2021 Publication 554

Userid: CPM Schema: tipx Leadpct: 100% Pt. size: 10

Draft Ok to Print

AH XSL/XML

Fileid: … tions/p554/2021/a/xml/cycle04/source (Init. & Date) _______

Page 1 of 39 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Department of the Treasury

Internal Revenue Service

Publication 554

Cat. No. 15102R

Tax Guide

for Seniors

For use in preparing

2021 Returns

Get forms and other information faster and easier at:

• IRS.gov (English)

• IRS.gov/Spanish (Español)

•

IRS.gov/Chinese (中文)

•

IRS.gov/Korean (한국어)

• IRS.gov/Russian (Pусский)

• IRS.gov/Vietnamese (Tiếng Việt)

Contents

What's New .............................. 1

Reminders ............................... 2

Introduction .............................. 2

Chapter 1. 2021 Filing Requirements .......... 5

General Requirements .................... 5

Chapter 2. Taxable and Nontaxable Income ..... 6

Compensation for Services ................. 6

Retirement Plan Distributions ................ 7

Social Security and Equivalent Railroad

Retirement Benefits ................... 13

Sickness and Injury Benefits ............... 16

Life Insurance Proceeds .................. 17

Sale of Home .......................... 18

Reverse Mortgages ..................... 20

Other Items ........................... 20

Chapter 3. Adjustments to Income ........... 21

Individual Retirement Arrangement (IRA)

Contributions and Deductions ............ 21

Chapter 4. Deductions .................... 22

Standard Deduction ..................... 22

Itemized Deductions ..................... 23

Chapter 5. Credits ........................ 27

Credit for the Elderly or the Disabled ......... 27

Child and Dependent Care Credit ........... 30

Earned Income Credit (EIC) ................ 30

Chapter 6. Estimated Tax .................. 32

Who Must Make Estimated Tax Payments ..... 32

Chapter 7. How To Get Tax Help ............. 32

Index .................................. 37

Future Developments

For the latest information about developments related to

Pub. 554, such as legislation enacted after it was

published, go to IRS.gov/Pub554.

What's New

Qualified disaster tax relief. Special rules provide for

tax-favored withdrawals and repayments from certain re-

tirement plans for taxpayers who suffered economic loss

as a result of a qualified disaster. See Form 8915-F,

Qualified Disaster Retirement Plan Distributions and Re-

payments, for more information.

Feb 09, 2022

Page 2 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Standard deduction amount increased. For 2021, the

standard deduction amount has been increased for all fil-

ers. The amounts are:

•

Single or Married filing separately—$12,550.

•

Married filing jointly or Qualifying widow(er)—$25,100.

•

Head of household—$18,800.

Alternative minimum tax exemption increased. The

AMT exemption amount has increased to $73,600

($114,600 if married filing jointly or qualifying widow(er);

$57,300 if married filing separately).

Earned income credit. The maximum amount of income

you can earn and still get the credit has increased. You

may be able to take the credit if you earn less than:

•

$21,430 ($27,380 if married filing jointly), don't have a

qualifying child, and are at least 25 years old and un-

der age 65;

•

$42,158 ($48,108 if married filing jointly), and you

have one qualifying child;

•

$47,915 ($53,865 if married filing jointly), and you

have two qualifying children; or

•

$51,464 ($57,414 if married filing jointly), and you

have three or more qualifying children.

For more information, see Earned Income Credit, later.

Standard mileage rate. For 2021, the standard mileage

rate allowed for operating expenses for a car when you

use it for medical reasons decreased to 16 cents a mile.

Reminders

Maximum age for traditional IRA contributions. The

age restriction for contributions to a traditional IRA has

been eliminated.

Increase in age for mandatory distributions. Individu-

als who reach age 70

/2 on January 1, 2021, or later may

delay distributions until April 1 of the year following the

year in which they turn age 72.

Form 1040-SR. Form 1040-SR, U.S. Tax Return for Se-

niors, was introduced in 2019. You can use this form if you

are age 65 or older at the end of 2021. The form generally

mirrors Form 1040. However, the Form 1040-SR has

larger text and some helpful tips for older taxpayers. See

the Instructions for Form 1040 for more information.

Tax return preparers. Choose your preparer carefully. If

you pay someone to prepare your return, the preparer is

required, under the law, to sign the return and fill in the

other blanks in the Paid Preparer Use Only area of your

return. Remember, however, that you are still responsible

for the accuracy of every item entered on your return. If

there is any underpayment, you are responsible for paying

it, plus any interest and penalty that may be due.

Third party designee. You can check the “Yes” box in

the Third Party Designee area of your return to authorize

the IRS to discuss your return with your preparer, a friend,

a family member, or any other person you choose. This

allows the IRS to call the person you identified as your

designee to answer any questions that may arise during

the processing of your return. It also allows your designee

to perform certain actions. See your income tax return in-

structions for details.

Employment tax withholding. Your wages are subject

to withholding for income tax, social security tax, and

Medicare tax even if you are receiving social security ben-

efits.

Social security benefits information. Social security

beneficiaries may quickly and easily obtain various infor-

mation from the Social Security Administration’s (SSA’s)

website with a my Social Security account, including get-

ting a replacement SSA-1099 or SSA-1042S. For more in-

formation, go to SSA.gov/myaccount. See Obtaining so-

cial security information, later.

Photographs of missing children. The Internal Reve-

nue Service is a proud partner with the National Center for

Missing & Exploited Children® (NCMEC). Photographs of

missing children selected by the Center may appear in

this publication on pages that would otherwise be blank.

You can help bring these children home by looking at the

photographs and calling 800-THE-LOST (800-843-5678)

if you recognize a child.

Introduction

The purpose of this publication is to provide a general

overview of selected topics that are of interest to older tax-

payers. This publication will help you determine if you

need to file a return and, if so, what items to report on your

return. Each topic is discussed only briefly, so you will find

references to other free IRS publications that provide

more detail on these topics if you need it.

Table I has a list of questions you may have about filing

your federal tax return. To the right of each question is the

location of the answer in this publication. Also, at the back

of this publication, there is an index to help you search for

the topic you need.

While most federal income tax laws apply equally to all

taxpayers, regardless of age, there are some provisions

that give special treatment to older taxpayers. The follow-

ing are some examples.

•

Higher gross income threshold for filing. You

must be age 65 or older at the end of the year to get

this benefit. You are considered age 65 on the day be-

fore your 65th birthday. Therefore, you are considered

age 65 at the end of the year if your 65th birthday is on

or before January 1 of the following year.

•

Higher standard deduction. If you don't itemize de-

ductions, you are entitled to a higher standard deduc-

tion if you are age 65 or older at the end of the year.

You are considered age 65 at the end of the year if

your 65th birthday is on or before January 1 of the fol-

lowing year.

•

Credit for the elderly or the disabled. If you qualify,

you may benefit from the credit for the elderly or the

disabled. To determine if you qualify and how to figure

Page 2 Publication 554 (2021)

Page 3 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

this credit, see Credit for the Elderly or the Disabled,

later.

Return preparation assistance. The IRS wants to make

it easier for you to file your federal tax return. You may find

it helpful to visit a Volunteer Income Tax Assistance

(VITA), Tax Counseling for the Elderly (TCE), or American

Association of Retired Persons (AARP) Tax-Aide site near

you.

Volunteer Income Tax Assistance and Tax Coun-

seling for the Elderly. These programs provide free

help for low-income taxpayers and taxpayers age 60 or

older to prepare and file their returns. For the VITA/TCE

site nearest you, contact your local IRS office. For more

information, see Preparing and filing your tax return under

How To Get Tax Help.

AARP Tax-Aide. AARP Foundation Tax-Aide offers

free tax preparation and has more than 5,000 locations in

neighborhood libraries, malls, banks, community centers,

and senior centers annually during the filing season. Visit

AARP.org/TaxAide or call 888-OUR-AARP

(888-687-2277) for more information.

Comments and suggestions. We welcome your com-

ments about this publication and suggestions for future

editions.

You can send us comments through IRS.gov/

FormComments. Or, you can write to the Internal Reve-

nue Service, Tax Forms and Publications, 1111 Constitu-

tion Ave. NW, IR-6526, Washington, DC 20224.

Although we can’t respond individually to each com-

ment received, we do appreciate your feedback and will

consider your comments and suggestions as we revise

our tax forms, instructions, and publications. Don’t send

tax questions, tax returns, or payments to the above ad-

dress.

Getting answers to your tax questions. If you have

a tax question not answered by this publication or the How

To Get Tax Help section at the end of this publication, go

to the IRS Interactive Tax Assistant page at IRS.gov/

Help/ITA where you can find topics by using the search

feature or viewing the categories listed.

Getting tax forms, instructions, and publications.

Go to IRS.gov/Forms to download current and prior-year

forms, instructions, and publications.

Ordering tax forms, instructions, and publications.

Go to IRS.gov/OrderForms to order current forms, instruc-

tions, and publications; call 800-829-3676 to order

prior-year forms and instructions. The IRS will process

your order for forms and publications as soon as possible.

Don’t resubmit requests you’ve already sent us. You can

get forms and publications faster online.

Publication 554 (2021) Page 3

Page 4 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

What You Should Know About Federal Taxes

Note. The following is a list of questions you may have about filling out your federal income tax return.

To the right of each question is the location of the answer in this publication.

What I Should Know Where To Find the Answer

Do I need to file a return? See chapter 1.

Is my income taxable or nontaxable?

If it is nontaxable, must I still report it?

See chapter 2.

How do I report benefits I received from the Social

Security Administration or the Railroad Retirement Board?

Are these benefits taxable?

See Social Security and Equivalent Railroad Retirement

Benefits in chapter 2.

Must I report the sale of my home?

If I had a gain, is any part of it taxable?

See Sale of Home in chapter 2.

What are some of the items that I can deduct to reduce my

income?

See chapters 3 and 4.

How do I report the amounts I set aside for my IRA? See Individual Retirement Arrangement Contributions

and Deductions in chapter 3.

Would it be better for me to claim the standard deduction

or itemize my deductions?

See chapter 4.

What are some of the credits I can claim to reduce my tax? See chapter 5 for discussions on the credit for the elderly

or the disabled, the child and dependent care credit, and

the earned income credit.

Must I make estimated tax payments? See chapter 6.

How do I contact the IRS or get more information? See chapter 7.

Table I.

Page 4 Publication 554 (2021)

Page 5 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

2021 Filing Requirements

If income tax was withheld from your pay, or if you qualify

for a refundable credit (such as the earned income credit,

the additional child tax credit, or the American opportunity

credit), you should file a return to get a refund even if you

aren't otherwise required to file a return.

Don't file a federal income tax return if you don't

meet the filing requirements and aren't due a re-

fund. If you need assistance to determine if you

need to file a federal income tax return for 2021, go to

IRS.gov/ITA and use the Interactive Tax Assistant (ITA).

General Requirements

If you are a U.S. citizen or resident alien, you must file a

return if your gross income for the year was at least the

TIP

amount shown on the appropriate line in Table 1-1. For

other filing requirements, see your tax return instructions

or Pub. 501, Dependents, Standard Deduction, and Filing

Information. If you were a nonresident alien at any time

during the year, the filing requirements that apply to you

may be different from those that apply to U.S. citizens.

See Pub. 519, U.S. Tax Guide for Aliens.

Gross income. Gross income is all income you receive

in the form of money, goods, property, and services that

isn't exempt from tax. If you are married and live with your

spouse in a community property state, half of any income

defined by state law as community income may be con-

sidered yours. States with community property laws in-

clude Arizona, California, Idaho, Louisiana, Nevada, New

Mexico, Texas, Washington, and Wisconsin. A registered

domestic partner in Nevada, Washington, or California

must generally report half the combined community in-

come of the individual and his or her domestic partner. For

more information about community property, see Pub.

555, Community Property.

For more information on what to include in gross in-

come, see chapter 2.

2021 Filing Requirements Chart for Most Taxpayers

Note. You must file a return if your gross income was at least the amount shown in the last column.

IF your filing status is. . .

AND at the end of 2021

you were . . .

THEN file a return if your

gross income

was at least. . .

Single under 65 $12,550

65 or older $14,250

Head of household under 65 $18,800

65 or older $20,500

Married filing jointly

***

under 65 (both spouses) $25,100

65 or older (one spouse) $26,450

65 or older (both spouses) $27,800

Married filing separately any age $ 5

Qualifying widow(er) under 65 $25,100

65 or older $26,450

If you were born before January 2, 1957, you are considered to be age 65 or older at the end of 2021. (If your spouse

died in 2021 or if you are preparing a return for someone who died in 2021, see Pub. 501.)

Gross income means all income you receive in the form of money, goods, property, and services that isn't exempt from

tax, including any income from sources outside the United States or from the sale of your main home (even if you can

exclude part or all of it). It also includes gains, but not losses, reported on Form 8949 or Schedule D. Gross income from

a business means, for example, the amount on Schedule C, line 7, or Schedule F, line 9. But, in figuring gross income,

don't reduce your income by any losses, including any loss on Schedule C, line 7, or Schedule F, line 9. Don't include

any social security benefits unless (a) you are married filing separately and you lived with your spouse at any time in

2021, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more

than $25,000 ($32,000 if married filing jointly). If (a) or (b) applies, see the Instructions for Form 1040 or Pub. 915, Social

Security and Equivalent Railroad Retirement Benefits, to figure the taxable part of social security benefits you must

include in gross income.

***

If you didn't live with your spouse at the end of 2021 (or on the date your spouse died) and your gross income was at

least $5, you must file a return regardless of your age.

Table 1-1.

Chapter 1 2021 Filing Requirements Page 5

Page 6 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Self-employed persons. If you are self-employed in a

business that provides services (where the production,

purchase, or sale of merchandise isn't an income-produc-

ing factor), gross income from that business is the gross

receipts. If you are self-employed in a business involving

manufacturing, merchandising, or mining, gross income

from that business is the total sales minus the cost of

goods sold. In either case, you must add any income from

investments and from incidental or outside operations or

sources. See Pub. 334, Tax Guide for Small Business, for

more information.

Dependents. If you could be claimed as a dependent by

another taxpayer (that is, you meet the dependency tests

in Pub. 501), special filing requirements apply. See Pub.

501.

Decedents

A personal representative of a decedent's estate can be

an executor, administrator, or anyone who is in charge of

the decedent's property.

If you are acting as the personal representative of a

person who died during the year, you may have to file a

final return for that decedent. You also have other duties,

such as notifying the IRS that you are acting as the per-

sonal representative. Form 56, Notice Concerning Fidu-

ciary Relationship, is available for this purpose.

When you file a return for the decedent, either as the

personal representative or as the surviving spouse, you

should enter “DECEASED,” the decedent's name, and the

date of death across the top of the tax return.

If no personal representative has been appointed by

the due date for filing the return, the surviving spouse (on

a joint return) should sign the return and enter in the sig-

nature area “Filing as surviving spouse.”

For more information, see Pub. 559, Survivors, Execu-

tors, and Administrators.

Surviving spouse. If you are the surviving spouse, the

year your spouse died is the last year for which you can

file a joint return with that spouse. After that, if you don't

remarry, you must file as a qualifying widow(er), head of

household, or single. For more information about each of

these filing statuses, see Pub. 501.

If you remarry before the end of the year in which your

spouse died, a final joint return with the deceased spouse

can't be filed. You can, however, file a joint return with

your new spouse. In that case, the filing status of your de-

ceased spouse for his or her final return is married filing

separately.

The level of income that requires you to file an in-

come tax return changes when your filing status

changes (see Table 1-1). Even if you and your de-

ceased spouse weren't required to file a return for several

years, you may have to file a return for tax years after the

year of death. For example, if your filing status changes

from filing jointly in 2020 to single in 2021 because of the

death of your spouse, and your gross income is $17,500

CAUTION

for both years, you must file a return for 2021 even though

you didn't have to file a return for 2020.

Taxable and Nontaxable

Income

Generally, income is taxable unless it is specifically ex-

empt (not taxed) by law. Your taxable income may include

compensation for services, interest, dividends, rents, roy-

alties, income from partnerships, estate or trust income,

gain from sales or exchanges of property, and business

income of all kinds.

Under special provisions of the law, certain items are par-

tially or fully exempt from tax. Provisions that are of spe-

cial interest to older taxpayers are discussed in this chap-

ter.

Compensation for Services

Generally, you must include in gross income everything

you receive in payment for personal services. In addition

to wages, salaries, commissions, fees, and tips, this in-

cludes other forms of compensation such as fringe bene-

fits and stock options.

You don’t need to receive the compensation in cash for

it to be taxable. Payments you receive in the form of

goods or services must generally be included in gross in-

come at their fair market value.

Volunteer work. Don't include in your gross income

amounts you receive for supportive services or reimburse-

ments for out-of-pocket expenses under any of the follow-

ing volunteer programs.

•

Retired Senior Volunteer Program (RSVP).

•

Foster Grandparent Program.

•

Senior Companion Program.

•

Service Corps of Retired Executives (SCORE).

Unemployment compensation. You must include in in-

come all unemployment compensation you or your

spouse (if married filing jointly) received.

More information. See Pub. 525, Taxable and Nontaxa-

ble Income, for more detailed information on specific

types of income.

Page 6 Chapter 2 Taxable and Nontaxable Income

Page 7 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Retirement Plan Distributions

This section summarizes the tax treatment of amounts

you receive from traditional individual retirement arrange-

ments (IRAs), employee pensions or annuities, and disa-

bility pensions or annuities. A traditional IRA is any IRA

that isn't a Roth or SIMPLE IRA. A Roth IRA is an individ-

ual retirement plan that can be either an account or an an-

nuity and features nondeductible contributions and

tax-free distributions. A SIMPLE IRA is a tax-favored re-

tirement plan that certain small employers (including

self-employed individuals) can set up for the benefit of

their employees. More detailed information can be found

in Pub. 590-A, Contributions to Individual Retirement Ar-

rangements; Pub. 590-B, Distributions from Individual Re-

tirement Arrangements; and Pub. 575, Pension and Annu-

ity Income.

Individual Retirement Arrangements

(IRAs)

In general, distributions from a traditional IRA are taxable

in the year you receive them. Exceptions to the general

rule are rollovers, tax-free withdrawals of contributions,

and the return of nondeductible contributions. These are

discussed in Pub. 590-B.

If you made nondeductible contributions to a tra-

ditional IRA, you must file Form 8606, Nondeduc-

tible IRAs. If you don't file Form 8606 with your re-

turn, you may have to pay a $50 penalty. Also, when you

receive distributions from your traditional IRA, the

amounts will be taxed unless you can show, with satisfac-

tory evidence, that nondeductible contributions were

made.

Early distributions. Generally, early distributions are

amounts distributed from your traditional IRA account or

annuity before you are age 59

/2, or amounts you receive

when you cash in retirement bonds before you are age

/2. You must include early distributions of taxable

amounts in your gross income. These taxable amounts

are also subject to an additional 10% tax unless the distri-

bution qualifies for an exception. For purposes of the addi-

tional 10% tax, an IRA is a qualified retirement plan. For

more information about this tax, see Tax on Early Distribu-

tions under Pensions and Annuities, later.

Tax benefits of a coronavirus-related distribution. If

a distribution meets the requirements to be a “coronavi-

rus-related distribution” (defined below), you can elect to

include the taxable amounts as income ratably over 3

years and recontribute the amount of the distribution to an

eligible retirement plan within 3 years. Such distributions

are also not subject to the 10% additional tax on distribu-

tions that generally applies before age 59

/2. For more in-

formation concerning the reporting of the distribution and

the ability to recontribute the distribution, see Form

8915-F and its instructions.

TIP

Coronavirus-related distribution. A coronavirus-rela-

ted distribution is any distribution from an eligible retire-

ment plan that meets the following requirements.

1. The distribution was made after December 31, 2019,

and before December 31, 2020.

2. The distribution was made to an individual that was

diagnosed with either SARS-CoV-2 or coronavirus

disease 2019 (COVID-19) by the Centers for Disease

Control and Prevention (CDCP), or whose spouse or

dependent was diagnosed with SARS-CoV-2 or

COVID-19 by the CDCP.

3. The individual, the individual’s spouse, or a member

of the individual’s household (as defined below) expe-

rienced adverse financial consequences as a result of

being quarantined, furloughed, laid off, or had work

hours reduced or a reduction in pay (or self-employ-

ment income) due to coronavirus, was unable to work

due to lack of childcare resulting from coronavirus,

closed or reduced hours of a business owned or oper-

ated by the individual, or had a job offer rescinded or

start date delayed (including for a spouse or member

of the household) due to coronavirus.

For purposes of applying the factors in (3) above, a

member of the individual’s household is someone who

shares the individual’s principal residence. See Pub. 575

and Form 8915-F and its instructions for more information.

IRA distributions as income. If the distribution meets

the “coronavirus-related distribution” definition, you can

elect to include the taxable amounts as income ratably

over 3 years and recontribute the amount of the distribu-

tion to an eligible retirement plan within 3 years.

After age 59

/2. After you reach age 59

/2, you can re-

ceive distributions from your traditional IRA without having

to pay the 10% additional tax.

Required Distributions

General required minimum distribution rule. If you

are the owner of a traditional IRA, you must generally re-

ceive the entire balance in your IRA or start receiving peri-

odic distributions from your IRA by April 1 of the year fol-

lowing the year in which you reach age 72 (70

/2 for those

individuals who reach age 70

/2 before January 1, 2020).

See When Must You Withdraw Assets? (Required Mini-

mum Distributions) in Pub. 590-B. If distributions from

your traditional IRA(s) are less than the required minimum

distribution for the year, you may have to pay a 50% ex-

cise tax for that year on the amount not distributed as re-

quired. For purposes of the 50% excise tax, an IRA is a

qualified retirement plan. For more information about this

tax, see Tax on Excess Accumulation under Pensions and

Annuities, later. See also Excess Accumulations (Insuffi-

cient Distributions) in Pub. 590-B.

Chapter 2 Taxable and Nontaxable Income Page 7

Page 8 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Pensions and Annuities

Generally, if you didn't pay any part of the cost of your em-

ployee pension or annuity, and your employer didn't with-

hold part of the cost of the contract from your pay while

you worked, the amounts you receive each year are fully

taxable. However, see Insurance Premiums for Retired

Public Safety Officers, later.

If you paid part of the cost of your pension or annuity

plan (see Cost, later), you can exclude part of each annu-

ity payment from income as a recovery of your cost (in-

vestment in the contract). This tax-free part of the pay-

ment is figured when your annuity starts and remains the

same each year, even if the amount of the payment

changes. The rest of each payment is taxable. However,

see Insurance Premiums for Retired Public Safety Offi-

cers, later.

You figure the tax-free part of the payment using one of

the following methods.

•

Simplified Method. You must generally use this

method if your annuity is paid under a qualified plan (a

qualified employee plan, a qualified employee annuity,

or a tax-sheltered annuity plan or contract). You can't

use this method if your annuity is paid under a non-

qualified plan.

•

General Rule. You must use this method if your an-

nuity is paid under a nonqualified plan. You generally

can't use this method if your annuity is paid under a

qualified plan.

Contact your employer or plan administrator to

find out if your pension or annuity is paid under a

qualified or nonqualified plan.

You determine which method to use when you first be-

gin receiving your annuity, and you continue using it each

year that you recover part of your cost.

Exclusion limit. If your annuity starting date is after

1986, the total amount of annuity income you can exclude

over the years as a recovery of the cost can't exceed your

total cost. Any unrecovered cost at your (or the last annui-

tant's) death is allowed as an “other itemized deduction”

on the final return of the decedent.

If you contributed to your pension or annuity and your

annuity starting date is before 1987, you can continue to

take your monthly exclusion for as long as you receive

your annuity. If you chose a joint and survivor annuity,

your survivor can continue to take the survivor's exclusion

figured as of the annuity starting date. The total exclusion

may be more than your cost.

Cost. Before you can figure how much, if any, of your

pension or annuity benefits are taxable, you must deter-

mine your cost in the plan (your investment in the con-

tract). Your total cost in the plan includes everything that

you paid. It also includes amounts your employer contrib-

uted that were taxable to you when paid. However, see

Foreign employment contributions, later.

From this total cost, subtract any refunded premiums,

rebates, dividends, unrepaid loans, or other tax-free

TIP

amounts you received by the later of the annuity starting

date or the date on which you received your first payment.

Annuity starting date. The annuity starting date is the

later of the first day of the first period for which you re-

ceived a payment from the plan or the date on which the

plan's obligations became fixed.

The amount of your contributions to the plan may

be shown in box 9b of any Form 1099-R, Distribu-

tions From Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that

you receive.

Foreign employment contributions. If you worked

abroad, certain amounts your employer paid into your re-

tirement plan that weren't includible in your gross income

may be considered part of your cost. For details, see For-

eign employment contributions in Pub. 575.

Withholding. The payer of your pension, profit-sharing,

stock bonus, annuity, or deferred compensation plan will

withhold income tax on the taxable part of amounts paid to

you. However, you can choose not to have tax withheld on

the payments you receive, unless they are eligible rollover

distributions. (These are distributions that are eligible for

rollover treatment but aren't paid directly to another quali-

fied retirement plan or to a traditional IRA.) See Withhold-

ing Tax and Estimated Tax and Rollovers in Pub. 575 for

more information.

For payments other than eligible rollover distributions,

you can tell the payer how much to withhold by filing a

Form W-4P, Withholding Certificate for Pension or Annuity

Payments.

Simplified Method. Under the Simplified Method, you

figure the tax-free part of each annuity payment by divid-

ing your cost by the total number of anticipated monthly

payments. For an annuity that is payable over the lives of

the annuitants, this number is based on the annuitants'

ages on the annuity starting date and is determined from a

table. For any other annuity, this number is the number of

monthly annuity payments under the contract.

Who must use the Simplified Method. You must

use the Simplified Method if your annuity starting date is

after November 18, 1996, and you meet both of the follow-

ing conditions.

1. You receive your pension or annuity payments from a

qualified plan.

2. On your annuity starting date, at least one of the fol-

lowing conditions applies to you.

a. You are under age 75.

b. You are entitled to less than 5 years of guaranteed

payments.

If your annuity starting date is after July 1, 1986, and

before November 19, 1996, and you previously chose to

use the Simplified Method, you must continue to use it

each year that you recover part of your cost. You could

have chosen to use the Simplified Method if your annuity

TIP

Page 8 Chapter 2 Taxable and Nontaxable Income

Page 9 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

is payable for your life (or the lives of you and your survi-

vor annuitant) and you met both of the conditions listed

above.

Guaranteed payments. Your annuity contract pro-

vides guaranteed payments if a minimum number of pay-

ments or a minimum amount (for example, the amount of

your investment) is payable even if you and any survivor

annuitant don't live to receive the minimum. If the mini-

mum amount is less than the total amount of the pay-

ments you are to receive, barring death, during the first 5

years after payments begin (figured by ignoring any pay-

ment increases), you are entitled to less than 5 years of

guaranteed payments.

Who can't use the Simplified Method. You can't use

the Simplified Method and must use the General Rule if

you receive pension or annuity payments from:

•

A nonqualified plan, such as a private annuity, a pur-

chased commercial annuity, or a nonqualified em-

ployee plan; or

•

A qualified plan if you are age 75 or older on your an-

nuity starting date and you are entitled to at least 5

years of guaranteed payments (defined above).

In addition, you had to use the General Rule for either

circumstance described above if your annuity starting

date is after July 1, 1986, and before November 19, 1996.

You also had to use it for any fixed-period annuity. If you

didn't have to use the General Rule, you could have

chosen to use it. You also had to use the General Rule for

payments from a qualified plan if your annuity starting

date is before July 2, 1986, and you didn't qualify to use

the Three-Year Rule.

If you had to use the General Rule (or chose to use it),

you must continue to use it each year that you recover

your cost.

Unless your annuity starting date was before 1987,

once you have recovered all of your nontaxable invest-

ment, all of each remaining payment you receive is fully

taxable. Once your remaining payments are fully taxable,

there is no longer a concern with the General Rule or Sim-

plified Method.

Complete information on the General Rule, including

the actuarial tables you need, is contained in Pub. 939,

General Rule for Pensions and Annuities.

How to use the Simplified Method. Complete the

Simplified Method Worksheet in the Instructions for Form

1040 or Instructions for Form 1040-NR, or in Pub. 575 to

figure your taxable annuity for 2021. Be sure to keep the

completed worksheet; it will help you figure your taxable

annuity next year.

To complete line 3 of the worksheet, you must deter-

mine the total number of expected monthly payments for

your annuity. How you do this depends on whether the an-

nuity is for a single life, multiple lives, or a fixed period. For

this purpose, treat an annuity that is payable over the life

of an annuitant as payable for that annuitant's life even if

the annuity has a fixed-period feature or also provides a

temporary annuity payable to the annuitant's child under

age 25.

You don't need to complete line 3 of the work-

sheet or make the computation on line 4 if you re-

ceived annuity payments last year and used last

year's worksheet to figure your taxable annuity. Instead,

enter the amount from line 4 of last year's worksheet on

line 4 of this year's worksheet.

Single-life annuity. If your annuity is payable for your

life alone, use Table 1 at the bottom of the worksheet to

determine the total number of expected monthly pay-

ments. Enter on line 3 the number shown for your age on

your annuity starting date. This number will differ depend-

ing on whether your annuity starting date is before No-

vember 19, 1996, or after November 18, 1996.

Multiple-lives annuity. If your annuity is payable for

the lives of more than one annuitant, use Table 2 at the

bottom of the worksheet to determine the total number of

expected monthly payments. Enter on line 3 the number

shown for the annuitants' combined ages on the annuity

starting date. For an annuity payable to you as the primary

annuitant and to more than one survivor annuitant, com-

bine your age and the age of the youngest survivor annui-

tant. For an annuity that has no primary annuitant and is

payable to you and others as survivor annuitants, combine

the ages of the oldest and youngest annuitants. Don't treat

as a survivor annuitant anyone whose entitlement to pay-

ments depends on an event other than the primary annui-

tant's death.

However, if your annuity starting date is before 1998,

don't use Table 2 and don't combine the annuitants' ages.

Instead, you must use Table 1 at the bottom of the work-

sheet and enter on line 3 the number shown for the pri-

mary annuitant's age on the annuity starting date. This

number will differ depending on whether your annuity

starting date is before November 19, 1996, or after No-

vember 18, 1996.

Fixed-period annuities. If your annuity doesn't de-

pend in whole or in part on anyone's life expectancy, the

total number of expected monthly payments to enter on

line 3 of the worksheet is the number of monthly annuity

payments under the contract.

Line 6. The amount on line 6 should include all

amounts that could have been recovered in prior years. If

you didn't recover an amount in a prior year, you may be

able to amend your returns for the affected years.

Be sure to keep a copy of the completed work-

sheet; it will help you figure your taxable annuity in

later years.

Example. Bill Smith, age 65, began receiving retire-

ment benefits in 2021, under a joint and survivor annuity.

Bill's annuity starting date is January 1, 2021. The benefits

are to be paid over the joint lives of Bill and his wife, Ka-

thy, age 65. Bill had contributed $31,000 to a qualified

plan and had received no distributions before the annuity

starting date. Bill is to receive a retirement benefit of

$1,200 a month, and Kathy is to receive a monthly survi-

vor benefit of $600 upon Bill's death.

TIP

Chapter 2 Taxable and Nontaxable Income Page 9

Page 10 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Bill must use the Simplified Method to figure his taxable

annuity because his payments are from a qualified plan

and he is under age 75. See the illustrated Worksheet

2-A, later. You can find a blank version of this worksheet

in Pub. 575. (The references in the illustrated worksheet

are to sections in Pub. 575.)

His annuity is payable over the lives of more than one

annuitant, so Bill uses his and Kathy's combined ages,

130 (65 + 65), and Table 2 at the bottom of the worksheet

in completing line 3 of the worksheet. He finds the line 3

amount to be 310.

Bill's tax-free monthly amount is $100 ($31,000 ÷ 310)

as shown on line 4 of the worksheet. Upon Bill's death, if

Bill hasn't recovered the full $31,000 investment, Kathy

will also exclude $100 from her $600 monthly payment.

The full amount of any annuity payments received after

310 payments must generally be included in gross in-

come.

If Bill and Kathy die before 310 payments are made, an

other itemized deduction will be allowed for the unrecov-

ered cost on the final income tax return of the last to die.

Survivors of retirees. Benefits paid to you as a survivor

under a joint and survivor annuity must be included in your

gross income in the same way the retiree would have in-

cluded them in gross income.

If you receive a survivor annuity because of the death

of a retiree who had reported the annuity under the

Three-Year Rule, include the total received in your in-

come. The retiree's cost has already been recovered tax

free.

If the retiree was reporting the annuity payments under

the General Rule, you must apply the same exclusion per-

centage the retiree used to your initial payment called for

in the contract. The resulting tax-free amount will then re-

main fixed. Any increases in the survivor annuity are fully

taxable.

If the retiree was reporting the annuity payments under

the Simplified Method, the part of each payment that is tax

free is the same as the tax-free amount figured by the re-

tiree at the annuity starting date. See Simplified Method,

earlier.

How to report. If you file Form 1040, 1040-SR, or

1040-NR, report your total annuity on line 5a, and the tax-

able part on line 5b. If your pension or annuity is fully taxa-

ble, enter it on line 5b. Don't make an entry on line 5a.

Example. You are a Form 1040 or 1040-SR filer and

you received monthly payments totaling $1,200 (12

months x $100) during 2021 from a pension plan that was

completely financed by your employer. You had paid no

tax on the payments that your employer made to the plan,

and the payments weren't used to pay for accident,

health, or long-term care insurance premiums (as dis-

cussed later under Insurance Premiums for Retired Public

Safety Officers). The entire $1,200 is taxable. You include

$1,200 only on Form 1040 or 1040-SR, line 5b.

Joint return. If you file a joint return and you and your

spouse each receive one or more pensions or annuities,

report the total of the pensions and annuities on line 5a of

Form 1040, 1040-SR, or 1040-NR. Report the total of the

taxable parts on line 5b of Form 1040, 1040-SR, or

1040-NR.

Form 1099-R. You should receive a Form 1099-R for

your pension or annuity. Form 1099-R shows your pen-

sion or annuity for the year and any income tax withheld.

You should receive a Form W-2, Wage and Tax State-

ment, if you receive distributions from certain nonqualified

plans.

You must attach Forms 1099-R or Forms W-2 to

your 2021 tax return if federal income tax was

withheld. Generally, you should be sent these

forms by January 31, 2022.

Nonperiodic Distributions

If you receive a nonperiodic distribution from your retire-

ment plan, you may be able to exclude all or part of it from

your income as a recovery of your cost. Nonperiodic distri-

butions include cash withdrawals, distributions of current

earnings (dividends) on your investment, and certain

loans. For information on how to figure the taxable amount

of a nonperiodic distribution, see Taxation of Nonperiodic

Payments in Pub. 575.

The taxable part of a nonperiodic distribution may

be subject to an additional 10% tax. See Tax on

Early Distributions, later.

Lump-sum distributions. If you receive a lump-sum dis-

tribution from a qualified employee plan or qualified em-

ployee annuity and the plan participant was born before

January 2, 1936, you may be able to elect optional meth-

ods of figuring the tax on the distribution. The part from

active participation in the plan before 1974 may qualify as

capital gain subject to a 20% tax rate. The part from par-

ticipation after 1973 (and any part from participation be-

fore 1974 that you don't report as capital gain) is ordinary

income. You may be able to use the 10-year tax option

(explained in Pub. 575) to figure tax on the ordinary in-

come part.

Form 1099-R. If you receive a total distribution from a

plan, you should receive a Form 1099-R. If the distribution

qualifies as a lump-sum distribution, box 3 shows the cap-

ital gain part of the distribution. The amount in box 2a,

Taxable amount, minus the amount in box 3, Capital gain,

is the ordinary income part.

More information. For more detailed information on

lump-sum distributions, see Pub. 575 or Form 4972, Tax

on Lump-Sum Distributions.

Tax on Early Distributions

Most distributions you receive from your qualified retire-

ment plan and nonqualified annuity contracts before you

reach age 59

/2 are subject to an additional tax of 10%.

The tax applies to the taxable part of the distribution.

CAUTION

Page 10 Chapter 2 Taxable and Nontaxable Income

Page 11 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Simplified Method Worksheet—IllustratedWorksheet 2-A. Keep for Your Records

1. Enter the total pension or annuity payments received this year. Also, add this amount to the total for

Form 1040, 1040-SR, or 1040-NR, line 5a .................................................... 1.

$ 14,400

2. Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion.*

See Cost, earlier .......................................................................... 2.

31,000

Note. If your annuity starting date was before this year and you completed this worksheet last year,

skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if the

amount of your pension or annuity has changed). Otherwise, go to line 3.

3. Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and

the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2

below ................................................................................... 3.

310

4. Divide line 2 by the number on line 3 .........................................................

100

5. Multiply line 4 by the number of months for which this year's payments were made. If your annuity

starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11.

Otherwise, go to line 6 ..................................................................... 5.

1,200

6. Enter any amount previously recovered tax free in years after 1986. This is the amount shown on

line 10 of your worksheet for last year ........................................................ 6.

7. Subtract line 6 from line 2 ..................................................................

31,000

8. Enter the smaller of line 5 or line 7 ...........................................................

1,200

9. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also,

add this amount to the total for Form 1040, 1040-SR, or 1040-NR, line 5b.

Note. If your Form 1099-R shows a larger taxable amount, use the amount figured on this line

instead. If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety

Officers, earlier, before entering an amount on your tax return ................................... 9.

$ 13,200

10. Was your annuity starting date before 1987?

Yes. STOP. Don't complete the rest of this worksheet.

No. Add lines 6 and 8. This is the amount you have recovered tax free through 2021. You will need

this number if you need to fill out this worksheet next year ...................................... 10.

1,200

11. Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you won't have to complete

this worksheet next year. The payments you receive next year will generally be fully taxable ........ 11.

$ 29,800

* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21,

1996.

Table 1 for Line 3 Above

AND your annuity starting date was—

IF your age on your annuity

starting date was . . .

BEFORE November 19,

1996, enter on line 3 . . .

AFTER November 18,

1996, enter on line 3 . . .

55 or under 300 360

56 – 60 260 310

61 – 65 240 260

66 – 70 170 210

71 or over 120 160

Table 2 for Line 3 Above

IF the annuitants' combined

ages on your annuity starting

date were . . . THEN enter on line 3 . . .

110 or under 410

111 – 120 360

121 – 130 310

131 – 140 260

141 or over 210

Chapter 2 Taxable and Nontaxable Income Page 11

Page 12 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

For this purpose, a qualified retirement plan is:

•

A qualified employee plan (including a qualified cash

or deferred arrangement (CODA) under Internal Reve-

nue Code section 401(k)),

•

A qualified employee annuity plan,

•

A tax-sheltered annuity plan (section 403(b) plan),

•

An eligible state or local government section 457 de-

ferred compensation plan (to the extent that any distri-

bution is attributable to amounts the plan received in a

direct transfer or rollover from one of the other plans

listed here or an IRA), or

•

An IRA.

You may have to pay a 25%, rather than a 10%,

additional tax if you receive distributions from a

SIMPLE IRA before you are age 59

/2. See Pub.

560, Retirement Plans for Small Business (SEP, SIMPLE,

and Qualified Plans).

General exceptions to tax. The early distribution tax

doesn't apply to any distributions that are:

•

Made as part of a series of substantially equal periodic

payments (made at least annually) for your life (or life

expectancy) or the joint lives (or joint life expectan-

cies) of you and your designated beneficiary (if from a

qualified retirement plan, the payments must begin af-

ter separation from service);

•

Made because you are totally and permanently disa-

bled;

•

Made on or after the death of the plan participant or

contract holder.

Reporting tax. If you owe the tax on early distributions,

you must generally attach Form 5329, Additional Taxes on

Qualified Plans (Including IRAs) and Other Tax-Favored

Accounts, to your 2021 income tax return. If you don’t

have to file a 2021 income tax return, you may file Form

5329 by itself. See the Instructions for Form 5329. In addi-

tion, you don’t have to attach Form 5329 to your income

tax return if distribution code 1 (early distribution, no

known exception) is correctly shown in box 7 of all your

Forms 1099-R, and you owe the additional tax on each

Form 1099-R. Instead, multiply the taxable part of the

early distribution by 10% (0.10) and enter the result on

Schedule 2 (Form 1040), line 8. See the instructions for

Schedule 2 (Form 1040), line 8, for more information

about reporting the early distribution tax.

Tax on Excess Accumulation

To make sure that most of your retirement benefits are

paid to you during your lifetime, rather than to your benefi-

ciaries after your death, the payments that you receive

from qualified retirement plans must begin no later than

your required beginning date. Unless the rule for 5% own-

ers applies, this is generally April 1 of the year that follows

the later of:

•

The calendar year in which you reach age 70

/2, or

CAUTION

•

The calendar year in which you retire from employ-

ment with the employer maintaining the plan.

However, your plan may require you to begin to receive

payments by April 1 of the year that follows the year in

which you reach age 70

/2, even if you haven't retired.

For this purpose, a qualified retirement plan includes:

•

A qualified employee plan,

•

A qualified employee annuity plan,

•

An eligible section 457 deferred compensation plan,

•

A tax-sheltered annuity plan (section 403(b) plan) (for

benefits accruing after 1986), or

•

An IRA.

An excess accumulation is the undistributed re-

mainder of the required minimum distribution that

was left in your qualified retirement plan.

5% owners. If you are a 5% owner, see Pub. 575 for

more information on distribution dates.

Amount of tax. If you don't receive the required mini-

mum distribution, you are subject to an additional tax. The

tax equals 50% of the difference between the amount that

must be distributed and the amount that was distributed

during the tax year. You can get this excise tax excused if

you establish that the shortfall in distributions was due to

reasonable error and that you are taking reasonable steps

to remedy the shortfall.

Form 5329. You must file a Form 5329 if you owe a tax

because you didn't receive a minimum required distribu-

tion from your qualified retirement plan.

Additional information. For more detailed information

on the tax on excess accumulation, see Pub. 575.

Insurance Premiums for Retired Public

Safety Officers

If you are an eligible retired public safety officer (law en-

forcement officer, firefighter, chaplain, or member of a res-

cue squad or ambulance crew), you can elect to exclude

from income distributions made from your eligible retire-

ment plan that are used to pay the premiums for accident

or health insurance or long-term care insurance. The pre-

miums can be for coverage for you, your spouse, or de-

pendent(s). The distribution must be made directly from

the plan to the insurance provider. You can exclude from

income the smaller of the amount of the insurance premi-

ums or $3,000. You can only make this election for

amounts that would otherwise be included in your income.

The amount excluded from your income can't be used to

claim a medical expense deduction.

An eligible retirement plan is a governmental plan that

is a:

•

Qualified trust,

•

Section 403(a) plan,

TIP

Page 12 Chapter 2 Taxable and Nontaxable Income

Page 13 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

•

Section 403(b) annuity, or

•

Section 457(b) plan.

If you make this election, reduce the otherwise taxable

amount of your pension or annuity by the amount exclu-

ded. The taxable amount shown in box 2a of any Form

1099-R that you receive doesn't reflect the exclusion. Re-

port your total distributions on Form 1040, 1040-SR, or

1040-NR, line 5a. Report the taxable amount on Form

1040, 1040-SR, or 1040-NR, line 5b. Enter “PSO” next to

the appropriate line on which you report the taxable

amount.

Railroad Retirement Benefits

Benefits paid under the Railroad Retirement Act fall into

two categories. These categories are treated differently

for income tax purposes.

Social security equivalent benefits. The first category

is the amount of tier 1 railroad retirement benefits that

equals the social security benefit that a railroad employee

or beneficiary would have been entitled to receive under

the social security system. This part of the tier 1 benefit is

the social security equivalent benefit (SSEB) and is trea-

ted for tax purposes like social security benefits. (See So-

cial Security and Equivalent Railroad Retirement Benefits,

later.)

Non-social security equivalent benefits. The second

category contains the rest of the tier 1 benefits, called the

non-social security equivalent benefit (NSSEB). It also

contains any tier 2 benefit, vested dual benefit (VDB), and

supplemental annuity benefit. This category of benefits is

treated as an amount received from a qualified employee

plan. This allows for the tax-free (nontaxable) recovery of

employee contributions from the tier 2 benefits and the

NSSEB part of the tier 1 benefits. VDBs and supplemental

annuity benefits are non-contributory pensions and are

fully taxable.

More information. For more information about railroad

retirement benefits, see Pub. 575.

Military Retirement Pay

Military retirement pay based on age or length of service

is taxable and must be included in income as a pension

on Form 1040, 1040-SR, or 1040-NR, lines 5a and 5b.

But, certain military and government disability pensions

that are based on a percentage of disability from active

service in the U.S. Armed Forces of any country generally

aren't taxable. For more information, including information

about veterans' benefits and insurance, see Pub. 525.

Social Security and Equivalent

Railroad Retirement Benefits

This discussion explains the federal income tax rules for

social security benefits and equivalent tier 1 railroad retire-

ment benefits.

Social security benefits include monthly retirement, sur-

vivor, and disability benefits. They don't include supple-

mental security income (SSI) payments, which aren't taxa-

ble.

Equivalent tier 1 railroad retirement benefits are the

part of tier 1 benefits that a railroad employee or benefi-

ciary would have been entitled to receive under the social

security system. They are commonly called the social se-

curity equivalent benefit (SSEB) portion of tier 1 benefits.

If you received these benefits during 2021, you should

have received a Form SSA-1099 or Form RRB-1099

(Form SSA-1042S or Form RRB-1042S if you are a non-

resident alien) showing the amount of the benefits.

Social Security Information

Obtaining social security information. Social security

beneficiaries may quickly and easily obtain various infor-

mation from the SSA's website with a my Social Security

account to:

•

Keep track of your earnings and verify them every

year,

•

Get an estimate of your future benefits if you are still

working,

•

Get a letter with proof of your benefits if you currently

receive them,

•

Change your address,

•

Start or change your direct deposit,

•

Get a replacement Medicare card, and

•

Get a replacement SSA-1099 or SSA-1042S for the

tax season.

For more information and to set up an account, go to

SSA.gov/myaccount.

Are Any of Your Benefits Taxable?

Note. When the term “benefits” is used in this section,

it applies to both social security benefits and the SSEB

portion of tier 1 railroad retirement benefits.

To find out whether any of your benefits may be taxable,

compare the base amount for your filing status (explained

later) with the total of:

•

One-half of your benefits; plus

•

All your other income, including tax-exempt interest.

Chapter 2 Taxable and Nontaxable Income Page 13

Page 14 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

When making this comparison, don't reduce your other

income by any exclusions for:

•

Interest from qualified U.S. savings bonds,

•

Employer-provided adoption benefits,

•

Foreign earned income or foreign housing, or

•

Income earned in American Samoa or Puerto Rico by

bona fide residents.

Figuring total income. To figure the total of one-half of

your benefits plus your other income, use Worksheet 2-B.

If that total amount is more than your base amount, part of

your benefits may be taxable.

If you are married and file a joint return for 2021, you

and your spouse must combine your incomes and your

benefits to figure whether any of your combined benefits

are taxable. Even if your spouse didn't receive any bene-

fits, you must add your spouse's income to yours to figure

whether any of your benefits are taxable.

If the only income you received during 2021 was

your social security or the SSEB portion of tier 1

railroad retirement benefits, your benefits gener-

ally aren't taxable and you probably don't have to file a re-

turn. If you have income in addition to your benefits, you

may have to file a return even if none of your benefits are

taxable.

TIP

Base Amount

Your base amount is:

•

$25,000 if you are single, head of household, or quali-

fying widow(er);

•

$25,000 if you are married filing separately and lived

apart from your spouse for all of 2021;

•

$32,000 if you are married filing jointly; or

•

$0 if you are married filing separately and lived with

your spouse at any time during 2021.

Repayment of Benefits

Any repayment of benefits you made during 2021 must be

subtracted from the gross benefits you received in 2021. It

doesn't matter whether the repayment was for a benefit

you received in 2021 or in an earlier year. If you repaid

more than the gross benefits you received in 2021, see

Repayments More Than Gross Benefits, later.

Your gross benefits are shown in box 3 of Form

SSA-1099 or Form RRB-1099. Your repayments are

shown in box 4. The amount in box 5 shows your net ben-

efits for 2021 (box 3 minus box 4). Use the amount in

box 5 to figure whether any of your benefits are taxable.

Worksheet 2-B. A Quick Way To Check if Your Benefits May

Be Taxable Keep for Your Records

A. Enter the amount from box 5 of all your Forms SSA-1099 and RRB-1099. Include

the full amount of any lump-sum benefit payments received in 2021, for 2021 and

earlier years. (If you received more than one form, combine the amounts from box 5

and enter the total.) ............................................................ A.

Note. If the amount on line A is zero or less, stop here; none of your benefits are

taxable this year.

B. Enter one-half of the amount on line A .............................................

C. Enter your taxable pensions, wages, interest, dividends, and other taxable income ........

D. Enter any tax-exempt interest income (such as interest on municipal bonds) plus any

exclusions from income for:

• Interest from qualified U.S. savings bonds,

• Employer-provided adoption benefits,

• Foreign earned income or foreign housing, or

• Income earned in American Samoa or Puerto Rico by bona fide residents .............. D.

E. Add lines B, C, and D and enter the total ..........................................

F. If you are:

• Married filing jointly, enter $32,000;

• Single, head of household, qualifying widow(er), or married filing separately and you

lived apart from your spouse for all of 2021, enter $25,000; or

• Married filing separately and you lived with your spouse at any time during 2021,

enter -0- ................................................................... F.

G. Is the amount on line F less than or equal to the amount on line E?

No. None of your benefits are taxable this year.

Yes. Some of your benefits may be taxable. To figure how much of your benefits

are taxable, see Which worksheet to use under How Much Is Taxable.

Page 14 Chapter 2 Taxable and Nontaxable Income

Page 15 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Tax Withholding and Estimated Tax

You can choose to have federal income tax withheld from

your social security and/or the SSEB portion of your tier 1

railroad retirement benefits. If you choose to do this, you

must complete a Form W-4V, Voluntary Withholding Re-

quest.

If you don't choose to have income tax withheld, you

may have to request additional withholding from other in-

come, or pay estimated tax during the year. For details,

see Pub. 505, Tax Withholding and Estimated Tax, or the

Instructions for Form 1040-ES, Estimated Tax for Individu-

als.

How Much Is Taxable?

If part of your benefits is taxable, how much is taxable de-

pends on the total amount of your benefits and other in-

come. Generally, the higher that total amount, the greater

the taxable part of your benefits.

Maximum taxable part. The taxable part of your bene-

fits usually can't be more than 50%. However, up to 85%

of your benefits can be taxable if either of the following sit-

uations applies to you.

•

The total of one-half of your benefits and all your other

income is more than $34,000 ($44,000 if you are mar-

ried filing jointly).

•

You are married filing separately and lived with your

spouse at any time during 2021.

If you are a nonresident alien, 85% of your benefits are

taxable. However, this income is exempt under some tax

treaties.

Which worksheet to use. A worksheet to figure your

taxable benefits is in the Instructions for Form 1040. How-

ever, you will need to use a different worksheet(s) if any of

the following situations applies to you.

1. You contributed to a traditional IRA and you or your

spouse were covered by a retirement plan at work. In

this situation, you must use the special worksheets in

Pub. 590-A to figure both your IRA deduction and

your taxable benefits.

2. Situation (1) doesn't apply and you take one or more

of the following exclusions.

•

Interest from qualified U.S. savings bonds (Form

8815, Exclusion of Interests From Series EE and I

U.S. Savings Bonds Issued After 1989).

•

Employer-provided adoption benefits (Form 8839,

Qualified Adoption Expenses).

•

Foreign earned income or housing (Form 2555,

Foreign Earned Income).

•

Income earned in American Samoa (Form 4563,

Exclusion of Income for Bona Fide Residents of

American Samoa) or Puerto Rico by bona fide

residents.

In these situations, you must use Worksheet 1 in

Pub. 915, Social Security and Equivalent Railroad Re-

tirement Benefits, to figure your taxable benefits.

3. You received a lump-sum payment for an earlier year.

In this situation, also complete Worksheet 2 or 3 and

Worksheet 4 in Pub. 915. See Lump-Sum Election,

later.

How To Report Your Benefits

If part of your benefits is taxable, you must use Form

1040, 1040-SR, or 1040-NR.

Reporting on Form 1040 or 1040-SR. Report your net

benefits (the amount in box 5 of your Form SSA-1099 or

Form RRB-1099) on line 6a and the taxable part on

line 6b. If you are married filing separately and you lived

apart from your spouse for all of 2021, also enter “D” to

the right of the word “benefits” on line 6a.

Reporting on Form 1040-NR. Report 85% of the total

amount of your benefits (box 5 of your Form SSA-1042S

or Form RRB-1042S) in the appropriate column of Sched-

ule NEC (Form 1040-NR), line 8.

Benefits not taxable. Report your net benefits (the

amount in box 5 of your Form SSA-1099 or Form

RRB-1099) on Form 1040 or 1040-SR, line 6a. Enter -0-

on Form 1040 or 1040-SR, line 6b. If you are married filing

separately and you lived apart from your spouse for all of

2021, also enter “D” to the right of the word “benefits” on

Form 1040 or 1040-SR, line 6a.

Lump-Sum Election

You must include the taxable part of a lump-sum (retroac-

tive) payment of benefits received in 2021 in your 2021 in-

come, even if the payment includes benefits for an earlier

year.

This type of lump-sum benefit payment shouldn't

be confused with the lump-sum death benefit that

both the SSA and Railroad Retirement Board

(RRB) pay to many of their beneficiaries. No part of the

lump-sum death benefit is subject to tax. For more infor-

mation about the lump-sum death benefit, visit the SSA

website at SSA.gov, and use keyword: “death benefit.”

Generally, you use your 2021 income to figure the taxa-

ble part of the total benefits received in 2021. However,

you may be able to figure the taxable part of a lump-sum

payment for an earlier year separately, using your income

for the earlier year. You can elect this method if it lowers

your taxable benefits. See Pub. 915 for more information.

Repayments More Than Gross

Benefits

In some situations, your Form SSA-1099 or Form

RRB-1099 will show that the total benefits you repaid

(box 4) are more than the gross benefits (box 3) you

TIP

Chapter 2 Taxable and Nontaxable Income Page 15

Page 16 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

received. If this occurred, your net benefits in box 5 will be

a negative figure (a figure in parentheses) and none of

your benefits will be taxable. If you receive more than one

form, a negative figure in box 5 of one form is used to off-

set a positive figure in box 5 of another form for that same

year.

If you have any questions about this negative figure,

contact your local SSA office or your local U.S. RRB field

office.

Joint return. If you and your spouse file a joint return,

and your Form SSA-1099 or RRB-1099 has a negative

figure in box 5 but your spouse's doesn't, subtract the

box 5 amount on your form from the box 5 amount on your

spouse's form. You do this to get your net benefits when

figuring if your combined benefits are taxable.

Repayment of benefits received in an earlier year. If

the total amount shown in box 5 of all of your Forms

SSA-1099 and RRB-1099 is a negative figure, you may be

able to take an itemized deduction for the part of this neg-

ative figure that represents benefits you included in gross

income in an earlier year.

The deduction must be more than $3,000 and you have

to follow some special instructions. See Pub. 915 for

those instructions.

Sickness and Injury Benefits

Generally, you must report as income any amount you re-

ceive for personal injury or sickness through an accident

or health plan that is paid for by your employer. If both you

and your employer pay for the plan, only the amount you

receive that is due to your employer's payments is repor-

ted as income. However, certain payments may not be

taxable to you. Some of these payments are discussed

later in this section. Also, see Military and Government

Disability Pensions and Other Sickness and Injury Bene-

fits in Pub. 525.

Cost paid by you. If you pay the entire cost of an acci-

dent or health plan, don't include any amounts you receive

from the plan for personal injury or sickness as income on

your tax return. If your plan reimbursed you for medical

expenses you deducted in an earlier year, you may have

to include some, or all, of the reimbursement in your in-

come.

Disability Pensions

If you retired on disability, you must include in income any

disability pension you receive under a plan that is paid for

by your employer. You must report your taxable disability

payments as wages on Form 1040 or 1040-SR, line 1, or

on Form 1040-NR, line 1a, until you reach minimum retire-

ment age. Minimum retirement age is generally the age at

which you can first receive a pension or annuity if you

aren't disabled.

If you were age 65 or older by the end of 2021 or

you were retired on permanent and total disability

and received taxable disability income, you may

be able to claim the credit for the elderly or the disabled.

See Credit for the Elderly or the Disabled, later. For more

information on this credit, see Pub. 524, Credit for the Eld-

erly or the Disabled.

Beginning on the day after you reach minimum retire-

ment age, payments you receive are taxable as a pension

or annuity. Report the payments on Form 1040, 1040-SR,

or 1040-NR, lines 5a and 5b. For more information on

pensions and annuities, see Pub. 575.

Note. Don’t include in your income disability payments

you receive for injuries incurred as a direct result of terro-

rist attacks directed against the United States (or its al-

lies), whether outside or within the United States. For

more information, see Terrorist attacks in Pub. 525.

Retirement and profit-sharing plans. If you receive

payments from a retirement or profit-sharing plan that

doesn't provide for disability retirement, don't treat the

payments as a disability pension. The payments must be

reported as a pension or annuity.

Accrued leave payment. If you retire on disability, any

lump-sum payment you receive for accrued annual leave

is a salary payment. The payment isn't a disability pay-

ment. Include it in your income in the tax year you receive

it.

Long-Term Care Insurance Contracts

In most cases, long-term care insurance contracts are

treated as accident and health insurance contracts.

Amounts you receive from them (other than policyholder

dividends or premium refunds) are generally excludable

from income as amounts received for personal injury or

sickness. However, the amount you can exclude may be

limited. Long-term care insurance contracts are discussed

in more detail in Pub. 525.

Workers' Compensation

Amounts you receive as workers' compensation for an oc-

cupational sickness or injury are fully exempt from tax if

they are paid under a workers' compensation act or a stat-

ute in the nature of a workers' compensation act. The ex-

emption also applies to your survivors. The exemption,

however, doesn't apply to retirement plan benefits you re-

ceive based on your age, length of service, or prior contri-

butions to the plan, even if you retired because of an oc-

cupational sickness or injury.

If part of your workers' compensation reduces

your social security or equivalent railroad retire-

ment benefits, that part is considered social se-

curity (or equivalent railroad retirement) benefits and may

be taxable. For a discussion of the taxability of these ben-

efits, see Social Security and Equivalent Railroad Retire-

ment Benefits, earlier.

TIP

CAUTION

Page 16 Chapter 2 Taxable and Nontaxable Income

Page 17 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Return to work. If you return to work after qualifying for

workers' compensation, salary payments you receive for

performing light duties are taxable as wages.

Other Sickness and Injury Benefits

In addition to disability pensions and annuities, you may

receive other payments for sickness or injury.

Federal Employees' Compensation Act (FECA). Pay-

ments received under this Act for personal injury or sick-

ness, including payments to beneficiaries in case of

death, aren't taxable. However, you are taxed on amounts

you receive under this Act as continuation of pay for up to

45 days while a claim is being decided. Report this in-

come on Form 1040 or 1040-SR, line 1, or Form 1040-NR,

line 1a. Also, pay for sick leave while a claim is being pro-

cessed is taxable and must be included in your income as

wages.

If part of the payments you receive under FECA

reduces your social security or equivalent railroad

retirement benefits, that part is considered social

security (or equivalent railroad retirement) benefits and

may be taxable. For a discussion of the taxability of these

benefits, see Social Security and Equivalent Railroad Re-

tirement Benefits, earlier.

Other compensation. Many other amounts you receive

as compensation for sickness or injury aren't taxable.

These include the following amounts.

•

Benefits you receive under an accident or health in-

surance policy on which either you paid the premiums

or your employer paid the premiums but you had to in-

clude the amount of employer-paid premiums in your

income.

•

Disability benefits you receive for loss of income or

earning capacity as a result of injuries under a no-fault

car insurance policy.

•

Compensation you receive for permanent loss or loss

of use of a part or function of your body, for your per-

manent disfigurement, or for such loss or disfigure-

ment suffered by your spouse or dependent(s). This

compensation must be based only on the injury and

not on the period of your absence from work. These

benefits aren't taxable even if your employer pays for

the accident and health plan that provides these bene-

fits.

Life Insurance Proceeds

Life insurance proceeds paid to you because of the death

of the insured person aren't taxable unless the policy was

turned over to you for a price. This is true even if the pro-

ceeds were paid under an accident or health insurance

policy or an endowment contract.

Proceeds not received in installments. If death bene-

fits are paid to you in a lump sum or other than at regular

CAUTION

intervals, include in your income only the benefits that are

more than the amount payable to you at the time of the in-

sured person's death. If the benefit payable at death isn't

specified, include in your income the benefit payments

that are more than the present value of the payments at

the time of death.

Proceeds received in installments. If you receive life

insurance proceeds in installments, you can exclude part

of each installment from your income.

To determine the excluded part, divide the amount held

by the insurance company (generally, the total lump-sum

payable at the death of the insured person) by the number

of installments to be paid. Include anything over this ex-

cluded part in your income as interest.

Installments for life. If, as the beneficiary under an in-

surance contract, you are entitled to receive the proceeds

in installments for the rest of your life without a refund or

period-certain guarantee, figure the excluded part of each

installment by dividing the amount held by the insurance

company by your life expectancy. If there is a refund or

period-certain guarantee, the amount held by the insur-

ance company for this purpose is reduced by the actuarial

value of the guarantee.

Surviving spouse. If your spouse died before Octo-

ber 23, 1986, and insurance proceeds paid to you be-

cause of the death of your spouse are received in install-

ments, you can exclude, in any year, up to $1,000 of the

interest included in the installments. If you remarry, you

can continue to take the exclusion.

Surrender of policy for cash. If you surrender a life in-

surance policy for cash, you must include in income any

proceeds that are more than the cost of the life insurance

policy. In general, your cost (or investment in the contract)

is the total of premiums that you paid for the life insurance

policy, less any refunded premiums, rebates, dividends,

or unrepaid loans that weren't included in your income.

You should receive a Form 1099-R showing the total pro-

ceeds and the taxable part. Report these amounts on

Form 1040, 1040-SR, or 1040-NR, lines 5a and 5b.

Endowment Contract Proceeds

An endowment contract is a policy that pays you a speci-

fied amount of money on a certain date unless you die be-

fore that date, in which case the money is paid to your

designated beneficiary. Endowment proceeds paid in a

lump sum to you at maturity are taxable only if the pro-

ceeds are more than the cost of the policy. To determine

your cost, subtract from the total premiums (or other con-

sideration) paid for the contract any amount that you pre-

viously received under the contract and excluded from

your income. Include in your income the part of the

lump-sum payment that is more than your cost.

Endowment proceeds that you choose to receive in in-

stallments instead of a lump-sum payment at the maturity

of the policy are taxed as an annuity. The tax treatment of

an annuity is explained in Pub. 575. For this treatment to

apply, you must choose to receive the proceeds in

Chapter 2 Taxable and Nontaxable Income Page 17

Page 18 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

installments before receiving any part of the lump sum.

This election must be made within 60 days after the

lump-sum payment first becomes payable to you.

Accelerated Death Benefits

Certain amounts paid as accelerated death benefits under

a life insurance contract or viatical settlement before the

insured's death are generally excluded from income if the

insured is terminally or chronically ill. However, see Ex-

ception, later. For a chronically ill individual, accelerated

death benefits paid on the basis of costs incurred for

qualified long-term care services are fully excludable. Ac-

celerated death benefits paid on a per diem or other peri-

odic basis without regard to the costs are excludable up to

a limit.

In addition, if any portion of a death benefit under a life

insurance contract on the life of a terminally or chronically

ill individual is sold or assigned to a viatical settlement

provider, the amount received is also excluded from in-

come. Generally, a viatical settlement provider is one who

regularly engages in the business of buying or taking as-

signment of life insurance contracts on the lives of insured

individuals who are terminally or chronically ill.

To report taxable accelerated death benefits made on a

per diem or other periodic basis, you must file Form 8853,

Archer MSAs and Long-Term Care Insurance Contracts,

with your return.

Terminally or chronically ill defined. A terminally ill

person is one who has been certified by a physician as

having an illness or physical condition that can reasonably

be expected to result in death within 24 months from the

date of the certification. A chronically ill person is one who

isn't terminally ill but has been certified (within the previ-

ous 12 months) by a licensed health care practitioner as

meeting either of the following conditions.

•

The person is unable to perform (without substantial

help) at least two activities of daily living (eating, toilet-

ing, transferring, bathing, dressing, and continence)

for a period of 90 days or more because of a loss of

functional capacity.

•

The person requires substantial supervision to protect

himself or herself from threats to health and safety due

to severe cognitive impairment.

Exception. The exclusion doesn't apply to any amount

paid to a person other than the insured if that other person

has an insurable interest in the life of the insured because

the insured:

•

Is a director, officer, or employee of the other person;

•

Has a financial interest in the business of the other

person.

Sale of Home

You may be able to exclude from income any gain up to

$250,000 ($500,000 on a joint return in most cases) on

the sale of your main home. Generally, if you can exclude

all of the gain, you don't need to report the sale on your

tax return. You can choose not to take the exclusion by in-

cluding the gain from the sale in your gross income on

your tax return for the year of the sale.

Main home. Usually, your main home is the home you

live in most of the time and can be a:

•

House,

•

Houseboat,

•

Mobile home,

•

Cooperative apartment, or

•

Condominium.

Repaying the first-time homebuyer credit. If you pur-

chased your home in 2008 and claimed the first-time

homebuyer credit, you must continue repaying the credit

with your 2021 tax return. If you are required to repay the

credit because you sold the home or it otherwise ceased

to be your main home in 2021, you must generally repay

the balance of the unpaid credit with your 2021 return.

See the Instructions for Form 5405, Repayment of the

First-Time Homebuyer Credit, for more information and

exceptions.

Maximum Amount of Exclusion

You can generally exclude up to $250,000 of the gain

(other than gain allocated to periods of nonqualified use)

on the sale of your main home if all of the following are

true.

•

You meet the ownership test.

•

You meet the use test.

•

During the 2-year period ending on the date of the

sale, you didn't exclude gain from the sale of another

home.

Joint returns. You may be able to exclude up to

$500,000 of the gain (other than gain allocated to periods

of nonqualified use) on the sale of your main home if you

are married and file a joint return and meet the require-

ments listed in the discussion of the special rules for joint

returns, later, under Married Persons.

Reduced exclusion. Even if you don't meet the require-

ments described above, you can still claim an exclusion in

some cases. Generally, you must have sold the home due

to a change in place of employment, health, or unforeseen

circumstances. The maximum amount you can exclude

will be reduced. See Pub. 523, Selling Your Home, for

more information.

Page 18 Chapter 2 Taxable and Nontaxable Income

Page 19 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Expatriation tax. You can't exclude gain from the sale of

your home if you are subject to the expatriation tax. See

Pub. 519 for more information about the expatriation tax.

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and

use tests. These tests generally require that during the

5-year period ending on the date of the sale, you must

have:

•

Owned the home for at least 2 years (the ownership

test), and

•

Lived in the home as your main home for at least 2

years (the use test). The 2 years of residence can fall

anywhere within the 5-year period, and it doesn't need

to be a single block of time.

Exception to use test for individuals with a disability.

There is an exception to the use test if, during the 5-year

period before the sale of your home:

•

You become physically or mentally unable to care for

yourself, and

•

You owned and lived in your home as your main home

for a total of at least 1 year.

If you qualify for this exception, you are considered to live

in your home during any time that you own the home and

live in a facility (including a nursing home) that is licensed

by a state or political subdivision to care for persons in

your condition.

If you meet this exception to the use test, you still have

to meet the 2-out-of-5-year ownership test to claim the ex-

clusion.

Exception to ownership test for property acquired in

a like-kind exchange. If you acquired your main home in

a like-kind exchange, you must own the home for 5 years

before you qualify for the exclusion. This special 5-year

ownership rule continues to apply to the home even if you

give it to another person. A like-kind exchange is an ex-

change of property held for productive use in a trade or

business or for investment in which no gain or loss is rec-

ognized. See Pub. 523 for more information.

Period of nonqualified use. Generally, the gain from

the sale or exchange of your main home won't qualify for

the exclusion to the extent that the gain is allocated to pe-

riods of nonqualified use. Nonqualified use is any period

after December 31, 2008, during which the property isn't

used as the main home. See Pub. 523 for more informa-

tion.

Married Persons

Generally, if the home you sold counts as your main home

and you are a married person filing separately, the first

$250,000 of gain isn't taxable if all of the following are

true.

•

You meet the ownership test.

•

You meet the use test.

•

During the 2-year period ending on the date of the

sale, you didn’t exclude gain from the sale of another

home.

You may be able to exclude up to $500,000 of the gain

(other than gain allocated to periods of nonqualified use)

on the sale of your main home if you are married and file a

joint return and meet the requirements for joint returns dis-

cussed under Special rules for joint returns next.

Special rules for joint returns. You can exclude up to

$500,000 of the gain on the sale of your main home if all of

the following are true.

•

You are married and file a joint return for the year.

•

Either you or your spouse meets the ownership test.

•

Both you and your spouse meet the use test.

•

During the 2-year period ending on the date of the

sale, neither you nor your spouse exclude gain from

the sale of another home.

Sale of home by surviving spouse. If your spouse died

and you didn't remarry before the date of sale, you are

considered to have owned and lived in the property as

your main home during any period of time when your

spouse owned and lived in it as a main home.

If you meet all of the following requirements, you may

qualify to exclude up to $500,000 of any gain from the sale

or exchange of your main home in 2021.

•

The sale or exchange took place no more than 2 years

after the date of death of your spouse.

•

You haven't remarried.

•

You and your spouse met the use test at the time of

your spouse's death.

•

You or your spouse met the ownership test at the time

of your spouse's death.

•

Neither you nor your spouse excluded gain from the

sale of another home during the last 2 years.

Home transferred from spouse. If your home was

transferred to you by your spouse (or former spouse if the

transfer was incident to divorce), you are considered to

have owned it during any period of time when your spouse

owned it.

Use of home after divorce. You are considered to have

used property as your main home during any period when:

•

You owned it, and

•

Your spouse or former spouse is allowed to live in it

under a divorce or separation instrument and uses it

as his or her main home.

Business Use or Rental of Home

You may be able to exclude gain from the sale of a home

that you have used for business or to produce rental in-

come. However, you must meet the ownership and use

tests. See Pub. 523 for more information.

Chapter 2 Taxable and Nontaxable Income Page 19

Page 20 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Recapturing depreciation. If you used all or part of your

home for business or rental after May 6, 1997, you may

need to pay back (recapture) some or all of the deprecia-

tion you were entitled to take on your property when you

sell it. See Pub. 523 for more information.

Reporting the Sale

Don't report the 2021 sale of your main home on your tax

return unless:

•

You received Form 1099-S, Proceeds From Real Es-

tate Transactions;

•

You have a gain and you don't qualify to exclude all of

it;

•

You have a gain and you choose not to exclude it; or

•

You have a loss from the sale that is deductible.

A loss from the sale of your home, or the personal

part of your home if it was also used for business

or to produce rental income, isn’t deductible.

If any of the above apply, report the sale on Part I or

Part II of Form 8949 as a short-term or long-term transac-

tion, depending on how long you owned the home. If you

used your home for business or to produce rental income,

you may have to use Form 4797, Sales of Business Prop-

erty, to report the sale of the business or rental part. See

Pub. 523 for more information.

Reverse Mortgages

A reverse mortgage is a loan where the lender pays you

(in a lump sum, a monthly advance, a line of credit, or a

combination of all three) while you continue to live in your

home. With a reverse mortgage, you retain title to your

home. Depending on the plan, your reverse mortgage be-

comes due with interest when you move, sell your home,

reach the end of a pre-selected loan period, or die. Be-

cause reverse mortgages are considered loan advances

and not income, the amount you receive isn't taxable. Any

interest (including original interest discount) accrued on a

reverse mortgage isn’t deductible home mortgage inter-

est. See Pub. 936, Home Mortgage Interest Deduction, for

more information.

Other Items

The following items are generally excluded from taxable

income. You shouldn't report them on your return, unless

otherwise indicated as taxable or includible in income.

Gifts and inheritances. In most cases, property you re-

ceive as a gift, bequest, or inheritance isn't included in

your income. However, if property you receive this way

later produces income such as interest, dividends, or

rents, that income is taxable to you. If property is given to

a trust and the income from it is paid, credited, or distrib-

uted to you, that income is also taxable to you. If the gift,

CAUTION

bequest, or inheritance is the income from property, that

income is taxable to you.

Veterans' benefits. Don't include in your income any

veterans' benefits paid under any law, regulation, or ad-

ministrative practice administered by the Department of

Veterans Affairs (VA). See Pub. 525.

Public assistance benefits. Other items that are gener-

ally excluded from taxable income also include the follow-

ing public assistance benefits.

Welfare benefits. Don't include in your income benefit

payments from a public welfare fund based upon need,

such as payments due to blindness. However, you must

include in your income any welfare payments that are

compensation for services or that are obtained fraudu-

lently.

Payments from a state fund for victims of crime.

Don't include in your income payments from a state fund

for victims of crime if the payments are in the nature of

welfare payments. Don't deduct medical expenses that

are reimbursed by such a fund.

Mortgage assistance payments. Payments made

under section 235 of the National Housing Act for mort-

gage assistance aren't included in the homeowner's in-

come. Interest paid for the homeowner under the mort-

gage assistance program can't be deducted.

Also, mortgage payments provided under the Depart-

ment of Housing and Urban Development's Emergency

Homeowners' Loan Program (EHLP), state housing fi-

nance authorities receiving funds allocated from the

Housing Finance Agency Innovation Fund for the Hard-

est-Hit Housing Markets (HFA Hardest Hit Fund), or other

similar state programs receiving funding from the EHLP

are excluded from income. Interest paid for the home-

owner under the EHLP or the HFA Hardest Hit Fund may

be deductible. See Form 1098-MA, Mortgage Assistance

Payments, and its instructions for details.

Payments to reduce cost of winter energy use.

Payments made by a state to qualified people on the ba-

sis of need to reduce their cost of winter energy use aren't

taxable.

Nutrition Program for the Elderly. Food benefits you

receive under the Nutrition Program for the Elderly (now

known as the Nutrition Services Incentive Program) aren't

taxable. If you prepare and serve free meals for the pro-

gram, include in your income as wages the cash pay you

receive, even if you are also eligible for food benefits.

Reemployment Trade Adjustment Assistance

(RTAA). Payments you receive from a state agency un-

der RTAA must be included in your income. The state

must send you Form 1099-G, Certain Government Pay-

ments, to advise you of the amount you should include in

income. The amount should be reported on Schedule 1

(Form 1040), line 8z.

Persons with disabilities. If you have a disability, in-

clude in income compensation you receive for services

you perform unless the compensation is otherwise

Page 20 Chapter 2 Taxable and Nontaxable Income

Page 21 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

excluded. However, don't include in income the value of

goods, services, and cash that you receive, not in return

for your services, but for your training and rehabilitation

because you have a disability. Excludable amounts in-

clude payments for transportation and attendant care,

such as interpreter services for the deaf, reader services

for the blind, and services to help individuals with an intel-

lectual disability do their work.

Medicare. Medicare benefits received under title XVIII of

the Social Security Act aren't includible in the gross in-

come of the individuals for whom they are paid. This in-

cludes basic (Part A (Hospital Insurance Benefits for the

Aged)) and supplementary (Part B (Supplementary Medi-

cal Insurance Benefits for the Aged)).

Social security benefits. The SSA provides benefits

such as old-age benefits, benefits to disabled workers,

and benefits to spouses and dependents. These benefits

may be subject to federal income tax depending on your

filing status and other income. See Social Security and

Equivalent Railroad Retirement Benefits, earlier, and Pub.

915 for more information.

Adjustments to Income

You may be able to subtract amounts from your total in-

come (Form 1040 or 1040-SR, line 9) or total effectively

connected income (Form 1040-NR, line 9) to get your ad-

justed gross income (Form 1040, 1040-SR, or 1040-NR,

line 11). Some adjustments to income follow.

•

Contributions to your IRA (Schedule 1 (Form 1040),

line 20), explained later.

•

Some health insurance costs (Schedule 1 (Form

1040), line 17) if you were self-employed and had a

net profit for the year, or if you received wages in 2021

from an S corporation in which you were a

more-than-2% shareholder. For more details, see

Pub. 535, Business Expenses.

•

Payments to your self-employed SEP, SIMPLE, or

qualified plan (Schedule 1 (Form 1040), line 16). For

more information, including limits on how much you

can deduct, see Pub. 560.

•

Penalties paid on early withdrawal of savings (Sched-

ule 1 (Form 1040), line 18). Form 1099-INT, Interest

Income, or Form 1099-OID, Original Issue Discount,

will show the amount of any penalty you were

charged.

•

Alimony payments (Schedule 1 (Form 1040),

line 19a). Certain conditions may apply for your ali-

mony payment to be deductible from income. For

more information, see Pub. 504, Divorced or Separa-

ted Individuals.

There are other items you can claim as adjustments to in-

come. These adjustments are discussed in your tax return

instructions.

Individual Retirement

Arrangement (IRA)

Contributions and Deductions

This section explains the tax treatment of amounts you

pay into traditional IRAs. A traditional IRA is any IRA that

isn't a Roth or SIMPLE IRA. Roth and SIMPLE IRAs are

defined earlier in the IRA discussion under Retirement

Plan Distributions. For more detailed information, see

Pub. 590-A and Pub. 590-B.

Contributions. An IRA is a personal savings plan that of-

fers you tax advantages to set aside money for your retire-

ment. Two advantages of a traditional IRA are:

•

You may be able to deduct some or all of your contri-

butions to it, depending on your circumstances; and

•

Generally, amounts in your IRA, including earnings

and gains, aren't taxed until distributed.

Although interest earned from your traditional IRA

generally isn't taxed in the year earned, it isn't

tax-exempt interest. Don't report this interest on

your tax return as tax-exempt interest.

General limit. The most that can be contributed for 2021

to your traditional IRA is the smaller of the following

amounts.

•

Your taxable compensation for the year, or

•

$6,000 ($7,000 if you were age 50 or older by the end

of 2021).

Contributions to Kay Bailey Hutchison Spousal

IRAs. In the case of a married couple filing a joint return

for 2021, up to $6,000 ($7,000 for each spouse age 50 or

older by the end of 2021) can be contributed to IRAs on

behalf of each spouse, even if one spouse has little or no

compensation.

For more information on the general limit and the Kay

Bailey Hutchison Spousal IRA limit, see How Much Can

Be Contributed? in Pub. 590-A.

Deductible contribution. Generally, you can deduct

the lesser of the contributions to your traditional IRA for

the year or the general limit (or Kay Bailey Hutchison

Spousal IRA limit, if applicable) just explained. However, if

you or your spouse was covered by an employer retire-

ment plan at any time during the year for which contribu-

tions were made, you may not be able to deduct all of the

contributions. Your deduction may be reduced or elimina-

ted, depending on your filing status and the amount of

CAUTION

Chapter 3 Adjustments to Income Page 21

Page 22 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

your income. For more information, see Limit if Covered

by Employer Plan in Pub. 590-A.

Nondeductible contribution. The difference be-

tween your total permitted contributions and your IRA de-

duction, if any, is your nondeductible contribution. You

must file Form 8606 to report nondeductible contributions

even if you don't have to file a tax return for the year.

Deductions

Most taxpayers have a choice of taking a standard deduc-

tion or itemizing their deductions. You benefit from the

standard deduction if your standard deduction is more

than the total of your allowable itemized deductions. If you

have a choice, you should use the method that gives you

the lower tax.

Standard Deduction

The standard deduction amount depends on your filing

status, whether you are 65 or older or blind, and whether

another taxpayer can claim you as a dependent. Gener-

ally, the standard deduction amounts are adjusted each

year for inflation. In most cases, you can use Worksheet

4-1 to figure your standard deduction amount.

Persons not eligible for the standard deduction. Your

standard deduction is zero and you should itemize any

deductions you have if:

•

You are married and filing a separate return, and your

spouse itemizes deductions;

•

You are filing a tax return for a short tax year because

of a change in your annual accounting period; or

•

You are a nonresident or dual-status alien during the

year. You are considered a dual-status alien if you

were both a nonresident alien and a resident alien

during the year.

If you are a nonresident alien who is married to a U.S.

citizen or resident alien at the end of the year, you can

choose to be treated as a U.S. resident. See Pub. 519. If

you make this choice, you can take the standard deduc-

tion.

Decedent's final return. The amount of the standard de-

duction for a decedent's final tax return is the same as it

would have been had the decedent continued to live.

However, if the decedent wasn't age 65 or older at the

time of death, the higher standard deduction for age can't

be claimed. See Death before age 65, later.

Higher standard deduction for age (65 or older). If

you don't itemize deductions, you are entitled to a higher

standard deduction if you are age 65 or older at the end of

the year. You are considered age 65 on the day before

your 65th birthday. Therefore, you can take a higher

standard deduction for 2021 if you were born before Janu-

ary 2, 1957.

Death before age 65. If you are preparing a return for

someone who died in 2021, consider the taxpayer to be

age 65 or older at the end of 2021 only if he or she was

age 65 or older at the time of death. A taxpayer is consid-

ered age 65 on the day before his or her birthday.

Example. Your spouse was born on February

14,1956, and died on February 13, 2021. Your spouse is

considered age 65 at the time of death. However, if your

spouse died on February 12, 2021, your spouse isn't con-

sidered age 65 at the time of death and isn't age 65 or

older at the end of 2021.

Higher standard deduction for blindness. If you are

blind on the last day of the year and you don't itemize de-

ductions, you are entitled to a higher standard deduction.

Not totally blind. If you aren't totally blind, you must get

a certified statement from an eye doctor (ophthalmologist

or optometrist) that:

•

You can't see better than 20/200 in the better eye with

glasses or contact lenses, or

•

Your field of vision isn't more than 20 degrees.

If your eye condition isn’t likely to improve beyond

these limits, the statement should include this fact. You

must keep the statement in your records.

If your vision can be corrected beyond these limits only

by contact lenses that you can wear only briefly because

of pain, infection, or ulcers, you can take the higher stand-

ard deduction for blindness if you otherwise qualify.

Spouse age 65 or older or blind. You can take the

higher standard deduction if your spouse is age 65 or

older or blind and:

•

You file a joint return, or

•

You file a separate return and your spouse had no

gross income and can’t be claimed as a dependent by

another taxpayer.

You can't claim the higher standard deduction for

an individual other than yourself and your spouse.

Example. This example illustrates how to determine

your standard deduction using Worksheet 4-1.

Bill and Lisa are filing a joint return for 2021. Both are

over age 65. Neither is blind, and neither can be claimed

as a dependent. They don't itemize deductions, so they

use Worksheet 4-1. Because they are married filing jointly,

they enter $25,100 on line 1. They check the “No” box on

line 2, so they also enter $25,100 on line 4. Because they

are both over age 65, they enter $2,600 ($1,300 × 2) on

CAUTION

Page 22 Chapter 4 Deductions

Page 23 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

line 5. They enter $27,700 ($25,100 + $2,600) on line 6,

so their standard deduction is $27,700.

Standard Deduction for Dependents

The standard deduction for an individual who can be

claimed as a dependent on another person's tax return is

generally limited to the greater of:

•

$1,100, or

•

The individual's earned income for the year plus $350

(but not more than the regular standard deduction

amount).

However, the standard deduction may be higher if the

individual is age 65 or older or blind.

If you (or your spouse if you are filing jointly) can be

claimed as a dependent on someone else's return, use

Worksheet 4-1, if applicable, to determine your standard

deduction.

Itemized Deductions

Some individuals should itemize their deductions because

it will save them money. Others should itemize because

they don't qualify for the standard deduction. See the

discussion under Standard Deduction, earlier, to decide if

it would be to your advantage to itemize deductions.

Medical and dental expenses, some taxes, certain in-

terest expenses, charitable contributions, casualty and

theft losses, and certain other expenses may be itemized

as deductions on Schedule A (Form 1040).

You may benefit from itemizing your deductions on

Schedule A (Form 1040) if you:

•

Can't take the standard deduction;

•

Had uninsured medical or dental expenses that are

more than 7.5% of your adjusted gross income (AGI);

•

Paid interest on a loan secured by your home and that

you used to buy, build, or improve your home;

•

Paid real estate or personal property taxes;

•

Paid state and local income taxes or general sales

taxes;

•

Had large uninsured casualty or theft losses due to a

federally declared disaster;

•

Made large contributions to qualified charities (see

Pub. 526, Charitable Contributions); or

•

Have total itemized deductions that are more than the

standard deduction that applies to you.

2021 Standard Deduction WorksheetWorksheet 4-1. Keep for Your Records

Caution. If you are married filing separately and your spouse itemizes deductions, or if you are a dual-status alien, don't complete this worksheet.

If you were born before January 2, 1957, and/or you were blind at the end of 2021, check the correct box(es) below. Put the total

number of boxes checked in box c and go to line 1.

a. You

Born before January 2, 1957 Blind

b. Your spouse

Born before January 2, 1957 Blind

c. Total boxes checked

1. Enter the amount shown below for your filing status.

•

Single or married filing separately—$12,550

•

Married filing jointly or qualifying widow(er)—$25,100

•

Head of household—$18,800

............................ 1.

2. Can you (or your spouse if filing jointly) be claimed as a dependent on someone else's return?

No. Skip line 3; enter the amount from line 1 on line 4.

Yes. Go to line 3.

3. Is your earned income* more than $750?

Yes. Add $350 to your earned income. Enter the total.

............................ 3.

No. Enter $1,100.

4. Enter the smaller of line 1 or line 3 ............................................................

5. If born before January 2, 1957, or blind, multiply the number in box c by $1,350 ($1,700 if single or head of

household). Enter the result here. Otherwise, enter -0- ........................................... 5.

6. Add lines 4 and 5. This is your standard deduction for 2021** ......................................

* Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. It also

includes any taxable scholarship or fellowship grant. Generally, your earned income is the total of the amount(s) you reported on Form 1040 or

1040-SR, line 1, Schedule 1 (Form 1040), lines 3 and 6, minus the amount, if any, on Schedule 1 (Form 1040), line 15.

** You may be able to increase the amount of your standard deduction on line 6 by a loss you suffered related to property in one of

the Presidentially declared disaster areas eligible for that relief. See Pub. 976 for more information.

Chapter 4 Deductions Page 23

Page 24 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

See the Instructions for Schedule A (Form 1040) for

more information.

Medical and Dental Expenses

You can deduct certain medical and dental expenses you

paid for yourself, your spouse, and your dependent(s) if

you itemize your deductions on Schedule A (Form 1040).

Table 4-1 shows some common items that you can or

can't include in figuring your medical expense deduction.

For more information, see the following discussions of se-

lected items, which are presented in alphabetical order. A

more extensive list of items and further details can be

found in Pub. 502, Medical and Dental Expenses.

You can deduct only the amount of your medical

and dental expenses that is more than 7.5% of

your AGI.

What to include. Generally, you can include only the

medical and dental expenses you paid this year, regard-

less of when the services were provided. If you pay medi-

cal expenses by check, the day you mail or deliver the

check is generally the date of payment. If you use a

pay-by-phone or online account to pay your medical ex-

penses, the date reported on the statement of the financial

institution showing when payment was made is the date of

CAUTION

payment. You can include medical expenses you charge

to your credit card in the year the charge is made. It

doesn't matter when you actually pay the amount

charged.

Home Improvements

You can include in medical expenses amounts you pay for

home improvements if their main purpose is medical care

for you, your spouse, or your dependent(s).

Only reasonable costs to accommodate a home to your

disabled condition (or that of your spouse or your depend-

ent(s) who lives with you) are considered medical care.

Additional costs for personal motives, such as for archi-

tectural or aesthetic reasons, aren't medical expenses.

Pub. 502 contains additional information and examples,

including a capital expense worksheet, to assist you in fig-

uring the amount of the capital expense that you can in-

clude in your medical expenses. Also, see Pub. 502 for in-

formation about deductible operating and upkeep

expenses related to such capital expense items, and for

information about improvements, for medical reasons, to

property rented by a person with disabilities.

Table 4-1. Medical and Dental Expenses Checklist

You can include: You can't include:

•

Bandages

•

Capital expenses for

equipment or

improvements to your

home needed for

medical care (see Pub.

502)

•

Certain weight-loss

expenses for obesity

•

Diagnostic devices

•

Expenses of an organ

donor

•

Eye surgery—to promote

the correct function of

the eye

•

Guide dogs or other

service animals aiding

the blind, deaf, and

disabled

•

Hospital services fees

(lab work, therapy,

nursing services,

surgery, etc.)

•

Lead-based paint

removal (see Pub. 502)

•

Long-term care

contracts, qualified (see

Pub. 502)

•

Meals and lodging

provided by a hospital

during medical treatment

•

Medical and hospital

insurance premiums

•

Medical services fees

(from doctors, dentists,

surgeons, specialists,

and other medical

practitioners)

•

Medicare Part D

premiums

•

Oxygen equipment and

oxygen

•

Part of life-care fee paid

to retirement home

designated for medical

care

•

Prescription medicines

(prescribed by a doctor)

and insulin

•

Psychiatric and

psychological treatment

•

Social security tax,

Medicare tax, FUTA tax,

and state employment

tax for worker providing

medical care (see Pub.

502)

•

Special items (artificial

limbs, false teeth,

eyeglasses, contact

lenses, hearing aids,

crutches, wheelchair,

etc.)

•

Special education for

mentally or physically

disabled persons (see

Pub. 502)

•

Stop-smoking programs

•

Transportation for

needed medical care

•

Treatment at a drug or

alcohol center (includes

meals and lodging

provided by the center)

•

Wages for nursing

services (see Pub. 502)

•

Contributions to Archer

MSAs (see Pub. 969)

•

Bottled water

•

Diaper service

•

Expenses for your

general health (even if

following your doctor's

advice) such as:

—Health club dues;

—Household help (even if

recommended by a

doctor);

—Social activities, such

as dancing or swimming

lessons; and

—Trip for general health

improvement

•

Flexible spending

account reimbursements

for medical expenses (if

contributions were on a

pre-tax basis) (see Pub.

502)

•

Funeral, burial, or

cremation expenses

•

Health savings account

payments for medical

expenses (see Pub. 502)

•

Illegal operation or

treatment

•

Life insurance or income

protection policies, or

policies providing

payment for loss of life,

limb, sight, etc.

•

Medical insurance

included in a car

insurance policy

covering all persons

injured in or by your car

•

Medicine you buy

without a prescription

•

Nursing care for a

healthy baby

•

Prescription drugs you

brought in (or ordered

shipped) from another

country, in most cases

(see Pub. 502)

•

Surgery for purely

cosmetic reasons (see

Pub. 502)

•

Toothpaste, toiletries,

cosmetics, etc.

•

Teeth whitening

•

Weight-loss expenses

not for the treatment of

obesity or other disease

Page 24 Chapter 4 Deductions

Page 25 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Household Help

You can't include in medical expenses the cost of house-

hold help, even if such help is recommended by a doctor.

This is a personal expense that isn't deductible. However,

you may be able to include certain expenses paid to a

person providing nursing-type services. For more informa-

tion, see Nursing Services, later. Also, certain mainte-

nance or personal care services provided for qualified

long-term care can be included in medical expenses. For

more information, see Qualified long-term care services

under Long-Term Care, later.

Hospital Services

You can include in medical expenses amounts you pay for

the cost of inpatient care at a hospital or similar institution

if a principal reason for being there is to receive medical

care. This includes amounts paid for meals and lodging.

Also, see Meals and Lodging, later.

Long-Term Care

You can include in medical expenses amounts paid for

qualified long-term care services and certain amounts of

premiums paid for qualified long-term care insurance con-

tracts.

Qualified long-term care services. Qualified long-term

care services are necessary diagnostic, preventive, thera-

peutic, curing, treating, mitigating, rehabilitative services,

and maintenance and personal care services (defined

later) that are:

1. Required by a chronically ill individual, and

2. Provided under a plan of care prescribed by a li-

censed health care practitioner.

Chronically ill individual. An individual is chronically

ill if, within the previous 12 months, a licensed health care

practitioner has certified that the individual meets either of

the following descriptions.

1. He or she is unable to perform at least two activities of

daily living without substantial assistance from an-

other individual for at least 90 days, due to a loss of

functional capacity. Activities of daily living are eating,

toileting, transferring, bathing, dressing, and conti-

nence.

2. He or she requires substantial supervision to be pro-

tected from threats to health and safety due to severe

cognitive impairment.

Maintenance and personal care services. Mainte-

nance or personal care services is care which has as its

primary purpose the providing of a chronically ill individual

with needed assistance with his or her disabilities (includ-

ing protection from threats to health and safety due to se-

vere cognitive impairment).

Qualified long-term care insurance contracts. A

qualified long-term care insurance contract is an insur-

ance contract that provides only coverage of qualified

long-term care services. The contract must:

1. Be guaranteed renewable;

2. Not provide for a cash surrender value or other money

that can be paid, assigned, pledged, or borrowed;

3. Provide that refunds, other than refunds on the death

of the insured or complete surrender or cancellation

of the contract, and dividends under the contract must

be used only to reduce future premiums or increase

future benefits; and

4. Generally not pay or reimburse expenses incurred for

services or items that would be reimbursed under

Medicare, except where Medicare is a secondary

payer, or the contract makes per diem or other peri-

odic payments without regard to expenses.

The amount of qualified long-term care premiums you

can include is limited. You can include the following as

medical expenses on Schedule A (Form 1040).

1. Qualified long-term care premiums up to the following

amounts.

a. Age 40 or under—$450.

b. Age 41 to 50—$850.

c. Age 51 to 60—$1,690.

d. Age 61 to 70—$4,520.

e. Age 71 or over—$5,640.

2. Unreimbursed expenses for qualified long-term care

services.

Note. The limit on premiums is for each person.

Meals and Lodging

You can include in medical expenses the cost of meals

and lodging at a hospital or similar institution if your main

reason for being there is to receive medical care.

You may be able to include in medical expenses the

cost of lodging (but not meals) not provided in a hospital

or similar institution. You can include the cost of such

lodging while away from home if all of the following re-

quirements are met.

•

The lodging is primarily for, and essential to, medical

care.

•

The medical care is provided by a doctor in a licensed

hospital or in a medical care facility related to, or the

equivalent of, a licensed hospital.

•

The lodging isn't lavish or extravagant under the cir-

cumstances.

•

There is no significant element of personal pleasure,

recreation, or vacation in the travel away from home.

The amount you include in medical expenses for lodg-

ing can't be more than $50 per night for each person. You

can include lodging for a person traveling with the person

Chapter 4 Deductions Page 25

Page 26 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

receiving the medical care. For example, if a parent is

traveling with a sick child, up to $100 per night can be in-

cluded as a medical expense for lodging. (Meals aren't in-

cluded.)

Nursing home. You can include in medical expenses the

cost of medical care in a nursing home or a home for the

aged for yourself, your spouse, or your dependent(s). This

includes the cost of meals and lodging in the home if a

main reason for being there is to get medical care.

Don't include the cost of meals and lodging if the rea-

son for being in the home is personal. However, you can

include in medical expenses the part of the cost that is for

medical or nursing care.

Medical Insurance Premiums

You can include in medical expenses insurance premiums

you pay for policies that cover medical care. Policies can

provide payment for:

•

Hospitalization, surgical fees, X-rays;

•

Prescription drugs and insulin;

•

Dental care;

•

Replacement of lost or damaged contact lenses; and

•

Qualified long-term care insurance contracts (subject

to the additional limits included in the discussion on

qualified long-term care insurance contracts under

Long-Term Care, earlier).

If you have a policy that provides payments for other

than medical care, you can include the premiums for the

medical care part of the policy if the charge for the medi-

cal part is reasonable. The cost of the medical portion

must be separately stated in the insurance contract or

given to you in a separate statement.

Medicare Part A. If you are covered under social secur-

ity (or if you are a government employee who paid Medi-

care tax), you are enrolled in Medicare Part A. The payroll

tax paid for Medicare Part A isn't a medical expense. If

you aren't covered under social security (or weren't a gov-

ernment employee who paid Medicare tax), you can enroll

voluntarily in Medicare Part A. In this situation, you can in-

clude the premiums you paid for Medicare Part A as a

medical expense.

Medicare Part B. Medicare Part B is a supplemental

medical insurance. Premiums you pay for Medicare Part B

are a medical expense. Check the information you re-

ceived from the SSA to find out your premium.

Social security beneficiaries may quickly and easily ob-

tain various information from the SSA’s website with a my

Social Security account, including getting a replacement

SSA-1099 or SSA-1042-S. For more information, see Ob-

taining social security information, earlier.

Medicare Part D. Medicare Part D is a voluntary pre-

scription drug insurance program for persons with Medi-

care Part A or Part B. You can include as a medical ex-

pense premiums you pay for Medicare Part D.

Prepaid insurance premiums. Insurance premiums you

pay before you are age 65 for medical care for yourself,

your spouse, or your dependents after you reach age 65

are medical care expenses in the year paid if they are:

•

Payable in equal yearly installments or more often;

and

•

Payable for at least 10 years, or until you reach age 65

(but not for less than 5 years).

Medicines

You can include in medical expenses amounts you pay for

prescribed medicines and drugs. A prescribed drug is one

that requires a prescription by a doctor for its use by an in-

dividual. You can also include amounts you pay for insu-

lin. Except for insulin, you can't include in medical expen-

ses amounts you pay for a drug that isn't prescribed.

Imported medicines and drugs. If you import medi-

cines or drugs from other countries, see Medicines and

Drugs From Other Countries under What Expenses Aren't

Includible in Pub. 502.

Nursing Services

You can include in medical expenses wages and other

amounts you pay for nursing services. The services need

not be performed by a nurse as long as the services are of

a kind generally performed by a nurse. This includes serv-

ices connected with caring for the patient's condition,

such as giving medication or changing dressings, as well

as bathing and grooming the patient. These services can

be provided in your home or another care facility.

Generally, only the amount spent for nursing services is

a medical expense. If the attendant also provides per-

sonal and household services, amounts paid to the at-

tendant must be divided between the time spent perform-

ing household and personal services and the time spent

for nursing services. However, certain maintenance or

personal care services provided for qualified long-term

care can be included in medical expenses. See Mainte-

nance and personal care services under Qualified

long-term care services, earlier. Additionally, certain ex-

penses for household services or for the care of a qualify-

ing individual incurred to allow you to work may qualify for

the child and dependent care credit. See Child and De-

pendent Care Credit, later, and Pub. 503, Child and De-

pendent Care Expenses.

You can also include in medical expenses part of the

amount you pay for that attendant's meals. Divide the food

expense among the household members to find the cost

of the attendant's food. Then, divide that cost in the same

manner as in the preceding paragraph. If you had to pay

additional amounts for household upkeep because of the

attendant, you can include the extra amounts with your

medical expenses. This includes extra rent or utilities you

pay because you moved to a larger apartment to provide

space for the attendant.

Page 26 Chapter 4 Deductions

Page 27 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Employment taxes. You can include as a medical ex-

pense social security tax, FUTA tax, Medicare tax, and

state employment taxes you pay for a nurse, attendant, or

other person who provides medical care. If the attendant

also provides personal and household services, you can

include as a medical expense only the amount of employ-

ment taxes paid for medical services as explained earlier

under Nursing Services. For information on employment

tax responsibilities of household employers, see Pub.

926, Household Employer's Tax Guide.

Transportation

You can include in medical expenses amounts paid for

transportation primarily for, and essential to, medical care.

Car expenses. You can include out-of-pocket expenses,

such as the cost of gas and oil, when you use a car for

medical reasons. You can't include depreciation, insur-

ance, general repair, or maintenance expenses.

If you don't want to use your actual expenses for 2021,

you can use the standard medical mileage rate of 16

cents a mile.

You can also include parking fees and tolls. You can

add these fees and tolls to your medical expenses

whether you use actual expenses or use the standard

mileage rate.

You can also include:

•

Bus, taxi, train, or plane fares or ambulance service;

and

•

Transportation expenses of a nurse or other person

who can give injections, medications, or other treat-

ment required by a patient who is traveling to get med-

ical care and is unable to travel alone.

Don't include transportation expenses if, for

purely personal reasons, you choose to travel to

another city for an operation or other medical care

prescribed by your doctor.

CAUTION

Credits

This chapter briefly discusses the credit for the elderly or

disabled, the child and dependent care credit, and the

earned income credit. You may be able to reduce your

federal income tax by claiming one or more of these cred-

its. You may also be able to increase your refund by

claiming the earned income credit.

Credit for the Elderly or the

Disabled

This section explains who qualifies for the credit for the

elderly or the disabled and how to figure this credit. For

more information, see Pub. 524.

You can take the credit only if you file Form 1040

or 1040-SR. You can't take the credit if you file

Form 1040-NR.

Can You Take the Credit?

You can take the credit for the elderly or the disabled if

you meet both of the following requirements.

•

You are a qualified individual.

•

Your income isn't more than certain limits.

You can use Figure 5-A and Figure 5-B as guides to see if

you are eligible for the credit.

CAUTION

Chapter 5 Credits Page 27

Page 28 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Qualified Individual

You are a qualified individual for this credit if you are a

U.S. citizen or resident alien, and either of the following

applies.

1. You were age 65 or older at the end of 2021.

2. You were under age 65 at the end of 2021 and all

three of the following statements are true.

a. You retired on permanent and total disability (ex-

plained later).

b. You received taxable disability income for 2021.

c. On January 1, 2021, you had not reached manda-

tory retirement age (defined later under Disability

income).

Age 65. You are considered to be age 65 on the

day before your 65th birthday. As a result, if you

were born on January 1, 1957, you are consid-

ered to be age 65 at the end of 2021.

U.S. citizen or resident alien. You must be a U.S. citi-

zen or resident alien (or be treated as a resident alien) to

take the credit. Generally, you can't take the credit if you

were a nonresident alien at any time during the tax year.

TIP

Exceptions. You may be able to take the credit if you

are a nonresident alien who is married to a U.S. citizen or

resident alien at the end of the tax year and you and your

spouse choose to treat you as a U.S. resident alien. If you

make that choice, both you and your spouse are taxed on

your worldwide income.

If you were a nonresident alien at the beginning of the

year and a resident alien at the end of the year, and you

were married to a U.S. citizen or resident alien at the end

of the year, you may be able to choose to be treated as a

U.S. resident alien for the entire year. In that case, you

may be allowed to take the credit.

For information on these choices, see chapter 1 of Pub.

519.

Married persons. Generally, if you are married at the

end of the tax year, you and your spouse must file a joint

return to take the credit. However, if you and your spouse

didn't live in the same household at any time during the

tax year, you can file either a joint return or separate re-

turns and still take the credit.

Head of household. You can file as head of household

and qualify to take the credit even if your spouse lived with

you during the first 6 months of the year if you meet cer-

tain tests. See Pub. 524 and Pub. 501.

Figure 5-A. Are You a Qualified Individual?

Were you married at the end of the tax

year?

Yes

Did you receive taxable disability

benets during the tax year?

You are a qualied

individual and may be able

to take the credit for the

elderly or the disabled

unless your income

exceeds the limits in

Figure 5-B.

Yes

You aren’t a qualied

individual and can’t

take the credit for the

elderly or the disabled.

Yes

If you were a nonresident alien at any time during the tax year and were married to a U.S. citizen or resident alien at the end of the tax year, see U.S. Citizen or

Resident Alien under Qualiﬁed Individual. If you and your spouse choose to treat you as a U.S. resident alien, answer “Yes” to this question.

Mandatory retirement age is the age set by your employer at which you would have been required to retire, had you not become disabled.

START HERE

Did you live with your

spouse at any time

during the tax year?

Are you a U.S. citizen or resident alien?

Yes

Are you ling a joint

return with your spouse?

Yes

Were you 65 or older at the end of

the tax year?

Are you retired on permanent and

total disability?

Did you reach mandatory retirement

age before the tax year?

However, you may be able to claim this credit even if you lived with your spouse during the rst 6 months of the tax year, as long as you qualify to le as head of

household. You qualify to le as head of household if you are considered unmarried and meet certain other conditions. See Pub. 501 for more information.

Page 28 Chapter 5 Credits

Page 29 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Under age 65. If you are under age 65 at the end of

2021, you can qualify for the credit only if you are retired

on permanent and total disability and have taxable disabil-

ity income (discussed later under Disability income). You

are considered to be under age 65 at the end of 2021 if

you were born after January 1, 1957. You are retired on

permanent and total disability if:

•

You were permanently and totally disabled when you

retired, and

•

You retired on disability before the end of the tax year.

Even if you don't retire formally, you may be considered

retired on disability when you have stopped working be-

cause of your disability. If you retired on disability before

1977, and weren't permanently and totally disabled at the

time, you can qualify for the credit if you were permanently

and totally disabled on January 1, 1976, or January 1,

1977.

Permanent and total disability. You are permanently

and totally disabled if you can't engage in any substantial

gainful activity because of your physical or mental condi-

tion. A physician must certify that the condition has lasted

or can be expected to last continuously for 12 months or

more, or that the condition can be expected to result in

death. See Physician's statement, later.

Substantial gainful activity. Substantial gainful activ-

ity is the performance of significant duties over a reasona-

ble period of time while working for pay or profit, or in work

generally done for pay or profit.

Full-time work (or part-time work done at the employ-

er's convenience) in a competitive work situation for at

least the minimum wage conclusively shows that you are

able to engage in substantial gainful activity.

Substantial gainful activity isn't work you do to take

care of yourself or your home. It isn't unpaid work on hob-

bies, institutional therapy or training, school attendance,

clubs, social programs, and similar activities. However,

doing this kind of work may show that you are able to en-

gage in substantial gainful activity.

The fact that you haven't worked or have been unem-

ployed for some time isn't, of itself, conclusive evidence

that you can't engage in substantial gainful activity.

Physician's statement.

If you are under age 65, you

must have your physician complete a statement certifying

that you were permanently and totally disabled on the

date you retired.

You don't have to file this statement with your tax re-

turn, but you must keep it for your records. The Instruc-

tions for Schedule R (Form 1040) include a statement

your physician can complete and that you can keep for

your records.

Veterans. If the VA certifies that you are permanently

and totally disabled, you can substitute VA Form 21-0172,

Certification of Permanent and Total Disability, for the

physician's statement you are required to keep. VA Form

21-0172 must be signed by a person authorized by the VA

to do so. You can get this form from your local VA regional

office.

Physician's statement obtained in earlier year. If

you got a physician's statement in an earlier year and, due

to your continued disability, you were unable to engage in

any substantial gainful activity during 2021, you may not

need to get another physician's statement for 2021. For a

detailed explanation of the conditions you must meet, see

the instructions for Schedule R (Form 1040), Part II. If you

meet the required conditions, you must check the box on

Schedule R (Form 1040), Part II, line 2.

If you checked Schedule R (Form 1040), Part I, box 4,

5, or 6, enter in the space above the box in Part II, line 2,

the first name(s) of the spouse(s) for whom the box is

checked.

Disability income. If you are under age 65, you must

also have taxable disability income to qualify for the credit.

Disability income must meet the following two require-

ments.

•

It must be paid under your employer's accident or

health plan or pension plan.

•

It must be included in your income as wages (or pay-

ments in lieu of wages) for the time you are absent

from work because of permanent and total disability.

Payments that aren't disability income. Any pay-

ment you receive from a plan that doesn't provide for

Figure 5-B. Income Limits

IF your filing status is...

THEN even if you qualify (see Figure 5-A), you CAN’T take the credit if:

Your AGI* is equal to or more than...

OR the total of your nontaxable social

security and other nontaxable pension(s),

annuities, or disability income is equal to or

more than...

single, head of household, or qualifying

widow(er)

$17,500 $5,000

married filing jointly and only one spouse

qualifies in Figure 5-A

$20,000 $5,000

married filing jointly and both spouses qualify in

Figure 5-A

$25,000 $7,500

married filing separately and you lived apart

from your spouse for all of 2021

$12,500 $3,750

* AGI is the amount on Form 1040 or 1040-SR, line 11.

Chapter 5 Credits Page 29

Page 30 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

disability retirement isn't disability income. Any lump-sum

payment for accrued annual leave that you receive when

you retire on disability is a salary payment and isn't disa-

bility income.

For purposes of the credit for the elderly or the disa-

bled, disability income doesn't include amounts you re-

ceive after you reach mandatory retirement age. Manda-

tory retirement age is the age set by your employer at

which you would have had to retire had you not become

disabled.

Figuring the Credit

You can figure the credit yourself or allow the IRS to figure

it for you.

Figuring the credit yourself. If you figure the credit

yourself, fill out the front of Schedule R (Form 1040). Next,

fill out Schedule R (Form 1040), Part III.

Credit figured for you. If you can take the credit and

you want the IRS to figure the credit for you, see Pub. 524

or the Instructions for Schedule R (Form 1040). If you

want the IRS to figure your tax, see chapter 13 of Pub. 17,

Your Federal Income Tax.

Child and Dependent Care

Credit

You may be able to claim this credit if you pay someone to

care for your dependent who is under age 13 or for your

spouse or dependent who isn't able to care for himself or

herself. The credit can be up to 35% of your expenses. To

qualify, you must pay these expenses so you can work or

look for work.

If you claim this credit, you must include on your

return the name and taxpayer identification num-

ber (generally, the social security number) of each

qualifying person for whom care is provided. You must

also show on your return the name, address, and taxpayer

identification number of the person(s) or organization(s)

that provided the care. If the correct information isn't

shown, the credit may be reduced or disallowed.

For more information, see Pub. 503.

Earned Income Credit (EIC)

The EIC is a refundable tax credit for certain people who

work and have earned income under $57,414. The EIC is

available to persons with or without a qualifying child.

Credit has no effect on certain welfare benefits. Any

refund you receive because of the EIC can't be counted

as income when determining whether you or anyone else

is eligible for benefits or assistance, or how much you or

anyone else can receive, under any federal program or

under any state or local program financed in whole or in

CAUTION

part with federal funds. These programs include the fol-

lowing.

•

Medicaid.

•

SSI.

•

Supplemental Nutrition Assistance Program (SNAP)

(food stamps).

•

Low-income housing.

•

Temporary Assistance for Needy Families (TANF).

In addition, when determining eligibility, the refund can't

be counted as a resource for at least 12 months after you

receive it. Check with your local benefit coordinator to find

out if your refund will affect your benefits.

Do You Qualify for the EIC?

Use Table 5-1 as an initial guide to the rules you must

meet in order to qualify for the EIC. The specific rules you

must meet depend on whether you have a qualifying child.

•

If you have a qualifying child, the rules in Parts A, B,

and D apply to you.

•

If you don't have a qualifying child, the rules in Parts A,

C, and D apply to you.

If, after reading all the rules in each part that applies to

you, you think you may qualify for the credit, see Pub. 596,

Earned Income Credit, for more details about the EIC. You

can also find information about the EIC in the instructions

for Form 1040, line 27a.

The sections that follow provide additional information

for some of the rules.

Adjusted gross income (AGI). Under Rule 1, you can't

claim the EIC unless your AGI is less than the applicable

limit shown in Part A of Table 5-1. Your AGI is the amount

on line 11 of Form 1040 or 1040-SR.

Social security number (SSN). Under Rule 2, you (and

your spouse if you are married filing jointly) must have a

valid SSN issued by the SSA. Any qualifying child listed

on Schedule EIC must also have a valid SSN. (See Quali-

fying child, later, if you have a qualifying child.)

If your social security card (or your spouse's if you are

married filing jointly) says “Not valid for employment” and

your SSN was issued so that you (or your spouse) could

get a federally funded benefit, you can't get the EIC. An

example of a federally funded benefit is Medicaid.

Investment income. Under Rule 6, you can't claim the

EIC unless your investment income is $3,650 or less. If

your investment income is more than $3,650, you can't

claim the credit. For most people, investment income is

the total of the following amounts.

•

Taxable interest (line 2b of Form 1040 or 1040-SR).

•

Tax-exempt interest (line 2a of Form 1040 or

1040-SR).

•

Dividend income (line 3b of Form 1040 or 1040-SR).

Page 30 Chapter 5 Credits

Page 31 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

•

Capital gain net income (line 7 of Form 1040 or

1040-SR, if more than zero).

For more information about investment income, see

Pub. 596.

Earned income. Under Rule 7, you must have earned in-

come to claim the EIC. Under Rule 15, you can't claim the

EIC unless your earned income is less than the applicable

limit shown in Table 5-1, Part D. Earned income includes

all of the following types of income.

1. Wages, salaries, tips, and other taxable employee

pay. Employee pay is earned income only if it is taxa-

ble. Nontaxable employee pay, such as certain de-

pendent care benefits and adoption benefits, isn't

earned income. But there is an exception for nontaxa-

ble combat pay, which you can choose to include in

earned income.

2. Net earnings from self-employment.

3. Gross income received as a statutory employee.

Gross income defined. Gross income means all income

you received in the form of money, goods, property, and

services that isn't exempt from tax, including any income

from sources outside the United States or from the sale of

your main home (even if you can exclude part or all of it).

Don't include any social security benefits unless (a) you

are married filing a separate tax return and you lived with

your spouse at any time in 2021, or (b) one-half of your

social security benefits plus your other gross income and

any tax-exempt interest is more than $25,000 ($32,000 if

married filing jointly). If (a) or (b) applies, see the instruc-

tions for Form 1040, lines 6a and 6b, to figure the taxable

part of social security benefits you must include in gross

income.

Self-employed persons. If you are self-employed

and your net earnings are $400 or more, be sure to cor-

rectly fill out Schedule SE (Form 1040), Self-Employment

Tax, and pay the proper amount of self-employment tax. If

you don't, you may not get all the credit to which you are

entitled.

Disability benefits. If you retired on disability, taxable

benefits you receive under your employer's disability re-

tirement plan are considered earned income until you

reach minimum retirement age. Minimum retirement age

is generally the earliest age at which you could have re-

ceived a pension or annuity if you weren't disabled. Begin-

ning on the day after you reach minimum retirement age,

Table 5-1. Earned Income Credit (EIC) in a Nutshell

First, you must meet all the rules in this

column.

Second, you must meet all the rules in

one of these columns, whichever applies.

Third, you must meet

the rule in this column.

Part A.

Rules for Everyone

Part B.

Rules if You Have a

Qualifying Child

Part C.

Rules if You Don't

Have a Qualifying

Child

Part D.

Figuring and Claiming

the EIC

1. Your adjusted gross

income (AGI) must be

less than:

•$51,464 ($57,414 for

married filing jointly) if

you have three or

more qualifying

children who have

valid SSNs,

•$47,915 ($53,865 for

married filing jointly) if

you have two

qualifying children who

have valid SSNs,

•$42,158 ($48,108 for

married filing jointly) if

you have one

qualifying child who

has a valid SSN, or

•$21,430 ($27,380 for

married filing jointly) if

you don't have a

qualifying child who

has a valid SSN.

2. You must have a

valid SSN by the due

date of your 2021

return (including

extensions).

3. You must meet

certain requirements

if you are separated

from your spouse and

not filing a joint return.

4. You must be a U.S.

citizen or resident

alien all year.

(However, see Pub.

596 if your filing

status is married filing

jointly.)

5. You can't file Form

2555 (relating to

foreign earned

income).

6. Your investment

income must be

$10,000 or less.

7. You must have

earned income.

8. Your child must meet

the relationship, age,

residency, and joint

return tests.

9. Your qualifying child

can't be used by more

than one person to

claim the EIC.

10. You can't be a

qualifying child of

another person.

11. You must meet

the age

requirements.

12. You can't be the

dependent of

another person.

13. You can't be a

qualifying child of

another person.

14. You must have

lived in the United

States more than

half of the year.

15. Your earned income

must be less than:

•$51,464 ($57,414 for

married filing jointly) if you

have three or more

qualifying children who

have valid SSNs,

•$47,915 ($53,865 for

married filing jointly) if you

have two qualifying

children who have valid

SSNs,

•$42,158 ($48,108 for

married filing jointly) if you

have one qualifying child

who has a valid SSN, or

•$21,430 ($27,380 for

married filing jointly) if you

don't have a qualifying

child who has a valid SSN.

Chapter 5 Credits Page 31

Page 32 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

payments you receive are taxable as a pension and aren't

considered earned income.

Payments you received from a disability insurance pol-

icy that you paid the premiums for aren't earned income. It

doesn't matter whether you have reached minimum retire-

ment age. If this policy is through your employer, the

amount may be shown in box 12 of your Form W-2 with

code J.

Income that isn't earned income. Examples of items

that aren't earned income under Rule 7 include:

•

Interest and dividends;

•

Pensions and annuities;

•

Social security and railroad retirement benefits (in-

cluding disability benefits—except for payments cov-

ered under Disability benefits, earlier);

•

Alimony and child support;

•

Welfare benefits;

•

Workers' compensation benefits;

•

Unemployment compensation (insurance);

•

Nontaxable foster care payments; and

•

Veterans' benefits, including VA rehabilitation pay-

ments.

Don't include any of these items in your earned income.

Workfare payments. Nontaxable workfare payments

aren't earned income for the EIC. These are cash pay-

ments certain people receive from a state or local agency

that administers public assistance programs funded under

the federal TANF program in return for certain work activi-

ties such as (1) work experience activities (including re-

modeling or repairing public housing) if sufficient private

sector employment isn't available, or (2) community serv-

ice program activities.

Qualifying child. Under Rule 8, your child is a qualifying

child if your child meets four tests. The four tests are:

1. Relationship,

2. Age,

3. Joint return, and

4. Residency.

The four tests are illustrated in Figure 5-C. See Pub.

596 for more information about each test.

Figuring the EIC

To figure the amount of your credit, you have two choices.

1. Have the IRS figure the EIC for you. If you want to do

this, see IRS Will Figure the EIC for You in Pub. 596.

2. Figure the EIC yourself. If you want to do this, see

How To Figure the EIC Yourself in Pub. 596.

Estimated Tax

Estimated tax is a method used to pay tax on income that

isn't subject to withholding. This income includes self-em-

ployment income, interest, dividends, alimony, rent, gains

from the sale of assets, prizes, and awards.

Income tax is generally withheld from pensions and annu-

ity payments you receive. However, if the tax withheld

from your pension (or other) income isn't enough, you may

have to pay estimated tax. If you don't pay enough tax

through withholding, by making estimated tax payments,

or both, you may be charged a penalty.

Who Must Make Estimated Tax

Payments

If you had a tax liability for 2021, you may have to pay esti-

mated tax for 2022. In most cases, you must pay estima-

ted tax for 2022 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2022, af-

ter subtracting your withholding and refundable cred-

its.

2. You expect your withholding and refundable credits to

be less than the smaller of:

•

90% of the tax to be shown on your 2022 tax return, or

•

100% of the tax shown on your 2021 tax return. The

2021 tax return must cover all 12 months.

If all of your income is subject to income tax withholding

and enough tax is withheld, you probably don't need to

make estimated tax payments.

For more information on estimated tax, see Pub. 505.

How To Get Tax Help

If you have questions about a tax issue; need help prepar-

ing your tax return; or want to download free publications,

forms, or instructions, go to IRS.gov to find resources that

can help you right away.

Preparing and filing your tax return. After receiving all

your wage and earnings statements (Forms W-2, W-2G,

1099-R, 1099-MISC, 1099-NEC, etc.); unemployment

compensation statements (by mail or in a digital format) or

other government payment statements (Form 1099-G);

Page 32 Chapter 6 Estimated Tax

Page 33 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

and interest, dividend, and retirement statements from

banks and investment firms (Forms 1099), you have sev-

eral options to choose from to prepare and file your tax re-

turn. You can prepare the tax return yourself, see if you

qualify for free tax preparation, or hire a tax professional to

prepare your return.

For 2021, if you received an Economic Impact

Payment (EIP), refer to your Notice 1444-C, Your

2021 Economic Impact Payment. If you received

Advance Child Tax Credit payments, refer to your Letter

6419.

Free options for tax preparation. Go to IRS.gov to see

your options for preparing and filing your return online or

in your local community, if you qualify, which include the

following.

•

Free File. This program lets you prepare and file your

federal individual income tax return for free using

brand-name tax-preparation-and-filing software or

Free File fillable forms. However, state tax preparation

may not be available through Free File. Go to IRS.gov/

FreeFile to see if you qualify for free online federal tax

CAUTION

preparation, e-filing, and direct deposit or payment op-

tions.

•

VITA. The Volunteer Income Tax Assistance (VITA)

program offers free tax help to people with

low-to-moderate incomes, persons with disabilities,

and limited-English-speaking taxpayers who need

help preparing their own tax returns. Go to IRS.gov/

VITA, download the free IRS2Go app, or call

800-906-9887 for information on free tax return prepa-

ration.

•

TCE. The Tax Counseling for the Elderly (TCE) pro-

gram offers free tax help for all taxpayers, particularly

those who are 60 years of age and older. TCE volun-

teers specialize in answering questions about pen-

sions and retirement-related issues unique to seniors.

Go to IRS.gov/TCE, download the free IRS2Go app,

or call 888-227-7669 for information on free tax return

preparation.

•

MilTax. Members of the U.S. Armed Forces and

qualified veterans may use MilTax, a free tax service

offered by the Department of Defense through Military

OneSource. For more information, go to

MilitaryOneSource (MilitaryOneSource.mil/Tax).

Figure 5-C. Tests for Qualifying Child

A qualifying child for the EIC is a child who is your...

Son, daughter, stepchild, foster child,

or a descendant of any of them (for example, your grandchild)

Brother, sister, half brother, half sister, stepbrother,

stepsister, or a descendant of any of them (for example, your

niece or nephew)

AND

was...

Under age 19 at the end of 2021 and younger than you (or your spouse, if filing jointly)

Under age 24 at the end of 2021, a student, and younger than you (or your spouse, if filing jointly)

Permanently and totally disabled at any time during the year, regardless of age

AND

who...

Isn’t filing a joint return for 2021

(or is filing a joint return for 2021 only to claim a refund of income tax withheld or estimated tax paid)

AND

who...

Lived with you in the United States for more than half

of 2021.

If the child didn't live with you for the

required time, see Pub. 596 for more information.

Chapter 7 How To Get Tax Help Page 33

Page 34 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Also, the IRS offers Free Fillable Forms, which can

be completed online and then filed electronically re-

gardless of income.

Using online tools to help prepare your return. Go to

IRS.gov/Tools for the following.

•

The Earned Income Tax Credit Assistant (IRS.gov/

EITCAssistant) determines if you’re eligible for the

earned income credit (EIC).

•

The Online EIN Application (IRS.gov/EIN) helps you

get an employer identification number (EIN) at no

cost.

•

The Tax Withholding Estimator (IRS.gov/W4app)

makes it easier for everyone to pay the correct amount

of tax during the year. The tool is a convenient, online

way to check and tailor your withholding. It’s more

user-friendly for taxpayers, including retirees and

self-employed individuals. The features include the

following.

▶ Easy to understand language.

▶ The ability to switch between screens, correct

previous entries, and skip screens that don’t apply.

▶ Tips and links to help you determine if you qualify

for tax credits and deductions.

▶ A progress tracker.

▶ A self-employment tax feature.

▶ Automatic calculation of taxable social security

benefits.

•

The First-Time Homebuyer Credit Account Look-up

(IRS.gov/HomeBuyer) tool provides information on

your repayments and account balance.

•

The Sales Tax Deduction Calculator (IRS.gov/

SalesTax) figures the amount you can claim if you

itemize deductions on Schedule A (Form 1040).

Getting answers to your tax questions. On

IRS.gov, you can get up-to-date information on

current events and changes in tax law.

•

IRS.gov/Help: A variety of tools to help you get an-

swers to some of the most common tax questions.

•

IRS.gov/ITA: The Interactive Tax Assistant, a tool that

will ask you questions and, based on your input, pro-

vide answers on a number of tax law topics.

•

IRS.gov/Forms: Find forms, instructions, and publica-

tions. You will find details on 2021 tax changes and

hundreds of interactive links to help you find answers

to your questions.

•

You may also be able to access tax law information in

your electronic filing software.

Need someone to prepare your tax return? There are

various types of tax return preparers, including tax prepar-

ers, enrolled agents, certified public accountants (CPAs),

attorneys, and many others who don’t have professional

credentials. If you choose to have someone prepare your

tax return, choose that preparer wisely. A paid tax pre-

parer is:

•

Primarily responsible for the overall substantive accu-

racy of your return,

•

Required to sign the return, and

•

Required to include their preparer tax identification

number (PTIN).

Although the tax preparer always signs the return, you're

ultimately responsible for providing all the information re-

quired for the preparer to accurately prepare your return.

Anyone paid to prepare tax returns for others should have

a thorough understanding of tax matters. For more infor-

mation on how to choose a tax preparer, go to Tips for

Choosing a Tax Preparer on IRS.gov.

Advance child tax credit payments. From July through

December 2021, advance payments were sent automati-

cally to taxpayers with qualifying children who met certain

criteria. The advance child tax credit payments were early

payments of up to 50% of the estimated child tax credit

that taxpayers may properly claim on their 2021 returns.

Go to IRS.gov/AdvCTC for more information about these

payments and how they can affect your taxes.

Coronavirus. Go to IRS.gov/Coronavirus for links to in-

formation on the impact of the coronavirus, as well as tax

relief available for individuals and families, small and large

businesses, and tax-exempt organizations.

Employers can register to use Business Services On-

line. The Social Security Administration (SSA) offers on-

line service at SSA.gov/employer for fast, free, and secure

online W-2 filing options to CPAs, accountants, enrolled

agents, and individuals who process Form W-2, Wage

and Tax Statement, and Form W-2c, Corrected Wage and

Tax Statement.

IRS social media. Go to IRS.gov/SocialMedia to see the

various social media tools the IRS uses to share the latest

information on tax changes, scam alerts, initiatives, prod-

ucts, and services. At the IRS, privacy and security are

our highest priority. We use these tools to share public in-

formation with you. Don’t post your social security number

(SSN) or other confidential information on social media

sites. Always protect your identity when using any social

networking site.

The following IRS YouTube channels provide short, in-

formative videos on various tax-related topics in English,

Spanish, and ASL.

•

Youtube.com/irsvideos.

•

Youtube.com/irsvideosmultilingua.

•

Youtube.com/irsvideosASL.

Watching IRS videos. The IRS Video portal

(IRSVideos.gov) contains video and audio presentations

for individuals, small businesses, and tax professionals.

Online tax information in other languages. You can

find information on IRS.gov/MyLanguage if English isn’t

your native language.

Page 34 Chapter 7 How To Get Tax Help

Page 35 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Free Over-the-Phone Interpreter (OPI) Service. The

IRS is committed to serving our multilingual customers by

offering OPI services. The OPI service is a federally fun-

ded program and is available at Taxpayer Assistance

Centers (TACs), other IRS offices, and every VITA/TCE

return site. OPI service is accessible in more than 350 lan-

guages.

Accessibility Helpline available for taxpayers with

disabilities. Taxpayers who need information about ac-

cessibility services can call 833-690-0598. The Accessi-

bility Helpline can answer questions related to current and

future accessibility products and services available in al-

ternative media formats (for example, braille, large print,

audio, etc.).

Getting tax forms and publications. Go to IRS.gov/

Forms to view, download, or print all of the forms, instruc-

tions, and publications you may need. Or, you can go to

IRS.gov/OrderForms to place an order.

Getting tax publications and instructions in eBook

format. You can also download and view popular tax

publications and instructions (including the Instructions for

Form 1040) on mobile devices as eBooks at IRS.gov/

eBooks.

Note. IRS eBooks have been tested using Apple's

iBooks for iPad. Our eBooks haven’t been tested on other

dedicated eBook readers, and eBook functionality may

not operate as intended.

Access your online account (individual taxpayers

only). Go to IRS.gov/Account to securely access infor-

mation about your federal tax account.

•

View the amount you owe and a breakdown by tax

year.

•

See payment plan details or apply for a new payment

plan.

•

Make a payment or view 5 years of payment history

and any pending or scheduled payments.

•

Access your tax records, including key data from your

most recent tax return, your EIP amounts, and tran-

scripts.

•

View digital copies of select notices from the IRS.

•

Approve or reject authorization requests from tax pro-

fessionals.

•

View your address on file or manage your communi-

cation preferences.

Tax Pro Account. This tool lets your tax professional

submit an authorization request to access your individual

taxpayer IRS online account. For more information, go to

IRS.gov/TaxProAccount.

Using direct deposit. The fastest way to receive a tax

refund is to file electronically and choose direct deposit,

which securely and electronically transfers your refund di-

rectly into your financial account. Direct deposit also

avoids the possibility that your check could be lost, stolen,

or returned undeliverable to the IRS. Eight in 10 taxpayers

use direct deposit to receive their refunds. If you don’t

have a bank account, go to IRS.gov/DirectDeposit for

more information on where to find a bank or credit union

that can open an account online.

Getting a transcript of your return. The quickest way

to get a copy of your tax transcript is to go to IRS.gov/

Transcripts. Click on either “Get Transcript Online” or “Get

Transcript by Mail” to order a free copy of your transcript.

If you prefer, you can order your transcript by calling

800-908-9946.

Reporting and resolving your tax-related identity

theft issues.

•

Tax-related identity theft happens when someone

steals your personal information to commit tax fraud.

Your taxes can be affected if your SSN is used to file a

fraudulent return or to claim a refund or credit.

•

The IRS doesn’t initiate contact with taxpayers by

email, text messages, telephone calls, or social media

channels to request personal or financial information.

This includes requests for personal identification num-

bers (PINs), passwords, or similar information for

credit cards, banks, or other financial accounts.

•

Go to IRS.gov/IdentityTheft, the IRS Identity Theft

Central webpage, for information on identity theft and

data security protection for taxpayers, tax professio-

nals, and businesses. If your SSN has been lost or

stolen or you suspect you’re a victim of tax-related

identity theft, you can learn what steps you should

take.

•

Get an Identity Protection PIN (IP PIN). IP PINs are

six-digit numbers assigned to taxpayers to help pre-

vent the misuse of their SSNs on fraudulent federal in-

come tax returns. When you have an IP PIN, it pre-

vents someone else from filing a tax return with your

SSN. To learn more, go to IRS.gov/IPPIN.

Ways to check on the status of your refund.

•

Go to IRS.gov/Refunds.

•

Download the official IRS2Go app to your mobile de-

vice to check your refund status.

•

Call the automated refund hotline at 800-829-1954.

Note. The IRS can’t issue refunds before mid-Febru-

ary 2022 for returns that claimed the EIC or the additional

child tax credit (ACTC). This applies to the entire refund,

not just the portion associated with these credits.

Making a tax payment. Go to IRS.gov/Payments for in-

formation on how to make a payment using any of the fol-

lowing options.

•

IRS Direct Pay: Pay your individual tax bill or estima-

ted tax payment directly from your checking or sav-

ings account at no cost to you.

•

Debit or Credit Card: Choose an approved payment

processor to pay online or by phone.

Chapter 7 How To Get Tax Help Page 35

Page 36 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

•

Electronic Funds Withdrawal: Schedule a payment

when filing your federal taxes using tax return prepara-

tion software or through a tax professional.

•

Electronic Federal Tax Payment System: Best option

for businesses. Enrollment is required.

•

Check or Money Order: Mail your payment to the ad-

dress listed on the notice or instructions.

•

Cash: You may be able to pay your taxes with cash at

a participating retail store.

•

Same-Day Wire: You may be able to do same-day

wire from your financial institution. Contact your finan-

cial institution for availability, cost, and time frames.

Note. The IRS uses the latest encryption technology to

ensure that the electronic payments you make online, by

phone, or from a mobile device using the IRS2Go app are

safe and secure. Paying electronically is quick, easy, and

faster than mailing in a check or money order.

What if I can’t pay now? Go to IRS.gov/Payments for

more information about your options.

•

Apply for an online payment agreement (IRS.gov/

OPA) to meet your tax obligation in monthly install-

ments if you can’t pay your taxes in full today. Once

you complete the online process, you will receive im-

mediate notification of whether your agreement has

been approved.

•

Use the Offer in Compromise Pre-Qualifier to see if

you can settle your tax debt for less than the full

amount you owe. For more information on the Offer in

Compromise program, go to IRS.gov/OIC.

Filing an amended return. You can now file Form

1040-X electronically with tax filing software to amend

2019 or 2020 Forms 1040 and 1040-SR. To do so, you

must have e-filed your original 2019 or 2020 return. Amen-

ded returns for all prior years must be mailed. Go to

IRS.gov/Form1040X for information and updates.

Checking the status of your amended return. Go to

IRS.gov/WMAR to track the status of Form 1040-X amen-

ded returns.

Note. It can take up to 3 weeks from the date you filed

your amended return for it to show up in our system, and

processing it can take up to 16 weeks.

Understanding an IRS notice or letter you’ve re-

ceived. Go to IRS.gov/Notices to find additional informa-

tion about responding to an IRS notice or letter.

You can use Schedule LEP, Request for Change in

Language Preference, to state a preference to receive no-

tices, letters, or other written communications from the

IRS in an alternative language, when these are available.

Once your Schedule LEP is processed, the IRS will deter-

mine your translation needs and provide you translations

when available. If you have a disability requiring notices in

an accessible format, see Form 9000.

Contacting your local IRS office. Keep in mind, many

questions can be answered on IRS.gov without visiting an

IRS TAC. Go to IRS.gov/LetUsHelp for the topics people

ask about most. If you still need help, IRS TACs provide

tax help when a tax issue can’t be handled online or by

phone. All TACs now provide service by appointment, so

you’ll know in advance that you can get the service you

need without long wait times. Before you visit, go to

IRS.gov/TACLocator to find the nearest TAC and to check

hours, available services, and appointment options. Or,

on the IRS2Go app, under the Stay Connected tab,

choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate

Service (TAS) Is Here To Help

You

What Is TAS?

TAS is an independent organization within the IRS that

helps taxpayers and protects taxpayer rights. Their job is

to ensure that every taxpayer is treated fairly and that you

know and understand your rights under the Taxpayer Bill

of Rights.

How Can You Learn About Your Taxpayer

Rights?

The Taxpayer Bill of Rights describes 10 basic rights that

all taxpayers have when dealing with the IRS. Go to

TaxpayerAdvocate.IRS.gov to help you understand what

these rights mean to you and how they apply. These are

your rights. Know them. Use them.

What Can TAS Do for You?

TAS can help you resolve problems that you can’t resolve

with the IRS. And their service is free. If you qualify for

their assistance, you will be assigned to one advocate

who will work with you throughout the process and will do

everything possible to resolve your issue. TAS can help

you if:

•

Your problem is causing financial difficulty for you,

your family, or your business;

•

You face (or your business is facing) an immediate

threat of adverse action; or

•

You’ve tried repeatedly to contact the IRS but no one

has responded, or the IRS hasn’t responded by the

date promised.

How Can You Reach TAS?

TAS has offices in every state, the District of Columbia,

and Puerto Rico. Your local advocate’s number is in your

local directory and at TaxpayerAdvocate.IRS.gov/

Contact-Us. You can also call them at 877-777-4778.

Page 36 Chapter 7 How To Get Tax Help

Page 37 of 39 Fileid: … tions/p554/2021/a/xml/cycle04/source 16:14 - 9-Feb-2022

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

How Else Does TAS Help Taxpayers?

TAS works to resolve large-scale problems that affect

many taxpayers. If you know of one of these broad issues,

report it to them at IRS.gov/SAMS.

TAS for Tax Professionals

TAS can provide a variety of information for tax professio-

nals, including tax law updates and guidance, TAS pro-

grams, and ways to let TAS know about systemic prob-

lems you’ve seen in your practice.

Low Income Taxpayer Clinics (LITCs)

LITCs are independent from the IRS. LITCs represent in-

dividuals whose income is below a certain level and need

to resolve tax problems with the IRS, such as audits, ap-

peals, and tax collection disputes. In addition, LITCs can

provide information about taxpayer rights and responsibili-

ties in different languages for individuals who speak Eng-

lish as a second language. Services are offered for free or

a small fee for eligible taxpayers. To find an LITC near

you, go to TaxpayerAdvocate.IRS.gov/about-us/Low-

Income-Taxpayer-Clinics-LITC or see IRS Pub. 4134, Low

Income Taxpayer Clinic List.

To help us develop a more useful index, please let us know if you have ideas for index entries.

See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

Index

Accelerated death benefits 18

Accounting periods:

Change in, standard deduction not

allowed 22

Accrued leave payment:

Disability retirement and 16

Adjusted gross income (AGI) 21

Adjustments to income 21

Age:

Elderly or disabled credit,

requirements for 28

Standard deduction for age 65 or

older 22

American Association of Retired

Persons (AARP) 3

Annuities 8

Assistance (See Tax help)

Base amount, social security

benefits 14

Benefits:

Accident or health 17

Long-term care 16

No-fault insurance 17

Sickness and injury 16

Social security 13

Veterans' 20

Bequests 20

Blind persons:

Standard deduction for 22

Child and dependent care credit 30

Children:

Standard deduction for 23

Chronically ill, defined 18

Chronically ill persons 25

Compensation:

For services 6

Loss or disfigurement 17

Contributions:

Foreign employment 8

Pension or annuity 8

Coronavirus-related distribution 7

Cost, pension or annuity 8

Credits:

Child and dependent care 30

Earned income 30

Elderly or disabled 27

Death benefit, accelerated 18

Decedents 6

Standard deduction 22

Deductions:

Generally 22

Insurance premiums 26

Itemized 23

Meals and lodging 25

Medical and dental 24

Standard 22

Dependents 6

Standard deduction for 23

Disability 29

Credit for, permanently and totally

disabled 27

Income 17, 29

Definition and exceptions, for

elderly and disabled credit 29

Exclusions from, generally 20

Inclusions in, generally 20

Sale of home, for persons

with (See (See Sale of home))

Distributions, retirement plan 7

Drugs (See Medicines)

Dual-status taxpayers:

Standard deduction 22

Early distributions, tax 10

Earned income credit 30

Elderly:

Credit for, persons who are 27

Employment taxes 27

Employment tax withholding 2

Endowment proceeds 17

Estimated tax 15, 32

Excess accumulation, tax on 12

Exclusion, gain on sale of home:

Expatriate tax, effect of 18

Federal Employees:

Compensation Act (FECA)

payments 17

Filing requirements:

Decedents 6

General requirements 5

Surviving spouse 6

Final return for decedent:

Standard deduction 22

First-time homebuyer credit:

Repayment 18

Form:

1099-R 10

5329 12

8853 18

Schedule R 27

W-4P 8

Publication 554 (2021) Page 37