J.K. Lasser's 1001 deductions and tax breaks 2016: your complete guide to everything deductible

478 Pages·2016·6.316 MB·English

by  J.K. Lasser Institute.;Weltman, Barbara

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J.K. LASSER’STM
1001 DEDUCTIONS
AND TAX BREAKS
2016
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J.K. LASSER’STM
1001 DEDUCTIONS
AND TAX BREAKS
2016
Your Complete Guide
to Everything Deductible
Barbara Weltman
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Coverdesign:Wiley
Copyright©2016byBarbaraWeltman.Allrightsreserved.
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Contents
Introduction vii
1. YouandYourFamily 1
2. MedicalExpenses 29
3. EducationCosts 73
4. YourHome 108
5. RetirementSavings 146
6. CharitableGiving 181
7. YourCar 208
8. Investing 224
9. Travel 261
10. Entertainment 282
11. RealEstate 300
12. BorrowingandInterest 324
13. InsuranceandCatastrophes 338
14. YourJob 356
15. YourBusiness 387
16. MiscellaneousItems 416
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vi CONTENTS
AppendixA. ItemsAdjustedAnnuallyforInflation 441
AppendixB. ChecklistofTax-FreeItems 444
AppendixC. ChecklistofNondeductibleItems 448
Index 453
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Introduction
Saytheword“taxes”andmostpeoplegroan.Therearegoodreasonsforthis
response:Firstofall,thecostofpayingyourtaxesannuallycanbeafinancial
burden.Youmayfeeltakentothecleanerseverytimeyouviewyourpaycheck
afterwithholdingforfederalincometaxes(nottomentionstateincometaxes
aswellasSocialSecurityandMedicaretaxes).Andtaxesaretimeconsuming–
costingindividuals6billionhoursannuallytofiletheirreturns.
Second, the tax law is very complicated and changing all the time. Accord-
ing to some sources, the Internal Revenue Code (Tax Code) had 3.7 million
words. There were only 11,400 words in the Tax Code in 1914, one year after
theconstitutionalamendmentauthorizingthelevyofanincometax.Between
2001and2012,therewere4,600changes(whichworksouttomorethanonea
day).Therehavebeenmajorchangesinthetaxlawnearlyeveryyearoverthe
past 50 years—and this year is no exception! Congress is expectedto enact a
lawextendingfor2015themorethan50taxrulesthatexpiredattheendof2014
or,perhaps,toadoptmajortaxchanges.Inaddition,newcourtdecisionsand
IRSrulingsappeareachday,providingguidanceonhowtointerpretthelaw.
Third,youhavetoknowwhatthetaxrulesareandcan’tclaimignoranceto
avoidtaxesandpenalties.Evenifyouuseataxprofessionalortaxpreparation
softwaretoprepareyourreturn,youremainresponsibleforyourtaxes.TheTax
Courthasnotedthatusingsoftwareisnotanautomaticexcusetoavoidunder-
paymentpenalties.
How can you combat the feeling of dread when it comes to taxes? It helps
to know that the tax law is peppered with many, many tax breaks to which
you may be entitled. These breaks allow you to not report certain economic
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viii INTRODUCTION
benefitsyouenjoyortosubtractcertainexpensesfromyourincomeorevendi-
rectlyfromyourtaxbill.AsthefamousjuristJudgeLearnedHandoncestated
(inthe1934caseofHelveringv.GregoryintheCourtofAppealsfortheSecond
Circuit):
Anyonemayarrangehisaffairssothathistaxesshallbeaslowaspossible;he
isnotboundtochoosethatpatternwhichbestpaysthetreasury.Thereisnot
evenapatrioticdutytoincreaseone’staxes.OverandoveragaintheCourts
havesaidthatthereisnothingsinisterinsoarrangingaffairsastokeeptaxes
aslowaspossible.Everyonedoesit,richandpooralike,andalldoright,for
nobodyowesanypublicdutytopaymorethanthelawdemands.
SogetyourtaxaffairsinorderandreducewhatyoupayeachyeartoUncle
Sam!
Ingettingahandleonhowtodothisbytakingadvantageofeverytaxbreak
you may be entitled to without running afoul of the Internal Revenue Service
(IRS),therearesomesimplerulestokeepinmind.Theyinclude:
• Youmustreportallofyourincomeunlessaspecificlawallowsyoutoex-
cludeorexemptit(sothatitisnevertaxed)ordeferit(sothatitistaxed
atalatertime).
• Youcanclaimdeductionsonlywhenandtotheextentthelawallows.De-
ductionsarereferredtoasa“matteroflegislativegrace;”Congressdoesn’t
havetocreatethemanddoessoonlyforsomepurpose(forexample,toen-
courageeconomicactivityortobalancesomeperceivedinequityinthetax
law).
• Taxcreditsareworthmorethantaxdeductions.Acreditreducesyourtax
payment on a dollar-for-dollar basis; a $1,000 credit saves you $1,000 in
taxes.Adeductionisworthonlyasmuchasthetoptaxbracketyouarein.
Supposeyouare in the 28% taxbracket,which means this is the highest
rateyoupayonatleastsomeofyourincome.Ifyouhavea$1,000deduction,
itisworth$280(28%of$1,000)becauseitsavesyou$280intaxesyouwould
otherwisehavetopay.
• Even if your income is modest, you may have to file Form 1040 (the
so-called long form), rather than a simplified return (Form 1040A or
1040EZ),inordertoclaimcertaintaxbenefits.
• In a number of cases, different deduction rules apply to the alternative
minimum tax (AMT), a shadow tax system that ensures you pay at least
sometaxifyourregularincometaxislowerthanitwouldhavebeenwith-
outcertaindeductions.
Whetheryouprepareyourreturnbyhand(as3%offilersdo),usecomputer
softwareoranonlinesolution(37%),orrelyonaprofessional(60%),thisbook
isdesignedtotellyouhowtogeteverytaxedgeyou’reentitledto.Knowingwhat