Your Income Tax 2022: For Preparing Your 2021 Tax Return
By J. K. Lasser
Contents:
What’s New for 2021 xxvii
Tax News for 2021 xxvii
Key Tax Numbers for 2021 xxx
Tax-Saving Opportunities for 2021 and Beyond xxxiii
Pending Tax Rule Changes xxxiv
Expiring Provisions xxxvi
FILING BASICS 1
Do You Have to File a 2021 Tax Return? 2
Filing Tests for Dependents: 2021 Returns 4
Where to File Your 2021 Form 1040 or 1040-SR 5
Filing Deadlines (on or before) 6
What Forms Do You Need to File? 8
Filing Status 9
1.1 Which Filing Status Should You Use? 10
1.2 Tax Rates Based on Filing Status 11
1.3 Filing Separately Instead of Jointly 13
1.4 Filing a Joint Return 14
1.5 Nonresident Alien Spouse 16
1.6 Community Property Rules 16
1.7 Innocent Spouse Rules 18
1.8 Separate Liability Relief for Former Spouses 19
1.9 Equitable Relief 22
1.10 Death of Your Spouse in 2021 23
1.11 Qualifying Widow/Widower Status for 2021
If Your Spouse Died in 2020 or 2019 24
1.12 Qualifying as Head of Household 25
1.13 Filing for Your Child 27
1.14 Return for Deceased 27
1.15 Return for an Incompetent Person 29
1.16 How a Nonresident Alien Is Taxed 29
1.17 How a Resident Alien Is Taxed 30
1.18 Who Is a Resident Alien? 30
1.19 Certificate of Tax Compliance for Alien
Leaving the United States 33
1.20 Expatriation Tax 33
REPORTING YOUR INCOME 35
Wages, Salary, and Other Compensation 37
2.1 Salary and Wage Income 40
2.2 Constructive Receipt of Year-End Paychecks 41
2.3 Pay Received in Property Is Taxed 42
2.4 Commissions Taxable When Credited 42
2.5 Unemployment Benefits 43
2.6 Strike Pay Benefits and Penalties 43
2.7 Nonqualified Deferred Compensation 44
2.8 Did You Return Wages Received in a Prior Year? 45
2.9 Waiver of Executor’s and Trustee’s Commissions 46
2.10 Life Insurance Benefits 46
2.11 Educational Benefits for Employees’ Children 47
2.12 Sick Pay Is Taxable 48
2.13 Workers’ Compensation Is Tax Free 48
2.14 Disability Pay and Pensions 49
2.15 Stock Appreciation Rights (SARs) 51
2.16 Stock Options 51
2.17 Election to Defer Income on Qualified Equity Grants from Private Companies (Section 83(i) election) 54
2.18 Restricted Stock 54
3.1 Tax-Free Health and Accident Coverage Under Employer Plans 58
3.2 Health Savings Accounts (HSAs) and Archer MSAs 58
3.3 Reimbursements and Other Tax-Free Payments
From Employer Health and Accident Plans 61
3.4 Group-Term Life Insurance Premiums 65
3.5 Dependent Care Assistance 67
3.6 Adoption Benefits 67
3.7 Education Assistance Plans 68
3.8 Company Cars, Parking, and Transit Passes 69
3.9 Working Condition Fringe Benefits 71
3.10 De Minimis Fringe Benefits 72
3.11 Employer-Provided Retirement Advice 72
3.12 Employee Achievement Awards 73
3.13 Employer-Furnished Meals or Lodging 73
3.14 Minister’s Housing or Housing Allowance 76
3.15 Cafeteria Plans Provide Choice of Benefits 77
3.16 Flexible Spending Arrangements 78
3.17 Company Services Provided at No Additional Cost 83
3.18 Discounts on Company Products or Services 83
Dividend and Interest Income 84
4.1 Reporting Dividends and Mutual Fund Distributions 85
4.2 Qualified Corporate Dividends Taxed at Favorable
Capital Gain Rates 86
4.3 Dividends From a Partnership, S Corporation,
Estate, or Trust 87
4.4 Real Estate Investment Trust (REIT) Dividends 87
4.5 Taxable Dividends of Earnings and Profits 88
4.6 Stock Dividends on Common Stock 88
4.7 Dividends Paid in Property 89
4.8 Taxable Stock Dividends 89
4.9 Who Reports the Dividends 89
4.10 Year Dividends Are Reported 90
4.11 Distribution Not Out of Earnings: Return of Capital 91
4.12 Reporting Interest on Your Tax Return 91
4.13 Interest on Frozen Accounts Not Taxed 92
4.14 Interest Income on Debts Owed to You 93
4.15 Reporting Interest on Bonds Bought or Sold 93
4.16 Forfeiture of Interest on Premature Withdrawals 94
4.17 Amortization of Bond Premium 94
4.18 Discount on Bonds 96
4.19 Reporting Original Issue Discount on Your Return 97
4.20 Reporting Income on Market Discount Bonds 98
4.21 Discount on Short-Term Obligations 100
4.22 Stripped Coupon Bonds and Stock 100
4.23 Sale or Retirement of Bonds and Notes 101
4.24 State and City Interest Generally Tax Exempt 102
4.25 Taxable State and City Interest 102
4.26 Tax-Exempt Bonds Bought at a Discount 103
4.27 Treasury Bills, Notes, and Bonds 103
4.28 Interest on United States Savings Bonds 104
4.29 Deferring United States Savings Bond Interest 105
4.30 Minimum Interest Rules 107
4.31 Interest-Free or Below-Market-Interest Loans 107
4.32 Minimum Interest on Seller-Financed Sales 110
Reporting Property Sales 112
5.1 General Tax Rules for Property Sales 113
5.2 How Property Sales Are Classified and Taxed 113
5.3 Capital Gains Rates and Holding Periods 115
5.4 Capital Losses and Carryovers 119
5.5 Capital Losses of Married Couples 119
5.6 Losses May Be Disallowed on Sales to Related Persons 120
5.7 Special Treatment of Gain on Sale of Small Business Stock
or Qualified Opportunity Zone Investment 121
5.8 Reporting Capital Asset Sales on Form 8949
and on Schedule D 123
5.9 Counting the Months in Your Holding Period 131
5.10 Holding Period for Securities 131
5.11 Holding Period for Real Estate 132
5.12 Holding Period: Gifts, Inheritances, and Other Property 132
5.13 Calculating Gain or Loss 133
5.14 Amount Realized Is the Total Selling Price 134
5.15 Finding Your Cost 134
5.16 Unadjusted Basis of Your Property 134
5.17 Basis of Property You Inherited or Received as a Gift 136
5.18 Joint Tenancy Basis Rules for Surviving Tenants 140
5.19 Allocating Cost Among Several Assets 143
5.20 How To Find Adjusted Basis 143
5.21 Tax Advantage of Installment Sales 144
5.22 Figuring the Taxable Part of Installment Payments 145
5.23 Electing Not To Report on the Installment Method 148
5.24 Restriction on Installment Sales to Relatives 149
5.25 Contingent Payment Sales 150
5.26 Using Escrow and Other Security Arrangements 151
5.27 Minimum Interest on Deferred Payment Sales 152
5.28 Dispositions of Installment Notes 152
5.29 Repossession of Personal Property Sold on Installment 154
5.30 Boot in Like-Kind Exchange Payable in Installments 154
5.31 “Interest” Taxed if Sales Price Exceeds $150,000
With Over $5 Million Debt 155
5.32 Worthless Securities 155
5.33 Tax Consequences of Bad Debts 157
5.34 Four Rules To Prove a Bad Debt Deduction 158
5.35 Family Bad Debts 159
Tax-Free Exchanges of Property 160
6.1 Like-Kind Exchanges of Real Property Used
for Investment or Business 161
6.2 Receipt of Cash and Other Property—“Boot” 162
6.3 Time Limits and Security Arrangements
for Deferred Exchanges 165
6.4 Qualified Exchange Accommodation Arrangements (QEAAs)
for Reverse Exchanges 167
6.5 Exchanges Between Related Parties 168
6.6 Property Transfers Between Spouses and Ex-Spouses 169
6.7 Tax-Free Exchanges of Stock in Same Corporation 171
6.8 Joint Ownership Interests 172
6.9 Setting up Closely Held Corporations 172
6.10 Tax-Free Exchanges of Insurance Policies 173
Retirement and Annuity Income 174
7.1 Retirement Distributions on Form 1099-R 176
7.2 Lump-Sum Distributions 178
7.3 Lump-Sum Options If You Were Born Before
January 2, 1936 178
7.4 Lump-Sum Payments Received by Beneficiary 179
7.5 Tax-Free Rollovers From Qualified Plans 180
7.6 Direct Rollover or Personal Rollover 181
7.7 Rollover of Proceeds From Sale of Property 184
7.8 Distribution of Employer Stock or Other Securities 185
7.9 Survivor Annuity for Spouse 186
7.10 Court Distributions to Former Spouse Under a QDRO 187
7.11 When You Must Begin Receiving Required
Minimum Distributions (RMDs) 188
7.12 Payouts to Beneficiaries 189
7.13 Penalty for Distributions Before Age 59½ 190
7.14 Restrictions on Loans From Company Plans 192
7.15 Tax Benefits of 401(k) Plans 194
7.16 Limit on Salary-Reduction Deferrals 195
7.17 Withdrawals From 401(k) Plans Restricted 196
7.18 Designated Roth Account Within 401(k), 403(b),
or Governmental 457 Plans 197
7.19 403(b) Plans (Tax-Sheltered Annuity Plans) for Employees
of Tax-Exempts and Schools and Ministers 198
7.20 Government and Exempt Organization Deferred Pay Plans 200
7.21 Figuring the Taxable Part of Commercial Annuities 201
7.22 Life Expectancy Tables 206
7.23 When You Convert Your Endowment Policy 208
7.24 Reporting Employee Annuities 208
7.25 Simplified Method for Calculating Taxable Employee Annuity 209
7.26 Employee’s Cost in Annuity 211
7.27 Withdrawals From Employer’s Qualified Retirement Plan
Before Annuity Starting Date 211
7.28 Coronavirus-Related Distributions 212
7.29 Qualified Disaster Distributions 213
IRAs 214
8.1 Starting a Traditional IRA 215
8.2 Contribution Limit for Traditional IRAs 216
8.3 Contributions to a Traditional IRA If You Are Married 218
8.4 Restrictions on Traditional IRA Deduction for Active
Participants in Employer Plans 219
8.5 Active Participation in an Employer Plan 224
8.6 Nondeductible Contributions to Traditional IRAs 225
8.7 Penalty for Excess Contributions to Traditional IRAs 226
8.8 Distributions From Traditional IRAs 227
8.9 Partially Tax-Free Traditional IRA Distributions
Allocable to Nondeductible Contributions 229
8.10 Tax-Free Direct Transfer or Rollover From
One Traditional IRA to Another 231
8.11 Transfer of Traditional IRA to Spouse at Divorce 235
8.12 Penalty for Traditional IRA Withdrawals Before Age 59½ 235
8.13 Required Minimum Distributions (RMDs)
From a Traditional IRA 240
8.14 Beneficiaries of Traditional IRA Owners
Who Died Before 2020 245
8.15 Beneficiaries of Traditional IRA Owners
Who Die After 2019 247
8.16 SEP Basics 251
8.17 Salary-Reduction SEP Set Up Before 1997 251
8.18 Who Is Eligible for a SIMPLE IRA? 252
8.19 SIMPLE IRA Contributions and Distributions 253
8.20 Roth IRA Advantages 254
8.21 Annual Contributions to a Roth IRA 254
8.22 Recharacterizing a Traditional IRA Contribution
to a Roth IRA and Vice Versa 259
8.23 Converting a Traditional IRA to a Roth IRA 260
8.24 Conversions Made After 2017 to a Roth IRA
Cannot Be Recharacterized 261
8.25 Distributions From a Roth IRA 261
8.26 Distributions to Roth IRA Beneficiaries 263
8.27 Coronavirus-Related IRA Distributions
and Qualified Disaster Distributions 265
Income From Real Estate Rentals and Royalties 267
9.1 Reporting Rental Real Estate Income and Expenses 268
9.2 Checklist of Rental Deductions 269
9.3 Distinguishing Between a Repair and an Improvement 270
9.4 Reporting Rents From a Multi-Unit Residence 272
9.5 Depreciation on Converting a Home to Rental Property 273
9.6 Renting a Residence to a Relative 275
9.7 Personal Use and Rental of a Residence During the Year 275
9.8 Counting Personal-Use Days and Rental Days for a Residence 277
9.9 Allocating Expenses of a Residence to Rental Days 278
9.10 IRS May Challenge Loss Claimed on Temporary
Rental of Residence Before Sale 280
9.11 Reporting Royalty Income 281
9.12 Production Costs of Books and Creative Properties 282
9.13 Deducting the Cost of Patents or Copyrights 282
9.14 Intangible Drilling Costs 282
9.15 Depletion Deduction 283
9.16 Oil and Gas Percentage Depletion 284
9.17 Qualified Business Income Deduction for
Real Estate Activities 285
Loss Restrictions: Passive Activities and At-Risk Limits 287
10.1 Rental Activities Generally Treated as Passive 288
10.2 Rental Real Estate Loss Allowance of up to $25,000 290
10.3 Real Estate Professionals 293
10.4 Business Participation May Avoid Passive Loss Restrictions 296
10.5 Classifying Business Activities as One or Several 296
10.6 Material Participation in a Business 297
10.7 Tax Credits of Passive Activities Limited 300
10.8 Determining Passive or Nonpassive Income and Loss 300
10.9 Passive Income Recharacterized as Nonpassive Income 302
10.10 Working Interests in Oil and Gas Wells 305
10.11 Partners and Members of LLCs and LLPs 305
10.12 Form 8582 and Other Tax Forms 306
10.13 Suspended Losses Allowed on Disposition of Your Interest 307
10.14 Suspended Tax Credits 309
10.15 Personal Service and Closely Held Corporations 310
10.16 Sales of Property and of Passive Activity Interests 311
10.17 At-Risk Limits 312
10.18 What Is At Risk? 313
10.19 Amounts Not At Risk 314
10.20 At-Risk Investment in Several Activities 315
10.21 Carryover of Disallowed Losses 316
10.22 Recapture of Losses Where At Risk Is Less Than Zero 316
Charitable Contribution Deductions 356
14.1 Deductible Contributions 357
14.2 Nondeductible Contributions 358
14.3 Contributions That Provide You With Benefits 359
14.4 Unreimbursed Expenses of Volunteer Workers 362
14.5 Support of a Student in Your Home 363
14.6 What Kind of Property Are You Donating? 363
14.7 Cars, Clothing, and Other Property Valued Below Cost 367
14.8 Bargain Sales of Appreciated Property 369
14.9 Art Objects 370
14.10 Interests in Real Estate 371
14.11 Life Insurance 373
14.12 Business Inventory 374
14.13 Donations Through Trusts 374
14.14 Records Needed To Substantiate Your Contributions 374
14.15 Form 8283 and Written Appraisal Requirements
for Property Donations 376
14.16 Penalty for Substantial Overvaluation of Property 378
14.17 Ceiling on Charitable Contributions 378
14.18 Carryover for Excess Donations 382
14.19 Election To Reduce Fair Market Value by Appreciation 383
Itemized Deduction for Interest Expenses 384
15.1 Deduction for Home Mortgage Interest 385
15.2 Home Acquisition Loans 386
15.3 Home Equity Loans 389
15.4 Home Construction Loans 391
15.5 Mortgage Insurance Premiums and
Other Payment Rules 392
15.6 Interest on Refinanced Loans 393
15.7 “Points” 394
15.8 Cooperative and Condominium Apartments 395
15.9 Investment Interest Limitations 396
15.10 Debts To Carry Tax-Exempt Obligations 397
15.11 Earmarking Use of Loan Proceeds
For Investment or Business 398
15.12 Year To Claim an Interest Deduction 400
15.13 Prepaid Interest 401
Deductions for Taxes 402
16.1 Overall Limit on Deduction for State and Local Taxes 403
16.2 Nondeductible Taxes 404
16.3 State and Local Income Taxes or General Sales Taxes 404
16.4 Deducting Real Estate Taxes 405
16.5 Assessments 408
16.6 Tenants’ Payment of Taxes 408
16.7 Allocating Taxes When You Sell or Buy Realty 408
16.8 Automobile License Fees 410
16.9 Taxes Deductible as Business Expenses 410
16.10 Foreign Taxes 410
Medical and Dental Expense Deductions 411
17.1 Medical and Dental Expenses Must Exceed AGI Threshold 412
17.2 Allowable Medical and Dental Care Costs 412
17.3 Nondeductible Medical Expenses 416
17.4 Reimbursements Reduce Deductible Expenses 417
17.5 Expenses of Your Spouse 419
17.6 Expenses of Your Dependents 419
17.7 Decedent’s Medical Expenses 421
17.8 Premiums for Health Insurance 421
17.9 Travel Costs May Be Medical Deductions 422
17.10 Schooling for the Mentally or Physically Disabled 424
17.11 Nursing Homes 425
17.12 Nurses’ Wages 425
17.13 Home Improvements as Medical Expenses 426
17.14 Costs Deductible as Business Expenses 428
17.15 Long-Term Care Premiums and Services 429
17.16 Life Insurance Used by Chronically ill
or Terminally ill Person 430
Casualty and Theft Losses and Involuntary Conversions 431
18.1 Casualty or Theft Losses for Personal-Use Property
Must Be Due to a Federally Declared Disaster 432
18.2 When To Deduct a Casualty or Theft Loss 434
18.3 Prior-Year Election for Disaster Losses 435
18.4 Gain Realized From Insurance Proceeds for Damaged
or Destroyed Principal Residence 436
18.5 Who May Deduct a Casualty or Theft Loss 438
18.6 Proving a Casualty Loss 438
18.7 Theft Losses 438
18.8 Floors for Personal-Use Property Losses 440
18.9 Figuring Your Loss on Form 4684 442
18.10 Personal and Business Use of Property 445
18.11 Repairs May Be a “Measure of Loss” 445
18.12 Excess Living Costs Paid by Insurance
Are Not Taxable 446
18.13 Do Your Casualty or Theft Losses
Exceed Your Income? 447
18.14 Defer Gain from Involuntary Conversion
by Replacing Property 447
18.15 Involuntary Conversions Qualifying for Tax Deferral 449
18.16 How to Elect to Defer Gain 450
18.17 Types of Qualifying Replacement Property 450
18.18 Time Period for Buying Replacement Property 452
18.19 Cost of Replacement Property Determines Postponed Gain 453
18.20 Special Assessments and Severance Damages from Condemnation 454
Other Itemized Deductions 455
19.1 Only a Few Expenses Are Allowed as
“Other” Itemized Deductions 456
19.2 Deductions for Job Costs and Other Miscellaneous
Expenses No Longer Allowed 457
Travel and Meal Expense Deductions 458
20.1 Who May Deduct Travel and Transportation Expenses 459
20.2 Commuting Expenses 459
20.3 Overnight-Sleep Test Limits Deduction of Meal Costs 460
20.4 IRS Meal Allowance 461
20.5 Business Trip Deductions 462
20.6 When Are You Away From Home? 464
20.7 Tax Home of Married Couple Working in Different Cities 465
20.8 Deducting Living Costs on Temporary Assignment 465
20.9 Business-Vacation Trips Within the United States 467
20.10 Business-Vacation Trips Outside the United States 467
20.11 Deducting Expenses of Business Conventions 468
20.12 Restrictions on Foreign Conventions and Cruises 469
20.13 Entertainment Expenses Generally Not Deductible 470
20.14 Business Meals Are Generally Deductible 470
20.15 Limitation on Some Deductible Meals 472
20.16 Substantiating Travel Expenses 473
20.17 Employee Reporting of Unreimbursed Expenses 474
20.18 Are You Reimbursed Under an Accountable Plan? 474
20.19 Per Diem Travel Allowance Under Accountable Plans 475
20.20 Automobile Mileage Allowance 477
20.21 Reimbursements Under Non-Accountable Plans 478
PERSONAL TAX COMPUTATIONS 479
Dependents 481
21.1 No Exemption Deductions Are Allowed 482
21.2 How Many Dependents Do You Have? 482
21.3 Qualifying Children 483
21.4 Qualifying Relatives 485
21.5 Meeting the Support Test for a Qualifying Relative 487
21.6 Multiple Support Agreements 491
21.7 Special Rule for Divorced or Separated Parents 492
21.8 Reporting Social Security Numbers of Dependents 493
Figuring Your Regular Income Tax Liability 495
22.1 Taxable Income and Regular Income Tax Liability 496
22.2 Using the Tax Table 496
22.3 Tax Computation Worksheet 497
22.4 Tax Calculation If You Have Net Capital Gain
or Qualified Dividends 498
22.5 Foreign Earned Income Tax Worksheet 498
22.6 Income Averaging for Farmers and Fishermen 498
22.7 Tax Credits 499
22.8 Additional Medicare Tax and Net Investment Income Tax 499
Alternative Minimum Tax (AMT) 500
23.1 Computing Alternative Minimum Tax on Form 6251 502
23.2 Adjustments and Preferences for AMT 503
23.3 Tax Credits Allowed Against AMT 506
23.4 Regular Tax Credit for Prior-Year AMT 506
23.5 Avoiding AMT 507
Computing the “Kiddie Tax” on Your Child’s Unearned Income 508
24.1 Filing Your Child’s Return 509
24.2 Children Subject to “Kiddie Tax” for 2021 510
24.3 Computing “Kiddie Tax” on Child’s Return 511
24.4 Parent’s Election To Report Child’s Dividends and Interest 511
Personal Tax Credits Reduce Your Tax Liability 514
25.1 Overview of Personal Tax Credits 515
25.2 Child Tax Credit for Children Under Age 18 515
25.3 Figuring the Child Tax Credit and Additional Child Tax Credit 516
25.4 Credit for Other Dependents 518
25.5 Child and Dependent Care Credit 518
25.6 Figuring the Child and Dependent Care Credit 520
25.7 Earned Income Credit 523
25.8 Income Tests for Earned Income Credit 525
25.9 Qualifying for the Adoption Credit 526
25.10 Claiming the Adoption Credit on Form 8839 527
25.11 Eligibility for the Saver’s Credit 528
25.12 Figuring the Saver’s Credit 529
25.13 Premium Tax Credit 530
25.14 Health Coverage Credit 534
25.15 Mortgage Interest Credit 534
25.16 Residential Energy Credits 534
25.17 Credit for Qualified Plug-in Electric and
Fuel Cell Vehicles 535
25.18 Repayment of the First-Time Homebuyer Credit 536
25.19 Recovery Rebate Credit 537
Tax Withholdings 538
26.1 Withholdings Should Cover Estimated Tax 539
26.2 Income Taxes Withheld on Wages 539
26.3 Low Earners May Be Exempt From Withholding 540
26.4 Are You Withholding the Right Amount? 540
26.5 Voluntary Withholding on Government Payments 541
26.6 When Tips Are Subject to Withholding 541
26.7 Withholding on Gambling Winnings 542
26.8 FICA Withholdings 543
26.9 Withholding on Distributions from Retirement Plans
and Commercial Annuities 544
26.10 Backup Withholding 545
Estimated Tax Payments 546
27.1 Do You Owe an Estimated Tax Penalty for 2021? 547
27.2 Planning Estimated Tax Payments for 2022 549
27.3 Dates for Paying Estimated Tax Installments for 2022 550
27.4 Estimates by Married Taxpayers 550
27.5 Adjusting Your Payments During the Year 551
Additional Medicare Tax and Net Investment Income Tax 552
28.1 Higher-Income Taxpayers May be Subject to Additional Taxes 553
28.2 Additional 0.9% Medicare Tax on Earnings 553
28.3 Additional 3.8% Tax on Net Investment Income 555
TAX PLANNING 559
Tax Savings for Residence Sales 561
29.1 Avoiding Tax on Sale of Principal Residence 562
29.2 Meeting the Ownership and Use Tests for Exclusion 563
29.3 Home Sales by Married Persons 567
29.4 Reduced Maximum Exclusion 568
29.5 Figuring Gain or Loss 571
29.6 Figuring Adjusted Basis 572
29.7 Personal and Business Use of a Home 573
29.8 No Loss Allowed on Personal Residence 574
29.9 Loss on Residence Converted to Rental Property 575
29.10 Loss on Residence Acquired by Gift or Inheritance 576
Tax Rules for Investors in Securities 578
30.1 Planning Year-End Securities Transactions 579
30.2 Earmarking Stock Lots 579
30.3 Sale of Stock Dividends 580
30.4 Stock Rights 581
30.5 Short Sales of Stock 581
30.6 Wash Sales 583
30.7 Convertible Stocks and Bonds 585
30.8 Stock Options 586
30.9 Sophisticated Financial Transactions 587
30.10 Investing in Tax-Exempts 587
30.11 Ordinary Loss for Small Business Stock (Section 1244) 588
30.12 Series EE Bonds 589
30.13 I Bonds 590
30.14 Trader, Dealer, or Investor? 591
30.15 Mark-to-Market Election for Traders 592
30.16 Cryptocurrency Transactions 594
Tax Savings for Investors in Real Estate 595
31.1 Real Estate Ventures 596
31.2 Sales of Subdivided Land—Dealer or Investor? 597
31.3 Exchanging Real Estate Without Tax 598
31.4 Timing Your Real Property Sales 600
31.5 Cancellation of a Lease 600
31.6 Sale of an Option 600
31.7 Granting of an Easement 600
31.8 Special Tax Credits for Real Estate Investments 601
31.9 Foreclosures, Repossessions, Short Sales, and
Voluntary Conveyances to Creditors 602
31.10 Restructuring Mortgage Debt 603
31.11 Abandonments 604
31.12 Seller’s Repossession After Buyer’s Default on Mortgage 605
31.13 Foreclosure on Mortgages Other Than Purchase Money 607
31.14 Foreclosure Sale to Third Party 607
31.15 Transferring Mortgaged Realty 608
31.16 QBI Deduction for REIT Dividends 608
Tax Rules for Investors in Mutual Funds 609
32.1 Timing of Your Investment Can Affect Your Taxes 610
32.2 Reinvestment Plans 610
32.3 Mutual Fund Distributions Reported on Form 1099-DIV 610
32.4 Tax-Exempt Bond Funds 611
32.5 Fund Expenses 611
32.6 Tax Credits From Mutual Funds 612
32.7 How to Report Mutual Fund Distributions 612
32.8 Redemptions and Exchanges of Fund Shares 612
32.9 Basis of Redeemed Shares 614
32.10 Comparison of Basis Methods 616
32.11 Mutual Funds Compared to Exchange-Traded Funds 617
Educational Tax Benefits 618
33.1 Scholarships and Grants 619
33.2 Tuition Reductions for College Employees 619
33.3 How Fulbright Awards Are Taxed 619
33.4 United States Savings Bond Tuition Plans 619
33.5 Contributing to a Qualified Tuition Program
(Section 529 Plan) 621
33.6 Distributions From Qualified Tuition Programs
(Section 529 Plans) 622
33.7 Education Tax Credits 624
33.8 American Opportunity Credit 625
33.9 Lifetime Learning Credit 627
33.10 Contributing to a Coverdell Education Savings Account (ESA) 628
33.11 Distributions From Coverdell ESAs 629
33.12 Tuition and Fees Deduction No Longer Allowed 631
33.13 Student Loan Interest Deduction 631
33.14 Types of Deductible Work-Related Costs 633
33.15 Work-Related Tests for Education Costs 633
33.16 Local Transportation and Travel Away From
Home To Take Courses 634
Special Tax Rules for Senior Citizens and the Disabled 636
34.1 Senior Citizens Get Certain Filing Breaks 637
34.2 Social Security Benefits Subject to Tax 637
34.3 Computing Taxable Social Security Benefits 638
34.4 Election for Lump-Sum Social Security Benefit Payment 643
34.5 Retiring on Social Security Benefits 643
34.6 How Tax on Social Security Reduces Your Earnings 644
34.7 Eligibility for the Credit for the Elderly or the Disabled 645
34.8 Figuring the Credit for the Elderly or Disabled 645
34.9 Tax Effects of Moving to a Continuing Care Facility 646
34.10 Medicare Part B and Part D Premiums for 2022 648
34.11 Special Tax Rules for Individuals with a Disability 648
34.12 ABLE Accounts 649
Members of the Armed Forces 651
35.1 Taxable Armed Forces Pay and Benefits 652
35.2 Tax Breaks for Armed Forces Members 652
35.3 Deductions for Armed Forces Personnel 654
35.4 Tax-Free Pay for Service in Combat Zone 654
35.5 Tax Deadlines Extended for Combat Zone or
Contingency Operation Service 656
35.6 Tax Forgiveness for Combat Zone or Terrorist or
Military Action Deaths 656
35.7 Extension To Pay Your Tax When Entering the Service 657
35.8 Tax Information for Reservists 657
How To Treat Foreign Earned Income 659
36.1 Claiming the Foreign Earned Income Exclusion 660
36.2 What Is Foreign Earned Income? 660
36.3 Qualifying for the Foreign Earned Income Exclusion 662
36.4 How To Treat Housing Costs 663
36.5 Meeting the Foreign Residence or Physical Presence Test 664
36.6 Claiming Deductions 666
36.7 Exclusion Not Established When Your Return Is Due 666
36.8 Tax-Free Meals and Lodging for Workers in Camps 667
36.9 U. S. Virgin Islands, Samoa, Guam, and Northern Marianas 667
36.10 Earnings in Puerto Rico 667
36.11 Tax Treaties With Foreign Countries 668
36.12 Exchange Rates and Blocked Currency 668
36.13 Foreign Tax Credit or Deduction for Foreign Taxes Paid 668
Planning Alimony and Marital Settlements 670
37.1 Rules for Post-2018 Divorce and Separation Agreements 671
37.2 Rules for Pre-2019 Divorces or Separation Agreements 671
37.3 Decree or Agreement Required 672
37.4 Cash Payments Required 672
37.5 Payments Must Stop at Death 673
37.6 Child Support Payments Are Not Alimony 674
37.7 No Minimum Payment Period for Alimony 675
37.8 Legal Fees of Marital Settlements 675
Other Taxes 676
38.1 Overview of Household Employment Taxes 677
38.2 Social Security and Medicare (FICA) Taxes
for Household Employees 678
38.3 Filing Schedule H To Report Household
Employment Taxes 679
38.4 Federal Unemployment Taxes (FUTA)
for Household Employees 681
Gift and Estate Tax Planning Basics 682
39.1 Gifts of Appreciated Property 683
39.2 Gift Tax Basics 683
39.3 Filing a Gift Tax Return 684
39.4 Gift Tax Credit 684
39.5 Custodial Accounts for Minors 684
39.6 Trusts in Family Planning 685
39.7 What is the Estate Tax? 686
39.8 Take Inventory and Estimate the Value
of Your Potential Estate 686
39.9 Estate Tax for 2021 687
39.10 Planning for a Potential Estate Tax 688
BUSINESS TAX PLANNING 691
Income or Loss From Your Business or Profession 693
40.1 Forms of Doing Business 694
40.2 Reporting Self-Employed Income 694
40.3 Accounting Methods for Reporting Business Income 696
40.4 Tax Reporting Year for Self-Employed 697
40.5 Reporting Certain Payments and Receipts to the IRS 697
40.6 Filing Schedule C 699
40.7 Deductions for Professionals 704
40.8 Nondeductible Expense Items 705
40.9 How Authors and Artists May Write Off Expenses 706
40.10 Deducting Expenses of a Sideline Business or Hobby 706
40.11 Deducting Expenses of Looking for a New Business 707
40.12 Home Office Deduction 708
40.13 Write-Off Methods for Home Office Expenses 710
40.14 Allocating Expenses to Business Use 712
40.15 Business Income May Limit Home Office Deductions 713
40.16 Home Office for Sideline Business 715
40.17 Depreciation of Office in Cooperative Apartment 716
40.18 Net Operating Losses (NOLs) 716
40.19 How To Report a Net Operating Loss 717
40.20 Excess Business Losses 718
40.21 Business Credits 718
40.22 Filing Schedule F 720
40.23 Farming Expenses 720
40.24 Qualified Business Income Deduction 721
Retirement and Medical Plans for Self-Employed 723
41.1 Overview of Retirement and Medical Plans 724
41.2 Choosing a Qualified Retirement Plan 724
41.3 Choosing a SEP 725
41.4 Deductible Contributions 725
41.5 How To Qualify a Retirement Plan or SEP Plan 729
41.6 Tax Credits for Setting Up a Retirement Plan 729
41.7 Annual Qualified Retirement Plan Reporting 730
41.8 How Qualified Retirement Plan Distributions Are Taxed 730
41.9 SIMPLE IRA Plans 731
41.10 Health Savings Account (HSA) Basics 731
41.11 Limits on Deductible HSA Contributions 731
41.12 Distributions From HSAs 732
41.13 Archer MSAs 733
41.14 Health Reimbursement Arrangements (HRAs) 734
41.15 Small Employer Health Insurance Credit 735
Claiming Depreciation Deductions 736
42.1 What Property May Be Depreciated? 737
42.2 Claiming Depreciation on Your Tax Return 738
42.3 First-Year Expensing Deduction 738
42.4 MACRS Recovery Periods 740
42.5 MACRS Rates 741
42.6 Half-Year Convention for MACRS 742
42.7 Last Quarter Placements—Mid-Quarter Convention 743
42.8 150% Rate Election 744
42.9 Straight Line Depreciation 745
42.10 Listed Property 746
42.11 Assets in Service Before 1987 747
42.12 MACRS for Real Estate Placed in Service After 1986 747
42.13 Demolishing a Building 749
42.14 Qualified Improvement Property 749
42.15 Depreciating Real Estate Placed in Service
After 1980 and Before 1987 750
42.16 Amortizing Goodwill and Other Intangibles (Section 197) 750
42.17 Amortizing Research and Experimentation Costs 751
42.18 Bonus Depreciation 751
Deducting Car and Truck Expenses 753
43.1 Standard Mileage Rate 754
43.2 Expense Allocations 755
43.3 Depreciation Restrictions on Cars, Trucks, and Vans 756
43.4 Annual Ceilings on Depreciation 757
43.5 MACRS Rates for Cars, Trucks, and Vans 758
43.6 Straight Line Method 763
43.7 Depreciation for Year Vehicle Is Disposed Of 764
43.8 Depreciation After Recovery Period Ends 764
43.9 Trade-in of Business Vehicle 765
43.10 Recapture of Deductions on Business Car, Truck, or Van 765
43.11 Keeping Records of Business Use 767
43.12 Leased Business Vehicles: Deductions and Income 767
Sales of Business Property 768
44.1 Depreciation Recaptured as Ordinary Income
on Sale of Personal Property 769
44.2 Depreciation Recaptured as Ordinary Income
on Sale of Real Estate 769
44.3 Recapture of First-Year Expensing and Bonus Depreciation 770
44.4 Gifts and Inheritances of Depreciable Property 771
44.5 Involuntary Conversions and Tax-Free Exchanges 771
44.6 Installment Sale of Depreciable Property 771
44.7 Sale of a Proprietorship 771
44.8 Property Used in a Business (Section 1231 Assets) 772
44.9 Sale of Property Used for Business and Personal Purposes 773
44.10 Should You Trade in Business Equipment? 773
44.11 Corporate Liquidation 773
44.12 Additional Taxes on Higher-Income Taxpayers 774
Figuring Self-Employment Tax 775
45.1 What Is Self-Employment Income? 776
45.2 Partners Pay Self-Employment Tax 777
45.3 Schedule SE 778
45.4 How Wages Affect Self-Employment Tax 778
45.5 Optional Method If 2021 Was a Low-Income or Loss Year 781
45.6 Self-Employment Tax Rules for Certain Positions 782
45.7 Paying the Deferred Portion of Self-Employment Tax for 2021 784
FILING YOUR RETURN AND WHAT HAPPENS AFTER YOU FILE 785
Filing Your Return 787
46.1 Keeping Tax Records 788
46.2 Getting Ready to File Your Return 788
46.3 Applying for an Extension 789
46.4 Getting Your Refund 790
46.5 Paying Taxes Due 791
46.6 Handling Identity Theft 793
46.7 Notify the IRS of Address Changes 793
46.8 Interest on Tax Underpayments 793
46.9 Tax Penalties for Late Filing and Late Payment 794
Filing Refund Claims, and Amended Returns 795
47.1 Filing an Amended Return 796
47.2 When to File a Refund Claim 796
47.3 Stating the Reasons for Refund Claim 797
47.4 Quick Refund Claims 797
47.5 Interest Paid on Refund Claims 797
47.6 Refunds Withheld to Cover Debts 798
47.7 Amended Returns Showing Additional Tax 798
47.8 Penalty for Filing Excessive Refund Claim 798
If the IRS Examines Your Return 799
48.1 Odds of Being Audited 800
48.2 When the IRS Can Assess Additional Taxes 801
48.3 Audit Overview 802
48.4 Preparing for the Audit 803
48.5 Handling the Audit 804
48.6 Tax Penalties for Inaccurate Returns 804
48.7 Penalties for Not Reporting Foreign Financial Accounts 807
48.8 Agreeing to the Audit Changes 808
48.9 Disputing the Audit Changes 808
48.10 Offer in Compromise 809
48.11 Recovering Costs of a Tax Dispute 811
48.12 Suing the IRS for Unauthorized Collection 811
2021 TAX FORMS 813
Form 1040 815
Form 1040-SR 817
Schedule 1 821
Schedule 2 823
Schedule 3 825
Schedule A 827
Schedule B 828
Schedule 8812 829
2021 Tax Table 832
2021 Tax Computation Worksheet 844
2021 Earned Income Credit (EIC) Table 845
GLOSSARY 855
INDEX 861