Preparing 2017 Individual Income Tax Returns

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Table of Contents Module 1 – Chapters 1-4 Chapter 1 – Filing Information .............................................................................................................. 1

Learning Objectives ............................................................................................................................................ 1 Introduction ......................................................................................................................................................... 1 Do I Have To File a Return? ................................................................................................................................ 1 Which Form Should I Use? .................................................................................................................................. 5 Does My Return Have To Be on Paper? .............................................................................................................. 7 When Do I Have To File? .................................................................................................................................... 8 How Do I Prepare My Return? ........................................................................................................................... 11 Where Do I File? ............................................................................................................................................... 19 What Happens After I File?................................................................................................................................ 19 What If I Made a Mistake? ................................................................................................................................. 24 Review Questions ............................................................................................................................................. 29 Review Answers ............................................................................................................................................... 31

Chapter 2 – Filing Status ..................................................................................................................... 33

Learning Objectives .......................................................................................................................................... 33 Introduction ....................................................................................................................................................... 33 Marital Status .................................................................................................................................................... 33 Single ............................................................................................................................................................... 34 Married Filing Jointly ......................................................................................................................................... 34 Married Filing Separately................................................................................................................................... 36 Head of Household ........................................................................................................................................... 37 Qualifying Widow(er) With Dependent Child ....................................................................................................... 40 Review Questions ............................................................................................................................................. 41 Review Answers ............................................................................................................................................... 42

Chapter 3 – Personal Exemptions & Dependents .............................................................................. 43

Learning Objectives .......................................................................................................................................... 43 Introduction ....................................................................................................................................................... 43 Exemptions ....................................................................................................................................................... 43 Exemptions for Dependents .............................................................................................................................. 44 Phaseout of Exemptions.................................................................................................................................... 62 Social Security Numbers for Dependents ........................................................................................................... 62 Review Questions ............................................................................................................................................. 64 Review Answers ............................................................................................................................................... 65

Chapter 4 – Tax Withholding & Estimated Tax ................................................................................... 67

Learning Objectives .......................................................................................................................................... 67 Introduction ....................................................................................................................................................... 67 Tax Withholding for 2018................................................................................................................................... 67 Estimated Tax for 2018 ..................................................................................................................................... 73 Credit for Withholding and Estimated Tax for 2017 ............................................................................................. 78 Underpayment Penalty for 2017 ........................................................................................................................ 81 Review Questions ............................................................................................................................................. 82 Review Answers ............................................................................................................................................... 84

Module 2 – Chapters 5-8 Chapter 5 – Wages, Salaries, & Other Earnings ................................................................................. 87

Learning Objectives .......................................................................................................................................... 87 Introduction ....................................................................................................................................................... 87 Employee Compensation .................................................................................................................................. 87 Special Rules for Certain Employees ................................................................................................................. 95 Sickness and Injury Benefits .............................................................................................................................. 97 Review Questions ........................................................................................................................................... 101 Review Answers ............................................................................................................................................. 102

Chapter 6 – Tip Income ..................................................................................................................... 103

Learning Objectives ........................................................................................................................................ 103

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Introduction ..................................................................................................................................................... 103 Keeping a Daily Tip Record ............................................................................................................................. 103 Reporting Tips to Your Employer ..................................................................................................................... 104 Reporting Tips on Your Tax Return .................................................................................................................. 105 Allocated Tips ................................................................................................................................................. 106 Review Questions ........................................................................................................................................... 107 Review Answers ............................................................................................................................................. 108

Chapter 7 – Interest Income .............................................................................................................. 109

Learning Objectives ........................................................................................................................................ 109 Introduction ..................................................................................................................................................... 109 General Information ........................................................................................................................................ 109 Taxable Interest .............................................................................................................................................. 111 When to Report Interest Income ...................................................................................................................... 120 How to Report Interest Income ........................................................................................................................ 120 Review Questions ........................................................................................................................................... 123 Review Answers ............................................................................................................................................. 124

Chapter 8 – Dividends & Other Distributions ................................................................................... 125

Learning Objectives ........................................................................................................................................ 125 Introduction ..................................................................................................................................................... 125 General Information ........................................................................................................................................ 125 Ordinary Dividends ......................................................................................................................................... 126 Capital Gain Distributions ................................................................................................................................ 129 Nondividend Distributions ................................................................................................................................ 129 Other Distributions .......................................................................................................................................... 130 How to Report Dividend Income ...................................................................................................................... 131 Review Questions ........................................................................................................................................... 133 Review Answers ............................................................................................................................................. 134

Module 3 – Chapters 9-13 Chapter 9 – Rental Income & Expenses ........................................................................................... 135

Learning Objectives ........................................................................................................................................ 135 Introduction ..................................................................................................................................................... 135 Rental Income ................................................................................................................................................ 135 Rental Expenses ............................................................................................................................................. 136 Property Changed to Rental Use ..................................................................................................................... 137 Renting Part of Property .................................................................................................................................. 138 Not Rented for Profit ....................................................................................................................................... 138 Personal Use of Dwelling Unit (Including Vacation Home) ................................................................................ 138 Depreciation ................................................................................................................................................... 143 Limits on Rental Losses .................................................................................................................................. 144 How to Report Rental Income and Expenses ................................................................................................... 145 Review Questions ........................................................................................................................................... 147 Review Answers ............................................................................................................................................. 148

Chapter 10 – Retirement Plans, Pensions, & Annuities ................................................................... 149

Learning Objectives ........................................................................................................................................ 149 Introduction ..................................................................................................................................................... 149 General Information ........................................................................................................................................ 149 Cost (Investment in the Contract) .................................................................................................................... 150 Taxation of Periodic Payments ........................................................................................................................ 151 Taxation of Nonperiodic Payments .................................................................................................................. 153 Rollovers ........................................................................................................................................................ 155 Special Additional Taxes ................................................................................................................................. 157 Survivors and Beneficiaries ............................................................................................................................. 159 Review Questions ........................................................................................................................................... 161 Review Answers ............................................................................................................................................. 162

Chapter 11 – Social Security & Equivalent Railroad Retirement Benefits ...................................... 163

Learning Objectives ........................................................................................................................................ 163 Introduction ..................................................................................................................................................... 163 Are Any of Your Benefits Taxable? .................................................................................................................. 163

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How to Report Your Benefits ........................................................................................................................... 165 Examples ....................................................................................................................................................... 166 Deductions Related to Your Benefits................................................................................................................ 169 Review Questions ........................................................................................................................................... 171 Review Answers ............................................................................................................................................. 172

Chapter 12 – Other Income ............................................................................................................... 173

Learning Objectives ........................................................................................................................................ 173 Introduction ..................................................................................................................................................... 173 Bartering ......................................................................................................................................................... 173 Canceled Debts .............................................................................................................................................. 174 Host or Hostess .............................................................................................................................................. 175 Life Insurance Proceeds .................................................................................................................................. 175 Partnership Income ......................................................................................................................................... 176 S Corporation Income ..................................................................................................................................... 177 Recoveries ..................................................................................................................................................... 177 Rents from Personal Property.......................................................................................................................... 179 Repayments ................................................................................................................................................... 179 Royalties ........................................................................................................................................................ 180 Unemployment Benefits .................................................................................................................................. 181 Welfare and Other Public Assistance Benefits .................................................................................................. 182 Other Income .................................................................................................................................................. 183 Review Questions ........................................................................................................................................... 190 Review Answers ............................................................................................................................................. 191

Chapter 13 – Basis of Property ......................................................................................................... 193

Learning Objectives ........................................................................................................................................ 193 Introduction ..................................................................................................................................................... 193 Cost Basis ...................................................................................................................................................... 193 Adjusted Basis ................................................................................................................................................ 194 Basis Other Than Cost .................................................................................................................................... 196 Review Questions ........................................................................................................................................... 202 Review Answers ............................................................................................................................................. 203

Module 4 – Chapters 14-18 Chapter 14 – Sale of Property ........................................................................................................... 205

Learning Objectives ........................................................................................................................................ 205 Introduction ..................................................................................................................................................... 205 Sales and Trades ............................................................................................................................................ 205 Capital Gains and Losses ................................................................................................................................ 210 Review Questions ........................................................................................................................................... 217 Review Answers ............................................................................................................................................. 218

Chapter 15 – Selling Your Home ....................................................................................................... 219

Learning Objectives ........................................................................................................................................ 219 Introduction ..................................................................................................................................................... 219 Main Home ..................................................................................................................................................... 219 Figuring Gain or Loss ...................................................................................................................................... 220 Excluding the Gain .......................................................................................................................................... 223 Business Use or Rental of Home ..................................................................................................................... 226 Reporting the Sale .......................................................................................................................................... 227 Special Situations ........................................................................................................................................... 228 Recapturing (Paying Back) a Federal Mortgage Subsidy .................................................................................. 228 Review Questions ........................................................................................................................................... 230 Review Answers ............................................................................................................................................. 231

Chapter 16 – Reporting Gains & Losses .......................................................................................... 233

Learning Objectives ........................................................................................................................................ 233 Introduction ..................................................................................................................................................... 233 Reporting Capital Gains and Losses ................................................................................................................ 233 Review Questions ........................................................................................................................................... 238 Review Answers ............................................................................................................................................. 239

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Chapter 17 – Individual Retirement Arrangements (IRAs) ............................................................... 241 Learning Objectives ........................................................................................................................................ 241 Introduction ..................................................................................................................................................... 241 Traditional IRAs .............................................................................................................................................. 241 Roth IRAs ....................................................................................................................................................... 257 Review Questions ........................................................................................................................................... 262 Review Answers ............................................................................................................................................. 263

Chapter 18 – Alimony ........................................................................................................................ 265

Learning Objectives ........................................................................................................................................ 265 Introduction ..................................................................................................................................................... 265 General Rules ................................................................................................................................................. 265 Instruments Executed After 1984 ..................................................................................................................... 266 How to Deduct Alimony Paid ........................................................................................................................... 269 How to Report Alimony Received .................................................................................................................... 269 Recapture Rule ............................................................................................................................................... 269 Review Questions ........................................................................................................................................... 271 Review Answers ............................................................................................................................................. 272

Module 5 – Chapters 19-23 Chapter 19 – Education-Related Adjustments ................................................................................. 273

Learning Objectives ........................................................................................................................................ 273 Introduction ..................................................................................................................................................... 273 Student Loan Interest Deduction...................................................................................................................... 273 Tuition and Fees Deduction ............................................................................................................................. 276 Educator Expenses ......................................................................................................................................... 280 Review Questions ........................................................................................................................................... 281 Review Answers ............................................................................................................................................. 282

Chapter 20 – Standard Deduction ..................................................................................................... 283

Learning Objectives ........................................................................................................................................ 283 Introduction ..................................................................................................................................................... 283 Standard Deduction Amount ............................................................................................................................ 283 Standard Deduction for Dependents ................................................................................................................ 285 Who Should Itemize ........................................................................................................................................ 287 Review Questions ........................................................................................................................................... 288 Review Answers ............................................................................................................................................. 289

Chapter 21 – Medical & Dental Expenses ......................................................................................... 291

Learning Objectives ........................................................................................................................................ 291 Introduction ..................................................................................................................................................... 291 What Are Medical Expenses? .......................................................................................................................... 291 What Expenses Can You Include This Year? ................................................................................................... 291 How Much of the Expenses Can You Deduct? ................................................................................................. 291 Whose Medical Expenses Can You Include? ................................................................................................... 292 What Medical Expenses Are Includible? .......................................................................................................... 294 How Do You Treat Reimbursements? .............................................................................................................. 297 Damages for Personal Injuries ......................................................................................................................... 299 How Do You Figure and Report the Deduction on Your Tax Return? ................................................................ 299 Impairment-Related Work Expenses ................................................................................................................ 299 Health Insurance Costs for Self-Employed Persons.......................................................................................... 300 Review Questions ........................................................................................................................................... 301 Review Answers ............................................................................................................................................. 302

Chapter 22 – Taxes ............................................................................................................................ 303

Learning Objectives ........................................................................................................................................ 303 Introduction ..................................................................................................................................................... 303 Tests to Deduct Any Tax ................................................................................................................................. 303 Income Taxes ................................................................................................................................................. 304 General Sales Taxes ....................................................................................................................................... 305 Real Estate Taxes ........................................................................................................................................... 306 Personal Property Taxes ................................................................................................................................. 309 Taxes and Fees You Cannot Deduct ............................................................................................................... 309

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Where to Deduct ............................................................................................................................................. 310 Review Questions ........................................................................................................................................... 311 Review Answers ............................................................................................................................................. 312

Chapter 23 – Interest Expense .......................................................................................................... 313

Learning Objectives ........................................................................................................................................ 313 Introduction ..................................................................................................................................................... 313 Home Mortgage Interest .................................................................................................................................. 313 Investment Interest ......................................................................................................................................... 320 Items You Cannot Deduct ............................................................................................................................... 322 Allocation of Interest........................................................................................................................................ 323 How to Report ................................................................................................................................................. 323 Review Questions ........................................................................................................................................... 325 Review Answers ............................................................................................................................................. 326

Module 6 – Chapters 24-27 Chapter 24 – Contributions ............................................................................................................... 327

Learning Objectives ........................................................................................................................................ 327 Introduction ..................................................................................................................................................... 327 Organizations That Qualify To Receive Deductible Contributions ...................................................................... 327 Contributions You Can Deduct ........................................................................................................................ 328 Contributions You Cannot Deduct .................................................................................................................... 332 Contributions of Property ................................................................................................................................. 334 When to Deduct .............................................................................................................................................. 337 Limits on Deductions ....................................................................................................................................... 337 Records to Keep ............................................................................................................................................. 339 How to Report ................................................................................................................................................. 342 Review Questions ........................................................................................................................................... 343 Review Answers ............................................................................................................................................. 344

Chapter 25 – Nonbusiness Casualty & Theft Losses ....................................................................... 345

Learning Objectives ........................................................................................................................................ 345 Introduction ..................................................................................................................................................... 345 Casualty ......................................................................................................................................................... 345 Theft ............................................................................................................................................................... 346 Loss on Deposits ............................................................................................................................................ 347 Proof of Loss .................................................................................................................................................. 347 Figuring a Loss ............................................................................................................................................... 347 Deduction Limits ............................................................................................................................................. 352 When to Report Gains and Losses .................................................................................................................. 354 How to Report Gains and Losses .................................................................................................................... 355 Review Questions ........................................................................................................................................... 357 Review Answers ............................................................................................................................................. 358

Chapter 26 – Car Expenses & Other Employee Business Expenses .............................................. 359

Learning Objectives ........................................................................................................................................ 359 Introduction ..................................................................................................................................................... 359 Travel Expenses ............................................................................................................................................. 359 Entertainment Expenses ................................................................................................................................. 367 Gift Expenses ................................................................................................................................................. 370 Transportation Expenses................................................................................................................................. 371 Recordkeeping................................................................................................................................................ 376 How to Report ................................................................................................................................................. 379 Review Questions ........................................................................................................................................... 389 Review Answers ............................................................................................................................................. 390

Chapter 27 – Tax Benefits for Work-Related Education .................................................................. 391

Learning Objectives ........................................................................................................................................ 391 Introduction ..................................................................................................................................................... 391 Qualifying Work-Related Education ................................................................................................................. 391 What Expenses Can Be Deducted ................................................................................................................... 395 Reimbursements ............................................................................................................................................. 398 Deducting Business Expenses ........................................................................................................................ 398

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Recordkeeping................................................................................................................................................ 399 Review Questions ........................................................................................................................................... 400 Review Answers ............................................................................................................................................. 401

Module 7 – Chapters 28-32 Chapter 28 – Miscellaneous Deductions .......................................................................................... 403

Learning Objectives ........................................................................................................................................ 403 Introduction ..................................................................................................................................................... 403 Deductions Subject to the 2% Limit .................................................................................................................. 403 Deductions Not Subject to the 2% Limit ........................................................................................................... 408 Nondeductible Expenses ................................................................................................................................. 409 Limit on Itemized Deductions ........................................................................................................................... 412 Review Questions ........................................................................................................................................... 413 Review Answers ............................................................................................................................................. 414

Chapter 29 – How to Figure Your Tax ............................................................................................... 415

Learning Objectives ........................................................................................................................................ 415 Introduction ..................................................................................................................................................... 415 Figuring Your Tax ........................................................................................................................................... 415 Alternative Minimum Tax ................................................................................................................................. 416 Tax Figured by IRS ......................................................................................................................................... 417 Review Questions ........................................................................................................................................... 420 Review Answers ............................................................................................................................................. 421

Chapter 30 – Tax on Investment Income of Certain Children .......................................................... 423

Learning Objectives ........................................................................................................................................ 423 Introduction ..................................................................................................................................................... 423 Which Parent’s Return To Use ........................................................................................................................ 423 Parent’s Election to Report Child’s Interest and Dividends ................................................................................ 424 Tax for Certain Children Who Have Unearned Income ..................................................................................... 426 Review Questions ........................................................................................................................................... 429 Review Answers ............................................................................................................................................. 430

Chapter 31 – Child & Dependent Care Credit ................................................................................... 431

Learning Objectives ........................................................................................................................................ 431 Introduction ..................................................................................................................................................... 431 Tests to Claim the Credit ................................................................................................................................. 431 How to Figure the Credit.................................................................................................................................. 438 How to Claim the Credit .................................................................................................................................. 442 Employment Taxes for Household Employers .................................................................................................. 442 Review Questions ........................................................................................................................................... 443 Review Answers ............................................................................................................................................. 444

Chapter 32 – Credit for the Elderly or the Disabled ......................................................................... 445

Learning Objectives ........................................................................................................................................ 445 Introduction ..................................................................................................................................................... 445 Are You Eligible for the Credit? ........................................................................................................................ 445 Credit Figured for You ..................................................................................................................................... 448 Credit Figured by You ..................................................................................................................................... 448 Review Questions ........................................................................................................................................... 451 Review Answers ............................................................................................................................................. 452

Module 8 – Chapters 33-36 Chapter 33 – Child Tax Credit ........................................................................................................... 453

Learning Objectives ........................................................................................................................................ 453 Introduction ..................................................................................................................................................... 453 Qualifying Child............................................................................................................................................... 453 Amount of Credit ............................................................................................................................................. 454 Claiming the Credit ......................................................................................................................................... 454 Additional Child Tax Credit .............................................................................................................................. 454 Review Questions ........................................................................................................................................... 455 Review Answers ............................................................................................................................................. 456

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Chapter 34 - Education Credits ......................................................................................................... 457 Learning Objectives ........................................................................................................................................ 457 Introduction ..................................................................................................................................................... 457 Who Can Claim an Education Credit ................................................................................................................ 458 Qualified Education Expenses ......................................................................................................................... 460 Review Questions ........................................................................................................................................... 464 Review Answers ............................................................................................................................................. 465

Chapter 35 – Earned Income Credit (EIC) ......................................................................................... 467

Learning Objectives ........................................................................................................................................ 467 Introduction ..................................................................................................................................................... 467 Do You Qualify for the Credit? ......................................................................................................................... 467 Part A. Rules for Everyone .............................................................................................................................. 468 Part B. Rules If You Have a Qualifying Child .................................................................................................... 472 Part C. Rules If You Do Not Have a Qualifying Child ........................................................................................ 479 Part D. Figuring and Claiming the EIC ............................................................................................................. 481 Review Questions ........................................................................................................................................... 484 Review Answers ............................................................................................................................................. 485

Chapter 36 – Other Credits................................................................................................................ 487

Learning Objectives ........................................................................................................................................ 487 Introduction ..................................................................................................................................................... 487 Nonrefundable Credits .................................................................................................................................... 487 Refundable Credits ......................................................................................................................................... 492 Review Questions ........................................................................................................................................... 494 Review Answers ............................................................................................................................................. 495

Glossary ............................................................................................................................................. 497 Index .................................................................................................................................................. 507