Title Details

Key Tax Numbers for 2011 xxix

Part 1 Filing Basics 1

Do You Have to File a 2011 Tax Return? 3

Filing Tests for Dependents: 2011 Returns 4

Where to File 5

Filing Deadlines (on or before) 6

Choosing Which Tax Form to File 8

Filing Status 9

1.1 Which Filing Status Should You Use? 10

1.2 Tax Rates Based on Filing Status 10

1.3 Filing Separately Instead of Jointly 11

1.4 Filing a Joint Return 13

1.5 Nonresident Alien Spouse 14

1.6 Community Property Rules 14

1.7 Innocent Spouse Rules 15

1.8 Separate Liability Election for Former Spouses 16

1.9 Equitable Relief 20

1.10 Death of Your Spouse in 2011 21

1.11 Qualifying Widow(er) Status If Your Spouse Died in 2010 or 2009 22

1.12 Qualifying as Head of Household 22

1.13 Filing for Your Child 24

1.14 Return for Deceased 25

1.15 Return for an Incompetent Person 26

1.16 How a Nonresident Alien Is Taxed 26

1.17 How a Resident Alien Is Taxed 27

1.18 Who Is a Resident Alien? 27

1.19 When an Alien Leaves the United States 29

1.20 Expatriation Tax 30

Part 2 R eporting Your Income 31

Wages, Salary, and Other Compensation 33

2.1 Salary and Wage Income 36

2.2 Constructive Receipt of Year-End Paychecks 37

2.3 Pay Received in Property Is Taxed 37

2.4 Commissions Taxable When Credited 38

2.5 Unemployment Benefits 38

2.6 Strike Pay Benefits and Penalties 39

2.7 Nonqualified Deferred Compensation 39

2.8 Did You Return Wages Received in a Prior Year? 41

2.9 Waiver of Executor’s and Trustee’s Commissions 41

2.10 Life Insurance Benefits 41

2.11 Educational Benefits for Employees’ Children 42

2.12 Sick Pay Is Taxable 43

2.13 Workers’ Compensation Is Tax Free 43

2.14 Disability Pensions 44

2.15 Stock Appreciation Rights (SARs) 45

2.16 Stock Options 45

2.17 Restricted Stock 48

Fringe Benefits 50

3.1 Tax-Free Health and Accident Coverage Under Employer Plans 52

3.2 Health Savings Accounts (HSAs) and Archer MSAs 54

3.3 Reimbursements and Other Tax-Free Payments From Employer Health and Accident Plans 56

3.4 Group-Term Life Insurance Premiums 59

3.5 Dependent Care Assistance 60

3.6 Adoption Benefits 61

3.7 Education Assistance Plans 61

3.8 Company Cars, Parking, and Transit Passes 62

3.9 Working Condition Fringe Benefits 64

3.10 De Minimis Fringe Benefits 64

3.11 Employer-Provided Retirement Advice 65

3.12 Employee Achievement Awards 65

3.13 Employer-Furnished Meals or Lodging 65

3.14 Minister’s Rental or Housing Allowance 68

3.15 Cafeteria Plans Provide Choice of Benefits 69

3.16 Flexible Spending Arrangements 70

3.17 Company Services Provided at No Additional Cost 71

3.18 Discounts on Company Products or Services 72

Dividend and Interest Income 73

4.1 Reporting Dividends and Mutual-Fund Distributions 74

4.2 Qualified Corporate Dividends Taxed at Favorable Capital Gain Rates 75

4.3 Dividends From a Partnership, S Corporation, Estate, or Trust 76

4.4 Real Estate Investment Trust (REIT) Dividends 76

4.5 Taxable Dividends of Earnings and Profits 77

4.6 Stock Dividends on Common Stock 77

4.7 Dividends Paid in Property 77

4.8 Taxable Stock Dividends 78

4.9 Who Reports the Dividends 78

4.10 Year Dividends Are Reported 79

4.11 Distribution Not Out of Earnings: Return of Capital 79

4.12 Reporting Interest on Your Tax Return 80

4.13 Interest on Frozen Accounts Not Taxed 81

4.14 Interest Income on Debts Owed to You 81

4.15 Reporting Interest on Bonds Bought or Sold 82

4.16 Forfeiture of Interest on Premature Withdrawals 83

4.17 Amortization of Bond Premium 83

4.18 Discount on Bonds 84

4.19 Reporting Original Issue Discount on Your Return 85

4.20 Reporting Income on Market Discount Bonds 86

4.21 Discount on Short-Term Obligations 87

4.22 Stripped Coupon Bonds and Stock 88

4.23 Sale or Retirement of Bonds and Notes 89

4.24 State and City Interest Generally Tax Exempt 89

4.25 Taxable State and City Interest 90

4.26 Tax-Exempt Bonds Bought at a Discount 90

4.27 Treasury Bills, Notes, and Bonds 91

4.28 Interest on United States Savings Bonds 92

4.29 Deferring United States Savings Bond Interest 93

4.30 Minimum Interest Rules 94

4.31 Interest-Free or Below-Market-Interest Loans 94

4.32 Minimum Interest on Seller-Financed Sales 96

Reporting Property Sales 99

5.1 General Tax Rules for Property Sales 100

5.2 How Property Sales Are Classified and Taxed 100

5.3 Capital Gains Rates and Holding Periods 101

5.4 Capital Losses and Carryovers 104

5.5 Capital Losses of Married Couples 105

5.6 Losses May Be Disallowed on Sales to Related Persons 105

5.7 Deferring or Excluding Gain on Small Business Stock Investment 107

5.8 Sample Entries of Capital Asset Sales on Form 8949 and on Schedule D 108

5.9 Counting the Months in Your Holding Period 115

5.10 Holding Period for Securities 115

5.11 Holding Period for Real Estate 116

5.12 Holding Period: Gifts, Inheritances, and Other Property 116

5.13 Calculating Gain or Loss 117

5.14 Amount Realized Is the Total Selling Price 118

5.15 Finding Your Cost 118

5.16 Unadjusted Basis of Your Property 118

5.17 Basis of Property You Inherited or Received as a Gift 120

5.18 Joint Tenancy Basis Rules for Surviving Tenants 122

5.19 Allocating Cost Among Several Assets 124

5.20 How To Find Adjusted Basis 125

5.21 Tax Advantage of Installment Sales 126

5.22 Figuring the Taxable Part of Installment Payments 127

5.23 Electing Not To Report on the Installment Method 130

5.24 Restriction on Installment Sales to Relatives 130

5.25 Contingent Payment Sales 131

5.26 Using Escrow and Other Security Arrangements 132

5.27 Minimum Interest on Deferred Payment Sales 133

5.28 Dispositions of Installment Notes 133

5.29 Repossession of Personal Property Sold on Installment 134

5.30 Boot in Like-Kind Exchange Payable in Installments 135

5.31 “Interest” Tax on Sales Over $150,000

Plus $5 Million Debt 136

5.32 Worthless Securities 136

5.33 Tax Consequences of Bad Debts 137

5.34 Four Rules To Prove a Bad Debt Deduction 139

5.35 Family Bad Debts 140

Tax-Free Exchanges of Property 141

6.1 Trades of Like-Kind Property 142

6.2 Personal Property Held for Business or Investment 143

6.3 Receipt of Cash and Other Property—“Boot” 144

6.4 Time Limits for Deferred Exchanges 146

6.5 Qualified Exchange Accommodation Arrangements (QEAAs) for Reverse Exchanges 149

6.6 Exchanges Between Related Parties 149

6.7 Property Transfers Between Spouses and Ex-Spouses 150

6.8 Tax-Free Exchanges of Stock in Same Corporation 152

6.9 Joint Ownership Interests 153

6.10 Setting up Closely Held Corporations 153

6.11 Exchanges of Coins and Bullion 153

6.12 Tax-Free Exchanges of Insurance Policies 154

Retirement and Annuity Income 156

7.1 Retirement Distributions on Form 1099-R 158

7.2 Lump-Sum Distributions 160

7.3 Lump-Sum Options If You Were Born Before January 2, 1936 161

7.4 Averaging on Form 4972 161

7.5 Capital Gain Treatment for Pre-1974 Participation 163

7.6 Lump-Sum Payments Received by Beneficiary 163

7.7 Tax-Free Rollovers From Qualified Plans 164

7.8 Direct Rollover or Personal Rollover 165

7.9 Rollover of Proceeds From Sale of Property 168

7.10 Distribution of Employer Stock or Other Securities 168

7.11 Survivor Annuity for Spouse 169

7.12 Court Distributions to Former Spouse Under a QDRO 170

7.13 When Retirement Benefits Must Begin 171

7.14 Payouts to Beneficiaries 171

7.15 Penalty for Distributions Before Age 59½ 172

7.16 Restrictions on Loans From Company Plans 173

7.17 Tax Benefits of 401(k) Plans 174

7.18 Limit on Salary-Reduction Deferrals 176

7.19 Withdrawals From 401(k) Plans Restricted 176

7.20 Designated Roth Contributions to 401(k) Plans 177

7.21 Annuities for Employees of Tax-Exempts and Schools (403(b) Plans) 178

7.22 Government and Exempt Organization Deferred Pay Plans 179

7.23 Figuring the Taxable Part of Your Annuity 180

7.24 Life Expectancy Tables 184

7.25 When You Convert Your Endowment Policy 185

7.26 Reporting Employee Annuities 186

7.27 Simplified Method for Calculating Taxable Employee Annuity 186

7.28 Employee’s Cost in Annuity 188

7.29 Withdrawals From Employer’s Qualified Retirement Plan Before Annuity Starting Date 188

IRAs 189

8.1 Starting a Traditional IRA 190

8.2 Traditional IRA Contributions Must Be Based on Earnings 191

8.3 Contributions to a Traditional IRA If You Are Married 192

8.4 IRA Deduction Restrictions for Active Participants in Employer Plan 194

8.5 Active Participation in Employer Plan 197

8.6 Nondeductible Contributions to Traditional IRAs 198

8.7 Penalty for Excess Contributions to Traditional IRAs 199

8.8 Taxable Distributions From Traditional IRAs 199

8.9 Partially Tax-Free Traditional IRA Distributions Allocable to Nondeductible Contributions 201

8.10 Tax-Free Rollovers and Direct Transfers to Traditional IRAs 203

8.11 Transfer of Traditional IRA to Spouse at Divorce 205

8.12 Penalty for Traditional IRA Withdrawals Before Age 59½ 205

8.13 Mandatory Distributions From a Traditional IRA After Age 70½ 209

8.14 Inherited Traditional IRAs 212

8.15 SEP Basics 217

8.16 Salary-Reduction SEP Set Up Before 1997 218

8.17 Who Is Eligible for a SIMPLE IRA? 218

8.18 SIMPLE IRA Contributions and Distributions 219

8.19 Roth IRA Advantages 220

8.20 Annual Contributions to a Roth IRA 220

8.21 Converting a Traditional IRA to a Roth IRA 222

8.22 Recharacterizations and Reconversions 223

8.23 Distributions From a Roth IRA 225

8.24 Distributions to Roth IRA Beneficiaries 227

Income From Rents and Royalties 228

9.1 Reporting Rental Income and Expenses 229

9.2 Checklist of Rental Deductions 229

9.3 Distinguishing Between a Repair and an Improvement 231

9.4 Reporting Rents From a Multi-Unit Residence 232

9.5 Depreciation on Converting a Home to Rental Property 232

9.6 Renting a Residence to a Relative 234

9.7 Personal Use and Rental of a Residence During the Year 234

9.8 Counting Personal-Use Days and Rental Days for a Residence 236

9.9 Allocating Expenses of a Residence to Rental Days 237

9.10 Rentals Lacking Profit Motive 239

9.11 Reporting Royalty Income 240

9.12 Production Costs of Books and Creative Properties 241

9.13 Deducting the Cost of Patents or Copyrights 241

9.14 Intangible Drilling Costs 242

9.15 Depletion Deduction 242

9.16 Oil and Gas Percentage Depletion 243

Loss Restrictions: Passive Activities and At-Risk Limits 245

10.1 Rental Activities 246

10.2 Rental Real Estate Loss Allowance of up to $25,000 248

10.3 Real Estate Professionals 251

10.4 Participation May Avoid Passive Loss Restrictions 253

10.5 Classifying Business Activities as One or Several 253

10.6 Material Participation Tests for Business 255

10.7 Tax Credits of Passive Activities Limited 257

10.8 Determining Passive or Nonpassive Income and Loss 257

10.9 Passive Income Recharacterized as Nonpassive Income 259

10.10 Working Interests in Oil and Gas Wells 262

10.11 Partners and Members of LLCs and LLPs 262

10.12 Form 8582 263

10.13 Suspended Losses Allowed on Disposition of Your Interest 264

10.14 Suspended Tax Credits 265

10.15 Personal Service and Closely Held Corporations 266

10.16 Sales of Property and of Passive Activity Interests 267

10.17 At-Risk Limits 268

10.18 What Is At Risk? 269

10.19 Amounts Not At Risk 270

10.20 At-Risk Investment in Several Activities 271

10.21 Carryover of Disallowed Losses 272

10.22 Recapture of Losses Where At Risk Is Less Than Zero 272

Other Income 273

11.1 Prizes and Awards 274

11.2 Lottery and Sweepstake Winnings 274

11.3 Gambling Winnings and Losses 274

11.4 Gifts and Inheritances 276

11.5 Refunds of State and Local Income Tax Deductions 276

11.6 Other Recovered Deductions 279

11.7 How Legal Damages Are Taxed 280

11.8 Cancellation of Debts You Owe 282

11.9 Schedule K-1 286

11.10 How Partners Report Partnership Profit and Loss 286

11.11 When a Partner Reports Income or Loss 287

11.12 Partnership Loss Limitations 288

11.13 Unified Tax Audits of Partnerships 288

11.14 Stockholder Reporting of S Corporation Income and Loss 289

11.15 How Beneficiaries Report Estate or Trust Income 290

11.16 Reporting Income in Respect of a Decedent (IRD) 290

11.17 Deduction for Estate Tax Attributable to IRD 290

11.18 How Life Insurance Proceeds Are Taxed to a Beneficiary 291

11.19 A Policy With a Family Income Rider 292

11.20 Selling or Surrendering Life Insurance Policy 292

Part 3 Claiming Deductions 295

Deductions Allowed in Figuring Adjusted Gross Income 297

12.1 Figuring Adjusted Gross Income (AGI) 298

12.2 Claiming Deductions From Gross Income 298

12.3 What Moving Costs Are Deductible? 301

12.4 The Distance Test 302

12.5 The 39-Week Test for Employees 302

12.6 The 78-Week Test for the Self-Employed and Partners 303

12.7 Claiming Deductible Moving Expenses 304

12.8 Reimbursements of Moving Expenses 304

Claiming the Standard Deduction or Itemized Deductions 305

13.1 Claiming the Standard Deduction 307

13.2 Husbands and Wives Filing Separate Returns 308

13.3 Standard Deduction If 65 or Older or Blind 309

13.4 Standard Deduction for Dependents 310

13.5 Prepaying or Postponing Itemized Expenses 311

13.6 No Phaseout of Itemized Deductions 311

Charitable Contribution Deductions 312

14.1 Deductible Contributions 313

14.2 Nondeductible Contributions 314

14.3 Contributions That Provide You With Benefits 315

14.4 Unreimbursed Expenses of Volunteer Workers 317

14.5 Support of a Student in Your Home 318

14.6 What Kind of Property Are You Donating? 318

14.7 Cars, Clothing, and Other Property Valued Below Cost 322

14.8 Bargain Sales of Appreciated Property 323

14.9 Art Objects 324

14.10 Interests in Real Estate 326

14.11 Life Insurance 327

14.12 Business Inventory 327

14.13 Donations Through Trusts 327

14.14 Records Needed To Substantiate Your Contributions 328

14.15 Form 8283 and Written Appraisal Requirements 331

14.16 Penalty for Substantial Overvaluation of Property 331

14.17 Ceiling on Charitable Contributions 331

14.18 Carryover for Excess Donations 334

14.19 Election To Reduce Fair Market Value by Appreciation 335

Itemized Deduction for Interest Expenses 336

15.1 Home Mortgage Interest 337

15.2 Home Acquisition Loans 338

15.3 Home Equity Loans 339

15.4 Home Construction Loans 339

15.5 Home Improvement Loans 340

15.6 Mortgage Insurance Premiums and Other Payment Rules 340

15.7 Interest on Refinanced Loans 342

15.8 “Points” 343

15.9 Cooperative and Condominium Apartments 344

15.10 Investment Interest Limitations 345

15.11 Debts To Carry Tax-Exempt Obligations 346

15.12 Earmarking Use of Loan Proceeds 347

15.13 Year To Claim an Interest Deduction 348

15.14 Prepaid Interest 349

Deductions for Taxes 350

16.1 Deductible Taxes 351

16.2 Nondeductible Taxes 352

16.3 State and Local Income Taxes or General Sales Taxes 352

16.4 Deducting Real Estate Taxes 353

16.5 Assessments 354

16.6 Tenants’ Payment of Taxes 354

16.7 Allocating Taxes When You Sell or Buy Realty 354

16.8 Automobile License Fees 356

16.9 Taxes Deductible as Business Expenses 356

16.10 Foreign Taxes 356

Medical and Dental Expense Deductions 357

17.1 Medical Expenses Must Exceed 7.5% of AGI 358

17.2 Allowable Medical Care Costs 358

17.3 Nondeductible Medical Expenses 362

17.4 Reimbursements Reduce Deductible Expenses 362

17.5 Premiums of Medical Care Policies 364

17.6 Expenses of Your Spouse 365

17.7 Expenses of Your Dependents 365

17.8 Decedent’s Medical Expenses 367

17.9 Travel Costs May Be Medical Deductions 367

17.10 Schooling for the Mentally or Physically Disabled 369

17.11 Nursing Homes 370

17.12 Nurses’ Wages 370

17.13 Home Improvements as Medical Expenses 371

17.14 Costs Deductible as Business Expenses 372

17.15 Long-Term Care Premiums and Services 373

17.16 Life Insurance Used by Chronically ill or Terminally ill Persons 374

Casualty and Theft Losses and Involuntary Conversions 375

18.1 Sudden Event Test for Casualty Losses 376

18.2 When To Deduct a Casualty Loss 378

18.3 Disaster Losses 379

18.4 Who May Deduct a Casualty Loss 381

18.5 Bank Deposit Losses 382

18.6 Damage to Trees and Shrubs 383

18.7 Deducting Damage to Your Car 384

18.8 Proving a Casualty Loss 384

18.9 Theft Losses 385

18.10 Proving a Theft Loss 386

18.11 Nondeductible Losses 386

18.12 Floors for Personal-Use Property Losses 387

18.13 Figuring Your Loss on Form 4684 388

18.14 Personal and Business Use of Property 390

18.15 Repairs May Be a “Measure of Loss” 391

18.16 Insurance Reimbursements 391

18.17 Excess Living Costs Paid by Insurance Are Not Taxable 392

18.18 Do Your Casualty or Theft Losses Exceed Your Income? 393

18.19 Defer Gain by Replacing Property 393

18.20 Involuntary Conversions Qualifying for Tax Deferral 394

18.21 How To Elect To Defer Tax 395

18.22 Time Period for Buying Replacement Property 395

18.23 Types of Qualifying Replacement Property 396

18.24 Cost of Replacement Property Determines Postponed Gain 397

18.25 Special Assessments and Severance Damages 398

18.26 Reporting Gains From Casualties 399

Deducting Job Costs and Other Miscellaneous Expenses 400

19.1 2% AGI Floor Reduces Most Miscellaneous Expenses 401

19.2 Effect of 2% AGI Floor on Deductions 402

19.3 Checklist of Job Expenses Subject to the 2% AGI Floor 402

19.4 Job Expenses Not Subject to the 2% AGI Floor 403

19.5 Dues and Subscriptions 403

19.6 Uniforms and Work Clothes 404

19.7 Expenses of Looking for a New Job 405

19.8 Local Transportation Costs 406

19.9 Unusual Job Expenses 406

19.10 Computers Bought for Work 407

19.11 Cell Phones, Calculators, Copiers, Fax Machines, and Typewriters 408

19.12 Small Tools 408

19.13 Employee Home Office Deductions 408

19.14 Telephone Costs 409

19.15 Checklist of Deductible Investment Expenses 409

19.16 Costs of Tax Return Preparation and Audits 411

19.17 Deducting Legal Costs 412

19.18 Contingent Fees Paid Out of Taxable Awards 413

Travel and Entertainment Expense Deductions 414

20.1 Deduction Guide for Travel and Transportation Expenses 415

20.2 Commuting Expenses 415

20.3 Overnight-Sleep Test Limits Deduction of Meal Costs 416

20.4 IRS Meal Allowance 418

20.5 Business Trip Deductions 419

20.6 When Are You Away From Home? 420

20.7 Fixing a Tax Home If You Work in Different Locations 421

20.8 Tax Home of Married Couple Working in Different Cities 421

20.9 Deducting Living Costs on Temporary Assignment 422

20.10 Business-Vacation Trips Within the United States 423

20.11 Business-Vacation Trips Outside the United States 424

20.12 Deducting Expenses of Business Conventions 425

20.13 Travel Expenses of a Spouse or Dependents 426

20.14 Restrictions on Foreign Conventions and Cruises 427

20.15 50% Deduction Limit 427

20.16 The Restrictive Tests for Meals and Entertainment 427

20.17 Directly Related Dining and Entertainment 428

20.18 Goodwill Entertainment 429

20.19 Home Entertaining 429

20.20 Your Personal Share of Entertainment Costs 429

20.21 Entertainment Costs of Spouses 429

20.22 Entertainment Facilities and Club Dues 429

20.23 Restrictive Test Exception for Reimbursements 430

20.24 50% Cost Limitation on Meals and Entertainment 430

20.25 Business Gift Deductions Are Limited 431

20.26 Record-Keeping Requirements 433

20.27 Proving Travel and Entertainment Expenses 433

20.28 Reporting T&E Expenses If You Are Self-Employed 434

20.29 Employee Reporting of Unreimbursed T&E Expenses 434

20.30 Tax Treatment of Reimbursements 434

20.31 What Is an Accountable Plan? 435

20.32 Per Diem Travel Allowance Under Accountable Plans 436

20.33 Automobile Mileage Allowance 438

20.34 Reimbursements Under Non-Accountable Plans 439

Personal Exemptions 440

21.1 How Many Exemptions May You Claim? 441

21.2 Your Spouse as an Exemption 442

21.3 Qualifying Children 442

21.4 Qualifying Relatives 444

21.5 Meeting the Support Test for a Qualifying Relative 446

21.6 Multiple Support Agreements 449

21.7 Special Rule for Divorced or Separated Parents 449

21.8 The Dependent Must Meet a Citizen or Resident Test 450

21.9 The Dependent Does Not File a Joint Return 451

21.10 Spouses’ Names and Social Security Numbers on Joint Return 451

21.11 Reporting Social Security Numbers of Dependents 451

21.12 Personal Exemptions Not Subject to Phaseout for 2011 or 2012 452

Part 4 Personal Tax Computations 453

Figuring Your Regular Income Tax Liability 455

22.1 Taxable Income and Regular Income Tax Liability 456

22.2 Using the Tax Table 456

22.3 Tax Computation Worksheet 457

22.4 Tax Calculation If You Have Net Capital Gain or Qualified Dividends 457

22.5 Foreign Earned Income Tax Worksheet 458

22.6 Income Averaging for Farmers and Fishermen 458

22.7 Tax Credits 458

Alternative Minimum Tax (AMT) 459

23.1 Computing Alternative Minimum Tax on Form 6251 460

23.2 Adjustments for AMT 462

23.3 Tax Preference Items 465

23.4 Net Operating Losses 465

23.5 Tax Credits Allowed Against AMT 465

23.6 AMT Tax Credit From Regular Tax 465

23.7 Avoiding AMT 466

Computing the “Kiddie Tax” on Your Child’s Investment Income 467

24.1 Filing Your Child’s Return 468

24.2 Children Subject to “Kiddie Tax” for 2011 469

24.3 Computing “Kiddie Tax” on Child’s Return 470

24.4 Parent’s Election To Report Child’s Dividends and Interest 471

Personal Tax Credits Reduce Your Tax Liability 473

25.1 Overview of Personal Tax Credits 474

25.2 Child Tax Credit for Children Under Age 17 474

25.3 Figuring the Child Tax Credit 475

25.4 Qualifying for Child and Dependent Care Credit 476

25.5 Limits on the Dependent Care Credit 476

25.6 Earned Income Test for Dependent Care Credit 478

25.7 Credit Allowed for Care of Qualifying Persons 478

25.8 Expenses Qualifying for the Dependent Care Credit 479

25.9 Dependent Care Credit Rules for Separated Couples 480

25.10 Qualifying Tests for EIC 480

25.11 Income Tests for Earned Income Credit (EIC) 482

25.12 Look up EIC in Government Tables 483

25.13 Advance Payment of Earned Income Credit 483

25.14 Qualifying for the Adoption Credit 483

25.15 Claiming the Adoption Credit on Form 8839 483

25.16 Eligibility for the Saver’s Credit 485

25.17 Figuring the Saver’s Credit 485

25.18 Health Coverage Credit 486

25.19 Mortgage Interest Credit 486

25.20 District of Columbia First-Time Homebuyer Credit 486

25.21 Residential Energy Credits 487

25.22 Credits for Fuel Cell Vehicles and Plug-in Electric Vehicles 487

25.23 First-Time Homebuyer Credit 488

Tax Withholdings 491

26.1 Withholdings Should Cover Estimated Tax 492

26.2 Income Taxes Withheld on Wages 492

26.3 Low Earners May Be Exempt From Withholding 493

26.4 Are You Withholding the Right Amount? 493

26.5 When To File a New Form W-4 494

26.6 Voluntary Withholding on Government Payments 494

26.7 When Tips Are Subject to Withholding 494

26.8 Withholding on Gambling Winnings 495

26.9 FICA Withholdings 496

26.10 Withholding on Retirement Distributions 496

26.11 Backup Withholding 497

Estimated Tax Payments 498

27.1 Do You Owe an Estimated Tax Penalty for 2011? 499

27.2 Planning Estimated Tax Payments for 2012 500

27.3 Dates for Paying Estimated Tax Installments for 2012 501

27.4 Estimates by Husband and Wife 502

27.5 Adjusting Your Payments During the Year 502

Part 5 T ax Planning 505

Tax Planning Overview 507

28.1 Tax-Saving Opportunities 508

28.2 When To Defer Income and Accelerate Deductions 509

28.3 Watch for Tax Law Changes 510

Tax Savings for Residence Sales 511

29.1 Avoiding Tax on Sale of Principal Residence 512

29.2 Meeting the Ownership and Use Tests 513

29.3 Home Sales by Married Persons 516

29.4 Reduced Maximum Exclusion 516

29.5 Figuring Gain or Loss 519

29.6 Figuring Adjusted Basis 520

29.7 Personal and Business Use of a Home 521

29.8 No Loss Allowed on Personal Residence 523

29.9 Loss on Residence Converted to Rental Property 523

29.10 Loss on Residence Acquired by Gift or Inheritance 525

Tax Rules for Investors in Securities 526

30.1 Planning Year-End Securities Transactions 527

30.2 Earmarking Stock Lots 527

30.3 Sale of Stock Dividends 528

30.4 Stock Rights 529

30.5 Short Sales of Stock 530

30.6 Wash Sales 532

30.7 Convertible Stocks and Bonds 533

30.8 Constructive Sales of Appreciated Financial Positions 534

30.9 Straddle Losses 535

30.10 Capital Gain Restricted on Conversion Transactions 537

30.11 Puts and Calls and Index Options 537

30.12 Investing in Tax-Exempts 538

30.13 Ordinary Loss for Small Business Stock (Section 1244) 539

30.14 Series EE and E Bonds 540

30.15 I Bonds 541

30.16 Trader, Dealer, or Investor? 541

30.17 Mark-to-Market Election for Traders 543

Tax Savings for Investors in Real Estate 545

31.1 Real Estate Ventures 546

31.2 Sales of Subdivided Land—Dealer or Investor? 547

31.3 Exchanging Real Estate Without Tax 548

31.4 Timing Your Real Property Sales 549

31.5 Cancellation of a Lease 549

31.6 Sale of an Option 550

31.7 Granting of an Easement 550

31.8 Special Tax Credits for Real Estate Investments 551

31.9 Foreclosures, Repossessions, Short Sales,

and Voluntary Conveyances to Creditors 552

31.10 Restructuring Mortgage Debt 553

31.11 Abandonments 554

31.12 Seller’s Repossession After Buyer’s Default on Mortgage 555

31.13 Foreclosure on Mortgages Other Than Purchase Money 556

31.14 Foreclosure Sale to Third Party 557

31.15 Transferring Mortgaged Realty 558

Tax Rules for Investors in Mutual Funds 559

32.1 Timing of Your Investment Can Affect Your Taxes 560

32.2 Reinvestment Plans 560

32.3 Mutual-Fund Distributions Reported on Form 1099-DIV 560

32.4 Tax-Exempt Bond Funds 561

32.5 Fund Expenses 561

32.6 Tax Credits From Mutual Funds 561

32.7 How To Report Mutual Fund Distributions 563

32.8 Redemptions and Exchanges of Fund Shares 563

32.9 Basis of Redeemed Shares 563

32.10 Comparison of Basis Methods 565

Educational Tax Benefits 568

33.1 Scholarships and Grants 569

33.2 Tuition Reductions for College Employees 569

33.3 How Fulbright Awards Are Taxed 569

33.4 United States Savings Bond Tuition Plans 569

33.5 Contributing to a Qualified Tuition Program (Section 529 Plan) 571

33.6 Distributions From Qualified Tuition Programs (Section 529 Plans) 571

33.7 Education Tax Credits 573

33.8 American Opportunity Credit 574

33.9 Lifetime Learning Credit 575

33.10 Income Phaseout of Education Credits 575

33.11 Contributing to a Coverdell Education Savings Account (ESA) 576

33.12 Distributions From Coverdell ESAs 577

33.13 Tuition and Fees Deduction 578

33.14 Student Loan Interest Deduction 579

33.15 Types of Deductible Work-Related Costs 581

33.16 Work-Related Tests for Education Costs 582

33.17 Local Transportation and Travel Away From Home To Take Courses 583

Special Tax Rules for Senior Citizens 585

34.1 Senior Citizens Get Certain Filing Breaks 586

34.2 Social Security Benefits Subject to Tax 586

34.3 Computing Taxable Social Security Benefits 588

34.4 Election for Lump-Sum Social Security Benefit Payment 588

34.5 Retiring on Social Security Benefits 589

34.6 How Tax on Social Security Reduces Your Earnings 589

34.7 Claiming the Credit for the Elderly and Disabled 590

34.8 Base Amount for the Elderly or Disabled Credit 591

34.9 Reduction of the Base Amount and Liability Limitation for the Credit 591

34.10 Tax Effects of Moving to a Continuing Care Facility 592

34.11 Medicare Part B and Part D Premiums for 2012 593

Members of the Armed Forces 594

35.1 Taxable Armed Forces Pay and Benefits 595

35.2 Tax-Free Armed Forces Benefits 595

35.3 Deductions for Armed Forces Personnel 597

35.4 Tax-Free Pay for Service in Combat Zone 597

35.5 Tax Deadlines Extended for Combat Zone

or Contingency Operation Service 599

35.6 Tax Forgiveness for Combat Zone or Terrorist or Military Action Deaths 599

35.7 Extension To Pay Your Tax When Entering the Service 600

35.8 Tax Information for Reservists 600

How To Treat Foreign Earned Income 602

36.1 Claiming the Foreign Earned Income Exclusion 603

36.2 What Is Foreign Earned Income? 603

36.3 Qualifying for the Foreign Earned Income Exclusion 605

36.4 How To Treat Housing Costs 606

36.5 Meeting the Foreign Residence or Physical Presence Test 607

36.6 Claiming Deductions 608

36.7 Exclusion Not Established When Your Return Is Due 609

36.8 Tax-Free Meals and Lodging for Workers in Camps 610

36.9 Virgin Islands, Samoa, Guam, and Northern Marianas 610

36.10 Earnings in Puerto Rico 610

36.11 Tax Treaties With Foreign Countries 610

36.12 Exchange Rates and Blocked Currency 610

36.13 Reporting Foreign Bank Accounts 611

36.14 Foreign Tax Credit 611

Planning Alimony and Marital Settlements 613

37.1 Planning Alimony Agreements 614

37.2 Decree or Agreement Required 614

37.3 Cash Payments Required 616

37.4 Payments Must Stop at Death 616

37.5 Child Support Payments Are Not Alimony 617

37.6 No Minimum Payment Period for Alimony 618

37.7 3rd Year Recapture If Alimony Drops by More Than $15,000 618

37.8 Legal Fees of Marital Settlements 619

Household Employment Taxes (“Nanny Tax”) 620

38.1 Who Is a Household Employee? 621

38.2 Social Security and Medicare (FICA) Taxes for Household Employees 621

38.3 Filing Schedule H To Report Household Employment Taxes 622

38.4 Federal Unemployment Taxes (FUTA)

for Household Employees 624

Gift and Estate Tax Planning 625

39.1 Gifts of Appreciated Property 626

39.2 Gift Tax Basics 626

39.3 Filing a Gift Tax Return 627

39.4 Gift Tax Credit 627

39.5 Custodial Accounts for Minors 628

39.6 Trusts in Family Planning 628

39.7 Estate Tax Basics 629

39.8 Take Inventory of Your Potential Estate 629

39.9 Valuing Your Potential Estate 630

39.10 Estimating Potential Estate Tax Liability 630

39.11 Reducing or Eliminating a Potential Estate Tax 631

Part 6 Business Tax Planning 633

Income or Loss From Your Business or Profession 635

40.1 Forms of Doing Business 636

40.2 Reporting Self-Employed Income 636

40.3 Accounting Methods for Reporting Business Income 638

40.4 Tax Reporting Year for Self-Employed 640

40.5 Reporting Certain Payments and Receipts to the IRS 640

40.6 Filing Schedule C 641

40.7 Deductions for Professionals 645

40.8 Nondeductible Expense Items 646

40.9 How Authors and Artists May Write Off Expenses 647

40.10 Deducting Expenses of a Sideline Business or Hobby 647

40.11 Deducting Expenses of Looking for a New Business 648

40.12 Home Office Deduction 649

40.13 What Home Office Expenses Are Deductible? 652

40.14 Allocating Expenses to Business Use 652

40.15 Business Income May Limit Home Office Deductions 653

40.16 Home Office for Sideline Business 654

40.17 Depreciation of Office in Cooperative Apartment 655

40.18 Net Operating Losses (NOLs) 656

40.19 Your Net Operating Loss 656

40.20 How To Report a Net Operating Loss 657

40.21 How To Carry Back Your Net Operating Loss 658

40.22 Election To Carry Forward Losses 658

40.23 Overview of the Domestic Production Activities Deduction 658

40.24 Qualified Production Activities 658

40.25 Figuring the Deduction 659

40.26 Business Credits 659

40.27 Filing Schedule F 660

40.28 Farming Expenses 661

Retirement and Medical Plans for Self-Employed 662

41.1 Overview of Retirement and Medical Plans 663

41.2 Choosing a Keogh Plan 663

41.3 Choosing a SEP 664

41.4 Deductible Keogh or SEP Contributions 664

41.5 How To Claim the Keogh or SEP Deduction 667

41.6 How To Qualify a Keogh Plan or SEP Plan 667

41.7 Annual Keogh Plan Return 667

41.8 How Keogh Plan Distributions Are Taxed 668

41.9 SIMPLE IRA Plans 668

41.10 Health Savings Account (HSA) Basics 668

41.11 Limits on Deductible HSA Contributions 669

41.12 Distributions From HSAs 669

41.13 Archer MSAs 670

41.14 Small Business Health Tax Credit 671

Claiming Depreciation Deductions 672

42.1 What Property May Be Depreciated? 673

42.2 Claiming Depreciation on Your Tax Return 674

42.3 First-Year Expensing Deduction 674

42.4 MACRS Recovery Periods 676

42.5 MACRS Rates 677

42.6 Half-Year Convention for MACRS 679

42.7 Last Quarter Placements—Mid-Quarter Convention 679

42.8 150% Rate Election 680

42.9 Straight-Line Depreciation 680

42.10 Computers and Other Listed Property 682

42.11 Assets in Service Before 1987 683

42.12 Straight-Line Recovery for Assets in Service Before 1987 683

42.13 MACRS for Real Estate Placed in Service After 1986 683

42.14 Demolishing a Building 685

42.15 Leasehold Improvements 685

42.16 Depreciating Real Estate Placed in Service After 1980 and Before 1987 686

42.17 When MACRS Is Not Allowed 686

42.18 Amortizing Goodwill and Other Intangibles (Section 197) 686

42.19 Deducting the Cost of Computer Software 688

42.20 Amortizing Song Rights 688

42.21 Bonus Depreciation 688

Deducting Car and Truck Expenses 690

43.1 Standard Mileage Rate 691

43.2 Expense Allocations 693

43.3 Depreciation Restrictions on Cars, Trucks, and Vans 693

43.4 Annual Ceilings on Depreciation 694

43.5 MACRS Rates for Cars, Trucks, and Vans 695

43.6 Straight-Line Method 699

43.7 Depreciation for Year Vehicle Is Disposed Of 700

43.8 Depreciation After Recovery Period Ends 701

43.9 Trade-in of Business Vehicle 701

43.10 Recapture of Deductions on Business Car, Truck, or Van 702

43.11 Keeping Records of Business Use 703

43.12 Leased Business Vehicles: Deductions and Income 703

Sales of Business Property 704

44.1 Depreciation Recaptured as Ordinary Income on Sale of Personal Property 705

44.2 Depreciation Recaptured as Ordinary Income on Sale of Real Estate 705

44.3 Recapture of First-Year Expensing 706

44.4 Gifts and Inheritances of Depreciable Property 706

44.5 Involuntary Conversions and Tax-Free Exchanges 707

44.6 Installment Sale of Depreciable Property 707

44.7 Sale of a Proprietorship 707

44.8 Property Used in a Business (Section 1231 Assets) 707

44.9 Sale of Property Used for Business and Personal Purposes 708

44.10 Should You Trade in Business Equipment? 709

44.11 Corporate Liquidation 709

Figuring Self-Employment Tax 710

45.1 What Is Self-Employment Income? 711

45.2 Partners Pay Self-Employment Tax 712

45.3 Schedule SE 712

45.4 How Wages Affect Self-Employment Tax 714

45.5 Optional Method If 2011 Was a Low-Income or Loss Year 715

45.6 Self-Employment Tax Rules for Certain Positions 716

Part 7 Filing Your Return and What Happens After You File 719

Filing Your Return 721

46.1 Keeping Tax Records 722

46.2 Getting Ready To File Your Return 722

46.3 Applying for an Extension 723

46.4 Getting Your Refund 724

46.5 Paying Taxes Due 725

46.6 Electronic Filing 726

46.7 Notify the IRS of Address Changes 726

46.8 Interest on Tax Underpayments 727

46.9 Tax Penalties for Late Filing and Late Payment 727

Filing Refund Claims, and Amended Returns 733

47.1 Filing An Amended Return 734

47.2 When To File a Refund Claim 734

47.3 Joint Refund Claims 735

47.4 Stating the Reasons for Refund Claim 735

47.5 Quick Refund Claims 735

47.6 Interest Paid on Refund Claims 735

47.7 Refunds Withheld To Cover Debts 736

47.8 Amended Returns Showing Additional Tax 736

47.9 Penalty for Filing Excessive Refund Claim 736

If the IRS Examines Your Return 737

48.1 Odds of Being Audited 738

48.2 When the IRS Can Assess Additional Taxes 739

48.3 Audit Overview 740

48.4 Preparing for the Audit 740

48.5 Handling the Audit 741

48.6 Tax Penalties for Inaccurate Returns 741

48.7 Agreeing to the Audit Changes 743

48.8 Disputing the Audit Changes 744

48.9 Offer in Compromise 745

48.10 Recovering Costs of a Tax Dispute 745

48.11 Suing the IRS for Unauthorized Collection 746

Part 8 2011 Tax & EIC TableS, and Form 1040 747

Form 1040 749

2011 Tax Table 751

2011Tax Computation Worksheet 763

2011 EIC Table 765

Part 9 T ax Law Authorities 785

Legislative Authorities

Internal Revenue Code 787

Congressional Committee Reports 787

Administrative Authorities

Treasury Regulations 787

Revenue Rulings 787

Other IRS Rulings and Releases 788

Judicial Authorities

Court Decisions 788

U.S. Tax Court 788

Federal District Court 789

U.S. Court of Federal Claims 789

Court of Appeals Decisions 789

Supreme Court Decisions 790

States Within Court of Appeals Regions 790

Part 10 Citations of Authority 791

Key to Citations 793

Filing Basics 794

Citations to tax content for Parts 1–7 795

Part 11 Practice Before The IRS 919

How Returns Are Examined 921

Audit Rules for Partnerships 928

The Time Limits Within Which the IRS Must Act for Additional Taxes 928

Filing Refund Claims 934

How To Arrange Closing Agreements and Compromises 938

How To Get the IRS’s Opinion on a Tax Problem 940

Who May Practice Before the IRS 945

Tax Return Preparer Penalties 950

Glossary 955

Index 961