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Publication 505 - Introductory Material


Introduction

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay as you go.

  • Withholding. If you are an employee, your employer probably withholds income tax from your pay. In addition, tax may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. The amount withheld is paid to the Internal Revenue Service (IRS) in your name.

  • Estimated tax. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. People who are in business for themselves generally will have to pay their tax this way. You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rents, and royalties. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.

This publication explains both of these methods. It also explains how to take credit on your return for the tax that was withheld and for your estimated tax payments.

If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. Generally, the IRS can figure this penalty for you. This underpayment penalty, and the exceptions to it, are discussed in chapter 4.

Nonresident aliens.    Before completing Form W-4, Employee's Withholding Allowance Certificate, nonresident alien employees should see the Instructions for Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Also see chapter 8 of Publication 519, U.S. Tax Guide for Aliens, for important information on withholding.

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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.

What's New for 2016

Use your 2015 tax return as a guide in figuring your 2016 estimated tax, but be sure to consider the following.

Standard mileage rates. The 2016 rate for business use of your vehicle is 54 cents per mile. The rate for use of your vehicle to get medical care or move is 19 cents per mile. The rate of 14 cents per mile for charitable use is unchanged.

Personal exemption increased for certain taxpayers. For 2016, the personal exemption amount is increased to $4,050 for taxpayers with adjusted gross income at or below $311,300 if married filing jointly or qualifying widow(er), $285,350 if head of household, $259,400 if single, or $155,650 if married filing separately. The personal exemption amount for taxpayers with adjusted gross income above these thresholds may be reduced.

Limitation on itemized deductions. For 2016, itemized deductions for taxpayers with adjusted gross income above $311,300 if married filing jointly or qualifying widow(er), $285,350 if head of household, $259,400 if single, and $155,650 if married filing separately may be reduced.

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

Lifetime learning credit income limits. In order to claim a lifetime learning credit, your MAGI must be less than $55,000 ($111,000 if married filing jointly).

Retirement savings contribution credit income limits increased. In order to claim this credit for 2016, your MAGI must be less than $30,750 ($61,500 if married filing jointly; $46,125 if head of household).

Adoption credit or exclusion. The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $13,460. In order to claim either the credit or exclusion, your MAGI must be less than $241,920.

Earned income credit (EIC).  You may be able to take the EIC in 2016 if:

  • Three or more children lived with you and you earned less than $47,955 ($53,505 if married filing jointly),

  • Two children lived with you and you earned less than $44,648 ($50,198 if married filing jointly),

  • One child lived with you and you earned less than $39,296 ($44,846 if married filing jointly), or

  • A child did not live with you and you earned less than $14,880 ($20,430 if married filing jointly).

Also, the maximum MAGI you can have and still get the credit has increased. You may be able to take the credit if your MAGI is less than the amount in the above list that applies to you. The maximum investment income you can have and get the credit is $3,400 for 2016. 
 

Reminders

Future developments. The IRS has created a page on IRS.gov for information about Publication 505 at www.irs.gov/pub505. Information about any future developments affecting Publication 505 (such as legislation enacted after we release it) will be posted on that page.

Social security tax.  Generally, each employer for whom you work during the tax year must withhold social security tax up to the annual limit. The annual limit is $118,500 in 2016.

Health care coverage. When you file your 2016 tax return in 2017, you will need to either (1) indicate on your return that you and your family had health care coverage throughout 2016, (2) claim an exemption from the health care coverage requirement for some or all of 2016, or (3) make a payment if you do not have coverage or an exemption(s) for all 12 months of 2016. See Form 8965 and its instructions for more information on claiming an exemption or making a payment.

Advance payments of the premium tax credit. If you buy health insurance through the Health Insurance Marketplace, you may be eligible for advance payments of the premium tax credit to help pay for your insurance coverage. Receiving too little or too much in advance will affect your refund or balance due. Promptly report changes in your income or family size to your Marketplace. See Form 8962 and its instructions for more information.

Additional Medicare Tax. A 0.9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status. You may need to include this amount when figuring your estimated tax. You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4, Employee's Withholding Allowance Certificate.

Net Investment Income Tax. You may be subject to Net Investment Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. NIIT may need to be included when figuring estimated tax. You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would 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.


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