefits or change your employment or immigration status under U.S. law.



Penalty for not providing social security number.

If you don't include your SSN or the SSN of your spouse or dependent as required, you may have to pay a penalty. See the discussion on Penalties , later, for more information.



SSN on correspondence.

If you write to the IRS about your tax account, be sure to include your SSN (and the name and SSN of your spouse, if you filed a joint return) in your correspondence. Because your SSN is used to identify your account, this helps the IRS respond to your correspondence promptly.



Presidential Election Campaign Fund

This fund helps pay for Presidential election campaigns. The fund also helps pay for pediatric medical research. If you want $3 to go to this fund, check the box. If you are filing a joint return, your spouse can also have $3 go to the fund. If you check a box, your tax or refund won't change.

Computations

The following information may be useful in making the return easier to complete.

Rounding off dollars.

You can round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.

If you have to add two or more amounts to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.



Equal amounts.

If you are asked to enter the smaller or larger of two equal amounts, enter that amount.



Negative amounts.

If you file a paper return and you need to enter a negative amount, put the amount in parentheses rather than using a minus sign. To combine positive and negative amounts, add all the positive amounts together and then subtract the negative amounts.



Attachments

Depending on the form you file and the items reported on your return, you may have to complete additional schedules and forms and attach them to your paper return.

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You may be able to file a paperless return using IRS e-file. There's nothing to attach or mail, not even your Forms W-2. See Why Should I File Electronically, earlier.

Form W-2.

Form W-2 is a statement from your employer of wages and other compensation paid to you and taxes withheld from your pay. You should have a Form W-2 from each employer. If you file a paper return, be sure to attach a copy of Form W-2 in the place indicated on the front page of your return. Attach it to the front page of your paper return, not to any attachments. For more information, see Form W-2 in chapter 4.



Form 1099-R.

If you received a Form 1099-R, showing federal income tax withheld, and you file a paper return, attach a copy of that form in the place indicated on the front page of your return.



Form 1040EZ.

There are no additional schedules to file with Form 1040EZ.



Form 1040A.

If you file a paper return, attach any forms and schedules behind Form 1040A in order of the "Attachment Sequence Number" shown in the upper right corner of the form or schedule. Then arrange all other statements or attachments in the same order as the forms and schedules they relate to and attach them last. Don't attach items unless required to do so.



Form 1040.

If you file a paper return, attach any forms and schedules behind Form 1040 in order of the "Attachment Sequence Number" shown in the upper right corner of the form or schedule. Then arrange all other statements or attachments in the same order as the forms and schedules they relate to and attach them last. Don't attach items unless required to do so.



Third Party Designee

You can authorize the IRS to discuss your return with your preparer, a friend, family member, or any other person you choose. If you check the "Yes" box in the Third party designee area of your 2016 tax return and provide the information required, you are authorizing:

  1. The IRS to call the designee to answer any questions that arise during the processing of your return, and

  2. The designee to:

    1. Give information that is missing from your return to the IRS,

    2. Call the IRS for information about the processing of your return or the status of your refund or payments,

    3. Receive copies of notices or transcripts related to your return, upon request, and

    4. Respond to certain IRS notices about math errors, offsets (see Refunds , later), and return preparation.

The authorization will automatically end no later than the due date (without any extensions) for filing your 2017 tax return. This is April 17, 2018, for most people.

See your form instructions for more information.

Signatures

You must sign and date your return. If you file a joint return, both you and your spouse must sign the return, even if only one of you had income.

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If you file a joint return, both spouses are generally liable for the tax, and the entire tax liability may be assessed against either spouse. See chapter 2.

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If you electronically file your return, you can use an electronic signature to sign your return. See Why Should I File Electronically, earlier.

If you are due a refund, it can’t be issued unless you have signed your return.

Enter your occupation. If you file a joint return, enter both your occupation and your spouse's occupation. Entering your daytime phone number may help speed the processing of your return.

When someone can sign for you.

You can appoint an agent to sign your return if you are:

  1. Unable to sign the return because of disease or injury,

  2. Absent from the United States for a continuous period of at least 60 days before the due date for filing your return, or

  3. Given permission to do so by the IRS office in your area.



Power of attorney.

A return signed by an agent in any of these cases must have a power of attorney (POA) attached that authorizes the agent to sign for you. You can use a POA that states that the agent is granted authority to sign the return, or you can use Form 2848. Part I of Form 2848 must state that the agent is granted authority to sign the return.



Court-appointed, conservator, or other fiduciary.

If you are a court-appointed conservator, guardian, or other fiduciary for a mentally or physically incompetent individual who has to file a tax return, sign your name for the individual. File Form 56.



Unable to sign.

If the taxpayer is mentally competent but physically unable to sign the return or POA, a valid "signature" is defined under state law. It can be anything that clearly indicates the taxpayer's intent to sign. For example, the taxpayer's "X" with the signatures of two witnesses might be considered a valid signature under a state's law.



Spouse unable to sign.

If your spouse is unable to sign for any reason, see Signing a joint return in chapter 2.



Child's return.

If a child has to file a tax return but can’t sign the return, the child's parent, guardian, or another legally responsible person must sign the child's name, followed by the words "By (your signature), parent for minor child."



Paid Preparer

Generally, anyone you pay to prepare, assist in preparing, or review your tax return must sign it and fill in the other blanks, including their Preparer Tax Identification Number (PTIN), in the paid preparer's area of your return.

Many preparers are required to e-file the tax returns they prepare. They sign these e-filed returns using their tax preparation software. However, you can choose to have your return completed on paper if you prefer. In that case, the paid preparer can sign the paper return manually or use a rubber stamp or mechanical device. The preparer is personally responsible for affixing his or her signature to the return.

If the preparer is self-employed (that is, not employed by any person or business to prepare the return), he or she should check the self-employed box in the Paid Preparer Use Only space on the return.

The preparer must give you a copy of your return in addition to the copy filed with the IRS.

If you prepare your own return, leave this area blank. If another person prepares your return and doesn't charge you, that person shouldn't sign your return.

If you have questions about whether a preparer must sign your return, contact any IRS office.

Refunds

When you complete your return, you will determine if you paid more income tax than you owed. If so, you can get a refund of the amount you overpaid or, if you file Form 1040 or Form 1040A, you can choose to apply all or part of the overpayment to your next year's (2017) estimated tax. You can’t have your overpayment applied to your 2017 estimated tax if you file Form 1040EZ.

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If you choose to have a 2016 overpayment applied to your 2017 estimated tax, you can’t change your mind and have any of it refunded to you after the due date (without extensions) of your 2016 return.

Follow the form instructions to complete the entries to claim your refund and/or to apply your overpayment to your 2017 estimated tax.

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If your refund for 2016 is large, you may want to decrease the amount of income tax withheld from your pay in 2017. See chapter 4 for more information.

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Instead of getting a paper check, you may be able to have your refund deposited directly into your checking or savings account, including an individual retirement arrangement. Follow the form instructions to request direct deposit. If the direct deposit can’t be done, the IRS will send a check instead.

Don't request a deposit of any part of your refund to an account that isn't in your name. Don't allow your tax preparer to deposit any part of your refund into his or her account. The number of direct deposits to a single account or prepaid debit card is limited to three refunds a year. After this limit is exceeded, paper checks will be sent instead. Learn more at IRS.gov/Individuals/Direct-Deposit-Limits.

myRA®.

If you already have a myRA® account, you can request a deposit of your refund (or part of it) to your myRA account. A myRA is a starter retirement account offered by the Department of the Treasury. For more information on myRA and to open a myRA account online, visit www.myRA.gov.



IRA.

You can have your refund (or part of it) directly deposited to a traditional IRA, Roth IRA (including a myRA), or SEP-IRA, but not a SIMPLE IRA. You must establish the IRA at a bank or financial institution before you request direct deposit.



TreasuryDirect®.

You can request a deposit of your refund to a TreasuryDirect® online account to buy U.S. Treasury marketable securities and savings bonds. For more information, go to www.treasurydirect.gov.



Split refunds.

If you choose direct deposit, you may be able to split the refund and have it deposited among two or three accounts or buy up to $5,000 in paper series I savings bonds. Complete Form 8888 and attach it to your return.



Overpayment less than one dollar.

If your overpayment is less than one dollar, you won't get a refund unless you ask for it in writing.



Cashing your refund check.

Cash your tax refund check soon after you receive it. Checks expire the last business day of the 12th month of issue.

If your check has expired, you can apply to the IRS to have it reissued.



Refund more or less than expected.

If you receive a check for a refund you aren’t entitled to, or for an overpayment that should have been credited to estimated tax, don't cash the check. Call the IRS.

If you receive a check for more than the refund you claimed, don't cash the check until you receive a notice explaining the difference.

If your refund check is for less than you claimed, it should be accompanied by a notice explaining the difference. Cashing the check doesn't stop you from claiming an additional amount of refund.

If you didn't receive a notice and you have any questions about the amount of your refund, you should wait 2 weeks. If you still haven’t received a notice, call the IRS.



Offset against debts.

If you are due a refund but haven’t paid certain amounts you owe, all or part of your refund may be used to pay all or part of the past-due amount. This includes past-due federal income tax, other federal debts (such as student loans), state income tax, child and spousal support payments, and state unemployment compensation debt. You will be notified if the refund you claimed has been offset against your debts.



Joint return and injured spouse.

When a joint return is filed and only one spouse owes a past-due amount, the other spouse can be considered an injured spouse. An injured spouse should file Form 8379, Injured Spouse Allocation, if both of the following apply and the spouse wants a refund of his or her share of the overpayment shown on the joint return.

  1. You aren’t legally obligated to pay the past-due amount.

  2. You made and reported tax payments (such as federal income tax withheld from your wages or estimated tax payments), or claimed a refundable tax credit (see the credits listed under Who Should File , earlier).

Note.

If the injured spouse's residence was in a community property state at any time during the tax year, special rules may apply. See the Instructions for Form 8379.

If you haven’t filed your joint return and you know that your joint refund will be offset, file Form 8379 with your return. You should receive your refund within 14 weeks from the date the paper return is filed or within 11 weeks from the date the return is filed electronically.

If you filed your joint return and your joint refund was offset, file Form 8379 by itself. When filed after offset, it can take up to 8 weeks to receive your refund. Don't attach the previously filed tax return, but do include copies of all Forms W-2 and W-2G for both spouses and any Forms 1099 that show income tax withheld. The processing of Form 8379 may be delayed if these forms aren’t attached, or if the form is incomplete when filed.

A separate Form 8379 must be filed for each tax year to be considered.

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An injured spouse claim is different from an innocent spouse relief request. An injured spouse uses Form 8379 to request the division of the tax overpayment attributed to each spouse. An innocent spouse uses Form 8857, Request for Innocent Spouse Relief, to request relief from joint liability for tax, interest, and penalties on a joint return for items of the other spouse (or former spouse) that were incorrectly reported on the joint return. For information on innocent spouses, see Relief from joint responsibility under Filing a Joint Return in chapter 2.



Amount You Owe

When you complete your return, you will determine if you have paid the full amount of tax that you owe. If you owe additional tax, you should pay it with your return.

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You don't have to pay if the amount you owe is under $1.

If the IRS figures your tax for you, you will receive a bill for any tax that is due. You should pay this bill within 30 days (or by the due date of your return, if later). See Tax Figured by IRS in chapter 30.

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If you don't pay your tax when due, you may have to pay a failure-to-pay penalty. See Penalties, later. For more information about your balance due, see Pub. 594.

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If the amount you owe for 2016 is large, you may want to increase the amount of income tax withheld from your pay or make estimated tax payments for 2017. See chapter 4 for more information.

How To Pay

You can pay online, by phone, by mobile device, in cash, or by check or money order. Don't include any estimated tax payment for 2017 in this payment. Instead, make the estimated tax payment separately.

Bad check or payment.

The penalty for writing a bad check to the IRS is $25 or 2% of the check, whichever is more. This penalty also applies to other forms of payment if the IRS doesn't receive the funds.



Pay online.

Paying online is convenient and secure and helps make sure we get your payments on time.

You can pay online with a direct transfer from your bank account using IRS Direct Pay, the Electronic Federal Tax Payment System, or by debit or credit card.

To pay your taxes online or for more information, go to IRS.gov/payments.



Pay by phone.

Paying by phone is another safe and secure method of paying electronically. Use one of the following methods.

  • Electronic Federal Tax Payment System (EFTPS).

  • Debit or credit card.

To use EFTPS, you must be enrolled either online or have an enrollment form mailed to you. To make a payment using EFTPS call 1-800-555-4477 (English) or 1-800-244-4829 (Español). People who are deaf, hard of hearing, or have a speech disability and have access to TTY/TDD equipment can call 1-800-733-4829. For more information about EFTPS, go to IRS.gov/payments or www.eftps.gov.

To pay using a debit or credit card, you can call one of the following service providers. There is a convenience fee charged by these providers that varies by provider, card type, and payment amount.

Link2Gov Corporation
1-888-PAY-1040TM (1-888-729-1040)
www.PAY1040.com

WorldPay US, Inc.
1-844-PAY-TAX-8TM (1-844-729-8298)
www.payUSAtax.com

Official Payments
1-888-UPAY-TAXTM (1-888-872-9829)
www.officialpayments.com

For the latest details on how to pay by phone, go to IRS.gov/payments.



Pay by mobile device.

To pay through your mobile device, download the IRS2Go app.



Pay by cash.

Cash is a new in-person payment option for individuals provided through retail partners with a maximum of $1,000 per day per transaction. To make a cash payment you must first be registered online at www.officialpayments.com.



Pay by check or money order.

Make your check or money order payable to "United States Treasury" for the full amount due. Don't send cash. Don't attach the payment to your return. Show your correct name, address, SSN, daytime phone number, and the tax year and form number on the front of your check or money order. If you are filing a joint return, enter the SSN shown first on your tax return.



Estimated tax payments.

Don't include any 2017 estimated tax payment in the payment for your 2016 income tax return. See chapter 4 for information on how to pay estimated tax.



Interest

Interest is charged on tax you don't pay by the due date of your return. Interest is charged even if you get an extension of time for filing.

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If the IRS figures your tax for you, to avoid interest for late payment, you must pay the bill within 30 days of the date of the bill or by the due date of your return, whichever is later. For information, see Tax Figured by IRS in chapter 30.

Interest on penalties.

Interest is charged on the failure-to-file penalty, the accuracy-related penalty, and the fraud penalty from the due date of the return (including extensions) to the date of payment. Interest on other penalties starts on the date of notice and demand, but isn't charged on penalties paid within 21 calendar days from the date of the notice (or within 10 business days if the notice is for $100,000 or more).



Interest due to IRS error or delay.

All or part of any interest you were charged can be forgiven if the interest is due to an unreasonable error or delay by an officer or employee of the IRS in performing a ministerial or managerial act.

A ministerial act is a procedural or mechanical act that occurs during the processing of your case. A managerial act includes personnel transfers and extended personnel training. A decision concerning the proper application of federal tax law isn't a ministerial or managerial act.

The interest can be forgiven only if you aren’t responsible in any important way for the error or delay and the IRS has notified you in writing of the deficiency or payment. For more information, see Pub. 556.



Interest and certain penalties may also be suspended for a limited period if you filed your return by the due date (including extensions) and the IRS doesn't provide you with a notice specifically stating your liability and the basis for it before the close of the 36-month period beginning on the later of:

  • The date the return is filed, or

  • The due date of the return without regard to extensions.

For more information, see Pub. 556.

Installment Agreement

If you can’t pay the full amount due with your return, you can ask to make monthly installment payments for the full or a partial amount. However, you will be charged interest and may be charged a late payment penalty on the tax not paid by the date your return is due, even if your request to pay in installments is granted. If your request is granted, you must also pay a fee. To limit the interest and penalty charges, pay as much of the tax as possible with your return. But before requesting an installment agreement, you should consider other less costly alternatives, such as a bank loan or credit card payment.

To apply for an installment agreement online, go to IRS.gov/opa. You can also use Form 9465.

In addition to paying by check or money order, you can use a credit or debit card or direct payment from your bank account to make installment agreement payments. See How To Pay , earlier.

Gift To Reduce Debt Held by the Public

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You can make a contribution (gift) to reduce debt held by the public. If you wish to do so, make a separate check payable to "Bureau of the Fiscal Service."

Send your check to:

Bureau of the Fiscal Service
ATTN: Department G
P.O. Box 2188
Parkersburg, WV 26106-2188

Or, enclose your separate check in the envelope with your income tax return. Don't add this gift to any tax you owe.

For information on making this type of gift online, go to www.treasurydirect.gov and click on "How To Make a Contribution to Reduce the Debt."

You may be able to deduct this gift as a charitable contribution on next year's tax return if you itemize your deductions on Schedule A (Form 1040).

Name and Address

After you have completed your return, fill in your name and address in the appropriate area of Form 1040, Form 1040A, or Form 1040EZ.

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You must include your SSN in the correct place on your tax return.

P.O. box.

If your post office doesn't deliver mail to your street address and you have a P.O. box, enter your P.O. box number on the line for your present home address instead of your street address.



Foreign address.

If your address is outside the United States or its possessions or territories, enter the city name on the appropriate line of your return. Don't enter any other information on that line, but also complete the line listing:

  1. Foreign country name,

  2. Foreign province/state/county, and

  3. Foreign postal code.

Follow the country's practice for entering the postal code and the name of the province, county, or state.



Where Do I File?

After you complete your return, you must send it to the IRS. You can mail it or you may be able to file it electronically. See Why Should I File Electronically , earlier.

Mailing your paper return.

Mail your paper return to the address shown in your tax return instructions.



What Happens After I File?

After you send your return to the IRS, you may have some questions. This section discusses concerns you may have about recordkeeping, your refund, and what to do if you move.

What Records Should I Keep?

This part discusses why you should keep records, what kinds of records you should keep, and how long you should keep them.

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You must keep records so that you can prepare a complete and accurate income tax return. The law doesn't require any special form of records. However, you should keep all receipts, canceled checks or other proof of payment, and any other records to support any deductions or credits you claim.

If you file a claim for refund, you must be able to prove by your records that you have overpaid your tax.

This part doesn't discuss the records you should keep when operating a business. For information on business records, see Pub. 583, Starting a Business and Keeping Records.

Why Keep Records?

Good records help you:

  • Identify sources of income. Your records can identify the sources of your income to help you separate business from nonbusiness income and taxable from nontaxable income.

  • Keep track of expenses. You can use your records to identify expenses for which you can claim a deduction. This helps you determine if you can itemize deductions on your tax return.

  • Keep track of the basis of property. You need to keep records that show the basis of your property. This includes the original cost or other basis of the property and any improvements you made.

  • Prepare tax returns. You need records to prepare your tax return.

  • Support items reported on tax returns. The IRS may question an item on your return. Your records will help you explain any item and arrive at the correct tax. If you can’t produce the correct documents, you may have to pay additional tax and be subject to penalties.

Kinds of Records to Keep

The IRS doesn't require you to keep your records in a particular way. Keep them in a manner that allows you and the IRS to determine your correct tax.

You can use your checkbook to keep a record of your income and expenses. You also need to keep documents, such as receipts and sales slips, that can help prove a deduction.

In this section you will find guidance about basic records that everyone should keep. The section also provides guidance about specific records you should keep for certain items.

Electronic records.

All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law.

For details on electronic storage system requirements, see Revenue Procedure 97-22, which is on page 9 of Internal Revenue Bulletin 1997-13 at IRS.gov/pub/irs-irbs/irb97-13.pdf.



Copies of tax returns.

You should keep copies of your tax returns as part of your tax records. They can help you prepare future tax returns, and you will need them if you file an amended return or are audited. Copies of your returns and other records can be helpful to your survivor or the executor or administrator of your estate.

If necessary, you can request a copy of a return and all attachments (including Form W-2) from the IRS by using Form 4506. There is a charge for a copy of a return. For information on the cost and where to file, see the Instructions for Form 4506.

If you just need information from your return, you can order a transcript in one of the following ways.

There is no fee for a transcript. For more information, see Form 4506-T.



Basic Records

Basic records are documents that everybody should keep. These are the records that prove your income and expenses. If you own a home or investments, your basic records should contain documents related to those items.

Income.

Your basic records prove the amounts you report as income on your tax return. Your income may include wages, dividends, interest, and partnership or S corporation distributions. Your records also can prove that certain amounts aren’t taxable, such as tax-exempt interest.



Note.

If you receive a Form W-2, keep Copy C until you begin receiving social security benefits. This will help protect your benefits in case there is a question about your work record or earnings in a particular year.

Expenses.

Your basic records prove the expenses for which you claim a deduction (or credit) on your tax return. Your deductions may include alimony, charitable contributions, mortgage interest, and real estate taxes. You also may have child care expenses for which you can claim a credit.



Home.

Your basic records should enable you to determine the basis or adjusted basis of your home. You need this information to determine if you have a gain or loss when you sell your home or to figure depreciation if you use part of your home for business purposes or for rent. Your records should show the purchase price, settlement or closing costs, and the cost of any improvements. They also may show any casualty losses deducted and insurance reimbursements for casualty losses.

For detailed information on basis, including which settlement or closing costs are included in the basis of your home, see chapter 13.

When you sell your home, your records should show the sales price and any selling expenses, such as commissions. For information on selling your home, see chapter 15.



Investments.

Your basic records should enable you to determine your basis in an investment and whether you have a gain or loss when you sell it. Investments include stocks, bonds, and mutual funds. Your records should show the purchase price, sales price, and commissions. They may also show any reinvested dividends, stock splits and dividends, load charges, and original issue discount (OID).

For information on stocks, bonds, and mutual funds, see chapters 8, 13, 14, and 16.



Proof of Payment

One of your basic records is proof of payment. You should keep these records to support certain amounts shown on your tax return. Proof of payment alone isn't proof that the item claimed on your return is allowable. You also should keep other documents that will help prove that the item is allowable.

Generally, you prove payment with a cash receipt, financial account statement, credit card statement, canceled check, or substitute check. If you make payments in cash, you should get a dated and signed receipt showing the amount and the reason for the payment.

If you make payments using your bank account, you may be able to prove payment with an account statement.

Account statements.

You may be able to prove payment with a legible financial account statement prepared by your bank or other financial institution.



Pay statements.

You may have deductible expenses withheld from your paycheck, such as union dues or medical insurance premiums. You should keep your year-end or final pay statements as proof of payment of these expenses.



How Long to Keep Records

You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support items shown on your return until the period of limitations for that return runs out.

The period of limitations is the period of time in which you can amend your return to claim a credit or refund or the IRS can assess additional tax. Table 1-7 contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period beginning after the return was filed. Returns filed before the due date are treated as being filed on the due date.

Table 1-7. Period of Limitations

IF you... THEN the
period is...
1 File a return and (2), (3), and (4) don't apply to you 3 years
2 Don't report income that you should and it is more than 25% of the gross income shown on your return 6 years
3 File a fraudulent return No limit
4 Don't file a return No limit
5 File a claim for credit or refund after you filed your return The later of 3 years or 2 years after tax was paid
6 File a claim for a loss from worthless securities or bad debt deduction 7 years


Property.

Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure your basis for computing gain or loss when you sell or otherwise dispose of the property.

Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up. You must keep the records on the old property, as well as the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.



Refund Information

You can go online to check the status of your 2016 refund 24 hours after the IRS receives your e-filed return, or 4 weeks after you mail a paper return. If you filed Form 8379 with your return, allow 14 weeks (11 weeks if you filed electronically) before checking your refund status. Be sure to have a copy of your 2016 tax return handy because you will need to know the filing status, the first SSN shown on the return, and the exact whole-dollar amount of the refund. To check on your refund, do one of the following.

  • Go to IRS.gov/refunds.

  • Download the free IRS2Go app to your smart phone and use it to check your refund status.

  • Call the automated refund hotline at 1-800-829-1954.

Interest on Refunds

If you are due a refund, you may get interest on it. The interest rates are adjusted quarterly.

If the refund is made within 45 days after the due date of your return, no interest will be paid. If you file your return after the due date (including extensions), no interest will be paid if the refund is made within 45 days after the date you filed. If the refund isn't made within this 45-day period, interest will be paid from the due date of the return or from the date you filed, whichever is later.

Accepting a refund check doesn't change your right to claim an additional refund and interest. File your claim within the period of time that applies. See Amended Returns and Claims for Refund , later. If you don't accept a refund check, no more interest will be paid on the overpayment included in the check.

Interest on erroneous refund.

All or part of any interest you were charged on an erroneous refund generally will be forgiven. Any interest charged for the period before demand for repayment was made will be forgiven unless:

  1. You, or a person related to you, caused the erroneous refund in any way, or

  2. The refund is more than $50,000.

For example, if you claimed a refund of $100 on your return, but the IRS made an error and sent you $1,000, you wouldn't be charged interest for the time you held the $900 difference. You must, however, repay the $900 when the IRS asks.



Change of Address

If you have moved, file your return using your new address.

If you move after you filed your return, you should give the IRS clear and concise notification of your change of address. The notification may be written, electronic, or oral. Send written notification to the Internal Revenue Service Center serving your old address. You can use Form 8822, Change of Address. If you are expecting a refund, also notify the post office serving your old address. This will help in forwarding your check to your new address (unless you chose direct deposit of your refund). For more information, see Revenue Procedure 2010-16, 2010-19 I.R.B. 664, available at IRS.gov/irb/2010-19_IRB/ar07.html.

Be sure to include your SSN (and the name and SSN of your spouse, if you filed a joint return) in any correspondence with the IRS.

What If I Made a Mistake?

Errors may delay your refund or result in notices being sent to you. If you discover an error, you can file an amended return or claim for refund.

Amended Returns and Claims for Refund

You should correct your return if, after you have filed it, you find that:

  1. You didn't report some income,

  2. You claimed deductions or credits you shouldn't have claimed,

  3. You didn't claim deductions or credits you could have claimed, or

  4. You should have claimed a different filing status. (Once you file a joint return, you can’t choose to file separate returns for that year after the due date of the return. However, an executor may be able to make this change for a deceased spouse.)

If you need a copy of your return, see Copies of tax returns under Kinds of Records to Keep, earlier in this chapter.

Form 1040X.

Use Form 1040X to correct a return you have already filed. An amended tax return can’t be filed electronically.



Completing Form 1040X.

On Form 1040X, enter your income, deductions, and credits as you originally reported them on your return, the changes you are making, and the corrected amounts. Then figure the tax on the corrected amount of taxable income and the amount you owe or your refund.

If you owe tax, pay the full amount with Form 1040X. The tax owed won't be subtracted from any amount you had credited to your estimated tax.

If you can’t pay the full amount due with your return, you can ask to make monthly installment payments. See Installment Agreement , earlier.

If you overpaid tax, you can have all or part of the overpayment refunded to you, or you can apply all or part of it to your estimated tax. If you choose to get a refund, it will be sent separately from any refund shown on your original return.



Filing Form 1040X.

When completing Form 1040X, don't forget to show the year of your original return and explain all changes you made. Be sure to attach any forms or schedules needed to explain your changes. Mail your Form 1040X to the Internal Revenue Service Center serving the area where you now live (as shown in the instructions to the form). However, if you are filing Form 1040X in response to a notice you received from the IRS, mail it to the address shown on the notice.

File a separate form for each tax year involved.



Time for filing a claim for refund.

Generally, you must file your claim for a credit or refund within 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. Returns filed before the due date (without regard to extensions) are considered filed on the due date (even if the due date was a Saturday, Sunday, or legal holiday). These time periods are suspended while you are financially disabled, discussed later.

If the last day for claiming a credit or refund is a Saturday, Sunday, or legal holiday, you can file the claim on the next business day.

If you don't file a claim within this period, you may not be entitled to a credit or a refund.



Protective claim for refund.

Generally, a protective claim is a formal claim or amended return for credit or refund normally based on current litigation or expected changes in tax law or other legislation. You file a protective claim when your right to a refund is contingent on future events and may not be determinable until after the statute of limitations expires. A valid protective claim doesn't have to list a particular dollar amount or demand an immediate refund. However, a valid protective claim must:

  • Be in writing and signed,

  • Include your name, address, SSN or ITIN, and other contact information,

  • Identify and describe the contingencies affecting the claim,

  • Clearly alert the IRS to the essential nature of the claim, and

  • Identify the specific year(s) for which a refund is sought.

Mail your protective claim for refund to the address listed in the instructions for Form 1040X, under Where To File.

Generally, the IRS will delay action on the protective claim until the contingency is resolved.



Limit on amount of refund.

If you file your claim within 3 years after the date you filed your return, the credit or refund can’t be more than the part of the tax paid within the 3-year period (plus any extension of time for filing your return) immediately before you filed the claim. This time period is suspended while you are financially disabled, discussed later.



Tax paid.

Payments, including estimated tax payments, made before the due date (without regard to extensions) of the original return are considered paid on the due date. For example, income tax withheld during the year is considered paid on the due date of the return, April 15 for most taxpayers.

Example 1.

You made estimated tax payments of $500 and got an automatic extension of time to October 15, 2013, to file your 2012 income tax return. When you filed your return on that date, you paid an additional $200 tax. On October 15, 2016, you filed an amended return and claimed a refund of $700. Because you filed your claim within 3 years after you filed your original return, you can get a refund of up to $700, the tax paid within the 3 years plus the 6-month extension period immediately before you filed the claim.

Example 2.

The situation is the same as in Example 1, except you filed your return on October 30, 2013, 2 weeks after the extension period ended. You paid an additional $200 on that date. On October 31, 2016, you filed an amended return and claimed a refund of $700. Although you filed your claim within 3 years from the date you filed your original return, the refund was limited to $200, the tax paid within the 3 years plus the 6-month extension period immediately before you filed the claim. The estimated tax of $500 paid before that period can’t be refunded or credited.

If you file a claim more than 3 years after you file your return, the credit or refund can’t be more than the tax you paid within the 2 years immediately before you file the claim.

Example.

You filed your 2012 tax return on April 15, 2013. You paid taxes of $500. On November 5, 2014, after an examination of your 2012 return, you had to pay an additional tax of $200. On May 12, 2016, you file a claim for a refund of $300. However, because you filed your claim more than 3 years after you filed your return, your refund will be limited to the $200 you paid during the 2 years immediately before you filed your claim.



Financially disabled.

The time periods for claiming a refund are suspended for the period in which you are financially disabled. For a joint income tax return, only one spouse has to be financially disabled for the time period to be suspended. You are financially disabled if you are unable to manage your financial affairs because of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. However, you aren’t treated as financially disabled during any period your spouse or any other person is authorized to act on your behalf in financial matters.

To claim that you are financially disabled, you must send in the following written statements with your claim for refund.

  1. A statement from your qualified physician that includes:

    1. The name and a description of your physical or mental impairment,

    2. The physician's medical opinion that the impairment prevented you from managing your financial affairs,

    3. The physician's medical opinion that the impairment was or can be expected to result in death, or that its duration has lasted, or can be expected to last, at least 12 months,

    4. The specific time period (to the best of the physician's knowledge), and

    5. The following certification signed by the physician: "I hereby certify that, to the best of my knowledge and belief, the above representations are true, correct, and complete."

  2. A statement made by the person signing the claim for credit or refund that no person, including your spouse, was authorized to act on your behalf in financial matters during the period of disability (or the exact dates that a person was authorized to act for you).



Exceptions for special types of refunds.

If you file a claim for one of the items in the following list, the dates and limits discussed earlier may not apply. These items, and where to get more information, are as follows.

  • Bad debt. See Nonbusiness Bad Debts in chapter 14.

  • Worthless security. See Worthless securities in chapter 14.

  • Foreign tax paid or accrued. See Pub. 514.

  • Net operating loss carryback. See Pub. 536.

  • Carryback of certain business tax credits. See Form 3800.

  • Claim based on an agreement with the IRS extending the period for assessment of tax.



Processing claims for refund.

Claims are usually processed 8–12 weeks after they are filed. Your claim may be accepted as filed, disallowed, or subject to examination. If a claim is examined, the procedures are the same as in the examination of a tax return.

If your claim is disallowed, you will receive an explanation of why it was disallowed.



Taking your claim to court.

You can sue for a refund in court, but you must first file a timely claim with the IRS. If the IRS disallows your claim or doesn't act on your claim within 6 months after you file it, you can then take your claim to court. For information on the burden of proof in a court proceeding, see Pub. 556.



The IRS provides a direct method to move your claim to court if:

  • You are filing a claim for a credit or refund based solely on contested income tax or on estate tax or gift tax issues considered in your previously examined returns, and

  • You want to take your case to court instead of appealing it within the IRS.

When you file your claim with the IRS, you get the direct method by requesting in writing that your claim be immediately rejected. A notice of claim disallowance will be sent to you.

You have 2 years from the date of mailing of the notice of claim disallowance to file a refund suit in the United States District Court having jurisdiction or in the United States Court of Federal Claims.

Interest on refund.

If you receive a refund because of your amended return, interest will be paid on it from the due date of your original return or the date you filed your original return, whichever is later, to the date you filed the amended return. However, if the refund isn't made within 45 days after you file the amended return, interest will be paid up to the date the refund is paid.



Reduced refund.

Your refund may be reduced by an additional tax liability that has been assessed against you.

Also, your refund may be reduced by amounts you owe for past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support, or certain other federal nontax debts, such as student loans. If your spouse owes these debts, see Offset against debts , under Refunds, earlier, for the correct refund procedures to follow.



Effect on state tax liability.

If your return is changed for any reason, it may affect your state income tax liability. This includes changes made as a result of an examination of your return by the IRS. Contact your state tax agency for more information.



Penalties

The law provides penalties for failure to file returns or pay taxes as required.

Civil Penalties

If you don't file your return and pay your tax by the due date, you may have to pay a penalty. You may also have to pay a penalty if you substantially understate your tax, understate a reportable transaction, file an erroneous claim for refund or credit, file a frivolous tax submission, or fail to supply your SSN or individual taxpayer identification number. If you provide fraudulent information on your return, you may have to pay a civil fraud penalty.

Filing late.

If you don't file your return by the due date (including extensions), you may have to pay a failure-to-file penalty. The penalty is usually 5% for each month or part of a month that a return is late, but not more than 25%. The penalty is based on the tax not paid by the due date (without regard to extensions).



Fraud.

If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.



Return over 60 days late.

If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $205 (adjusted for inflation) or 100% of the unpaid tax.



Exception.

You won't have to pay the penalty if you show that you failed to file on time because of reasonable cause and not because of willful neglect.



Paying tax late.

You will have to pay a failure-to-pay penalty of ½ of 1% (0.50%) of your unpaid taxes for each month, or part of a month, after the due date that the tax isn't paid. This penalty doesn't apply during the automatic 6-month extension of time to file period if you paid at least 90% of your actual tax liability on or before the due date of your return and pay the balance when you file the return.

The monthly rate of the failure-to-pay penalty is half the usual rate (0.25% instead of 0.50%) if an installment agreement is in effect for that month. You must have filed your return by the due date (including extensions) to qualify for this reduced penalty.

If a notice of intent to levy is issued, the rate will increase to 1% at the start of the first month beginning at least 10 days after the day that the notice is issued. If a notice and demand for immediate payment is issued, the rate will increase to 1% at the start of the first month beginning after the day that the notice and demand is issued.

This penalty can’t be more than 25% of your unpaid tax. You won't have to pay the penalty if you can show that you had a good reason for not paying your tax on time.



Combined penalties.

If both the failure-to-file penalty and the failure-to-pay penalty (discussed earlier) apply in any month, the 5% (or 15%) failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $205 (adjusted for inflation) or 100% of the unpaid tax.



Accuracy-related penalty.

You may have to pay an accuracy-related penalty if you underpay your tax because:

  1. You show negligence or disregard of the rules or regulations,

  2. You substantially understate your income tax,

  3. You claim tax benefits for a transaction that lacks economic substance, or

  4. You fail to disclose a foreign financial asset.

The penalty is equal to 20% of the underpayment. The penalty is 40% of any portion of the underpayment that is attributable to an undisclosed noneconomic substance transaction or an undisclosed foreign financial asset transaction. The penalty won't be figured on any part of an underpayment on which the fraud penalty (discussed later) is charged.



Negligence or disregard.

The term "negligence" includes a failure to make a reasonable attempt to comply with the tax law or to exercise ordinary and reasonable care in preparing a return. Negligence also includes failure to keep adequate books and records. You won't have to pay a negligence penalty if you have a reasonable basis for a position you took.

The term "disregard" includes any careless, reckless, or intentional disregard.



Adequate disclosure.

You can avoid the penalty for disregard of rules or regulations if you adequately disclose on your return a position that has at least a reasonable basis. See Disclosure statement , later.

This exception won't apply to an item that is attributable to a tax shelter. In addition, it won't apply if you fail to keep adequate books and records, or substantiate items properly.



Substantial understatement of income tax.

You understate your tax if the tax shown on your return is less than the correct tax. The understatement is substantial if it is more than the larger of 10% of the correct tax or $5,000. However, the amount of the understatement may be reduced to the extent the understatement is due to:

  1. Substantial authority, or

  2. Adequate disclosure and a reasonable basis.

If an item on your return is attributable to a tax shelter, there is no reduction for an adequate disclosure. However, there is a reduction for a position with substantial authority, but only if you reasonably believed that your tax treatment was more likely than not the proper treatment.



Substantial authority.

Whether there is or was substantial authority for the tax treatment of an item depends on the facts and circumstances. Some of the items that may be considered are court opinions, Treasury regulations, revenue rulings, revenue procedures, and notices and announcements issued by the IRS and published in the Internal Revenue Bulletin that involve the same or similar circumstances as yours.



Disclosure statement.

To adequately disclose the relevant facts about your tax treatment of an item, use Form 8275. You must also have a reasonable basis for treating the item the way you did.

In cases of substantial understatement only, items that meet the requirements of Revenue Procedure 2016-13 (or later update) are considered adequately disclosed on your return without filing Form 8275.

Use Form 8275-R to disclose items or positions contrary to regulations.



Transaction lacking economic substance.

For more information on economic substance, see section 7701(o).



Foreign financial asset.

For more information on undisclosed foreign financial assets, see section 6662(j).



Reasonable cause.

You won't have to pay a penalty if you show a good reason (reasonable cause) for the way you treated an item. You must also show that you acted in good faith. This doesn't apply to a transaction that lacks economic substance.



Filing erroneous claim for refund or credit.

You may have to pay a penalty if you file an erroneous claim for refund or credit. The penalty is equal to 20% of the disallowed amount of the claim, unless you can show a reasonable basis for the way you treated an item. However, any disallowed amount due to a transaction that lacks economic substance won't be treated as having a reasonable basis. The penalty won't be figured on any part of the disallowed amount of the claim that relates to the earned income credit or on which the accuracy-related or fraud penalties are charged.



Frivolous tax submission.

You may have to pay a penalty of $5,000 if you file a frivolous tax return or other frivolous submissions. A frivolous tax return is one that doesn't include enough information to figure the correct tax or that contains information clearly showing that the tax you reported is substantially incorrect. For more information on frivolous returns, frivolous submissions, and a list of positions that are identified as frivolous, see Notice 2010-33, 2010-17 I.R.B. 609, available at IRS.gov/irb/2010-17_IRB/ar13.html.

You will have to pay the penalty if you filed this kind of return or submission based on a frivolous position or a desire to delay or interfere with the administration of federal tax laws. This includes altering or striking out the preprinted language above the space provided for your signature.

This penalty is added to any other penalty provided by law.



Fraud.

If there is any underpayment of tax on your return due to fraud, a penalty of 75% of the underpayment due to fraud will be added to your tax.



Joint return.

The fraud penalty on a joint return doesn't apply to a spouse unless some part of the underpayment is due to the fraud of that spouse.



Failure to supply SSN.

If you don't include your SSN or the SSN of another person where required on a return, statement, or other document, you will be subject to a penalty of $50 for each failure. You will also be subject to a penalty of $50 if you don't give your SSN to another person when it is required on a return, statement, or other document.

For example, if you have a bank account that earns interest, you must give your SSN to the bank. The number must be shown on the Form 1099-INT or other statement the bank sends you. If you don't give the bank your SSN, you will be subject to the $50 penalty. (You also may be subject to "backup" withholding of income tax. See chapter 4.)

You won't have to pay the penalty if you are able to show that the failure was due to reasonable cause and not willful neglect.



Criminal Penalties

You may be subject to criminal prosecution (brought to trial) for actions such as:

  1. Tax evasion,

  2. Willful failure to file a return, supply information, or pay any tax due,

  3. Fraud and false statements,

  4. Preparing and filing a fraudulent return, or

  5. Identity theft.

Identity Theft

Identity theft occurs when someone uses your personal information such as your name, SSN, or other identifying information, without your permission, to commit fraud or other crimes. An identity thief may use your SSN to get a job or may file a tax return using your SSN to receive a refund.

To reduce your risk:

  • Protect your SSN,

  • Ensure your employer is protecting your SSN, and

  • Be careful when choosing a tax preparer.

If your tax records are affected by identity theft and you receive a notice from the IRS, respond right away to the name and phone number printed on the IRS notice or letter.

If your SSN has been lost or stolen or you suspect you are a victim of tax-related identity theft, visit IRS.gov/identitytheft to learn what steps you should take.

For more information, see Pub. 5027.

Victims of identity theft who are experiencing economic harm or a systemic problem, or are seeking help in resolving tax problems that have not been resolved through normal channels, may be eligible for Taxpayer Advocate Service (TAS) assistance. You can reach TAS by calling the National Taxpayer Advocate helpline at 1-877-777-4778 or TTY/TDD at 1-800-829-4059. Deaf or hard-of-hearing individuals can also contact the IRS through relay services such as the Federal Relay Service available at www.gsa.gov/fedrelay.

Protect yourself from suspicious emails or phishing schemes.

Phishing is the creation and use of email and websites designed to mimic legitimate business emails and websites. The most common form is the act of sending an email to a user falsely claiming to be an established legitimate enterprise in an attempt to scam the user into surrendering private information that will be used for identity theft.

The IRS doesn't initiate contacts with taxpayers via emails. Also, the IRS doesn't request detailed personal information through email or ask taxpayers for the PIN numbers, passwords, or similar secret access information for their credit card, bank, or other financial accounts.

If you receive an unsolicited email claiming to be from the IRS, forward the message to phishing@irs.gov. You may also report misuse of the IRS name, logo, forms or other IRS property to the Treasury Inspector General for Tax Administration toll-free at 1-800-366-4484. You can forward suspicious emails to the Federal Trade Commission at spam@uce.gov or contact them at www.ftc.gov/idtheft or 1-877-IDTHEFT (1-877-438-4338).



Go to IRS.gov/idprotection to learn more about identity theft and how to reduce your risk.

2. Filing Status

Introduction

This chapter helps you determine which filing status to use. There are five filing statuses.

  • Single.

  • Married Filing Jointly.

  • Married Filing Separately.

  • Head of Household.

  • Qualifying Widow(er) With Dependent Child.

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If more than one filing status applies to you, choose the one that will give you the lowest tax.

You must determine your filing status before you can determine whether you must file a tax return (chapter 1), your standard deduction (chapter 20), and your tax (chapter 30). You also use your filing status to determine whether you are eligible to claim certain deductions and credits.

Useful Items - You may want to see:

Publication

  • 501 Exemptions, Standard Deduction, and Filing Information

  • 519 U.S. Tax Guide for Aliens

  • 555 Community Property

Marital Status

In general, your filing status depends on whether you are considered unmarried or married.

Unmarried persons.

You are considered unmarried for the whole year if, on the last day of your tax year, you are either:

  • Unmarried, or

  • Legally separated from your spouse under a divorce or separate maintenance decree. State law governs whether you are married or legally separated under a divorce or separate maintenance decree.



Divorced persons.

If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year.



Divorce and remarriage.

If you obtain a divorce for the sole purpose of filing tax returns as unmarried individuals, and at the time of divorce you intend to and do, in fact, remarry each other in the next tax year, you and your spouse must file as married individuals in both years.



Annulled marriages.

If you obtain a court decree of annulment, which holds that no valid marriage ever existed, you are considered unmarried even if you filed joint returns for earlier years. You must file Form 1040X, Amended U.S. Individual Income Tax Return, claiming single or head of household status for all tax years that are affected by the annulment and not closed by the statute of limitations for filing a tax return. Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. If you filed your original return early (for example, March 1) your return is considered filed on the due date (generally April 15). However, if you had an extension to file (for example, until October 15) but you filed earlier and we received it on July 1, your return is considered filed on July 1.



Head of household or qualifying widow(er) with dependent child.

If you are considered unmarried, you may be able to file as a head of household or as a qualifying widow(er) with a dependent child. See Head of Household and Qualifying Widow(er) With Dependent Child to see if you qualify.



Married persons.

If you are considered married, you and your spouse can file a joint return or separate returns.



Considered married.

You are considered married for the whole year if, on the last day of your tax year, you and your spouse meet any one of the following tests.

  1. You are married and living together.

  2. You are living together in a common law marriage recognized in the state where you now live or in the state where the common law marriage began.

  3. You are married and living apart, but not legally separated under a decree of divorce or separate maintenance.

  4. You are separated under an interlocutory (not final) decree of divorce.



Same-sex marriage.

For federal tax purposes, the marriage of a same-sex couple is treated the same as the marriage of a man to a woman. The term “spouse” in this chapter includes an individual married to a person of the same sex. However, individuals who have entered into a registered domestic partnership, civil union, or other similar relationship that isn’t considered a marriage under state law aren’t considered married for federal tax purposes. For more details, see Pub. 501.



Spouse died during the year.

If your spouse died during the year, you are considered married for the whole year for filing status purposes.

If you didn't remarry before the end of the tax year, you can file a joint return for yourself and your deceased spouse. For the next 2 years, you may be entitled to the special benefits described later under Qualifying Widow(er) With Dependent Child .

If you remarried before the end of the tax year, you can file a joint return with your new spouse. Your deceased spouse's filing status is married filing separately for that year.



Married persons living apart.

If you live apart from your spouse and meet certain tests, you may be able to file as head of household even if you aren't divorced or legally separated. If you qualify to file as head of household instead of married filing separately, your standard deduction will be higher. Also, your tax may be lower, and you may be able to claim the earned income credit. See Head of Household , later.



Single

Your filing status is single if you are considered unmarried and you don’t qualify for another filing status. To determine your marital status, see Marital Status , earlier.

Widow(er).

Your filing status may be single if you were widowed before January 1, 2016, and didn't remarry before the end of 2016. You may, however, be able to use another filing status that will give you a lower tax. See Head of Household and Qualifying Widow(er) With Dependent Child , later, to see if you qualify.



How to file.

You can file Form 1040. If you have taxable income of less than $100,000, you may be able to file Form 1040A. If, in addition, you have no dependents, and are under 65 and not blind, and meet other requirements, you can file Form 1040EZ. If you file Form 1040A or Form 1040, show your filing status as single by checking the box on line 1. Use the Single column of the Tax Table or Section A of the Tax Computation Worksheet to figure your tax.



Married Filing Jointly

You can choose married filing jointly as your filing status if you are considered married and both you and your spouse agree to file a joint return. On a joint return, you and your spouse report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions.

If you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (if you don’t itemize deductions) may be higher, and you may qualify for tax benefits that don’t apply to other filing statuses.

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If you and your spouse each have income, you may want to figure your tax both on a joint return and on separate returns (using the filing status of married filing separately). You can choose the method that gives the two of you the lower combined tax.

How to file.

If you file as married filing jointly, you can use Form 1040. If you and your spouse have taxable income of less than $100,000, you may be able to file Form 1040A. If, in addition, you and your spouse have no dependents, are both under 65 and not blind, and meet other requirements, you can file Form 1040EZ. If you file Form 1040 or Form 1040A, show this filing status by checking the box on line 2. Use the Married filing jointly column of the Tax Table or Section B of the Tax Computation Worksheet to figure your tax.



Spouse died.

If your spouse died during the year, you are considered married for the whole year and can choose married filing jointly as your filing status. See Spouse died during the year under Marital Status, earlier, for more information.

If your spouse died in 2017 before filing a 2016 return, you can choose married filing jointly as your filing status on your 2016 return.



Divorced persons.

If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year and you can’t choose married filing jointly as your filing status.



Filing a Joint Return

Both you and your spouse must include all of your income, exemptions, and deductions on your joint return.

Accounting period.

Both of you must use the same accounting period, but you can use different accounting methods. See Accounting Periods and Accounting Methods in chapter 1.



Joint responsibility.

Both of you may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. This means that if one spouse doesn't pay the tax due, the other may have to. Or, if one spouse doesn't report the correct tax, both spouses may be responsible for any additional taxes assessed by the IRS. One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse.



You may want to file separately if:

  • You believe your spouse isn't reporting all of his or her income, or

  • You don’t want to be responsible for any taxes due if your spouse doesn't have enough tax withheld or doesn't pay enough estimated tax.

Divorced taxpayer.

You may be held jointly and individually responsible for any tax, interest, and penalties due on a joint return filed before your divorce. This responsibility may apply even if your divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns.



Relief from joint responsibility.

In some cases, one spouse may be relieved of joint responsibility for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. You can ask for relief no matter how small the liability.

There are three types of relief available.

  1. Innocent spouse relief.

  2. Separation of liability (available only to joint filers who are divorced, widowed, legally separated, or haven't lived together for the 12 months ending on the date the election for this relief is filed).

  3. Equitable relief.

You must file Form 8857, Request for Innocent Spouse Relief, to request relief from joint responsibility. Pub. 971, Innocent Spouse Relief, explains these kinds of relief and who may qualify for them.



Signing a joint return.

For a return to be considered a joint return, both spouses generally must sign the return.



Spouse died before signing.

If your spouse died before signing the return, the executor or administrator must sign the return for your spouse. If neither you nor anyone else has yet been appointed as executor or administrator, you can sign the return for your spouse and enter "Filing as surviving spouse" in the area where you sign the return.



Spouse away from home.

If your spouse is away from home, you should prepare the return, sign it, and send it to your spouse to sign so that it can be filed on time.



Injury or disease prevents signing.

If your spouse can’t sign because of disease or injury and tells you to sign for him or her, you can sign your spouse's name in the proper space on the return followed by the words "By (your name), Husband (or Wife)." Be sure to also sign in the space provided for your signature. Attach a dated statement, signed by you, to the return. The statement should include the form number of the return you are filing, the tax year, and the reason your spouse can’t sign, and should state that your spouse has agreed to your signing for him or her.



Signing as guardian of spouse.

If you are the guardian of your spouse who is mentally incompetent, you can sign the return for your spouse as guardian.



Spouse in combat zone.

You can sign a joint return for your spouse if your spouse can’t sign because he or she is serving in a combat zone (such as the Persian Gulf Area, Serbia, Montenegro, Albania, or Afghanistan), even if you don’t have a power of attorney or other statement. Attach a signed statement to your return explaining that your spouse is serving in a combat zone. For more information on special tax rules for persons who are serving in a combat zone, or who are in missing status as a result of serving in a combat zone, see Pub. 3, Armed Forces' Tax Guide.



Other reasons spouse can’t sign.

If your spouse can’t sign the joint return for any other reason, you can sign for your spouse only if you are given a valid power of attorney (a legal document giving you permission to act for your spouse). Attach the power of attorney (or a copy of it) to your tax return. You can use Form 2848, Power of Attorney and Declaration of Representative.



Nonresident alien or dual-status alien.

Generally, a married couple can’t file a joint return if either one is a nonresident alien at any time during the tax year. However, if one spouse was a nonresident alien or dual-status alien who was married to a U.S. citizen or resident alien at the end of the year, the spouses can choose to file a joint return. If you do file a joint return, you and your spouse are both treated as U.S. residents for the entire tax year. See chapter 1 of Pub. 519.



Married Filing Separately

You can choose married filing separately as your filing status if you are married. This filing status may benefit you if you want to be responsible only for your own tax or if it results in less tax than filing a joint return.

If you and your spouse don’t agree to file a joint return, you must use this filing status unless you qualify for head of household status, discussed later.

You may be able to choose head of household filing status if you are considered unmarried because you live apart from your spouse and meet certain tests (explained later, under Head of Household ). This can apply to you even if you aren't divorced or legally separated. If you qualify to file as head of household, instead of as married filing separately, your tax may be lower, you may be able to claim the earned income credit and certain other credits, and your standard deduction will be higher. The head of household filing status allows you to choose the standard deduction even if your spouse chooses to itemize deductions. See Head of Household , later, for more information.

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You will generally pay more combined tax on separate returns than you would on a joint return for the reasons listed under Special Rules, later. However, unless you are required to file separately, you should figure your tax both ways (on a joint return and on separate returns). This way you can make sure you are using the filing status that results in the lowest combined tax. When figuring the combined tax of a married couple, you may want to consider state taxes as well as federal taxes.

How to file.

If you file a separate return, you generally report only your own income, exemptions, credits, and deductions. You can claim an exemption for your spouse only if your spouse had no gross income, isn't filing a return, and wasn't the dependent of another person.



You can file Form 1040. If your taxable income is less than $100,000, you may be able to file Form 1040A. Select this filing status by checking the box on line 3 of either form. Enter your spouse's full name and SSN or ITIN in the spaces provided. If your spouse doesn't have and isn't required to have an SSN or ITIN, enter "NRA" in the space for your spouse's SSN. Use the Married filing separately column of the Tax Table or Section C of the Tax Computation Worksheet to figure your tax.

Special Rules

If you choose married filing separately as your filing status, the following special rules apply. Because of these special rules, you usually pay more tax on a separate return than if you use another filing status you qualify for.


  1. Your tax rate generally is higher than on a joint return.

  2. Your exemption amount for figuring the alternative minimum tax is half that allowed on a joint return.

  3. You can’t take the credit for child and dependent care expenses in most cases, and the amount you can exclude from income under an employer's dependent care assistance program is limited to $2,500 (instead of $5,000). However, if you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit. For more information about these expenses, the credit, and the exclusion, see chapter 32.

  4. You can’t take the earned income credit.

  5. You can’t take the exclusion or credit for adoption expenses in most cases.

  6. You can’t take the education credits (the American opportunity credit and lifetime learning credit), the deduction for student loan interest, or the tuition and fees deduction.

  7. You can’t exclude any interest income from qualified U.S. savings bonds you used for higher education expenses.

  8. If you lived with your spouse at any time during the tax year:

    1. You can’t claim the credit for the elderly or the disabled, and

    2. You must include in income a greater percentage (up to 85%) of any social security or equivalent railroad retirement benefits you received.

  9. The following credits and deductions are reduced at income levels half those for a joint return:

    1. The child tax credit,

    2. The retirement savings contributions credit,

    3. The deduction for personal exemptions, and

    4. Itemized deductions.

  10. Your capital loss deduction limit is $1,500 (instead of $3,000 on a joint return).

  11. If your spouse itemizes deductions, you can’t claim the standard deduction. If you can claim the standard deduction, your basic standard deduction is half the amount allowed on a joint return.

Adjusted gross income (AGI) limits.

If your AGI on a separate return is lower than it would have been on a joint return, you may be able to deduct a larger amount for certain deductions that are limited by AGI, such as medical expenses.



Individual retirement arrangements (IRAs).

You may not be able to deduct all or part of your contributions to a traditional IRA if you or your spouse were covered by an employee retirement plan at work during the year. Your deduction is reduced or eliminated if your income is more than a certain amount. This amount is much lower for married individuals who file separately and lived together at any time during the year. For more information, see How Much Can You Deduct in chapter 17.



Rental activity losses.

If you actively participated in a passive rental real estate activity that produced a loss, you generally can deduct the loss from your nonpassive income, up to $25,000. This is called a special allowance. However, married persons filing separate returns who lived together at any time during the year can’t claim this special allowance. Married persons filing separate returns who lived apart at all times during the year are each allowed a $12,500 maximum special allowance for losses from passive real estate activities. See Limits on Rental Losses in chapter 9.



Community property states.

If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin and file separately, your income may be considered separate income or community income for income tax purposes. See Pub. 555.



Joint Return After Separate Returns

You can change your filing status from a separate return to a joint return by filing an amended return using Form 1040X.

You generally can change to a joint return any time within 3 years from the due date of the separate return or returns. This doesn't include any extensions. A separate return includes a return filed by you or your spouse claiming married filing separately, single, or head of household filing status.

Separate Returns After Joint Return

Once you file a joint return, you can’t choose to file separate returns for that year after the due date of the return.

Exception.

A personal representative for a decedent can change from a joint return elected by the surviving spouse to a separate return for the decedent. The personal representative has 1 year from the due date of the return (including extensions) to make the change. See Pub. 559, Survivors, Executors, and Administrators, for more information on filing a return for a decedent.



Head of Household

You may be able to file as head of household if you meet all the following requirements.

  1. You are unmarried or "considered unmarried" on the last day of the year. See Marital Status , earlier, and Considered Unmarried , later.

  2. You paid more than half the cost of keeping up a home for the year.

  3. A qualifying person lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the qualifying person is your dependent parent, he or she doesn't have to live with you. See Special rule for parent , later, under Qualifying Person.

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If you qualify to file as head of household, your tax rate usually will be lower than the rates for single or married filing separately. You will also receive a higher standard deduction than if you file as single or married filing separately.

Kidnapped child.

You may be eligible to file as head of household even if the child who is your qualifying person has been kidnapped. For more information, see Pub. 501.



How to file.

If you file as head of household, you can use Form 1040. If your taxable income is less than $100,000, you may be able to file Form 1040A. Indicate your choice of this filing status by checking the box on line 4 of either form. Use the Head of a household column of the Tax Table or Section D of the Tax Computation Worksheet to figure your tax.



Considered Unmarried

To qualify for head of household status, you must be either unmarried or considered unmarried on the last day of the year. You are considered unmarried on the last day of the tax year if you meet all the following tests.

  1. You file a separate return. A separate return includes a return claiming married filing separately, single, or head of household filing status.

  2. You paid more than half the cost of keeping up your home for the tax year.

  3. Your spouse didn't live in your home during the last 6 months of the tax year. Your spouse is considered to live in your home even if he or she is temporarily absent due to special circumstances. See Temporary absences , under Qualifying Person, later.

  4. Your home was the main home of your child, stepchild, or foster child for more than half the year. (See Home of qualifying person , under Qualifying Person, later, for rules applying to a child's birth, death, or temporary absence during the year.)

  5. You must be able to claim an exemption for the child. However, you meet this test if you can’t claim the exemption only because the noncustodial parent can claim the child using the rules described in Children of divorced or separated parents (or parents who live apart) under Qualifying Child in chapter 3, or referred to in Support Test for Children of Divorced or Separated Parents (or Parents Who Live Apart) under Qualifying Relative in chapter 3. The general rules for claiming an exemption for a dependent are explained under Exemptions for Dependents in chapter 3.

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If you were considered married for part of the year and lived in a community property state (listed earlier under Married Filing Separately), special rules may apply in determining your income and expenses. See Pub. 555 for more information.

Nonresident alien spouse.

You are considered unmarried for head of household purposes if your spouse was a nonresident alien at any time during the year and you don’t choose to treat your nonresident spouse as a resident alien. However, your spouse isn't a qualifying person for head of household purposes. You must have another qualifying person and meet the other tests to be eligible to file as a head of household.



Choice to treat spouse as resident.

You are considered married if you choose to treat your spouse as a resident alien. See Pub. 519.



Keeping Up a Home

To qualify for head of household status, you must pay more than half of the cost of keeping up a home for the year. You can determine whether you paid more than half of the cost of keeping up a home by using Worksheet 2–1.

Worksheet 2-1. Cost of Keeping Up a Home

Amount
You Paid
Total Cost
Property taxes $ $
Mortgage interest expense
Rent
Utility charges
Repairs/maintenance
Property insurance
Food eaten in the home
Other household expenses
Totals $ $
Minus total amount you paid ()
Amount others paid $
If the total amount you paid is more than the amount others paid, you meet the requirement of paying more than half the cost of keeping up the home.

Costs you include.

Include in the cost of keeping up a home expenses such as rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, and food eaten in the home.

If you used payments you received under Temporary Assistance for Needy Families (TANF) or other public assistance programs to pay part of the cost of keeping up your home, you can’t count them as money you paid. However, you must include them in the total cost of keeping up your home to figure if you paid over half the cost.



Costs you don’t include.

Don’t include the costs of clothing, education, medical treatment, vacations, life insurance, or transportation. Also, don’t include the rental value of a home you own or the value of your services or those of a member of your household.



Qualifying Person

See Table 2-1 to see who is a qualifying person. Any person not described in Table 2-1 isn't a qualifying person.

Table 2-1. Who Is a Qualifying Person Qualifying You To File as Head of Household?1

Caution.See the text of this chapter for the other requirements you must meet to claim head of household filing status.

IF the person is your . . . AND . . . THEN that person is . . .
qualifying child (such as a son, daughter, or grandchild who lived with you more than half the year and meets certain other tests)2 he or she is single a qualifying person, whether or not you can claim an exemption for the person.
he or she is married and you can claim an exemption for him or her a qualifying person.
he or she is married and you can’t claim an exemption for him or her not a qualifying person.3
qualifying relative4 who is your father or mother you can claim an exemption for him or her5 a qualifying person.6
you can’t claim an exemption for him or her not a qualifying person.
qualifying relative4 other than your father or mother (such as a grandparent, brother, or sister who meets certain tests) he or she lived with you more than half the year, and he or she is related to you in one of the ways listed under Relatives who don’t have to live with you in chapter 3 and you can claim an exemption for him or her5 a qualifying person.
he or she didn't live with you more than half the year not a qualifying person.
he or she isn't related to you in one of the ways listed under Relatives who don’t have to live with you in chapter 3 and is your qualifying relative only because he or she lived with you all year as a member of your household not a qualifying person.
you can’t claim an exemption for him or her not a qualifying person.
1A person can’t qualify more than one taxpayer to use the head of household filing status for the year.
2The term "qualifying child" is defined in chapter 3. Note. If you are a noncustodial parent, the term "qualifying child" for head of household filing status doesn't include a child who is your qualifying child for exemption purposes only because of the rules described under Children of divorced or separated parents (or parents who live apart) under Qualifying Child in chapter 3. If you are the custodial parent and those rules apply, the child generally is your qualifying child for head of household filing status even though the child isn't a qualifying child for whom you can claim an exemption.
3This person is a qualifying person if the only reason you can’t claim the exemption is that you can be claimed as a dependent on someone else's return.
4The term "qualifying relative" is defined in chapter 3.
5If you can claim an exemption for a person only because of a multiple support agreement, that person isn't a qualifying person. See Multiple Support Agreement in chapter 3.
6See Special rule for parent .

Example 1—child.

Your unmarried son lived with you all year and was 18 years old at the end of the year. He didn't provide more than half of his own support and doesn't meet the tests to be a qualifying child of anyone else. As a result, he is your qualifying child (see Qualifying Child in chapter 3) and, because he is single, your qualifying person for you to claim head of household filing status.

Example 2—child who isn't qualifying person.

The facts are the same as in Example 1 except your son was 25 years old at the end of the year and his gross income was $5,000. Because he doesn't meet the age test (explained under Qualifying Child in chapter 3), your son isn't your qualifying child. Because he doesn't meet the gross income test (explained later under Qualifying Relative in chapter 3), he isn't your qualifying relative. As a result, he isn't your qualifying person for head of household purposes.

Example 3—girlfriend.

Your girlfriend lived with you all year. Even though she may be your qualifying relative if the gross income and support tests (explained in chapter 3) are met, she isn't your qualifying person for head of household purposes because she isn't related to you in one of the ways listed under Relatives who don’t have to live with you in chapter 3. See Table 2-1.

Example 4—girlfriend's child.

The facts are the same as in Example 3 except your girlfriend's 10-year-old son also lived with you all year. He isn't your qualifying child and, because he is your girlfriend's qualifying child, he isn't your qualifying relative (see Not a Qualifying Child Test in chapter 3). As a result, he isn't your qualifying person for head of household purposes.

Home of qualifying person.

Generally, the qualifying person must live with you for more than half of the year.



Special rule for parent.

If your qualifying person is your father or mother, you may be eligible to file as head of household even if your father or mother doesn't live with you. However, you must be able to claim an exemption for your father or mother. Also, you must pay more than half the cost of keeping up a home that was the main home for the entire year for your father or mother.

If you pay more than half the cost of keeping your parent in a rest home or home for the elderly, that counts as paying more than half the cost of keeping up your parent's main home.



Death or birth.

You may be eligible to file as head of household even if the individual who qualifies you for this filing status is born or dies during the year. If the individual is your qualifying child, the child must have lived with you for more than half the part of the year he or she was alive. If the individual is anyone else, see Pub. 501.



Temporary absences.

You and your qualifying person are considered to live together even if one or both of you are temporarily absent from your home due to special circumstances such as illness, education, business, vacation, military service, or detention in a juvenile facility. It must be reasonable to assume the absent person will return to the home after the temporary absence. You must continue to keep up the home during the absence.



Qualifying Widow(er) With Dependent Child

If your spouse died in 2016, you can use married filing jointly as your filing status for 2016 if you otherwise qualify to use that status. The year of death is the last year for which you can file jointly with your deceased spouse. See Married Filing Jointly , earlier.

You may be eligible to use qualifying widow(er) with dependent child as your filing status for 2 years following the year your spouse died. For example, if your spouse died in 2015, and you haven't remarried, you may be able to use this filing status for 2016 and 2017.

This filing status entitles you to use joint return tax rates and the highest standard deduction amount (if you don’t itemize deductions). It doesn't entitle you to file a joint return.

How to file.

If you file as qualifying widow(er) with dependent child, you can use Form 1040. If you also have taxable income of less than $100,000 and meet certain other conditions, you may be able to file Form 1040A. Check the box on line 5 of either form. Use the Married filing jointly column of the Tax Table or Section B of the Tax Computation Worksheet to figure your tax.



Eligibility rules.

You are eligible to file your 2016 return as a qualifying widow(er) with dependent child if you meet all of the following tests.

  • You were entitled to file a joint return with your spouse for the year your spouse died. It doesn't matter whether you actually filed a joint return.

  • Your spouse died in 2014 or 2015 and you didn't remarry before the end of 2016.

  • You have a child or stepchild for whom you can claim an exemption. This doesn't include a foster child.

  • This child lived in your home all year, except for temporary absences. See Temporary absences , earlier, under Head of Household. There are also exceptions, described later, for a child who was born or died during the year and for a kidnapped child.

  • You paid more than half the cost of keeping up a home for the year. See Keeping Up a Home , earlier, under Head of Household.

Example.

John's wife died in 2014. John hasn't remarried. During 2015 and 2016, he continued to keep up a home for himself and his child, who lives with him and for whom he can claim an exemption. For 2014 he was entitled to file a joint return for himself and his deceased wife. For 2015 and 2016, he can file as qualifying widower with a dependent child. After 2016 he can file as head of household if he qualifies.



Death or birth.

You may be eligible to file as a qualifying widow(er) with dependent child if the child who qualifies you for this filing status is born or dies during the year. You must have provided more than half of the cost of keeping up a home that was the child's main home during the entire part of the year he or she was alive.



Kidnapped child.

You may be eligible to file as a qualifying widow(er) with dependent child even if the child who qualifies you for this filing status has been kidnapped. See Pub. 501.



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As mentioned earlier, this filing status is available for only 2 years following the year your spouse died.

3. Personal Exemptions and Dependents

What's New

Exemption amount. The amount you can deduct for each exemption has increased. It was $4,000 for 2015. It is $4,050 for 2016.

Exemption phaseout. You lose at least part of the benefit of your exemptions if your adjusted gross income is more than a certain amount. For 2016, this amount is $155,650 for a married individual filing a separate return; $259,400 for a single individual; $285,350 for a head of household; and $311,300 for married individuals filing jointly or a qualifying widow(er). See Phaseout of Exemptions , later.

Introduction

This chapter discusses the following topics.

  • Personal exemptions — You generally can take one for yourself and, if you are married, one for your spouse.

  • Exemptions for dependents — You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. If you are entitled to claim an exemption for a dependent, that dependent can’t claim a personal exemption on his or her own tax return.

  • Phaseout of exemptions — Your deduction is reduced if your adjusted gross income is more than a certain amount.

  • Social security number (SSN) requirement for dependents — You must list the SSN of any dependent for whom you claim an exemption.

Deduction.

Exemptions reduce your taxable income. You can deduct $4,050 for each exemption you claim in 2016. But you may lose at least part of the dollar amount of your exemptions if your adjusted gross income is more than a certain amount. See Phaseout of Exemptions , later.



How to claim exemptions.

How you claim an exemption on your tax return depends on which form you file.

If you file Form 1040EZ, the exemption amount is combined with the standard deduction amount and entered on line 5.

If you file Form 1040A, complete lines 6a through 6d. The total number of exemptions you can claim is the total in the box on line 6d. Also complete line 26.

If you file Form 1040, complete lines 6a through 6d. The total number of exemptions you can claim is the total in the box on line 6d. Also complete line 42.



Useful Items - You may want to see:

Publication

  • 501 Exemptions, Standard Deduction, and Filing Information

Form (and Instructions)

  • 2120 Multiple Support Declaration

  • 8332 Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent

Exemptions

There are two types of exemptions you may be able to take:

  • Personal exemptions for yourself and your spouse, and

  • Exemptions for dependents (dependency exemptions).

While each is worth the same amount ($4,050 for 2016), different rules apply to each type.

Personal Exemptions

You are generally allowed one exemption for yourself. If you are married, you may be allowed one exemption for your spouse. These are called personal exemptions.

Your Own Exemption

You can take one exemption for yourself unless you can be claimed as a dependent by another taxpayer. If another taxpayer is entitled to claim you as a dependent, you can’t take an exemption for yourself even if the other taxpayer doesn't actually claim you as a dependent.

Your Spouse's Exemption

Your spouse is never considered your dependent.

Joint return.

On a joint return you can claim one exemption for yourself and one for your spouse.



Separate return.

If you file a separate return, you can claim an exemption for your spouse only if your spouse:

  • Had no gross income,

  • Isn't filing a return, and

  • Wasn't the dependent of another taxpayer.

This is true even if the other taxpayer doesn't actually claim your spouse as a dependent.

You can claim an exemption for your spouse even if he or she is a nonresident alien. In that case, your spouse:

  • Must have no gross income for U.S. tax purposes,

  • Must not be filing a return, and

  • Must not be the dependent of another taxpayer.



Death of spouse.

If your spouse died during the year and you file a joint return for yourself and your deceased spouse, you generally can claim your spouse's exemption under the rules just explained in Joint return . If you file a separate return for the year, you may be able to claim your spouse's exemption under the rules just described in Separate return .

If you remarried during the year, you can’t take an exemption for your deceased spouse.

If you are a surviving spouse without gross income and you remarry in the year your spouse died, you can be claimed as an exemption on both the final separate return of your deceased spouse and the separate return of your new spouse for that year. If you file a joint return with your new spouse, you can be claimed as an exemption only on that return.



Divorced or separated spouse.

If you obtained a final decree of divorce or separate maintenance during the year, you can’t take your former spouse's exemption. This rule applies even if you provided all of your former spouse's support.



Exemptions for Dependents

You are allowed one exemption for each person you can claim as a dependent. You can claim an exemption for a dependent even if your dependent files a return. However, see Joint Return Test , later.

The term "dependent" means:

  • A qualifying child, or

  • A qualifying relative.

The terms " qualifying child " and " qualifying relative " are defined later.

All the requirements for claiming an exemption for a dependent are summarized in Table 3-1.

Table 3-1. Overview of the Rules for Claiming an Exemption for a Dependent

Caution. This table is only an overview of the rules. For details, see the rest of this chapter.

  • You can’t claim any dependents if you (or your spouse, if filing jointly) could be claimed as a dependent by another taxpayer.

  • You can’t claim a married person who files a joint return as a dependent unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.

  • You can’t claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico.1

  • You can’t claim a person as a dependent unless that person is your qualifying child or qualifying relative.

Tests To Be a Qualifying Child Tests To Be a Qualifying Relative
  1. The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.

  2. The child must be (a) under age 19 at the end of the year and younger than you (or your spouse, if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse, if filing jointly), or (c) any age if permanently and totally disabled.

  3. The child must have lived with you for more than half of the year.2

  4. The child must not have provided more than half of his or her own support for the year.

  5. The child must not be filing a joint return for the year (unless that return is filed only to get a refund of income tax withheld or estimated tax paid).


If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child. See Qualifying Child of More Than One Person to find out which person is the person entitled to claim the child as a qualifying child.
  1. The person can’t be your qualifying child or the qualifying child of any other taxpayer.

  2. The person either (a) must be related to you in one of the ways listed under Relatives who don’t have to live with you , or (b) must live with you all year as a member of your household2 (and your relationship must not violate local law).

  3. The person's gross income for the year must be less than $4,050.3

  4. You must provide more than half of the person's total support for the year.4

1There is an exception for certain adopted children.
2There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents (or
parents who live apart), and kidnapped children.
3There is an exception if the person is disabled and has income from a sheltered workshop.
4There are exceptions for multiple support agreements, children of divorced or separated parents (or parents who live apart), and kidnapped
children.

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Dependent not allowed a personal exemption. If you can claim an exemption for your dependent, the dependent can’t claim his or her own personal exemption on his or her own tax return. This is true even if you don’t claim the dependent's exemption on your return. It is also true if the dependent's exemption on your return is reduced or eliminated under the phaseout rule described under Phaseout of Exemptions, later.

Housekeepers, maids, or servants.

If these people work for you, you can’t claim exemptions for them.



Child tax credit.

You may be entitled to a child tax credit for each qualifying child who was under age 17 at the end of the year if you claimed an exemption for that child. For more information, see chapter 34.



Exceptions

Even if you have a qualifying child or qualifying relative, you can claim an exemption for that person only if these three tests are met.

These three tests are explained in detail here.

Dependent Taxpayer Test

If you can be claimed as a dependent by another person, you can’t claim anyone else as a dependent. Even if you have a qualifying child or qualifying relative, you can’t claim that person as a dependent.

If you are filing a joint return and your spouse can be claimed as a dependent by someone else, you and your spouse can’t claim any dependents on your joint return.

Joint Return Test

You generally cannot claim a married person as a dependent if he or she files a joint return.

Exception.

You can claim an exemption for a person who files a joint return if that person and his or her spouse file the joint return only to claim a refund of income tax withheld or estimated tax paid.



Example 1—child files joint return.

You supported your 18-year-old daughter, and she lived with you all year while her husband was in the Armed Forces. He earned $25,000 for the year. The couple files a joint return. You can’t take an exemption for your daughter.

Example 2—child files joint return only as claim for refund of withheld tax.

Your 18-year-old son and his 17-year-old wife had $800 of wages from part-time jobs and no other income. They lived with you all year. Neither is required to file a tax return. They don’t have a child. Taxes were taken out of their pay so they filed a joint return only to get a refund of the withheld taxes. The exception to the joint return test applies, so you aren't disqualified from claiming an exemption for each of them just because they file a joint return. You can claim exemptions for each of them if all the other tests to do so are met.

Example 3—child files joint return to claim American opportunity credit.

The facts are the same as in Example 2 except no taxes were taken out of your son's pay or his wife's pay. However, they file a joint return to claim an American opportunity credit of $124 and get a refund of that amount. Because claiming the American opportunity credit is their reason for filing the return, they aren't filing it only to get a refund of income tax withheld or estimated tax paid. The exception to the joint return test doesn't apply, so you can’t claim an exemption for either of them.

Citizen or Resident Test

You generally can’t claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. However, there is an exception for certain adopted children, as explained next.

Exception for adopted child.

If you are a U.S. citizen or U.S. national who has legally adopted a child who isn't a U.S. citizen, U.S. resident alien, or U.S. national, this test is met if the child lived with you as a member of your household all year. This exception also applies if the child was lawfully placed with you for legal adoption.



Child's place of residence.

Children usually are citizens or residents of the country of their parents.

If you were a U.S. citizen when your child was born, the child may be a U.S. citizen and meet this test even if the other parent was a nonresident alien and the child was born in a foreign country.



Foreign students' place of residence.

Foreign students brought to this country under a qualified international education exchange program and placed in American homes for a temporary period generally aren't U.S. residents and don’t meet this test. You can’t claim an exemption for them. However, if you provided a home for a foreign student, you may be able to take a charitable contribution deduction. See Expenses Paid for Student Living With You in chapter 24.



U.S. national.

A U.S. national is an individual who, although not a U.S. citizen, owes his or her allegiance to the United States. U.S. nationals include American Samoans and Northern Mariana Islanders who chose to become U.S. nationals instead of U.S. citizens.



Qualifying Child

Five tests must be met for a child to be your qualifying child. The five tests are:

These tests are explained next.

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If a child meets the five tests to be the qualifying child of more than one person, there are rules you must use to determine which person can actually treat the child as a qualifying child. See Qualifying Child of More Than One Person, later.

Relationship Test

To meet this test, a child must be:

  • Your son, daughter, stepchild, foster child, or a descendant (for example, your grandchild) of any of them, or

  • Your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant (for example, your niece or nephew) of any of them.

Adopted child.

An adopted child is always treated as your own child. The term "adopted child" includes a child who was lawfully placed with you for legal adoption.



Foster child.

A foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.



Age Test

To meet this test, a child must be:

  • Under age 19 at the end of the year and younger than you (or your spouse, if filing jointly),

  • A student under age 24 at the end of the year and younger than you (or your spouse, if filing jointly), or

  • Permanently and totally disabled at any time during the year, regardless of age.

Example.

Your son turned 19 on December 10. Unless he was permanently and totally disabled or a student, he doesn't meet the age test because, at the end of the year, he wasn't under age 19.

Child must be younger than you or spouse.

To be your qualifying child, a child who isn't permanently and totally disabled must be younger than you. However, if you are married filing jointly, the child must be younger than you or your spouse but doesn't have to be younger than both of you.

Example 1—child not younger than you or spouse.

Your 23-year-old brother, who is a student and unmarried, lives with you and your spouse, who provide more than half of his support. He isn't disabled. Both you and your spouse are 21 years old, and you file a joint return. Your brother isn't your qualifying child because he isn't younger than you or your spouse.

Example 2—child younger than your spouse but not younger than you.

The facts are the same as in Example 1 except your spouse is 25 years old. Because your brother is younger than your spouse, and you and your spouse are filing a joint return, your brother is your qualifying child, even though he isn't younger than you.



Student defined.

To qualify as a student, your child must be, during some part of each of any 5 calendar months of the year:

  1. A full-time student at a school that has a regular teaching staff, course of study, and a regularly enrolled student body at the school, or

  2. A student taking a full-time, on-farm training course given by a school described in (1), or by a state, county, or local government agency.

The 5 calendar months don’t have to be consecutive.



Full-time student.

A full-time student is a student who is enrolled for the number of hours or courses the school considers to be full-time attendance.



School defined.

A school can be an elementary school, junior or senior high school, college, university, or technical, trade, or mechanical school. However, an on-the-job training course, correspondence school, or school offering courses only through the Internet doesn’t count as a school.



Vocational high school students.

Students who work on "co-op" jobs in private industry as a part of a school's regular course of classroom and practical training are considered full-time students.



Permanently and totally disabled.

Your child is permanently and totally disabled if both of the following apply.

  • He or she can’t engage in any substantial gainful activity because of a physical or mental condition.

  • A doctor determines the condition has lasted or can be expected to last continuously for at least a year or can lead to death.



Residency Test

To meet this test, your child must have lived with you for more than half the year. There are exceptions for temporary absences, children who were born or died during the year, kidnapped children, and children of divorced or separated parents.

Temporary absences.

Your child is considered to have lived with you during periods of time when one of you, or both, are temporarily absent due to special circumstances such as:

  • Illness,

  • Education,

  • Business,

  • Vacation,

  • Military service, or

  • Detention in a juvenile facility.



Death or birth of child.

A child who was born or died during the year is treated as having lived with you more than half of the year if your home was the child's home more than half of the time he or she was alive during the year. The same is true if the child lived with you more than half the year except for any required hospital stay following birth.



Child born alive.

You may be able to claim an exemption for a child born alive during the year, even if the child lived only for a moment. State or local law must treat the child as having been born alive. There must be proof of a live birth shown by an official document, such as a birth certificate. The child must be your qualifying child or qualifying relative, and all the other tests to claim an exemption for a dependent must be met.



Stillborn child.

You can’t claim an exemption for a stillborn child.



Kidnapped child.

You may be able to treat your child as meeting the residency test even if the child has been kidnapped. See Pub. 501 for details.



Children of divorced or separated parents (or parents who live apart).

In most cases, because of the residency test, a child of divorced or separated parents is the qualifying child of the custodial parent. However, the child will be treated as the qualifying child of the noncustodial parent if all four of the following statements are true.

  1. The parents:

    1. Are divorced or legally separated under a decree of divorce or separate maintenance,

    2. Are separated under a written separation agreement, or

    3. Lived apart at all times during the last 6 months of the year, whether or not they are or were married.

  2. The child received over half of his or her support for the year from the parents.

  3. The child is in the custody of one or both parents for more than half of the year.

  4. Either of the following statements is true.

    1. The custodial parent signs a written declaration, discussed later, that he or she won't claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return. (If the decree or agreement went into effect after 1984 and before 2009, see Post-1984 and pre-2009 divorce decree or separation agreement , later. If the decree or agreement went into effect after 2008, see Post-2008 divorce decree or separation agreement , later.)

    2. A pre-1985 decree of divorce or separate maintenance or written separation agreement that applies to 2016 states that the noncustodial parent can claim the child as a dependent, the decree or agreement wasn't changed after 1984 to say the noncustodial parent can’t claim the child as a dependent, and the noncustodial parent provides at least $600 for the child's support during the year.

If statements (1) through (4) are all true, only the noncustodial parent can:

  • Claim the child as a dependent, and

  • Claim the child as a qualifying child for the child tax credit.

However, this doesn’t allow the noncustodial parent to claim head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, the earned income credit, or the health coverage tax credit. See Applying the tiebreaker rules to divorced or separated parents (or parents who live apart) , later.

Example—earned income credit.

Even if statements (1) through (4) are all true and the custodial parent signs Form 8332 or a substantially similar statement that he or she will not claim the child as a dependent for 2016, this does not allow the noncustodial parent to claim the child as a qualifying child for the earned income credit. The custodial parent or another taxpayer, if eligible, can claim the child for the earned income credit.



Custodial parent and noncustodial parent.

The custodial parent is the parent with whom the child lived for the greater number of nights during the year. The other parent is the noncustodial parent.

If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one with whom the child lived for the greater number of nights during the rest of the year.

A child is treated as living with a parent for a night if the child sleeps:

  • At that parent's home, whether or not the parent is present, or

  • In the company of the parent, when the child doesn't sleep at a parent's home (for example, the parent and child are on vacation together).



Equal number of nights.

If the child lived with each parent for an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income (AGI).



December 31.

The night of December 31 is treated as part of the year in which it begins. For example, the night of December 31, 2016, is treated as part of 2016.



Emancipated child.

If a child is emancipated under state law, the child is treated as not living with either parent. See Examples 5 and 6.



Absences.

If a child wasn't with either parent on a particular night (because, for example, the child was staying at a friend's house), the child is treated as living with the parent with whom the child normally would have lived for that night, except for the absence. But if it can’t be determined with which parent the child normally would have lived or if the child would not have lived with either parent that night, the child is treated as not living with either parent that night.



Parent works at night.

If, due to a parent's nighttime work schedule, a child lives for a greater number of days, but not nights, with the parent who works at night, that parent is treated as the custodial parent. On a school day, the child is treated as living at the primary residence registered with the school.



Example 1—child lived with one parent for a greater number of nights.

You and your child’s other parent are divorced. In 2016, your child lived with you 210 nights and with the other parent 156 nights. You are the custodial parent.

Example 2—child is away at camp.

In 2016, your daughter lives with each parent for alternate weeks. In the summer, she spends 6 weeks at summer camp. During the time she is at camp, she is treated as living with you for 3 weeks and with her other parent, your ex-spouse, for 3 weeks because this is how long she would have lived with each parent if she had not attended summer camp.

Example 3—child lived same number of nights with each parent.

Your son lived with you 180 nights during the year and lived the same number of nights with his other parent, your ex-spouse. Your AGI is $40,000. Your ex-spouse's AGI is $25,000. You are treated as your son's custodial parent because you have the higher AGI.

Example 4—child is at parent’s home but with other parent.

Your son normally lives with you during the week and with his other parent, your ex-spouse, every other weekend. You become ill and are hospitalized. The other parent lives in your home with your son for 10 consecutive days while you are in the hospital. Your son is treated as living with you during this 10-day period because he was living in your home.

Example 5—child emancipated in May.

When your son turned age 18 in May 2016, he became emancipated under the law of the state where he lives. As a result, he isn't considered in the custody of his parents for more than half of the year. The special rule for children of divorced or separated parents doesn't apply.

Example 6—child emancipated in August.

Your daughter lives with you from January 1, 2016, until May 31, 2016, and lives with her other parent, your ex-spouse, from June 1, 2016, through the end of the year. She turns 18 and is emancipated under state law on August 1, 2016. Because she is treated as not living with either parent beginning on August 1, she is treated as living with you the greater number of nights in 2016. You are the custodial parent.

Written declaration.

The custodial parent must use either Form 8332 or a similar statement (containing the same information required by the form) to make the written declaration to release the exemption to the noncustodial parent. The noncustodial parent must attach a copy of the form or statement to his or her tax return.

The exemption can be released for 1 year, for a number of specified years (for example, alternate years), or for all future years, as specified in the declaration.



Post-1984 and pre-2009 divorce decree or separation agreement.

If the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent may be able to attach certain pages from the decree or agreement instead of Form 8332. The decree or agreement must state all three of the following.

  1. The noncustodial parent can claim the child as a dependent without regard to any condition, such as payment of support.

  2. The custodial parent won't claim the child as a dependent for the year.

  3. The years for which the noncustodial parent, rather than the custodial parent, can claim the child as a dependent.

The noncustodial parent must attach all of the following pages of the decree or agreement to his or her tax return.

  • The cover page (write the other parent's social security number on this page).

  • The pages that include all of the information identified in items (1) through (3) above.

  • The signature page with the other parent's signature and the date of the agreement.



Post-2008 divorce decree or separation agreement.

The noncustodial parent can’t attach pages from the decree or agreement instead of Form 8332 if the decree or agreement went into effect after 2008. The custodial parent must sign either Form 8332 or a similar statement whose only purpose is to release the custodial parent's claim to an exemption for a child, and the noncustodial parent must attach a copy to his or her return. The form or statement must release the custodial parent's claim to the child without any conditions. For example, the release must not depend on the noncustodial parent paying support.

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The noncustodial parent must attach the required information even if it was filed with a return in an earlier year.



Revocation of release of claim to an exemption.

The custodial parent can revoke a release of claim to exemption. For the revocation to be effective for 2016, the custodial parent must have given (or made reasonable efforts to give) written notice of the revocation to the noncustodial parent in 2015 or earlier. The custodial parent can use Part III of Form 8332 for this purpose and must attach a copy of the revocation to his or her return for each tax year he or she claims the child as a dependent as a result of the revocation.



Remarried parent.

If you remarry, the support provided by your new spouse is treated as provided by you.



Parents who never married.

This special rule for divorced or separated parents also applies to parents who never married, and who lived apart at all times during the last 6 months of the year.



Support Test (To Be a Qualifying Child)

To meet this test, the child can’t have provided more than half of his or her own support for the year.

This test is different from the support test to be a qualifying relative, which is described later. However, to see what is or isn't support, see Support Test (To Be a Qualifying Relative) , later. If you aren't sure whether a child provided more than half of his or her own support, you may find Worksheet 3-1 helpful.

Worksheet 3-1. Worksheet for Determining Support

Funds Belonging to the Person You Supported
1. Enter the total funds belonging to the person you supported, including income received (taxable and nontaxable) and amounts borrowed during the year, plus the amount in savings and other accounts at the beginning of the year. Don’t include funds provided by the state; include those amounts on line 23 instead 1.
2. Enter the amount on line 1 that was used for the person's support 2.
3. Enter the amount on line 1 that was used for other purposes 3.
4. Enter the total amount in the person's savings and other accounts at the end of the year 4.
5. Add lines 2 through 4. (This amount should equal line 1.) 5.
Expenses for Entire Household (where the person you supported lived)
6. Lodging (complete line 6a or 6b):
a. Enter the total rent paid 6a.
b. Enter the fair rental value of the home. If the person you supported owned the home,
also include this amount in line 21
6b.
7. Enter the total food expenses 7.
8. Enter the total amount of utilities (heat, light, water, etc. not included in line 6a or 6b) 8.
9. Enter the total amount of repairs (not included in line 6a or 6b) 9.
10. Enter the total of other expenses. Don’t include expenses of maintaining the home, such as mortgage interest, real estate taxes, and insurance 10.
11. Add lines 6a through 10. These are the total household expenses 11.
12. Enter total number of persons who lived in the household 12.
Expenses for the Person You Supported
13. Divide line 11 by line 12. This is the person's share of the household expenses 13.
14. Enter the person's total clothing expenses 14.
15. Enter the person's total education expenses 15.
16. Enter the person's total medical and dental expenses not paid for or reimbursed by insurance 16.
17. Enter the person's total travel and recreation expenses 17.
18. Enter the total of the person's other expenses 18.
19. Add lines 13 through 18. This is the total cost of the person's support for the year 19.
Did the Person Provide More Than Half of His or Her Own Support?
20. Multiply line 19 by 50% (0.50) 20.
21. Enter the amount from line 2, plus the amount from line 6b if the person you supported owned
the home. This is the amount the person provided for his or her own support
21.
22. Is line 21 more than line 20?

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No. You meet the support test for this person to be your qualifying child. If this person also meets the other tests to be a qualifying child, stop here; don’t complete lines 23–26. Otherwise, go to line 23 and fill out the rest of the worksheet to determine if this person is your qualifying relative.

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Yes. You don’t meet the support test for this person to be either your qualifying child or your qualifying relative. Stop here.

Did You Provide More Than Half?
23. Enter the amount others provided for the person's support. Include amounts provided by state, local, and other welfare societies or agencies. Don’t include any amounts included on line 1 23.
24. Add lines 21 and 23 24.
25. Subtract line 24 from line 19. This is the amount you provided for the person's support 25.
26. Is line 25 more than line 20?

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Yes. You meet the support test for this person to be your qualifying relative.

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No. You don’t meet the support test for this person to be your qualifying relative. You can’t claim an exemption for this person unless you can do so under a multiple support agreement, the support test for children of divorced or separated parents, or the special rule for kidnapped children. See Multiple Support Agreement or Support Test for Children of Divorced or Separated Parents (or Parents Who Live Apart) , or Kidnapped child under Qualifying Relative.

Example.

You provided $4,000 toward your 16-year-old son's support for the year. He has a part-time job and provided $6,000 to his own support. He provided more than half of his own support for the year. He isn't your qualifying child.

Foster care payments and expenses.

Payments you receive for the support of a foster child from a child placement agency are considered support provided by the agency. Similarly, payments you receive for the support of a foster child from a state or county are considered support provided by the state or county.

If you aren't in the trade or business of providing foster care and your unreimbursed out-of-pocket expenses in caring for a foster child were mainly to benefit an organization qualified to receive deductible charitable contributions, the expenses are deductible as charitable contributions but aren't considered support you provided. For more information about the deduction for charitable contributions, see chapter 24. If your unreimbursed expenses aren't deductible as charitable contributions, they may qualify as support you provided.

If you are in the trade or business of providing foster care, your unreimbursed expenses aren't considered support provided by you.

Example 1.

Lauren, a foster child, lived with Mr. and Mrs. Smith for the last 3 months of the year. The Smiths cared for Lauren because they wanted to adopt her (although she had not been placed with them for adoption). They didn't care for her as a trade or business or to benefit the agency that placed her in their home. The Smiths' unreimbursed expenses aren't deductible as charitable contributions but are considered support they provided for Lauren.



Example 2.

You provided $3,000 toward your 10-year-old foster child's support for the year. The state government provided $4,000, which is considered support provided by the state, not by the child. See Support provided by the state (welfare, food stamps, housing, etc.) , later. Your foster child didn't provide more than half of her own support for the year.

Scholarships.

A scholarship received by a child who is a student isn't taken into account in determining whether the child provided more than half of his or her own support.



Joint Return Test (To Be a Qualifying Child)

To meet this test, the child can’t file a joint return for the year.

Exception.

An exception to the joint return test applies if your child and his or her spouse file a joint return only to claim a refund of income tax withheld or estimated tax paid.



Example 1—child files joint return.

You supported your 18-year-old daughter, and she lived with you all year while her husband was in the Armed Forces. He earned $25,000 for the year. The couple files a joint return. Because your daughter and her husband file a joint return, she isn't your qualifying child.

Example 2—child files joint return only as a claim for refund of withheld tax.

Your 18-year-old son and his 17-year-old wife had $800 of wages from part-time jobs and no other income. They lived with you all year. Neither is required to file a tax return. They don’t have a child. Taxes were taken out of their pay so they filed a joint return only to get a refund of the withheld taxes. The exception to the joint return test applies, so your son may be your qualifying child if all the other tests are met.

Example 3—child files joint return to claim American opportunity credit.

The facts are the same as in Example 2 except no taxes were taken out of your son's pay or his wife's pay. However, they file a joint return to claim an American opportunity credit of $124 and get a refund of that amount. Because claiming the American opportunity credit is their reason for filing the return, they aren't filing it only to get a refund of income tax withheld or estimated tax paid. The exception to the joint return test doesn't apply, so your son isn't your qualifying child.

Qualifying Child of More Than One Person

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If your qualifying child isn't a qualifying child of anyone else, this topic doesn't apply to you and you don’t need to read about it. This is also true if your qualifying child isn't a qualifying child of anyone else except your spouse with whom you plan to file a joint return.

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If a child is treated as the qualifying child of the noncustodial parent under the rules for children of divorced or separated parents (or parents who live apart) described earlier, see Applying the tiebreaker rules to divorced or separated parents (or parents who live apart), later.

Sometimes, a child meets the relationship, age, residency, support, and joint return tests to be a qualifying child of more than one person. Although the child is a qualifying child of each of these persons, only one person can actually treat the child as a qualifying child to take all of the following tax benefits (provided the person is eligible for each benefit).

  1. The exemption for the child.

  2. The child tax credit.

  3. Head of household filing status.

  4. The credit for child and dependent care expenses.

  5. The exclusion from income for dependent care benefits.

  6. The earned income credit.

The other person can’t take any of these benefits based on this qualifying child. In other words, you and the other person can’t agree to divide these benefits between you. The other person can’t take any of these tax benefits for a child unless he or she has a different qualifying child.

Tiebreaker rules.

To determine which person can treat the child as a qualifying child to claim these six tax benefits, the following tiebreaker rules apply.

  • If only one of the persons is the child's parent, the child is treated as the qualifying child of the parent.

  • If the parents file a joint return together and can claim the child as a qualifying child, the child is treated as the qualifying child of the parents.

  • If the parents don’t file a joint return together but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year.

  • If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year.

  • If a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person's AGI is higher than the highest AGI of any of the child's parents who can claim the child. If the child's parents file a joint return with each other, this rule can be applied by dividing the parents' combined AGI equally between the parents. See Example 6 .

Subject to these tiebreaker rules, you and the other person may be able to choose which of you claims the child as a qualifying child.



Example 1—child lived with parent and grandparent.

You and your 3-year-old daughter Jane lived with your mother all year. You are 25 years old, unmarried, and your AGI is $9,000. Your mother's AGI is $15,000. Jane's father didn't live with you or your daughter. You haven't signed Form 8332 (or a similar statement) to release the child's exemption to the noncustodial parent.

Jane is a qualifying child of both you and your mother because she meets the relationship, age, residency, support, and joint return tests for both you and your mother. However, only one of you can claim her. Jane isn't a qualifying child of anyone else, including her father. You agree to let your mother claim Jane. This means your mother can claim Jane as a qualifying child for all of the six tax benefits listed earlier, if she qualifies for each of those benefits (and if you don’t claim Jane as a qualifying child for any of those tax benefits).

Example 2—parent has higher AGI than grandparent.

The facts are the same as in Example 1 except your AGI is $18,000. Because your mother's AGI isn't higher than yours, she can’t claim Jane. Only you can claim Jane.

Example 3—two persons claim same child.

The facts are the same as in Example 1 except that you and your mother both claim Jane as a qualifying child. In this case, you, as the child's parent, will be the only one allowed to claim Jane as a qualifying child. The IRS will disallow your mother's claim to the six tax benefits listed earlier unless she has another qualifying child.

Example 4—qualifying children split between two persons.

The facts are the same as in Example 1 except you also have two other young children who are qualifying children of both you and your mother. Only one of you can claim each child. However, if your mother's AGI is higher than yours, you can allow your mother to claim one or more of the children. For example, if you claim one child, your mother can claim the other two.

Example 5—taxpayer who is a qualifying child.

The facts are the same as in Example 1 except you are only 18 years old and didn't provide more than half of your own support for the year. This means you are your mother's qualifying child. If she can claim you as a dependent, then you can’t claim your daughter as a dependent because of the Dependent Taxpayer Test explained earlier.

Example 6—child lived with both parents and grandparent.

The facts are the same as in Example 1 except you are married to your daughter's father. The two of you live together with your daughter and your mother, and have an AGI of $20,000 on a joint return. If you and your husband don’t claim your daughter as a qualifying child, your mother can claim her instead. Even though the AGI on your joint return, $20,000, is more than your mother's AGI of $15,000, for this purpose each parent's AGI can be treated as $10,000, so your mother's $15,000 AGI is treated as higher than the highest AGI of any of the child's parents who can claim the child.

Example 7—separated parents.

You, your husband, and your 10-year-old son lived together until August 1, 2016, when your husband moved out of the household. In August and September, your son lived with you. For the rest of the year, your son lived with your husband, the boy's father. Your son is a qualifying child of both you and your husband because your son lived with each of you for more than half the year and because he met the relationship, age, support, and joint return tests for both of you. At the end of the year, you and your husband still weren't divorced, legally separated, or separated under a written separation agreement, so the rule for children of divorced or separated parents (or parents who live apart) doesn't apply.

You and your husband will file separate returns. Your husband agrees to let you treat your son as a qualifying child. This means, if your husband doesn't claim your son as a qualifying child, you can claim your son as a qualifying child for the dependency exemption, child tax credit, and exclusion for dependent care benefits (if you qualify for each of those tax benefits). However, you can’t claim head of household filing status because you and your husband didn't live apart for the last 6 months of the year. As a result, your filing status is married filing separately, so you can’t claim the earned income credit or the credit for child and dependent care expenses.

Example 8—separated parents claim same child.

The facts are the same as in Example 7 except that you and your husband both claim your son as a qualifying child. In this case, only your husband will be allowed to treat your son as a qualifying child. This is because, during 2016, the boy lived with him longer than with you. If you claimed an exemption or the child tax credit for your son, the IRS will disallow your claim to both these tax benefits. If you don’t have another qualifying child or dependent, the IRS will also disallow your claim to the exclusion for dependent care benefits. In addition, because you and your husband didn't live apart for the last 6 months of the year, your husband can’t claim head of household filing status. As a result, his filing status is married filing separately, so he can’t claim the earned income credit or the credit for child and dependent care expenses.

Example 9—unmarried parents.

You, your 5-year-old son, and your son's father lived together all year. You and your son's father aren't married. Your son is a qualifying child of both you and his father because he meets the relationship, age, residency, support, and joint return tests for both you and his father. Your AGI is $12,000 and your son's father's AGI is $14,000. Your son's father agrees to let you claim the child as a qualifying child. This means you can claim him as a qualifying child for the dependency exemption, child tax credit, head of household filing status, credit for child and dependent care expenses, exclusion for dependent care benefits, and the earned income credit, if you qualify for each of those tax benefits (and if your son's father doesn't claim your son as a qualifying child for any of those tax benefits).

Example 10—unmarried parents claim same child.

The facts are the same as in Example 9 except that you and your son's father both claim your son as a qualifying child. In this case, only your son's father will be allowed to treat your son as a qualifying child. This is because his AGI, $14,000, is more than your AGI, $12,000. If you claimed an exemption or the child tax credit for your son, the IRS will disallow your claim to both these tax benefits. If you don’t have another qualifying child or dependent, the IRS will also disallow your claim to the earned income credit, head of household filing status, the credit for child and dependent care expenses, and the exclusion for dependent care benefits.

Example 11—child didn't live with a parent.

You and your 7-year-old niece, your sister's child, lived with your mother all year. You are 25 years old, and your AGI is $9,300. Your mother's AGI is $15,000. Your niece's parents file jointly, have an AGI of less than $9,000, and don’t live with you or their child. Your niece is a qualifying child of both you and your mother because she meets the relationship, age, residency, support, and joint return tests for both you and your mother. However, only your mother can treat her as a qualifying child. This is because your mother's AGI, $15,000, is more than your AGI, $9,300.

Applying the tiebreaker rules to divorced or separated parents (or parents who live apart).

If a child is treated as the qualifying child of the noncustodial parent under the rules described earlier for children of divorced or separated parents (or parents who live apart), only the noncustodial parent can claim an exemption and the child tax credit for the child. However, only the custodial parent can claim the credit for child and dependent care expenses or the exclusion for dependent care benefits for the child, and only the custodial parent can treat the child as a dependent for the health coverage tax credit. Also, the noncustodial parent can't claim the child as a qualifying child for head of household filing status or the earned income credit. Instead, the custodial parent, if eligible, or other eligible person can claim the child as a qualifying child for those two benefits. If the child is the qualifying child of more than one person for these benefits, then the tiebreaker rules just explained determine whether the custodial parent or another eligible person can treat the child as a qualifying child.



Example 1.

You and your 5-year-old son lived all year with your mother, who paid the entire cost of keeping up the home. Your AGI is $10,000. Your mother's AGI is $25,000. Your son's father didn't live with you or your son.

Under the rules explained earlier for children of divorced or separated parents (or parents who live apart), your son is treated as the qualifying child of his father, who can claim an exemption and the child tax credit for him. Because of this, you can’t claim an exemption or the child tax credit for your son. However, those rules don't allow your son's father to claim your son as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, the earned income credit, or the health coverage tax credit.

You and your mother didn't have any child care expenses or dependent care benefits, so neither of you can claim the credit for child and dependent care expenses or the exclusion for dependent care benefits. Also, neither of you qualifies for the health coverage tax credit. But the boy is a qualifying child of both you and your mother for head of household filing status and the earned income credit because he meets the relationship, age, residency, support, and joint return tests for both you and your mother. (Note: The support test doesn't apply for the earned income credit.) However, you agree to let your mother claim your son. This means she can claim him for head of household filing status and the earned income credit if she qualifies for each and if you don’t claim him as a qualifying child for the earned income credit. (You can’t claim head of household filing status because your mother paid the entire cost of keeping up the home.)

Example 2.

The facts are the same as in Example 1 except your AGI is $25,000 and your mother's AGI is $21,000. Your mother can’t claim your son as a qualifying child for any purpose because her AGI isn't higher than yours.

Example 3.

The facts are the same as in Example 1 except you and your mother both claim your son as a qualifying child for the earned income credit. Your mother also claims him as a qualifying child for head of household filing status. You, as the child's parent, will be the only one allowed to claim your son as a qualifying child for the earned income credit. The IRS will disallow your mother's claim to the earned income credit and head of household filing status unless she has another qualifying child.

Qualifying Relative

Four tests must be met for a person to be your qualifying relative. The four tests are:

Age.

Unlike a qualifying child, a qualifying relative can be any age. There is no age test for a qualifying relative.



Kidnapped child.

You may be able to treat a child as your qualifying relative even if the child has been kidnapped. See Pub. 501 for details.



Not a Qualifying Child Test

A child isn't your qualifying relative if the child is your qualifying child or the qualifying child of any other taxpayer.

Example 1.

Your 22-year-old daughter, who is a student, lives with you and meets all the tests to be your qualifying child. She isn't your qualifying relative.

Example 2.

Your 2-year-old son lives with your parents and meets all the tests to be their qualifying child. He isn't your qualifying relative.

Example 3.

Your son lives with you but isn't your qualifying child because he is 30 years old and doesn't meet the age test. He may be your qualifying relative if the gross income test and the support test are met.

Example 4.

Your 13-year-old grandson lived with his mother for 3 months, with his uncle for 4 months, and with you for 5 months during the year. He isn't your qualifying child because he doesn't meet the residency test. He may be your qualifying relative if the gross income test and the support test are met.

Child of person not required to file a return.

A child isn't the qualifying child of any other taxpayer and so may qualify as your qualifying relative if the child's parent (or other person for whom the child is defined as a qualifying child) isn't required to file an income tax return and either:

  • Doesn't file an income tax return, or

  • Files a return only to get a refund of income tax withheld or estimated tax paid.

Example 1—return not required.

You support an unrelated friend and her 3-year-old child, who lived with you all year in your home. Your friend has no gross income, isn't required to file a 2016 tax return, and doesn't file a 2016 tax return. Both your friend and her child are your qualifying relatives if the support test is met.

Example 2—return filed to claim refund.

The facts are the same as in Example 1 except your friend had wages of $1,500 during the year and had income tax withheld from her wages. She files a return only to get a refund of the income tax withheld and doesn't claim the earned income credit or any other tax credits or deductions. Both your friend and her child are your qualifying relatives if the support test is met.

Example 3—earned income credit claimed.

The facts are the same as in Example 2 except your friend had wages of $8,000 during the year and claimed the earned income credit on her return. Your friend's child is the qualifying child of another taxpayer (your friend), so you can’t claim your friend's child as your qualifying relative. Also, you can’t claim your friend as your qualifying relative because of the gross income test explained later.



Child in Canada or Mexico.

You may be able to claim your child as a dependent even if the child lives in Canada or Mexico. If the child doesn't live with you, the child doesn't meet the residency test to be your qualifying child. However, the child may still be your qualifying relative. If the persons the child does live with aren't U.S. citizens and have no U.S. gross income, those persons aren't "taxpayers," so the child isn't the qualifying child of any other taxpayer. If the child isn't the qualifying child of any other taxpayer, the child is your qualifying relative as long as the gross income test and the support test are met.

You can’t claim as a dependent a child who lives in a foreign country other than Canada or Mexico, unless the child is a U.S. citizen, U.S. resident alien, or U.S. national. There is an exception for certain adopted children who lived with you all year. See Citizen or Resident Test , earlier.

Example.

You provide all the support of your children, ages 6, 8, and 12, who live in Mexico with your mother and have no income. You are single and live in the United States. Your mother isn't a U.S. citizen and has no U.S. income, so she isn't a "taxpayer." Your children aren't your qualifying children because they don’t meet the residency test. But since they aren't the qualifying children of any other taxpayer, they are your qualifying relatives and you can claim them as dependents. You may also be able to claim your mother as a dependent if the gross income and support tests are met.



Member of Household or Relationship Test

To meet this test, a person must either:

  1. Live with you all year as a member of your household, or

  2. Be related to you in one of the ways listed under Relatives who don’t have to live with you .

If at any time during the year the person was your spouse, that person can’t be your qualifying relative. However, see Personal Exemptions , earlier.

Relatives who don’t have to live with you.

A person related to you in any of the following ways doesn't have to live with you all year as a member of your household to meet this test.

  • Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). (A legally adopted child is considered your child.)

  • Your brother, sister, half brother, half sister, stepbrother, or stepsister.

  • Your father, mother, grandparent, or other direct ancestor, but not foster parent.

  • Your stepfather or stepmother.

  • A son or daughter of your brother or sister.

  • A son or daughter of your half brother or half sister.

  • A brother or sister of your father or mother.

  • Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

Any of these relationships that were established by marriage aren't ended by death or divorce.

Example.

You and your wife began supporting your wife's father, a widower, in 2010. Your wife died in 2015. Despite your wife's death, your father-in-law continues to meet this test, even if he doesn't live with you. You can claim him as a dependent if all other tests are met, including the gross income test and support test.



Foster child.

A foster child is an individual who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.



Joint return.

If you file a joint return, the person can be related to either you or your spouse. Also, the person doesn't need to be related to the spouse who provides support.

For example, your spouse's uncle who receives more than half of his support from you may be your qualifying relative, even though he doesn't live with you. However, if you and your spouse file separate returns, your spouse's uncle can be your qualifying relative only if he lives with you all year as a member of your household.



Temporary absences.

A person is considered to live with you as a member of your household during periods of time when one of you, or both, are temporarily absent due to special circumstances such as:

  • Illness,

  • Education,

  • Business,

  • Vacation,

  • Military service, or

  • Detention in a juvenile facility.

If the person is placed in a nursing home for an indefinite period of time to receive constant medical care, the absence may be considered temporary.



Death or birth.

A person who died during the year, but lived with you as a member of your household until death, will meet this test. The same is true for a child who was born during the year and lived with you as a member of your household for the rest of the year. The test is also met if a child lived with you as a member of your household except for any required hospital stay following birth.

If your dependent died during the year and you otherwise qualify to claim an exemption for the dependent, you can still claim the exemption.

Example.

Your dependent mother died on January 15. She met the tests to be your qualifying relative. The other tests to claim an exemption for a dependent were also met. You can claim an exemption for her on your return.



Local law violated.

A person doesn't meet this test if at any time during the year the relationship between you and that person violates local law.

Example.

Your girlfriend lived with you as a member of your household all year. However, your relationship with her violated the laws of the state where you live, because she was married to someone else. Therefore, she doesn't meet this test and you can’t claim her as a dependent.



Adopted child.

An adopted child is always treated as your own child. The term "adopted child" includes a child who was lawfully placed with you for legal adoption.



Cousin.

Your cousin meets this test only if he or she lives with you all year as a member of your household. A cousin is a descendant of a brother or sister of your father or mother.



Gross Income Test

To meet this test, a person's gross income for the year must be less than $4,050.

Gross income defined.

Gross income is all income in the form of money, property, and services that isn't exempt from tax.

In a manufacturing, merchandising, or mining business, gross income is the total net sales minus the cost of goods sold, plus any miscellaneous income from the business.

Gross receipts from rental property are gross income. Don’t deduct taxes, repairs, or other expenses to determine the gross income from rental property.

Gross income includes a partner's share of the gross (not a share of the net) partnership income.

Gross income also includes all taxable unemployment compensation and certain scholarship and fellowship grants. Scholarships received by degree candidates and used for tuition, fees, supplies, books, and equipment required for particular courses generally aren't included in gross income. For more information about scholarships, see chapter 12.

Tax-exempt income, such as certain social security benefits, isn't included in gross income.



Disabled dependent working at sheltered workshop.

For purposes of the gross income test, the gross income of an individual who is permanently and totally disabled at any time during the year doesn't include income for services the individual performs at a sheltered workshop. The availability of medical care at the workshop must be the main reason for the individual's presence there. Also, the income must come solely from activities at the workshop that are incident to this medical care.

A "sheltered workshop" is a school that:

  • Provides special instruction or training designed to alleviate the disability of the individual, and

  • Is operated by certain tax-exempt organizations, or by a state, a U.S. possession, a political subdivision of a state or possession, the United States, or the District of Columbia.



"Permanently and totally disabled" has the same meaning here as under Qualifying Child, earlier.

Support Test (To Be a Qualifying Relative)

To meet this test, you generally must provide more than half of a person's total support during the calendar year.

However, if two or more persons provide support, but no one person provides more than half of a person's total support, see Multiple Support Agreement , later.

How to determine if support test is met.

You figure whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources. This includes support the person provided from his or her own funds.

You may find Worksheet 3-1 helpful in figuring whether you provided more than half of a person's support.



Person's own funds not used for support.

A person's own funds aren't support unless they are actually spent for support.

Example.

Your mother received $2,400 in social security benefits and $300 in interest. She paid $2,000 for lodging and $400 for recreation. She put $300 in a savings account.

Even though your mother received a total of $2,700 ($2,400 + $300), she spent only $2,400 ($2,000 + $400) for her own support. If you spent more than $2,400 for her support and no other support was received, you have provided more than half of her support.



Child's wages used for own support.

You can’t include in your contribution to your child's support any support paid for by the child with the child's own wages, even if you paid the wages.



Year support is provided.

The year you provide the support is the year you pay for it, even if you do so with borrowed money that you repay in a later year.

If you use a fiscal year to report your income, you must provide more than half of the dependent's support for the calendar year in which your fiscal year begins.



Armed Forces dependency allotments.

The part of the allotment contributed by the government and the part taken out of your military pay are both considered provided by you in figuring whether you provide more than half of the support. If your allotment is used to support persons other than those you name, you can take the exemptions for them if they otherwise qualify.

Example.

You are in the Armed Forces. You authorize an allotment for your widowed mother that she uses to support herself and her sister. If the allotment provides more than half of each person's support, you can take an exemption for each of them, if they otherwise qualify, even though you authorize the allotment only for your mother.



Tax-exempt military quarters allowances.

These allowances are treated the same way as dependency allotments in figuring support. The allotment of pay and the tax-exempt basic allowance for quarters are both considered as provided by you for support.



Tax-exempt income.

In figuring a person's total support, include tax-exempt income, savings, and borrowed amounts used to support that person. Tax-exempt income includes certain social security benefits, welfare benefits, nontaxable life insurance proceeds, Armed Forces family allotments, nontaxable pensions, and tax-exempt interest.

Example 1.

You provide $4,000 toward your mother's support during the year. She has earned income of $600, nontaxable social security benefits of $4,800, and tax-exempt interest of $200. She uses all these for her support. You can’t claim an exemption for your mother because the $4,000 you provide isn't more than half of her total support of $9,600 ($4,000 + $600 + $4,800 + $200).

Example 2.

Your niece takes out a student loan of $2,500 and uses it to pay her college tuition. She is personally responsible for the loan. You provide $2,000 toward her total support. You can’t claim an exemption for her because you provide less than half of her support.



Social security benefits.

If a married couple receives benefits that are paid by one check made out to both of them, half of the total paid is considered to be for the support of each spouse, unless they can show otherwise.

If a child receives social security benefits and uses them toward his or her own support, the benefits are considered as provided by the child.



Support provided by the state (welfare, food stamps, housing, etc.).

Benefits provided by the state to a needy person generally are considered support provided by the state. However, payments based on the needs of the recipient won't be considered as used entirely for that person's support if it is shown that part of the payments weren't used for that purpose.



Foster care.

Payments you receive for the support of a foster child from a child placement agency are considered support provided by the agency. See Foster care payments and expenses , earlier.



Home for the aged.

If you make a lump-sum advance payment to a home for the aged to take care of your relative for life and the payment is based on that person's life expectancy, the amount of support you provide each year is the lump-sum payment divided by the relative's life expectancy. The amount of support you provide also includes any other amounts you provided during the year.



Total Support

To figure if you provided more than half of a person's support, you must first determine the total support provided for that person. Total support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities.

Generally, the amount of an item of support is the amount of the expense incurred in providing that item. For lodging, the amount of support is the fair rental value of the lodging.

Expenses not directly related to any one member of a household, such as the cost of food for the household, must be divided among the members of the household.

Example 1.

Grace Brown, mother of Mary Miller, lives with Frank and Mary Miller and their two children. Grace gets social security benefits of $2,400, which she spends for clothing, transportation, and recreation. Grace has no other income. Frank and Mary's total food expense for the household is $5,200. They pay Grace's medical and drug expenses of $1,200. The fair rental value of the lodging provided for Grace is $1,800 a year, based on the cost of similar rooming facilities. Figure Grace's total support as follows:

Fair rental value of lodging $ 1,800
Clothing, transportation, and recreation 2,400
Medical expenses 1,200
Share of food (1/5 of $5,200) 1,040
Total support $6,440


The support Frank and Mary provide, $4,040 ($1,800 lodging + $1,200 medical expenses + $1,040 food), is more than half of Grace's $6,440 total support.

Example 2.

Your parents live with you, your spouse, and your two children in a house you own. The fair rental value of your parents' share of the lodging is $2,000 a year ($1,000 each), which includes furnishings and utilities. Your father receives a nontaxable pension of $4,200, which he spends equally between your mother and himself for items of support such as clothing, transportation, and recreation. Your total food expense for the household is $6,000. Your heat and utility bills amount to $1,200. Your mother has hospital and medical expenses of $600, which you pay during the year. Figure your parents' total support as follows:

Support provided Father Mother
Fair rental value of lodging $1,000 $1,000
Pension spent for their support 2,100 2,100
Share of food (1/6 of $6,000) 1,000 1,000
Medical expenses for mother 600
Parents' total support $4,100 $4,700

You must apply the support test separately to each parent. You provide $2,000 ($1,000 lodging + $1,000 food) of your father's total support of $4,100 — less than half. You provide $2,600 to your mother ($1,000 lodging + $1,000 food + $600 medical) — more than half of her total support of $4,700. You meet the support test for your mother, but not your father. Heat and utility costs are included in the fair rental value of the lodging, so these aren't considered separately.

Lodging.

If you provide a person with lodging, you are considered to provide support equal to the fair rental value of the room, apartment, house, or other shelter in which the person lives. Fair rental value includes a reasonable allowance for the use of furniture and appliances, and for heat and other utilities that are provided.



Fair rental value defined.

Fair rental value is the amount you could reasonably expect to receive from a stranger for the same kind of lodging. It is used instead of actual expenses such as taxes, interest, depreciation, paint, insurance, utilities, and the cost of furniture and appliances. In some cases, fair rental value may be equal to the rent paid.

If you provide the total lodging, the amount of support you provide is the fair rental value of the room the person uses, or a share of the fair rental value of the entire dwelling if the person has use of your entire home. If you don’t provide the total lodging, the total fair rental value must be divided depending on how much of the total lodging you provide. If you provide only a part and the person supplies the rest, the fair rental value must be divided between both of you according to the amount each provides.

Example.

Your parents live rent free in a house you own. It has a fair rental value of $5,400 a year furnished, which includes a fair rental value of $3,600 for the house and $1,800 for the furniture. This doesn't include heat and utilities. The house is completely furnished with furniture belonging to your parents. You pay $600 for their utility bills. Utilities aren't usually included in rent for houses in the area where your parents live. Therefore, you consider the total fair rental value of the lodging to be $6,000 ($3,600 fair rental value of the unfurnished house + $1,800 allowance for the furnishings provided by your parents + $600 cost of utilities) of which you are considered to provide $4,200 ($3,600 + $600).



Person living in his or her own home.

The total fair rental value of a person's home that he or she owns is considered support contributed by that person.



Living with someone rent free.

If you live with a person rent free in his or her home, you must reduce the amount you provide for support of that person by the fair rental value of lodging he or she provides you.



Property.

Property provided as support is measured by its fair market value. Fair market value is the price that property would sell for on the open market. It is the price that would be agreed upon between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.



Capital expenses.

Capital items, such as furniture, appliances, and cars, bought for a person during the year can be included in total support under certain circumstances.

The following examples show when a capital item is or isn't support.

Example 1.

You buy a $200 power lawn mower for your 13-year-old child. The child is given the duty of keeping the lawn trimmed. Because the lawn mower benefits all members of the household, don’t include the cost of the lawn mower in the support of your child.

Example 2.

You buy a $150 television set as a birthday present for your 12-year-old child. The television set is placed in your child's bedroom. You can include the cost of the television set in the support of your child.

Example 3.

You pay $5,000 for a car and register it in your name. You and your 17-year-old daughter use the car equally. Because you own the car and don’t give it to your daughter but merely let her use it, don’t include the cost of the car in your daughter's total support. However, you can include in your daughter's support your out-of-pocket expenses of operating the car for her benefit.

Example 4.

Your 17-year-old son, using personal funds, buys a car for $4,500. You provide the rest of your son's support, $4,000. Because the car is bought and owned by your son, the car's fair market value ($4,500) must be included in his support. Your son has provided more than half of his own total support of $8,500 ($4,500 + $4,000), so he isn't your qualifying child. You didn't provide more than half of his total support, so he isn't your qualifying relative. You can’t claim an exemption for your son.



Medical insurance premiums.

Medical insurance premiums you pay, including premiums for supplementary Medicare coverage, are included in the support you provide.



Medical insurance benefits.

Medical insurance benefits, including basic and supplementary Medicare benefits, aren't part of support.



Tuition payments and allowances under the GI Bill.

Amounts veterans receive under the GI Bill for tuition payments and allowances while they attend school are included in total support.

Example.

During the year, your son receives $2,200 from the government under the GI Bill. He uses this amount for his education. You provide the rest of his support, $2,000. Because GI benefits are included in total support, your son's total support is $4,200 ($2,200 + $2,000). You haven't provided more than half of his support.



Child care expenses.

If you pay someone to provide child or dependent care, you can include these payments in the amount you provided for the support of your child or disabled dependent, even if you claim a credit for the payments. For information on the credit, see chapter 32.



Other support items.

Other items may be considered as support depending on the facts in each case.



Don’t Include in Total Support

The following items aren't included in total support.

  1. Federal, state, and local income taxes paid by persons from their own income.

  2. Social security and Medicare taxes paid by persons from their own income.

  3. Life insurance premiums.

  4. Funeral expenses.

  5. Scholarships received by your child if your child is a student.

  6. Survivors' and Dependents' Educational Assistance payments used for the support of the child who receives them.

Multiple Support Agreement

Sometimes no one provides more than half of the support of a person. Instead, two or more persons, each of whom would be able to take the exemption but for the support test, together provide more than half of the person's support.

When this happens, you can agree that any one of you who individually provides more than 10% of the person's support, but only one, can claim an exemption for that person as a qualifying relative. Each of the others must sign a statement agreeing not to claim the exemption for that year. The person who claims the exemption must keep these signed statements for his or her records. A multiple support declaration identifying each of the others who agreed not to claim the exemption must be attached to the return of the person claiming the exemption. Form 2120 can be used for this purpose.

You can claim an exemption under a multiple support agreement for someone related to you or for someone who lived with you all year as a member of your household.

Example 1.

You, your sister, and your two brothers provide the entire support of your mother for the year. You provide 45%, your sister 35%, and your two brothers each provide 10%. Either you or your sister can claim an exemption for your mother. The other must sign a statement agreeing not to take an exemption for your mother. The one who claims the exemption must attach Form 2120, or a similar declaration, to his or her return and must keep the statement signed by the other for his or her records. Because neither brother provides more than 10% of the support, neither can take the exemption and neither has to sign a statement.

Example 2.

You and your brother each provide 20% of your mother's support for the year. The remaining 60% of her support is provided equally by two persons who aren't related to her. She doesn't live with them. Because more than half of her support is provided by persons who can’t claim an exemption for her, no one can take the exemption.

Example 3.

Your father lives with you and receives 25% of his support from social security, 40% from you, 24% from his brother (your uncle), and 11% from a friend. Either you or your uncle can take the exemption for your father if the other signs a statement agreeing not to. The one who takes the exemption must attach Form 2120, or a similar declaration, to his return and must keep for his records the signed statement from the one agreeing not to take the exemption.

Support Test for Children of Divorced or Separated Parents (or Parents Who Live Apart)

In most cases, a child of divorced or separated parents (or parents who live apart) will be a qualifying child of one of the parents. See Children of divorced or separated parents (or parents who live apart) under Qualifying Child, earlier. However, if the child doesn't meet the requirements to be a qualifying child of either parent, the child may be a qualifying relative of one of the parents. If you think this might apply to you, see Pub. 501.

Phaseout of Exemptions

You lose at least part of the benefit of your exemptions if your adjusted gross income (AGI) is above a certain amount. For 2016, the phaseout begins at the following amounts.

Filing Status AGI Level That Reduces
Exemption Amount
Married filing separately $155,650
Single 259,400
Head of household 285,350
Married filing jointly 311,300
Qualifying widow(er) 311,300

You must reduce the dollar amount of your exemptions by 2% for each $2,500, or part of $2,500 ($1,250 if you are married filing separately), that your AGI exceeds the amount shown above for your filing status. If your AGI exceeds the amount shown above by more than $122,500 ($61,250 if married filing separately), the amount of your deduction for exemptions is reduced to zero.

If your AGI exceeds the level for your filing status, use Worksheet 3-2 to figure the amount of your deduction for exemptions.

Worksheet 3-2.Worksheet for Determining the Deduction for Exemptions

1. Is the amount on Form 1040, line 38, more than the amount on line 4 below for your filing status?
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No. Stop. Multiply $4,050 by the total number of exemptions claimed on line 6d of Form 1040 and enter the result on Form 1040, line 42.
This is an Image: box.gif
Yes. Continue.
2. Multiply $4,050 by the total number of exemptions claimed on line 6d of Form 1040 2.
3. Enter the amount from Form 1040, line 38 3.
4. Enter the amount shown below for your filing status:
  • Married filing separately—$155,650

  • Single—$259,400

  • Head of household—$285,350

  • Married filing jointly or Qualifying widow(er)—$311,300

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4.
5. Subtract line 4 from line 3. If the result is more than $122,500 ($61,250 if married filing separately), stop here. You can’t take a deduction for exemptions 5.
6. Divide line 5 by $2,500 ($1,250 if married filing separately). If the result isn't a whole number, round it up to the next higher whole number (for example, increase .00004 to 1) 6.
7. Multiply line 6 by 2% (0.02) and enter the result as a decimal (rounded to at least three places) 7.
8. Multiply line 2 by line 7 8.
9. Deduction for exemptions. Subtract line 8 from line 2. Enter the result here and on Form 1040, line 42 9.

Social Security Numbers for Dependents

You must show the social security number (SSN) of any dependent for whom you claim an exemption in column (2) of line 6c of your Form 1040 or Form 1040A.

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If you don’t show the dependent's SSN when required or if you show an incorrect SSN, the exemption may be disallowed.

No SSN.

If a person for whom you expect to claim an exemption on your return doesn't have an SSN, either you or that person should apply for an SSN as soon as possible by filing Form SS-5, Application for a Social Security Card, with the Social Security Administration (SSA). You can get Form SS-5 online at www.socialsecurity.gov or at your local SSA office.

It usually takes about 2 weeks to get an SSN once the SSA has all the information it needs. If you don’t have a required SSN by the filing due date, you can file Form 4868 for an extension of time to file.



Born and died in 2016.

If your child was born and died in 2016, and you don’t have an SSN for the child, you may attach a copy of the child's birth certificate, death certificate, or hospital records instead. The document must show the child was born alive. If you do this, enter "DIED" in column (2) of line 6c of your Form 1040 or Form 1040A.



Alien or adoptee with no SSN.

If your dependent doesn't have and can’t get an SSN, you must list the individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN) instead of an SSN.



Taxpayer identification numbers for aliens.

If your dependent is a resident or nonresident alien who doesn't have and isn't eligible to get an SSN, your dependent must apply for an individual taxpayer identification number (ITIN). For details on how to apply, see Form W-7, Application for IRS Individual Taxpayer Identification Number.



Taxpayer identification numbers for adoptees.

If you have a child who was placed with you by an authorized placement agency, you may be able to claim an exemption for the child. However, if you can’t get an SSN or an ITIN for the child, you must get an adoption taxpayer identification number (ATIN) for the child from the IRS. See Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, for details.



4. Tax Withholding and Estimated Tax

What's New for 2017

Tax law changes for 2017. When you figure how much income tax you want withheld from your pay and when you figure your estimated tax, consider tax law changes effective in 2017. For more information, see Pub. 505, Tax Withholding and Estimated Tax.

Reminders

Estimated tax safe harbor for higher income taxpayers. If your 2016 adjusted gross income was more than $150,000 ($75,000 if you are married filing a separate return), you must pay the smaller of 90% of your expected tax for 2017 or 110% of the tax shown on your 2016 return to avoid an estimated tax penalty.

Introduction

This chapter discusses how to pay your tax as you earn or receive income during the year. In general, the federal income tax is a pay-as-you-go tax. There are two ways to pay as you go.

  • Withholding. If you are an employee, your employer probably withholds income tax from your pay. Tax also may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. The amount withheld is paid to the IRS in your name.

  • Estimated tax. If you don't pay your tax through withholding, or don't pay enough tax that way, you may have to pay estimated tax. People who are in business for themselves generally will have to pay their tax this way. Also, you may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rent, and royalties. Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax as well.

This chapter explains these methods. In addition, it also explains the following.

  • Credit for withholding and estimated tax. When you file your 2016 income tax return, take credit for all the income tax withheld from your salary, wages, pensions, etc., and for the estimated tax you paid for 2016. Also take credit for any excess social security or railroad retirement tax withheld (discussed in chapter 38).

  • Underpayment penalty. If you didn't pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. In most cases, the IRS can figure this penalty for you. See Underpayment Penalty for 2016 at the end of this chapter.

Useful Items - You may want to see:

Publication

  • 505 Tax Withholding and Estimated Tax

Form (and Instructions)

  • W-4 Employee's Withholding Allowance Certificate

  • W-4P Withholding Certificate for Pension or Annuity Payments

  • W-4S Request for Federal Income Tax Withholding From Sick Pay

  • W-4V Voluntary Withholding Request

  • 1040-ES Estimated Tax for Individuals

  • 2210 Underpayment of Estimated Tax by Individuals, Estates, and Trusts

  • 2210-F Underpayment of Estimated Tax by Farmers and Fishermen

Tax Withholding for 2017

This section discusses income tax withholding on:

  • Salaries and wages,

  • Tips,

  • Taxable fringe benefits,

  • Sick pay,

  • Pensions and annuities,

  • Gambling winnings,

  • Unemployment compensation, and

  • Certain federal payments.

This section explains the rules for withholding tax from each of these types of income.

This section also covers backup withholding on interest, dividends, and other payments.

Salaries and Wages

Income tax is withheld from the pay of most employees. Your pay includes your regular pay, bonuses, commissions, and vacation allowances. It also includes reimbursements and other expense allowances paid under a nonaccountable plan. See Supplemental Wages , later, for more information about reimbursements and allowances paid under a nonaccountable plan.

If your income is low enough that you won't have to pay income tax for the year, you may be exempt from withholding. This is explained under Exemption From Withholding , later.

You can ask your employer to withhold income tax from noncash wages and other wages not subject to withholding. If your employer doesn't agree to withhold tax, or if not enough is withheld, you may have to pay estimated tax, as discussed later under Estimated Tax for 2017 .

Military retirees.

Military retirement pay is treated in the same manner as regular pay for income tax withholding purposes, even though it is treated as a pension or annuity for other tax purposes.



Household workers.

If you are a household worker, you can ask your employer to withhold income tax from your pay. A household worker is an employee who performs household work in a private home, local college club, or local fraternity or sorority chapter.

Tax is withheld only if you want it withheld and your employer agrees to withhold it. If you don't have enough income tax withheld, you may have to pay estimated tax, as discussed later under Estimated Tax for 2017 .



Farmworkers.

Generally, income tax is withheld from your cash wages for work on a farm unless your employer does both of these:

  • Pays you cash wages of less than $150 during the year, and

  • Has expenditures for agricultural labor totaling less than $2,500 during the year.



Differential wage payments.

When employees are on leave from employment for military duty, some employers make up the difference between the military pay and civilian pay. Payments to an employee who is on active duty for a period of more than 30 days will be subject to income tax withholding, but not subject to social security, Medicare, or federal unemployment (FUTA) tax withholding. The wages and withholding will be reported on Form W-2, Wage and Tax Statement.



Determining Amount of Tax Withheld Using Form W-4

The amount of income tax your employer withholds from your regular pay depends on two things.

  • The amount you earn in each payroll period.

  • The information you give your employer on Form W-4.

Form W-4 includes four types of information that your employer will use to figure your withholding.

  • Whether to withhold at the single rate or at the lower married rate.

  • How many withholding allowances you claim (each allowance reduces the amount withheld).

  • Whether you want an additional amount withheld.

  • Whether you are claiming an exemption from withholding in 2017. See Exemption From Withholding , later.

Note.

You must specify a filing status and a number of withholding allowances on Form W-4. You can’t specify only a dollar amount of withholding.

New Job

When you start a new job, you must fill out Form W-4 and give it to your employer. Your employer should have copies of the form. If you need to change the information later, you must fill out a new form.

If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld. You may be able to avoid overwithholding if your employer agrees to use the part-year method. See Part-Year Method in chapter 1 of Pub. 505 for more information.

Employee also receiving pension income.

If you receive pension or annuity income and begin a new job, you will need to file Form W-4 with your new employer. However, you can choose to split your withholding allowances between your pension and job in any manner.



Changing Your Withholding

During the year changes may occur to your marital status, exemptions, adjustments, deductions, or credits you expect to claim on your tax return. When this happens, you may need to give your employer a new Form W-4 to change your withholding status or your number of allowances.

If the changes reduce the number of allowances you are claiming or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days.

Generally, you can submit a new Form W-4 whenever you wish to change the number of your withholding allowances for any other reason.

Changing your withholding for 2018.

If events in 2017 will decrease the number of your withholding allowances for 2018, you must give your employer a new Form W-4 by December 1, 2017. If the event occurs in December 2017, submit a new Form W-4 within 10 days.



Checking Your Withholding

After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too little or too much. If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding. You should try to have your withholding match your actual tax liability. If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty. If too much tax is withheld, you will lose the use of that money until you get your refund. Always check your withholding if there are personal or financial changes in your life or changes in the law that might change your tax liability.

Note.

You can’t give your employer a payment to cover withholding on salaries and wages for past pay periods or a payment for estimated tax.

Completing Form W-4 and Worksheets

Form W-4 has worksheets to help you figure how many withholding allowances you can claim. The worksheets are for your own records. Don't give them to your employer.

Multiple jobs.

If you have income from more than one job at the same time, complete only one set of Form W-4 worksheets. Then split your allowances between the Forms W-4 for each job. You can’t claim the same allowances with more than one employer at the same time. You can claim all your allowances with one employer and none with the other(s), or divide them any other way.



Married individuals.

If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using your combined income, adjustments, deductions, exemptions, and credits. Use only one set of worksheets. You can divide your total allowances any way, but you can’t claim an allowance that your spouse also claims.

If you and your spouse expect to file separate returns, figure your allowances using separate worksheets based on your own individual income, adjustments, deductions, exemptions, and credits.



Alternative method of figuring withholding allowances.

You don't have to use the Form W-4 worksheets if you use a more accurate method of figuring the number of withholding allowances. For more information, see Alternative method of figuring withholding allowances under Completing Form W-4 and Worksheets in Pub. 505, chapter 1.



Personal Allowances Worksheet.

Use the Personal Allowances Worksheet on Form W-4 to figure your withholding allowances based on exemptions and any special allowances that apply.



Deduction and Adjustments Worksheet.

Use the Deduction and Adjustments Worksheet on Form W-4 if you plan to itemize your deductions, claim certain credits, or claim adjustments to the income on your 2017 tax return and you want to reduce your withholding. Also, complete this worksheet when you have changes to these items to see if you need to change your withholding.



Two-Earners/Multiple Jobs Worksheet.

You may need to complete the Two-Earners/Multiple Jobs Worksheet on Form W-4 if you have more than one job, a working spouse, or are also receiving a pension. Also, on this worksheet you can add any additional withholding necessary to cover any amount you expect to owe other than income tax, such as self-employment tax.



Getting the Right Amount of Tax Withheld

In most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these two rules.

  • You accurately complete all the Form W-4 worksheets that apply to you.

  • You give your employer a new Form W-4 when changes occur.

But because the worksheets and withholding methods don't account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations.

  • You are married and both you and your spouse work.

  • You have more than one job at a time.

  • You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.

  • You will owe additional amounts with your return, such as self-employment tax.

  • Your withholding is based on obsolete Form W-4 information for a substantial part of the year.

  • Your earnings are more than the amount shown under Check your withholding in the instructions at the top of page 1 of Form W-4.

  • You work only part of the year.

  • You change the number of your withholding allowances during the year.

Cumulative wage method.

If you change the number of your withholding allowances during the year, too much or too little tax may have been withheld for the period before you made the change. You may be able to compensate for this if your employer agrees to use the cumulative wage withholding method for the rest of the year. You must ask your employer in writing to use this method.

To be eligible, you must have been paid for the same kind of payroll period (weekly, biweekly, etc.) since the beginning of the year.



Publication 505

To make sure you are getting the right amount of tax withheld, get Pub. 505. It will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It also will help you determine how much, if any, additional withholding is needed each payday to avoid owing tax when you file your return. If you don't have enough tax withheld, you may have to pay estimated tax, as explained under Estimated Tax for 2017 , later.

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You can use the IRS Withholding Calculator at IRS.gov/w4app, instead of Pub. 505 or the worksheets included with Form W-4, to determine whether you need to have your withholding increased or decreased.

Rules Your Employer Must Follow

It may be helpful for you to know some of the withholding rules your employer must follow. These rules can affect how to fill out your Form W-4 and how to handle problems that may arise.

New Form W-4.

When you start a new job, your employer should have you complete a Form W-4. Beginning with your first payday, your employer will use the information you give on the form to figure your withholding.

If you later fill out a new Form W-4, your employer can put it into effect as soon as possible. The deadline for putting it into effect is the start of the first payroll period ending 30 or more days after you turn it in.



No Form W-4.

If you don't give your employer a completed Form W-4, your employer must withhold at the highest rate, as if you were single and claimed no withholding allowances.



Repaying withheld tax.

If you find you are having too much tax withheld because you didn't claim all the withholding allowances you are entitled to, you should give your employer a new Form W-4. Your employer can’t repay any of the tax previously withheld. Instead, claim the full amount withheld when you file your tax return.

However, if your employer has withheld more than the correct amount of tax for the Form W-4 you have in effect, you don't have to fill out a new Form W-4 to have your withholding lowered to the correct amount. Your employer can repay the amount that was withheld incorrectly. If you aren’t repaid, your Form W-2 will reflect the full amount actually withheld, which you would claim when you file your tax return.



Exemption From Withholding

If you claim exemption from withholding, your employer won't withhold federal income tax from your wages. The exemption applies only to income tax, not to social security, Medicare, or FUTA tax withholding.

You can claim exemption from withholding for 2017 only if both of the following situations apply.

  • For 2016 you had a right to a refund of all federal income tax withheld because you had no tax liability.

  • For 2017 you expect a refund of all federal income tax withheld because you expect to have no tax liability.

Students.

If you are a student, you aren’t automatically exempt. See chapter 1 to find out if you must file a return. If you work only part time or only during the summer, you may qualify for exemption from withholding.



Age 65 or older or blind.

If you are 65 or older or blind, use Worksheet 1-3 or 1-4 in chapter 1 of Pub. 505, to help you decide if you qualify for exemption from withholding. Don't use either worksheet if you will itemize deductions, claim exemptions for dependents, or claim tax credits on your 2017 return. Instead, see Itemizing deductions or claiming exemptions or credits in chapter 1 of Pub. 505.



Claiming exemption from withholding.

To claim exemption, you must give your employer a Form W-4. Don't complete lines 5 and 6. Enter "Exempt" on line 7.

If you claim exemption, but later your situation changes so that you will have to pay income tax after all, you must file a new Form W-4 within 10 days after the change. If you claim exemption in 2017, but you expect to owe income tax for 2018, you must file a new Form W-4 by December 1, 2017.

Your claim of exempt status may be reviewed by the IRS.



An exemption is good for only 1 year.

You must give your employer a new Form W-4 by February 15 each year to continue your exemption.



Supplemental Wages

Supplemental wages include bonuses, commissions, overtime pay, vacation allowances, certain sick pay, and expense allowances under certain plans. The payer can figure withholding on supplemental wages using the same method used for your regular wages. However, if these payments are identified separately from your regular wages, your employer or other payer of supplemental wages can withhold income tax from these wages at a flat rate.

Expense allowances.

Reimbursements or other expense allowances paid by your employer under a nonaccountable plan are treated as supplemental wages.

Reimbursements or other expense allowances paid under an accountable plan that are more than your proven expenses are treated as paid under a nonaccountable plan if you don't return the excess payments within a reasonable period of time.

For more information about accountable and nonaccountable expense allowance plans, see Reimbursements in chapter 26.



Penalties

You may have to pay a penalty of $500 if both of the following apply.

  • You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.

  • You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.

There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of up to $1,000 or imprisonment for up to 1 year, or both.

These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the proper withholding of taxes. A simple error or an honest mistake won't result in one of these penalties. For example, a person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is six, won't be charged a W-4 penalty.

Tips

The tips you receive while working on your job are considered part of your pay. You must include your tips on your tax return on the same line as your regular pay. However, tax isn't withheld directly from tip income, as it is from your regular pay. Nevertheless, your employer will take into account the tips you report when figuring how much to withhold from your regular pay.

See chapter 6 for information on reporting your tips to your employer. For more information on the withholding rules for tip income, see Pub. 531, Reporting Tip Income.

How employer figures amount to withhold.

The tips you report to your employer are counted as part of your income for the month you report them. Your employer can figure your withholding in either of two ways.

  • By withholding at the regular rate on the sum of your pay plus your reported tips.

  • By withholding at the regular rate on your pay plus a percentage of your reported tips.



Not enough pay to cover taxes.

If your regular pay isn't enough for your employer to withhold all the tax (including income tax and social security and Medicare taxes (or the equivalent railroad retirement tax)) due on your pay plus your tips, you can give your employer money to cover the shortage. See Giving your employer money for taxes in chapter 6.



Allocated tips.

Your employer shouldn't withhold income tax, Medicare tax, social security tax, or railroad retirement tax on any allocated tips. Withholding is based only on your pay plus your reported tips. Your employer should refund to you any incorrectly withheld tax. See Allocated Tips in chapter 6 for more information.



Taxable Fringe Benefits

The value of certain noncash fringe benefits you receive from your employer is considered part of your pay. Your employer generally must withhold income tax on these benefits from your regular pay.

For information on fringe benefits, see Fringe Benefits under Employee Compensation in chapter 5.

Although the value of your personal use of an employer-provided car, truck, or other highway motor vehicle is taxable, your employer can choose not to withhold income tax on that amount. Your employer must notify you if this choice is made.

For more information on withholding on taxable fringe benefits, see chapter 1 of Pub. 505.

Sick Pay

Sick pay is a payment to you to replace your regular wages while you are temporarily absent from work due to sickness or personal injury. To qualify as sick pay, it must be paid under a plan to which your employer is a party.

If you receive sick pay from your employer or an agent of your employer, income tax must be withheld. An agent who doesn't pay regular wages to you may choose to withhold income tax at a flat rate.

However, if you receive sick pay from a third party who isn't acting as an agent of your employer, income tax will be withheld only if you choose to have it withheld. See Form W-4S , later.

If you receive payments under a plan in which your employer doesn't participate (such as an accident or health plan where you paid all the premiums), the payments aren’t sick pay and usually aren’t taxable.

Union agreements.

If you receive sick pay under a collective bargaining agreement between your union and your employer, the agreement may determine the amount of income tax withholding. See your union representative or your employer for more information.



Form W-4S.

If you choose to have income tax withheld from sick pay paid by a third party, such as an insurance company, you must fill out Form W-4S. Its instructions contain a worksheet you can use to figure the amount you want withheld. They also explain restrictions that may apply.

Give the completed form to the payer of your sick pay. The payer must withhold according to your directions on the form.



Estimated tax.

If you don't request withholding on Form W-4S, or if you don't have enough tax withheld, you may have to make estimated tax payments. If you don't pay enough tax, either through estimated tax or withholding, or a combination of both, you may have to pay a penalty. See Underpayment Penalty for 2016 at the end of this chapter.



Pensions and Annuities

Income tax usually will be withheld from your pension or annuity distributions unless you choose not to have it withheld. This rule applies to distributions from:

  • A traditional individual retirement arrangement (IRA);

  • A life insurance company under an endowment, annuity, or life insurance contract;

  • A pension, annuity, or profit-sharing plan;

  • A stock bonus plan; and

  • Any other plan that defers the time you receive compensation.

The amount withheld depends on whether you receive payments spread out over more than 1 year (periodic payments), within 1 year (nonperiodic payments), or as an eligible rollover distribution (ERD). Income tax withholding from an ERD is mandatory.

More information.

For more information on taxation of annuities and distributions (including ERDs) from qualified retirement plans, see chapter 10. For information on IRAs, see chapter 17. For more information on withholding on pensions and annuities, including a discussion of Form W-4P, see Pensions and Annuities in chapter 1 of Pub. 505.



Gambling Winnings

Income tax is withheld at a flat 25% rate from certain kinds of gambling winnings.

Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding.

  • Any sweepstakes; wagering pool, including payments made to winners of poker tournaments; or lottery.

  • Any other wager, if the proceeds are at least 300 times the amount of the bet.

It doesn't matter whether your winnings are paid in cash, in property, or as an annuity. Winnings not paid in cash are taken into account at their fair market value.

Exception.

Gambling winnings from bingo, keno, and slot machines generally aren’t subject to income tax withholding. However, you may need to provide the payer with a social security number to avoid withholding. See Backup withholding on gambling winnings in chapter 1 of Pub. 505. If you receive gambling winnings not subject to withholding, you may need to pay estimated tax. See Estimated Tax for 2017 , later.



If you don't pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. See Underpayment Penalty for 2016 at the end of this chapter.

Form W-2G.

If a payer withholds income tax from your gambling winnings, you should receive a Form W-2G, Certain Gambling Winnings, showing the amount you won and the amount withheld. Report the tax withheld on line 64 of Form 1040.



Unemployment Compensation

You can choose to have income tax withheld from unemployment compensation. To make this choice, fill out Form W-4V (or a similar form provided by the payer) and give it to the payer.

All unemployment compensation is taxable. If you don't have income tax withheld, you may have to pay estimated tax. See Estimated Tax for 2017 , later.

If you don't pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. For information, see Underpayment Penalty for 2016 at the end of this chapter.

Federal Payments

You can choose to have income tax withheld from certain federal payments you receive. These payments are:

  1. Social security benefits,

  2. Tier 1 railroad retirement benefits,

  3. Commodity credit corporation loans you choose to include in your gross income,

  4. Payments under the Agricultural Act of 1949 (7 U.S.C. 1421 et. seq.), as amended, or title II of the Disaster Assistance Act of 1988, that are treated as insurance proceeds and that you receive because:

    1. Your crops were destroyed or damaged by drought, flood, or any other natural disaster, or

    2. You were unable to plant crops because of a natural disaster described in (a), and

  5. Any other payment under federal law as determined by the Secretary.

To make this choice, fill out Form W-4V (or a similar form provided by the payer) and give it to the payer.

If you don't choose to have income tax withheld, you may have to pay estimated tax. See Estimated Tax for 2017 , later.

If you don't pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. For information, see Underpayment Penalty for 2016 at the end of this chapter.

More information.

For more information about the tax treatment of social security and railroad retirement benefits, see chapter 11. Get Pub. 225, Farmer's Tax Guide, for information about the tax treatment of commodity credit corporation loans or crop disaster payments.



Backup Withholding

Banks or other businesses that pay you certain kinds of income must file an information return (Form 1099) with the IRS. The information return shows how much you were paid during the year. It also includes your name and taxpayer identification number (TIN). TINs are explained in chapter 1 under Social Security Number (SSN) .

These payments generally aren’t subject to withholding. However, "backup" withholding is required in certain situations. Backup withholding can apply to most kinds of payments that are reported on Form 1099.

The payer must withhold at a flat 28% rate in the following situations.

  • You don't give the payer your TIN in the required manner.

  • The IRS notifies the payer that the TIN you gave is incorrect.

  • You are required, but fail, to certify that you aren’t subject to backup withholding.

  • The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 210-day period.

See Backup Withholding in chapter 1 of Pub. 505 for more information.

Penalties.

There are civil and criminal penalties for giving false information to avoid backup withholding. The civil penalty is $500. The criminal penalty, upon conviction, is a fine of up to $1,000 or imprisonment of up to 1 year, or both.



Estimated Tax for 2017

Estimated tax is the method used to pay tax on income that isn't subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income isn't enough.

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you don't pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. If you don't pay enough by the due date of each payment period (see When To Pay Estimated Tax , later), you may be charged a penalty even if you are due a refund when you file your tax return. For information on when the penalty applies, see Underpayment Penalty for 2016 at the end of this chapter.

Who Doesn't Have To Pay Estimated Tax

If you receive salaries or wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of your earnings. To do this, give a new Form W-4 to your employer. See chapter 1 of Pub. 505.

Estimated tax not required.

You don't have to pay estimated tax for 2017 if you meet all three of the following conditions.

  • You had no tax liability for 2016.

  • You were a U.S. citizen or resident alien for the whole year.

  • Your 2016 tax year covered a 12-month period.

You had no tax liability for 2016 if your total tax was zero or you didn't have to file an income tax return. For the definition of "total tax" for 2016, see Pub. 505, chapter 2.



Who Must Pay Estimated Tax

If you owe additional tax for 2016, you may have to pay estimated tax for 2017.

You can use the following general rule as a guide during the year to see if you will have enough withholding, or if you should increase your withholding or make estimated tax payments.

General rule.

In most cases, you must pay estimated tax for 2017 if both of the following apply.

  1. You expect to owe at least $1,000 in tax for 2017, after subtracting your withholding and refundable credits.

  2. You expect your withholding plus your refundable credits to be less than the smaller of:

    1. 90% of the tax to be shown on your 2017 tax return, or

    2. 100% of the tax shown on your 2016 tax return (but see Special rules for farmers, fishermen, and higher income taxpayers , later). Your 2016 tax return must cover all 12 months.

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If the result from using the general rule above suggests that you won't have enough withholding, complete the 2017 Estimated Tax Worksheet in Pub. 505 for a more accurate calculation.



Special rules for farmers, fishermen, and higher income taxpayers.

If at least two-thirds of your gross income for tax year 2016 or 2017 is from farming or fishing, substitute 662/3% for 90% in (2a) under the General rule , earlier. If your AGI for 2016 was more than $150,000 ($75,000 if your filing status for 2017 is married filing a separate return), substitute 110% for 100% in (2b) under General rule , earlier. See Figure 4-A and Pub. 505, chapter 2 for more information.

Figure 4-A. Do You Have To Pay Estimated Tax?

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Figure 4-A Do You Have To Pay Estimated Tax?

Please click here for the text description of the image.



Aliens.

Resident and nonresident aliens also may have to pay estimated tax. Resident aliens should follow the rules in this chapter unless noted otherwise. Nonresident aliens should get Form 1040-ES (NR), U.S. Estimated Tax for Nonresident Alien Individuals.

You are an alien if you aren’t a citizen or national of the United States. You are a resident alien if you either have a green card or meet the substantial presence test. For more information about the substantial presence test, see Pub. 519, U.S. Tax Guide for Aliens.



Married taxpayers.

If you qualify to make joint estimated tax payments, apply the rules discussed here to your joint estimated income.

You and your spouse can make joint estimated tax payments even if you aren’t living together.

However, you and your spouse can’t make joint estimated tax payments if:

  • You are legally separated under a decree of divorce or separate maintenance,

  • You and your spouse have different tax years, or

  • Either spouse is a nonresident alien (unless that spouse elected to be treated as a resident alien for tax purposes (see chapter 1 of Pub. 519)).

If you don't qualify to make joint estimated tax payments, apply these rules to your separate estimated income. Making joint or separate estimated tax payments won't affect your choice of filing a joint tax return or separate returns for 2017.



2016 separate returns and 2017 joint return.

If you plan to file a joint return with your spouse for 2017, but you filed separate returns for 2016, your 2016 tax is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household, or married filing separately.



2016 joint return and 2017 separate returns.

If you plan to file a separate return for 2017 but you filed a joint return for 2016, your 2016 tax is your share of the tax on the joint return. You file a separate return if you file as single, head of household, or married filing separately.

To figure your share of the tax on the joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2016 using the same filing status as for 2017. Then multiply the tax on the joint return by the following fraction.

The tax you would have paid had you filed a separate return
The total tax you and your spouse would have paid had you filed separate returns

Example.

Joe and Heather filed a joint return for 2016 showing taxable income of $48,500 and a tax of $6,351. Of the $48,500 taxable income, $40,100 was Joe's and the rest was Heather's. For 2017, they plan to file married filing separately. Joe figures his share of the tax on the 2016 joint return as follows.

Tax on $40,100 based on a separate return $5,803
Tax on $8,400 based on a separate return 843
Total $6,646
Joe's percentage of total ($5,803 ÷ $6,646) 87.3%
Joe's share of tax on joint return
($6,351 × 87.3%)
$5,544



How To Figure Estimated Tax

To figure your estimated tax, you must figure your expected adjusted gross income (AGI), taxable income, taxes, deductions, and credits for the year.

When figuring your 2017 estimated tax, it may be helpful to use your income, deductions, and credits for 2016 as a starting point. Use your 2016 federal tax return as a guide. You can use Form 1040-ES and Pub. 505 to figure your estimated tax. Nonresident aliens use Form 1040-ES (NR) and Pub. 505 to figure estimated tax (see chapter 8 of Pub. 519 for more information).

You must make adjustments both for changes in your own situation and for recent changes in the tax law. For a discussion of these changes, visit IRS.gov.

For more complete information on how to figure your estimated tax for 2017, see chapter 2 of Pub. 505.

When To Pay Estimated Tax

For estimated tax purposes, the tax year is divided into four payment periods. Each period has a specific payment due date. If you don't pay enough tax by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your income tax return. The payment periods and due dates for estimated tax payments are shown next.

For the period: Due date:*
Jan. 1 – March 31 April 18
April 1 – May 31 June 15
June 1 – August 31 Sept. 15
Sept. 1– Dec. 31 Jan. 16, next year

Saturday, Sunday, holiday rule.

If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that isn't a Saturday, Sunday, or legal holiday.



January payment.

If you file your 2017 Form 1040 or Form 1040A by January 31, 2018, and pay the rest of the tax you owe, you don't need to make the payment due on January 16, 2018.



Fiscal year taxpayers.

If your tax year doesn't start on January 1, see the Form 1040-ES instructions for your payment due dates.



When To Start

You don't have to make estimated tax payments until you have income on which you will owe income tax. If you have income subject to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period. You can pay all your estimated tax at that time, or you can pay it in installments. If you choose to pay in installments, make your first payment by the due date for the first payment period. Make your remaining installment payments by the due dates for the later periods.

No income subject to estimated tax during first period.

If you don't have income subject to estimated tax until a later payment period, you must make your first payment by the due date for that period. You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods. The following chart shows when to make installment payments.

If you first have income on which you must pay estimated tax: Make a
payment
by:*
Make later
installments
by:*
Before April 1 April 18 June 15
Sept. 15
Jan. 16, next year
April 1–May 31 June 15 Sept. 15
Jan. 16, next year
June 1–Aug. 31 Sept. 15 Jan. 16, next year
After Aug. 31 Jan. 16,
next year
(None)



How much to pay to avoid a penalty.

To determine how much you should pay by each payment due date, see How To Figure Each Payment , next.



How To Figure Each Payment

You should pay enough estimated tax by the due date of each payment period to avoid a penalty for that period. You can figure your required payment for each period by using either the regular installment method or the annualized income installment method. These methods are described in chapter 2 of Pub. 505. If you don't pay enough during each payment period, you may be charged a penalty even if you are due a refund when you file your tax return.

If the earlier discussion of No income subject to estimated tax during first period or the later discussion of Change in estimated tax applies to you, you may benefit from reading Annualized Income Installment Method in chapter 2 of Pub. 505 for information on how to avoid a penalty.

Underpayment penalty.

Under the regular installment method, if your estimated tax payment for any period is less than one-fourth of your estimated tax, you may be charged a penalty for underpayment of estimated tax for that period when you file your tax return. Under the annualized income installment method, your estimated tax payments vary with your income, but the amount required must be paid each period. See chapter 4 of Pub. 505 for more information.



Change in estimated tax.

After you make an estimated tax payment, changes in your income, adjustments, deductions, credits, or exemptions may make it necessary for you to refigure your estimated tax. Pay the unpaid balance of your amended estimated tax by the next payment due date after the change or in installments by that date and the due dates for the remaining payment periods.



Estimated Tax Payments Not Required

You don't have to pay estimated tax if your withholding in each payment period is at least as much as:

  • One-fourth of your required annual payment, or

  • Your required annualized income installment for that period.

You also don't have to pay estimated tax if you will pay enough through withholding to keep the amount you owe with your return under $1,000.

How To Pay Estimated Tax

There are several ways to pay estimated tax.

  • Credit an overpayment on your 2016 return to your 2017 estimated tax.

  • Pay by direct transfer from your bank account, or pay by debit or credit card using a pay-by-phone system or the Internet.

  • Send in your payment (check or money order) with a payment voucher from Form 1040-ES.

Credit an Overpayment

If you show an overpayment of tax after completing your Form 1040 or Form 1040A for 2016, you can apply part or all of it to your estimated tax for 2017. On line 77 of Form 1040, or line 49 of Form 1040A, enter the amount you want credited to your estimated tax rather than refunded. Take the amount you have credited into account when figuring your estimated tax payments.

You can’t have any of the amount you credited to your estimated tax refunded to you until you file your tax return for the following year. You also can’t use that overpayment in any other way.

Pay Online

The IRS offers an electronic payment option that is right for you. Paying online is convenient, secure, and helps make sure we get your payments on time. To pay your taxes online or for more information, go to IRS.gov/payments. You can pay using any of the following methods.

  • IRS Direct Pay for online transfers directly from your checking or savings account at no cost to you. Go to IRS.gov/payments.

  • Pay by Card to pay by debit or credit card. Go to IRS.gov/payments. A convenience fee is charged by these service providers.

  • Electronic Funds Withdrawal(EFW) is an integrated e-file/e-pay option offered when filing your federal taxes electronically using tax preparation software, through a tax professional, or the IRS at IRS.gov/payments.

  • Online Payment Agreement if you can’t pay in full by the due date of your tax return. You can apply for an online monthly installment agreement at IRS.gov/payments. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved. A convenience fee is charged.

  • IRS2GO is the mobile application of the IRS. You can access Direct Pay or Pay By Card by downloading the application.

Pay by Phone

Paying by phone is another safe and secure method of paying electronically. Use one of the following methods (1) call one of the debit or credit card providers or (2) use the Electronic Federal Tax Payment System (EFTPS).

  1. Debit or credit card. Call one of our service providers. Each charges a fee that varies by provider, card type, and payment amount.

    Link2Gov Corporation
    1-888-PAY-1040TM (1-888-729-1040)
    www.PAY1040.com

    WorldPay US, Inc.
    1-844-PAY-TAX-8TM (1-844-729-8298)
    www.payUSAtax.com

    Official Payments Corporation
    1-888-UPAY-TAXTM (1-888-872-9829)
    www.officialpayments.com

  2. EFTPS. To use EFTPS, you must be enrolled either online or have an enrollment form mailed to you. To make a payment using EFTPS, call 1-800-555-4477 (English) or 1-800-244-4829 (Español). People who are deaf, hard of hearing, or have a speech disability and who have access to TTY/TDD equipment can call 1-800-733-4829. For more information about EFTPS, go to IRS.gov/payments or www.eftps.gov.

For the latest details on how to pay by phone, go to IRS.gov/Payments.

Pay by Mobile Device

To pay through your mobile device, download the IRS2Go application.

Pay With Cash

Paying with cash is a new in-person payment option for individuals. This service is provided through retail partners and is limited $1,000 per day per transaction. To make a cash payment, you must first be registered online at www.officialpayments.com, our Official Payment provider.

Pay by Check or Money Order Using the Estimated Tax Payment Voucher

Before submitting a payment through the mail using the estimated tax payment voucher, please consider alternative methods. One of our safe, quick, and easy electronic payment options might be right for you.

If you choose to mail in your payment, each payment of estimated tax by check or money order must be accompanied by a payment voucher from Form 1040-ES.

During 2016, if you:

  • made at least one estimated tax payment but not by electronic means,

  • didn't use software or a paid preparer to prepare or file your return,


then you should receive a copy of the 2017 Form 1040-ES/V.

The enclosed payment vouchers will be preprinted with your name, address, and social security number. Using the preprinted vouchers will speed processing, reduce the chance of error, and help save processing costs.

Use the window envelopes that came with your Form 1040-ES package. If you use your own envelopes, make sure you mail your payment vouchers to the address shown in the Form 1040-ES instructions for the place where you live.

Note.

These criteria can change without notice. If you don't receive a Form 1040-ES/V package and you are required to make an estimated tax payment, you should go to IRS.gov/form1040es and print a copy of Form 1040-ES which includes four blank payment vouchers. Complete one of these and make your payment timely to avoid penalties for paying late.

This is an Image: caution.gif

Don't use the address shown in the Form 1040 or Form 1040A instructions for your estimated tax payments.

If you didn't pay estimated tax last year, you can order Form 1040-ES from the IRS (see inside back cover of this publication) or download it from IRS.gov. Follow the instructions to make sure you use the vouchers correctly.

Joint estimated tax payments.

If you file a joint return and are making joint estimated tax payments, enter the names and social security numbers on the payment voucher in the same order as they will appear on the joint return.



Change of address.

You must notify the IRS if you are making estimated tax payments and you changed your address during the year. Complete Form 8822, Change of Address, and mail it to the address shown in the instructions for that form.



Credit for Withholding and Estimated Tax for 2016

When you file your 2016 income tax return, take credit for all the income tax and excess social security or railroad retirement tax withheld from your salary, wages, pensions, etc. Also take credit for the estimated tax you paid for 2016. These credits are subtracted from your total tax. Because these credits are refundable, you should file a return and claim these credits, even if you don't owe tax.

Two or more employers.

If you had two or more employers in 2016 and were paid wages of more than $118,500, too much social security or tier 1 railroad retirement tax may have been withheld from your pay. You may be able to claim the excess as a credit against your income tax when you file your return. See Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld in chapter 38.



Withholding

If you had income tax withheld during 2016, you should be sent a statement by January 31, 2017, showing your income and the tax withheld. Depending on the source of your income, you should receive:

  • Form W-2, Wage and Tax Statement,

  • Form W-2G, Certain Gambling Winnings, or

  • A form in the 1099 series.

Forms W-2 and W-2G.

If you file a paper return, always file Form W-2 with your income tax return. File Form W-2G with your return only if it shows any federal income tax withheld from your winnings.

You should get at least two copies of each form. If you file a paper return, attach one copy to the front of your federal income tax return. Keep one copy for your records. You also should receive copies to file with your state and local returns.



Form W-2

Your employer is required to provide or send Form W-2 to you no later than January 31, 2017. You should receive a separate Form W-2 from each employer you worked for.

If you stopped working before the end of 2016, your employer could have given you your Form W-2 at any time after you stopped working. However, your employer must provide or send it to you by January 31, 2017.

If you ask for the form, your employer must send it to you within 30 days after receiving your written request or within 30 days after your final wage payment, whichever is later.

If you haven't received your Form W-2 by January 31, you should ask your employer for it. If you don't receive it by February 15, call the IRS.

Form W-2 shows your total pay and other compensation and the income tax, social security tax, and Medicare tax that was withheld during the year. Include the federal income tax withheld (as shown in box 2 of Form W-2) on:

  • Line 64 if you file Form 1040,

  • Line 40 if you file Form 1040A, or

  • Line 7 if you file Form 1040EZ.

In addition, Form W-2 is used to report any taxable sick pay you received and any income tax withheld from your sick pay.

Form W-2G

If you had gambling winnings in 2016, the payer may have withheld income tax. If tax was withheld, the payer will give you a Form W-2G showing the amount you won and the amount of tax withheld.

Report the amounts you won on line 21 of Form 1040. Take credit for the tax withheld on line 64 of Form 1040. If you had gambling winnings, you must use Form 1040; you can’t use Form 1040A or Form 1040EZ.

The 1099 Series

Most forms in the 1099 series aren’t filed with your return. These forms should be furnished to you by January 31, 2017 (or, for Forms 1099-B, 1099-S, and certain Forms 1099-MISC, by February 15, 2017). Unless instructed to file any of these forms with your return, keep them for your records. There are several different forms in this series, including:

  • Form 1099-B, Proceeds From Broker and Barter Exchange Transactions;

  • Form 1099-DIV, Dividends and Distributions;

  • Form 1099-G, Certain Government Payments;

  • Form 1099-INT, Interest Income;

  • Form 1099-K, Payment Card and Third Party Network Transactions;

  • Form 1099-MISC, Miscellaneous Income;

  • Form 1099-OID, Original Issue Discount;

  • Form 1099-PATR, Taxable Distributions Received From Cooperatives;

  • Form 1099-Q, Payments From Qualified Education Programs;

  • Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.;

  • Form 1099-S, Proceeds From Real Estate Transactions;

  • Form RRB-1099, Payments by the Railroad Retirement Board.

If you received the types of income reported on some forms in the 1099 series, you may not be able to use Form 1040A or Form 1040EZ. See the instructions to these forms for details.

Form 1099-R.

Attach Form 1099-R to your paper return if box 4 shows federal income tax withheld. Include the amount withheld in the total on line 64 of Form 1040 or line 40 of Form 1040A. You can’t use Form 1040EZ if you received payments reported on Form 1099-R.



Backup withholding.

If you were subject to backup withholding on income you received during 2016, include the amount withheld, as shown on your Form 1099, in the total on line 64 of Form 1040, line 40 of Form 1040A, or line 7 of Form 1040EZ.



Form Not Correct

If you receive a form with incorrect information on it, you should ask the payer for a corrected form. Call the telephone number or write to the address given for the payer on the form. The corrected Form W-2G or Form 1099 you receive will have an "X" in the "CORRECTED" box at the top of the form. A special form, Form W-2c, Corrected Wage and Tax Statement, is used to correct a Form W-2.

In certain situations, you will receive two forms in place of the original incorrect form. This will happen when your taxpayer identification number is wrong or missing, your name and address are wrong, or you received the wrong type of form (for example, a Form 1099-DIV instead of a Form 1099-INT). One new form you receive will be the same incorrect form or have the same incorrect information, but all money amounts will be zero. This form will have an "X" in the "CORRECTED" box at the top of the form. The second new form should have all the correct information, prepared as though it is the original (the "CORRECTED" box won't be checked).

Form Received After Filing

If you file your return and you later receive a form for income that you didn't include on your return, you should report the income and take credit for any income tax withheld by filing Form 1040X, Amended U.S. Individual Income Tax Return.

Separate Returns

If you are married but file a separate return, you can take credit only for the tax withheld from your own income. Don't include any amount withheld from your spouse's income. However, different rules may apply if you live in a community property state.

Community property states are listed in chapter 2. For more information on these rules, and some exceptions, see Pub. 555, Community Property.

Fiscal Years

If you file your tax return on the basis of a fiscal year (a 12-month period ending on the last day of any month except December), you must follow special rules to determine your credit for federal income tax withholding. For a discussion of how to take credit for withholding on a fiscal year return, see Fiscal Years (FY) in chapter 3 of Pub. 505.

Estimated Tax

Take credit for all your estimated tax payments for 2016 on line 65 of Form 1040 or line 41 of Form 1040A. Include any overpayment from 2015 that you had credited to your 2016 estimated tax. You must use Form 1040 or Form 1040A if you paid estimated tax. You can’t use Form 1040EZ.

Name changed.

If you changed your name, and you made estimated tax payments using your old name, attach a brief statement to the front of your paper tax return indicating:

  • When you made the payments,

  • The amount of each payment,

  • Your name when you made the payments, and

  • Your social security number.

The statement should cover payments you made jointly with your spouse as well as any you made separately.

Be sure to report the change to the Social Security Administration. This prevents delays in processing your return and issuing any refunds.



Separate Returns

If you and your spouse made separate estimated tax payments for 2016 and you file separate returns, you can take credit only for your own payments.

If you made joint estimated tax payments, you must decide how to divide the payments between your returns. One of you can claim all of the estimated tax paid and the other none, or you can divide it in any other way you agree on. If you can’t agree, you must divide the payments in proportion to each spouse's individual tax as shown on your separate returns for 2016.

Divorced Taxpayers

If you made joint estimated tax payments for 2016, and you were divorced during the year, either you or your former spouse can claim all of the joint payments, or you each can claim part of them. If you can’t agree on how to divide the payments, you must divide them in proportion to each spouse's individual tax as shown on your separate returns for 2016.

If you claim any of the joint payments on your tax return, enter your former spouse's social security number (SSN) in the space provided on the front of Form 1040 or Form 1040A. If you divorced and remarried in 2016, enter your present spouse's SSN in that space and write your former spouse's SSN, followed by "DIV," to the left of Form 1040, line 65, or Form 1040A, line 41.

Underpayment Penalty for 2016

If you didn't pay enough tax, either through withholding or by making timely estimated tax payments, you will have an underpayment of estimated tax and you may have to pay a penalty.

Generally, you won't have to pay a penalty for 2016 if any of the following apply.

  • The total of your withholding and estimated tax payments was at least as much as your 2015 tax (or 110% of your 2015 tax if your AGI was more than $150,000, $75,000 if your 2016 filing status is married filing separately) and you paid all required estimated tax payments on time;

  • The tax balance due on your 2016 return is no more than 10% of your total 2016 tax, and you paid all required estimated tax payments on time;

  • Your total 2016 tax minus your withholding and refundable credits is less than $1,000;

  • You didn't have a tax liability for 2015 and your 2015 tax year was 12 months; or

  • You didn't have any withholding taxes and your current year tax less any household employment taxes is less than $1,000.

See Pub. 505, chapter 4, for a definition of "total tax" for 2015 and 2016.

Farmers and fishermen.

Special rules apply if you are a farmer or fisherman. See Farmers and Fishermen in chapter 4 of Pub. 505 for more information.



IRS can figure the penalty for you.

If you think you owe the penalty but you don't want to figure it yourself when you file your tax return, you may not have to. Generally, the IRS will figure the penalty for you and send you a bill. However, if you think you are able to lower or eliminate your penalty, you must complete Form 2210 or Form 2210-F and attach it to your paper return. See chapter 4 of Pub. 505.



Income

The eight chapters in this part discuss many kinds of income. They explain which income is and is not taxed. See Part Three for information on gains and losses you report on Form 8949 and Schedule D (Form 1040) and for information on selling your home.

5. Wages, Salaries, and Other Earnings

Reminder

Foreign income. If you’re a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it’s exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).If you reside outside the United States, you may be able to exclude part or all of your foreign source earned income. For details, see Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Introduction

This chapter discusses compensation received for services as an employee, such as wages, salaries, and fringe benefits. The following topics are included.

  • Bonuses and awards.

  • Special rules for certain employees.

  • Sickness and injury benefits.

The chapter explains what income is included and isn’t included in the employee's gross income and what’s not included.

Useful Items - You may want to see:

Publication

  • 463 Travel, Entertainment, Gift, and Car Expenses

  • 525 Taxable and Nontaxable Income

  • 554 Tax Guide for Seniors

  • 926 Household Employer's Tax Guide

  • 3920 Tax Relief for Victims of Terrorist Attacks

Employee Compensation

This section discusses various types of employee compensation including fringe benefits, retirement plan contributions, stock options, and restricted property.

Form W-2.

If you’re an employee, you should receive a Form W-2 from your employer showing the pay you received for your services. Include your pay on line 7 of Form 1040 or Form 1040A, or on line 1 of Form 1040EZ, even if you don’t receive a Form W-2.

In some instances your employer isn’t required to give you a Form W-2. Your employer isn’t required to give you a Form W-2 if you perform household work in your employer's home for less than $2,000 in cash wages during the calendar year and you have no federal income taxes withheld from your wages. Household work is work done in or around an employer's home. Some examples of workers who do household work are:

  • Babysitters,

  • Caretakers,

  • House cleaning workers,

  • Domestic workers,

  • Drivers,

  • Health aides,

  • Housekeepers,

  • Maids,

  • Nannies,

  • Private nurses, and

  • Yard workers.

See Schedule H (Form 1040), Household Employment Taxes, and its instructions, and Pub. 926, Household Employer's Tax Guide, for more information.

If you performed services, other than as an independent contractor, and your employer didn’t withhold social security and Medicare taxes from your pay, you must file Form 8919, Uncollected Social Security and Medicare Tax on Wages, with your Form 1040. See Form 8919 and its instructions for more information on how to calculate unreported wages and taxes and how to include them on your income tax return.



Childcare providers.

If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you aren’t an employee, you’re probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally aren’t an employee unless you’re subject to the will and control of the person who employs you as to what you’re to do and how you’re to do it.



Babysitting.

If you’re paid to babysit, even for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.



Employment tax.

Whether you're an employee or self-employed person, your income could be subject to self-employment tax. See the instructions for Schedule C and SE (Form 1040) if you're self-employed. Also see Pub. 926, Household Employer's Tax Guide for more information.



Miscellaneous Compensation

This section discusses different types of employee compensation.

Advance commissions and other earnings.

If you receive advance commissions or other amounts for services to be performed in the future and you’re a cash-method taxpayer, you must include these amounts in your income in the year you receive them.

If you repay unearned commissions or other amounts in the same year you receive them, reduce the amount included in your income by the repayment. If you repay them in a later tax year, you can deduct the repayment as an itemized deduction on your Schedule A (Form 1040), or you may be able to take a credit for that year. See Repayments in chapter 12.



Allowances and reimbursements.

If you receive travel, transportation, or other business expense allowances or reimbursements from your employer, see Pub. 463. If you’re reimbursed for moving expenses, see Pub. 521, Moving Expenses.



Back pay awards.

If you receive an amount in payment of a settlement or judgment for back pay, you must include the amount of the payment in your income. This includes payments made to you for damages, unpaid life insurance premiums, and unpaid health insurance premiums. They should be reported to you by your employer on Form W-2.



Bonuses and awards.

If you receive a bonus or award (cash, goods, services) from your employer, you must include its value in your income. However, if your employer merely promises to pay you a bonus or award at some future time, it isn’t taxable until you receive it or it’s made available to you.



Employee achievement award.

If you receive tangible personal property (other than cash, a gift certificate, or an equivalent item) as an award for length of service or safety achievement, you generally can exclude its value from your income. The amount you can exclude is limited to your employer's cost and can’t be more than $1,600 for qualified plan awards or $400 for nonqualified plan awards for all such awards you receive during the year. Your employer can tell you whether your award is a qualified plan award. Your employer must make the award as part of a meaningful presentation, under conditions and circumstances that don’t create a significant likelihood of it being disguised pay.

However, the exclusion doesn’t apply to the following awards.

  • A length-of-service award if you received it for less than 5 years of service or if you received another length-of-service award during the year or the previous 4 years.

  • A safety achievement award if you’re a manager, administrator, clerical employee, or other professional employee or if more than 10% of eligible employees previously received safety achievement awards during the year.



Example.

Ben Green received three employee achievement awards during the year: a nonqualified plan award of a watch valued at $250, two qualified plan awards of a stereo valued at $1,000, and a set of golf clubs valued at $500. Assuming that the requirements for qualified plan awards are otherwise satisfied, each award by itself would be excluded from income. However, because the $1,750 total value of the awards is more than $1,600, Ben must include $150 ($1,750 – $1,600) in his income.

Differential wage payments.

This is any payment made to you by an employer for any period during which you’re, for a period of more than 30 days, an active duty member of the uniformed services and represents all or a portion of the wages you would have received from the employer during that period. These payments are treated as wages and are subject to income tax withholding, but not FICA or FUTA taxes. The payments are reported as wages on Form W-2.



Government cost-of-living allowances.

Most payments received by U.S. Government civilian employees for working abroad are taxable. However, certain cost-of-living allowances are tax free. Pub. 516, U.S. Government Civilian Employees Stationed Abroad, explains the tax treatment of allowances, differentials, and other special pay you receive for employment abroad.



Nonqualified deferred compensation plans.

Your employer may report to you the total amount of deferrals for the year under a nonqualified deferred compensation plan on Form W-2, box 12, using code Y. This amount isn’t included in your income.

However, if at any time during the tax year, the plan fails to meet certain requirements, or isn’t operated under those requirements, all amounts deferred under the plan for the tax year and all preceding tax years to the extent vested and not previously included in income are included in your income for the current year. This amount is included in your wages shown on Form W-2, box 1. It’s also shown on Form W-2, box 12, using code Z.



Note received for services.

If your employer gives you a secured note as payment for your services, you must include the fair market value (usually the discount value) of the note in your income for the year you receive it. When you later receive payments on the note, a proportionate part of each payment is the recovery of the fair market value that you previously included in your income. Don’t include that part again in your income. Include the rest of the payment in your income in the year of payment.

If your employer gives you a nonnegotiable unsecured note as payment for your services, payments on the note that are credited toward the principal amount of the note are compensation income when you receive them.



Severance pay.

If you receive a severance payment when your employment with your employer ends or is terminated, you must include this amount in your income.



Accrued leave payment.

If you’re a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2.

If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on the return and the wages on your Forms W-2.



Outplacement services.

If you choose to accept a reduced amount of severance pay so that you can receive outplacement services (such as training in résumé writing and interview techniques), you must include the unreduced amount of the severance pay in income.

However, you can deduct the value of these outplacement services (up to the difference between the severance pay included in income and the amount actually received) as a miscellaneous deduction (subject to the 2%-of-adjusted-gross-income (AGI) limit) on Schedule A (Form 1040).



Sick pay.

Pay you receive from your employer while you’re sick or injured is part of your salary or wages. In addition, you must include in your income sick pay benefits received from any of the following payers.

  • A welfare fund.

  • A state sickness or disability fund.

  • An association of employers or employees.

  • An insurance company, if your employer paid for the plan.

However, if you paid the premiums on an accident or health insurance policy yourself, the benefits you receive under the policy aren’t taxable. For more information, see Pub. 525.



Social security and Medicare taxes paid by employer.

If you and your employer have an agreement that your employer pays your social security and Medicare taxes without deducting them from your gross wages, you must report the amount of tax paid for you as taxable wages on your tax return. The payment also is treated as wages for figuring your social security and Medicare taxes and your social security and Medicare benefits. However, these payments aren’t treated as social security and Medicare wages if you’re a household worker or a farm worker.



Stock appreciation rights.

Don’t include a stock appreciation right granted by your employer in income until you exercise (use) the right. When you use the right, you’re generally entitled to a cash payment equal to the fair market value of the corporation's stock on the date of use minus the fair market value on the date the right was granted. You include the cash payment in your income in the year you use the right.



Fringe Benefits

Fringe benefits received in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they’re specifically excluded by law. Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules.

Accounting period.

You must use the same accounting period your employer uses to report your taxable noncash fringe benefits. Your employer has the option to report taxable noncash fringe benefits by using either of the following rules.

  • The general rule: benefits are reported for a full calendar year (January 1–December 31).

  • The special accounting period rule: benefits provided during the last 2 months of the calendar year (or any shorter period) are treated as paid during the following calendar year. For example, each year your employer reports the value of benefits provided during the last 2 months of the prior year and the first 10 months of the current year.


Your employer doesn’t have to use the same accounting period for each fringe benefit, but must use the same period for all employees who receive a particular benefit.

You must use the same accounting period that you use to report the benefit to claim an employee business deduction (for use of a car, for example).



Form W-2.

Your employer must include all taxable fringe benefits in box 1 of Form W-2 as wages, tips, and other compensation and, if applicable, in boxes 3 and 5 as social security and Medicare wages. Although not required, your employer may include the total value of fringe benefits in box 14 (or on a separate statement). However, if your employer provided you with a vehicle and included 100% of its annual lease value in your income, the employer must separately report this value to you in box 14 (or on a separate statement).



Accident or Health Plan

In most cases, the value of accident or health plan coverage provided to you by your employer isn’t included in your income. Benefits you receive from the plan may be taxable, as explained later under Sickness and Injury Benefits .

For information on the items covered in this section, other than Long-term care coverage, see Pub. 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Long-term care coverage.

Contributions by your employer to provide coverage for long-term care services generally aren’t included in your income. However, contributions made through a flexible spending or similar arrangement offered by your employer must be included in your income. This amount will be reported as wages in box 1 of your Form W-2.

Contributions you make to the plan are discussed in Pub. 502, Medical and Dental Expenses.



Archer MSA contributions.

Contributions by your employer to your Archer MSA generally aren’t included in your income. Their total will be reported in box 12 of Form W-2 with code R. You must report this amount on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. File the form with your return.



Health flexible spending arrangement (health FSA).

If your employer provides a health FSA that qualifies as an accident or health plan, the amount of your salary reduction, and reimbursements of your medical care expenses, in most cases, aren’t included in your income.

Note.

Health FSAs are subject to a $2,500 limit on salary reduction contributions for plan years beginning after 2012. The $2,500 limit is subject to an inflation adjustment for plan years beginning after 2013. For more information, see Notice 2012-40, 2012-26 I.R.B. 1046, available at IRS.gov/irb/2012-26 IRB/ar09.html.

For tax year 2016, the dollar limitation under section 125(i) on voluntary employee salary reductions for contributions to health flexible spending arrangements is $2,550.



Health reimbursement arrangement (HRA).

If your employer provides an HRA that qualifies as an accident or health plan, coverage and reimbursements of your medical care expenses generally aren’t included in your income.



Health savings account (HSA).

If you’re an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA. Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Contributions made by your employer aren’t included in your income. Distributions from your HSA that are used to pay qualified medical expenses aren’t included in your income. Distributions not used for qualified medical expenses are included in your income. See Pub. 969 for the requirements of an HSA.

Contributions by a partnership to a bona fide partner's HSA aren’t contributions by an employer. The contributions are treated as a distribution of money and aren’t included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are includible in the partner's gross income. In both situations, the partner can deduct the contribution made to the partner's HSA.

Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are includible in the shareholder-employee's gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.



Qualified HSA funding distribution.

You can make a one-time distribution from your individual retirement account (IRA) to an HSA and you generally won’t include any of the distribution in your income.



Adoption Assistance

You may be able to exclude from your income amounts paid or expenses incurred by your employer for qualified adoption expenses in connection with your adoption of an eligible child. See the Instructions for Form 8839, Qualified Adoption Expenses, for more information.

Adoption benefits are reported by your employer in box 12 of Form W-2 with code T. They also are included as social security and Medicare wages in boxes 3 and 5. However, they aren’t included as wages in box 1. To determine the taxable and nontaxable amounts, you must complete Part III of Form 8839. File the form with your return.

De Minimis (Minimal) Benefits

If your employer provides you with a product or service and the cost of it is so small that it would be unreasonable for the employer to account for it, you generally don’t include its value in your income. In most cases, don’t include in your income the value of discounts at company cafeterias, cab fares home when working overtime, and company picnics.

Holiday gifts.

If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, don’t include the value of the gift in your income. However, if your employer gives you cash or a cash equivalent, you must include it in your income.



Educational Assistance

You can exclude from your income up to $5,250 of qualified employer-provided educational assistance. For more information, see Pub. 970, Tax Benefits for Education.

Group-Term Life Insurance

In most cases, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer (or former employer) isn’t included in your income. However, you must include in income the cost of employer-provided insurance that is more than the cost of $50,000 of coverage reduced by any amount you pay toward the purchase of the insurance.

For exceptions, see Entire cost excluded , and Entire cost taxed , later.

If your employer provided more than $50,000 of coverage, the amount included in your income is reported as part of your wages in box 1 of your Form W-2. Also, it’s shown separately in box 12 with code C.

Group-term life insurance.

This insurance is term life insurance protection (insurance for a fixed period of time) that:

  • Provides a general death benefit,

  • Is provided to a group of employees,

  • Is provided under a policy carried by the employer, and

  • Provides an amount of insurance to each employee based on a formula that prevents individual selection.



Permanent benefits.

If your group-term life insurance policy includes permanent benefits, such as a paid-up or cash surrender value, you must include in your income, as wages, the cost of the permanent benefits minus the amount you pay for them. Your employer should be able to tell you the amount to include in your income.



Accidental death benefits.

Insurance that provides accidental or other death benefits but doesn’t provide general death benefits (travel insurance, for example) isn’t group-term life insurance.



Former employer.

If your former employer provided more than $50,000 of group-term life insurance coverage during the year, the amount included in your income is reported as wages in box 1 of Form W-2. Also, it’s shown separately in box 12 with code C. Box 12 also will show the amount of uncollected social security and Medicare taxes on the excess coverage, with codes M and N. You must pay these taxes with your income tax return. Include them on Form 1040, line 62, and follow the instructions there.



Two or more employers.

Your exclusion for employer-provided group-term life insurance coverage can’t exceed the cost of $50,000 of coverage, whether the insurance is provided by a single employer or multiple employers. If two or more employers provide insurance coverage that totals more than $50,000, the amounts reported as wages on your Forms W-2 won’t be correct. You must figure how much to include in your income. Reduce the amount you figure by any amount reported with code C in box 12 of your Forms W-2, add the result to the wages reported in box 1, and report the total on your return.



Figuring the taxable cost.

Use Worksheet 5-1 to figure the amount to include in your income.


Worksheet 5-1. Figuring the Cost of Group-Term Life Insurance To Include in Income

1. Enter the total amount of your insurance coverage from your employer(s) 1.
2. Limit on exclusion for employer-provided group-term life insurance coverage 2. 50,000
3. Subtract line 2 from line 1 3.
4. Divide line 3 by $1,000. Figure to the nearest tenth 4.
5. Go to Table 5-1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5.
6. Multiply line 4 by line 5 6.
7. Enter the number of full months of coverage at this cost 7.
8. Multiply line 6 by line 7 8.
9. Enter the premiums you paid per month 9.
10. Enter the number of months you paid the premiums 10.
11. Multiply line 9 by line 10 11.
12. Subtract line 11 from line 8. Include this amount in your income as wages 12.

Table 5-1. Cost of $1,000 of Group-Term Life Insurance for One Month

Age Cost
Under 25 $ 0.05
25 through 29 0.06
30 through 34 0.08
35 through 39 0.09
40 through 44 0.10
45 through 49 0.15
50 through 54 0.23
55 through 59 0.43
60 through 64 0.66
65 through 69 1.27
70 and above 2.06




Example.

You are 51 years old and work for employers A and B. Both employers provide group-term life insurance coverage for you for the entire year. Your coverage is $35,000 with employer A and $45,000 with employer B. You pay premiums of $4.15 a month under the employer B group plan. You figure the amount to include in your income as shown in Worksheet 5-1. Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated next.

Worksheet 5-1. Figuring the Cost of Group-Term Life Insurance to Include in Income—Illustrated

1. Enter the total amount of your insurance coverage from your employer(s) 1. 80,000
2. Limit on exclusion for employer-provided group-term life insurance coverage 2. 50,000
3. Subtract line 2 from line 1 3. 30,000
4. Divide line 3 by $1,000. Figure to the nearest tenth 4. 30.0
5. Go to Table 5-1. Using your age on the last day of the tax year, find your age group in the left column, and enter the cost from the column on the right for your age group 5. 0.23
6. Multiply line 4 by line 5 6. 6.90
7. Enter the number of full months of coverage at this cost 7. 12
8. Multiply line 6 by line 7 8. 82.80
9. Enter the premiums you paid per month 9. 4.15
10. Enter the number of months you paid the premiums 10. 12
11. Multiply line 9 by line 10 11. 49.80
12. Subtract line 11 from line 8. Include this amount in your income as wages 12. 33.00

Entire cost excluded.

You aren’t taxed on the cost of group-term life insurance if any of the following circumstances apply.

  1. You’re permanently and totally disabled and have ended your employment.

  2. Your employer is the beneficiary of the policy for the entire period the insurance is in force during the tax year.

  3. A charitable organization (defined in chapter 24) to which contributions are deductible is the only beneficiary of the policy for the entire period the insurance is in force during the tax year. (You aren’t entitled to a deduction for a charitable contribution for naming a charitable organization as the beneficiary of your policy.)

  4. The plan existed on January 1, 1984, and

    1. You retired before January 2, 1984, and were covered by the plan when you retired, or

    2. You reached age 55 before January 2, 1984, and were employed by the employer or its predecessor in 1983.



Entire cost taxed.

You’re taxed on the entire cost of group-term life insurance if either of the following circumstances apply.

  • The insurance is provided by your employer through a qualified employees' trust, such as a pension trust or a qualified annuity plan.

  • You‘re a key employee and your employer's plan discriminates in favor of key employees.



Retirement Planning Services

Generally, don’t include the value of qualified retirement planning services provided to you and your spouse by your employer's qualified retirement plan. Qualified services include retirement planning advice, information about your employer's retirement plan, and information about how the plan may fit into your overall individual retirement income plan. You can’t exclude the value of any tax preparation, accounting, legal, or brokerage services provided by your employer.

Transportation

If your employer provides you with a qualified transportation fringe benefit, it can be excluded from your income, up to certain limits. A qualified transportation fringe benefit is:

  • Transportation in a commuter highway vehicle (such as a van) between your home and work place,

  • A transit pass,

  • Qualified parking, or

  • Qualified bicycle commuting reimbursement.

Cash reimbursement by your employer for these expenses under a bona fide reimbursement arrangement is also excludable. However, cash reimbursement for a transit pass is excludable only if a voucher or similar item that can be exchanged only for a transit pass isn’t readily available for direct distribution to you.

Exclusion limit.

The exclusion for commuter vehicle transportation and transit pass fringe benefits can’t be more than $255 a month.

The exclusion for the qualified parking fringe benefit can’t be more than $255 a month.

The exclusion for qualified bicycle commuting in a calendar year is $20 multiplied by the number of qualified bicycle commuting months that year. You can’t exclude from your income any qualified bicycle commuting reimbursement if you can choose between reimbursement and compensation that is otherwise includible in your income.

If the benefits have a value that is more than these limits, the excess must be included in your income.



Commuter highway vehicle.

This is a highway vehicle that seats at least six adults (not including the driver). At least 80% of the vehicle's mileage must reasonably be expected to be:

  • For transporting employees between their homes and workplace, and

  • On trips during which employees occupy at least half of the vehicle's adult seating capacity (not including the driver).



Transit pass.

This is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) free or at a reduced rate or to ride in a commuter highway vehicle operated by a person in the business of transporting persons for compensation.



Qualified parking.

This is parking provided to an employee at or near the employer's place of business. It also includes parking provided on or near a location from which the employee commutes to work by mass transit, in a commuter highway vehicle, or by carpool. It doesn’t include parking at or near the employee's home.



Qualified bicycle commuting.

This is reimbursement based on the number of qualified bicycle commuting months for the year. A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your home and place of employment and you don’t receive any of the other qualified transportation fringe benefits. The reimbursement can be for expenses you incurred during the year for the purchase of a bicycle and bicycle improvements, repair, and storage.



Retirement Plan Contributions

Your employer's contributions to a qualified retirement plan for you aren’t included in income at the time contributed. (Your employer can tell you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included. See Group-Term Life Insurance , earlier, under Fringe Benefits.

If your employer pays into a nonqualified plan for you, you generally must include the contributions in your income as wages for the tax year in which the contributions are made. However, if your interest in the plan isn’t transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you don’t have to include the value of your interest in your income until it’s transferable or is no longer subject to a substantial risk of forfeiture.

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For information on distributions from retirement plans, see Pub. 575, Pension and Annuity Income (or Pub. 721, Tax Guide to U.S. Civil Service Retirement Benefits, if you’re a federal employee or retiree).

Elective deferrals.

If you’re covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. An elective deferral, other than a designated Roth contribution (discussed later), isn’t included in wages subject to income tax at the time contributed. Rather it’s subject to income tax when distributed from the plan. However, it’s included in wages subject to social security and Medicare taxes at the time contributed.

Elective deferrals include elective contributions to the following retirement plans.

  1. Cash or deferred arrangements (section 401(k) plans).

  2. The Thrift Savings Plan for federal employees.

  3. Salary reduction simplified employee pension plans (SARSEP).

  4. Savings incentive match plans for employees (SIMPLE plans).

  5. Tax-sheltered annuity plans (section 403(b) plans).

  6. Section 501(c)(18)(D) plans.

  7. Section 457 plans.



Qualified automatic contribution arrangements.

Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. You’re to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. The notice must explain:

  • Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage, and

  • How contributions made will be invested in the absence of any investment decision by you.

You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions.



Overall limit on deferrals.

For 2016, in most cases, you shouldn’t have deferred more than a total of $18,000 of contributions to the plans listed in (1) through (3) and (5) above. The limit for SIMPLE plans is $12,500. The limit for section 501(c)(18)(D) plans is the lesser of $7,000 or 25% of your compensation. The limit for section 457 plans is the lesser of your includible compensation or $18,000. Amounts deferred under specific plan limits are part of the overall limit on deferrals.



Designated Roth contributions.

Employers with section 401(k) and section 403(b) plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Designated Roth contributions are treated as elective deferrals, except that they’re included in income at the time contributed.



Excess deferrals.

Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you’re responsible for monitoring the total you defer to ensure that the deferrals aren’t more than the overall limit.

If you set aside more than the limit, the excess generally must be included in your income for that year, unless you have an excess deferral of a designated Roth contribution. See Pub. 525 for a discussion of the tax treatment of excess deferrals.



Catch-up contributions.

You may be allowed catch-up contributions (additional elective deferral) if you’re age 50 or older by the end of the tax year.



Stock Options

If you receive a nonstatutory option to buy or sell stock or other property as payment for your services, you usually will have income when you receive the option, when you exercise the option (use it to buy or sell the stock or other property), or when you sell or otherwise dispose of the option. However, if your option is a statutory stock option, you won’t have any income until you sell or exchange your stock. Your employer can tell you which kind of option you hold. For more information, see Pub. 525.

Restricted Property

In most cases, if you receive property for your services, you must include its fair market value in your income in the year you receive the property. However, if you receive stock or other property that has certain restrictions that affect its value, you don’t include the value of the property in your income until it has substantially vested. (Although you can elect to include the value of the property in your income in the year it‘s transferred to you.) For more information, see Restricted Property in Pub. 525.

Dividends received on restricted stock.

Dividends you receive on restricted stock are treated as compensation and not as dividend income. Your employer should include these payments on your Form W-2.



Stock you elected to include in income.

Dividends you receive on restricted stock you elected to include in your income in the year transferred are treated the same as any other dividends. Report them on your return as dividends. For a discussion of dividends, see chapter 8.

For information on how to treat dividends reported on both your Form W-2 and Form 1099-DIV, see Dividends received on restricted stock in Pub. 525.



Special Rules for Certain Employees

This section deals with special rules for people in certain types of employment: members of the clergy, members of religious orders, people working for foreign employers, military personnel, and volunteers.

Clergy

Generally, if you’re a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc., in addition to your salary. If the offering is made to the religious institution, it isn’t taxable to you.

If you’re a member of a religious organization and you give your outside earnings to the religious organization, you still must include the earnings in your income. However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. See chapter 24.

Pension.

A pension or retirement pay for a member of the clergy usually is treated as any other pension or annuity. It must be reported on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A.



Housing.

Special rules for housing apply to members of the clergy. Under these rules, you don’t include in your income the rental value of a home (including utilities) or a designated housing allowance provided to you as part of your pay. However, the exclusion can’t be more than the lesser of the following amounts: 1) the amount actually used to provide or rent a home; 2) the fair market rental value of the home (including furnishings, utilities, garage, etc.); 3) the amount officially designated (in advance of payment) as a rental or housing allowance; or 4) an amount that represents reasonable pay for your services. If you pay for the utilities, you can exclude any allowance designated for utility cost, up to your actual cost. The home or allowance must be provided as compensation for your services as an ordained, licensed, or commissioned minister. However, you must include the rental value of the home or the housing allowance as earnings from self-employment on Schedule SE (Form 1040) if you’re subject to the self-employment tax. For more information, see Pub. 517, Social Security and Other Information for Members of the Clergy and Religious Workers.



Members of Religious Orders

If you’re a member of a religious order who has taken a vow of poverty, how you treat earnings that you renounce and turn over to the order depends on whether your services are performed for the order.

Services performed for the order.

If you’re performing the services as an agent of the order in the exercise of duties required by the order, don’t include in your income the amounts turned over to the order.

If your order directs you to perform services for another agency of the supervising church or an associated institution, you’re considered to be performing the services as an agent of the order. Any wages you earn as an agent of an order that you turn over to the order aren’t included in your income.

Example.

You’re a member of a church order and have taken a vow of poverty. You renounce any claims to your earnings and turn over to the order any salaries or wages you earn. You’re a registered nurse, so your order assigns you to work in a hospital that is an associated institution of the church. However, you remain under the general direction and control of the order. You’re considered to be an agent of the order and any wages you earn at the hospital that you turn over to your order aren’t included in your income.



Services performed outside the order.

If you’re directed to work outside the order, your services aren’t an exercise of duties required by the order unless they meet both of the following requirements.

  • They’re the kind of services that are ordinarily the duties of members of the order.

  • They‘re part of the duties that you must exercise for, or on behalf of, the religious order as its agent.

If you’re an employee of a third party, the services you perform for the third party won’t be considered directed or required of you by the order. Amounts you receive for these services are included in your income, even if you have taken a vow of poverty.

Example.

Mark Brown is a member of a religious order and has taken a vow of poverty. He renounces all claims to his earnings and turns over his earnings to the order.

Mark is a schoolteacher. He was instructed by the superiors of the order to get a job with a private tax-exempt school. Mark became an employee of the school, and, at his request, the school made the salary payments directly to the order.

Because Mark is an employee of the school, he is performing services for the school rather than as an agent of the order. The wages Mark earns working for the school are included in his income.



Foreign Employer

Special rules apply if you work for a foreign employer.

U.S. citizen.

If you’re a U.S. citizen who works in the United States for a foreign government, an international organization, a foreign embassy, or any foreign employer, you must include your salary in your income.



Social security and Medicare taxes.

You’re exempt from social security and Medicare employee taxes if you’re employed in the United States by an international organization or a foreign government. However, you must pay self-employment tax on your earnings from services performed in the United States, even though you aren’t self-employed. This rule also applies if you’re an employee of a qualifying wholly owned instrumentality of a foreign government.



Employees of international organizations or foreign governments.

Your compensation for official services to an international organization is exempt from federal income tax if you aren’t a citizen of the United States or you’re a citizen of the Philippines (whether or not you‘re a citizen of the United States).

Your compensation for official services to a foreign government is exempt from federal income tax if all of the following are true.

  • You aren’t a citizen of the United States or you’re a citizen of the Philippines (whether or not you’re a citizen of the United States).

  • Your work is like the work done by employees of the United States in foreign countries.

  • The foreign government gives an equal exemption to employees of the United States in its country.



Waiver of alien status.

If you’re an alien who works for a foreign government or international organization and you file a waiver under section 247(b) of the Immigration and Nationality Act to keep your immigrant status, different rules may apply. See Foreign Employer in Pub. 525.



Employment abroad.

For information on the tax treatment of income earned abroad, see Pub. 54.



Military

Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension. Allowances generally aren’t taxed. For more information on the tax treatment of military allowances and benefits, see Pub. 3, Armed Forces' Tax Guide.

Differential wage payments.

Any payments made to you by an employer during the time you’re performing service in the uniformed services are treated as compensation. These wages are subject to income tax withholding and are reported on a Form W-2. See the discussion under Miscellaneous Compensation , earlier.



Military retirement pay.

If your retirement pay is based on age or length of service, it’s taxable and must be included in your income as a pension on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. Don’t include in your income the amount of any reduction in retirement or retainer pay to provide a survivor annuity for your spouse or children under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan.

For more detailed discussion of survivor annuities, see chapter 10.



Disability.

If you’re retired on disability, see Military and Government Disability Pensions under Sickness and Injury Benefits, later.



Veterans' benefits.

Don’t include in your income any veterans' benefits paid under any law, regulation, or administrative practice administered by the Department of Veterans Affairs (VA). The following amounts paid to veterans or their families aren’t taxable.

  • Education, training, and subsistence allowances.

  • Disability compensation and pension payments for disabilities paid either to veterans or their families.

  • Grants for homes designed for wheelchair living.

  • Grants for motor vehicles for veterans who lost their sight or the use of their limbs.

  • Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death.

  • Interest on insurance dividends you leave on deposit with the VA.

  • Benefits under a dependent-care assistance program.

  • The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001.

  • Payments made under the compensated work therapy program.

  • Any bonus payment by a state or political subdivision because of service in a combat zone.



Volunteers

The tax treatment of amounts you receive as a volunteer worker for the Peace Corps or similar agency is covered in the following discussions.

Peace Corps.

Living allowances you receive as a Peace Corps volunteer or volunteer leader for housing, utilities, household supplies, food, and clothing are generally exempt from tax.



Taxable allowances.

The following allowances, however, must be included in your income and reported as wages.

  • Allowances paid to your spouse and minor children while you’re a volunteer leader training in the United States.

  • Living allowances designated by the Director of the Peace Corps as basic compensation. These are allowances for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses.

  • Leave allowances.

  • Readjustment allowances or termination payments. These are considered received by you when credited to your account.

Example.

Gary Carpenter, a Peace Corps volunteer, gets $175 a month as a readjustment allowance during his period of service, to be paid to him in a lump sum at the end of his tour of duty. Although the allowance isn’t available to him until the end of his service, Gary must include it in his income on a monthly basis as it’s credited to his account.



Volunteers in Service to America (VISTA).

If you’re a VISTA volunteer, you must include meal and lodging allowances paid to you in your income as wages.



National Senior Services Corps programs.

Don’t include in your income amounts you receive for supportive services or reimbursements for out-of-pocket expenses from the following programs.

  • Retired Senior Volunteer Program (RSVP).

  • Foster Grandparent Program.

  • Senior Companion Program.



Service Corps of Retired Executives (SCORE).

If you receive amounts for supportive services or reimbursements for out-of-pocket expenses from SCORE, don’t include these amounts in gross income.



Volunteer tax counseling.

Don’t include in your income any reimbursements you receive for transportation, meals, and other expenses you have in training for, or actually providing, volunteer federal income tax counseling for the elderly (TCE).

You can deduct as a charitable contribution your unreimbursed out-of-pocket expenses in taking part in the volunteer income tax assistance (VITA) program. See chapter 24.



Sickness and Injury Benefits

This section discusses sickness and injury benefits including disability pensions, long-term care insurance contracts, workers' compensation, and other benefits.

In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. However, certain payments may not be taxable to you. Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension. In addition to disability pensions and annuities, you may be receiving other payments for sickness and injury.

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Don’t report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established.

Cost paid by you.

If you pay the entire cost of a health or accident insurance plan, don’t include any amounts you receive from the plan for personal injury or sickness as income on your tax return. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. See Reimbursement in a later year in chapter 21.



Cafeteria plans.

In most cases, if you’re covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums wasn’t included in your income, you aren’t considered to have paid the premiums and you must include any benefits you receive in your income. If the amount of the premiums was included in your income, you’re considered to have paid the premiums, and any benefits you receive aren’t taxable.



Disability Pensions

If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A, until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you’re not disabled.

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You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on this credit and the definition of permanent and total disability, see chapter 33.

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines 16a and 16b of Form 1040 or on lines 12a and 12b of Form 1040A. The rules for reporting pensions are explained in How To Report in chapter 10.

For information on disability payments from a governmental program provided as a substitute for unemployment compensation, see chapter 12.

Retirement and profit-sharing plans.

If you receive payments from a retirement or profit-sharing plan that doesn’t provide for disability retirement, don’t treat the payments as a disability pension. The payments must be reported as a pension or annuity. For more information on pensions, see chapter 10.



Accrued leave payment.

If you retire on disability, any lump-sum payment you receive for accrued annual leave is a salary payment. The payment is not a disability payment. Include it in your income in the tax year you receive it.



Military and Government Disability Pensions

Certain military and government disability pensions aren’t taxable.

Service-connected disability.

You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services.

  • The armed forces of any country.

  • The National Oceanic and Atmospheric Administration.

  • The Public Health Service.

  • The Foreign Service.



Conditions for exclusion.

Don’t include the disability payments in your income if any of the following conditions apply.

  1. You were entitled to receive a disability payment before September 25, 1975.

  2. You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975.

  3. You receive the disability payments for a combat-related injury. This is a personal injury or sickness that:

    1. Results directly from armed conflict,

    2. Takes place while you’re engaged in extra-hazardous service,

    3. Takes place under conditions simulating war, including training exercises such as maneuvers, or

    4. Is caused by an instrumentality of war.

  4. You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA.



Pension based on years of service.

If you receive a disability pension based on years of service, in most cases you must include it in your income. However, if the pension qualifies for the exclusion for a Service-connected disability (discussed earlier), don’t include in income the part of your pension that you would have received if the pension had been based on a percentage of disability. You must include the rest of your pension in your income.



Retroactive VA determination.

If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period. You must include with each Form 1040X a copy of the official VA Determination letter granting the retroactive benefit. The letter must show the amount withheld and the effective date of the benefit.

If you receive a lump-sum disability severance payment and are later awarded VA disability benefits, exclude 100% of the severance benefit from your income. However, you must include in your income any lump-sum readjustment or other nondisability severance payment you received on release from active duty, even if you’re later given a retroactive disability rating by the VA.



Special period of limitation.

In most cases, under the period of limitation, a claim for credit or refund must be filed within 3 years from the time a return was filed or 2 years from the time the tax was paid. However, if you receive a retroactive service-connected disability rating determination, the period of limitation is extended by a 1-year period beginning on the date of the determination. This 1-year extended period applies to claims for credit or refund filed after June 17, 2008, and doesn’t apply to any tax year that began more than 5 years before the date of the determination.



Terrorist attack or military action.

Don’t include in your income disability payments you receive for injuries incurred as a direct result of a terrorist attack directed against the United States (or its allies), whether outside or within the United States or from military action. See Pub. 3920, Tax Relief for Victims of Terrorist Attacks, for more information.



Long-Term Care Insurance Contracts

Long-term care insurance contracts in most cases are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) in most cases are excludable from income as amounts received for personal injury or sickness. To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return.

A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. The contract must:

  • Be guaranteed renewable;

  • Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed;

  • Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract, may only be used to reduce future premiums or increase future benefits; and

  • In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.

Qualified long-term care services.

Qualified long-term care services are:

  • Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance and personal care services; and

  • Required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.



Chronically ill individual.

A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months as one of the following.

  • An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

  • An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.



Limit on exclusion.

You generally can exclude from gross income up to $340 a day for 2016. See Limit on exclusion, under Long-Term Care Insurance Contracts, under Sickness and Injury Benefits in Pub. 525 for more information.



Workers' Compensation

Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they’re paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors. The exemption, however, doesn’t apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

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If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For more information, see Pub. 915, Social Security and Equivalent Railroad Retirement Benefits.

Return to work.

If you return to work after qualifying for workers' compensation, salary payments you receive for performing light duties are taxable as wages.



Other Sickness and Injury Benefits

In addition to disability pensions and annuities, you may receive other payments for sickness or injury.

Railroad sick pay.

Payments you receive as sick pay under the Railroad Unemployment Insurance Act are taxable and you must include them in your income. However, don’t include them in your income if they’re for an on-the-job injury.

If you received income because of a disability, see Disability Pensions , earlier.



Federal Employees' Compensation Act (FECA).

Payments received under this Act for personal injury or sickness, including payments to beneficiaries in case of death, aren’t taxable. However, you’re taxed on amounts you receive under this Act as continuation of pay for up to 45 days while a claim is being decided. Report this income as wages. Also, pay for sick leave while a claim is being processed is taxable and must be included in your income as wages.

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If part of the payments you receive under FECA reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. See Pub. 554 for more information.

You can deduct the amount you spend to buy back sick leave for an earlier year to be eligible for nontaxable FECA benefits for that period. It’s a miscellaneous deduction subject to the 2%-of-AGI limit on Schedule A (Form 1040). If you buy back sick leave in the same year you used it, the amount reduces your taxable sick leave pay. Don’t deduct it separately.



Other compensation.

Many other amounts you receive as compensation for sickness or injury aren’t taxable. These include the following amounts.

  • Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments.

  • Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income.

  • Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy.

  • Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. This compensation must be based only on the injury and not on the period of your absence from work. These benefits aren’t taxable even if your employer pays for the accident and health plan that provides these benefits.



Reimbursement for medical care.

A reimbursement for medical care is generally not taxable. However, it may reduce your medical expense deduction. For more information, see chapter 21.



6. Tip Income

Introduction

This chapter is for employees who receive tips.

All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.

The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to tax.

Reporting your tip income correctly isn't difficult. You must do three things.

  1. Keep a daily tip record.

  2. Report tips to your employer.

  3. Report all your tips on your income tax return.


This chapter will explain these three things and show you what to do on your tax return if you haven't done the first two. This chapter will also show you how to treat allocated tips.

For information on special tip programs and agreements, see Pub. 531.

Useful Items - You may want to see:

Publication

  • 531 Reporting Tip Income

  • 1244 Employee's Daily Record of Tips and Report to Employer

Form (and Instructions)

  • 4137 Social Security and Medicare Tax on Unreported Tip Income

  • 4070 Employee's Report of Tips to Employer

Keeping a Daily Tip Record

Why keep a daily tip record.

You must keep a daily tip record so you can:

  • Report your tips accurately to your employer,

  • Report your tips accurately on your tax return, and

  • Prove your tip income if your return is ever questioned.



How to keep a daily tip record.

There are two ways to keep a daily tip record. You can either:

  • Write information about your tips in a tip diary; or

  • Keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips.

You should keep your daily tip record with your tax or other personal records. You must keep your records for as long as they're important for administration of the federal tax law. For information on how long to keep records, see How long to keep records in chapter 1.

If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. To get Form 4070A, ask your employer for Pub. 1244 or go online to IRS.gov/pub/irs-pdf/p1244.pdf for a copy of Pub. 1244. Pub. 1244 includes a 1-year supply of Form 4070A. Each day, write in the information asked for on the form.

In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Although you don't report these tips to your employer, you must report them on your tax return.

If you don't use Form 4070A, start your records by writing your name, your employer's name, and the name of the business (if it's different from your employer's name). Then, each workday, write the date and the following information.

  • Cash tips you get directly from customers or from other employees.

  • Tips from credit and debit card charge customers that your employer pays you.

  • The value of any noncash tips you get, such as tickets, passes, or other items of value.

  • The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips.



Electronic tip record.

You can use an electronic system provided by your employer to record your daily tips. If you do, you must receive and keep a paper copy of this record.



Service charges.

Don't write in your tip diary the amount of any service charge that your employer adds to a customer's bill and then pays to you and treats as wages. This is part of your wages, not a tip. See examples below.

Example 1.

Good Food Restaurant adds an 18% charge to the bill for parties of 6 or more customers. Jane’s bill for food and beverages for her party of 8 includes an amount on the tip line equal to 18% of the charges for food and beverages, and the total includes this amount. Because Jane didn't have an unrestricted right to determine the amount on the "tip line," the 18% charge is considered a service charge. Don't include the 18% charge in your tip diary. Service charges that are paid to you are considered wages, not tips.

Example 2.

Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided to customers. David’s bill includes a blank "tip line," with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath the signature line. Because David is free to enter any amount on the "tip line" or leave it blank, any amount he includes is considered a tip. Be sure to include this amount in your tip diary.



Reporting Tips to Your Employer

Why report tips to your employer.

You must report tips to your employer so that:

  • Your employer can withhold federal income tax and social security, Medicare, Additional Medicare, or railroad retirement taxes;

  • Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die); and

  • You can avoid the penalty for not reporting tips to your employer (explained later).



What tips to report.

Report to your employer only cash, check, and debit and credit card tips you receive.

If your total tips for any 1 month from any one job are less than $20, don't report the tips for that month to that employer.

If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Don't report to your employer any portion of the tips you receive that you pass on to other employees. However, you must report tips you receive from other employees.

Don't report the value of any noncash tips, such as tickets or passes, to your employer. You don't pay social security, Medicare, Additional Medicare, or railroad retirement taxes on these tips.



How to report.

If your employer doesn't give you any other way to report tips, you can use Form 4070. Fill in the information asked for on the form, sign and date the form, and give it to your employer. To get a 1-year supply of the form, ask your employer for Pub. 1244 or go online to IRS.gov/pub/irs-pdf/p1244.pdf for a copy of Pub. 1244.

If you don't use Form 4070, give your employer a statement with the following information.

  • Your name, address, and social security number.

  • Your employer's name, address, and business name (if it is different from your employer's name).

  • The month (or the dates of any shorter period) in which you received tips.

  • The total tips required to be reported for that period.

You must sign and date the statement. Be sure to keep a copy with your tax or other personal records.

Your employer may require you to report your tips more than once a month. However, the statement cannot cover a period of more than 1 calendar month.



Electronic tip statement.

Your employer can have you furnish your tip statements electronically.



When to report.

Give your report for each month to your employer by the 10th of the next month. If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report by the next day that isn't a Saturday, Sunday, or legal holiday.

Example.

You must report your tips received in September 2017 by October 10, 2017.



Final report.

If your employment ends during the month, you can report your tips when your employment ends.



Penalty for not reporting tips.

If you don't report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security, Medicare, and Additional Medicare taxes or railroad retirement tax you owe on the unreported tips. For information about these taxes, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, later. The penalty amount is in addition to the taxes you owe.

You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. To do so, attach a statement to your return explaining why you didn't report them.



Giving your employer money for taxes.

Your regular pay may not be enough for your employer to withhold all the taxes you owe on your regular pay plus your reported tips. If this happens, you can give your employer money until the close of the calendar year to pay the rest of the taxes.

If you don't give your employer enough money, your employer will apply your regular pay and any money you give in the following order.

  1. All taxes on your regular pay.

  2. Social security, Medicare, and Additional Medicare taxes or railroad retirement taxes on your reported tips.

  3. Federal, state, and local income taxes on your reported tips.

Any taxes that remain unpaid can be collected by your employer from your next paycheck. If withholding taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. See Pub. 505, Tax Withholding and Estimated Tax, for more information.

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Uncollected taxes. You must report on your tax return any social security and Medicare taxes or railroad retirement tax that remained uncollected at the end of 2016. These uncollected taxes will be shown on your 2016 Form W-2. See Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer under Reporting Tips on Your Tax Return, later.



Reporting Tips on Your Tax Return

How to report tips.

Report your tips with your wages on Form 1040, line 7; Form 1040A, line 7; or Form 1040EZ, line 1.



What tips to report.

You must report all tips you received in 2016 on your tax return, including both cash tips and noncash tips. Any tips you reported to your employer for 2016 are included in the wages shown on your Form W-2, box 1. Add to the amount in box 1 only the tips you did not report to your employer.

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If you received $20 or more in cash and charge tips in a month and didn't report all of those tips to your employer, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer, later.

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If you didn't keep a daily tip record as required and an amount is shown on your Form W-2, box 8, see Allocated Tips, later.

If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add the following tips to the amount on your Form W-2, box 1.

  • Cash and charge tips you received that totaled less than $20 for any month.

  • The value of noncash tips, such as tickets, passes, or other items of value.

Example.

Ben Smith began working at the Blue Ocean Restaurant (his only employer in 2016) on June 30 and received $10,000 in wages during the year. Ben kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. He wasn't required to report his June tips to his employer, but he reported all of the rest of his tips to his employer as required.

Ben's Form W-2 from Blue Ocean Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. He adds the $18 unreported tips to that amount and reports $17,018 as wages on his tax return.



Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer.

If you received $20 or more in cash and charge tips in a month from any one job and didn't report all of those tips to your employer, you must report the social security, Medicare, and Additional Medicare taxes on the unreported tips as additional tax on your return. To report these taxes, you must file Form 1040, Form 1040, 1040NR, 1040-PR, or 1040-SS (not Form 1040EZ or Form 1040A) even if you wouldn't otherwise have to file.

Use Form 4137 to figure social security and Medicare taxes and/or Form 8959 to figure Additional Medicare Tax. Enter the taxes on your return as instructed, and attach the completed Form 4137 and/or Form 8959 to your return.

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If you're subject to the Railroad Retirement Tax Act, you cannot use Form 4137 to pay railroad retirement tax on unreported tips. To get railroad retirement credit, you must report tips to your employer.



Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer.

You may have uncollected taxes if your regular pay wasn't enough for your employer to withhold all the taxes you owe and you didn't give your employer enough money to pay the rest of the taxes. For more information, see Giving your employer money for taxes under Reporting Tips to Your Employer, earlier.

If your employer couldn't collect all the social security and Medicare taxes or railroad retirement tax you owe on tips reported for 2016, the uncollected taxes will be shown on your Form W-2, box 12 (codes A and B). You must report these amounts as additional tax on your return. Unlike the uncollected portion of the regular (1.45%) Medicare tax, the uncollected Additional Medicare Tax isn't reported on your Form W-2.

To report these uncollected taxes, you must file Form 1040, 1040NR, 1040-PR, or 1040-SS (not Form 1040EZ or Form 1040A) even if you wouldn't otherwise have to file. You must report these taxes on Form 1040, line 62, or the corresponding line of Form 1040NR, 1040-PR, or 1040-SS (not Form 1040EZ or Form 1040A). See the instructions for these forms for exact reporting information.



Allocated Tips

If your employer allocated tips to you, they're shown separately on your Form W-2, box 8. They aren't included in box 1 with your wages and reported tips. If box 8 is blank, this discussion doesn't apply to you.

What are allocated tips.

These are tips that your employer assigned to you in addition to the tips you reported to your employer for the year. Your employer will have done this only if:

  • You worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees, and

  • The tips you reported to your employer were less than your share of 8% of food and drink sales.

No income, social security, Medicare, Additional Medicare, or railroad retirement taxes are withheld on allocated tips.



How were your allocated tips figured.

The tips allocated to you are your share of an amount figured by subtracting the reported tips of all employees from 8% (or an approved lower rate) of food and drink sales (other than carryout sales and sales with a service charge of 10% or more). Your share of that amount was figured using either a method provided by an employer-employee agreement or a method provided by IRS regulations based on employees' sales or hours worked. For information about the exact allocation method used, ask your employer.



Must you report your allocated tips on your tax return.

You must report all tips you received in 2016 on your tax return, including both cash tips and noncash tips. Any tips you reported to your employer for 2016 are included in the wages shown on your Form W-2, box 1. Add to the amount in box 1 only the tips you didn't report to your employer. This should include any allocated tips shown on your Form(s) W-2, box 8, unless you have adequate records to show that you received less tips in the year than the allocated figures.

See What tips to report under Reporting Tips on Your Tax Return, and Keeping a Daily Tip Record , earlier.



How to report allocated tips.

Report the amounts shown on your Form(s) W-2, box 1 (wages and tips) and box 8 (allocated tips), as wages on Form 1040, line 7; Form 1040NR, line 8; or Form 1040NR-EZ, line 3. You cannot file Form 1040A or Form 1040EZ when you have allocated tips.

Because social security, Medicare, and Additional Medicare taxes weren't withheld from the allocated tips, you must report those taxes as additional tax on your return. Complete Form 4137, and include the allocated tips on line 1 of the form. See Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, earlier.



7. Interest Income

Reminder

Foreign-source income. If you are a U.S. citizen with interest income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.

Introduction

This chapter discusses the following topics.

  • Different types of interest income.

  • What interest is taxable and what interest is nontaxable.

  • When to report interest income.

  • How to report interest income on your tax return.

In general, any interest you receive or that is credited to your account and can be withdrawn is taxable income. Exceptions to this rule are discussed later in this chapter.

You may be able to deduct expenses you have in earning this income on Schedule A (Form 1040) if you itemize your deductions. See Money borrowed to invest in certificate of deposit , later, and chapter 28.

Useful Items - You may want to see:

Publication

  • 537 Installment Sales

  • 550 Investment Income and Expenses

  • 1212 Guide to Original Issue Discount (OID) Instruments

Form (and Instructions)

  • Schedule A (Form 1040) Itemized Deductions

  • Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends

  • 8615 Tax for Certain Children Who Have Unearned Income

  • 8814 Parents' Election To Report Child's Interest and Dividends

  • 8815 Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989

  • 8818 Optional Form To Record Redemption of Series EE and I U.S. Savings Bonds Issued After 1989

General Information

A few items of general interest are covered here.

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Recordkeeping. You should keep a list showing sources and interest amounts received during the year. Also, keep the forms you receive showing your interest income (Forms 1099-INT, for example) as an important part of your records.

Tax on unearned income of certain children.

Part of a child's 2016 unearned income may be taxed at the parent's tax rate. If so, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate.

Some parents can choose to include the child's interest and dividends on the parent's return. If you can, use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose.

For more information about the tax on unearned income of children and the parents' election, see chapter 31.



Beneficiary of an estate or trust.

Interest you receive as a beneficiary of an estate or trust is generally taxable income. You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc., from the fiduciary. Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040.



Social security number (SSN).

You must give your name and SSN or individual taxpayer identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. This includes payers of interest. If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty.



SSN for joint account.

If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. (For information on who owns the funds in a joint account, see Joint accounts , later.) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. This is because only one name and SSN can be shown on Form 1099.

These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN.



Custodian account for your child.

If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. For example, you must give your child's SSN to the payer of interest on an account owned by your child, even though the interest is paid to you as custodian.



Penalty for failure to supply SSN.

If you do not give your SSN to the payer of interest, you may have to pay a penalty. See Failure to supply SSN under Penalties in chapter 1. Backup withholding also may apply.



Backup withholding.

Your interest income is generally not subject to regular withholding. However, it may be subject to backup withholding to ensure that income tax is collected on the income. Under backup withholding, the payer of interest must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate.

Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. For more information, see Backup Withholding in chapter 4.



Reporting backup withholding.

If backup withholding is deducted from your interest income, the payer must give you a Form 1099-INT for the year indicating the amount withheld. The Form 1099-INT will show any backup withholding as "Federal income tax withheld."



Joint accounts.

If two or more persons hold property (such as a savings account or bond) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest from the property is determined by local law.



Income from property given to a child.

Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property.

Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation.



Savings account with parent as trustee.

Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true.

  • The savings account legally belongs to the child.

  • The parents are not legally permitted to use any of the funds to support the child.



Form 1099-INT.

Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. This form shows you the interest you received during the year. Keep this form for your records. You do not have to attach it to your tax return.

Report on your tax return the total interest income you receive for the tax year. See the instructions to Form 1099-INT to see whether you need to adjust any of the amounts reported to you.



Interest not reported on Form 1099-INT.

Even if you do not receive Form 1099-INT, you must still report all of your interest income. For example, you may receive distributive shares of interest from partnerships or S corporations. This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deduction, Credits, etc., or Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc.



Nominees.

Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf.

If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on nominee distributions under How To Report Interest Income in chapter 1 of Pub. 550, or Schedule B (Form 1040A or 1040) instructions.



Incorrect amount.

If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. The new Form 1099-INT you receive will be marked "Corrected."



Form 1099-OID.

Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter.



Exempt-interest dividends.

Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. (However, see Information reporting requirement , next.) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. You do not reduce your basis for distributions that are exempt-interest dividends.



Information reporting requirement.

Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. This is an information reporting requirement and does not change the exempt-interest dividends into taxable income.

Note.

Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. See Alternative Minimum Tax (AMT) in chapter 30 for more information. Chapter 1 of Pub. 550 contains a discussion on private activity bonds under State or Local Government Obligations.



Interest on VA dividends.

Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. This includes interest paid on dividends on converted United States Government Life Insurance and on National Service Life Insurance policies.



Individual retirement arrangements (IRAs).

Interest on a Roth IRA generally is not taxable. Interest on a traditional IRA is tax deferred. You generally do not include it in your income until you make withdrawals from the IRA. See chapter 17.



Taxable Interest

Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following are some sources of taxable interest.

Dividends that are actually interest.

Certain distributions commonly called dividends are actually interest. You must report as interest so-called "dividends" on deposits or on share accounts in:

  • Cooperative banks,

  • Credit unions,

  • Domestic building and loan associations,

  • Domestic savings and loan associations,

  • Federal savings and loan associations, and

  • Mutual savings banks.


The "dividends" will be shown as interest income on Form 1099-INT.



Money market funds.

Money market funds pay dividends and are offered by nonbank financial institutions, such as mutual funds and stock brokerage houses. Generally, amounts you receive from money market funds should be reported as dividends, not as interest.



Certificates of deposit and other deferred interest accounts.

If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later.



Interest subject to penalty for early withdrawal.

If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. See Penalty on early withdrawal of savings in chapter 1 of Pub. 550 for more information on how to report the interest and deduct the penalty.



Money borrowed to invest in certificate of deposit.

The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. You must report the total interest you earn on the certificate in your income. If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. See Interest Expenses in chapter 3 of Pub. 550.

Example.

You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. The certificate earned $575 at maturity in 2016, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. The bank gives you a Form 1099-INT for 2016 showing the $575 interest you earned. The bank also gives you a statement showing that you paid $310 interest for 2016. You must include the $575 in your income. If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit.



Gift for opening account.

If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest.

For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution.

Example.

You open a savings account at your local bank and deposit $800. The account earns $20 interest. You also receive a $15 calculator. If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. You must report $35 interest income on your tax return.



Interest on insurance dividends.

Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs.



Prepaid insurance premiums.

Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw.



U.S. obligations.

Interest on U.S. obligations, such as U.S. Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes.



Interest on tax refunds.

Interest you receive on tax refunds is taxable income.



Interest on condemnation award.

If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable.



Installment sale payments.

If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Generally, that interest is taxable when you receive it. If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. See Unstated Interest and Original Issue Discount in Pub. 537, Installment Sales.



Interest on annuity contract.

Accumulated interest on an annuity contract you sell before its maturity date is taxable.



Usurious interest.

Usurious interest is interest charged at an illegal rate. This is taxable as interest unless state law automatically changes it to a payment on the principal.



Interest income on frozen deposits.

Exclude from your gross income interest on frozen deposits. A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because:

  • The financial institution is bankrupt or insolvent, or

  • The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent.

The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of:

  • The net amount you withdrew from these deposits during the year, and

  • The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit).

If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2016, see Frozen deposits under How To Report Interest Income in chapter 1 of Pub. 550 for information about reporting this interest income exclusion on your tax return.

The interest you exclude is treated as credited to your account in the following year. You must include it in income in the year you can withdraw it.

Example.

$100 of interest was credited on your frozen deposit during the year. You withdrew $80 but could not withdraw any more as of the end of the year. You must include $80 in your income and exclude $20 from your income for the year. You must include the $20 in your income for the year you can withdraw it.



Bonds traded flat.

If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. The defaulted or unpaid interest is not income and is not taxable as interest if paid later. When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Interest that accrues after the date of purchase, however, is taxable interest income for the year it is received or accrued. See Bonds Sold Between Interest Dates , later, for more information.



Below-market loans.

In general, a below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. See Below-Market Loans in chapter 1 of Pub. 550 for more information.



U.S. Savings Bonds

This section provides tax information on U.S. savings bonds. It explains how to report the interest income on these bonds and how to treat transfers of these bonds.

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For other information on U.S. savings bonds, write to:

For series HH/H:
Series HH and Series H
Treasury Retail Securities Site
P.O. Box 2186
Minneapolis, MN 55480-2186

For series EE and I paper savings bonds:
Series EE and Series I
Treasury Retail Securities Site
P.O. Box 214
Minneapolis, MN 55480-0214

For series EE and I electronic bonds:
Series EE and Series I
Treasury Retail Securities Site
P.O. Box 7015
Minneapolis, MN 55480-7015

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Or, on the Internet, visit
www.treasurydirect.gov/indiv/indiv.htm.

Accrual method taxpayers.

If you use an accrual method of accounting, you must report interest on U.S. savings bonds each year as it accrues. You cannot postpone reporting interest until you receive it or until the bonds mature. Accrual methods of accounting are explained in chapter 1 under Accounting Methods .



Cash method taxpayers.

If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U.S. savings bonds when you receive it. The cash method of accounting is explained in chapter 1 under Accounting Methods . But see Reporting options for cash method taxpayers , later.



Series HH bonds.

These bonds were issued at face value. Interest is paid twice a year by direct deposit to your bank account. If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it.

Series HH bonds were first offered in 1980 and last offered in August 2004. Before 1980, series H bonds were issued. Series H bonds are treated the same as series HH bonds. If you are a cash method taxpayer, you must report the interest when you receive it.

Series H bonds have a maturity period of 30 years. Series HH bonds mature in 20 years. The last series H bonds matured in 2009.



Series EE and series I bonds.

Interest on these bonds is payable when you redeem the bonds. The difference between the purchase price and the redemption value is taxable interest.



Series EE bonds.

Series EE bonds were first offered in January 1980 and have a maturity period of 30 years.



Before July 1980, series E bonds were issued. The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Paper series EE and series E bonds are issued at a discount. The face value is payable to you at maturity. Electronic series EE bonds are issued at their face value. The face value plus accrued interest is payable to you at maturity. As of January 1, 2012, paper savings bonds were no longer sold at financial institutions.

Owners of paper series EE bonds can convert them to electronic bonds. These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest).



Series I bonds.

Series I bonds were first offered in 1998. These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. The face value plus all accrued interest is payable to you at maturity.



Reporting options for cash method taxpayers.

If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways.

  1. Method 1. Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year they mature. (However, see Savings bonds traded , later.)

  2. Method 2. Choose to report the increase in redemption value as interest each year.

You must use the same method for all series EE, series E, and series I bonds you own. If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1.

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If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. To learn how, see Education Savings Bond Program, later.



Change from method 1.

If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. In the year of change you must report all interest accrued to date and not previously reported for all your bonds.

Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next.



Change from method 2.

To change from method 2 to method 1, you must request permission from the IRS. Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements.

  1. You have typed or printed the following number at the top: "131."

  2. It includes your name and social security number under "131."

  3. It includes the year of change (both the beginning and ending dates).

  4. It identifies the savings bonds for which you are requesting this change.

  5. It includes your agreement to:

    1. Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and

    2. Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years.

You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions).

You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. To get this extension, you must have filed your original return for the year of the change by the due date (including extensions).

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By the date you file the original statement with your return, you must also send a signed copy to the address below.

Internal Revenue Service
Attention: Automatic Change
P.O. Box 7604
Benjamin Franklin Station
Washington, DC 20044

If you use a private delivery service, send the signed copy to the address below.

Internal Revenue Service
Attention: Automatic Change
1111 Constitution Avenue NW
Washington, DC 20224
Room 5336

Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115, Application for Change in Accounting Method. In that case, follow the form instructions for an automatic change. No user fee is required.



Co-owners.

If a U.S. savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond.



One co-owner's funds used.

If you used your funds to buy the bond, you must pay the tax on the interest. This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. The co-owner who redeemed the bond is a "nominee." See Nominee distributions under How To Report Interest Income in chapter 1 of Pub. 550 for more information about how a person who is a nominee reports interest income belonging to another person.



Both co-owners' funds used.

If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid.



Community property.

If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. If you file separate returns, each of you generally must report one-half of the bond interest. For more information about community property, see Pub. 555.



Table 7-1.

These rules are also shown in Table 7-1.



Ownership transferred.

If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time.

This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce.



Purchased jointly.

If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. This interest, however, as well as all interest earned after the reissue, is income to the former co-owner.

This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. But the new co-owner will report only his or her share of the interest earned after the transfer.

If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued.

Table 7-1. Who Pays the Tax on U.S. Savings Bond Interest

IF ... THEN the interest must be reported by ...
you buy a bond in your name and the name of another person as co-owners, using only your own funds you.
you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond.
you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond.
you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. If you file separate returns, both you and your spouse generally report one-half of the interest.

Example 1.

You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. The bond was issued to you and your spouse as co-owners. You both postpone reporting interest on the bond. You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. At that time, neither you nor your spouse has to report the interest earned to the date of reissue.

Example 2.

You bought a $1,000 series EE savings bond entirely with your own funds. The bond was issued to you and your spouse as co-owners. You both postpone reporting interest on the bond. You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. You must report half the interest earned to the date of reissue.



Transfer to a trust.

If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier.

The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. See Savings bonds traded , later.



Decedents.

The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. This is explained in chapter 1 of Pub. 550.



Savings bonds traded.

If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. (You cannot trade series I bonds for series HH bonds. After August 31, 2004, you cannot trade any other series of bonds for series HH bonds.) Any cash you received is income up to the amount of the interest earned on the bonds traded. When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade.

Example.

You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. You reported the $223 as taxable income on your tax return. At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. You hold the series HH bonds until maturity, when you receive $2,500. You must report $300 as interest income in the year of maturity. This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade.)



Choice to report interest in year of trade.

You could have chosen to treat all of the previously unreported accrued interest on the series EE or series E bonds traded for series HH bonds as income in the year of the trade. If you made this choice, it is treated as a change from method 1. See Change from method 1 , earlier.



Form 1099-INT for U.S. savings bonds interest.

When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. However, your Form 1099-INT may show more interest than you have to include on your income tax return. For example, this may happen if any of the following are true.

  • You chose to report the increase in the redemption value of the bond each year. The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income.

  • You received the bond from a decedent. The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return.

  • Ownership of the bond was transferred. The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer.

  • You were named as a co-owner, and the other co-owner contributed funds to buy the bond. The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. (See Co-owners , earlier in this chapter, for more information about the reporting requirements.)

  • You received the bond in a taxable distribution from a retirement or profit-sharing plan. The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year of distribution.)

For more information on including the correct amount of interest on your return, see How To Report Interest Income , later. Pub. 550 includes examples showing how to report these amounts.

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Interest on U.S. savings bonds is exempt from state and local taxes. The Form 1099-INT you receive will indicate the amount that is for U.S. savings bond interest in box 3.



Education Savings Bond Program

You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U.S. savings bonds during the year if you pay qualified higher educational expenses during the same year. This exclusion is known as the Education Savings Bond Program.

You do not qualify for this exclusion if your filing status is married filing separately.

Form 8815.

Use Form 8815 to figure your exclusion. Attach the form to your Form 1040 or Form 1040A.



Qualified U.S. savings bonds.

A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). You must be at least 24 years old before the bond's issue date. For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child.

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The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased.



Beneficiary.

You can designate any individual (including a child) as a beneficiary of the bond.



Verification by IRS.

If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of the Treasury.



Qualified expenses.

Qualified higher education expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution.

Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account.

Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program.



Eligible educational institutions.

These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the U.S. Department of Education.



Reduction for certain benefits.

You must reduce your qualified higher education expenses by all of the following tax-free benefits.

  1. Tax-free part of scholarships and fellowships (see Scholarships and fellowships in chapter 12).

  2. Expenses used to figure the tax-free portion of distributions from a Coverdell ESA.

  3. Expenses used to figure the tax-free portion of distributions from a qualified tuition program.

  4. Any tax-free payments (other than gifts or inheritances) received for educational expenses, such as:

    1. Veterans' educational assistance benefits,

    2. Qualified tuition reductions, or

    3. Employer-provided educational assistance.

  5. Any expense used in figuring the American opportunity and lifetime learning credits.



Amount excludable.

If the total proceeds (interest and principal) from the qualified U.S. savings bonds you redeem during the year are not more than your adjusted qualified higher education expenses for the year, you may be able to exclude all of the interest. If the proceeds are more than the expenses, you may be able to exclude only part of the interest.

To determine the excludable amount, multiply the interest part of the proceeds by a fraction. The numerator of the fraction is the qualified higher education expenses you paid during the year. The denominator of the fraction is the total proceeds you received during the year.

Example.

In February 2016, Mark and Joan, a married couple, cashed qualified series EE U.S. savings bonds with a total denomination of $10,000 that they bought in April 2000 for $5,000. They received proceeds of $7,828, representing principal of $5,000 and interest of $2,828. In 2016, they paid $4,000 of their daughter's college tuition. They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance. They can exclude $1,445 ($2,828 × ($4,000 ÷ $7,828)) of interest in 2016. They must include the remaining $1,383 ($2,828 − $1,445) interest in gross income.



Modified adjusted gross income limit.

The interest exclusion is limited if your modified adjusted gross income (modified AGI) is:

  • $77,550 to $92,550 for taxpayers filing single or head of household, and

  • $116,300 to $146,300 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child.

You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status.

Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040, line 37, or Form 1040A, line 21) figured before the interest exclusion, and modified by adding back any:

  1. Foreign earned income exclusion,

  2. Foreign housing exclusion and deduction,

  3. Exclusion of income for bona fide residents of American Samoa,

  4. Exclusion for income from Puerto Rico,

  5. Exclusion for adoption benefits received under an employer's adoption assistance program,

  6. Deduction for tuition and fees,

  7. Deduction for student loan interest, and

  8. Deduction for domestic production activities.

Use the Line 9 Worksheet in the Form 8815 instructions to figure your modified AGI.

If you have investment interest expense incurred to earn royalties and other investment income, see Education Savings Bond Program in chapter 1 of Pub. 550.



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Recordkeeping. If you claim the interest exclusion, you must keep a written record of the qualified U.S. savings bonds you redeem. Your record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each bond. You can use Form 8818 to record this information. You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher education expenses during the year.

U.S. Treasury Bills, Notes, and Bonds

Treasury bills, notes, and bonds are direct debts (obligations) of the U.S. Government.

Taxation of interest.

Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. You should receive Form 1099-INT showing the interest (in box 3) paid to you for the year.

Payments of principal and interest generally will be credited to your designated checking or savings account by direct deposit through the TreasuryDirect® system.



Treasury bills.

These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity period. They are generally issued at a discount in the amount of $100 and multiples of $100. The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. Generally, you report this interest income when the bill is paid at maturity. If you paid a premium for a bill (more than the face value), you generally report the premium as a section 171 deduction when the bill is paid at maturity.



Treasury notes and bonds.

Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. Maturity periods for Treasury bonds are longer than 10 years. Both generally are issued in denominations of $100 to $1 million and generally pay interest every 6 months. Generally, you report this interest for the year paid. For more information, see U.S. Treasury Bills, Notes, and Bonds in chapter 1 of Pub. 550.



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For other information on Treasury notes or bonds, write to:

Treasury Retail Securities Site
P.O. Box 7015
Minneapolis, MN 55480-7015

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Or, on the Internet, visit www.treasurydirect.gov/indiv/indiv.htm.

For information on series EE, series I, and series HH savings bonds, see U.S. Savings Bonds , earlier.

Treasury inflation-protected securities (TIPS).

These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation. For the tax treatment of these securities, see Inflation-Indexed Debt Instruments under Original Issue Discount (OID) in Pub. 550.



Bonds Sold Between Interest Dates

If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. You must report that part of the sales price as interest income for the year of sale.

If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, treat it as a nontaxable return of your capital investment, rather than as interest income. See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Pub. 550 for information on reporting the payment.

Insurance

Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. But if you receive the proceeds in installments, you must usually report a part of each installment payment as interest income.

For more information about insurance proceeds received in installments, see Pub. 525, Taxable and Nontaxable Income.

Annuity.

If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. See chapter 10 for information on pension and annuity income from nonqualified plans.



State or Local Government Obligations

Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions.

Bonds issued after 1982 (including tribal economic development bonds issued after February 17, 2009) by an Indian tribal government are treated as issued by a state. Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function.

For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified tax credit bonds, and Build America bonds, see State or Local Government Obligations in chapter 1 of Pub. 550.

Information reporting requirement.

If you must file a tax return, you are required to show any tax-exempt interest you received on your return. This is an information reporting requirement only. It does not change tax-exempt interest to taxable interest.



Original Issue Discount (OID)

Original issue discount (OID) is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer.

A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. OID is the difference between the stated redemption price at maturity and the issue price.

All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one example of these instruments.

The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). See Discount on Short-Term Obligations in chapter 1 of Pub. 550.

De minimis OID.

You can treat the discount as zero if it is less than one-fourth of 1% (.0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. This small discount is known as "de minimis" OID.

Example 1.

You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Because the $20 discount is less than $25, the OID is treated as zero. (If you hold the bond at maturity, you will recognize $20 ($1,000 − $980) of capital gain.)

Example 2.

The facts are the same as in Example 1, except that the bond was issued at $950. The OID is $50. Because the $50 discount is more than the $25 figured in Example 1, you must include the OID in income as it accrues over the term of the bond.



Debt instrument bought after original issue.

If you buy a debt instrument with de minimis OID at a premium, the discount is not includible in income. If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules. See Market Discount Bonds in chapter 1 of Pub. 550.



Exceptions to reporting OID as current income.

The OID rules discussed in this chapter do not apply to the following debt instruments.

  1. Tax-exempt obligations. (However, see Stripped tax-exempt obligations under Stripped Bonds and Coupons in chapter 1 of Pub. 550).

  2. U.S. savings bonds.

  3. Short-term debt instruments (those with a fixed maturity date of not more than 1 year from the date of issue).

  4. Obligations issued by an individual before March 2, 1984.

  5. Loans between individuals if all the following are true.

    1. The lender is not in the business of lending money.

    2. The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less.

    3. Avoiding any federal tax is not one of the principal purposes of the loan.



Form 1099-OID.

The issuer of the debt instrument (or your broker if you held the instrument through a broker) should give you Form 1099-OID, or a similar statement, if the total OID for the calendar year is $10 or more. Form 1099-OID will show, in box 1, the amount of OID for the part of the year that you held the bond. It also will show, in box 2, the stated interest you must include in your income. Box 8 shows OID on a U.S. Treasury obligation for the part of the year you owned it and is not included in box 1. A copy of Form 1099-OID will be sent to the IRS. Do not file your copy with your return. Keep it for your records.

In most cases, you must report the entire amount in boxes 1, 2, and 8 of Form 1099-OID as interest income. But see Refiguring OID shown on Form 1099-OID , later in this discussion, for more information.



Form 1099-OID not received.

If you had OID for the year but did not receive a Form 1099-OID, you may have to figure the correct amount of OID to report on your return. See Pub. 1212 for details on how to figure the correct OID.



Nominee.

If someone else is the holder of record (the registered owner) of an OID instrument belonging to you and receives a Form 1099-OID on your behalf, that person must give you a Form 1099-OID.



Refiguring OID shown on Form 1099-OID.

You may need to refigure the OID shown in box 1 or box 8 of Form 1099-OID if either of the following apply.

  • You bought the debt instrument after its original issue and paid a premium or an acquisition premium.

  • The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon instruments).

For information about figuring the correct amount of OID to include in your income, see Figuring OID on Long-Term Debt Instruments in Pub. 1212 and the instructions for Form 1099-OID.



Refiguring periodic interest shown on Form 1099-OID.

If you disposed of a debt instrument or acquired it from another holder during the year, see Bonds Sold Between Interest Dates , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form 1099-OID for that instrument.



Certificates of deposit (CDs).

If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID.

This also applies to similar deposit arrangements with banks, building and loan associations, etc., including:

  • Time deposits,

  • Bonus plans,

  • Savings certificates,

  • Deferred income certificates,

  • Bonus savings certificates, and

  • Growth savings certificates.



Bearer CDs.

CDs issued after 1982 generally must be in registered form. Bearer CDs are CDs not in registered form. They are not issued in the depositor's name and are transferable from one individual to another.

Banks must provide the IRS and the person redeeming a bearer CD with a Form 1099-INT.



More information.

See chapter 1 of Pub. 550 for more information about OID and related topics, such as market discount bonds.



When To Report Interest Income

When to report your interest income depends on whether you use the cash method or an accrual method to report income.

Cash method.

Most individual taxpayers use the cash method. If you use this method, you generally report your interest income in the year in which you actually or constructively receive it. However, there are special rules for reporting the discount on certain debt instruments. See U.S. Savings Bonds and Original Issue Discount (OID) , earlier.

Example.

On September 1, 2014, you loaned another individual $2,000 at 12%, compounded annually. You are not in the business of lending money. The note stated that principal and interest would be due on August 31, 2016. In 2016, you received $2,508.80 ($2,000 principal and $508.80 interest). If you use the cash method, you must include in income on your 2016 return the $508.80 interest you received in that year.



Constructive receipt.

You constructively receive income when it is credited to your account or made available to you. You do not need to have physical possession of it. For example, you are considered to receive interest, dividends, or other earnings on any deposit or account in a bank, savings and loan, or similar financial institution, or interest on life insurance policy dividends left to accumulate, when they are credited to your account and subject to your withdrawal. This is true even if they are not yet entered in your passbook.

You constructively receive income on the deposit or account even if you must:

  • Make withdrawals in multiples of even amounts,

  • Give a notice to withdraw before making the withdrawal,

  • Withdraw all or part of the account to withdraw the earnings, or

  • Pay a penalty on early withdrawals, unless the interest you are to receive on an early withdrawal or redemption is substantially less than the interest payable at maturity.



Accrual method.

If you use an accrual method, you report your interest income when you earn it, whether or not you have received it. Interest is earned over the term of the debt instrument.

Example.

If, in the previous example, you use an accrual method, you must include the interest in your income as you earn it. You would report the interest as follows: 2014, $80; 2015, $249.60; and 2016, $179.20.



Coupon bonds.

Interest on bearer bonds with detachable coupons is generally taxable in the year the coupon becomes due and payable. It does not matter when you mail the coupon for payment.



How To Report Interest Income

Generally, you report all your taxable interest income on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2.

You cannot use Form 1040EZ if your taxable interest income is more than $1,500. Instead, you must use Form 1040A or Form 1040.

Form 1040A.

You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040A and any of the following are true.

  1. Your taxable interest income is more than $1,500.

  2. You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier).

  3. You received interest from a seller-financed mortgage, and the buyer used the property as a home.

  4. You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported in a previous tax year.

  5. You received, as a nominee, interest that actually belongs to someone else.

  6. You received a Form 1099-INT for interest on frozen deposits.

  7. You are reporting OID in an amount less than the amount shown on Form 1099-OID.

  8. You received a Form 1099-INT for interest on a bond you bought between interest payment dates.

  9. You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium (see Bond Premium Amortization in chapter 3 of Pub. 550).

List each payer's name and the amount of interest income received from each payer on line 1. If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer.

You cannot use Form 1040A if you must use Form 1040, as described next.



Form 1040.

You must use Form 1040 instead of Form 1040A or Form 1040EZ if:

  1. You forfeited interest income because of the early withdrawal of a time deposit;

  2. You acquired taxable bonds after 1987, you choose to reduce interest income from the bonds by any amortizable bond premium, and you are deducting the excess of bond premium amortization for the accrual period over the qualified stated interest for the period (see Bond Premium Amortization in chapter 3 of Pub. 550); or

  3. You received tax-exempt interest from private activity bonds issued after August 7, 1986.



Schedule B (Form 1040A or 1040).

You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040 and any of the following apply.

  1. Your taxable interest income is more than $1,500.

  2. You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier).

  3. You received interest from a seller-financed mortgage, and the buyer used the property as a home.

  4. You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported in a previous tax year.

  5. You received, as a nominee, interest that actually belongs to someone else.

  6. You received a Form 1099-INT for interest on frozen deposits.

  7. You received a Form 1099-INT for interest on a bond you bought between interest payment dates.

  8. You are reporting OID in an amount less than the amount shown on Form 1099-OID.

  9. Statement (2) in the preceding list under Form 1040 is true.

In Part I, line 1, list each payer's name and the amount received from each. If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer.



Reporting tax-exempt interest.

Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, including zero coupon municipal bonds) reported on Form 1099-INT, box 8, and exempt-interest dividends from a mutual fund or other regulated investment company reported on Form 1099-DIV, box 10. Add these amounts to any other tax-exempt interest you received. Report the total on line 8b of Form 1040A or Form 1040.

If you file Form 1040EZ, enter "TEI" and the amount in the space to the left of line 2. Do not add tax-exempt interest in the total on Form 1040EZ, line 2.

Form 1099-INT, box 9, and Form 1099-DIV, box 11, show the tax-exempt interest subject to the alternative minimum tax on Form 6251. These amounts are already included in the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. Do not add the amounts in Form 1099-INT, box 9, and Form 1099-DIV, box 11, to, or subtract them from, the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10.

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Do not report interest from an individual retirement account (IRA) as tax-exempt interest.



Form 1099-INT.

Your taxable interest income, except for interest from U.S. savings bonds and Treasury obligations, is shown in box 1 of Form 1099-INT. Add this amount to any other taxable interest income you received. See the instructions for Form 1099-INT if you have interest from a security acquired at a premium. You must report all of your taxable interest income even if you do not receive a Form 1099-INT. Contact your financial institution if you do not receive a Form 1099-INT by February 15. Your identifying number may be truncated on any paper Form 1099-INT you receive.

If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be shown on Form 1099-INT in box 2. See Penalty on early withdrawal of savings in chapter 1 of Pub. 550.

Box 3 of Form 1099-INT shows the interest income you received from U.S. savings bonds, Treasury bills, Treasury notes, and Treasury bonds. Generally, add the amount shown in box 3 to any other taxable interest income you received. If part of the amount shown in box 3 was previously included in your interest income, see U.S. savings bond interest previously reported , later. If you acquired the security at a premium, see the instructions for Form 1099-INT.

Box 4 of Form 1099-INT will contain an amount if you were subject to backup withholding. Include the amount from box 4 on Form 1040EZ, line 7; Form 1040A, line 40; or Form 1040, line 64 (federal income tax withheld).

Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. See chapter 28 for more information about investment expenses.

If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. You may be able to take a credit for the amount shown in box 6 unless you deduct this amount on line 8 of Schedule A (Form 1040). To take the credit, you may have to file Form 1116, Foreign Tax Credit. For more information, see Pub. 514, Foreign Tax Credit for Individuals.



U.S. savings bond interest previously reported.

If you received a Form 1099-INT for U.S. savings bond interest, the form may show interest you do not have to report. See Form 1099-INT for U.S. savings bonds interest , earlier.

On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. Then follow these steps.

  1. Several lines above line 2, enter a subtotal of all interest listed on line 1.

  2. Below the subtotal, enter "U.S. Savings Bond Interest Previously Reported" and enter amounts previously reported or interest accrued before you received the bond.

  3. Subtract these amounts from the subtotal and enter the result on line 2.



More information.

For more information about how to report interest income, see chapter 1 of Pub. 550 or the instructions for the form you must file.



8. Dividends and Other Distributions

Reminder

Foreign-source income. If you are a U.S. citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.

Introduction

This chapter discusses the tax treatment of:

  • Ordinary dividends,

  • Capital gain distributions,

  • Nondividend distributions, and

  • Other distributions you may receive from a corporation or a mutual fund.

This chapter also explains how to report dividend income on your tax return.

Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. However, some amounts you receive that are called dividends are actually interest income. (See Dividends that are actually interest in chapter 7.)

Most distributions are paid in cash (or check). However, distributions can consist of more stock, stock rights, other property, or services.

Useful Items - You may want to see:

Publication

  • 514 Foreign Tax Credit for Individuals

  • 550 Investment Income and Expenses

Form (and Instructions)

  • Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends

General Information

This section discusses general rules for dividend income.

Tax on unearned income of certain children.

Part of a child's 2016 unearned income may be taxed at the parent's tax rate. If it is, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate.

Some parents can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose.

For more information about the tax on unearned income of children and the parents' election, see chapter 31.



Beneficiary of an estate or trust.

Dividends and other distributions you receive as a beneficiary of an estate or trust are generally taxable income. You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc., from the fiduciary. Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040.



Social security number (SSN) or individual taxpayer identification number (ITIN).

You must give your SSN or ITIN to any person required by federal tax law to make a return, statement, or other document that relates to you. This includes payers of dividends. If you do not give your SSN or ITIN to the payer of dividends, you may have to pay a penalty.



For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1.

Backup withholding.

Your dividend income is generally not subject to regular withholding. However, it may be subject to backup withholding to ensure that income tax is collected on the income. Under backup withholding, the payer of dividends must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate.

Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. For more information, see Backup Withholding in chapter 4.



Stock certificate in two or more names.

If two or more persons hold stock as joint tenants, tenants by the entirety, or tenants in common, each person's share of any dividends from the stock is determined by local law.



Form 1099-DIV.

Most corporations and mutual funds use Form 1099-DIV, Dividends and Distributions, to show you the distributions you received from them during the year. Keep this form with your records. You do not have to attach it to your tax return.



Dividends not reported on Form 1099-DIV.

Even if you do not receive Form 1099-DIV, you must still report all your taxable dividend income. For example, you may receive distributive shares of dividends from partnerships or S corporations. These dividends are reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc.



Reporting tax withheld.

If tax is withheld from your dividend income, the payer must give you a Form 1099-DIV that indicates the amount withheld.



Nominees.

If someone receives distributions as a nominee for you, that person should give you a Form 1099-DIV, which will show distributions received on your behalf.



Form 1099-MISC.

Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. See Reporting Substitute Payments under Short Sales in chapter 4 of Pub. 550 for more information about reporting these payments.



Incorrect amount shown on a Form 1099.

If you receive a Form 1099 that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. The new Form 1099 you receive will be marked "Corrected."



Dividends on stock sold.

If stock is sold, exchanged, or otherwise disposed of after a dividend is declared but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income.



Dividends received in January.

If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. You report the dividend in the year it was declared.



Ordinary Dividends

Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. They are paid out of earnings and profits and are ordinary income to you. This means they are not capital gains. You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive.

Qualified Dividends

Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. They should be shown in box 1b of the Form 1099-DIV you receive.

The maximum rate of tax on qualified dividends is the following.

  • 0% on any amount that otherwise would be taxed at a 10% or 15% rate.

  • 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39.6%.

  • 20% on any amount that otherwise would be taxed at a 39.6% rate.

To qualify for the maximum rate, all of the following requirements must be met.

Holding period.

You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. Instead, the seller will get the dividend.

When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. See the examples later.



Exception for preferred stock.

In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. If the preferred dividends are due to periods totaling less than 367 days, the holding period in the previous paragraph applies.



Example 1.

You bought 5,000 shares of XYZ Corp. common stock on July 9, 2016. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 16, 2016. Your Form 1099-DIV from XYZ Corp. shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you sold the 5,000 shares on August 12, 2016. You held your shares of XYZ Corp. for only 34 days of the 121-day period (from July 10, 2016, through August 12, 2016). The 121-day period began on May 17, 2016 (60 days before the ex-dividend date), and ended on September 14, 2016. You have no qualified dividends from XYZ Corp. because you held the XYZ stock for less than 61 days.

Example 2.

Assume the same facts as in Example 1 except that you bought the stock on July 15, 2016 (the day before the ex-dividend date), and you sold the stock on September 16, 2016. You held the stock for 63 days (from July 16, 2016, through September 16, 2016). The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 16, 2016, through September 14, 2016).

Example 3.

You bought 10,000 shares of ABC Mutual Fund common stock on July 9, 2016. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 16, 2016. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 12, 2016. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.

Holding period reduced where risk of loss is diminished.

When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions.

  1. You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities.

  2. You were grantor (writer) of an option to buy substantially identical stock or securities.

  3. Your risk of loss is diminished by holding one or more other positions in substantially similar or related property.

For information about how to apply condition (3), see Regulations section 1.246-5.



Qualified foreign corporation.

A foreign corporation is a qualified foreign corporation if it meets any of the following conditions.

  1. The corporation is incorporated in a U.S. possession.

  2. The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. For a list of those treaties, see Table 8-1.

  3. The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. See Readily tradable stock , later.



Exception.

A corporation is not a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year.



Readily tradable stock.

Any stock (such as common, ordinary, or preferred) or an American depositary receipt in respect of that stock is considered to satisfy requirement (3) under Qualified foreign corporation , earlier, if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. For a list of the exchanges that meet these requirements, see www.sec.gov/divisions/marketreg/mrexchanges.shtml.



Dividends that are not qualified dividends.

The following dividends are not qualified dividends. They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV.

  • Capital gain distributions.

  • Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions. (Report these amounts as interest income.)

  • Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year.

  • Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation.

  • Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.

  • Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends.

  • Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends.



Table 8-1. Income Tax Treaties

Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation , earlier.
Australia Indonesia Romania
Austria Ireland Russian
Bangladesh Israel Federation
Barbados Italy Slovak
Belgium Jamaica Republic
Bulgaria Japan Slovenia
Canada Kazakhstan South Africa
China Korea, Republic of Spain
Cyprus Latvia Sri Lanka
Czech Lithuania Sweden
Republic Luxembourg Switzerland
Denmark Malta Thailand
Egypt Mexico Trinidad and
Estonia Morocco Tobago
Finland Netherlands Tunisia
France New Zealand Turkey
Germany Norway Ukraine
Greece Pakistan United
Hungary Philippines Kingdom
Iceland Poland Venezuela
India Portugal


Dividends Used To Buy More Stock

The corporation in which you own stock may have a dividend reinvestment plan. This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income.

If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date.

You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. But you may be able to deduct the service charge. See chapter 28 for more information about deducting expenses of producing income.

In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. When figuring this amount, use the fair market value of the stock on the dividend payment date.

Money Market Funds

Report amounts you receive from money market funds as dividend income. Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest.

Capital Gain Distributions

Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT.

Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT.

Undistributed capital gains of mutual funds and REITs.

Some mutual funds and REITs keep their long-term capital gains and pay tax on them. You must treat your share of these gains as distributions, even though you did not actually receive them. However, they are not included on Form 1099-DIV. Instead, they are reported to you in box 1a of Form 2439.

Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), line 11, column (h).

The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. You take credit for this tax by including it on Form 1040, line 73, and following the instructions there.



Basis adjustment.

Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid.



Additional information.

For more information on the treatment of distributions from mutual funds, see Pub. 550.



Nondividend Distributions

A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. You should receive a Form 1099-DIV or other statement showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you do not receive such a statement, you report the distribution as an ordinary dividend.

Basis adjustment.

A nondividend distribution reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered. This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first.

When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. See Holding Period in chapter 14.

Example.

You bought stock in 2003 for $100. In 2006, you received a nondividend distribution of $80. You did not include this amount in your income, but you reduced the basis of your stock to $20. You received a nondividend distribution of $30 in 2016. The first $20 of this amount reduced your basis to zero. You report the other $10 as a long-term capital gain for 2016. You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years.



Liquidating Distributions

Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. These distributions are, at least in part, one form of a return of capital. They may be paid in one or more installments. You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9.

For more information on liquidating distributions, see chapter 1 of Pub. 550.

Distributions of Stock and Stock Rights

Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as "stock options") are distributions by a corporation of rights to acquire the corporation's stock. Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return.

Taxable stock dividends and stock rights.

Distributions of stock dividends and stock rights are taxable to you if any of the following apply.

  1. You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights.

  2. The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders.

  3. The distribution is in convertible preferred stock and has the same result as in (2).

  4. The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders.

  5. The distribution is on preferred stock. (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right.)

The term "stock" includes rights to acquire stock, and the term "shareholder" includes a holder of rights or of convertible securities.



If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income.

Preferred stock redeemable at a premium.

If you receive preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. For more information, see chapter 1 of Pub. 550.



Basis.

Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. If you receive stock or stock rights that are not taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Pub. 550 for information on how to figure their basis.



Fractional shares.

You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares are not issued but instead are sold, and the cash proceeds are given to the shareholders. Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate.

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Report these transactions on Form 8949 with the correct box checked.

For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Pub. 550. Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040).

Example.

You own one share of common stock that you bought on January 3, 2007, for $100. The corporation declared a common stock dividend of 5% on June 30, 2016. The fair market value of the stock at the time the stock dividend was declared was $200. You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. You figure your gain or loss as follows:

Fair market value of old stock $200.00
Fair market value of stock dividend (cash received) +10.00
Fair market value of old stock and stock dividend $210.00
Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) $95.24
Basis (cost) of stock dividend (($10 ÷ $210) × $100) + 4.76
Total $100.00
Cash received $10.00
Basis (cost) of stock dividend − 4.76
Gain $5.24

Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain.



Scrip dividends.

A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. The certificate is generally nontaxable when you receive it. If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation's stock allocated to the certificate.

However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. You must include its fair market value in income on the date you receive it.



Other Distributions

You may receive any of the following distributions during the year.

Exempt-interest dividends.

Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Exempt-interest dividends should be shown in box 10 of Form 1099-DIV.



Information reporting requirement.

Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file a return. This is an information reporting requirement and does not change the exempt-interest dividends to taxable income.



Alternative minimum tax treatment.

Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. See Alternative Minimum Tax (AMT) in chapter 30 for more information.



Dividends on insurance policies.

Insurance policy dividends the insurer keeps and uses to pay your premiums are not taxable. However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company.

If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. Report any taxable distributions on insurance policies on Form 1040, line 21.



Dividends on veterans' insurance.

Dividends you receive on veterans' insurance policies are not taxable. In addition, interest on dividends left with the Department of Veterans Affairs is not taxable.



Patronage dividends.

Generally, patronage dividends you receive in money from a cooperative organization are included in your income.

Do not include in your income patronage dividends you receive on:

  • Property bought for your personal use, or

  • Capital assets or depreciable property bought for use in your business. But you must reduce the basis (cost) of the items bought. If the dividend is more than the adjusted basis of the assets, you must report the excess as income.

These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative.



Alaska Permanent Fund dividends.

Do not report these amounts as dividends. Instead, include these amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ, line 3.



How To Report Dividend Income

Generally, you can use either Form 1040 or Form 1040A to report your dividend income. Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. Report qualified dividends on line 9b of Form 1040 or Form 1040A.

If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. You cannot use Form 1040EZ if you receive any dividend income other than Alaska Permanent Fund dividends.

Form 1099-DIV.

If you owned stock on which you received $10 or more in dividends and other distributions, you should receive a Form 1099-DIV. Even if you do not receive Form 1099-DIV, you must report all your dividend income.

See Form 1099-DIV for more information on how to report dividend income.



Form 1040A or 1040.

You must complete Schedule B (Form 1040A or 1040), Part II, and attach it to your Form 1040A or 1040, if:

  • Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500; or

  • You received, as a nominee, dividends that actually belong to someone else.

If your ordinary dividends are more than $1,500, you must also complete Schedule B (Form 1040A or 1040), Part III.

List on Schedule B (Form 1040A or 1040), Part II, line 5, each payer's name and the ordinary dividends you received. If your securities are held by a brokerage firm (in "street name"), list the name of the brokerage firm shown on Form 1099-DIV as the payer. If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited.

Enter on line 6 the total of the amounts listed on line 5. Also enter this total on line 9a of Form 1040A or 1040.



Qualified dividends.

Report qualified dividends (Form 1099-DIV, box 1b) on line 9b of Form 1040 or Form 1040A. The amount in box 1b is already included in box 1a. Do not add the amount in box 1b to, or subtract it from, the amount in box 1a.

Do not include any of the following on line 9b.

  • Qualified dividends you received as a nominee. See Nominees under How To Report Dividend Income in chapter 1 of Pub. 550.

  • Dividends on stock for which you did not meet the holding period. See Holding period , earlier, under Qualified Dividends.

  • Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.

  • Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends.

  • Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends.

If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions, whichever applies. Enter qualified dividends on line 2 of the worksheet.



Investment interest deducted.

If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. For more information about the limit on investment interest, see Investment expenses in chapter 23.



Expenses related to dividend income.

You may be able to deduct expenses related to dividend income if you itemize your deductions on Schedule A (Form 1040). See chapter 28 for general information about deducting expenses of producing income.



More information.

For more information about how to report dividend income, see chapter 1 of Pub. 550 or the instructions for the form you must file.



9. Rental Income and Expenses

Introduction

This chapter discusses rental income and expenses. It also covers the following topics.

  • Personal use of dwelling unit (including vacation home).

  • Depreciation.

  • Limits on rental losses.

  • How to report your rental income and expenses.

If you sell or otherwise dispose of your rental property, see Pub. 544, Sales and Other Dispositions of Assets.

If you have a loss from damage to, or theft of, rental property, see Pub. 547, Casualties, Disasters, and Thefts.

If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. See Pub. 527, Residential Rental Property, for more information.

Useful Items - You may want to see:

Publication

  • 527 Residential Rental Property

  • 534 Depreciating Property Placed in Service Before 1987

  • 535 Business Expenses

  • 925 Passive Activity and At-Risk Rules

  • 946 How To Depreciate Property

Form (and Instructions)

  • 4562 Depreciation and Amortization

  • 6251 Alternative Minimum Tax—Individuals

  • 8582 Passive Activity Loss Limitations

  • Schedule E (Form 1040) Supplemental Income and Loss

Rental Income

In most cases, you must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property. In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income.

When to report.

If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.

For more information about when you constructively receive income, see Accounting Methods in chapter 1.



Advance rent.

Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.

Example.

You sign a 10-year lease to rent your property. In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. You must include $10,000 in your income in the first year.



Canceling a lease.

If your tenant pays you to cancel a lease, the amount you receive is rent. Include the payment in your income in the year you receive it regardless of your method of accounting.



Expenses paid by tenant.

If your tenant pays any of your expenses, those payments are rental income. Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. See Rental Expenses , later, for more information.



Property or services.

If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.

If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.



Security deposits.

Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.

If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.



Part interest.

If you own a part interest in rental property, you must report your part of the rental income from the property.



Rental of property also used as your home.

If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. See Personal Use of Dwelling Unit (Including Vacation Home) , later.



Rental Expenses

This part discusses expenses of renting property that you ordinarily can deduct from your rental income. It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Depreciation , which you can also deduct from your rental income, is discussed later.

Personal use of rental property.

If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Also, your rental expense deductions may be limited. See Personal Use of Dwelling Unit (Including Vacation Home) , later.



Part interest.

If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership.



When to deduct.

If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them.



Depreciation.

You can begin to depreciate rental property when it is ready and available for rent. See Placed in Service under When Does Depreciation Begin and End in chapter 2 of Pub. 527.



Pre-rental expenses.

You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent.



Uncollected rent.

If you are a cash-basis taxpayer, do not deduct uncollected rent. Because you have not included it in your income, it is not deductible.



Vacant rental property.

If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. However, you cannot deduct any loss of rental income for the period the property is vacant.



Vacant while listed for sale.

If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses.



Repairs and Improvements

Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense.

Improvements.

You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use.



Betterments.

Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.



Restoration.

Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.



Adaptation.

Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property.



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Separate the costs of repairs and improvements, and keep accurate records. You will need to know the cost of improvements when you sell or depreciate your property.

The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property.

Other Expenses

Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next.

Insurance premiums paid in advance.

If you pay an insurance premium for more than one year in advance, you cannot deduct the total premium in the year you pay it. For each year of coverage, you deduct only the part of the premium payment that applies to that year.



Legal and other professional fees.

You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. For example, on your 2016 Schedule E, you can deduct fees paid in 2016 to prepare your 2015 Schedule E, Part I. You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities.



Local benefits.

In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. These charges are nondepreciable capital expenditures, and must be added to the basis of your property. However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits.



Local transportation expenses.

You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. See Pub. 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business.

Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. For 2016, the standard mileage rate for business use is 54 cents per mile. For more information, see chapter 26.

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To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. In addition, you must complete Form 4562, Part V, and attach it to your tax return.



Rental of equipment.

You can deduct the rent you pay for equipment that you use for rental purposes. However, in some cases, lease contracts are actually purchase contracts. If so, you cannot deduct these payments. You can recover the cost of purchased equipment through depreciation.



Rental of property.

You can deduct the rent you pay for property that you use for rental purposes. If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease.



Travel expenses.

You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. You must properly allocate your expenses between rental and nonrental activities. You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. You recover the cost of improvements by taking depreciation. For information on travel expenses, see chapter 26.

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To deduct travel expenses, you must keep records that follow the rules in chapter 26.

See Rental Expenses in Pub. 527 for more information.



Property Changed to Rental Use

If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use.

You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes.

You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040).

Example.

Your tax year is the calendar year. You moved from your home in May and started renting it out on June 1. You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance.

Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities.

Renting Part of Property

If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property.

You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house.

There is no change in the types of expenses deductible for the personal-use part of your property. Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040).

You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it.

You do not have to divide the expenses that belong only to the rental part of your property. For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes.

How to divide expenses.

If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. You can use any reasona