publication 4555 (rev. 2009)software is in the applicable yellow tab section of publication 4012....
TRANSCRIPT
For Use in Preparing Tax Year 2009 Returns
• Volunteer Income Tax Assistance (VITA)
• Tax Counseling for the Elderly (TCE)
Visit www.irs.gov
for the most up-to-date
tax products and
information.
2009 Publication 4555Instructor Guide
Publication 4555 (Rev. 2009) Catalog Number 50820G Department of the Treasury Internal Revenue Service www.irs.govPublication 4555 (Rev. 2009) Catalog Number 50820G Department of the Treasury Internal Revenue Service www.irs.gov
Technical Updates
The mission of the VITA/TCE Program is to provide free basic tax return preparation for eligible taxpayers. Volunteers are the program's most valuable resource. To establish the greatest degree of public trust, Volunteers have a responsibility to provide high quality service and uphold the highest of ethical standards.
As a participant in the VITA/TCE Program, I agree to the following standards of conduct: • I will treat all taxpayers professionally, with courtesy and respect. • I will safeguard the confidentiality of taxpayer information. • I will apply the tax laws equitably and accurately to the best of my ability. • I will only prepare returns for which I am certified. (Basic, Advanced, etc.) • I will exercise reasonable care in the use and protection of equipment and supplies. • I will not solicit business from taxpayers I assist or use the knowledge I have gained about them for any direct or indirect personal benefit for me or any other specific individual. • I will not accept payment from taxpayers for the services I provide. I may receive compensation as an employee of a program sponsor. • I will ensure the returns I prepare, follow the Intake/Interview and Quality Review Processes.
Department of the Treasury – Internal Revenue Service
Volunteer Agreement Standards of Conduct – VITA/TCE Programs
The Tax Software Hints in this product are for sites using TaxWise© software to prepare tax returns. This software is copyrighted and owned by CCH Small Firm Services© (CCH). It is issued to VITA/TCE sites by the IRS. Consult your instructor and/or site coordinator for guidance and access to the software.
Confidentiality Statement
All tax information received from taxpayers in your volunteer capacity is strictly confidential and should not, under any circumstances, be disclosed to unauthorized individuals and should be properly safeguarded.
All persons, scenarios and addresses appearing in this product are fictitious. Any resemblance to persons living or dead is purely coincidental.
Publication 4491-X conveys tax law updates and other revisions to the VITA/TCE training products that occur after the products are published. The publication is normally available for downloading in mid-December via IRS.gov.
Volunteer Tax Alerts are issued during filing season (as needed) and may include additional technical updates. They are accessible via IRS.gov (keyword: Community Network). Also, consult your course instructor and/or site coordinator for guidance.
Product What’s New This Year
Publication 4491, Student Training Guide
or
Publication 4555, Instructor Guide
• Newtaxlawcontentfor2009
• NEW identifiesnewtaxlaws
• Taxsoftwarehintsinthestudentandinstructortrainingguidesprovidebrief,helpfulinformation.SpecificguidanceforenteringdatainthesoftwareisintheapplicableyellowtabsectionofPublication4012.
• IncomefromScheduleK-1s(interest,dividendsandcapitalgains)isanewAdvancedtopicinLesson12.
• Lesson14,SocialSecurityBenefitsisnowaBasiclesson.
• PenaltyforearlywithdrawalofsavingsisnowaBasictopicin Lesson17.
Publication4491-W,ComprehensiveProblems&ExercisesWorkbook
• Problemandpracticeexercisesthatcovernew2009taxlawfromtheAmericanRecoveryandReinvestmentAct(ARRA)andchangestowhat’sinscopethisyear.
• Ifpossible,sitesshouldwaittousethetaxyear2009taxpreparationsoftwarethatwillbeontheSoftwarePracticeLabwhenLink&LearnTaxesisavailableonwww.irs.govinearlyNovember.
Publication4012,VolunteerResourceGuide
• AjobaidforusingForm13614-C,Intake/Interview&QualityReviewSheet
• AdditionalguidanceforenteringdataintheIRS-providedtaxprepara-tionsoftwareisintheyellow(desktop)andblue(on-line)tabs.
Form6744,Test/Retest • ThetestisdesignedforusewiththesoftwarePracticeLabon Link&LearnTaxes.Itisopenbookandcanbetakenandscored onLink&LearnTaxes.
• Priortaxyearformsandsoftwarecannotbeusedtocompletetheworkbookorthetest/retestexercisesduetotheimpactoftheAmericanRecoveryandReinvestmentAct(ARRA)on2009taxpreparation.
Form13222andForm13232,studentandinstruc-torcourseevaluationforms
• Shareyourideasforenhancingthesematerialsbycompletingtheapplicableevaluationform.ReadtheDirector’sletterinthefrontofthebookforadditionalguidance.
SoftwarePracticeLab • ReinforceyourtrainingusingtheIRSorservicee-learningapplicationforvolunteers–Link&LearnTaxes.ThesitealsocontainsanearlyreleaseversionoftheIRS-providedtaxpreparationsoftware.
What’s in my training kit?
ii
Publication 4555 Instructor Guide iii
Introduction
Thisguideandtheproductsinthiskitcontaintheinformationandguidanceyouneedtosatisfyourmutualgoalofprovidingconsistent,yettailoredtraining.Remember,allindi-vidualsincludingIRS-SPECemployeesparticipatingintheVITA/TCEPrograms,whoanswertaxlawquestions,instructtaxlaw,prepareorcorrecttaxreturnsand/orconductqualityreviewsofcompletedtaxreturnsmustbecertified.
Themake-upofVolunteerIncomeTaxAssistance(VITA)andTaxCounselingfortheElderly(TCE)sitesaredifferentfromcitytocity.Becauseofthesedifferences,notallthematerialsinthisguidewillapplytoallsites.Therefore,itisuptoyoutoprovideyourstudentstheguidance,insightsandskillsrequiredtoprovidehighqualitytaxreturnpreparationservices.Inthepagesthatfollow,youwillfind:
• Informationabouttheprocess-basedtrainingapproach
• Answerstofrequentlyaskedinstructorquestions(Topicsinclude:gettingstarted,what’sinthiskit,whichlessonsyoushouldteach,suggestionsformaximizingyourresources,studentengagementandcomprehension,etc.)
• Recommendedpresentationtimesforeachlesson
• Thestudenttext(Publication4491)withinstructornotesinthemargins
What is the training approach?
YoucanteachfiveofthesevenVITA/TCEcoursesusingthisguideandtheotherproductsinyourkit.Eachcourseusestheprocess-basedtraining(PBT)approach.PBTisaperformancebasedtrainingcurricu-lumthatusesaprocessbasedapproachtoteachingthereturnpreparationprocess.Unliketaxlawlecturedriventraining,PBTengagesstudentsinthereturnpreparationprocessandrequiresextensiverole-play-ing,andthecompletionofproblemsandexercisesthatsimulatesituationstheywillencounteratthesite.
Manyvolunteersfindithelpfultotakethecoursesonline,eitherinaclassroomsettingorintheprivacyoftheirhome.Asexplainedonthebackinsidecover,Link&LearnTaxes(L<),theIRS’e-learningapplica-tionforVITA/TCEvolunteers,supportsthePBTtrain-ingapproachandincludesalinktothe“ElectronicTaxSoftwarePracticeLabforVITA/TCEVolunteers.”
ThePracticeLab,whichisprogrammedforTaxYear2009,providesvolunteerstheopportunitytogainprac-ticalexperiencewiththeactualsoftwarethatwillbeusedatmostsiteswhenassistingtaxpayers.StudentsmayfindthePracticeLabhelpfulforcompletingtheirpracticeexercises,comprehen-siveproblems,andtest.
DonotusetheElectronicTaxSoftwarePracticeLabtocompleteactualreturns.
TheprovisionsoftheAmericanRecoveryandReinvestmentAct(ARRA)requirenumeroustaxlawchangesfor2009.Ifsitesusethepriortaxyearformsandsoftwaretocompleteproblemsandexercises,theymustalsoapplytheprioryear’staxlawinordertoexcludeanyARRAmaterial.Ifpossible,sitesshouldwaittousethe2009taxpreparationsoftwarethatwillbeonthePracticeLabwhenL<isavailableon irs.govinearlyNovember.
Publication 4555 Notes to Instructors
Publication 4555 Instructor Guideiv
What resources are available to me?
Therearenumerousresourcesavailabletoyou,includingyourpartner/sponsor,SiteCoordinator,IRS-SPECTaxConsultant,theCommunityNetworkatwww.irs.gov,andPublication1084,VolunteerSiteCoordinator’sHandbook.
Publication1084containsacompleteoverviewofthevolunteerprograms,trainingdeliveryoptionsincludinginformationaboutorderingproducts,testing,andcertificationguidance.ThepublicationisavailablefromyourIRS-SPECTaxConsultantandcanbedownloadedfromwww.irs.gov.
How do I get started?
Thetrainingisbasedonatieredstrategy;eachtierrepresentsacompletecourseofstudy.There are seven courses of study –Basic,Intermediate,Advanced,Military,International,PuertoRico,andForeignStudents.FiveoftheVITA/TCEcoursesarecoveredinyourkitandthestudents’kit.
ThecoursesforPuerto Rico(taxlawspecifictoresidentsofPuertoRicowhomustfileaU.S.incometaxreturn)and Foreign Students(U.S.taxlawspecifictointernationalstudentsandscholars)areavailableonL<only.
Afterobtainingyourcertificationforthecourse(s)youwillteach,werecommendthefollowingprerequisitesforeachinstructor:
1. Allowtwohoursofpreparationtimeforeveryhourofinstruction.
2. ReviewanddiscussLessons1,2,and3asateam.Theselessonscontaininforma-tionthatwillflowthroughoutthecoursematerials,i.e.,eachinstructorwillcovervari-ousaspectsofVanessaFranklin’staxreturn.
3. EstablishanagendaforteachingthecourseusingExhibits1and2,whichcontainasuggestedsylla-busforpresentingtheinformation.
4. Reviewthetest/retestintroductoryinformationtomakesureyouunderstandthecertificationrequire-mentsandprocedures.
What’s in this kit?
Inadditiontothispublication,whichcontainsthestudentguideinitsentiretywithinstruc-tionalguidanceforeachlessoninthemargins,yourkitincludesthefollowingitems.Thepurpose,changes,andotherimportantinformationabouttheproductsareshownonpageiiofthisguide.
1.Publication 4491-W, Comprehensive Problems and Exercises Workbook
2.Publication 4012, Volunteer Resource Guide
3. Form 6744, Test/Retest
4.Administrative products:Form13232,InstructorCourseEvaluation,andDocument12107,PostagePaidLabelformailingevaluationformstotheIRSfreeofcharge.
Instructorsmustbecertifiedinthecourse(s)theyteach.Certificationisrequiredeachyearbeforeinstructionalservicesareprovided.
StudentswillusePublication4012atthetaxpreparationsite.
IfyourstudentsdonottestandcertifyusingL<,youwillalsoneedacopyofthetest/retestanswers(Publication4189)fromyourIRS-SPECTaxConsultant.
Publication 4555 Instructor Guide v
What are other recommended resources?
AsexplainedlaterintheCourseIntroduction,youmayfindthefollowingadditionalresourceshelpful:
1. Publication17,FederalIncomeTaxGuideforIndividuals
2. Statetaxmaterials
3. Form1040Instructionsforpaper/manualreturnpreparationclasses
4. Up-to-datetaxproductsandinformationavailableonwww.irs.gov.
5. Computersand/orInternetaccessforclassesincorporatingthetaxpreparationsoft-wareand/orL<–thisrequiresacomputerforeachstudent(ifpossible)and/oracomputerandprojectorfortheinstructors,tablespacefordocuments,flashdrivesorotherstoragemediaforstudentstosavetheirwork,and(ifpossible)oneassistantperfivestudents
6. L<tograde/scorethetest/retestand/ortosupple-mentclassroomtraining
7. SoftwarePracticeLabviaL<for24/7accesstotheIRSreturnpreparation software
How do I know what to cover?
Instructionforteachingthecoursesisprovidedinthispublication.ThereferencetabinPublication4012containsaScopeofServicechartthatyouwillfindhelpfulforplanningeachlesson.
Beginninginlesson8,theiconsdescribedbelowindicatetopicsthatarerequiredforeachcourse.
TheBasiccoursecoversincomefromwages,interest,dividends,socialsecurityincome,andthemorefrequentlyusedtaxcreditsforindividualsandcouples.SocialsecurityincomeandpenaltyonearlywithdrawalofsavingsarenewthisyearintheBasiccourse.Allvolunteersarerequiredtotakethiscourse.
TheIntermediate coursecoversalltaxtopicsintheBasiccoursepluseducationcred-its,additionalincometopics(suchasalimonyandScheduleC-EZ),itemizeddeduc-tions,adjustmentstoincome,andsomepensionissuesforindividualsandfamilies.
TheAdvancedcoursecoversalltaxtopicsintheBasicandIntermediatecoursesplusadditionalpensiontopics.Alsocoveredarestockandsaleofhomeissuesforindividu-alsandfamilies.
Whenusingproductsfromothersources,includingwww.irs.gov,makesureyouareawareofanycontentandprocessingchangesbeforesharingthemwithyourstudents.
Publication 4555 Instructor Guidevi
TheMilitarycourseisgenerallytheAdvancedcoursewithspecialemphasisontaxissuesthataffectarmedservicespersonnelandtheirfamilies,suchascombatpay,movingexpenses,etc.ThoseassistingorinstructingtheU.S.ArmedForcesoverseasmustalsotaketheInternationalcourse.
The InternationalcourseisgenerallytheAdvancedcoursewithspecialemphasisoninternationaltaxlawfortheU.S.ArmedForcesoverseasandU.S.residentslivingoutsidetheU.S.,especiallythoseservedbyU.S.embassiesandconsulates.
How can I maximize my resources?
Thefollowingpointsmaybehelpfulindeterminingyourtrainingdeliverymethod,presentationtimes,andcertificationmethod(paperorelectronic):
• What knowledge, skills, and abilities(KSAs)doyourstudentspossess?Forinstance,computerandpeopleskills,taxlawknowledge,interviewingskills,foreignlanguage(s),etc.Whatistheirexpertise/proficiencyineachoftheKSAs?
• Wherewillinstructiontakeplace?Doalargenumberofyourstudentshavecomputeraccess?Areyourstudentsinruralareas?Isitmorebeneficialtosupple-mentclassroomtrainingwithself-studytrainingusingL<orPublication4491?CansomeorallthestudentscompletethecourseindependentlyusingPublication4480andL<withadhocface-to-faceorelectronicguidancefromyou?
• Whoistheintendedaudience?Aretheyseniors,retirees,armedforcesperson-nel,low-to-moderatewageearners,students,disabledindividuals,etc.?Areyourstudentsfamiliarwithspecialtaxconcernsofthesetaxpayers?
• Howmuchtimedoyouhaveforclassroominstruc-tionandadministeringandscoringthetest?
Any pointers for keeping the students engaged?
Yes,breathelifeintothecourseyouteachbysharingyourexperiencesandinsights.Itmaytakemoretimebut,byfollowingtheprocessbasedtrainingapproachpresentedinthisguide,yourstudentswillbeengagedandrequirelessassistancewhenpreparingactualreturns.Therole-playsandproblemsandexercisesinPublication4491-Whelpstudents:
• Gainanunderstandingofthetaxpreparationprocessandtheresourcesavailabletothem
• Learntousetheresourcematerialsavailabletothematthesite
Encourage students to use L<toscoretheirtestandobtaintheircertification.
Checkwww.irs.gov(keyword:communitynetwork)fortrain-inginformationandguidancebeginninginNovember.
Publication 4555 Instructor Guide vii
• Completeexercisesandproblemsthatprovidethemanunderstandingoftaxlawandhowtoapplyitinvarioussituations
• Understandtheimportanceoffollowingthereturnpreparationprocessandsafe-guardingtaxpayerinformation
• Completeanaccuratereturn–eachandeverytime
Usingtheintroductoryinformationinthetest/retest,explainthetestingandcertificationprocess.Encouragestudentstobeawareofthetestcontentfortheirlevelofcertification.
How will I know if the students comprehended the information?
PBTisdesignedtoassistyouindeterminingifyourstudentsunderstandhowtoprepareacompleteandaccuratereturn.PBTrequiresextensiveroleplays,classroomdemonstrations,andreturnpreparationpractice.Groupdynamicsaregoodindicators–bodylanguage,listeningskills,etc.Youcanalsoobservethestudents’performanceastheycompletethecomprehensiveproblemfortheircourse.
Remember,youcanreinforceyourclassroomtrainingandprovidefurtherdevelopmentbyencouragingstudentstouseL<duringtheirfreetime.Ultimately,eachstudent’sachievementonthetestandtheresultsofqualityreviewsofthereturnstheypreparedwilldetermineiftheyunderstoodtheinformation.
How do I suggest changes to the course materials?
Wewelcomeyourcommentsandsuggestionsforenhancingyourteachingexperience.YourtrainingkitcontainsForm13232forsubmittingyourcomments;studentshaveForm13222intheirtrainingkitforthesamepurpose.
Forwardallcompletedformsusingthepostage-paidbusinessreplylabel(Document12107)inyourkit.Pleasebesuretofollowtheseinstructions:
• Entertheapplicablecity,state,andZIPcode
• Darkenthecirclebubbles;donotplaceanXorcheckmarkinthebubbles
• Donotfold,staple,orphotocopytheforms
• Mailformsinanenvelope9x12inchesorlarger
• Mailthecompletedevaluation(s)attheconclusionofeachcourse
ThesurveyresultsaresharedwithlocalIRS-SPECtaxconsultantsinearlytolateJune.
Donotusethemailinglabelinyourkittomailtaxdocuments;onlymailcourseevaluationsusingthemailinglabel.
Publication 4555 Instructor Guideviii
Exhibit 1: Content and Courses
Lesson1–CourseIntroduction Allcourses
Lesson2–ScreeningandInterviewing Allcourses
Lesson3–FilingBasics Allcourses
Lesson4–FilingStatus Allcourses
Lesson5–PersonalExemptions Allcourses
Lesson6–DependencyExemptions Allcourses
Lesson7–UniqueFilingStatusandExemption Allcourses Situations
Lessons8through16 SeeLesson8forachartof Incometopicsbylesson
Lesson17–AdjustmentstoIncome Allcourses(BasicshouldonlycoverPenaltyforEarlyWithdrawalofSavings)
Lesson18–MilitaryMovingExpenses Military
Lesson19–StandardDeductionandTaxComputation Allcourses
Lesson20–ItemizedDeductions Allcourses(exceptBasic)
Lesson21–MilitaryEmployeeBusinessExpenses Military
Lesson22–BusinessTravelExpenses International
Lesson23–CreditforChildandDependent Allcourses CareExpenses
Lesson24–EducationCredits Allcourses(exceptBasic)
Lesson25–ForeignTaxCredit Allcourses(exceptBasic)
Lesson26–ChildTaxCredit Allcourses
Lesson27–MiscellaneousCredits Allcourses(BasicshouldonlycoverElderlyorDisabledandQualifiedRetirementSavings)
Lesson28–OtherTaxes Allcourses
Lesson29–Payments Allcourses
Lesson30–EarnedIncomeCredit(EIC) Allcourses
Lesson31–Refund/AmountofTaxOwed Allcourses
Lesson32–QualityReviewoftheTaxReturn Allcourses
Lesson33–ConcludingtheInterview Allcourses
Lesson34–MilitaryFinishingandFilingtheReturn Military
Lesson35–AmendedReturns Allcourses
Publication 4555 Instructor Guide ix
Exhibit 2 – Curriculum Recommended Presentation Times
Lesson Content Estimated Minutes*Welcome&Introductions 15
1 Course Introduction 15-302 ScreeningandInterviewing 153 FilingBasics 15-454 FilingStatus 605 PersonalExemptions 306 DependencyExemptions 307 UniqueFilingStatusandExemptionSituations 308 Income-Wages,Interest,Etc. 90-1659 Income-BusinessIncomeorLoss 6010 Income-CapitalGainsorLoss 9011 Income-RetirementIncome 10512 Income-RentalandScheduleK-1s 6013 Income-UnemploymentCompensation 15-3014 Income-SocialSecurityBenefits 3015 Income-OtherIncome 15-3016 MilitaryIncome 6017 AdjustmentstoIncome 15-7518 MilitaryMovingExpenses 45-7519 StandardDeductionandTaxComputation 15-4520 ItemizedDeductions 4521 MilitaryEmployeeBusinessExpenses 3022 BusinessTravelExpenses 3023 CreditforChildandDependentCareExpenses 3024 Education Credits 3025 ForeignTaxCredit 6026 ChildTaxCredit 3027 Miscellaneous Credits 3028 OtherTaxes 1529 Payments 3030 EarnedIncomeCredit(EIC) 60-12031 Refund/AmountofTaxOwed 3032 QualityReviewoftheTaxReturn 6033 ConcludingtheInterview 3034 MilitaryFinishingandFilingtheReturn 6035 AmendedReturns 30
TestingGuidelines(UsingForm6744) 15ReviewTest 240Closing&EvaluationForm13222 15
*Estimatedtimedoesnotincludebreaksorlunch
Publication 4555 Instructor Guidex
Notes
Table of Contents a
Table of Contents
What’s New for 2009 ImportantTaxLawChangesfor2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Lesson 1: Course Introduction Welcome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1Whyisthispublicationsolarge?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2WhathappensafterIcompletethiscourse?. . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4WhattypesofreturnscanIprepare?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-5WhataremyresponsibilitiesasaVITA/TCEprogramvolunteer? . . . . . . . . . . 1-5Arethereothermaterialsavailabletoassistme? . . . . . . . . . . . . . . . . . . . . . . 1-7Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-8
Lesson 2: Screening and InterviewingIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-1Whatisincludedintheintakeandinterviewprocess?. . . . . . . . . . . . . . . . . . . 2-1WheredoIfindthetoolstoassistmewiththisprocess?. . . . . . . . . . . . . . . . . 2-2HowdoIusethetools?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-2HowdoIwelcomeandscreenthetaxpayer?. . . . . . . . . . . . . . . . . . . . . . . . . . 2-4HowdoIconductaprobinginterview?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6WhattechniquescanIusetoassistmewiththeinterview?. . . . . . . . . . . . . . . 2-8HowcanIovercomecommunicationbarriers?. . . . . . . . . . . . . . . . . . . . . . . . 2-10Whathappensnext?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2-11Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2-11
Lesson 3: Filing BasicsIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1Whomustfile?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1Whoshouldfile?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4HowdoIverifytaxpayeridentity?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5HowdoIchoosetheappropriatetaxreturnform?. . . . . . . . . . . . . . . . . . . . . . 3-8HowdoIfileareturn?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-10WhatdoItelltaxpayersaboutrecordkeeping?. . . . . . . . . . . . . . . . . . . . . . . . 3-10HowdoIanswertaxpayers’administrativequestions? . . . . . . . . . . . . . . . . . .3-11WhatpotentialpitfallsshouldIkeepinmind?. . . . . . . . . . . . . . . . . . . . . . . . . 3-12Whichformsanddocumentsneedtobefiled?. . . . . . . . . . . . . . . . . . . . . . . . 3-12Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-13Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-13
Lesson 4: Filing StatusIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1Whatarethefivefilingstatuses? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1Whataretherequirementsforeachfilingstatus? . . . . . . . . . . . . . . . . . . . . . . 4-2HowdoIdeterminethecorrectfilingstatus?. . . . . . . . . . . . . . . . . . . . . . . . . . 4-8Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-10Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-10
Table of Contentsb
Lesson 5: Personal Exemptions Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-1Whatareexemptions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-1HowdoIusetheinterviewtechniquestodeterminehowmany personalexemptionsataxpayercanclaim?. . . . . . . . . . . . . . . . . . . . . . . . . . 5-3HowdoIenterthepersonalexemptions?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-3TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . . 5-3NEW Exemptionforindividual(s)displacedbyaMidwesterndisaster. . . . . . 5-4Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-5Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-5
Lesson 6: Dependency ExemptionsIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1Whoaredependents?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1Whomaybeclaimedasadependent?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2HowdoIapplythedependencytests?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2Whatarethetestsforqualifyingchildren?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-3Canthechildbeaqualifyingchildofmorethanoneperson? . . . . . . . . . . . . . 6-5Whatarethetestsforqualifyingrelatives?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-6Whatarethenewrulesforchildrenofdivorcedornevermarriedparents?. . .6-11HowdoIentertheexemptionsinthetaxsoftware? . . . . . . . . . . . . . . . . . . . 6-12TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 6-12Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-13Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-13
Lesson 7: Unique Filing Status and Exemption Situations Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-1HowdoIapplytaxlawtononresidentaliens?. . . . . . . . . . . . . . . . . . . . . . . . . 7-1Cancitizensorresidentalienswholivewiththeirnonresident alienspouseeverfileasHeadofHousehold?. . . . . . . . . . . . . . . . . . . . . . . . . 7-6PersonalExemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-7HowdoIenterthefilingstatusintothetaxsoftware? . . . . . . . . . . . . . . . . . . . 7-7DependencyExemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-8Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-10
Lesson 8: Income – Wages, Interest, Etc.; Form 1040, Lines 7-11Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1Howaretaxableandnontaxableincomedetermined?. . . . . . . . . . . . . . . . . . . 8-2HowdoIgetstarted?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-3HowdoIreportwages,salaries,tips,etc.? . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-4Whatinterestistaxable?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-8TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 8-10HowdoIhandledividends?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8-11TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 8-13Whatshouldbereportedonline10ofForm1040?. . . . . . . . . . . . . . . . . . . . 8-14Whatisalimony?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-14Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-15Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-15
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Lesson 9: Income – Business; Form 1040, Line 12Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-1WheredoIgetbusinessincomeorlossinformation? . . . . . . . . . . . . . . . . . . . 9-1TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . . 9-3HowdoIcompleteScheduleC-EZ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-4Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-5Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-5
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-1WhatinformationmustIhavetoreportacapitalgainorloss?. . . . . . . . . . . . 10-2Whatisthebasisofstock? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-2HowdoIdeterminetheholdingperiod?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-4WhatinformationdoIneedfromForm1099-B?. . . . . . . . . . . . . . . . . . . . . . . 10-6HowdoIenterdataonScheduleD,PartsIandII?. . . . . . . . . . . . . . . . . . . . 10-8HowdoIreportcapitalgaindistributions? . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-8HowdoIcompletereportingofcapitalgainorloss?. . . . . . . . . . . . . . . . . . . 10-9HowdoIcalculateandreportacarryoverofacapitalloss?. . . . . . . . . . . . 10-10TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 10-10WhomustfileScheduleDforthesaleofahome?. . . . . . . . . . . . . . . . . . . . .10-11Whomustreportthesaleofahome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-12Whatisconsidereda“main”home?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-12Whataretheownershipandusetests?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-12HowdoIfigurethegain(orloss)fromthesaleofahome?. . . . . . . . . . . . . 10-14Howmuchofthegainfromahomesalecanataxpayerexclude? . . . . . . . 10-16WheredoIreportanytaxablegainfromthesaleofahome? . . . . . . . . . . . 10-16TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 10-17WhatistheFive-yearTestPeriodSuspension?. . . . . . . . . . . . . . . . . . . . . . 10-18Howisacancellationofdebtforaprincipalresidencereported onthereturn?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-19Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-33
Lesson 11: Income – Retirement Income; Form 1040, Lines 15-16Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-1Whatisretirementincome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-1WherecanIgetinformationaboutataxpayer’sretirementincome?. . . . . . . .11-1Whatifthetaxableportionisalreadycalculated?. . . . . . . . . . . . . . . . . . . . . . .11-2Whatifthetaxableportionisnotcalculated?. . . . . . . . . . . . . . . . . . . . . . . . . .11-3WhatdoIneedtoknowaboutretirementincomedistributions? . . . . . . . . . . .11-3HowdoIfindthetaxableportionofIRAincome?. . . . . . . . . . . . . . . . . . . . . . .11-4HowareIRAdistributionsreported?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-6HowdoIfindthetaxableportionofpensionsandannuities?. . . . . . . . . . . . . .11-8Whatotherretirementincomeissuesarethere? . . . . . . . . . . . . . . . . . . . . . .11-10HowdoIdeterminewhenanadjustmenttowithholdingshouldbemade? . .11-13Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-14
Table of Contentsd
Lesson 12: Income – Rental and Schedule K-1s Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-1NEW ScheduleK-1s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2Whatisrentalincome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-3Whatqualifiesasarentalexpense? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-3HowdoIhandledepreciationofrentalproperty?. . . . . . . . . . . . . . . . . . . . . . 12-7HowdoIfiguretheMACRSdeduction?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-9TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 12-10HowdoIhandlerentalpropertythatthetaxpayeralsouses?. . . . . . . . . . . .12-11HowdoIhandlerentallosses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-14Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-16
Lesson 13: Income – Unemployment Compensation; Form 1040, Line 19Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-1Whatisunemploymentcompensation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-1NEW What’sdifferentfor2009? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-2Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-2Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-2
Lesson 14: Income – Social Security Benefits; Form 1040, Line 20aIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-1Whataresocialsecurityandrailroadretirementbenefits?. . . . . . . . . . . . . . . 14-1Whatarelump-sumbenefitpayments? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-4Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-5
Lesson 15: Income – Other Income; Form 1040, Lines 21-22Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-1HowdoIhandleotherincome? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-1Whatisworldwideincome? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-2HowdoIconvertforeignincometoU.S.dollars?. . . . . . . . . . . . . . . . . . . . . . 15-3Whatistheforeignearnedincomeexclusion?. . . . . . . . . . . . . . . . . . . . . . . . 15-5Whatistheperiodofstayrequirement?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-8Whatisqualifyingincome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-9WhendoIcompleteandfileForm2555orForm2555-EZ?. . . . . . . . . . . . . 15-10TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 15-12Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-13
Lesson 16: Military Income Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-1Whatarethetypesofincome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-1Whatismilitaryseparationwithdisabilityseverancepay?. . . . . . . . . . . . . . . 16-2Whatisacombatzone?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-3TaxpayerInterviewandTaxLawApplication. . . . . . . . . . . . . . . . . . . . . . . . . 16-6Whatarethelawsregardingcommunityproperty? . . . . . . . . . . . . . . . . . . . . 16-6Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-7
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Lesson 17: Adjustments to IncomeIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-1HowdoIdetermineifthetaxpayerhasadjustmentstoincome?. . . . . . . . . . 17-1HowdoIhandleeducatorexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-2TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 17-4HowdoIhandleself-employmenttax?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-5HowdoIhandlepenaltiesforearlywithdrawal?. . . . . . . . . . . . . . . . . . . . . . . 17-5HowdoIhandlealimonypaid?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-5HowdoIhandleIRAcontributions?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-6HowdoIhandlestudentloaninterest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17-11TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 17-14HowdoIhandletuitionandfees?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-15Ispayforjurydutyanadjustmenttoincome? . . . . . . . . . . . . . . . . . . . . . . . 17-17Whataboutotheradjustmentstoincome?. . . . . . . . . . . . . . . . . . . . . . . . . . 17-17HowdoIdetermineAdjustedGrossIncome?. . . . . . . . . . . . . . . . . . . . . . . . 17-17TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 17-18Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-19Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-19
Lesson 18: Military Moving ExpensesIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-1Whatisapermanentchangeofstation?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-2Whatexpensesareincludedinthemovingexpenseadjustment?. . . . . . . . . 18-2HowdoIhandlemilitaryreimbursements?. . . . . . . . . . . . . . . . . . . . . . . . . . . 18-3TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 18-4TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 18-6Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-7
Lesson 19: Standard Deduction and Tax ComputationIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-1Whataredeductions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-1Howdoesageorblindnessaffectthestandarddeduction?. . . . . . . . . . . . . . 19-3Whataboutindividualswhocanbeclaimedasdependents? . . . . . . . . . . . . 19-5Whatabouttaxpayerswhopaidrealestatetaxesbutdonotitemize?. . . . . . 19-5Whatifthetaxpayerpurchasedanewmotorvehicle?. . . . . . . . . . . . . . . . . . 19-6HowdoIdeterminewhichdeductionisbestforthetaxpayer?. . . . . . . . . . . . 19-6Howaretaxableincomeandtaxdetermined?. . . . . . . . . . . . . . . . . . . . . . . . 19-7Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-8Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-8
Lesson 20: Itemized DeductionsIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-1Whomustitemize?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-1HowdoIhandlemedicalanddentalexpenses?. . . . . . . . . . . . . . . . . . . . . . 20-2HowdoIhandleinterest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-6HowdoIhandlegiftstocharity?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-8
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Lesson 20: Itemized Deductions (continued)Whatarecasualtyandtheftlosses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20-11Whataremiscellaneousdeductions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-12Practice-VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-13Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-13
Lesson 21: Military Employee Business ExpensesIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-1Whataremilitaryemployeebusinessexpenses?. . . . . . . . . . . . . . . . . . . . . . 21-1Whatarequalifieduniformexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-1Canservicemembersclaimwork-relatededucationalexpenses?. . . . . . . . . 21-3Whataretravelexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-4Whatarelocaltransportationexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-7WhoneedstocompleteForm2106?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-8TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 21-9Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21-11
Lesson 22: Business Travel ExpensesIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-1Whatqualifiesasadeductiblebusinesstravelexpense?. . . . . . . . . . . . . . . . 22-1Whatrecordsmustthetaxpayerhave? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-3Aretherealternativemethodsforfiguringsomeexpenses?. . . . . . . . . . . . . . 22-3HowdoIreportbusinessexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-5Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-5
Lesson 23: Credit for Child and Dependent Care ExpensesIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-1Whatisthechildanddependentcarecredit?. . . . . . . . . . . . . . . . . . . . . . . . . 23-1HowdoIdetermineifataxpayeriseligible? . . . . . . . . . . . . . . . . . . . . . . . . . 23-2Whatisthequalifyingpersontest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-2Whatistheearnedincometest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-3Whatisthework-relatedexpensetest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-4Whatisthejointreturntest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-6Whatistheprovideridentificationtest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-7TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 23-7HowdoIdeterminetheamountofthecredit? . . . . . . . . . . . . . . . . . . . . . . . . 23-8HowdoIcompleteForm2441?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-9HowdoIavoidcommonerrors?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-10Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-10Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23-11
Lesson 24: Education CreditsIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-1Whatareeducationcredits?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-1Whocantakeaneducationcredit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-1Whatisaneligibleinstitution?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-2Whatarequalifyingexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-2Whatrulesapplytoeachcredit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-4
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Canataxpayertakemultiplecredits?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-6HowdoIdeterminetheamountofthecredit? . . . . . . . . . . . . . . . . . . . . . . . . 24-6TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 24-7Whicheducationbenefitisbetterforthetaxpayer?. . . . . . . . . . . . . . . . . . . . 24-8HowcanIavoidcommonerrors?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-8Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-9Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-9
Lesson 25: Foreign Tax CreditIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-1WhatiftheforeigntaxcreditisreportedonForm1099-INTor Form1099-DIV?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-1Whatistheforeigntaxcredit(FTC)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-2Whatqualifiestaxpayersforthecredit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-3Whatis“economicbenefit”?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-5Whatcategoriesofincomequalifyforthecredit?. . . . . . . . . . . . . . . . . . . . . . 25-7TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 25-8DoIhavetofileForm1116?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-9HowdoIcompleteForm1116? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-10Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25-11
Lesson 26: Child Tax CreditIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-1Whatisthechildtaxcredit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-1Whocanclaimthechildtaxcredit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-1Whatistheamountofthecredit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-2HowdoIdeterminetaxpayereligibilityforthecredit? . . . . . . . . . . . . . . . . . . 26-4HowdoIcalculatethechildtaxcredit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-5Whatistheadditionalchildtaxcredit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-5HowdoIavoidcommonerrors?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-6Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-6Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-7
Lesson 27: Miscellaneous CreditsIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-1Whatisanonrefundablecredit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-1Whatistheretirementsavingscontributionscredit?. . . . . . . . . . . . . . . . . . . 27-2TaxpayerInterviewandTaxLawApplication. . . . . . . . . . . . . . . . . . . . . . . . . 27-4WhatareResidentialEnergyCredits?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-5HowdoIhandletheCreditfortheElderlyortheDisabled?. . . . . . . . . . . . . . 27-6TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 27-8WhatabouttheAlternativeMotorVehicleCredit? . . . . . . . . . . . . . . . . . . . . . 27-8WhatistheMortgageInterestCredit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-8Howarethetotalnonrefundablecreditsreported?. . . . . . . . . . . . . . . . . . . . 27-9Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-9Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-9
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Lesson 28: Other TaxesIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-1WhatareOtherTaxes? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-1Whatisself-employmenttax?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-2Whatabouttaxesonunreportedtipincome?. . . . . . . . . . . . . . . . . . . . . . . . . 28-3WhatabouttaxesonIRAsandotherqualifiedretirementplans?. . . . . . . . . . 28-5WhatareAdvanceEarnedIncomeCreditPayments?. . . . . . . . . . . . . . . . . . 28-6Whataboutrepaymentofthefirst-timehomebuyercredit? . . . . . . . . . . . . . . 28-7HowdoIfiguretotaltax? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-8Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-8Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-8
Lesson 29: PaymentsIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-1HowdoIreportfederalincometaxwithheld?. . . . . . . . . . . . . . . . . . . . . . . . . 29-2Whataboutestimatedtaxesandamountsappliedfromthe prioryear’sreturn?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-3TaxpayerInterviewandTaxLawApplication. . . . . . . . . . . . . . . . . . . . . . . . . 29-4Whatisthemakingworkpaycredit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-4Whatisthefirst-timehomebuyercredit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-6Whataboutamountspaidwithanextensiontofile?. . . . . . . . . . . . . . . . . . . . 29-8Whatareotherpayments?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-9Whatisexcesssocialsecurityandtier1RRTAtaxwithholding?. . . . . . . . . . 29-9HowdoIfindthetotalpayments?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-9Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-10Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-10
Lesson 30: Earned Income Credit (EIC)Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-1WhatistheEIC?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-1HowdoesataxpayerqualifyfortheEIC?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-2Whatrulesapplytoeveryone?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-2Whataretherulesfortaxpayerswithqualifyingchildren?. . . . . . . . . . . . . . . 30-4Whataretherulesfortaxpayerswithoutqualifyingchildren?. . . . . . . . . . . . . 30-5HowisthecorrectEarnedIncomeCreditamountcalculated?. . . . . . . . . . . . 30-7WherearetheEICtablesandhowdoIusethem? . . . . . . . . . . . . . . . . . . . . 30-7Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-8Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-8
Lesson 31: Refund and Amount of Tax OwedIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-1HowdoIknowifthetaxpayerisduearefund?. . . . . . . . . . . . . . . . . . . . . . . 31-1HowdoIknowifanamountisowed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-5TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 31-7Howistheestimatedtaxpenaltycalculated?. . . . . . . . . . . . . . . . . . . . . . . . . 31-7Howcantaxpayersmakesurethecorrectamountoftaxiswithheld?. . . . . . 31-8WhatistheThirdPartyDesignee?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-10
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HowcanIavoidcommonerrors?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31-11Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31-11Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31-11
Lesson 32: Quality Review of the Tax ReturnIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-1Howisaqualityreviewofareturncompleted? . . . . . . . . . . . . . . . . . . . . . . . 32-1HowdoIconductaqualityreviewofareturn?. . . . . . . . . . . . . . . . . . . . . . . . 32-2Whenshouldthetaxpayersignthereturn? . . . . . . . . . . . . . . . . . . . . . . . . . . 32-2DoIhavetoenterasitenumber?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-2Whatarethefinalstepsinthequalityreviewprocess? . . . . . . . . . . . . . . . . . 32-3Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-4Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-4
Lesson 33: Concluding the InterviewIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-1HowdoIpreparethee-filingpacket?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-2Whokeepstherecords?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-2WhatshouldItellthetaxpayeraboutrefundsorbalancesdue?. . . . . . . . . . 33-3Howcanthetaxpayeravoidabalanceduenextyear? . . . . . . . . . . . . . . . . . 33-4Howcantaxpayersadjusttheirwithholding?. . . . . . . . . . . . . . . . . . . . . . . . . 33-4Whenshouldthetaxpayermakeestimatedtaxpayments?. . . . . . . . . . . . . . 33-4Howisestimatedtaxfigured?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-5Howisestimatedtaxpaid?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-5HowdoIclosethecontact?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-6Doesthetaxpayerhavetodoanythingelse?. . . . . . . . . . . . . . . . . . . . . . . . . 33-6Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-6Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-7
Lesson 34: Military Finishing and Filing the ReturnIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-1Whattypeofidentifyinginformationshouldmembersofthe ArmedForcesenterontheirtaxreturns? . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-1WhereandwhenshouldmembersoftheArmedForcesfiletheirreturns?. . 34-2WhataretheextensionrequirementsfortaxpayerswithintheU.S.? . . . . . . 34-3WhataretheextensionrequirementsfortaxpayersoutsidetheU.S. andPuertoRico? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-5Whatarethetaxoptionsforcombatzoneparticipants?. . . . . . . . . . . . . . . . . 34-6Whatareothertaxoptionsforcombatzoneparticipants?. . . . . . . . . . . . . . . 34-7Whencantaxesbedeferred?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-7Whatarerulesfordeferment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-8Canotherpartiesassistwithataxreturn?. . . . . . . . . . . . . . . . . . . . . . . . . . . 34-8Whatarethetaxforgivenessprovisionsfordecedents? . . . . . . . . . . . . . . . . 34-8Whataretherulesforfilingareturnfordecedents?. . . . . . . . . . . . . . . . . . . . 34-9Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-10
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Lesson 35: Amended ReturnsIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-1Whenisanamendedreturnrequired?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-2HowdoIstart?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-3WhatisForm1040X?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-3Whatarethetimeframesrelatedtoamendedreturns?. . . . . . . . . . . . . . . . . 35-4Whatifthetaxpayerowesmoneyontheamendedreturn?. . . . . . . . . . . . . . 35-5HowdoIcompletetheamendedreturnusingtaxsoftware?. . . . . . . . . . . . . 35-6HowdoIassembleandsubmitForm1040X? . . . . . . . . . . . . . . . . . . . . . . . . 35-6Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-7
Appendix A: Vanessa Franklin Taxpayer ScenarioLesson3:FilingBasics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1Lesson4:FilingStatus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-6Lesson5:PersonalExemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-8Lesson6:DependencyExemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-9Lesson8:Income–Wages,Interest,Etc.;Form1040,Lines7-11. . . . . . . . A-12Lesson9:Income–Business;Form1040,Line12. . . . . . . . . . . . . . . . . . . . A-14Lesson13:Income–UnemploymentCompensation;Form1040,Line19 . . A-16Lesson17:AdjustmentstoIncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-17Lesson19:StandardDeductionandTaxComputation. . . . . . . . . . . . . . . . . . A-19Lesson20:ItemizedDeductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-21Lesson23:CreditforChildandDependentCare . . . . . . . . . . . . . . . . . . . . . A-25Lesson24:EducationCredits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-27Lesson26:ChildTaxCredit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-28Lesson27:MiscellaneousCredits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-30Lesson28:OtherTaxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32Lesson29:Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-34Lesson30:EarnedIncomeCredit(EIC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-35Lesson31:RefundandAmountofTaxOwed. . . . . . . . . . . . . . . . . . . . . . . . A-37Lesson32:QualityReviewoftheTaxReturn. . . . . . . . . . . . . . . . . . . . . . . . . A-39Lesson33:ConcludingtheInterview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-41
Appendix B: Vanessa’s Tax Documents
What’s New for 2009 1
Important Tax Law Changes for 2009
Economic Recovery Payment
The$250EconomicRecoveryPaymentwaspaidin2009torecipientsofcertainbene-fitsadministeredbytheSocialSecurityAdministration,DepartmentofVeteransAffairs,andtheRailroadRetirementBoard.Eligibleindividualsreceivedthepaymentauto-matically;theydidnothavetoapplyforthepayment.Anyeconomicrecoverypaymentreceivedduring2009isnottaxable,butitdoesreduceanymakingworkpaytaxcredit.
Making Work Pay Tax Credit
Themakingworkpaytaxcreditisarefundabletaxcreditofupto$400forworkingindividuals($800forMarriedFilingjointly).Thiscreditiscalculatedatarateof6.2%ofearnedincome.Itisphasedout(graduallyreduced)fortaxpayerswithamodifiedadjustedgrossincome(AGI)inexcessof$75,000($150,000forMarriedFilingJointly).Tobeeligibleforthecredit,taxpayersmusthaveavalidsocialsecuritynumber(SSN).ForMarriedFilingJointlytaxpayers,atleastonetaxpayermusthaveavalidSSN.
MostFormW-2wageearnershavealreadybenefitedfromthecreditwithalargerpaycheck,asaresultofthechangesmadetothefederalincometaxwithhold-ingtablesinearly2009(toimplementthemakingworkpaytaxcredit).Theamountofthecredit,however,muststillbeclaimedonthetaxpayer’s2009return(filedin2010).Generally,ScheduleM(Form1040Aor1040),MakingWorkPayandGovernmentRetireeCredits,isusedtoclaimthecredit.TaxpayersfilingForm1040EZdonothavetofileScheduleM.TheywillcalculatetheamountofthecreditdirectlyontheForm1040EZ.
Special Credit for Certain Government Retirees
Aone-timerefundablecreditof$250isavailablein2009forcertaingovernmentretir-eeswhoreceiveapensionfromworkandarenotcoveredbysocialsecurity.Thisone-timecreditmustbeclaimedonthe2009incometaxreturnandisareductiontoanymakingworkpaytaxcredit.Individualswhoreceiveaneconomicrecoverypaymentmustreducethegovernmentretireecreditbytheamountofthepayment.ScheduleM(Form1040Aor1040),MakingWorkPayandGovernmentRetireeCredits,isusedtoclaimthecredit.
American Opportunity Tax Credit – Expanded Hope Credit
Fortaxyears2009and2010,theAmericanopportunitytaxcreditmakestemporarychangestotheeducationcreditknownastheHopecredit.ThisnewcreditmodifiestheexistingHopecredit,makingitavailabletoabroaderrangeoftaxpayers,includinghigherincometaxpayersandthosewhoowenotax.Itaddsrequiredcoursematerialstothelistofqualifyingexpensesandallowsthecredittobeclaimedforfouryearsofpost-secondaryeducationinsteadoftwoyears.Themaximumamountofthecreditis
Nonresidentaliensandtaxpayerswhocanbeclaimedasdependentsonsomeoneelse’staxreturnarenoteligi-bleforthecredit.
What’s New for 2009
What’s New for 20092
increasedto$2,500perstudent.Inaddition,40%ofthecreditmayberefundable.ThecreditisphasedoutfortaxpayerswithamodifiedAGIbetween$80,000and$90,000($160,000and$180,000ifMarriedFilingJointly).
Unemployment Compensation
For2009,taxpayerscanexcludefromgrossincomeupto$2,400ofunemploymentcompensationreceivedin2009.Unemploymentcompensationover$2,400issubjecttofederalincometax.
First-time Homebuyer Credit
Forhomespurchasedin2009,taxpayerscanqualifyforarefundablecreditof10%ofthepurchasepriceupto$8,000($4,000ifMarriedFilingSeparately).Generally,thecreditforqualifyinghomepurchasesafterDecember31,2008,andbeforeDecember1,2009,donothavetoberepaid,aslongasthehomeremainsthetaxpayer’smainhomefor36monthsafterthepurchasedate.
TheamountofthecreditbeginstophaseoutfortaxpayerswhosemodifiedAGIismorethan$75,000($150,000ifMarriedFilingJointly).Forpurposesofthecredit,taxpayersareconsideredtobefirst-timehomebuyersiftheydidnotownanyothermainhomeduringthethree-yearperiodendingonthedateofpurchase.
Sale of Main Home
Gainfromthesaleorexchangeofthemainhomeisnolongerexcludablefromincomeifallocabletoperiodsofnonqualifieduse.Generally,nonqualifiedusemeansanyperiodafter2008whereneitherthetaxpayernorspouse(orformerspouse)usedthepropertyasamainhome(withcertainexceptions).Thisissuecanbecomplexandisoutsidethescopeofthevolunteerprogram.Refertaxpayerswith“nonqualifieduse”issuestoaprofessionaltaxpreparer.
Definition of Qualifying Child Revised
For2009,thefollowingchangeshavebeenmadetothedefinitionofaqualifyingchild:
• Tobeaqualifyingchild,thechildmustbeyoungerthanthetaxpayer,unlessthechildispermanentlyandtotallydisabled.
• Achildwhofilesajointreturncannotbeaqualifyingchild,unlessthereturnwasfiledonlyasaclaimforrefundandnotaxliabilitywouldexistforeitherspouseonseparatereturns.
• Iftheparentsofachildcanclaimthechildasaqualifyingchildbutneitherparentclaimsthechild,nooneelsecanclaimthechildasaqualifyingchildunlessthatperson’sAGIishigherthanthehighestAGIofanyparentofthechild.
• Ataxpayer’schildisaqualifyingchildforpurposesofthechildtaxcreditonlyifthetaxpayercananddoesclaimanexemptionforthechild.
Investment Income of Certain Children
Theamountoftaxableinvestmentincomeachildcanhavewithoutitbeingsubjecttotaxattheparent’sratehasincreasedto$1,900for2009.
TherearesomeexceptionsfortaxpayersclaimingtheHopecreditforastudentwhoattendedaschoolinaMidwesterndisasterareain2009.Formoreinforma-tion,seePublication4492-B,InformationforAffectedTaxpayersintheMidwesternDisasterAreas,andPublication970,TaxBenefitsforEducation.
What’s New for 2009 3
Standard Deduction Amount Increased
ThestandarddeductionfortaxpayerswhodonotitemizedeductionsonScheduleA(Form1040)hasincreasedfor2009:
• $11,400–MarriedFilingJointlyorQualifyingWidow(er)
• $8,350–HeadofHousehold
• $5,700–SingleorMarriedFilingSeparately
Deduction Allowed for New Vehicle Purchase
For2009,thereisanadditionaldeductionforstateandlocalsalesandexcisetax(includingcertainfeesinstatesthatdonothaveasalestax)onthepurchaseofqualifiedmotorvehicles.Aqualifiedmotorvehiclemustbenewandincludesapassengerautomobileorlighttruck,amotorcycle,oramotorhome.
Thedeductionislimitedtoeligibletaxesandfeespaidonthefirst$49,500ofthepurchasepriceonthevehi-cle.Thedeductionphasesoutfortaxpayerswithmodi-fiedAGIofmorethan$125,000($250,000ifMarriedFilingJointly).
Thenewvehicledeductionisavailabletotaxpayerswhoclaimthestandarddeduction,aswellastaxpay-erswhoitemizedeductionsonScheduleA(Form1040).Thenewdeductioncanbeusedtoincreasetheamountofthestandarddeductionoritcanbetakenasanitemizeddeduction(ifthetaxpayerisnotelectingtotakethestateandlocalgeneralsalestaxdeduction).
Limits Increased for Itemized Deductions
TaxpayerswithanAGIaboveacertainamountmaylosepartoftheiritemizeddeduc-tions.In2009,thisAGIamountisincreasedto$166,800($83,400ifMarriedFilingSeparately).
Exemption Amount Increased
Theamounteachtaxpayercandeductforeachexemptionincreasedto$3,650for2009.
Phaseout of Exemption Amount
TaxpayerswithanAGIaboveacertainamountmaylosepartofthebenefitoftheirexemptions.Theamountatwhichthephaseoutbeginsdependsuponthefilingstatus.For2009,thephaseoutbeginsat:
• $125,100–MarriedFilingSeparately
• $166,800–Single
• $208,500–HeadofHousehold,and
• $250,200–MarriedFilingJointlyorQualifyingWidow(er)
For2009,eachexemptioncannotbereducedtolessthan$2,433.
Donotconfusethedeductionforanewvehiclepurchasewiththe“CashforClunkers”program.TheCarAllowanceRebateSystem(CARS)or“CashforClunkers”program,ishandledthroughtheU.S.DepartmentofTransportation,NationalHighwayTrafficSafetyAdministration,notonataxreturn.Formoreinforma-tionabout“CashforClunkers”gotowww.cars.gov.
TaxesandfeespaidonpurchasesbeforeFebruary17,2009,arenoteligibleforthisspecialdeduction.
What’s New for 20094
Standard Mileage Rate
• Business-related mileage For2009,thestandardmileagerateforthecostofoperatingacar,van,orpickup/paneltruckforbusinessuseis55centspermile.
• Medical and move-related mileage For2009,thestandardmileagerateforthecostofoperatingavehicleformedicalreasonsoraspartofadeductiblemoveis24centspermile.
• Charitable-related mileage For2009,thestandardmileagerateforthecostofoperatingavehicleforcharitablepurposesremainsat14centspermile.
Earned Income Credit (EIC)
Amount of credit increased
For2009,themaximumcreditis:
• $3,043withonequalifyingchild
• $5,028withtwoqualifyingchildren
• $5,657withthreeormorequalifyingchildren
• $457withnoqualifyingchild
Earned income amount increased
Tobeeligibleforafullorpartialcredit,thetaxpayermusthaveearnedincomeofatleast$1butlessthan:
• $35,463($40,463ifMarriedFilingJointly)withonequalifyingchild
• $40,295($45,295ifMarriedFilingJointly)withtwoqualifyingchildren
• $43,279($48,279ifMarriedFilingJointly)withthreeormorequalifyingchildren
• $13,440($18,440ifMarriedFilingJointly)withnoqualifyingchild
Investment income amount increased
Taxpayerswhoseinvestmentincomeismorethan$3,100cannotclaimtheEIC.
Advance payment of the credit
QualifyingtaxpayerscangetadvanceEICpayments(upto$1,826)addedtotheirpay,bytheiremployer.
Additional Child Tax Credit
For2009,theminimumamountofearnedincomeneededtoclaimtheadditionalchildtaxcreditisreducedto$3,000.
New Rules for Children of Divorced or Separated Parents
FortaxyearsbeginningafterJuly2,2008(the2009calendaryearformosttaxpayers),newrulesapplytoallowthecustodialparenttorevokeareleaseofclaimtoexemp-tionthatwaspreviouslyreleasedtothenoncustodialparentonForm8332,Release/RevocationofReleaseofClaimtoExemptionforChildbyCustodialParent,orsimilarform.Therevocationiseffectivenoearlierthanthetaxyearbeginninginthecalendar
What’s New for 2009 5
yearfollowingthecalendaryearinwhichthecustodialparentprovided,ormadereason-ableeffortstoprovide,thenoncustodialparentwithwrittennoticeoftherevocation.
Ifthecustodialparentprovidesnoticeofrevocationtothenoncustodialparentin2009,theearliesttaxyeartherevocationcanbeeffectiveisthetaxyearbeginningin2010.PartIIIofForm8332maybeusedforthispurpose.Itmustbeattachedtothetaxreturnforeachtaxyearthechildisclaimedasadependentasaresultoftherevocation.
Post-1984 decree or agreement
Ifthedivorcedecreeorseparationagreementwentintoeffectafter1984andbefore2009,thenoncustodialparentcanstillattachcertainpagesfromthedecreeoragree-menttothetaxreturninsteadofForm8332.Foranydecreeoragreementexecutedafter2008,Form8332orsimilarformmustbeused.
Social Security and Medicare Taxes
Themaximumamountofwagessubjecttothesocialsecuritytaxfor2009is$106,800.ThereisnolimitontheamountofwagessubjecttotheMedicaretax.
Wage Threshold for Household Employees
ThesocialsecurityandMedicarewagethresholdforhouseholdemployeesis$1,700for2009.Thismeansthatifahouseholdemployeewaspaidcashwagesoflessthan$1,700in2009,thetaxpayerdoesnothavetoreportandpaysocialsecurityandMedicaretaxesonthatemployee’s2009wages.
Income Limits Increased for Student Loan Interest Deduction
For2009,theamountofthestudentloaninterestdeductionisphasedoutfortaxpay-erswhoaremarriedandfilejointly,andwhosemodifiedAGIisbetween$120,000and$150,000.IfthemodifiedAGIis$150,000ormore,nodeductionisallowed.
ForfilingstatusesSingle,HeadofHousehold,andQualifyingWidow(er),thestudentloaninterestdeduc-tionisphasedoutfortaxpayerswhosemodifiedAGIisbetween$60,000and$75,000.IfthemodifiedAGIis$75,000ormore,nodeductionisallowed.
Income Limits Increased for Lifetime Learning Credit
For2009,theamountofthelifetimelearningcreditisphasedoutfortaxpayerswithamodifiedAGIbetween$50,000and$60,000($100,000and$120,000ifMarriedFilingJointly).IfthemodifiedAGIis$60,000ormore($120,000ormoreforMarriedFilingJointly)nocreditisallowed.
Qualified Higher Education Expense (Section 529 Accounts)
Fortaxyears2009and2010,thedefinitionofqualifiedhighereducationexpensesfortax-freedistributionsfromaqualifiedtuitionprogramisexpandedtoincludethepurchaseofcomputertechnology,equipment,andInternetaccess(includingrelatedservices)thataretobeusedbythebeneficiaryandthebeneficiary’sfamilyduringanyoftheyearsthatthebeneficiaryisenrolledataneligibleeducationalinstitution.
Marriedtaxpayerswhofileseparatelydonotqualifyforthestudentloaninterestdeduction.
What’s New for 20096
Deductible Long-Term Care Premium Limits Increased
For2009,themaximumamountofqualifiedlong-termcarepremiumsincludibleasmedicalexpenseshasincreased.Qualifiedlong-termcarepremiumsuptotheamountsshownbelowcanbeincludedasmedicalexpensesonScheduleA(Form1040).
• $320-age40orunder
• $600-age41to50
• $1,190-age51to60
• $3,180-age61to70
• $3,980-age71andover
Income Limits Increased for Reduction of Education Savings Bond Interest Exclusion
For2009,theamountoftheinterestexclusionisphasedoutforMarriedFilingJointlytaxpayersorQualifyingWidow(er)taxpayerswhosemodifiedAGIisbetween$104,900and$134,900.IfthemodifiedAGIis$134,900ormore,nodeductionisallowed.
ForSingleandHeadofHouseholdfilingstatuses,theinterestexclusionisphasedoutfortaxpayerswhosemodifiedAGIisbetween$69,950and$84,950.IfthemodifiedAGIis$84,950ormore,nodeductionisallowed.
Residential Energy Credits
Nonbusiness energy property credit
Thenewlawreinstatesandincreasesthetaxcreditforhomeownerswhomakeenergyefficientimprovementstotheirexistinghomes.Thelawincreasesthecreditrateto30%ofthecostofallqualifyingimprovementsandraisesthemaximumcreditlimitto$1,500forimprovementsplacedinservicein2009and2010.
Thecreditappliestoimprovementssuchasaddinginsulation,energyefficientexteriorwindowsanddoors,energy-efficientheatingandairconditioningsystems,andcertainroofs.Thecredithasbeenexpandedtoincludecertainasphaltroofsandstovesthatburnbiomassfuel.
Residential energy efficient property credit
Thisnonrefundableenergytaxcreditwillhelpindividualtaxpayerspayforqualifiedresidentialenergyefficientproperty,suchassolarhotwaterheaters,geothermalheatpumps,andwindturbines.Thenewlawremovesmostofthepreviouslyimposedmaximumamountsandmaintainsthe30%creditforthepurchaseofqualifiedprop-erty.ThisenergycreditisclaimedonPartIIofForm5695,ResidentialEnergyCredits.Thisportionoftheenergycreditiscomplex.Refertaxpayerswiththeseexpensestoaprofessionaltaxpreparer.
Thelimitonpremiumsisforeachperson.
Marriedtaxpayerswhofileseparatelydonotqualifyfortheexclusion.
What’s New for 2009 7
Self-Employment Tax
Self-employmenttaxconsistsoftwoparts,socialsecurityandMedicare.Themaximumamountofnetearningssubjecttothesocialsecuritypartoftheself-employmenttaxfortaxyearsbeginningin2009is$106,800.Allnetearningsofatleast$400aresubjecttotheMedicarepartofthetax.
IRAs and Other Retirement Plans
Temporary Waiver of Required Minimum Distributions (RMDs)
For2009,taxpayersarenotrequiredtotakeanRMDfromIRAsormostdefinedcontri-butionplans.Thiswaiverappliestoplanparticipantsaswellastobeneficiaries.Thewaiveralsoappliestotaxpayerswhoturn70-1/2in2009anddelaytheir2009RMDuntilApril1,2010.ThewaiverdoesnotapplytoRMDsfor2008,evenfortaxpayerswhoturned70-1/2in2008andchoosetotakethe2008RMDbyApril1,2009.
Modified Adjusted Gross Income (AGI) Limit for Traditional IRA Contributions Increased
For2009,ifataxpayeriscoveredbyaretirementplanatwork,thedeductionforcontri-butionstoatraditionalIRAisreduced(phasedout)ifthemodifiedAGIis:
• Morethan$89,000butlessthan$109,000forMarriedFilingJointlytaxpayersorQualifyingWidow(er),
• Morethan$55,000butlessthan$65,000foraSingleorHeadofHousehold,or
• Lessthan$10,000forMarriedFilingSeparately.
Ifonlyonespouseiscoveredbyaretirementplanatwork,andthetaxpayerslivetogetherorfileajointreturn,thedeductionisphasedoutifthemodifiedAGIismorethan$166,000butlessthan$176,000.IfthemodifiedAGIis$176,000ormore,nodeductionforcontributionstoatraditionalIRAisallowed.
Modified AGI Limit for Retirement Savings Contribution Credit Increased
For2009,taxpayersmaybeabletoclaimtheretirementsavingscontributioncreditiftheirmodifiedAGIisnotmorethan:
• $55,500forMarriedFilingJointly,
• $41,625forHeadofHousehold,or
• $27,750forSingle,MarriedFilingSeparately,orQualifyingWidow(er).
Foreign Earned Income and Housing Exclusions
For2009,themaximumForeignEarnedIncomeExclusionincreasedto$91,400. Thebasehousingamountincreasedto$40.07perdayor$14,624fortheentire calendaryear.
What’s New for 20098
Deduction for Credit or Debit Card Convenience Fees
Taxpayerswhopaytheirincometax(includingestimatedtaxpayments)bycreditordebitcard,candeducttheconveniencefeechargedbythecardprocessorforusingthecreditordebitcard.ThedeductionisallowedfortheyearinwhichthefeewaschargedtothecardasamiscellaneousitemizeddeductiononScheduleA(Form1040)andissubjecttothe2%ofAGIfloor.
Decreased Estimated Tax Payments for Qualified Individuals With Small Businesses
For2009,qualifiedindividualswithsmallbusinessesmaybeeligibletomakesmallerestimatedtaxpayments.Iftheindividualqualifies,therequiredannualpaymentfor2009isthesmallerof90%ofthetaxshownonthe2008taxreturnor90%ofthetaxshownonthe2009taxreturn.
Schedule L (Form 1040A or 1040), Standard Deduction for Certain Filers
ScheduleLisanewformthatisusedtocalculatethestandarddeductionforcertainfilers.Taxpayerscanusethisformiftheyareincreasingtheirstandarddeductionbycertainstateorlocalrealestatetaxes,newmotorvehicletaxes,oranetdisasterloss.
Schedule M (Form 1040A or 1040), Making Work Pay and Government Retiree Credits
ScheduleMisanewformthatisusedtofigurethemakingworkpaycreditandgovern-mentretireecredit.
Refund Options – Savings Bonds
Taxpayerswhoreceiveataxrefund,canusetheir2009taxrefundtobuyU.S.savingsbonds,evenwithoutabankaccountoranexistingaccountwithTreasury.Taxpayerscansaveallorpartoftheirrefundbycheckingaboxwhentheyfiletheirreturn.Gotowww.irs.govforthelatestinformationandalistofquestionsandanswers.
Notes
Congressmayenactaddi-tionallegislationthatwillaffecttaxpayersafterthispublicationgoestoprint.Forthemostcurrenttaxlawinformation, gotowww.irs.gov.
Lesson 1: Course Introduction 1-1
Instructor Notes
Lesson 1: Course Introduction
Welcome
We’regladyoudecidedtotakeadvantageofthischallenging,yetrewardingexperienceasanimportantplayerinthetaxadministrationprocess.Thistrainingmaterialwillintro-duceyoutothemajorcomponentsoftheVolunteerIncomeTaxAssistanceandTaxCounselingfortheElderly(VITA/TCE)returnpreparationprocess.Thecomponentsoftheprocessare:
• ScreeningandinterviewingtaxpayersusingForm13614-C,Intake/Interview&QualityReviewSheetoranapprovedalternativeform
• Understandingandapplyingtaxlaw
• Usingreferences,resources,andtoolsincludingreturnpreparationsoftware
• Conductingqualityreviews
Introduction
Unlikemostclasses,thereisnoneedtomemorizealotofinformation–everythingaboutthiscourseisopenbook.Inordertobeasuccessfultaxpreparer,youneedto:
• Understandandhavecompassionforalltypesofpeople
• Knowwhereandhowtogetthe“rightanswer”
• Understandandapplytaxlaw,and
• Prepareaccuratereturns
Yourabilitytoprepareanaccuratereturnwillbemeasuredintwoways:
1. Thetestingandcertificationprocess–usedinitiallytogaugeyourunderstandingofthereturnprepara-tionprocess
2. Qualityreviewresultsofthereturnsyouprepare–demonstrateyourproficiencyinallaspectsoftheprocess
Objectives
Aftercompletingthiscourse,youwillbeableto:
• Certifyasavolunteertaxreturnpreparerbytakingthetest(s)locatedintheLink&LearnTaxese-learningcourseonwww.irs.gov(oronpaperifthisoptionisnotavail-abletoyou)
• Conducttheinitialinterviewandscreenthetaxpayerusinganapprovedintakeandinterviewsheet
• Determinewhetherthetaxpayerisrequiredtofileataxreturn
• Usereferenceandtechnicalmaterials,suchastheVolunteerResourceGuideandPublication17,toensurethatyouaskthecorrectquestionsduringyourdialogwiththetaxpayer,inordertoprepareacompleteandaccuratetaxreturn
Emphasize their donated time provides a tremendous service to the American public and to the community.
Conduct an icebreaker and introductions at this time.
Stress that accuracy is achieved by obtain-ing information from taxpayers during the screening and inter-view process, and from their supporting docu-mentation. A return is accurate when tax law is applied correctly and the return is free from error.
Point out that quality reviews are discussed in a later lesson. Each VITA/TCE site must have a process for conducting a quality review of each return prepared by volunteer preparers.
Summarize main points in the Introduc-tion.
Thecomponentsforcomplet-inganaccuratereturnarethesamewhetheryoupreparetaxreturnsusingcomputersoftwareorpreparethereturnonpaper.
Review objectives with the class.
Lesson 1: Course Introduction1-2
• Correctlycompletea1040seriesreturn,aswellasaccompanyingtaxforms,usingpapertaxformsorthetaxsoftwareprovidedatyoursite
• Usethequalityreviewprocesstocheckthetaxpay-er’sreturn
• Concludetheinterviewandassemblethereturn
• Preparethereturnforelectronicfilingusingtaxsoft-warelicensedbytheIRSforuseatVITA/TCEsites
Inthislessonyouwilllearnabout:
1. Thecourseofstudyaspresentedinthisbookandtheassociatedworkbook,test,andreferencebooks
2. ImportantinformationabouttheVITA/TCEprogramandtheroleofthevolunteers
3. TheapprovedVITA/TCEprocessforpreparing taxreturns
Attheendofthislessonyouwillbeabletodescribe:
• Themajorfeaturesofthecoursematerials
• ThemajorcomponentsoftheVITA/TCEprocess
• Whatisexpectedofavolunteeraftercompleting thiscourse
• Theresourcesavailabletoassistyou
Yourcourseinstructorwillprovidealltheavailabletech-nicalpublicationsandformsrequiredforthiscourse.
Why is this publication so large?
Therearefivecoursespresentedinthispublication,eachrepresentingalevelofcertification.Thefirstsevenlessonsapplytoalllevelsofcertification.BeginninginLesson8,thelevelofcertificationforthesubjectbeingcoveredwillbeindicatedbythefollowingicons:
Basic coversthecompletionofwageearnertypereturns.
Intermediatecoverscompletionofreturnsforwageearnerswhoreceivepensionincome,andmorecomplexForms1040.ItrequirescompletionoftheBasiccourse.
AdvancedcoversthecompletionofthefullscopeofVITA/TCEreturns.ItrequirescompletionoftheBasicandIntermediatecourses.
MilitarycoversthefullscopeofVITA/TCEreturnspresentedbymembersoftheArmedForces,Reserve,andNationalGuard.ItrequirescompletionoftheBasicandIntermediatecourses.
PriortoassistingtaxpayersattheVITA/TCESite,besuretocompletethe“AreYouReadytoGetStarted?”assessmentinthefrontoftheVolunteerResourceGuide.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ ApprovedQualityReviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication 4491 □ Publication4491-W□ Form6744□ Form13222□ Form13614-C□ Form13615□ 13614-CJobAidOptional:□ Publication3□ Publication596□ Publication972□ Publication4299□ Publication4403□ Publication4575□ Form13645□ InternetAccess(optional
buthighlyrecommended)
Seekfeedbackfromyoursponsorabouttheaccuracyrateofthereturnscompletedatyoursite.
Point out the resources cited under What do I need? and describe the contents of the kit.
It will not always be possible to have all suggested forms and publications available in the classroom or site. These forms and publications can all be viewed or downloaded at www.irs.gov.
Lesson 1: Course Introduction 1-3
Internationalcoversthecompletionofreturnsfornon-MilitarytaxpayerslivingoutsidetheUnitedStateswhoareassistedbyvolunteersworkingatU.S.EmbassiesandConsulatesorotherareas.ItrequirescompletionoftheBasicandIntermediatecourses.
Iconsaredisplayedafterthelessontitle.Ifasectionofalessonisassociatedwith onlyonecertificationlevel,thecorrespondingiconisdisplayedatthebeginningof thatsection. Ifnoiconsaredisplayedinasection,alliconsdisplayedafterthelessontitleapply.
What is the training approach?
Eachcourseusestheprocessbasedtraining(PBT)approach.PBTisastructuredfact-gatheringprocesstohelpyouprepareanaccuratereturn.Tocompletetheprocess,youwilluse:
• TheintakequestionsfromForm13614-C,Intake/Interview&QualityReviewSheetorapprovedalternativeformtoscreenthetaxpayerforeligibility,andpreparethereturn.
• Referencematerials,suchasPublication4012,VolunteerResourceGuide,Publication17,YourFederalIncomeTaxforIndividuals,andtaxsoftwarehelpfeaturesaswellasotherresourcesavailableatyoursite,topreparethereturn.Thesematerialswillprovideyouwithstandardizedquestionstoaskduringyourinterviewwiththetaxpayerinordertohelpyoupreparea100%accuratetaxreturn.
• Anapprovedqualityreviewsheettocheckthequalityofallcompletedreturns.AdheringtoaqualityreviewprocesshelpsensurehighqualityreturnsatallVITA/TCEprogramsites.
Inmostcases,whenyouhavecompletedthereturn,itwillbefiledelectronically.ThereshouldonlyberareinstanceswhenthetaxpayermayneedtomailthetaxreturntotheIRS.
What do I need to get started?
Inadditiontothispublication,yourtrainingkitincludesthefollowingitems:
• Publication4491-W,Workbook–ComprehensiveProblems&PracticeExercises
• Publication4012,VolunteerResourceGuide
• Form6744,Test/Retest
• Drafttaxforms
• Form13222,StudentEvaluationandForm13232,InstructorEvaluation
Thepurpose,changesandotherimportantinformationabouttheproductsinyourkitareshownonpageiiofthisguide.
Duetotheproductionscheduleforthistrainingguide,draftformsmaybeusedinillustra-tions.Thedraftformsshouldneverbeusedforactualtaxpreparation.Finalformsareavail-ableonwww.irs.gov,anewPublication17,aninstructionbooklet(e.g.,Form1040Instructions),orotherpublication.
IRSe-fileisaquickandeasyalternativetotraditionalpaperreturns.MostVITA/TCE volunteersitesarenowsetupforelectronicfilingusingtaxsoftware.
Summarize process based training for the class.
Display the quality review sheet on the third page of Form 13614-C. Explain that the quality review sheet, Form 8158, or an approved alternative contain the same ques-tions but with different headings, and are used to review the return.
Lesson 1: Course Introduction1-4
What other resources are available to help me learn?Publication4491-W,acompanionbooktothiscourse,providesmanyopportunitiestopracticetaxreturnpreparationusingtheinformationtaughtinthisguide.
DirectionsattheendofmanylessonsidentifyspecificproblemsinPublication4491-Wthatwillallowyoutopracticethelessonmaterial.Althoughitmightnotbepossibletoworkeachexercisesuggestedwiththeknowledgeyouhaveatthatpoint,attheendofthecourse,youwillhavetheopportunitytocompleteallofthecomprehensiveprob-lemsandexercisesinPublication4491-W.
YoumayusethePracticeLabintegratedwiththeonlinecourse,Link&LearnTaxes,tocompleteexercises,practicereturns,andtestscenariosusingtaxsoftware.
What happens after I complete this course?
Youwillbetestedonyourunderstandingoftaxlawandtheguidelinesandtoolsneededtoprepareanaccuratereturn.Afteryouhavebeencertified,youwillbereadytovolunteerataVITA/TCEsite.
How does this certification work?
ToparticipateintheVITA/TCEprogram,youmustpassatleasttheBasiccertifica-tiontest.AfteryourBasiccertification,youcantestforIntermediatecertification.Onceyouhaveachievedbothofthesecertifications,youmaytestforanyoralloftheothercertifications(Advanced,Military,andInternational).YoumaytakeonlineteststhatareavailableintheIRS’LinkandLearnTaxese-learningcourseonwww.irs.gov.Onlinetestingisfastandefficient;youwillknowimmediatelyifyouhavepassedandcanprintoutthecertificationforyourSiteCoordinator.Volunteerswhodonotpassthetestthefirsttimemayreviewthecoursematerialandtryagain.Apapertest(Form6744)mayalsobeavailable.TalkwithyourinstructororSiteCoordinatorformoreinformationontheseoptions.
Allvolunteerswhotrainothersinhowtocompletetaxreturns,preparetaxreturns,transmittaxreturns,orconductqualityreviewsoncompletedreturnsmustcompleteandpasstheVITA/TCEcertificationtestatalevelequivalenttothelevelatwhichtheytrain.
IfavolunteerdoesnotachievetheminimumrequiredscoreontheTestortheRetesttheyareencouragedtoparticipateintheprograminanothercapacitysuchasgreeter,publicity/communication,orresourceacquisition,amongothers.
Whenyoupassthetest,yourSiteCoordinatororinstructormayprovideyouwithaVITA/TCEprogramWalletCard,Form13645.
TheWalletCardwascreatedtoacknowledgetheaccomplishmentofcertifiedvolun-teers,aswellastoassistinternalandexternalstakeholdersinidentifyingcertifiedvolunteers.Thiscredentialprovidesanobjectivemeasurethatyouhavemasteredenoughtaxlawtopreparereturns.Ifprovided,youshouldbringyourWalletCardtothetaxpreparationsiteforidentificationpurposes.
Show Publication 4491-W and how to locate the workbook exercises.
Review testing options with the class.
Display/Circulate Form 13645, Wallet Card (if desired).
Lesson 1: Course Introduction 1-5
What types of returns can I prepare?
Itisimportantthatyouassistonlywithreturns,support-ingschedulesandformsforwhichyouhavebeentrainedandcertified.YoushouldonlypreparereturnsthatfallwithinthescopeoftheVITA/TCEprogram.ThetrainingresourcesandtoolsdiscussedinthisguideonlysupportthecompletionofabasicForm1040andassociatedtaxforms.AcompletelistofwhatiswithinthescopeoftheVITA/TCEprogramcanbefoundintheVolunteerResourceGuide(Tab14).
How does the IRS identify volunteer-prepared returns?
Eachpaperorelectronicallyfiledreturnshouldbeidentifiedwiththeappropriatesiteidentificationnumber(SIDN)toensurethatallvolunteer-preparedreturnsarereadilyidentifiablebytheInternalRevenueService.YourSIDNisan8-digitnumberprecededbythe“letterS”whichmustbeenteredonallreturnsyouprepare(Form1040,Form1040A,andForm1040EZ)–bothpaperandelectronic.YourSiteCoordinatorprovidesthisnumberalongwithothernecessaryguidelinesforcompletingthereturn.
TheSIDNshouldappearinthe“PaidPreparer’sUseOnly”sectionofthereturnandwillbediscussedindetailinLesson32,QualityReviewofTaxReturn.
Am I legally liable for returns I prepare?
Becausetheyacceptpaymentforpreparingataxreturn,paidpreparersarelegallyliableunderfederallawforthereturnstheyprepare.VITA/TCEprogramvolunteersarenotconsideredpaidpreparers.Thismeansyoucannotacceptpaymentofanykindfromthetaxpayerforpreparingafederaltaxreturnorforprovidinganyothertax-relatedassistance.YouarealsoprotectedbythefederalVolunteerProtectionActof1997,aslongasallofthefollowingconditionsaretrue:
• Youareactingwithinthescopeofyourvolunteerresponsibilities.
• Youcompletedtheleveloftrainingandcertificationrequiredforpreparingtaxreturnsatyoursite.
• Theharmwasnotcausedbywillful,criminal,reck-less,grosslynegligent,orconscious,flagrantly indifferentacts.
What are my responsibilities as a VITA/TCE program volunteer?
AsaVITA/TCEprogramvolunteer,youhavearesponsibilitytoprovidequalityserviceandtoupholdtheethicalstandardsoftheprogram.Whenyoubeginasavolunteer,youwillbeaskedtosignForm13615,VolunteerAgreement,StandardsofConduct,whichstatesthatyouwilladheretothesestandards:
• Treatalltaxpayersprofessionally,withcourtesyandrespect.
• Safeguardtheconfidentialityoftaxpayer information.
AccessacopyofthisActontheInternetbytyping“VolunteerProtectionActof1997”intoanysearchengine.
Provide the site SIDN (if available) and sug-gest the students write it in the Volunteer Resource Guide.
Remembertorefertaxpayerswithtaxsituationsoutsideyourscopeoftraining,experienceandcertificationtoyourSiteCoordinatorand/oraprofes-sionaltaxpreparer.
Identitytheftisagrowingproblemandyouneedtodoallyoucantopreventtaxpayerinformationfromendingupinthewronghands.
Lesson 1: Course Introduction1-6
• Applythetaxlawsequitablyandaccuratelytothebestofyourability.
• Onlypreparereturnswithinthescopeofyourtrainingandexperience.
• Exercisereasonablecareintheuseandprotectionofequipmentandsupplies.
• Donotsolicitbusinessfromtaxpayersyouassistoruseknowledgeyougainedaboutthemforanydirectorindirectpersonalbenefitforyouoranyotherindividualororganization.
• Donotacceptpaymentforservicesprovided.(Note:Youmayreceivecompensationfromyoursitesponsor.)
Ensurethestandardsaddressingreturnpreparationarefollowed.Theseincludebecomingcertified,usingtheintakeandinterviewprocess,usingreferencematerials,usingtheapprovedqualityreviewprocess,completingthestepstoelec-tronicallyfiletaxreturns,andadheringtotheprivacyandconfidentialityguidelines.
How do I maintain the taxpayer’s trust?
Taxpayerswilltrustthatallinformationyoureceivefromthemisprotectedfrom disclosure.Tomaintainthistrust:
• Donotdiscloseanypersonaltaxinformationgainedasaresultofthe serviceprovided.
• Donotopenlydiscusstaxpayersbynameinthepresenceofothervolunteersortaxpayers.Youmaydiscusstaxsituationswithothertaxpayersandvolunteers. Forexample,avolunteermayrefertoasituation(notataxpayer)andaskorgiveadviceabouttheappropriatetaxtreatmentforthatspecificsituation.
• Donotretaintaxpayers’documentsforafollow-upvisit.Ifyoucannotfullycompletethetaxpayer’sreturnatthetimeofservice,returnalldocumentstothetaxpayer.
• Donottaketaxpayers’informationforpreparationofthereturnoutsidethepresenceofthetaxpayer.
• Donotprepareataxreturnwhenyoususpectanindividualisnotprovidingtruthfulinformation.
Someindividualsmayattempttodefraudthegovernmentbyfilingfalsetaxreturns. Ifyouhaveanyquestionatallaboutthevalidityofinformationprovidedbyataxpayer,orareuncomfortablewithataxpayersituation,discussyourconcernwithyourSiteCoordinatororanotherindividualinchargeofthesite.
Therearemanycaseseachyearinwhichacouplefilesajointreturnandthenlater,oneorbothindividualsfileareturnasHeadofHousehold,usingthesamedependentinformation.Sinceonlyoneoriginalreturncanbefiledeachyearusinganygivensocialsecuritynumber,thisscenariocancauseadelayinprocessinganyorallofthereturnsassociatedwiththatsocialsecuritynumber.Creditsand/ordeductionsmaybedisallowed.Ifyouareassist-ingataxpayerwhomyoubelievefitsthisscenario,consultwithyourSiteCoordinator.
YouarethekeytotheintegrityoftheVITA/TCEprogram.
Moreinformationcanbe foundinPublication4299,PrivacyandConfidentiality –APublicTrust.
Donotsolicitoracceptpaymentfromtaxpayersforservicesyouprovide.
Show students the Vol-unteer Resource Guide listing of what is in scope.
Ask students to turn to Form 13615 in their Form 6744. Discuss each item in the agree-ment.
Explain to the students the importance of pro-viding quality service and upholding the ethical standards of the VITA/TCE program.
Emphasize the last two standards: never solicit or accept pay-ment for services. (This includes a donation jar for tips, the purchase of supplies, etc.)
Lesson 1: Course Introduction 1-7
Are there other materials available to assist me?
Whenyouarriveatthetaxpreparationsite,yourSiteCoordinatorwillassistyouwithyourresourceneeds.Yoursitemayevenhaveatechnicalresearchlibraryfromwhichyoucanaccessvariousforms,publications,andworksheets.
Youshouldnotusethistrainingguideatyourtaxpreparationsite.Itisdesignedfortrainingpurposesonly.TaketheVolunteerResourceGuideandPublication17withyouforuseatthesite.YourSiteCoordinatorshouldbeabletoprovideaccesstothe followingkeyresourcesaswell:
• Instructionbooklets,schedules,andworksheetsforForms1040,1040A,and1040EZ
• Taxinformationpublicationsthatarefrequentlyusedatthesites(e.g.,Publication596,EarnedIncomeCredit,Publication972,ChildTaxCredit,Publication3,ArmedForcesTaxGuide,etc.)
• Equipmentandsuppliesalongwithsecurity requirementsanduserestrictions
• VolunteerQualityAlerts
YoumayalsoreinforceyourtaxlawtrainingbyviewingonlinetrainingresourcessuchasLink&LearnTaxesandUnderstandingTaxes–e-learningcoursesonwww.irs.gov.
Thereisalsoatoll-freetaxinformationhotlineavailableforvolunteeruseonly.IfyouhaveataxlawquestionandcannotgettheanswerfromyourSiteCoordinatororyourreferencematerial,youcancall1-800-829-8482(1-800-TAX-VITA).Ifyoucall,besuretoidentifyyourselfasavolunteer.Do not give this phone number to taxpayers.ThevolunteerhotlineisgenerallyavailablefromFebruary1untilthefilingdeadline.ThisnumbercanbefoundonthebackcoveroftheVolunteerResourceGuide.
How do I get started using the tax software?
ManysitesusetheIRSsponsoredtaxpreparationsoftware.Thetaxsoftwareassistsinpreparingreturnsandalsoincludesahelpfeaturetoassistinunderstandingtheappli-cationoftaxlaw.
Ifyouareworkingatasitethatusestaxpreparationsoftware,youwillneedtobecomefamiliarwiththeparticularsoftwarepackagebeingusedatyoursite.IRScontractswithaspecificsoftwarecompanytoprovidesoftwareforuseintheVITA/TCEprogram.
Sincethemajorityofsitesusetaxpreparationsoftware,IRStrainingmaterialsaregearedtotheuseoftaxsoftwareinbothdesktopandonline(internet-based)versions.
Yourinstructorand/orSiteCoordinatorwillprovideyouwiththeinformationandpasswordsrequiredforloggingintotheprogramfortrainingand/ortaxpreparationpurposes.HowtoUsetheGuideintheVolunteerResourceGuidewillprovidemoreinformationformakingacomparisonbetweenthedesktopandonlineversions.
Point out the tax software comparison chart in the blue tab section of the Volunteer Resource Guide.
Provide the login and passwords for the tax software.
Recipientsofgovernmentpropertyandequipmentmustcertifythattheequipmentwillbeusedforvolunteertaxreturnpreparationpurposes.Commercialandcertainpersonalusesofthepropertymayterminatetheagreement.Thisappliestohardwareandsoftware,aswellassupplies.
HandycontactinformationislistednearthebackoftheVolunteerResourceGuide.
Point out students can always access such materials on the IRS website at www.irs.gov.
Point out the contact information on the Volunteer Resource Guide.
Provide instructions for accessing the practice lab.
Lesson 1: Course Introduction1-8
Where do I find information about the tax software?
TheVolunteerResourceGuideprovidesgeneralinformationandhelpfulhintsforusingthetaxsoftwareundertheyellowtabs.Informationspecifictotheonlineversionislistedunderthebluetabs.InformationaboutcompletingthereturnislistedundertheFinishingtheReturntab.
Summary
WelcometotheVITA/TCEprogram.Remember:
• Makesureyouhavetheresourcesandsupportyouneedtoprovideeach taxpayerwithhighqualityserviceandanaccuratereturn
• Areturnisaccuratewhentaxlawisappliedcorrectlyandeachtaxpayer’s supportingdocumentation(includinganapprovedintakeandinterviewsheet)supportstheentriesonthereturn
• Knowyourrightsandresponsibilitiesandupholdtheintegrityofthe VITA/TCEprogram
• Preparereturns:
- thatarewithinthescopeoftheVITA/TCEprogram
- forwhichyouhavebeencertified
• UseVITA/TCEequipmentandsupplies(includinghardwareandsoftware)fortheirintendedpurposes
• Completethe“AreYouReadytoGetStarted?”assessmentintheVolunteerResourceGuidepriortoassistingtaxpayerstodetermineifyouhaveeverythingyouneedtoprovidetopqualityprofessionalservice
Review the lesson summary.
Show the students the assessment (page 3 – Are you Ready to Get Started?) in the Volun-teer Resource Guide.
If students are using the tax software desk-top version, point out the tool bars and func-tion keys listed under the tax software Quick Reference Guide in the Volunteer Resource Guide.
Point out that the tax software flow chart explains the sequence of using the software.
If students are using the tax software online version, point out the tool bars and short cuts available.
Note: References to function keys in tax software discussions only apply to the desk-top version. There are many similarities between the two prod-ucts, but they do have their differences.
Lesson 2: Screening and Interviewing 2-1
Instructor Notes
Lesson 2: Screening and Interviewing
Introduction
Thislessonassistsyouindevelopinginterviewandscreeningskillsthatwillassuretaxpayersthatyouhavetheirbestinterestatheart.Withtheseskills,youwillbeabletoobtaintheinformationnecessarytoprepareacompleteandaccuratereturn.Youwillbeintroducedtotechniquesthatwillhelpyouconductaprobinginterviewduringthetaxpayer’sinitialscreeningforprogrameligibility.Youwillusetheseskillstoclarifyissuesthatmayariseasyoumovethroughthetaxreturnpreparationprocess.
Aprobinginterviewtodetermineimportantfactsaboutthetaxpayerisrequiredbeforeandduringthepreparationofthetaxreturnaswellasduringthequalityreviewprocess.Youwillusetheoralandwritteninformationgatheredthroughoutthetaxprep-arationprocesstopreparethetaxpayer’sreturnandtofacilitateaqualityreviewofthereturnafteritiscompleted.
Objectives
Attheendofthislesson,usingyourresourcematerials,youwillbeableto:
• Describetheelementsoftheintakeandinterviewprocess
• LocatethetoolsthatwillassistyouinPublication4012,VolunteerResourceGuide
• Probefornecessaryinformation
• Usethevariouscommunicationstechniquesneces-sarytosuccessfullyelicittheinformationneededtoprepareacompleteandaccuratereturnsuchas:
- Buildingrapport
- Askingeffectivequestions
- Usingactivelistening
- Overcomingcommunicationbarriers
What is included in the intake and interview process?
Whentaxpayersarriveatasite,theyshouldbegivenanapprovedintakeandinterviewsheet.Duringtheintakeprocess,youoracertifiedscreenerwillusetheapprovedintakeandinterviewsheettoscreentaxpayersforprogrameligibilityandvalidatetheinforma-tiontheyhaveprovided.Throughoutthescreeningprocess,listenforcluesthatwillassistincompletingthereturn–maritalstatus,numberofchildren,relativeslivingwiththem,childcareexpenses,potentialtoqualifyforcredits,unreportedincome(e.g.,cashtransactions),etc.
Theintakeandinterviewprocessmustincludethefollowing(ataminimum):
• Aninterviewwiththetaxpayerthatincludesexplainingthetaxpreparationprocessandencouragingthemtoaskquestionsthroughouttheinterviewprocess
• Useofanapprovedintakeandinterviewsheet
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ ApprovedQualityReview
Sheet
Review objectives with the class.
Point out the resources cited under What do I need?
Display or refer stu-dents to the approved intake and interview sheet.
Point out that these are minimum expectations.
Lesson 2: Screening and Interviewing2-2
• Confirmationoftheaccuracyofthetaxpayer’sresponsesprovidedonthefrontoftheapprovedintakeandinterviewsheetbyacertifiedreturnpreparer
• Useofprobingquestionstoensurecompleteinformationisgathered
• Reviewofallsupportingdocumentation,Form(s)W-2,1099,etc.
• Requestformissingorincompletedocumentation,ifapplicable
Asyouworkwiththetaxpayer,applytheseinterviewtechniques:
• Buildingrapport
• Askingeffectivequestions
• Usingactivelisteningskills
• Overcomingcommunicationbarriers
Where do I find the tools to assist me with this process?
ThetoolstoassistyouduringthescreeningandinterviewprocessareincludedintheintroductorysectionoftheVolunteerResourceGuide,whichispartofyourtrainingkit.
How do I use the tools?
How do I use the approved intake and interview sheet?
Everyvolunteertaxpreparationsitegatherstaxpayerinformationusinganapprovedintakeandinterviewsheet.Nomatterwhichapprovedintakeandinterviewsheetyouuse,itmustaskforthebasicintakeinforma-tionneededforacompleteandaccuratereturn.
Taxpayerscompletethesectionsoftheapprovedintakeandinterviewsheetlabeled“tobecompletedbythetaxpayer.”Oncethisisdone,volunteersrevieweachentry.Usingthequestioningtechniquescoveredinthislesson,volunteersworkwithtaxpayerstocompletetherestoftheform.
Process
Comparethetaxpayers’personalinformationtothesupportingdocumentstoensurethenames,addresses,andcontactinformationareallcorrect.
Payparticularattentiontomaritalstatusanddependentinformation;usethedecisiontreesintheVolunteerResourceGuide(ortheHelpfeatureinthetaxsoftware)toverifymaritalstatus.
ReviewtheIncomequestions.Taxpayersmayqualifyforadditionalcreditsanddeduc-tionsbasedonlifeevents.Ifthetaxpayerhasanswered“yes”toanyoftheseques-tions,conductfurtherresearchtomakeavaliddeterminationabouteligibilityforcreditsordeductions.Usetheappropriatesourcedocumentslistedonthe13614-CJobAid.Reviewthe“yes”boxestodeterminewhattoenteronthereturn.
Form13614-C,Intake/Interview&QualityReviewSheet,istheIRSversionoftheform.NEW The13614-CJobAid,whichcanbefoundintheVolunteerResourceGuide,isnewin2009,andgivesline-by-lineinstructionsonusingtheform.
Point out that they will practice these in this lesson.
Lesson 2: Screening and Interviewing 2-3
ReviewtheExpensesquestions.Someexpensesareenteredasadjustmentstoincome,someareitemizedonScheduleA,andcertainexpensesimpacttheadditionalstandarddeduction,whichiscoveredintheStandardDeductionandTaxComputationlesson.Ifthetaxpayerhasany“yes”answersfortheexpensesquestions,usetheVolunteerResourceGuide,the13614-CJobAid,ortheHelpfeatureinthesoftwaretodeterminethequalificationfortheseexpenses.
Usingtheinterviewskillsexplainedintheselessons,youwillrevieweachitemontheapprovedintakeandinterviewsheetwiththetaxpayerbeforeyoucompletethetaxreturn.
Ifacorrectiontothetaxpayer’sinformationisrequiredduringtheintakeandinterviewprocess,itshouldbeannotatedontheapprovedintakeandinterviewsheetpriortocompletingthereturn.Thesenotesexpeditethetaxreturnpreparationandthequalityreviewprocess.
How do I use the Volunteer Resource Guide?
TheVolunteerResourceGuidewillhelpyouasyouinterviewthetaxpayer.Itincludesdecisiontrees,interviewtips, andotherinformationtogather,clarify,andverifythetaxpayer’sinformationontheapprovedintakeandinterviewsheet.
TheVolunteerResourceGuideisdividedintofourmajorsections–GeneralInformation,TaxLaw,theTaxSoftwareandtheTaxSoftwareOnline.
• GeneralinformationlocatedinthefrontsectionandthecoversofthebookoffersguidanceandacopyofForm13614-CJobAid.
• Whitetabscontaintaxlawintheformofdecisiontrees,chartsandinterviewtips.
• Yellowtabscontainstep-by-stepproceduresforelectronicreturnpreparationusingthetaxsoftware.
• Bluetabscontaininformationspecifictousersoftheweb-basedoptionforthetaxsoftware.
TaxSoftwareOnlineusersshouldtakeadvantageofboththeyellowandbluetabsasmaterialwhichisuniversalforbothapplicationswillbecontainedintheyellowtabsection.
Tax Software Hint:Partnersmayuseformsprovidedinthesoftwareinlieuofan
approvedintakeandinterviewsheet.
Partnerschoosingthismethodmustprovidepapercopiesofthetaxsoftwareforms,oraccesstotheformsonline,tothereviewerconductingaqualityreturnreview.
InformationfromtheVolunteerResourceGuideisreferredtothroughoutthistraining.YoumustuseitatyourVITA/TCEsite,sorefertoitoftenduringclasstoprepareforyourtaxpayerinterviews.
Tell volunteers not to write on any of the tax-payer’s personal docu-ments or take them out of the taxpayer’s sight.
Explain if the tax soft-ware tabs will or won’t be used during this les-son and why.
Remind students to take their Volunteer Resource Guide to their VITA/TCE site.
Direct students to follow along in their copy of the Volunteer Resource Guide.
Lesson 2: Screening and Interviewing2-4
How do I welcome and screen the taxpayer?
How should I welcome the taxpayer?
Herearesuggestionsforwelcomingthetaxpayer:
• Greetthetaxpayerandintroduceyourself
• Takeafewmomentsforsmalltalk(weather, traffic,etc.)
• Explainthescreening,taxpreparationandqualityreviewprocesses
• Explainthat,oncethetaxpayerhascompletedtheportionoftheapprovedintakeandinterviewsheetlabeled“TobecompletedbytheTaxpayer,”youwillcompletetherestofittogether,andyouwillassistwiththetaxpayer’sportionifneeded
• Askifthetaxpayerhasanyquestions
HereisanexampleofhowJorge,avolunteerwelcomedBill,ataxpayer:
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… BIll responds…
Hello, I’m Jorge. How are you today?
I’m fine, thanks. Did you have any trouble finding the place?
Yes, especially this time of day. Did the receptionist ask you to complete an intake sheet like this one?
Thank you. I’ll have to see your photo ID and social security card and then I’ll check your income to make sure you qualify for volun-teer assistance. Next, we’ll go over your information together and make sure it’s complete. Then I’ll input the information into the computer to create your tax return. Finally, I’ll go over the return with you, and have our Site Quality Reviewer check it one last time for accuracy. You will then be able to sign and date it. Do you have any questions?
I’m glad you asked that. We normally file your return electronically, so you won’t have to mail your return at all. That way you can get your refund faster. Do you have any other questions before we look at your intake sheet?
Okay, but please feel free to ask questions as we go along. The tax process isn’t always clear to people, so it’s always good to ask, okay?
Hi,I’mBill.I’mfine.Howaboutyou?
Itwasn’ttoobad.Thetrafficwasterriblethough!
Yes,Ihaveithere.
IfIsignanddateit,doIhavetomailitrightaway?
Idon’tthinkso.
Sure,Iappreciatethat,thanks.
If available, play the DVD or VHS based on Publication 4475, Interview Techniques.
Ask two volunteers to role-play the sample interview.
Review student observations on the volunteer’s approach.
Lesson 2: Screening and Interviewing 2-5
How can I screen the taxpayer for eligibility?
Whenthetaxpayerindicatesthattheirportionoftheapprovedintakeandinterviewsheetiscomplete,begintheinterviewtocompletetheformandthenscreenthetaxpayerforeligibilityforthevolunteerprogram.Screeningmethodsdifferbetweenvolunteersites,butherearesuggestionsforthisstep:
• Askthetaxpayerfortheircompletedintakeandinterviewsheet.
• Verifythetaxpayer’sidentitywithapictureIDorotheracceptablemethod.
• Obtainsocialsecuritycards,aformorletterfromtheSocialSecurityAdministrationand/orIndividualTaxpayerIdentificationNumber(ITIN)lettersforeachpersontobelistedonthereturn.Keepthesedocumentsavailableforreferencethroughoutthereturnpreparationprocess.
• Reviewthetaxpayer’sincomeinformation,suchasForm(s)W-2,andForm(s)1099,todetermineiftheyfallwithinthescopeofthevolunteerprogramandyourlevelofcertification.YourSiteCoordinatorand/orinstructorwillletyouknowthetaxreturncriteriaforyourprogram.Iftheydonotfallwithinthescopeoftheprogram:
- Courteouslyexplainthatvolunteerservicesarelimitedtothosewhofallwithinthescopeoftheprogramandwhytheydonotqualify.
- Encouragethetaxpayertousetheinformationtheyrecordedontheintakeandinterviewsheetinworkingwithanothertaxpreparationservice.
- Thankthetaxpayerforcomingandexpressregretthatyoucannotassistthem.
• Ifthetaxpayerqualifiesforvolunteerassistance,begintheinterviewandcompletetherestoftheintakeandinterviewsheetwiththetaxpayer.Ifthetaxpayerqualifiesbutdoesnothaveallthenecessarydocumentation,explainhowtotoacquirethedocumentation.
HereisanexampleofhowavolunteerscreenedtaxpayerRobertCornellfor assistance:
Ask students to look at an approved intake and interview sheet.
Explain what to do if the taxpayer is eligible for the program, but not within the pre-parer’s level of certifi-cation.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… roBert responds…
Mr. Cornell, you might be aware that the volunteer program is limited. We are volunteers and can only do tax returns within the scope of our training. Did anyone let you know that?
Well, we’ll certainly do whatever we can. First, let’s look at your Form W-2, interest statements, and anything else that reports your income. May I look at those?
I’m sorry to tell you, but rental income is outside the scope of the volunteer program. I’m afraid we won’t be able to help you.
I’m afraid so. However, you are welcome to take the intake sheet with you – it may be helpful as you work with another preparer to complete your return. I’m sorry we weren’t able to work together.
Yes, but thank you so much for coming in.
No,notreally.Ihopeyoucanhelpme.
Sure,heretheyare.Ialsoownaduplexandcollectsomerentfromit.
Oh,I’mdisappointed.Areyousure?
Well,metoo,butrulesarerules, Iguess.
Okay,thanksanyway.
Ask two volunteers to role-play the sample interview.
Review student observations on the volunteer’s approach.
Besurenottorecommendaspecificbusinessorapersonwhenencouragingataxpayertouseataxpreparationservice.
Lesson 2: Screening and Interviewing2-6
How do I conduct a probing interview?
Asyoubecomeexperiencedwithinterviewingtaxpayers,youwilldevelopyourownapproach.Usethetechniquesyouwilllearninthenextsection,suchasbuildingrapport,askingeffectivequestions,andactivelistening.Asyouusethesetechniquesinaninterview,besuretocoverthesepoints:
• Reviewthetaxpayer’sportionoftheapprovedintakeandinterviewsheet.
• Askiftheywereuncertainaboutanyresponses.Reassurethemthatyouwillhelpthemcompletetheformaccurately.
• Explainthetaxpreparationprocessandencouragethemtoaskquestionsthrough-outtheinterview.
• Foreachpartoftheapprovedintakeandinterviewsheet,usetheinterviewtipsoradecisiontreeintheVolunteerResourceGuidetoprobeforaccurateandcompleteinformation.IfyouareusingForm13614-C,afteryouhaveverifiedthetaxpayer’sinformationonpages1and2,completeSectionBonpage3.SectionBwillprovidepromptsforyoutovalidatesomeofthemostcommonlyoverlookeditemsonthetaxreturn. Youmaycompletethissectionasyouinterviewthetaxpayer,oruseitaftertheinterviewtoensureyouhavenotmissedanything.
OpentheVolunteerResourceGuidetothecharts,decisiontreeandinterviewtipslocatedbehindTabB.ThefollowingsampleinterviewdemonstrateshowavolunteerusestheinterviewtipstoconductasmallpartofaprobinginterviewwithReginaReinhardtaboutwhichfilingstatusisappropriate.
Divide the class into pairs and ask students to role-play the sample interview.
Discuss the exercise.
Review the Determina-tion of Filing Status Interview Tips in Pub-lication 4012 (Tab B) as an example.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… regIna responds…
Ms. Reinhardt, were you uncertain how to answer any of the questions on the intake sheet?
Okay, as we go over that part. I’ll explain a little more about what they are looking for. You should feel free to ask questions. Fair enough?
I’m going to ask you a few questions that will help us determine the best filing status for you and then we will go over your depen-dent information. First, I see from your intake sheet that you were married as of the last day of the tax year. Is that right? (Step1)
So, he was not living with you?
Okay, do you plan on filing a joint return with your spouse? (Step2)
Yes, of course. Let’s assume for now that you will file separately, and I’ll ask you a few more questions. I see that you have two children. Did they live in your home during the tax year? (Step3)
Yes,actuallyIhadtroublewiththefamilyanddependentsection.
Yes,thanks.
Yes,Iwas,butmyhusbandandIwerelivingapart.
That’sright.Butwewerestilllegallymarried.
Well,I’mnotsure…Idon’treallyliketheideaofit.Iwasthinkingoffilingseparately.CanIdothat?
Yes,theylivedwithme.
The13614-CJobAidwillhelpyouobtainallthenecessaryinformation.
Lesson 2: Screening and Interviewing 2-7
ExErcisEs
Asyoucansee,thevolunteerusedtheinterviewtipsandtheinformationfromtheVolunteerResourceGuideinanaturalandpersonalway.Youwilllearnmoreaboutthisapproachinthislesson’ssectiononinterviewtechniques.
Readtheinterviewswiththeseexercisesandanswerthequestions.Answersarelocatedafterthelessonsummary.
Question 1:Fromthelistbelow,markallthethingsthevolunteerdid.
• Greetedtaxpayer
• Introducedhimselforherself
• Madesmalltalk
• Explainedscreeningandtaxpreparationprocesses
• Askedtaxpayertocompletetheapprovedintakesheettothebestoftheirability
• Asked the taxpayer if they had any questions
Question 2:Fromthelistbelow,selectallthethingsthevolunteerdid.
• Reviewed the approved intake and interview sheet
• Asked if taxpayer was uncertain about any responses
• Reassured taxpayer that they would help them complete the form
• Encouraged questions
Advise students that future lessons will pro-vide guidance for the taxpayer about missing SSNs, W-2, 1099s, etc.
Assign the following exercises.
Review answers with the class when com-plete.
Volunteer did only one thing right: asked if the taxpayer had any questions – but asked rudely.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… roBert responds…
Yes?
Here, fill out this intake form. You may sit over there.
Come back to me. Do you have any other questions?
I’mheretodomytaxes.
WhatdoIdowhenI’mfinished?
No,thanks…Iguess!
The volunteer did all of the recommended things courteously!
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… roBert responds…
Okay, let’s take a look at your intake sheet. Did you have any questions about filling it out?
Okay, don’t worry. Let’s start at the beginning and go step by step. When we get to those questions, I’ll explain what they mean, and we’ll try to answer them together. How does that sound?
Please feel free to ask questions as we go over the intake sheet. Shall we begin?
Yes,Iwasn’tsurewhatthisques-tionmeant,andthisonehere.
Thatwillhelp!
Yes,let’sgetstarted.
Lesson 2: Screening and Interviewing2-8
What techniques can I use to assist me with the interview?
What basic techniques are recommended?
Asyouusetheintakeandinterviewtools,youwillneedtoputthetaxpayerateaseandkeepcommunicationopen.Applyingthesetechniquescanhelpyoudothat:
• Buildingrapport
• Askingeffectivequestions
• Usingactivelisteningskills
• Overcomingcommunicationbarriers
How do I build rapport?
Youwantthetaxpayertofeelcomfortablewithyou.Trytoestablishthetaxpayer’strustandconfidencefromthebeginning.Asyouwelcomethetaxpayer:
• Befriendlyandrespectful
• Havematerialsorganized
• Speakclearlyandsimply
Explaintheprocessandmakesurethetaxpayerunderstandswhatwillhappennext.Encouragethetaxpayertoaskquestions.Thesampleinterviewpresentedearlierinthislessonisagoodexampleofhowavolunteerbuiltrapportwithataxpayer.
How can I ask effective questions?
Workingwithataxpayerrequiresyoutoaskmanyquestions.Youmayfeelthatyouareprying.Youarenot.You’reelicitingtheinformationneededtofileanaccuratereturnthatallowstaxpayerstoenjoyallthebenefitsorcreditstheyaredue.Whenyoustartaninterview,useoneortwoopen-ended questions. ThesekindsofquestionsrequiremorethanasimpleYes/Noanswer.
EvenquestionsontheapprovedintakeandinterviewsheetthatsimplyaskforaYes/Noresponsemayconfuseataxpayer.Agoodapproachistoaskthefirstkeytaxquestionandthenexplainwhytheinformationisnecessary.Thishelpsthetaxpayergiveamoreaccurateandfocusedanswer.
Avoidaskingleadingquestionsbecausetheymakethetaxpayerfeelyouhaveaspecificanswerinmind.Donotmakeassumptionsabouttaxpayers–letthemspeakforthemselves.
Askingopen-endedquestionsletsthetaxpayerdecidewhatisimportant,andthatcanhelpyoudiscoverspecialsitua-tions.Forexample,“What changes have you had this year that might make your tax situation different from last year?” and “What more can you tell me about that?”
Lesson 2: Screening and Interviewing 2-9
HereishowavolunteerusedeffectivequestioningwithDorothyStone:
How do I use active listening skills?
Activelisteningshowsthatyouarepayingcloseattention.Itreassurestheotherpersonthatyoucareaboutwhattheyhavetosayandthattheycantrustyou.Wealluseactivelisteningwhenwearetrulyinterestedinwhatsomeoneissaying.Herearewaysweshowthatweareactivelylistening:
• Usingnonverbalcuessuchasnodding,smilingappropriately,andmakingeyecontact
• Lettingtheotherpersontakethetimetheyneedtoexpressthemselves
• Respondingbyrestatingwhattheotherpersonhassaidtoensurethatyouunderstand
• Expressingsympathyorotherappropriateemotions
HereishowavolunteerdemonstratedactivelisteninginaninterviewwithMarsha:
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… dorothy responds…
Okay, Ms. Stone, I need to get some basic information today so we can complete your return. Before we do that, what tax docu-ments did you bring with you today? [open-endedquestion]
When we sat down, you mentioned that you and your husband separated or divorced last year. Did you bring any paperwork related to that?
Okay, that’s good. Let’s go over your intake sheet. Were you still married on December 31st of last year? What I mean to ask is, “did you receive a final decree of divorce by December 31st?” I need to ask so I can figure out how you should file. [questionwithexplanationofwhyitisneeded]
I see, thank you. Now that we have clarified your marital situation, we can determine which exemptions you can claim.
MyW-2sandintereststatements.
Oh,yes,sorry.Hereitis.
Well,wewenttocourtandfiledforthedivorceonSeptember1st,butwewon’thaveafinaldecreeuntiltheendofFebruary,orbeginningofMarchofthisyear.
Okay.
Ask the same student pairs to reverse roles for this interview.
Discuss the exercise.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… marsha responds…
I see that you left blank the question about whether you were living with your spouse on December 31st.
I see. [nodding] Can you tell me a little more?
I see. Thank you for the information. I know how difficult a situa-tion like that can be. [expressingsympathy]
Yeah,Iwasn’tsurewhattoputthere.Mysituationwaskindofcomplicatedattheendoflastyear.
Iguessso.MyhusbandmovedoutinOctober,buthecomesbacksometimestovisitthekids.
Ask the same student pairs to reverse roles for this interview.
Discuss the exercise.
Lesson 2: Screening and Interviewing2-10
How can I overcome communication barriers?
Communicationcanhitabarrierifthetaxpayerbecomesupsetordefensive.Whenthishappens,youcanoftenovercomebarriersbyshowingthatyouunderstandthetaxpayerandcareabouttheirconcerns,feelings,andneeds.Hereareafewwaystodothat:
• Donotbecomeupset
• Reassurethetaxpayer(Example:“Ihearyou”or“Iunderstand”)
• Keepontrackbyaskingthetaxquestion
• Provideamotivator(Example:“Thisisdifficult,butIneedthisinformationsoIcanmakesureyouareallowedallthebenefitsavailabletoyou.”)
• Useyouractivelisteningskills
• Allowthetaxpayerenoughtimetorespond
- Ifthetaxpayerissilent,encouragethembysaying,“Tellmemoreaboutthat…”
- Ifthetaxpayerisupset,showthatyouunderstandbyparaphrasingwhattheyhavetoldyou
Hereisanexampleofhowavolunteerovercamebarrierstocommunicatinginaninter-viewwithJackButler:
Ask the same student pairs to reverse roles for this interview.
Discuss the exercise.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… mr. Butler responds…
I’m sorry, according to this information, you don’t qualify for the deduction.
[notupset,sympathetic]I understand, Mr. Butler, nobody wants to pay more taxes. [paraphrasing,understanding]Keep in mind that we’re still trying to identify the deductions you can take, so your taxes will be as low as possible. Let’s look at the next set of deductions, okay?[didnotbecomeupset,keptontrackbyaskingthetaxquestion]
Take your time, Mr. Butler. Tell me more when you are ready. [gavetaxpayertimetorespond,askedhimto“tellmemore”]
Well, it makes sense that you would be concerned about being able to pay your tax bill on time. [paraphrasing]Now, if you end up owing more in taxes, we can discuss some possible options for payment. Shall we keep looking for deductions?
What?AreyousayingthatIcan’ttakethatdeduc-tion?ThatmeansIamgoingtoowetaxes!IthoughtIwasgoingtogetarefund!Ican’taffordtopaymoretaxes!
Okay,Iknow,you’retryingtohelp.I’mjustafraidthat…[silent]
I’mjustafraidIwon’tbeabletopaythebillontime.
Yes,thankyou.Let’sgoon.
Successfulvolunteersexpressempathy,understandingandcompassionforalltypesofpeople.Overcomebarriersbylettingtaxpayersknowyouunderstandandcareaboutthem.
TheintroductoryinformationintheVolunteerResourceGuidecontainsinterviewstepsandsuggestedactions.
Lesson 2: Screening and Interviewing 2-11
What happens next?
Basedonwhatyoulearnfromthetaxpayer’sapprovedintakeandinterviewsheetandfromtheinterview,youhavethreeoptions:
• AdvisethetaxpayerthattheirreturnisoutsidethescopeofyourtrainingandseekassistancefromyourSiteCoordinator.Ifthereisanothervolunteeravailablewhohastheappropriatetraining,theycantakeovertheinterview.
• Advisethetaxpayerthattheirtaxsituationisoutsidethescopeoftheprogram,or
• Assistthetaxpayerwiththeirreturn,requestassistancefromyourSiteCoordinatorasneeded.Ifthetaxpayerqualifiesbutdoesnothaveallthenecessarydocumenta-tion,provideguidancenecessaryforthemtoacquirethedocumentation.
Ifthetaxpayer’sreturniswithinthescopeoftheprogramandtheirtaxsituationiscoveredinyourcertification,youmaycompletetheirreturn.Refertaxpayerswhosetaxsituationsareoutsideyourscopeoftraining,experienceandcertificationtoyourSiteCoordinatorand/ortoaprofessionaltaxpreparer.
Iftaxpreparationassistanceisnotprovided,returntheapprovedintakeandinterviewsheettothetaxpayer.
Afterthereturniscompletedandthequalityreviewisfinished,theapprovedintakeandinterviewsheetcanbereturnedtothetaxpayeralongwithacopyoftheirreturn(s)oritcanberetaineduntilthereturnhasbeenaccepted.Forguidanceonproperproce-dures,consulttheSiteCoordinatoratthesitewhereyouarevolunteering.
Summary
Knowledgeoftaxlawandinterviewskillsarerequiredtoidentifytaxpayerswhoqualifyforvolunteerreturnpreparationassistanceandtoconducteffectiveprobinginterviews.Goodinterviewtechniques,combinedwithIRSorpartner-developedtools,maketheinterviewmoreeffectiveandcomfortableforyouandthetaxpayer.Remember,estab-lishingrapportandeducatingtaxpayersproducesaccuratereturns.
Havingtheabilitytocommunicatewithalltypesofpeople,knowingwhereandhowtoget“therightanswer,”understandingandapplyingtaxlaw,andpreparingaccuratereturnsaretheskillsyouwillneedtobeasuccessfulvolunteer.
Necessarytoolsare:
• Probingquestions
• Form13614-Corotherapprovedintakeandinter-viewsheet
• VolunteerResourceGuide
• SectionCofForm13614-Corotherapproved qualityreviewsheet
Duringthescreeningandinterviewingprocess,strivetoacquiretheinformationneededtoprepare100%accuratereturns,andmakenotesontheapprovedintakeandinterviewsheet.Remember,areturnisaccu-ratewhentaxlawisappliedcorrectlyandthereturnisbasedoninformationacquiredduringthisprocess.
Review the lesson summary with the class.
Lesson 2: Screening and Interviewing2-12
ExErcisE answErs
Helpfulinterviewtechniquesare:
• Buildingrapport
• Askingeffectivequestions
• Usingactivelisteningskills
• Overcomingcommunicationbarriers
Whenassistingtaxpayers,safeguardtheconfidentialinformationtheysharewithyou.
Answer 1: The volunteer did a very poor job on almost all counts. The only thing he did right was ask if the taxpayer had any questions, but he did that rudely.
Answer 2: The volunteer did all of the recommended things and did them courteously!
Notes
Lesson 3: Filing Basics 3-1
Instructor NotesIntroduction
Thislessonwillhelpyoudeterminewhichtaxpayersmustorshouldfileataxreturn.Youwillalsofindinformationonhowtoverifyataxpayer’sidentity,whichformtouse,completingthemaininformationsheetorlabelonthereturn,andhowlongtokeeptaxpayerrecords.
Objectives
Attheendofthislesson,usingyourreference materials,youwillbeableto:
• Determinewhomustfileataxreturn
• Determinewhoshould fileataxreturn
• Verifythetaxpayer’sidentity
• Selectthecorrectformtouse
• Determinehowtofilethereturn
• Telltaxpayershowlongtheyshouldkeepcertainrecordsanddocuments
Who must file?
U.S.citizensorresidentsoftheUnitedStatesmustfileareturnbasedonthreefactors–age,grossincome,filingstatus.Therearespecialrulesfordependents,survivingspouses,U.S.CitizensandresidentslivingoutsidetheU.S.,residentsofPuertoRico,andindividualswithincomefromU.S.possessions.
RemembertousetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglessonwhendeterminingwhomustfile.
What do I need to know?
Todecidewhethersomeonemustfileataxreturn,youneedtoknowtheindividual’s:
• Age
• Grossincome
• Filingstatus
Publication17,Chapter1–FilingInformation,containsadditionalinformationforotherindividualswhomustorshouldfileareturn–dependents,childrenunderage18,self-employed,aliens.
Where do I get information on the taxpayer’s age?
Lookattheapprovedintakeandinterviewsheetforthetaxpayer’sdateofbirth.Confirmthisdateduringtheinterview.Refertothesampleapprovedintakeandinter-viewsheetatthebeginningoftheVolunteerResourceGuide.
Lesson 3: Filing Basics
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Optional:Publication552
Review objectives with the class.
Point out the resources cited under What do I need?
Direct the students to the appropriate line of the approved intake and interview sheet.
Lesson 3: Filing Basics3-2
Where do I get information on the taxpayer’s gross income?
Anapproximationofgrossincomeisenoughtoseeifataxpayermustfileareturn.Grossincomeisalltheincomethetaxpayerreceivedduringthetaxyearintheformofmoney,goods,property,andservicesthatarenotexemptfromtax.Itincludesbothearnedandunearnedincome.
TheIncomesectionoftheVolunteerResourceGuide(TabD)liststhesourcesofincomethatshouldbeincludedandexcludedindeterminingaperson’sgrossincome.YoucanalsorefertotheIncomelesson.
Toapproximategrossincome:
• Obtainthetotalofwages,tips,andotheremploy-mentcompensationreportedinbox1ofthetaxpay-er’sForm(s)W-2
• Onpage2oftheapprovedintakeandinterviewsheet,reviewtheincomequestionswiththetaxpayertoseeiftherewasanyadditionalincome(frominvestments,retirementplans,socialsecu-rity,unemployment,orotherincomenotreportedonFormW-2orForm1099)anddetermineeachamount.TakealookatPartIVonPage2ofthesampleapprovedintakeandinterviewsheetatthebeginningoftheVolunteerResourceGuide.
Totaltheaboveamountsofincometodeterminethetaxpayer’sapproximategrossincome.
Where do I get information on the taxpayer’s filing status?
Taxpayersmayormaynotknowwhichfilingstatustouse.Forthepurposesof determiningwhetherapersonmustfileareturn,narrowingthechoicesdowntothemost likelyfilingstatus(es)isadequateinmostcases.
example
Basedontheapprovedintakeandinterviewsheetshownbelow,thistaxpayerwillmostlikelyusetheMarriedFilingJointlyfilingstatus.
Donotincludesocialsecuritybenefitswhendeterminingfilingrequirementunlessthetaxpayerismarried,filingaseparatereturn,andlivedwiththeirspouseatanytimeduringthetaxyear.
Remind the students to assemble all of the income reporting documents.
Point out that exclud-able, in this case, means not taxable.
Emphasize the importance of using the approved intake and interview sheet at the beginning of the process.
Review the example shown here.
Usethegrosssaleprice,notthenetprofit,whenestimatinggrossincomeforataxpayerwhosoldstockorotherassets.
Lesson 3: Filing Basics 3-3
ExErcisEs
ChecktheTaxpayerInformationsectionoftheapprovedintakeandinterviewsheetfor:
• Thetaxpayer’smaritalstatus
• Whetherthetaxpayercanbeclaimedasadependentonsomeoneelse’s taxreturn
• Thetaxpayer’spotentialdependents
UsetheVolunteerResourceGuide’sDeterminationofFilingStatusdecisiontreeandtheInterviewTips(TabB)forhelpfulprobingquestions.
Who is legally required to file a federal tax return?Todeterminewhetherataxpayerislegallyrequiredtofileareturn,startwiththeVolunteerResourceGuide(TabA),ChartA–ForMostPeopleWhoMustFile,andChartB–ForChildrenandOtherDependents.TurntherenowandreviewthedollaramountsinbothChartsAandB.
For Special Situations
IftheWhoMustFilechartsshowthatanindividualisnotrequiredtofileareturn,thencontinuetotheChartC–OtherSituationsWhenYouMustFileintheVolunteerResourceGuide(TabA)toseeifanyofthefollowingspecialconditionsrequirethepersontofile.
Someofthemostcommonsituationsyoumayseewhenindividualsarelegallyrequiredtofileareturnare:
• Self-employedwithnetearningsof$400ormore
• Advanced Earned Income Tax Credit payment recipientswhohaveanamountinbox9oftheirFormsW-2
• Taxpayers who owe Special Taxes
RefertotheWhoMustFilesectionoftheVolunteerResourceGuidetoanswerthesequestions.Answersareattheendofthelessonsummary.
Question 1:Bobis27yearsold.Hisgrossincomewas$9,550duringthetaxyear.Basedonlyonthisinformation,isherequiredtofileataxreturn?þ Yes ¨ No
example
Lucy,is36yearsold,single,andhergrossincomeis$20,000.ShemustfileataxreturnandwillusetheSinglefilingstatus.
example
HenriettaandJavieraremarriedandplantofileajointreturn.Henriettais67andhadagrossincomeof$11,000forthetaxyear.Javieris66.Hisgrossincomewas$5,000fortheyear.Sincetheircombinedgrossincomeis$16,000,theydonothavetofileareturn.
Explain that many military couples who are separated by the service assume they must file separately. The decision tree can help correct this mis-conception.
Assign the exercises.
Review the answers with the class when complete.
Point out that the amounts change each year.
Use the examples to illustrate the use of the Volunteer Resource Guide.
Bob’s gross income was over $9,350.
Lesson 3: Filing Basics3-4
ExErcisEs (continued)
Question 2: JanetandHarryaremarriedandusuallyfilejointly.Duringthetaxyear,sheturned66andheturned64.Theirgrossincomewas$16,200.Basedonlyonthisinformation,aretheyrequiredtofileataxreturn?£ Yes þ No
Question 3: JuanitacanfileasaQualifyingWidowwithDependentChild.Sheis47yearsold.Hergrossincomewas$15,400.Basedonlyonthisinformation,issherequiredtofileataxreturn? þ Yes £No
Who should file?
Evenifanindividualisnotrequiredtofileataxreturn,theyshouldfileareturnto getmoneybackiftheyqualifyincertainsituations.Remembertousetheinterview techniquesandtoolsdiscussedintheScreeningandInterviewinglesson.
Who should file a federal tax return?
Althoughsomeindividualsmaynotberequiredtofile,theyshouldfileareturniftheyareeligibletoclaim:
• Arefundofwithheldtaxes
• TheEarnedIncomeCredit(EIC)
• TheAdditionalChildTaxCredit
• TheHealthCoverageTaxCredit
• TheFirst-TimeHomebuyerCredit
Taxpayerswhoshouldfilemaybeentitledtoataxcreditandfilingareturnistheonlywaytogetit.
TheseitemsarelistedintheVolunteerResourceGuide(TabA)WhoMustFilesection,ChartD–OtherSituations.
Individualswhoarenotrequiredtofileareturnandwhowouldnotbenefitfromfilingareturncanreducethecost,time,andeffortofunnecessaryprocessingbynotfiling areturn.
How do I find out if a taxpayer is eligible to claim a refund?
Todeterminewhetherapersonshouldfileareturninordertoclaimataxrefundorrefundabletaxcredit,checkthetaxpayer’s:
• Form(s)W-2(boxes2and17)andForm(s)1099
• TheFamilyandDependentInformationsectionoftheapprovedintakeand interviewsheet
Thetaxpayermayqualifyforataxrefund,EarnedIncomeTaxCredit,and/orAdditionalChildTaxCreditif:
• Federalorstateincometaxwaswithheldonanyincomeform,and/or
• Thetaxpayerhadearnedincome,and/or
• Thetaxpayerhasaqualifyingchild
Direct students to this section of the Volun-teer Resource Guide.
Their combined gross income was less than $19,800.
Her gross income was over $15,050.
Lesson 3: Filing Basics 3-5
Whenindoubt,itmaybeworthwhiletobeginataxreturnforthetaxpayerandthenfilethereturnonlyifthetaxpayeriseligibleforarefund.
RefertaxpayerswhomayqualifyfortheHealthCoverageTaxCredittoaprofessionaltaxpreparer.
How do I verify taxpayer identity?
Toverifyataxpayer’sidentity,usetheinterviewtech-niquesandtoolsdiscussedintheScreeningandInterviewinglesson.
What documents do I use to verify identity?
Beforeyouenterthetaxpayeridentificationinformationonthetaxreturn,youshouldfirstverifytheidentityofthetaxpayer(s),theaccuracyofeachSSN(orITIN),andthespellingofnamesenteredonthetaxpayer’sapprovedintakeandinterviewsheet.
• Asktoseeasocialsecuritycard,anITINletter,orotherlegaldocumentforeachindividualwhowillbelistedonthereturn
• Asktoseeproofofidentityforthetaxpayer(andthespouseiffilingajointreturn)
• VerifytheSSN(orITIN)andproofofidentityareforthesameperson
• VerifytheSSN(orITIN)andthespellingofeachindividual’snameonthesocialsecuritycardorotheracceptabledocumentsmatchtheinformationyouenteronthetaxreturn
• Verifytheaddressandbirthdateontheapprovedintakeandinterviewsheetmatchestheinformationontheidentificationanddiscussanydiscrepancieswith thetaxpayers
• Makesurethetaxpayerunderstandshowcriticalitistohavethecorrectinformationinordertoreceiveanyage-relatedtaxbenefits
Taxpayerswhocannotsubstantiatetheiridentityshouldseekprofessionaltaxassistance.
What are Taxpayer Identification Numbers?
IRSregulationsrequirethateachpersonlistedonaU.S.federalincometaxreturnhaveavalidTaxpayerIdentificationNumber(TIN).ThetypesofTINsare:
• Socialsecuritynumber(SSN)
• IndividualTaxpayerIdentificationNumber(ITIN)
• AdoptionTaxpayerIdentificationNumber(ATIN)
Who has a social security number?
AnyindividualwhoislegallyeligibleforemploymentintheUnitedStatesmusthaveasocialsecuritynumber(SSN).
Identitydocumentsconsistofadriver’slicense(U.S.),employerID,schoolID,birthcertificate,stateidentifica-tioncard(U.S.),MilitaryID,nationalidentitycard,visa,orpassport.However,anyothervalidformofidentificationthatwouldnormallybeusedtoproveidentityisacceptable.
Point out that time spent verifying these issues can save time for the site coordinator and the taxpayer.
TheEarnedIncomeTaxCreditmayapplywithorwithoutachild.SeetheEarnedIncomeCreditandChildTaxCreditlessonsfordetailsondeter-miningeligibilityforthesetaxcredits.
Remind students that some taxpayer’s needs are beyond the scope of the VITA/TCE pro-gram.
SomeCanadianshavebothU.S.andCanadiansocialsecuritynumbers.NeverusetheCanadiannumberonaU.S.taxreturn.
Lesson 3: Filing Basics3-6
Who has an Individual Taxpayer Identification Number?
Someindividualswhoneedtofiletaxreturnsdonothavesocialsecuritynumbers.TheIRSissuesanITINtononresidentsandotherslivingintheU.S.whoarerequiredtohaveaU.S.TINbutwhoarenoteligibletoobtainSSNs.
TheITINcontainsninedigitsandisformattedlikeanSSN(XXX-XX-XXXX),butbeginswiththenumber9.YoushouldentertheITINonthereturnwhereverthesocialsecuritynumberisrequested.
Who has an Adoption Taxpayer Identification Number?
TaxpayerswhoareintheprocessofadoptingachildandwhoareabletoclaimthechildastheirdependentorareabletoclaimachildcarecreditneedanATINfortheiradoptivechild.
TheIRSissuesanATINforthechildwhilefinaldomesticadoptionispending,andtheadoptingtaxpayersdonothavethechild’sSSN.
LikeanITIN,thenine-digitATINbeginswiththenumber9.YoushouldentertheATINonthereturnwhereverthechild’ssocialsecuritynumberisrequested.
What are acceptable documents if the taxpayer doesn’t have a social security card?
Forindividualswhodonotbringtheirsocialsecuritycard,youmayaccepteitherofthefollowing:
• AnSSAletter
• AnITINcardorletter
Taxpayer,spouse,anddepen-dentnameandsocialsecuritynumbermismatchisratedasoneofthetopfiveerrorsinprocessingataxreturn.
TaxpayerswhocannotobtainanSSNmustapplyforanITINiftheyfileaU.S.taxreturnorarelistedonataxreturnasaspouseordependent.ThesetaxpayersmustfileForm W-7,ApplicationforIndividualTaxpayerIdentificationNumberandsupplydocumentationthatwillestablishforeignstatusandtrueidentity.AfederaltaxreturnmustbeassociatedwithallFormW-7applicationswithexceptionsasnotedintheinstructionsforFormW-7.
Driver’slicensesand passportsarenotacceptablesubstitutesforsocialsecurityorTINcards.
Lesson 3: Filing Basics 3-7
What if the taxpayer doesn’t have an SSN or ITIN?
ForindividualswithoutavalidSSN,explainthattheymusthaveataxpayeriden-tificationnumberbeforeyoucanassistthem.DirectthemtotheSocialSecurityAdministrationandadvisethemtocompleteFormSS-5,SocialSecurityNumberApplication.IftheindividualisnoteligibleforanSSN,referthemtotheIRSforFormW-7,ApplicationforIndividualTaxpayerIdentificationNumber.
ForataxpayerwhocannotobtainanSSNandhasnotyetappliedforanITIN,youcanuseatemporaryidentificationnumbertopreparethereturninthetaxsoftware.TurntoApplyforanITIN,intheVolunteerResourceGuide(Tab1).
WhenpreparingataxreturnforanITINapplication,includeallFormsW-2,eveniftheTINontheW-2doesnotbelongtothetaxpayer.Donot changeanyinformationontheW-2.Senditinwiththereturnasis.Sinceitisnotgoingtobetransmittedelectronically,itdoesnotmatteriftheTINdoesnotmatchinthesoftware.
AttachthetaxreturnbehindFormW-7,ApplicationforIndividualTaxpayerIdentificationNumberalongwithdocumentationthatwillestablishforeignstatusandtrueidentityandhavethetaxpayersubmitaccordingtoFormW-7instructions.
• Ifitisnotavailableatthevolunteersite,thetaxpayercanobtainFormW-7bycallingtheIRSat1-800-829-3676(1-800-TAXFORM)oratwww.irs.gov
• IftaxpayersneedassistanceincompletingFormW-7,referthemtoanIRSwalk-inofficeorforprofessionalassistanceunlessavolunteeratthatsitehasbeentrainedincompletionofFormW-7oranauthorizedacceptanceagentisavailable
What if the TIN on the Form W-2 doesn’t match the TIN on the tax return?
SSN(orITIN)onthetaxpayer’sFormW-2isexpectedtomatchtheoneyouenteredonthetaxreturn.Amismatchwilldelayreturnprocessingandcancreateseriouserrors.
Taxpayers with a valid SSN
Ifthetaxpayer’sFormW-2doesnothavethecorrectSSN,youcanpreparethetaxreturnwiththematerialsprovided.However,thetaxpayerneedstorequestacorrectedFormW-2fromtheemployerbeforesubmittingthetaxreturn.
Taxpayers with a valid ITIN
TaxpayerswhofiletaxreturnsundertheirITINs(andothertaxpayerswithoutvalidSSNs),oftenattachFormsW-2showingerroneousSSNs.IfsuchanITIN/SSNmismatchoccurs:
• DonotchangeanyinformationontheFormW-2
• Effectivein2006,itisacceptabletoe-fileareturnwithanITIN/SSNmismatch
• ThereturnshouldreflecttheITINforthetaxpayer,nottheSSNonFormW-2
• WheninputtingtheFormW-2(s),themismatchedSSNshouldbeenteredexactlyasshownontheFormW-2issuedbytheemployer
• ThetaxpayerisnoteligiblefortheEarnedIncomeCredit(EIC)
Ifpreparingthereturnonpaper,leavetheTINspacesonthereturnblankandfollowtheW-7procedures.
Lesson 3: Filing Basics3-8
ExErcisEs (continued)
Question 4:Itisyourresponsibilityasavolunteertaxpreparertochecktheaccuracyofeverysocialsecuritynumberprovidedtoyoubytaxpayers. þ True ¨ False
How do I enter the identification data?
Forpaperreturns,fillinthename,address,andsocialsecurityinformationinthelabelsectionofthereturn.Ifyouareusingtaxsoftware,turntotheMainInformationSheetsectionintheVolunteerResourceGuide(Tab1).Besuretoreadallthedetailsandhelpfulhintsforenteringthetaxpayer’sidentificationinformation.
Tax Software Hint:TurntotheVolunteerResourceGuide(Tab1)formoreinformationabouttheMainInformationSheet.
How do I choose the appropriate tax return form?AlltaxpayerscanuseForm1040.IndividualsmustmeetcertainrequirementstouseForm1040EZorForm1040A.
Tax Software Hint:Ifyouaree-filingthetaxreturns,theIRSdoesnotcarewhichformisused.Youmaydeterminetheeasiestformforthetaxpayer’sbenefit.ThisinformationisdisplayedatthetopoftheMainInformationSheet.
Form 1040EZ
Ofallthetaxreturnforms,Form1040EZisthesimplest.Theone-pageformisdesignedforindividualswhofileaseitherSingleorMarriedFilingJointlyandwhohavenodependents.Mostindividualswhocanbeclaimedasadependentonanothertaxpayer’sreturnuseForm1040EZ.
Form 1040A
Form1040Aisatwo-pageform.Page1showsthefilingstatus,exemptions,income,andadjustedgrossincome.Page2showsstandarddeduction,exemptionamount,taxableincome,tax,credits,payments,amountowedorrefund,andsignature.
TurntotheWhichFormtoFilechartintheVolunteerResourceGuide(TabA)toseewhichincomeandexpensescanbereportedwithaForm1040A.
Demonstrate how the tax software warns the user if a social security number might be incorrect or invalid.
example
Trudy,asingle22-year-oldfull-timecollegestudent,isclaimedasadependentonhermother’staxreturn.LastyearTrudygrossed$6,100fromherpart-timejobasanadministrativeassistant.TrudyshoulduseForm1040EZ.
Ask a volunteer to read the Trudy example.
Assign the exercise.
Review the answer with the class when complete.
Checking the accuracy of names and social security numbers prevents delays.
Lesson 3: Filing Basics 3-9
ExErcisEs (continued)
Form 1040
Form1040isatwo-pageformthatcontainsalltheentriesonForm1040Aplusentriesformoretypesofincome,itemizeddeductions,andothertaxes.Form1040providesschedulesforreportingthesevarioustypesofincomeanddeductions.
Taxpayerswhosetaxableincomeexceeds$100,000orwhohaveself-employmentincomemustuseform1040.
Which tax form do I select?
Whenfillingoutapapertaxreturn,youcanrefertotheWhichFormtoFiletableintheVolunteerResourceGuide(TabA)asyouinterviewthetaxpayer.
Whenusingtaxsoftware,alwaysselectForm1040fromtheMainInformationSheet.Basedontheinfor-mationyouenterwhencompletingthereturn,theprogramwilltellyouthesimplestformtouse.Allreturnsfiledelectronicallyaretransmittedinthesameformatregardlessoftheformselected.
UsingtheVolunteerResourceGuide,answerthefollowingquestions.
Question 5: LennyandLisaarefilingajointreturnandhavenodependents. Theircombinedincomewas$31,000,whichincluded$35intaxableinterestandtwomonthsofunemploymentincomeforLisa.Theywanttotakethestandarddeduction.WhichisthesimplestformthatLennyand Lisacanusefortheirtaxreturn?
Question 6: Rayismarried,butheandhiswifeStellaarefilingseparatereturns.Theircombinedincomewas$105,000,butRay’sincomewas$64,000,halfofwhichwasself-employmentincome.Rayisclaimingonlyoneexemptionforhimself,andhewantstoitemizehisdeduc-tions.WhichisthesimplestformthatRaycanuseforhistaxreturn?
example
CynthiaisdivorcedandwillfileasHeadofHousehold.Shehastwochildrenshewillclaimasdependents.Sheownsamedicaltranscriptionbusinessandearned$35,000intaxableincomeforthetaxyear.Sheplanstoitemizeherdeductions.CynthiawillfileForm1040.
example
RamonandJuliaaremarriedandhavetwodependents.TheywillfileMarriedFilingJointly.Theirsourcesofincomeincludesalariesfromtheirjobs,Ramon’spension,andJulia’sIRA.Theircombinedtaxableincomewas$65,000forthetaxyear.RamonandJuliacanfileForm1040or1040A,however,Form1040Aisrecommended.
Ask a volunteer to read the Ramon and Julia example.
Ask a volunteer to read the Cynthia example.
Assign the exercises.
Review the answers with the class when complete.
Form 1040EZ
Form 1040
FortaxpayerswhofiledForm1040EZorForm1040Athepreviousyear,determinewhethertheirsituationhaschanged.ItmaybetotheiradvantagetofileForm1040ifadditionaladjustmentsordeductionswillresultinalowertax!
Lesson 3: Filing Basics3-10
How do I file a return?
AreturncanbefiledbysendinginapaperreturnorbyusingIRSelectronicfiling(e-file).
What is electronic filing?
IRSe-fileisaquickandeasyalternativetotraditionalpaperreturns.MostVITA/TCEvolunteersitesarenowsetupforfilingelectronicallyusingtaxsoftware.
Electronicfilingisfasterandmoreaccuratethantraditionalpaperfiling.Withe-filing, taxpayersreceivetheirrefundinhalftheusualtime,andevenfasterwithdirectdeposit.
How do the two filing procedures compare?
What do I tell taxpayers about recordkeeping?
Taxpayersshouldkeepacopyofthetaxreturn,worksheetsused,andrecordsofallitemsappearingonit(suchas1099forms)untilthestatuteoflimitationsrunsoutforthatreturn.Usually,thisisthelaterof:
• Threeyearsfromthedatethereturnwasdueorfiled,or
• Twoyearsfromthedatethetaxwaspaid
How do I file a traditional paper return? How do I file an IRS e-file return?Manuallyreviewallentriesandcheckcalculations.
Checkthesoftwareformstreeforanyredexclamationpoints;reviewcorrespondingformsandcompleteredentries.
Rundiagnosticsandcorrecterrors.EnterthesiteidentificationnumberinthePaidPreparersection.
ThesoftwareautomaticallyentersthesiteidentificationnumberinthePaidPreparersectionofthereturn.
Assemblethereturnwithallitsproperlylabeledforms,schedules,andattach-mentsinthecorrectsequence.
Thesoftwareautomaticallyassembles andlabelsallofthereturn’sforms, schedules,andattachments.
Submitforqualityreview.
• Correcterrorsasneeded
Createthee-fileandsubmitfor qualityreview.
• Ifneeded,correcterrors,re-rundiagnostics,andrecreate thee-file
Providetwocopiesofthetaxreturnto thetaxpayer.
Havethetaxpayersignthereturn.
• Printonecopyofthereturnfortaxpayer.
• Print2copiesofForm8879,ifapplicable(oneforthetaxpayerandoneforthevolunteersite).
• HavethetaxpayersignbothcopiesofForm8879,ifapplicable.ProvideinstructionsonwhereandwhentosendthetaxreturntotheIRS.
ElectronicallyfiledreturnsaretransmittedtothecorrectIRSProcessingCenter,usuallybytheSiteCoordinator.Thetaxpayerdoesn’tmailanything.
Point out that some of the common elements are: quality review, site ID nos, and signature (man-ual or PIN docs.)
DetailedinstructionsforcompletingandfilingthereturnarecoveredintheConcludingtheInterviewlesson.
Lesson 3: Filing Basics 3-11
ExErcisEs (continued)
Taxpayersshouldkeep:
• FormsW-2untiltheSocialSecurityAdministrationhasrecordedtheearningsreflectedontheforms
• Propertyrecords(includingthoseonahome)aslongastheyareneededtofigurethebasisoftheoriginalorreplacementproperty
• Closingstatementsforahomeuntilthehomeissold
• Brokeragestatementsshowingthepurchasepriceofstockuntilthestockissold
• RecordsofcontributionstonondeductibleIRAsuntilallIRAfundsarewithdrawn
• Calculationsdeterminingthenontaxableportion ofpensionincomeuntilallofthepensionincome istaxable
How do I answer taxpayers’ administrative questions?
TheVolunteerResourceGuideandPublication17containtheanswerstomany administrativequestionsthatareaskedbytaxpayersduringtheinterviewprocess.
Suchquestionsas:“HowcanIgetacopyofmyprioryear’sreturn”or,“HowcanIgetacopyofanIRSformorpublication”canbeansweredbyresearchingyourreferencematerials.
Turntothe“FrequentTaxpayerInquiries”locatedatthebackoftheVolunteerResourceGuideandreviewthishelpfulinformation.Foralistofphonenumbersyoucanprovidetotaxpayers,refertothebottomportionofthe“ContactInformationforVolunteers,”locatedonthebackoftheVolunteerResourceGuide,
ReviewtheindexinthebackofPublication17andlocatetheanswerstothetaxpayers’inquiriesforquestionsnotansweredintheVolunteerResourceGuide,
Usingyourreferencematerials,answerthefollowingquestion.
Question 7:AtaxpayerwantstoknowwhatthePresidentialElectionCampaignFundis.Wherecan youfindthatinformation?
AdditionalinformationonavarietyoftopicscanbeobtainedbycontactingtheIRSat1-800-829-1040,accessingtheirwebsiteatwww.irs.gov,orbyvisitinganIRSTaxAssistanceCenterinyourarea.
Foradditionalrecordkeepinginformation,seePublication552,RecordkeepingforIndividuals.
If the internet is avail-able, demonstrate the search feature of the IRS website
Assign the exercise.
Review the answer with the class when complete.
Publication 17 - the chap-ter on Filing Information.
Lesson 3: Filing Basics3-12
What potential pitfalls should I keep in mind?
Remember:
• Alwaystreattheinformationusedtoprepareanindividual’sincometaxreturn asconfidential.
• Canadianshaveanumberthatislikeasocialsecuritynumber,butitisfortheiroldagepension.DonotusethisnumberonaU.S.taxreturn.CanadiansoftenhavebothaU.S.andaCanadiansocialsecuritynumber.
• ManytaxpayerserroneouslyreportamountsfromForm1099-MISC,MiscellaneousIncome,withwagesorotherincome.Incomefrombox7oftheForm1099-MISCgenerallyshouldbereportedonScheduleCorC-EZandonScheduleSE,Self-EmploymentTax.Iftheincomeisreportedincorrectly,theIRSmaylaterissueanoticeofproposedtaxincreasefortheself-employmentincomeandtax.
• Bealerttothefollowingpossibleindicationsoffraudulentactivity:
- AFormW-2thatistyped,handwritten,orhasnoticeablecorrections
- AFormW-2fromacompanythatlooksdifferentfromotherFormsW-2issuedbythesamecompany
- Asuspiciouspersonaccompanyingthetaxpayerandobservedonotheroccasions
- MultiplerefundsdirectedtothesameaddressorP.O.box
- Employmentorearnings,whichareabasisforrefundablecredits,thatarenotwelldocumented
- Similarreturns(e.g.,sameamountofrefund,orsamenumberofdependents,orsamenumberofFormsW-2)
Notifyyoursitecoordinatorifyoususpectanyfraudulentorunusualactivity.
Which forms and documents need to be filed?
Turntothechartthatliststheforms,typesofincome,andthelineitementriesforbothForm1040andthetaxsoftwareintheVolunteerResourceGuide(Tab2).
Tax Software Hint: Oncethemaininformationandincomestatementsareentered,thesoftwareautomaticallymakesavailablemostformsandapplicablesched-ules.Thesecreditformsandscheduleswillbeannotatedwitharedexclamationpoint.Thevolunteermuststillbealerttootherdeductionsandcredits(suchasAmericanOpportunity,Hope,andLifetimeLearningCredits,andretirementsavingscontributioncreditifthereisonlyaRothIRAcontribution).
Point out that volun-teers should notify their site coordinator of any suspicious behavior.
Lesson 3: Filing Basics 3-13
Practice – Vanessa Franklin
Let’spracticewhatwe’velearnedwithourtaxpayer,VanessaFranklin.GotoAppendixA-1todetermineifVanessahasafilingrequirementandverifyheridentity.
Summary
Who must file?
Todeterminewhetheranindividualisrequiredtofileafederaltaxreturn:
• Obtaintheperson’sage
• Calculatetheperson’sapproximategrossincome
• Determinetheperson’slikelyfilingstatus
• UsethetableandguidelinesintheWhoMustFilesectionoftheVolunteerResourceGuide(TabA)
How do I verify taxpayer identity?
Beforeenteringthetaxpayer’sidentityinformationintheMainInformationSheetortheappropriatetaxreturnform,firstverifytheidentityofthetaxpayer(s),theaccuracyofeachSSN(orITIN),andspellingofnameswiththeappropriatedocuments.
Which tax return form should I use?
ThethreefederaltaxreturnformsareForm1040EZ,Form1040A,andForm1040.
Whencompletingapapertaxreturn,refertotheWhichFormtoFiletableintheVolunteerResourceGuide(TabA).
Whenusingtaxsoftware,alwaysselectForm1040fromtheMainInformationSheet.Afteryouhavecompletedthereturn,theMainInformationSheetwilltellyouthesimplestformyoucanusetoprintthereturn.
Filing the Return
MostVITA/TCEvolunteersitesarenowsetupforfilingelectronicallyusingtaxsoft-ware.E-filingisfasterandmoreaccuratethantraditionalpaperfiling,andtaxpayersreceivetheirrefundinhalftheusualtime.
Recordkeeping Requirements
Taxpayersshouldkeepacopyofthetaxreturn,worksheetsused,andrecordsofallitemsappearingonit(suchasForms1099)untilthelaterof:
• Threeyearsfromthedatethereturnwasdueorfiled,or
• Twoyearsfromthedatethetaxwaspaid
RefertoPublication552,RecordkeepingforIndividuals,formoreinformation.
Review the lesson summary with the class.
Direct students to Appendix A, page A-1.
Lesson 3: Filing Basics3-14
ExErcisE answErs
Answer 1: Yes, Bob is required to file a return because his gross income was over $9,350.
Answer 2: No, Janet and Harry are not required to file because their combined gross income was less than $19,800.
Answer 3: Yes, Juanita must file because her gross income was over $15,050.
Answer 4: True. To prevent processing delays, you should check the accuracy of each social security number, as well as the spelling of the name associated with the number.
Answer 5: Lenny and Lisa can use Form 1040EZ to file their tax return.
Answer 6: Ray will need to file Form 1040 both for two reasons: because he had self-employment income and because he is itemizing deductions.
Answer 7: The index in Publication 17 directs us to a paragraph in the chapter on Filing Information.
Notes
Lesson 4: Filing Status 4-1
Instructor Notes
Lesson 4: Filing Status
Introduction
Thislessonwillhelpyoudeterminethemostadvantageous(andallowable)filingstatusforthetaxpayer.Selectingandenteringthecorrectfilingstatusisacriticalcomponentofcompletingthetaxpayer’sreturn.
Reportingofthecorrectfilingstatusishandleddifferently,dependingonwhichtaxformyouuse:
• Form1040orForm1040A:checktheboxfortaxpayer’sfilingstatusintheFilingStatussection.
• Form1040EZ:doesnotrequireanentryforfilingstatus.UseitonlyfortaxpayersfilingasSingleorasMarriedFilingJointlywithnodependents.
Todetermineataxpayer’sfilingstatus,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.SeetheVolunteerResourceGuide(TabB)fortheDeterminationofFilingStatusdecisiontreeandtheinterviewtipsforhelpfulprobingquestions.
Objective
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determinethemostadvantageous(andallowable)filingstatusforthetaxpayer
What are the five filing statuses?
Taxpayersmustuseoneoffivefilingstatuses.Filingstatusimpactsthecalculationofincometax,affectstheamountofthestandarddeduction,anddeterminesallowanceorlimitationofcertaincreditsanddeduc-tions.Thefollowinglistputstheminorderfromthemostbeneficialtotheleastbeneficialtothetaxpayer.
• MarriedFilingJointly
• QualifyingWidow(er)withDependentChild
• HeadofHousehold
• Single
• MarriedFilingSeparately
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17Optional:□ Publication501□ Publication 555□ Publication971□ Form1040□ Form8379
Taxpayersmayqualifyformorethanonefilingstatus.Choosethefilingstatusthatresultsinthelowesttax(mostbeneficial)forthetaxpayer.UsetheVolunteerResourceGuide(TabB)tohelpdeterminethecorrectfilingstatus(es).
Point out the resources cited under What do I need?
Review objective with the class.
Refer students to Tab B in the Volunteer Resource Guide.
Ask the students which filing statuses they have used in the past. Would their taxes be higher or lower if they could use one of the other filing statuses?
Lesson 4: Filing Status4-2
Tax Software Hint:FilingstatusisselectedontheMainInformationSheet. GototheVolunteerResourceGuide(Tab1),MainInformationScreen,toreviewthesoftwareentries.
How does marital status affect filing status?
Thefirststepindeterminingthetaxpayer’sfilingstatusistoconfirmtheirmaritalstatuson the last day of the tax year. Avoidusingtheinformationfromtheprioryear,asitmayhavechanged.
Generally,taxpayersareconsideredtobeunmarriedfortheentireyearif,onthelastdayofthetaxyear,theywere:
• Unmarried
• Legallyseparated,underaseparatemaintenancedecree,or
• DivorcedunderafinaldecreeonorbeforeDecember31ofthetaxyear
Taxpayersareconsideredtobemarriedfortheentireyearif:
• Theyweremarriedonthelastdayofthetaxyear,or
• Thespousediedduringtheyearandthesurvivingspousehasnotremarried
What are the requirements for each filing status?
Therearedifferentrequirementsforeachfilingstatus.
Who is considered Single?
TaxpayerscanusetheSinglefilingstatusif,onthelastdayofthetaxyear,theywere:
• Notmarried
• Legallyseparatedordivorced,or
• Widowedbeforethebeginningofthetaxyearanddidnotremarry
Can Single taxpayers qualify for another status?
SomeSingletaxpayersqualifyforHeadofHouseholdorforQualifyingWidow(er)withDependentChildstatus,whichcanmeanalowertax.
What is Married Filing Jointly?
Marriedtaxpayerswhochoosetofileajointreturnwilluseonereturntoreporttheircombinedincomeandtodeductcombinedallowableexpenses.Marriedtaxpay-erscanselectthisstatusevenifoneofthespousesdidnothaveanyincomeoranydeductions.TheMarriedFilingJointlystatuscanbeclaimedbytaxpayerswho,onthelastdayofthetaxyear:
• Weremarriedandlivedtogetherashusbandandwife
• Weremarriedandlivingapart,butwerenotlegallyseparatedordivorced
Avoidselectingafilingstatusthatresultsinahighertaxforthetaxpayer.Forexample,Singletaxpayerswithaquali-fyingpersonmayqualifyforHeadofHousehold,whichoftenresultsinalowertax.Therulesforwhoisaquali-fyingpersonareaddressedintheWhoisHeadofHousehold?topic.Point out for Married
Filing Jointly, one Form 1040EZ, 1040A, or 1040 is filed, which covers both spouses.
Lesson 1: Course Introduction 4-3
• Livedtogetherinacommonlawmarriagethatisrecognizedinthestatewheretheycurrentlyliveorthestatewherethecommonlawmarriagebegan,or
• Didnotremarryaftertheirspousediedduring theyear
What are the responsibilities of each taxpayer on a joint return?
Filingajointreturnforacommonlawmarriageappliestothefederalreturnonly.Volunteersmustcheckstateorlocallawsbeforecompletingastatereturn.Bothtaxpayersmustincludeallworldwideincomeontheirjointreturn.Theyeachmaybeheldresponsibleforallthetaxandforanyinterestorpenaltydue,evenifalltheincomewasearnedbyonlyonespouse.Asubsequentdivorceusuallydoesnotrelieveeitherspouseoftheliabilityassociatedwiththejointreturn.
Insomecases,aspousemayberelievedofjointliability.ThistopicisbeyondthescopeoftheVITA/TCEProgram.Refertaxpayersinthissituationtoaprofessionaltaxpreparer.Formoreinformation,seePublication971,InnocentSpouseRelief.Thispubli-cationcanbedownloadedfromwww.irs.gov.
What is Married Filing Separately?
TheMarriedFilingSeparatelystatusisfortaxpayerswhoqualifyasmarriedunderthedefinitionprovidedabove,andeither:
• Choosetofileseparatereturns,or
• Cannotagreetofileajointreturn
TaxpayerswhofileasMarriedFilingSeparatelyeachreporttheirownincomeanddeductionsonseparatereturns.Theserulesdonotapplyincommunitypropertystates.Moreinformationoncommunitypropertyisdiscussedinothertopicsinthislesson.
Can Married Filing Separately taxpayers qualify for another status?
Somemarriedtaxpayersmayqualifyasunmarried,accordingtotheIRSdefinition,eveniftheyarenotdivorcedorlegallyseparated.SuchtaxpayersmaybeabletousetheHeadofHouseholdfilingstatus.FilingasHeadofHouseholdmayresultinalowertaxthanMarriedFilingSeparately.RefertotheCanmarriedtaxpayerseverfileasHeadofHousehold?topicinthislessontoseeifthe“unmarried”definitionapplies.
Therulesaroundcommonlawmarriagesarecomplexanddifferfromstatetostate.Asavolunteer,itisnotyourresponsibilitytodeterminewhetheracoupleisinvolvedinacommonlawmarriage.Ifataxpayerisnotcertain,referhim/hertoaprofessionaltaxpreparer.
Acitizenorresidentalienmarriedtoanonresidentalienmaybeabletofileajointreturn.MoreinformationcanbefoundintheUniqueFilingStatusandExemptionSituationslesson.
Ask under what cir-cumstance can some-one not be legally married on the last day of the year, but still be considered to be mar-ried for tax purposes?
Answer: If the per-son’s spouse died dur-ing the year and the person did not remarry during that same year.
Explain that if the spouse is temporarily away but is expected to return home, the tax-payer is probably not considered unmarried.
Lesson 4: Filing Status4-4
Why are taxes usually higher for Married Filing Separately?
SpecialrulesapplytoMarriedFilingSeparatelytaxpayers,whichgenerallyresultinthetaxpayerpayingahighertax.Forexample,whenfilingseparately:
• Thetaxrateisgenerallyhigherthanonajointreturn.
• Taxpayerscannottakecreditsforchildanddependentcareexpenses,earnedincome,andcertainadoptionandeducationexpenses.
• Somecreditsanddeductionsarereducedatincomelevelsthatarehalfthoseforajointreturnsuchasthechildtaxcredit,retirementsavingscontributioncredit, itemizeddeductions,andthedeductionforpersonalexemptions.
IfonespousefilingMFSisitemizing,theotherspouse,iffilingMFS,mustitemizeor takeastandarddeductionofzero.
ForthecompletelistofspecialrulesseePublication17,FilingStatus.
Are there special rules for taxpayers who live in community property states?
TheincomeoftaxpayerswholivedinArizona,California,Idaho,Louisiana,Nevada,NewMexico,Texas,Washington,orWisconsinduringthetaxyearandwhowishtofileseparatereturnsmaybeconsideredasseparateincomeorcommunityincomefortaxpurposes.Eachstatehasitsowncommunitypropertylaws.SeePublication555,CommunityProperty,formoreinformation.
IfyourlocaltaxassistanceprogramviewscommunitypropertytaxlawsforMarriedFilingSeparatelytaxpayersasbeyondthescopeoftheprogram,refersuchtaxpayerstoaprofessionaltaxpreparer.
ForMarriedFilingSeparatelytaxpayers,youmustentertheotherspouse’snameandsocialsecuritynumberorITINonthetaxreturn.ThisisexplainedintheForm1040Instructionsforline3.
Tax Software Hint: GototheVolunteerResourceGuide(Tab1).FindthesectionoftheMainInformationSheetthataddressesfilingstatus.Noticetheques-tionsaskedoftheMarriedFilingSeparatelytaxpayers.Ifthetaxpayerisinoneofthecommunitypropertystatesmentionedontheform,additionalquestionsmustbeanswered.YoumayhavetocompleteaworksheetentitledAllocationofIncomeforCommunityPropertyIncome.
If filing jointly generally results in the lowest total tax, why would married taxpayers want to file separately?
Marriedtaxpayerssometimeschoosetofileseparatereturnswhenonespousedoesnotwanttoberesponsiblefortheotherspouse’staxobligations;orbecausefilingseparatelymayresultinalowertotaltax.Forexample,ifonespousehashigh medicalormiscellaneousexpenses,orlargecasualtylosses,separatereturns
Refer students to the list in Publication 17.
ThequestionofwhoisitemizingonlycomesintoconsiderationwhenbothtaxpayersarefilingasMarriedFilingSeparately.IfonespousequalifiestofileasHeadofHousehold,thefactthattheotheroneisfilingasMarriedFilingSeparatelyandisitemizingdoesn’tapply.
Lesson 1: Course Introduction 4-5
mayresultinlowertotaltaxesbecausealoweradjustedgrossincomeallowsmoreexpensesorlossestobededucted.
AnothercommonreasontaxpayersfileasMarriedFilingSeparatelyistoavoidanoffsetoftheirrefundagainsttheircurrentspouse’soutstandingpriordebt.Thisincludespastduechildsupport,pastduestudentloans,orataxliabilitythecurrentspouseincurredwhentheywerenotmarriedtoeachother.
Ifataxpayerwantstofileseparately,askforthereasontoelectthisstatus.Ifapotentialoffsetisthereason,educatethetaxpayeraboutthepossibilityofavoidingatleasttheirshareoftherefundoffsetandattachingForm8379,InjuredSpouseAllocation.SeethePublication17Index,keyword:“InjuredSpouse,”foradditionalinformation.TheForm8379instructionsarealsoinformative.Thisformcanbee-filed.
Beawareofcommunitypropertylawrequirements,whichmayaffecttheamountoftaxowedbytaxpayerslivingincommunitypropertystates.
What if a spouse died during the tax year?
Remember,taxpayerswhosespousesdiedduringthetaxyearareconsideredmarriedtothatspousefortheentireyear,providingthesurvivingspousedidnotremarry.ThesurvivingspouseiseligibletofileasMarriedFilingJointlyorMarriedFilingSeparately.
Ifthesurvivingspousehasremarried:
• Heorshemustfileeitherjointlywiththenewspouse(MarriedFilingJointly)or separatelyfromthenewspouse(MarriedFilingSeparately)
• Thedeceasedspouse’sfilingstatusbecomesMarriedFilingSeparately
Determinethemostadvantageousfilingstatusforthetaxpayer.SurvivingspouseswhohaveadependentchildmaybeabletousetheQualifyingWidow(er)withDependentChildstatusinthetwotaxyearsfollowingtheyearofthespouse’sdeath.Thisisdiscussedinasubsequentsection.
Who is Head of Household?
TaxpayersmayqualifyfortheHeadofHouseholdfilingstatus,ifthey:
• Areunmarriedorconsideredunmarriedandarenotaqualifyingwidow(er)withdependentchildonthelastdayofthetaxyear,and
• Paidmorethanhalfthecostofkeepingupahomeduringthetaxyear,and
• Hadaqualifyingpersonlivingintheirhomeformorethanhalftheyear(exceptfortemporaryabsencessuchasschool)
Foramarriedtaxpayertobeconsideredunmarried,thetaxpayermustalsohaveachildwhoisclaimedasadependent.Exception:iftheonlyreasonthetaxpayerisnotclaiminganexemptionforthechildisbecausethenoncustodialparentcanclaimtheexemption,thisrequirementismet.
TaxpayersmayalsochoosetheHeadofHouseholdfilingstatusiftheyarenotmarriedandmaintainahomefortheirparent(s).Thishomemustbetheprincipalplaceofabodefortheparent(s),butitdoesnothavetobethesamehomeasthatofthetaxpayer.Theparent(s)mustqualifyasthetaxpayer’sdependent(s).
Display Form 8379.
Ask students to find this information in Publication 17 by using the index. Recommend they make a note of the page number.
Point out that college students who attend school in another area often qualify as living in the home.
Point out that some aspects of Head of Household filing sta-tus depend on if the qualifying person is the taxpayer’s dependent. Explain that dependent qualifications will be covered in Lesson 6.
Point out that dependent parents are not required to live with the taxpayer.
Lesson 4: Filing Status4-6
ExErcisEs
Who is a qualifying person for Head of Household status?
TurntotheVolunteerResourceGuide(TabB),FilingStatus.LookattheDeterminationofFilingStatus–DecisionTree.
Aqualifyingpersonisdefinedas:
• Aqualifyingchild
• Amarriedchildwhocanbeclaimedasadependent
• Adependentparent
• AqualifyingrelativewholivedwiththetaxpayermorethanhalftheyearandisoneoftherelativeslistedintheVolunteerResourceGuideInterviewTipsforDependencyExemptionforQualifyingRelativeunder Step1only.SeeFootnote7.
Foramarriedtaxpayer,thequalifyingpersonforHeadofHouseholdmustbethetaxpayer’sdependentchild.(Exception:thenoncustodialparentrule.)
Answersareafterthelessonsummary.
Question 1:Alexandra’syoungerbrother,Sebastian,isseventeenyearsold.SebastianlivedwithsomefriendsfromJanuary-Februaryof2009.FromMarch-Julyof2009,helivedwithAlexandra.August1,Sebastianmovedbackinwithhisfriends,withwhomhestayedfortherestoftheyear.SinceSebastiandidnothaveajob,Alexandragavehimmoneyeverymonth.AssumingAlexandrahadnootherdependents,canshefileas“HeadofHousehold”for2009?¨ Yes þ No
NoticethattherelativesthatqualifyapersonforHeadofHouseholdmaynotbethesamerelativesthatcouldqualifyataxpayerforadependencyexemption.
WhenyougettoStep7oftheFilingStatusInterviewTipsintheVolunteerResourceGuide,besuretorefertothedefinitionsofaqualifyingpersononthepreviouspageifyouhaveanyquestions.
example
SinceJoan’shusbanddiedfiveyearsago,shehaslivedwithherfriend,MaryAnn.JoanisaU.S.citizen,sheissingleandlivedwithMaryAnnallyear,shehadnoincomeandreceivedallofhersupportfromMaryAnn.MaryAnnisalsoawidow.NoonecanclaimMaryAnnasadependentonhisorherreturn.Joanfallsunderthedefinitionofa“qualifyingrelative”andMaryAnncanclaimJoanasadependentonherreturn.
However,JoanwouldnotqualifyMaryAnnforHeadofHouseholdpurposes,becauseshedoesnotfallunderthe“otherrelative”definitionstatedintheVolunteerResourceGuide(TabB),FilingStatus.
No, because Sebastian only lived with Alexandra for five months, which is less than half the year.
Refer students to the Who is a Qualifying Person Qualifying You To File as Head of Household? table in the Volunteer Resource Guide (Tab B).
Ask a student to read the exercise.
Review student answers with the class when complete.
Ask a volunteer to read the example about Joan and Mary Ann.
Point out that Joan falls under the defi-nition of qualifying relative defined in the Dependency Exemp-tion for Qualifying Relative table in the Volunteer Resource Guide (Tab C).
Refer students to the Filing Status decision tree in the Volunteer Resource Guide (Tab B). Apersonmayqualify
asa“qualifyingrelative”dependent,butnotqualifythetaxpayerforHeadofHouseholdfilingstatus.
ThequalifyingpersonforHeadofHouseholdfilingstatusisalwaysrelatedtothetaxpayer.
Lesson 1: Course Introduction 4-7
ForHeadofHousehold,aqualifyingchilddoesnothavetobeadependentof thetaxpayer.Exception:amarriedtaxpayerconsideredunmarriedforHeadofHouseholdpurposes.
Ifthechildisnotthetaxpayer’sdependent,enterthequalifyingchild’snameonline4ofForm1040AorForm1040.Onlyenteronechild’sname.
Tax Software Hint:TurntotheVolunteerResourceGuide(Tab1).FindtheMainInformationSheetthatshowsthefilingstatussection.Thechild’snameandsocialsecuritynumbermustbeenteredinline4ifthechildisnotincludedintheDependents/Nondependentssection.
What are the advantages of filing as Head of Household?
TheHeadofHouseholdfilingstatusprovidesahigherstandarddeductionand, generally,alowertaxratethanSingleorMarriedFilingSeparately.
Can married taxpayers ever file as Head of Household?
MarriedtaxpayersmaybeconsideredunmarriedandfileasHeadofHouseholdiftheymeetthetestsformarriedpersonslivingapartwithdependentchildren.TaxpayersareconsideredunmarriedandcanfileasHeadofHouseholdifthey:
• Fileareturn,separatefromtheirspouse,forthetaxyear.Ifajointreturnhasbeenfiled,thefilingstatuscannotbechangediftheduedateofthereturnhaspassed.
• Havepaidmorethanhalfthecostofkeepinguptheirhomeforthetaxyear.SeePublication17,FilingStatus:HeadofHouseholdfortheCostofKeepingUpaHomeworksheet.
• Havelivedapartfromtheirspouseduringtheentirelastsixmonthsofthetaxyear.Thespouseisconsideredtohavelivedinthehomeeveniftemporarilyabsentduetospecialcircumstances,suchasmilitaryserviceoreducation.
• Haveprovidedthemainhomeofadependentchild,stepchild,adoptedchild,orfosterchildplacedbyanauthorizedagencyformorethanhalftheyear.Certainexceptionsexist.Tofinddetails,seePublication17,PersonalExemptionsandDependents,ExemptionsforDependents,andChildrenofDivorcedorSeparatedParents.
Taxpayerswhoaredivorcedorlegallyseparatedunderaseparatemaintenanceagree-mentareconsideredsingle.TheycanfileasSingle,ortheymightqualifyforHeadofHousehold.TheywouldhavetomeetthesamerulesasasinglepersonwouldforHeadofHousehold.
AtaxpayerwhoismarriedtoanonresidentalienspousemaybeabletofileasHeadofHouseholdeveniftheyhavelivedtogetherduringtheyear.ReviewtheUniqueFilingStatusandExemptionSituationslessonformoreinformation.
Point out the spouse is considered to have lived in the home even if temporarily absent due to special circumstances, such as military service or education.
Lesson 4: Filing Status4-8
Who is a Qualifying Widow(er) with Dependent Child?
Ataxpayer,whosespousediedinoneofthetwotaxyearspriorto2009(either2008or2007)andwhohasoneormoredependentchildren,mayclaimtheQualifyingWidow(er)withDependentChildstatus.Toqualify,thetaxpayermust:
• Beentitledtofileajointreturnfortheyearthespousedied,regardlessofwhetherthetaxpayeractuallyfiledajointreturnthatyear.
• Havehadaspousewhodiedin2007or2008.Thetaxpayermustnothaveremar-riedbeforetheendof2009.
• Haveachild,stepchild,oradoptedchildwhoquali-fiesasthetaxpayer’sdependentfortheyear.
• Havefurnishedoverhalfthecostofkeepingupahomeforhimself/herselfandthequalifyingchildfortheentireyear,exceptfortemporaryabsences.
Intheyearataxpayer’sspousedies,ifthetaxpayerdoesnotremarry,theMarriedFilingJointlyfilingstatuscanbeusedwiththedeceasedspouse.
TaxpayersmaybeabletousetheQualifyingWidow(er)withDependentChildfilingstatusfortwoyearsfollowingtheyearofdeath,providedtheydonotremarry.
ThestandarddeductionandtaxtablesarethesameforQualifyingWidow(er)withDependentChildandMarriedFilingJointlyfilingstatuses.ThesearemorefavorablethanthoseforHeadofHouseholdfilingstatus.
Tax Software Hint: GototheVolunteerResourceGuide(Tab1),MainInformationSheet,whichincludesthefilingstatussection,forthesoftwareentries.
How do I determine the correct filing status?
Todeterminethebestfilingstatus,followtheFilingStatusInterviewTipsandtheDeterminationofFilingStatusflowchartintheVolunteerResourceGuide(TabB).Thenenterthefilingstatusontheapprovedintakeandinterviewsheet.
example
Laura’shusband,Jim,diedinSeptemberofthetaxyear.Shehasnotremarried,andprovidesallthesupportfortheirdependentchildren,ages7and9.LauracanfileasMarriedFilingJointly,claiminganexemptionforherdeceasedhusband.Forthenexttwoyears,shecanusetheQualifyingWidow(er)withDependentChildstatusifshehasnotremarried.
Ask a volunteer to read the example about Laura and Jim.
Ask students if they have any questions about the example.
AfosterchilddoesnotqualifyataxpayerfortheQualifyingWidow(er)withDependentChildfilingstatus.
Lesson 1: Course Introduction 4-9
ExErcisEs (continued)
Checkyourunderstandingofeachfilingstatus.Feelfreetoreviewthelessonif youarenotsureofananswerandusetheVolunteerResourceGuide(TabB). Theanswersareattheendofthelesson.
Question 2: Jane’shusbanddiedin2009.Sheandherhusbandqualifiedto fileajointreturnin2008,buttheydidnot.Jane’schildrenaregrownandthey maintainhouseholdsoftheirown.Shehasnotremarried.Whatfilingstatus(es) cansheuse?
• Single
• Married Filing Jointly
• Married Filing Separately
• HeadofHousehold
• QualifyingWidow(er)withDependentChild
Question 3: Sethlivesaloneandhasnevermarried.Hedoesnotsupporteitherofhisparents.Whatfilingstatus(es)canheuse?
• Single
• MarriedFilingJointly
• MarriedFilingSeparately
• HeadofHousehold
• QualifyingWidow(er)withDependentChild
Question 4:Tanya’sdivorcebecamefinalinearlySeptemberofthetaxyear.Shehassolecustodyofherthreechildren,wholivedwithhertheentireyear.Thechil-drenareallundertheageof19.Sheprovidedmorethanhalfofthecostofkeepingupthehome.Whatfilingstatus(es)cansheuse?
• Single
• MarriedFilingJointly
• MarriedFilingSeparately
• Head of Household
• QualifyingWidow(er)withDependentChild
Question 5:Sydney’swifediedinJanuaryof2007.Hefiledajointreturnforthatyearasthesurvivingspouse.In2009,Sydney,whohasnotremarried,stillmain-tainsahomeforhisyoungchildrenallyear,andheprovidestheirsolesupport.Whatfilingstatus(es)canheuse?
• Single
• MarriedFilingJointly
• MarriedFilingSeparately
• Head of Household
• Qualifying Widow(er) with Dependent Child
Assign the exercises.
Instruct students to use both pages in the Filing Status Inter-view Tips, Volunteer Resource Guide (Tab B), to complete the exercises.
Review answers with the class when com-plete.
Review answers with the class when complete, demonstrating how to use the Filing Status Interview Tips and the Determina-tion of Filing Status Deci-sion Tree.
Lesson 4: Filing Status4-10
ExErcisEs (continued)
Question 6: AnearlierquestionreferredtoSydney,whosewifediedinJanuary2007.Hefiledajointreturnforthatyearasthesurvivingspouse.In2009,Sydney,whodidnotremarry,maintainedahomeforhisyoungchildren,andheprovidedtheirsolesupport.WedeterminedthathecouldfileasSingle,HeadofHouseholdorQualifyingWidow(er)withDependentChild.GobacktotheinterviewtipsandusethemtoidentifytherecommendedfilingstatusforSydney.Outlinetheanswerstotheinterviewsteps.Whatfilingstatusshouldheuse?
• Single
• MarriedFilingJointly
• MarriedFilingSeparately
• HeadofHousehold
• Qualifying Widow(er) with Dependent Child
Practice – Vanessa Franklin
Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin. GotoAppendixA-6todeterminethemostappropriatefilingstatusforher.
Summary
Thislessoncoveredthefivefilingstatuses,aslistedonthereturn,theyare:
• Single
• MarriedFilingJointly
• MarriedFilingSeparately
• HeadofHousehold
• QualifyingWidow(er)withDependentChild
Iftaxpayersqualifyformorethanonefilingstatus,choosetheonethatresultsinalowertax.Forexample,inmostcases,marriedcouplespaylesstaxiftheyfileajointreturn.
Ingeneral,theHeadofHouseholdstatusisforunmarriedtaxpayerswhopaidmorethanhalfthecostofmaintainingahomeforaqualifyingpersonduringthetaxyear.However,somemarriedtaxpayerswholivedapartfromtheirspouseduringthelastsixmonthsoftheyearandprovidedfordependentchildrenmayqualifytofileasHeadofHousehold.
AwidoworwidowerwithoneormoredependentchildrenmaybeabletousetheQualifyingWidow(er)withDependentChildfilingstatus,whichisavailablefortwoyearsfollowingtheyearofthespouse’sdeath.
Review the lesson summary with the class.
Ask students how fil-ing status impacts the tax return.
Answer: Filing status can impact the amount of tax, credits, and deductions.
Remind students that it is important to deter-mine the correct filing status so the taxpayers do not pay more tax than is required.
Direct students to Appendix A-6.
Assign the exercise.
Review answers with the class when com-plete.
Lesson 1: Course Introduction 4-11
ExErcisE answErs
Answer 1: No, because Sebastian only lived with Alexandra for five months, which is less than half the year.
Answer 2: Remember, if a spouse died during the year, and the surviving spouse did not remarry, the surviving spouse is considered to be married on December 31 for filing status purposes. Answer “yes” to Step 1.
Because she was widowed in 2009 and has not remarried, Jane can file as Married Filing Jointly or Married Filing Separately. However, she is likely to pay a lower tax if she chooses Married Filing Jointly. Jane is not eligible for the Qualifying Widow(er) with Dependent Children status because those rules are in effect for the two years after the year in which the spouse has died and she must have depen-dent children. Note: The exercise question stated they didn’t file as Married Filing Jointly in 2008, and this would be an opportunity for you to use your interview tech-niques to determine why they didn’t. There might have been circumstances that made it more advantageous to file as Married Filing Separately, which might still exist.
Answer 3: Because he is not married and has no dependents living in his house-hold, nor does he have dependent parents, Seth can only file as Single.
Answer 4: Because she is legally divorced, Tanya can file as Single. However because she has children, she may be able to file as Head of Household, which may result in a lower tax.
Answer 5: Sydney can file as Single but he also meets the test for Head of Household and Qualifying Widow(er) with Dependent Child. Qualifying Widow(er) with Dependent Child will likely give him the lowest tax.
Answer 6: The interview tips say that he should use the Qualifying Widow(er) with Dependent Child status. The interview steps are:
• Step 1: No
• Step 5: Yes
• Step 6: Yes
Lesson 4: Filing Status4-12
Notes
Lesson 5: Personal Exemptions 5-1
Instructor NotesIntroduction
ThisisthefirstoftwolessonscoveringtheExemptionsectionofthetaxreturn.Identifyingandenteringthecorrectnumberofexemptionsisacriticalcomponentofcompletingthetaxpayer’sreturn,becauseeachallowableexemptionreducestheirtaxableincome.
PersonalexemptionsarereflectedintheExemptionssectionofthetaxsoftwareandonpage1oftheForm1040series.RefertotheVolunteerResourceGuide(Tab1)foradisplayofanentryscreen.
Objectives
Attheendofthislesson,usingyourresourcematerials,youwillbeableto:
• Distinguishbetweenpersonalanddependencyexemption
• Determineifataxpayercanclaimapersonalexemption
• Determinehowmanypersonalexemptionsataxpayercanclaim
What are exemptions?
Anexemptionisadollaramountthatcanbedeductedfromanindividual’stotalincome,therebyreducingthetaxableincome.Taxpayersmaybeabletoclaimtwokindsofexemptions:
• Personal exemptions generallyallowtaxpayerstoclaimthemselves(andpossiblytheirspouse)
• Dependency exemptionsallowtaxpayerstoclaimqualifyingdependents
Thislessondiscussespersonalexemptions.
Lesson 5: Personal Exemptions
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Optional:Publication501
Theexemptionamountsareindexedforinflationandaregenerallyupdatedeveryyear.
Review the objectives with the class.
Point out the resources cited under What do I need?
Lesson 5: Personal Exemptions5-2
When can a taxpayer claim personal exemptions?
Todeterminethepersonalexemptionsthatataxpayercanclaim,usetheinterviewtechniquesandtoolsdiscussedintheInterviewlesson.SeetheVolunteerResourceGuide(TabC)fortheInterviewTipsreferencedinthislesson.Theycanprovidehelpfulprobingquestions.
Toclaimapersonalexemption,thetaxpayermustbeabletoanswer“no”totheintakequestion,“Canyouoryourspousebeclaimedasadependentontheincometaxreturnofanyotherpersonfor2009?”
Thisappliesevenifanotherpersondoesnotactuallyclaimthetaxpayerasa dependent.Ataxpayerwhocouldbeclaimedasadependentmustclaim“0” exemptions.Thismeanstheywon’tbeabletosubtracttheexemptionamountfromtheirgrossincome,andtheymayhavetouseasmallerstandarddeductionamount.(SeethelessonStandardDeductionandTaxComputation).
Ifmarriedtaxpayersfileajointreturn,theycantakeapersonalexemptionforeachspouse.Iftheyfilesepa-ratereturns,theycaneachtakeapersonalexemptionforthemselves.
When can taxpayers claim an exemption for their spouse?
Aspouseisneverconsideredthedependentoftheotherspouse.However,taxpayersmaybeabletotakeanexemptionfortheirspousesimplybecausetheyaremarried.
Toclaimapersonalexemptionforone’sspouse,thetaxpayermustmeetthese conditions:
• MarriedasofDecember31ofthetaxyear,and
• Spousecannotbeclaimedasadependentonanotherperson’staxreturn,and
• Filesajointreturn,orfilesaseparatereturnandthespousehadnoincomeandisnotfilingareturn
What about a deceased spouse?
Ataxpayerwhosespousediedduringthetaxyearcangenerallyclaimthepersonalexemptionforthedeceasedspouseifthetaxpayermeetsalloftheseconditions:
• DidnotremarrybyDecember31ofthetaxyear,and
• Wasnotdivorcedorlegallyseparatedfromtheirspouseonthedateofdeath,and
• Wouldhavebeenabletoclaimtheexemptionundertherulesforajointorseparatereturn.
Acommon-lawmarriageisrecognizedforfederaltaxpurposesifitisrecognizedbythestatewherethetaxpayerscurrentlyliveorinthestatewherethecommon-lawmarriagebegan.Legaladvicemaybenecessarytodetermineifacommon-lawmarriageexists.Note:Filingajointreturnforacommon-lawmarriageappliestothefederalreturnonly.Youmustcheckstateorlocallawbeforecompletingastatereturn.
AlwaysusetheInterviewTipsintheVolunteerResourceGuide(TabC)todeterminethenumberofexemptionseachtaxpayercanclaim.
Taxpayerswhoaredivorcedorlegallyseparatedattheendofthetaxyearcannotclaimtheir(former)spouseasanexemption.
Review the main points to ensure that the students understand.
Ask a volunteer to read the tips.
Lesson 5: Personal Exemptions 5-3
How do I use the interview techniques to determine how many personal exemptions a taxpayer can claim?
TheInterviewTipsforPersonalExemptionscanhelpdeterminewhetherthetaxpayercanclaimanypersonalexemptions.TakealookattheInterviewTipsintheVolunteerResourceGuide(TabC).Whileyouinterviewthetaxpayer,usethesequestionsasaguidetohelpyougettheinformationyouneedfromthetaxpayer.
How do I enter the personal exemptions?
Personal exemptions are claimed on line 6a and 6b of Form 1040.
Online 6aofthetaxreturn,checktheboxnextto“Yourself”ifthetaxpayermeetstherequirementsforclaimingthemselvesasanexemption.
Online 6b,checktheboxnextto“Spouse”ifthetaxpayermeetstherequirementsforclaimingtheirspouseasanexemption.
WhenfilingapaperreturnforataxpayerwhoisfilingasHeadofHouseholdandclaim-inganexemptionforanonresidentalienspouse,checktheboxonline 6b and enter thespouse’sfirstname,lastname,andSSNorITIN.
Tax Software Hint: Thetaxsoftwarewillauto-filltheentriesforlines6aand6baswellasfor“Numberofboxescheckedon6aand6b.”Thesoftwareautomati-callycheckstheexemptionsboxforthetaxpayer(andfortheirspouseifMarriedFilingJointlystatusisselected).ReviewtheMainInformationscreenintheVolunteerResourceGuide(Tab1).
Taxpayer Interview and Tax Law Application
RayJacksonisawidowerwhosewifediedduringthe2009taxyear.Ray’sapprovedintakeandinterviewsheetshowsthefollowingresponses.
Which personal exemptions can Ray claim?
UsetheInterviewTipsforPersonalExemptionsintheVolunteerResourceGuide (TabC)tohelpyoucompletelines6aand6bonhistaxreturn.Here’showtheconver-sationmightsound:
Direct students to the Interview Tips for Per-sonal Exemptions in the Volunteer Resource Guide (Tab C).
Direct students to Ray Jackson’s intake sheet, shown here.
Ask two volunteers to role-play the sample interview.
Lesson 5: Personal Exemptions5-4
Tax Software Hint: ReviewtheMainInformationscreenintheVolunteerResourceGuide(Tab1).
BecauseRaycanclaimhimselfandhislatewifeaspersonalexemptions,youwillenterboththeirnamesandSSNsintheMainInformationSheetinthetaxsoftware.Thesoft-wareautomaticallycheckstheboxesonlines6aand6bandenters“2”for“Numberofboxescheckedon6aand6b.”YouwillalsoentertheDateofDeathunderthespouseintheTaxpayerInformationareaoftheMainInformationSheetinthetaxsoftware.
Ifyouarepreparingapaperreturn,write“Deceased”alongwiththedeceasedspouse’snameandDateofDeathacrossthetopofthereturn.OnceyoucompletetheDateofDeathinthesoftware,theprogramwillautomaticallyprintthatnotation.
NEW Exemption for individual(s) displaced by a Midwestern disaster
Thetaxpayermaybeentitledtoanadditionalexemptionifhousingwasprovidedtoapersondisplacedbythestorms,tornadoes,orfloodinginaMidwesterndisasterarea.Thetaxpayercanclaimthisexemptionforuptofourdisplacedindividuals,butnotfortheirspouseordependent.Theexemptionamountis$500perpersonhoused,andthemaximumamountthatmaybeclaimedforalldisplacedindividualsis$2,000($1,000ifMarriedFilingSeparately).
Review this new topic with class.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… ray responds…
The questions I’m about to ask you will help us figure out if you can claim any personal exemptions. First of all, you’ve told me that you were married until your wife died in February. I’m sorry for your loss, sir. Did you remarry sometime during the rest of the tax year?
Are you filing a joint return with your late wife this year?
Can anyone else claim either of you as dependents?
Based on your answers, you can claim an exemption for yourself and for your late wife.
[Ontheapprovedintakeandinterviewsheet,volunteershouldcheck“No”forthequestion,“Canyourparentsorsomeoneelseclaimyouoryourspouseasadependentontheirtaxreturn?”whichRayleftblank.]
No,Ihaven’tremarried.
Yes.
Well,Idon’tthinkso.Welivedoffourownincome.
Lesson 5: Personal Exemptions 5-5
Totakethisexemptionallofthefollowingmustapply:
• Thetaxpayermusthaveprovidedhousingintheirmainhomeforatleast60consec-utivedaystoapersondisplacedbythestorms,tornadoes,orfloodinginadeclaredMidwesterndisasterarea.
• ThedisplacedpersonlivedinaMidwesterndisasterareawhenthedisasteroccurred.
• Thetaxpayerdidnotreceiverentoranypaymentforprovidinghousing.
ThisexemptionisclaimedonForm8914,ExemptionAmountforTaxpayersHousingMidwesternDisplacedIndividuals.Fordetailedinformation,seePublication4492-B,InformationforTaxpayersAffectedintheMidwesternDisasterAreas.
Practice - Vanessa Franklin
Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin. GotoAppendixA-8todeterminethepersonalexemptionsshecanclaim.
Summary
Therearetwotypesofexemptions–personalanddependency.Apersonalexemptioncanbeclaimedfor:
• Theindividualtaxpayer,unlesstheycanbeclaimedasadependentonanotherperson’staxreturn
• Thetaxpayer’sspouse,ifajointreturnisfiledandthespousecannotbeclaimedonanothertaxpayer’sreturn
• Thetaxpayer’sspouse,ifthetaxpayerisnotfilingajointreturnandthespousehadnoincome,isnotfilingtheirownreturn,andisnotadependentofanotherperson
PersonalexemptionsareclaimedintheExemptionssectionofthetaxreturn.
• Exemptionsreducethetaxpayer’staxableincome.
• Claiminganincorrectnumberofexemptionsisoneofthemostcommonerrorsmadeonareturn.
• Thetaxpayermaybeeligibleforanadditionalexemptionforprovidinghousingtoapersonorpersonsdisplacedbythestorms,tornadoes,orfloodinginaMidwesterndisasterarea.
• WhenpreparingapaperreturnforataxpayerfilingasHeadofHouseholdandclaiminganexemptionforanonresidentalienspouse,checktheboxonline6bandwriteinthespouse’sfullnameandSSNorITIN.
Review the lesson summary with the class.
Direct students to Appendix A-8.
Lesson 5: Personal Exemptions5-6
Notes
Lesson 6: Dependency Exemptions 6-1
Instructor Notes
Lesson 6: Dependency Exemptions
Introduction
ThisisthesecondandfinallessoncoveringtheExemptionssectionofthetaxreturn.Identifyingandenteringthecorrectnumberofexemptionsisacriticalcomponentofcompletingthetaxpayer’sreturn.Ataxpayercanclaimoneexemptionforeachqualifieddependentontheirreturn,therebyreducingtheirtaxableincome.
Todeterminethedependencyexemptions,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.SeetheVolunteerResourceGuide(TabC)fortheinterviewtipsinthislesson.Theinterviewtipscanprovidehelpfulprob-ingquestions.
Whentheinterviewiscomplete,theresultsaredocumentedontheapprovedintakeandinterviewsheet.Thisinformationwillbethebasisofyourentriesinthetaxsoftware.
Who are dependents?
Dependentsareeitheraqualifyingchildoraqualifyingrelativeofthetaxpayer.AsexplainedinthePersonalExemptionslesson,thetaxpayer’sspousecannotbeclaimedasadependent,butcanbeclaimedasapersonalexemption.Someexamplesofdependentsincludeachild,stepchild,brother,sister,orparent.
Ataxpayercanclaimoneexemptionforeachqualifieddependent,therebyreducingthetaxableincome.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determineifataxpayercanclaimanexemptionforadependentbyapplyingthedependencytest
• Determinehowmanyexemptionsataxpayercanclaimfordependents
Personswhoqualifytobeclaimedasadependentmayfileareturnfortaxeswithheld,buttheycannotclaimanyexemptions.
Review objectives with the class.
Point out the resources cited under What do I need?
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17Optional:□ Publication501□ Form2120□ Form8332
Lesson 6: Dependency Exemptions6-2
Who may be claimed as a dependent?
Adependentmaybeeithera“QualifyingChild”ora“QualifyingRelative.”Therequirementsforbothhavemuchincommon,buttherearesometeststhatarespecifictoqualifyingchildorqualifyingrelative.
NEW Thedefinitionofqualifyingchildhasbeenrevisedfor2009.
• Aqualifyingchildmustbeyoungerthanthetaxpayer,unlessthechildispermanentlyandtotallydisabled.SeeForm1040Instructions,page6.
• Achildcannotbethetaxpayer’squalifyingchildifthechildfilesajointreturn,unlessthereturnwasfiledonlyasaclaimforrefund.
• Ifthechild’sparentscanclaimaqualifyingchildbutchoosenotto,nooneelsecanclaimthechildasaqualifyingchildunlessthatperson’sadjustedgrossincome(AGI)ismorethanthehighestofeitherparent’sAGI.
• Thechildisaqualifyingchildforpurposesofthechildtaxcreditonlyifthetaxpayerclaimsanexemptionforthechild.
Inadditiontothetestsspecifictoqualifyingchildandqualifyingrelative,allofthefollowingtestsmustbemetforboth:
• Dependenttaxpayertest
• Jointreturntest
• Citizenorresidenttest
Usecautionwhenpreparingthissectionofthetaxpayer’sreturn.TheinterviewtipsintheExemptionssectionoftheVolunteerResourceGuide(TabC)covertherequire-mentsforallthedependencytests.Avoidusinginformationfromthetaxpayer’sprioryeardocumentstocompletethissection.
How do I apply the dependency tests?
TheFamilyandDependentInformationsectionoftheapprovedintakeandinterviewsheetaddressestheissuesconcerningdependency,butyouwillstillneedtouseyour interviewskillstoclarifywhethertheindividualslistedareeligibletobeclaimed asdependents.
UsetheVolunteerResourceGuide(TabC)tohelpyouaskprobingquestionstoverifytheinformationontheapprovedintakeandinterviewsheet.Usetheinterviewtipstoapplythedependencytests.
Does it matter if I use the interview tips?
Whetheryouareaneworreturningvolunteer,theinterviewtipsprovideguidelinesanddefinitionstohelpyouapplythedependencytests.Theyincorporatealloftheexcep-tions,suchasthespecialrulesforchildrenofdivorcedorseparatedparents–seetheVolunteerResourceGuide(TabC),Table3,aswellasthespecialmultiplesupportrules.
Ataxpayer’sspousecannot beclaimedasadependentbutcanbeclaimedasapersonalexemption.
Direct students to the Volunteer Resource Guide (Tab C).
Thetestsforqualifyingrela-tiveareappliedonlywhenthetestsforqualifyingchildarenotmet.
Lesson 6: Dependency Exemptions 6-3
How do I use the interview tips?
Onewaytoapplythedependencytestsistorefertotheinterviewtipsforeach dependencytest.
What are the tests for qualifying children?
Todetermineifthetaxpayerhasadependent,beginbyapplyingtherulesforaqualify-ingchild.Ifthesetestsarenotmet,thenyoucancontinueontothetestsforaqualify-ingrelative.Remember,apersonmustmeettherequirementsofeitheraqualifyingchildoraqualifyingrelativetobeclaimedasadependent.
Relationship
Reviewstep2oftheTable1interviewtips,intheVolunteerResourceGuide(TabC).
Thisstepdeterminesifthechildisrelatedtothetaxpayerinoneofthefollowingways:
• Thetaxpayer’schild,stepchildoradoptedchild,ortheirdescendant(grandchild)
• Thetaxpayer’sbrother,sister,stepbrother,stepsisterortheirdescendant (nieceornephew)
• Afosterchildplacedwiththetaxpayerbyanauthorizedplacementagencyorcourtorder
Age
Thenextstepisdeterminingthechild’sage.Reviewsteps1and3oftheTable1interviewtipsintheVolunteerResourceGuide(TabC).
Thechildmustbeatleastoneofthefollowing:
• Underage19andyoungerthanthetaxpayerattheendofthetaxyear
• Underage24,afull-timestudent(asdefined bytheschool)foratleast5monthsoftheyear,andyoungerthanthetaxpayer
• Anyageandpermanentlyandtotallydisabled
Support
Step4oftheinterviewtipsintheVolunteerResourceGuidedeterminesthelevelofsupportbythechild,notthepersonwhowantstoclaimthechildasadependent. Achildcannothaveprovidedmorethanhalfofhis/herownsupportduringthetaxyear.Aperson’sownfundsarenotsupportunlesstheyareactuallyspentforsupport.
To be considered a student, thetaxpayer’schildmustattendschoolfulltime(asdeterminedbytheschool)forsomepartofeachoffivecalendarmonthsoftheyear.Schooldoesnotincludeanon-the-jobtrainingcourse,correspondenceschool,oraschoolofferingcoursesonlythroughtheInternet.
Ask students to locate the interview tips in the Volunteer Resource Guide (Tab C) for determining the Depen-dency Exemption for Qualifying Child.
example
Bobis22,afull-timestudentandlivesathomewithhisparentswhenheisnotinthedorm.Heworkedpart-timeandmade$6,000,butthatwasnotoverhalf ofhistotalsupport.Bobmeetstherelationship,age,andsupporttests.Ifhemeetstherestofthetestsforaqualifyingchild,hecanbeclaimedasadependentby hisparents.
Ask a volunteer to read the Bob example.
Ask what if Bob’s earnings were over half of his total support.
Answer: He would fail the support test.
Lesson 6: Dependency Exemptions6-4
Residence
Step5oftheinterviewtipsexaminesresidency.Thechildmusthavethesameprincipalresidenceasthetaxpayerformorethanhalftheyear.Thechildisconsideredtohavethesameplaceofresidenceasthetaxpayerevenifthechild(ortheparent)istempo-rarilyabsentduetospecialcircumstancessuchaseducation,illness,vacation,busi-ness,ormilitaryservice.Thetaxpayers’homecanbeanylocationwheretheyregularlylive.Itdoesnotneedtobeatraditionalhome.Forexample,achildwholivedwiththetaxpayerformorethanhalftheyearinoneormorehomelesssheltersmeetstheresi-dencytest.
Special Exceptions for the Residence Test
Taxpayersmayclaimanexemptionforachildwhohasbeenkidnapped,achildwhowasbornaliveatanytimeduringtheyearandthendied,oranyotherdependentthatdiedduringtheyear,aslongasthedependentmeetsotherdependencytests.
Ataxpayermaynotclaimdependencyexemptionsforahousekeeper,otherhouseholdemployee,orforastillbornchild.
RefertothePersonalExemptionsandDependentschapterofPublication17fordetailedinformationregardingtheresidencytest.
Specialrulesthatapplytocustodialandnon-custodialparentswillbediscussedlaterinthislesson.
Additional Rules
Thefirstfivestepscoveredaboveapplyspecificallytoqualifyingchildren.Thenextfiveinterviewtipscoveradditionalrulesforconsideringaqualifyingchildasadependent.Someofthesestepswillalsoapplywhenwetalkaboutqualifyingrelatives.
Citizenship or Residency
Step6issometimesreferredtoasthecitizenorresidenttest.Donotgetitconfusedwithstep5whichreferstowhothechildislivingwith(residencytest).Topassthe citizenorresidenttest,thedependentmustbeeitheraU.S.citizen,U.S.national,orresidentoftheU.S.,CanadaorMexico.Notethat:
• Childrenareusuallycitizensorresidentsofthecountryinwhichtheirparentsarecitizens.So,ifeitherparentisaU.S.citizen,achildborninaforeigncountrycanberecognizedasaU.S.citizenfortaxpurposes.
example
Hugh’sdaughterdiedonJanuary15ofthetaxyear.Ifshemetallthedependencytestsupuntilherdeath,Hughcanclaimanexemptionforheronhisreturn.
Read the Hugh example. Answer any student questions.
Point out the special circumstances for kid-napping or birth and death of a child.
Point out the details listed here and answer any student questions.
example
Dorisis8yearsoldandhadasmallroleinatelevisionseries.Shemade$60,000duringthetaxyear,butherparentsputallthemoneyinatrustfundtopayforcollege.Shelivedathomeallyear.Dorismeetstherelationship,age,andsupporttests.Ifshemeetstherestofthetestsforaqualifyingchild,shecanbeclaimedasadependentbyherparents.
Ask a volunteer to read the Doris example. Answer any student questions.
Ask what if her par-ents used her earnings to defray household expenses.
Answer: She might fail the support test.
Inthecaseofachildwhowasbornanddiedduringtheyear,anSSNisnotrequiredbutthereturncannotbee-filed.Thetaxreturnmustbemailedin.RefertotheFilingInformationchapterofPublication17.
Lesson 6: Dependency Exemptions 6-5
• IfaU.S.taxpayerlegallyadoptsachildwhoisnotaU.S.citizenorresident,this testismetaslongasthechildliveswiththetaxpayerasamemberofthehouseholdallyear.Ifalltheotherdependencytestsaremet,thetaxpayercanclaimthechildasadependent.
• ForeignexchangestudentsgenerallyarenotU.S.residentsanddonotmeetthe citizenorresidenttest,sotheycannotbeclaimedasdependents.
Joint Return
Lookatsteps7and8intheinterviewtipsforqualifyingchildintheVolunteerResourceGuide(TabC).Topassthejointreturntest,thedependentmustnotfileajointreturnfortheyear,unless:
• Thejointreturnisfiledonlytoclaimarefundoftaxeswithheld,and
• Notaxliabilitywouldexistforeitherspouseonseparatereturns
Can the child be a qualifying child of more than one person?
Reviewstep9andtheassociatedfootnotesintheVolunteerResourceGuide.
Ifthechildmeetstheconditionstobethequalifyingchildofmorethanoneperson,onlyonepersoncanclaimthechildasaqualifyingchildforallofthefollowingtaxbenefits(unlessthespecialruleforchildrenofdivorcedorseparatedparentsapplies):
• Dependencyexemption
• Childtaxcredits
• HeadofHouseholdfilingstatus
• Creditforchildanddependentcareexpenses
• Exclusionfordependentcarebenefits
• Earnedincomecredit
example
Joan,whoisaU.S.citizen,adoptedaninfantboyfromCambodiawhohaslivedwithherfortheentiretaxyear.EventhoughJoan’schildisnotyetaU.S.citizenorresident,hemeetsthecitizenorresidenttestbecausehewasamemberofJoan’shouseholdfortheentireyear.
example
Ruthhadnoincome.ShemarriedinNovemberofthetaxyear.Ruth’shusbandhad$16,700incomeandtheyclaimedtwopersonalexemptionsontheirreturn.EventhoughRuth’sfathersupportedherandpaidforthewedding,hecannotclaimherasadependentbecausesheisfilingajointreturnwithherhusband.Whiletheyarefilingareturnjusttoclaimarefundoftaxeswithheld,Ruth’shusbandwouldhavetaxliabilityifhefiledaseparatereturn.
Ask a volunteer to read the Joan example. Answer any student questions.
Ask a volunteer to read the Ruth example.
Point out the footnotes to the interview tips.
Lesson 6: Dependency Exemptions6-6
Noothertaxpayercantakeanyofthesesixtaxbenefitsunlesstheyhaveanotherquali-fyingchild.Ifanytaxpayercanclaimthechildasaqualifyingchild,thefollowingrulesapply:
• Ifonlyoneofthetaxpayersisthechild’sparent,thechildistreatedasthequalifyingchildoftheparent.
• Iftwoofthepersonsarethechild’sparents,thechildistreatedasthequalifyingchildoftheparentwithwhomthechildlivedforthelongerperiodoftimein2009.Ifthechildlivedwitheachparentforthesameamountoftime,thechildisthequalify-ingchildoftheparentwhohadthehigheradjustedgrossincome(AGI)for2009.
• Ifnoparentcanclaimthechildasaqualifyingchild,thechildistreatedasthequali-fyingchildofthepersonwhohadthehighestAGIfor2009.
• Ifaparentcanclaimthechildasaqualifyingchildbutnoparentdoesso,thechildistreatedasthequalifyingchildofthepersonwhohadthehighestAGIfor2009,butonlyifthatperson’sAGIishigherthanthehighestAGIofeitherofthechild’sparents.
SeetheVolunteerResourceGuide(TabC)andPublication501formoreinformationandexamplesaboutaqualifyingchildofmorethanoneperson.
Ifthequalifyingchildisactuallyclaimedonmorethanonetaxreturninagivenyear,theIRSwillapplytheQualifyingChildofMoreThanOnePersonruleslistedinPublication17,PersonalExemptionsandDependents.
Dependent Taxpayer
Thefinalinterviewquestionforaqualifyingchildisstep10intheVolunteerResourceGuide(TabC).LookatthequestioninPartIonthetaxpayer’sapprovedintakeandinterviewsheetthatasks“Canyourparentsorsomeoneelseclaimyouoryourspouseontheirtaxreturn?”Toclaimadependencyexemption,ataxpayercannotbeadepen-dentonanotherperson’staxreturn.Ifataxpayercanbeclaimedasadependentbyanotherperson,thetaxpayermaynotclaimanyoneelseasadependent,evenifthetaxpayerhasaqualifyingchildorqualifyingrelative.
What are the tests for qualifying relatives?
Dependentswhodonotmeetthetestsforqualifyingchildmightmeettheslightlydiffer-entteststobeaqualifyingrelative.Thetestsare:
• Notaqualifyingchildtest
• Memberofhouseholdorrelationshiptest
• Citizenshiporresidencytest
• Grossincometest
• Supporttest(tobeaqualifyingrelative)
example
LynneandhermotherMargaretshareahomeandbothcontributetothehouse-holdexpenses.Lynne’stwelve-year-olddaughterKarenliveswiththem.AlthoughKarenmeetsalltheconditionstobeaqualifyingchildforbothLynneandhermother,LynneisthetaxpayerwhocanclaimKarenasaqualifyingchild,becausesheisKaren’sparent.
Ask a volunteer to read the Lynne and Marga-ret example. Answer any student questions.
Display or refer to step 10 of the interview tips for determining the Dependency Exemp-tion for Qualifying Child.
Display or refer to the interview tips in the Volunteer Resource Guide (Tab C) for determining the Depen-dency Exemption for Qualifying Relative.
Lesson 6: Dependency Exemptions 6-7
• Jointreturntest
• Dependenttaxpayertext
TurntotheQualifyingRelativeInterviewTipsintheVolunteerResourceGuide(TabC).
Not a Qualifying Child Test
Achildisnotconsideredataxpayer’squalifyingrelativeifthechildisthetaxpayer’squalifyingchildoristhequalifyingchildofanothertaxpayer.
However,thereisanexceptiontothisstatement.Achildmayqualifyasthetaxpayer’sdependentunderthetestsforqualifyingrelative,evenifthatchildisthequalifyingchildofanothertaxpayer.Thisisallowedonlywhentheothertaxpayerisnotrequiredtofileanincometaxreturnand:
• Doesnotfileanincometaxreturn,or
• Onlyfilesareturntogetarefundofincometaxwithheld
Specialrulesthatapplytocustodialandnoncustodialparentsarecoveredlaterinthislesson.
example
Toddhaslivedwithhisgirlfriend,Eva,andhertwochildrenallyearinhishome.Evaisnotrequiredtofilea2009taxreturn,anddoesnotfilea2009taxreturn.Toddhasprovidedmorethanhalfoftheirsupportfortheentireyear.EvaandhertwochildrenareTodd’squalifyingrelativesbecausetheymeetthememberofhouseholdorrelationshiptest,grossincometest,andsupporttest.(EvaandTodd’srelationshipdoesnotviolatelocallaws.)
Ask volunteers to read the following examples.
example
Allthefactsarethesameasinthepreviousexample,exceptthatEvaisrequiredtofileataxreturn.ShestillmeetsalltheteststobeTodd’squalifyingrelativedependent.SinceEvahasafilingrequirementandherchildrenmeettheteststobeEva’squalifyingchilddependents,Toddcannolongerclaimthechildrenasqualifyingrelativedependents.HecanstillclaimEvaasadependent,andEvamaynotclaimherselforanydependentsonherown.
example
Sincelatein2008,Sallyhasbeensupportingherfriend,Ann,andAnn’syoungson,Bobby.AnnandBobbylivedwithSallyallof2009andmeetalltheteststobeSally’squalifyingrelativedependents.Annworkedpart-timeandmade$3,100inwagesduring2009.Annfilesareturnonlytohaveherwithholdingrefunded.Shedoesnotclaimherownexemption.SallycanclaimAnnandBobbyasdependents.
example
Allthefactsarethesameasinthepreviousexample,except,whenAnnfileshertaxreturn,shealsoclaimstheearnedincomecredit.BecauseAnndidnotfileherreturnonlytogetarefundofherwithholding,BobbymustbeconsideredAnn’squalifyingchild.Therefore,SallycannotclaimBobbyasadependent.AnncannotclaimBobbyasadependenteither,sinceAnnisadependentherself.Anncan use Bobbyasaqualifyingchildfortheearnedincomecredit(coveredintheEarnedIncomeCreditlesson).
Lesson 6: Dependency Exemptions6-8
Member of Household or Relationship Test
Tomeetthistest,thepersonhastohaveaclosefamilialrelationshipwiththetaxpayerorhavelivedwiththetaxpayerfortheentireyear.Itisimportanttonotethatacloserelativeofthetaxpayerdoesnothavetoliveinthesamehouseholdtomeetthistest.
Anunrelatedpersonwholivedwiththetaxpayerfortheentireyearcanalsomeetthememberofhouseholdorrelationshiptest.Step3probestodetermineifthepersonisanindividual(otherthanaspouse)whohadthesameprincipalplaceofabodeasthetaxpayerandwasamemberofthetaxpayer’shouseholdfortheentireyear,regardlessofrelationship.Iftherelationshipviolateslocallaws,thistestisnotmet.Forexample,ifthetaxpayer’sstateprohibitscohabitation,thenthatpersoncannotbeclaimed,evenifallothercriteriaaremet.
Notethat:
• Temporaryabsencesduetoillness,education,business,vacation,militaryservice,andplacementinanursinghomeareacceptable.
• Arelationshipestablishedbymarriage,suchasmother-in-laworsister-in-law,doesnotendwithdivorceordeathofaspouse;theyarequalifyingrelativeseveniftheydonotlivewiththetaxpayer.
• Cousinscanmeettherelationshiptestforqualifyingrelativeonly if theylivewiththetaxpayerfortheentireyear.
• Qualifyingrelativescanbeunrelated,aslongastheylivedwiththetaxpayerallyear.
TheDependencyExemptionInterviewTips,steps2and3,canhelpyoudetermineifapersonpassesthequalifyingrelative,memberofhousehold,orrelationshiptest.
Citizenship or Residency Test
Step4willguideyoutodeterminecitizenshiporresidency.AlsolookatPartII,FamilyandDependentInformationofthetaxpayers’approvedintakeandinterviewsheet,whichasksthetaxpayeraboutcitizenshiporresidency.AdependentmustbeaU.S.citizen,U.S.national,U.S.residentalien,oraresidentofCanadaorMexico.
Thisisageneralrulefordependents.Itappliestobothqualifyingchildandqualifyingrelative.
Gross Income Test
Step5oftheinterviewtipsaddressesthegrossincometest.Thedependent’sgrossincomeforthetaxyearmustbelessthanthepersonalexemptionamount($3,650for2009).Thereisanexceptionifthepersonisdisabledandhasincomefromashel-teredworkshop.GrossincomeisdefinedinPublication17,PersonalExemptionsandDependents.Rememberthistestdoesnotapplytoqualifyingchildren,onlyqualifyingrelatives.
example
SusanandTedaremarriedandfileajointreturn.TheyhavesupportedTed’sparentsforthemajorityofthetaxyear.EventhoughTed’sparentsdonotlivewithTedandSusan,Ted’sparentsmeetthememberofhouseholdorrelationshiptest.
Ask a volunteer to read the Susan and Ted example. Answer any student questions.
Point out the details listed here and answer any student questions.
Lesson 6: Dependency Exemptions 6-9
Support
Step6oftheinterviewtipsasksaboutsupport.Thetaxpayermusthaveprovidedmorethan50%ofthedependent’stotalsupportforthetaxyear.Notethatthissupporttestisdifferentthantheoneforaqualifyingchild.
Whencalculatingtheamountoftotalsupport,taxpayersshouldcomparetheircontribu-tionswiththeentireamountofsupporttheirdependentreceivedfromallsources(suchastaxableincome,tax-exemptincome,andloans).ReviewthelistofvalidsupportexpensesandtheworksheetinthePersonalExemptionsandDependentschapter,Publication17.
SocialSecuritybenefitsreceivedbyachildandusedtowardssupportareconsideredtohavebeenprovidedbythechild.
Ifthetaxpayerprovidesoverhalftheperson’stotalsupport,youcanskipsteps7through10andgodirectlytostep11.Ifthetaxpayerhasnotprovidedoverhalftheperson’ssupport,gotostep7toseeifsome-oneelseisprovidingoverhalfthesupport.
Multiple Support Agreements (Form 2120)
Ifonepersonhasnotprovidedoverhalfthesupport,gotostep8todetermineifmultiplesupportexists.Multiplesupportmeansthattwoormorepeopletogether,whocouldclaimthepersonasadependentexceptforthesupporttest,providemorethanhalfthedependent’ssupport.However,only one taxpayercanclaimtheexemptionforadependentwithmultiplesupport.Inthissituation,theindividualswhoprovidemorethan10%oftheperson’stotalsupport(step9),andwhomeettheothertestsforaqualifyingrelative,canagreethatoneofthemwilltaketheperson’sexemption.
example
Sherrie’sfatherreceived$2,700fromsocialsecurityandinvestments,butheput$300ofitinasavingsaccountandspentonly$2,400forhisownsupport.Sherriespent$2,600ofherincomeforhissupport,soshehasprovidedoverhalfofhissupport.
Publication17containsaworksheetfordeterminingsupport.
example
Steveprovided$4,000towardhismother’ssupportduringtheyear.Hismotherhadearnedincomeof$600,nontaxablesocialsecuritybenefitpaymentsof$4,800,andtax-exemptinterestof$200.Sheusedalloftheseforhersupport.Stevecannotclaimadependencyexemptionforhismotherbecausethe$4,000heprovidedwasnotmorethanhalfofhertotalsupportof$9,600.
Ask a volunteer to read the Steve example. Answer any student questions.
Ask a volunteer to read the Sherrie example.
Ask what if Sherrie’s father had spent all his income on himself?
Answer: He would not pass the support test.
Statebenefitpaymentslikewelfare,TemporaryAssistanceforNeedyFamilies(TANF),foodstamps,Medicaid,orhousingassistanceareconsid-eredsupportprovidedbythestate,notbythetaxpayer.
RefertotheWorksheetforDeterminingSupportintheVolunteerResourceGuideorthePersonalExemptionsandDependentschapterofPublication17.
example
Joeis65yearsoldandliveswithhissonanddaughter-in-law.In2009,Joe’staxablepensionincomewas$4,700.Joe’ssonanddaughter-in-lawcannotclaimadependencyexemptionforJoebecauseJoe’sincomeexceedstheexemptionamountfor2009,whichis$3,650.
Ask a volunteer to read the Joe example.
Lesson 6: Dependency Exemptions6-10
Step10guidesyouinaskingifthetaxpayerhastheappropriatedocumentation.
• ThetaxpayerwhoisclaimingtheexemptionforthedependentmustattachtotheirtaxreturnForm2120,MultipleSupportDeclarationorsimilarstatement.
• Theothersupportingtaxpayersmustsignthiswrit-tenstatementagreeingnottoclaimtheexemptionforthatyear.Thepersonwhoclaimstheexemptionmustkeepthiswrittenstatementasarecord.
Joint Return
Topassthejointreturntest(steps11and12),thedependentmustnotfileajointreturnfortheyear,unless:
• Thejointreturnisfiledonlytoclaimarefund,and
• Notaxliabilitywouldexistforeitherspouseonseparatereturns
Thisisageneralrulefordependents.Itappliestobothaqualifyingchildandqualifyingrelative.
Dependent Taxpayer
Thefinalinterviewquestionforaqualifyingrelativeisstep13.Lookatthequestiononthetaxpayer’sapprovedintakeandinterviewsheetthatasks“Canyourparentsorsomeoneelseclaimyouoryourspouseontheirtaxreturn?”Toclaimadependencyexemption,ataxpayercannotbeadependentonanotherperson’staxreturn.Ifataxpayercanbeclaimedasadependentbyanotherperson,thetaxpayermaynotclaimanyoneelseasadependent,evenifthetaxpayerhasaqualifyingchildorqualify-ingrelative.
example
Fred’sfather,Charlie,liveswithhimandreceives27%ofhissupportfromsocialsecurity,40%fromFred,24%fromCharlie’sbrother,and9%fromCharlie’sfriend.EitherFredorCharlie’sbrothercantaketheexemptionforCharliebecausetheyeachprovidedmorethan10%ofCharlie’ssupport,andtogethercontributedmorethan50%towardshissupport.Whoeverisnotgoingtotaketheexemptionmustsignastatementagreeingnottotaketheexemption.
example
Dianeandherbrothereachprovided20%oftheirgrandmother’ssupportfortheyear.TwopersonswhoarenotrelatedtoDiane’sgrandmother,andwhodonotlivewithher,providedtheremaining60%ofhersupportequally.Nooneisentitledtothedependencyexemption,sincemorethanhalfofthegrandmother’ssupportisprovidedbypeoplewhocan’tclaimherexemption.
MultipleSupportAgreementsapplyonlytoaqualifyingrela-tive,nottoaqualifyingchild.
Read the Fred and Charlie example. Answer any student questions.
Ask a volunteer to read the Diane example.
Ask what if Diane and her brother each provided half of the support and the two unrelated persons con-tributed nothing.
Answer: Either Diane or her brother could claim the exemption because together they provided 100% of their grandmother’s support. ThetaxpayerswhoprovideMultipleSupportforadependentdecideamongthemselveswho
willtaketheexemptionfortheyear.Volunteertaxpreparersdonotdecide.
Display or refer to the approved intake and interview sheet ques-tion mentioned here.
Lesson 6: Dependency Exemptions 6-11
Special Rule for Children of Divorced, Separated, or Never Married Parents
Specialrulesapplyifthedependentissupportedbyparentswhoaredivorcedor separated;theserulesalsoapplytoparentswhowerenevermarried.Afterfirststart-ingwithTable1,useTable3:ChildrenofDivorcedorSeparatedParentswithintheVolunteerResourceGuide(TabC)todeterminewhichparentisentitledtoclaimthechildasadependent.
Ingeneral,thechildwillbeconsideredadependentofthecustodialparent,assum-ingthechildmeetsalltherulesforaqualifyingchildorqualifyingrelative.However,thecustodialparentcanagreetoallowthenoncustodialparenttotreatthechildasaqualifyingchildorqualifyingrelativeifcertainconditionsaremet.AsignedForm8332orequivalentisrequiredandmustbeattachedtothenoncustodialparent’sreturn,orattachedtoForm8453iffilingelectronically.
What are the new rules for children of divorced or never married parents?
NEW Revocation of Release of Claim to an Exemption
FortaxyearsafterJuly2,2008(the2009calendaryearformosttaxpayers),newrulesallowthecustodialparenttorevokereleaseofclaimtoexemptionpreviouslyfiledonForm8332,Release/RevocationofReleaseofClaimtoExemptionforChildbyCustodialParent,orsimilarform.Thecustodialparentmustprovide,ormakeareason-ableefforttoprovide,thenoncustodialparentwithwrittennoticeoftherevocationinthecalendaryearpriortothetaxyearinwhichtherevocationistotakeeffect.Therefore,ifthecustodialparentprovidesnoticeofrevocationtothenoncustodialparentin2009,theearliesttherevocationcantakeeffectisthe2010taxyear.PartIIIofForm8332canbeusedforthispurpose.Attachacopyoftherevocationtothereturnforeachtaxyearthechildisclaimedasadependentasaresultoftherevocation.
NEW Use of Divorce Decree or Separation Agreement Instead of Form 8332
Ifthedivorcedecreeorseparationagreementwentintoeffectafter1984andbefore2009,thenoncustodialparentcanstillattachcertainpagesfromthedecreeoragree-mentinsteadofForm8332orsimilarform.
Beginningwithdivorcedecreesgrantedin2009,thenoncustodialparentwillnolongerbeabletoattachpagesfromthedecreeoragreement.Form8332mustbefiledifthedecreeoragreementwasmadeafter2008.
Pre-1985decreeofdivorceorseparatemaintenanceorwrittenseparationagreementisstillapplicablefor2009whenthedecreegivestheexemptiontothenoncustodialparentandtheparentpaysatleast$600inchildsupportonly if the child is permanently and totally disabled.
TheSpecialRuleforChildrenofDivorcedorSeparatedParentsisdescribedindetailinthePersonalExemptionsandDependentschapterofPublication17.
ThisruledoesnotapplyforHeadofHouseholdfilingstatus,thecreditforchildanddependentcareexpenses,ortheearnedincomecredit.Forthesebenefits,thechildmustmeettheresidencytest.Thecustodialparentmaystillqualifyforthoseprovisionseventhoughthenoncustodialparentcanclaimthedepen-dencyexemption.
Display or refer to the Children of Divorced, Separated, or Never Married Parents Inter-view Tips in the Vol-unteer Resource Guide (Tab C).
Lesson 6: Dependency Exemptions6-12
How do I enter the exemptions in the tax software?
Thetaxsoftwaredeterminesthetaxpayer’sdependencyexemptionsbasedontheDependents/NondependentsinformationenteredonthetaxsoftwareMainInformationSheet.
Besuretoincludeandverifyallthefamilyanddependentinformationonthetaxpay-er’sapprovedintakeandinterviewsheetbeforeenteringthefollowingdataintotheDependents/Nondependentssectionofthetaxsoftware.
Fordetailedinstructions,refertotheVolunteerResourceGuide(Tab1),MainInformationSheet.
Taxpayer Interview and Tax Law Application
ElaineSmithhasoneFormW-2fromherclerkjobof36years,showingwagesof$37,000.Shehasbeendivorcedfromherhusbandforover20years.Sheisthemainproviderforhertwograndchildrenandtwoofhergrownsons,wholivewithher.Hersonsworkedparttimeandearned$4,000each.Theyarenotdisabled.Thegrandchil-drenarenotthechildrenofthesonsthatlivewithher.Shewouldliketofileataxreturnandclaimhersonsandgrandchildrenasdependents.
Form13614-Cshouldlooklikethis:
Display or refer to the Dependents/Nonde-pendents section of the tax software Main Information Sheet in the Volunteer Resource Guide (Tab 1).
example
Thetaxpayerhasa1999divorcedecreethatstatestheycanclaimtheirchildasadependent.Sincethedivorcedecreewascreatedpriorto2009,thedivorcedecreecanbeattachedtothetaxreturnandthetaxpayercanclaimthedependent.
example
Thetaxpayerhasa2009divorcedecreethatstatestheycanclaimtheirchildasadependent.Thetaxpayercannotattachacopyofthedivorcedecreetothetaxreturnevenifitstatesthetaxpayercanclaimthechildasadependent.ThetaxpayermustattachasignedForm8832tothetaxreturninordertoclaimthechildasadependent.
Read the examples. Answer any student questions.
Lesson 6: Dependency Exemptions 6-13
How do I apply the dependency tests to Elaine’s sons?
UsetheinterviewtipsintheVolunteerResourceGuidetoapplythetesttoeachofElaine’ssons.
How do I apply the dependency tests to Elaine’s grandchildren?
UsetheinterviewtipsintheVolunteerResourceGuidetoapplythetesttoeachofElaine’sgrandchildren.YouwillfindthatLisaandBrianarequalifyingchildrenofElaineandheradultsons,MichaelandTodd.However,underthetie-breakerrules,ElainewouldbeentitledtothedependencyexemptionsforLisaandBrianbecauseshehasthehighestAGI.
Dependents/Nondependents Determinations
Elainecanclaimhertwograndchildrenasdependencyexemptions,butnotheradultsons.Therefore,youusetheFamilyandDependentInformationsectionofElaine’sapprovedintakeandinterviewsheettoentertheinformationforhertwograndchildren.
Practice – Vanessa Franklin
Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin. GotoAppendixA-9andreviewthesampleinterviewwithVanessarelatedtodepen-dencyexemptions.
Summary
• Youcannotclaimanydependentsifyou,oryourspouseiffilingjointly,couldbeclaimedasadependentbyanothertaxpayer.
• Youcannotclaimamarriedpersonwhofilesajointreturnasadependentunlessthatjointreturnisonlyaclaimforrefundandtherewouldbenotaxliabilityforeitherspouseonseparatereturns.
• YoucannotclaimapersonasadependentunlessthatpersonisaU.S.citizen,U.S.residentalien,U.S.national,oraresidentofCanadaorMexico,forsomepartoftheyear.(Thereisanexceptionforcertainadoptedchildren.)
• Youcannotclaimapersonasadependentunlessthatpersonisyourqualifying child or qualifying relative.
Tax Software Hint: Afterverifyingthatthedependentsarequalified,enterthe
taxpayer’sdependents’informationintheDependents/NondependentssectionofthetaxsoftwareMainInformationSheet.Thetaxsoftwarewillusethisinformationtocalcu-latethetaxpayer’sexemptiondeduction.
Walk through the sequence of steps in the interview tips, if time permits.
Direct students to Appendix A-9.
Review the lesson summary with the class.
Lesson 6: Dependency Exemptions6-14
Notes
7-1
Instructor Notes
Lesson 7: Military – Unique Filing Status and Exemption Situations
Introduction
Thislessonwillassistyouinaddressingsomefilingstatusissuesyoumayencounterwhenhelpingservicemembersorotherswhosespousesarenonresidentaliens(notU.S.citizensorpermanentresidentaliens).
Thislessonalsocoversexemptionissuesrelatedtotaxpayerswhowanttoclaimanexemptionfor:
• Anonresidentalienspousewhodoesnotqualifytobearesidentalienfortaxpurposes,and/or
• Nonresidentalienstepchildren
Taxsituationsinvolvingnonresidentalienscanbecomplex.IfthetaxpayerhasaJ,Q,F,orMvisa,askthesitecoordinatorifthereisavolunteerwhoistrainedandcertifiedtopreparethesetypesofreturns.
Ifthereisn’tacertifiedvolunteeratthesiteorifyouarefacedwithasituationnotcoveredinthislesson,referthetaxpayertoaprofessionaltaxpreparer.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determinewhetheranindividual,forexample,anArmedForcesmember’sspouse,isanonresidentalien or resident alien
• DetermineifanArmedForcesmemberisentitledtoclaimthepersonalexemptionforaspousewhoisanonresident alien
• Applythesupporttestandcitizen/residenttesttodeterminewhetheranindividualcanbeclaimedasadependentbyanArmedForcesmember
• ApplyspecialrulesforHeadofHouseholdstatuswhenthespouseisanonresidentalien
How do I apply tax law to nonresident aliens?
Nonresidentalienscanbestudents,teachers,trainees,and/orundocumentedimmi-grants.Yourroleistodetermineifthenonresidentaliencanbetreatedasaresidentalienfortaxpurposes;ifso,mosttaxrules(withcertainexceptions)thatapplytoaU.S.citizenwillapplytothenonresidentalien,includingfilingstatusandexemptionissues.ResidentaliensandU.S.citizensmustreportworldwideincomeontheirtaxreturn.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication 519Optional:□ Publication3□ Publication 54□ Form1040NR-EZ□ Form1040NR
Lesson 7: Unique Filing Status and Exemption Situations
Review objective with the class.
Point out the resources cited under What do I need?
Lesson 7: Unique Filing Status and Exemption Situations7-2
Keepinmindthatapersonisconsideredmarriednomatterwhereintheworldtheyweremarried.Itdoesnotmatterifonespouseislivinginanothercountry.Thepersonwhoistheresidentalien/citizenstillmustfollowtaxrulesformarriedpersons.
Filingataxreturnasaresidentaliendoesnotaffecttheperson’simmigrationstatus inanyway.
Who is a citizen, resident alien, or nonresident alien?
Let’sbeginbylookingattheapprovedintakeandinterviewsheet.Locatethepartoftheformwheretaxpayersand/ortheirspousesindicatewhetherornottheyareU.S.citizensorresidentaliens.Inanotherpartoftheform,taxpayersindicatecitizenshiporresidencyoffamilymembersanddependents.
Ifthetaxpayerhaschecked“no”forU.S.citizenorresidentalienontheapprovedintakeandinterviewsheet,youmustdetermineifthepersoncanbetreatedasaresidentalienfortaxpurposesbeforecontinuing.Anindividualmustmeetoneofthefollowingteststobeconsideredaresident alien for tax purposes:
• GreenCardtest
• SubstantialPresencetest
What is the Green Card test?
IndividualswhowerelawfulpermanentresidentsoftheU.S.atanytimeduringthetaxyearareresidentaliens.Thesepeopleweregiventheprivilege,accordingtoimmigra-tionlaws,ofresidingpermanentlyintheU.S.Theyreceivealienregistrationcards,commonlyknownasa“greencards,”attestingtothisstatus.Greencardsareapproxi-matelythesizeofdriverlicenses.Theyarenolongergreenincolor,butstillholdthename.MostgreencardholdershavevalidsocialsecuritynumbersandmustfollowthesametaxlawsasU.S.citizens,includingtherequirementtoreportworldwideincomeontheirtaxreturns.
MoreinformationaboutgreencardholdersisavailableinPublication4588,BasicTaxGuideforGreenCardHolders,foundatwww.irs.gov.
What is the Substantial Presence test?
ThistestisbasedonaformulaofdaysandyearsapersonisphysicallypresentintheUnitedStates.Ifindividualsdonothavegreencards,findoutiftheymeettheSubstantialPresencetest,whichallowsthemtobetreatedasresidentaliensfor taxpurposes.
Page9oftheVolunteerResourceGuidereprintsthedecisiontree,NonresidentAlienorResidentAlien?fromPublication519,U.S.TaxGuideforAliens.Itisusedtodeter-mineifanalienisaresidentalienornonresidentalienfortaxpurposes.
UsetheResidentAlienorNonresidentAlien?decisiontreetodetermineanindividual’sresidencystatus.
Ask students to find these parts of the approved intake and interview sheet.
Ask students: When a green card has been issued, what is the resi-dency status?
Answer: Resident alien
Ask students to turn to the Resident Alien or Nonresident Alien? decision tree in the Volunteer Resource Guide, page 9.
Lesson 7: Unique Filing Status and Exemption Situations 7-3
Who is exempt from the Substantial Presence test?
PeoplewhoareintheU.S.onvalidF,J,MorQvisasareusuallyconsideredexemptfromtheSubstantialPresencetest.TaxpayersmustfollowtherulesdescribedinForms1040NRor1040NR-EZinstructions.
Forindividualswithvalidvisas,donotcountthedayspresentintheU.S.forpurposesoftheSubstantialPresencetest.Ingeneral,thesepeoplewillbe considered nonresident aliens for tax purposes.Otherexamplesofexemptindividualsinclude:
• Nonresidentalienswithmedicalconditionsthatpreventthemfromleavingthecountry,and
• CertaincommutersbetweentheU.S.,Canada andMexico
Publication519hasmoredetailedinformationonwhoisanexemptindividual.
What if a nonresident alien meets the Substantial Presence test?
NonresidentalienswhomeettheSubstantialPresencetestaretreatedasresidentaliensfortaxpurposes.
NopaperworkordocumentationisneededtoindicatethatapersonisanonresidentalienfilingasaresidentalienundertheSubstantialPresencetest.
Allpersonslistedonthereturnmusthaveeitheravalidsocialsecuritynumberoranindividualtaxidentificationnumber(ITIN).ITINsarediscussedintheFilingBasicslesson.
AtaxpayerobtainsanITINbyfillingoutFormW-7orFormW-7SP.Attachthisformtothetaxreturn.(Youmaypreparethereturnforthetaxpayer.)FollowtheinstructionsintheVolunteerResourceGuide(Tab1)forpreparingthereturnwithoutavalidSSNorITIN.AreturnwiththeFormW-7applicationcannotbee-filed;itmustbemailed.
AreturnwithanITINcanbee-filed.AreturnmissinganITINcannotbee-filed.
example
PFCGloriaBenton’shusband,Dante,hasneitheragreencardnoravisa.Dantedoesnothaveataxhomeinanothercountry.HewasphysicallypresentintheU.S.for150daysineachoftheyears2007,2008,and2009.IsDantearesidentalienundertheSubstantialPresencetestfor2009?
ThedecisiontreeindicatesthatDantedoesmeettheSubstantialPresencetestandisconsideredaresidentalienfortaxpurposes.
2009:150days2008:1/3of150=50days 2007:1/6of150days=25days
Totaldays=225days
Ifaperson’svisahasexpiredorthepersonisnotcomplyingwiththerequirementsofthevisa,thenthatpersonisnotanexemptindividualandcannotexcludethosedaystheyarephysi-callypresentintheU.S.
AnindividualwithanITINisnotentitledtotheEarnedIncomeCredit.ThiswillbecoveredintheEarnedIncomeCreditlesson.
MostVITAsitesdonotpreparereturnsforindividualswithF,J,M,orQvalidvisas.Askthesitecoordinatorifthereisavolunteerwhoiscertifiedtopreparethesetypesofreturns.Ifnot,referthetaxpayertoaprofessionaltaxpreparer.
Ask a volunteer to read the example about PFC Benton’s husband. Answer any student questions.
Point out the caution.
Lesson 7: Unique Filing Status and Exemption Situations7-4
IRSTaxpayerAssistanceCentersoracceptanceagentscanhelpthetaxpayercompleteFormW-7orFormW-7SP.Mostacceptanceagents,otherthantheIRS,chargeafeeforthisservice.
Formoreinformationaboutacceptanceagents,seePublication4393,WhatisanIRSITINAcceptanceAgent.Youcanfindthispublicationandmoreinformationaboutacceptanceagentsonwww.irs.gov,keyword“acceptanceagent.”
UsetheResidentAlienorNonresidentAlien?decisiontreeintheVolunteerResourceGuide(page9)todetermineifapersonmeetstheSubstantialPresencetest.
What if a nonresident alien does not meet the Green Card or Substantial Presence test?
IfanunmarriednonresidentaliendoesnotmeettheGreenCardorSubstantialPresencetest,referthetaxpayertoavolunteerwhohasbeentrainedandcertifiedtopreparereturnsfornonresidentaliensoraprofessionaltaxpreparertofileForm1040NRorForm1040NR-EZ.
IfthenonresidentalienismarriedandthespousedoesnotqualifytobetreatedasaresidentalienusingtheGreenCardorSubstantialPresencetest,youcanprovideassistance.
Marriedcouplesinthissituationhaveafewoptionswhenitcomestofillingataxreturn.Intheexample,Gabriella(wifeofSgt.PaulKingman)doesnotmeettheGreenCardnorSubstantialPresencetest.Thus,sheisconsideredanonresidentalien.
AsacitizenmarriedtoanonresidentalienspousewhodoesnotmeeteithertheGreenCardorSubstantialPresencetest,Sgt.Kingmanhasfourfilingstatusoptions:
1. HemaychoosetofileasMarriedFilingSeparately
2. ThecouplemaychosetofileasMarriedFilingJointly
3. HemayqualifyforHeadofHouseholdundertheregularrulesforamarriedpersonwhoisconsidered unmarriedforHeadofHouseholdpurposes
4. HemayqualifytofileasHeadofHousehold,evenwhile living with the nonresident alien spouse
example
Sgt.PaulKingmanandhiswife,Gabriella,weremarriedattheendof2009.Gabrielladoesnothaveagreencardnoravalidvisa.Theyhavenochildrenandarenotsupportinganyoneelse.
GabrielalivedintheU.S.for120daysin2009(fromSeptembertoDecember)asanonresidentalien.ShewasalsointheU.S.for120daysineachoftheyears2007and2008.Gabrielladoesnothaveataxhomeinanothercountry.DoesGabriellameettheSubstantialPresencetest?
Followingthedecisiontree,youfindthatGabrielladoesnotmeettheSubstantialPresencetest.Fortaxpurposes,sheisconsideredanonresidentalien.
2009:120days2008:1/3of120days=40days2007:1/6of120days=20days
Totaldays=180
Ask a volunteer to read the example about Sgt. Paul Kingman and his wife. Answer any stu-dent questions.
Refer students back to the Resident Alien or Nonresident Alien? decision tree in the Volunteer Resource Guide.
Ask students to turn to the Filing Status Inter-view Tips in the Vol-unteer Resource Guide (Tab B).
Lesson 7: Unique Filing Status and Exemption Situations 7-5
Who can file a joint return?
EventhoughGabrielladoesnotpasstheGreenCardtestortheSubstantialPresencetest,itispossibleforthismarriedcoupletofileajointreturn.Thecouplemayelecttotreatthenonresidentalienspouseasaresidentalienfortaxpurposes.ThisinformationcanbefoundinPublication519,U.S.TaxGuideforAliens.
How does a couple elect to treat the nonresident alien spouse as a U.S. resident for tax purposes?
Ifthenonresidentalienspouseagreestofileajointreturn,worldwideincomemustbereported,andasigneddeclarationisattachedtothejointreturnstating:
• OnespousewasanonresidentalienandtheotherspouseaU.S.citizenorresidentalienonthelastdayofthetaxyear,andbothchoosetobetreatedasU.S.residentsfortheentireyear
• Thename,address,andSSNorITINofeachspouse
How does this election affect filing status in future years?
Theelectioncontinuesinfutureyearsbutthespousescanfileseparatelyafterthefirstyear,iftheychoose.Theelectiontotreatthespouseasaresidentistermi-natedbyrevocation,thedeathofeitherspouse,theirlegalseparation,ortheIRSmayterminateitforfailuretokeepadequaterecords.
Asyoulearnedinapreviouslesson,marriedtaxpayerscanbeconsidered unmarried andclaimHeadofHouseholdstatusiftheyhavenotlivedwiththeirspouseforthelastsixmonthsoftheyear,andiftheymeetafewotherrequirements.
Tax Software Hint:FollowthefilingstatusinterviewtipsintheVolunteerResourceGuide(TabB)toseeifthecitizenspousequalifiestofileasHeadofHousehold.
example
EventhoughGabriella,Sgt.PaulKingman’snonresidentalienwife,doesnotpasstheGreenCardorSubstantialPresencetest,theybothagreetochoosetotreatGabriellaasaresidentalienbyattachingasignedstatementtotheirjointreturn.PaulandGabriellamustreporttheirworldwideincomefortheyearandforalllateryearsunlessthechoiceisendedorsuspended.AlthoughPaulandGabriellamustfileajointreturnfortheyeartheymakethechoice,theymayfileeitherjointorseparatereturnsforlateryears.
Makeanotebystep2ofthePersonalExemptionschartintheVolunteerResourceGuidethat,ifaspouseisanonresi-dentalien,thetaxpayercanstillmakethechoicedeclara-tion.
Display or refer stu-dents to Table 1-1, Ending the Choice, in Publication 54.
Ask a volunteer to read the example about Gabriella.
Lesson 7: Unique Filing Status and Exemption Situations7-6
ExErcisEs
Can citizens or resident aliens who live with their nonresident alien spouse ever file as Head of Household?
ThereisanexceptionthatallowsU.S.citizensandresidentalienspouseswholivewithnonresidentalienstofileasHeadofHousehold.Allofthefollowingrequirementsmustbemet:
• ThetaxpayerisaU.S.citizenorresidentalienfortheentireyearandmeetsallthe“consideredunmarried”rulesforHeadofHouseholdexceptforlivingwiththenonresidentalienspouse
• ThenonresidentalienspousedoesnotmeettheSubstantialPresencetest
• Thenonresidentalienspousedoesnotchoosetofileajointreturn
Question 1: Gloria’shusband,Dante,meetstheSubstantialPresencetest.GloriaisaU.S.citizen.Theydonothaveanychildrenanddonotsupportanyoneelse.DanteisapplyingforanITIN.GloriahasanSSN.Theylivetogether.
WhatfilingstatusoptionsdoesGloriahavefor2009?
Question 2:Sgt.RaulThomasisaU.S.citizenandservingintheU.S.ArmyinJapan.Hiswifeandhischildrenlivewithhimandheisabletoclaimthechildrenasdependents.Raul’swife,acitizenofJapan,choosesnottobetreatedasaresidentalienfortaxpurposes. Shedoesnotwanttofileajointreturnwithhim.
RaulmeetsalloftheotherqualificationsforHeadofHousehold.Eventhoughheismarriedandlivingwith hisspouse,canheclaimHeadofHouseholdstatus? þ Yes ¨ No
Can a taxpayer filing Head of Household who is married to and living with a nonresident alien spouse claim the Earned Income Tax Credit, if they are otherwise eligible?
No.TaxpayerswhoareconsideredunmarriedforHeadofHouseholdpurposes(becausetheyaremarriedtoanonresidentalien)arestillconsideredmarriedforpurposesoftheEarnedIncomeCredit.TaxpayersareonlyentitledtothecreditiftheyfileajointreturnandmeettheEICqualifications.
IntheVolunteerResourceGuide,turntoTabB,FilingStatus.Notatethefactthat,ifaspouseisanonresidentalien,theliving apart rule doesnotapplytothecitizenspouse.YouwillalsofindthisinformationinPublication17,under Head of Household, nonresident alien.
Gloria can file as either Married Filing Jointly or Married Filing Separately.
Yes, he can claim Head of Household status since his spouse is a nonresi-dent alien who won’t file a joint return with him, and he meets the other qualifications for Head of Household.
Assign the exercises.
Review answers with the class when com-plete.
Inthissituation,the20091040Instructionssaytoenter“NRA”online4(HeadofHouseholdstatus)ofForm1040.Whenpreparingapaperreturnforsuchanonresidentalientaxpayer,alsowrite“no”onthedottedlinenexttoline64a(EarnedIncomeCredit)ofForm1040.
Lesson 7: Unique Filing Status and Exemption Situations 7-7
Personal Exemptions
Can the citizen/resident alien spouse claim the personal exemption of the nonresident alien spouse when the nonresident alien spouse does not meet the Substantial Presence test and does not choose to file a joint return?
Yes,ifcertaintestsaremet.TurntothepersonalexemptionsInterviewTipsintheVolunteerResourceGuideunderTabC.UsetheInterviewTipstoseeifthecitizenspousecanclaimthepersonalexemptionofthenonresidentalienspouse.ItdoesnotmatterifthecitizenspouseisfilingasMarriedFilingSeparatelyorasHeadofHousehold.Makeanoteonstep6that,foranonresidentalienspouse,incomeisdefinedasU.S.-sourcedincomeonly.Alltheotherrulesapplyasstated.Toclarify step7,thepersoncannotbeclaimedasadependentofanotheronaU.S.taxreturn.
How do I enter the filing status into the tax software?
TurntotheVolunteerResourceGuide(Tab1).FindtheMainInformationSheet screen shots.Notateontheappropriatepageshowtoclaimthenonresidentalienspouse’spersonalexemptionforeachofthesesituations.
Findthepagewiththefilingstatussection.IfthetaxpayerisfilingasMarriedFilingSeparately,gotothelinethatsaysMarriedFilingSeparatelyandfillinthespouse’snameandSSNorITIN.NowfindtheMainInformationSheetscreenshotthatshowsthedependents/nondependentsection.Listthespouse’sname,dateofbirthandSSNorITINandwrite“other”intherelationshipcolumn.Enterthenumberofmonths,if any,thespouselivedinthehome.Enter“3”inthecodecolumn.A“3”meansall otherdependents.
example
Raul(mentionedearlier)isaU.S.citizenservingintheU.S.ArmyinJapan.Hiswifeandchildrenlivewithhimandheisabletoclaimthechildrenasdependents.Raul’swife,acitizenofJapan,choosesnottofileajointreturnwithhim.Raulcanclaimhiswife’spersonalexemptionaslongasshehasnoU.S.sourceincome,sheisnotanyoneelse’sdependent,andhasanITINorSSN.
Ask a volunteer to read the example about Raul.
example
MajorTomBeckleyisaU.S.citizen.HemarriedAnna,aKoreancitizen,in2009,butcamebacktotheU.Swithouther.AnnaisstillinKoreagettingherpaperworkinorder.Shedidnotchoosetofileajointreturnwithhim.MajorBeckleyisfilingasMarriedFilingSeparately.AnnahasnoU.S.-sourcedincomeandcannotbeclaimedasadependentonanyoneelse’sU.S.taxreturn.ShehasanITINfornow.MajorBeckleycanclaimherpersonalexemptiononhistaxreturn.
Ask a volunteer to read the example about Major Tom Beckley and his wife.
Direct students to the Filing Status section of the Main Information screens shown in the Volunteer Resource Guide (Tab 1).
WhenpreparingapaperreturnforataxpayerwhoisfilingasMarriedFilingSeparately,claimtheexemptionbycheckingbox6b(spouse’sexemption)ofForm1040.Enterthenameofthespouseinthespacetotherightofthebox.EntertheITINorSSNofthespouseinthespaceprovidedatthetopofForm1040.Thisiswherethespouse’sSSNorITINwouldbeenteredifajointreturnwasbeingfiled.
Lesson 7: Unique Filing Status and Exemption Situations7-8
IfthetaxpayerisfilingasHeadofHouseholdandclaimingthenonresidentalienspouse’spersonalexemption,gotothatlineinthefilingstatussectionoftheMainInformationSheet.ChecktheHeadofHouseholdbox.OntheMainInformationSheet,under“exemptions,”checktheboxunder6(c)thatstatesthatyouareusingfilingstatus4andclaiminganexemptionforanonresidentalienspouse.Entertheperson’snameandTINinthespaceprovided.Donotenterthepersonagaininthedependent/nonde-pendentsectionoftheMainInformationSheet.
Dependency Exemptions
Can a taxpayer claim a dependency exemption for a child born overseas, a foreign-born stepchild, and/or an adopted foreign-born child?
Child born overseas to a U.S. citizen
ChildrenbornoverseastoU.S.citizenparentsareconsideredtobeU.S.citizensfortaxpurposes.Achildcanbeclaimedasadependentaslongasalltheotherrulesfor qualifyingchildorqualifyingrelativearemet.
Thebirthofachildabroadshouldbereportedassoonaspossibleforthepurposeofestablishinganofficialrecordofthechild’sclaimtoU.S.citizenshipatbirth.FormFS-240,ConsularReportofBirth,establishesofficialevidencethatthechildisa U.S.citizen.
Can a foreign-born stepchild be claimed as a dependent?
Ifachildisanonresidentalien,beforeaddressingthedependencyexemptionquestion,itisnecessarytoconfirmthechild’sU.S.residencystatusfortaxpurposes.TurntotheResidentAlienorNonresidentAlien?interviewtipsintheVolunteerResourceGuide,(TabC).
example
Sgt.PatriciaSpencer,aU.S.citizen,ismarriedtoGilberto,anonresidentalienfromSpain.Theirdaughter,Eva,wasborninSpain,wheretheylive.
EvaisentitledtoU.S.citizenship.HermothershouldcheckwiththemilitaryofficeforinformationonreportingthebirthofthechildsoEvawillberecognizedasaU.S.citizen.Evawillneedasocialsecuritynumbertobeclaimedasadependentonhermother’staxreturn.
WhileapplyingfortheConsularReportofBirth,parentsshouldalsoapplyforasocialsecu-ritynumberandpassportfortheirchild.Withoutasocialsecuritynumber,theparentswillnotbeabletoclaimthechildasadependentnortakeadvantageofcredits,suchastheEarnedIncomeTaxCreditortheChildTaxCredit,evenifalloftheotherprerequisitesaremet.
Ask a volunteer to read the example about Sgt. Spencer and Gilberto.
example
Sgt.TerrySummers,aU.S.citizen,ismarriedtoaGermancitizenwhosethreechildrenareGermancitizensanddonothavegreencards.Sgt.Summershasnotadoptedthechildren.TheyallliveinGermany.
Read the example about Sgt. Summers.
Lesson 7: Unique Filing Status and Exemption Situations 7-9
ExErcisEs (continued)
Followtheinterviewtips.ThechildrendonothavegreencardsandwerenotphysicallypresentintheU.S.duringthetaxyear.Theyarenonresidentaliensfortaxpurposes.
NowturntotheinterviewtipsunderDependencyExemptionforQualifyingChildintheVolunteerResourceGuide(TabC).Step6asks,“IsthepersonaU.S.citizen,U.S.national,oraresidentofCanadaorMexico?”Theansweris“no.”Thechildrendonotmeetthecitizenshiptest.Sgt.Summerscannotclaimthechildrenasdependents.
What if Sgt. Summers adopted the stepchildren?
Continuingtheexampleabove,ifSgt.Summersadoptedthestepchildrenandthey lived with him all year,eventhoughtheyarestillnotcitizensoftheU.S.,Sgt.Summerscouldanswer“yes”tothecitizenshiptest.Ifalltheotherrulesweremetforaqualify-ingchildorqualifyingrelative,hecouldclaimtheadoptednonresidentalienchildrenasdependentsonhistaxreturn.Ofcourse,thechildrenwouldhavetoobtainSSNs,ITINs,orATINstobeclaimedonhistaxreturn.
AnAdoptionTaxpayerIdentificationNumber(ATIN)canbeobtainedwhenadomesticadoptionispendingandotherrulesaremet.AnATINcanbeobtainedinthecaseofaforeignadoptionwhenthechildalreadypossessesagreencardoracertificateofcitizenship(aformclaim-ingcitizenshipbecauseachildwasbornoverseastoaU.S.citizen).
SeePublication17undertheCitizenorResidenttestinChapter3formoreinformation,includingwhoisconsideredaU.S.national.
Question 3:Sgt.SummersmovedhisfamilytotheU.S.inJanuary.ThestepchildrenarestillnotU.S.citizensandtheydonothavegreencards.Theymettheotherdepen-dencytests.Ifhecanclaimthem,hewillapplyforITINsforthem.Canheclaimthestepchildrenasdependentsonhistaxreturn?þ Yes ¨ NoQuestion 4: Sgt.JohnRamsey,aU.S.citizenwhohasbeenintheU.S.Armyfor13years,isstationedinGermany.HiswifeisaGermancitizenwhohasneverlivedintheU.S.Theirtwo-year-oldsonwasborninGermany.Sgt.Ramsey’s12-year-oldstepdaughter,aGermancitizenwhomSgt.Ramseyhasnotadopted,alsoliveswiththem.TheRamseysprovidetotalsupportforthetwochildren.HowmanydependencyexemptionscanSgt.Ramseyclaimonajointreturn?
A. One
B.Two
C.Three
D.Zero
Anadoptednonresidentalienchildmustlivewiththetaxpayerallyeartopassthecitizenorresidentalientest.
Yes, the children meet the Substantial Presence test because they were in the United States more than 183 days.
He would answer “yes” to step 6, the citizen/resident test; they must also meet the requirements for quali-fying child/relative and obtain SSNs or ITINs.
He can claim one depen-dency exemption (his son, a U.S. citizen); the step-daughter does not meet the test, and a spouse is never a dependent.
Assign the exercises.
Review answers with the class when com-plete.
Lesson 7: Unique Filing Status and Exemption Situations7-10
Summary
Beforefilingataxreturn,U.S.citizensmarriedtoaspousewhoisnotaU.S.citizen,national,orresidentalienmustdeterminewhatfilingstatusoptionsareavailableandwhetherthenoncitizenspousewillbetreatedasaresidentalienfortaxpurposesorasanonresidentalien.
ResidentaliensfollowthesametaxlawsasU.S.citizens.Nonresidentaliensfollowanothersetoftaxlaws,mostofwhichareoutsidethescopeoftheVITAprogram.
Todeterminetheresidencystatusofanoncitizen,usetheResidentAlienorNonresidentAlien?decisiontreeintheVolunteerResourceGuide(TabC).
Amarriedcouple,whereacitizenorresidentalienismarriedtoapersonwhodoes notmeettheGreenCardorSubstantialPresencetest,stillhastheoptionofelectingtotreatthenonresidentspouseasaresidentalienandfileasMarriedFilingJointly.
IfthenonresidentalienspousedoesnotmeettheGreenCardorSubstantialPresencetestsanddoesnotchoosetofileajointreturn,undercertaincircumstances,theU.S.citizenorresidentaliencanfileasHeadofHouseholdeventhoughthecouplelivestogether.
AU.S.citizenorresidentalienmayclaimthenonresidentalienspouse’spersonalexemptionaslongasthespouse:
• HadnoU.S.-sourcedincome
• Cannotbeclaimedasadependentonsomeoneelse’sU.S.taxreturn,and
• HasaTIN
AU.S.citizen’schildisusuallyaU.S.citizenbybirth,evenifthechildisbornin anothercountry.
AnonresidentalienstepchildwhodoesnotmeettheGreenCardorSubstantialPresencetestscannotbeclaimedasadependentoftheU.S.citizenorresidentalienbecausethechilddoesnotpassthecitizenshiptest.
AnadoptednonresidentalienchildcanusuallybeclaimedasadependentofaU.S.citizenorresidentalienifthechildliveswiththeU.S.citizentheentireyear.
Review lesson sum-mary with the class.
Lesson 7: Unique Filing Status and Exemption Situations 7-11
ExErcisE answErs
Answer 1: Gloria can file as either Married Filing Jointly or Married Filing Separately. Since Dante meets the Substantial Presence test, he is a U.S. resident alien for tax purposes. He and Gloria can file as Married Filing Jointly, or they can both file as Married Filing Separately. Dante must follow the U.S. tax laws since he is considered a resident alien.
Answer 2: Yes. Raul can claim Head of Household status since his spouse is a nonresident alien, she does not choose to file a joint return with him, and Raul meets the other qualifications for Head of Household. If Raul had notmet the other qualifications for Head of Household, he would have to file as Married Filing Separately.
Answer 3: Yes. The children meet the Substantial Presence test because they were in the United States more than 183 days. Sgt. Summers’ stepchildren are considered resident aliens for tax purposes. He would answer “yes” to step 6, the citizen/resident test. As long as the other requirements for qualifying child or qualifying relative are met, Sgt. Summers can claim the stepchildren as dependents on his tax return. They have to obtain SSNs or ITINs.
Answer 4: A. Sgt. Ramsey can claim one dependency exemption for his son on his joint return. The son qualifies as a U.S. citizen because his father is a U.S. citizen. The stepdaughter does not meet the U.S. citizen or resident test. A spouse is never considered a dependent, although Sgt. Ramsey may be able to take her personal exemption.
Notes
Lesson 7: Unique Filing Status and Exemption Situations7-12
Notes
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-11 8-1
Instructor Notes
Lesson 8: Income – Wages, Interest, Etc.; Form 1040, Lines 7-11
Introduction
Thisisthefirstofninelessons(lessons8through16)coveringtheIncomesectionofthetaxpayer’sreturn.Acriticalcomponentofcompletingthetaxpayer’sreturnisdistin-guishingbetweentaxableandnontaxableincomeandknowingwheretoreportthedifferenttypesofincomeonForm1040,lines7through22.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Computetaxableandnontaxableincome
• Distinguishbetweenearnedandunearnedincome
• Reportincomecorrectlyonlines7through11ofForm1040
TheincomelessonsfollowtheorderoftheIncomesectionofForm1040.Thefollowingchartwillhelpyouselecttheappropriatetopicforyourcertificationcourse.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-WOptional:□ Form1040Instructions□ ScheduleB□ Publication531□ Publication926□ Publication970
Review objectives with the class.
Point out the resources cited under What do I need?
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-118-2
ThereareincometopicsthatarenotincludedintheVITA/TCEtrainingprogram:
• OtherGains/Losses
• FarmIncome
• Dependentchildundertheageof18(age24ifafull-timestudent),whohasinvest-mentincomeofmorethan$1,900
Taxpayerswithincomefromthesesourcesshouldbereferredtoaprofessionaltaxpreparer.
How are taxable and nontaxable income determined?
TheincomechartintheVolunteerResourceGuide(TabD)includesexamplesoftaxableandnontaxableincome.
Grossincomeisallincomereceivedintheformofmoney,goods,property,andservicesthatisnotexemptfromtax.ItincludesincomefromsourcesoutsidetheU.S.,evenifpartorallofthatincomewillnotbetaxable.Grossincomemayincludepartofunemploymentcompensation,partofsocialsecuritybenefitsreceived,andcertainscholarshipandfellowshipgrants.
LessonForm 1040 Topics
Certification Course
Basic Intermediate Advanced Military International8 Line7 Wages
8 Line8 InterestIncome
8 Line9 DividendIncome
8 Line10 TaxableRefunds N/A
8 Line11 AlimonyReceived N/A
9 Line12 BusinessIncome N/A
10 Line13 CapitalGain/Loss N/A N/A
N/A Line14 OtherGains/Losses N/A N/A N/A N/A N/A11 Line15 IRADistributions N/A *
11 Line16 Pensions/Annuities N/A *
12 Line17RentalIncome N/A N/A N/A
ScheduleK-1Distributions N/A N/A
N/A Line18 FarmIncome N/A N/A N/A N/A N/A13 Line19 UnemploymentCompensation
14 Line20 SocialSecurityBenefits
15 Line21OtherIncome
ForeignEarnedIncome N/A N/A N/A N/A
16 Line21 MilitaryIncome N/A N/A N/A
*Pensions/AnnuitiesareIntermediateifthetaxableamountisalreadydetermined.
Walk through the chart to help students interpret and apply it to their certification needs.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-11 8-3
What are types of nontaxable or exempt income?NEW Beginningin2009,eachrecipientofunemploymentcompensationcanexcludefromgrossincomeupto$2,400oftheamountreceivedduringtheyear.
• Nontaxableincome–includessuchthingsasgiftsandinheritances.Excludibleincomeisnotshownonthereturn.
• Exemptincome–includessuchthingsasinterestincomeproducedfromcertaintypesofinvestments.Therearesomeinstanceswhenexemptincomeisshownonthereturn,butnotincludedintheincometaxcomputation,e.g.tax-exemptinterestincome.
What are types of taxable income?
TheIncomesectionofForm1040isusedtoreportearnedandunearnedtaxableincome.ThesumofallearnedandunearnedincomeisreportedonForm1040,line22astotalincome.
• Earnedincome–anyincomereceivedforwork,suchaswages;businessincomereportedonForm1040,ScheduleC,ProfitorLossFromBusiness;Form1040,ScheduleC-EZ,orNetProfitFromBusiness
• Unearnedincome–anyincomeproducedbyinvestments,suchasinterestonsavings,dividendsonstocks,orrentalincome
How do I get started?
Todetermineataxpayer’sincome,discussandreviewtheIncomesectionoftheapprovedintakeandinterviewsheetwiththetaxpayer.UsetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewlessontoprobeforthisinformation.
Incomeisreportedonavarietyofformsdependingonitssource.AskthetaxpayertoshowyouallFormsW-2,Forms1099,andotherstatementsreportingincome.(Note:DonotconfuseForm1099withForm1098.Generally,Form1098reportsexpensesthetaxpayerhaspaid,notincometheyhavereceived.)Youmayalsofinditusefultousepage1ofForm1040asaguidetoaddressincomeitems.
Tax Software Hint:Afteryouhavecollectedalltheincomestatements,reviewIncomeandHow/WheretoEnterIncomeintheVolunteerResourceGuide(Tab2).Thesepageswillshowyouwheretocorrectlyreportincomeitems.
Direct students to the Income section of the Volunteer Resource Guide (Tab D).
Point out that the earned/unearned income concept will be important later in the training, especially when learning about the earned income credit.
Ask students to explain the difference between taxable and nontaxable income. Correct any misunderstanding.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-118-4
How do I report wages, salaries, tips, etc.?
What is Form W-2?
MostemployersissueastandardizedversionofFormW-2.ReviewFormW-2intheVolunteerResourceGuide(Tab2).
EmployersmustreportwagesandotheremployeecompensationonFormW-2andhaveitavailabletotheemployeebyJanuary31.TheemployerisnotrequiredtomailoutFormsW-2,buttheymustmakethemavail-abletotheemployees.TheemployeemayneedtopickupFormW-2fromtheiremployer.
What if the taxpayer does not receive Form W-2 by January 31?
IfthetaxpayerdoesnotreceiveFormW-2byJanuary31,theyshouldfirstcontacttheemployerandfindoutif,orwhen,FormW-2wasmailedorifthetaxpayercanpickupFormW-2inperson.SomeemployersmakeFormW-2availableonlinetotheiremploy-eesasanoption.
IfFormW-2isstillnotreceivedafterallowingareasonableamountoftimefortheemployertoissueorreissueFormW-2,thenthetaxpayershouldcontacttheIRSforassistanceat1-800-829-1040,butnotbeforeFebruary15.
If,afterrequestingFormW-2fromtheemployer,thetaxpayerdoesnotreceiveitinsufficienttimetofilethereturn,theyshouldfilethetaxreturnwithForm4852,SubstituteforFormW-2,WageandTaxStatementorForm1099-R,DistributionsfromPensions,Annuities,RetirementorProfit-SharingPlans,IRAs,InsuranceContracts,Etc.ThetaxpayershouldkeepacopyofForm4852fortheirrecords.UsuallyForm4852canbeusedwithastatereturnaswell.
IftheearningsreportedonForm4852arenotreflectedontheyearlySocialSecurityStatement,thetaxpayershouldcontacttheSocialSecurityAdministrationatthenumbershownonthestatement.
Tax Software Hint:RefertotheVolunteerResourceGuide(Tab2)forinstruc-tionsonenteringincomeintothesoftware.ItisimportanttoentertheinformationfromFormW-2exactlyasitappears.OnceyouenterallForm(s)W-2intothesoftware,itautomaticallyreportsthetotalonline7ofForm1040.Thetaxsoftwareautomatically
Youalwayswanttostresstothetaxpayerthat,whentheyfinallyreceivetheemployer’sFormW-2,ifthenumbersaredifferentfromthoseontheirForm4852,theyneedtoamendtheirreturnstoreportthecorrectamounts.Direct students to
How/Where to Enter Income in the Volun-teer Resource Guide (Tab 2).
example
In2009,Boblefthisoldemployerandtookajobwithanewone.HereceivedtwoFormsW-2,eachlistingadifferentaddress.Hisreturnwilllisthiswagesasthetotaloftheamountsinbox1,buteachFormW-2mustbeenteredintotheprogramseparately.
Ask a volunteer to read the Bob example.
Refer students to Pub-lication 4491-W for examples of Form W-2. Ifthereisamismatchofthe
ITINontheForm1040andtheSSNonFormW-2orForm1099,entertheFormW2orForm1099exactlyasshown.UsetheITINonForm1040.Thereturncanbee-filedusingtheITIN.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-11 8-5
transfersnecessaryinformationforcredits,deductions,withholding,etc.fromformstoothersectionsofthetaxreturn.
Entering Form(s) W-2 information when preparing a paper Form 1040
• Theamountinbox1shouldbeenteredonline7ofForm1040.
• Theamountinbox2shouldbeenteredonline61ofForm1040.
• Theamountinbox8shouldbeincludedonline7ofForm1040andonForm4137.
• Theamountinbox9shouldbeincludedonline59ofForm1040andchecktheboxforAEICpayments.
• Theamountinbox10shouldbeincludedonline14ofForm2441.
• Ifthereisanamountinbox12labeledwitha“D,”completeForm8880whenyougettothenonrefundablecreditsectiontoseeifthetaxpayeriseligiblefortheretirementsavingscontributionscredit.OthercodesmayimpacteligibilityfortheRetirementSavingsContributionscredit;checkthereversesideofthetaxpayer’scopyofFormW-2.
Tip Income
Ifthetaxpayerhasajobinwhichtipsarenormallyreceived(i.e.waiter/waitress,bell-hop,motelmaid,etc.),besuretoaskaboutanytipstheymayhavereceived.Alltipincomeistaxable,whetheritisreportedtotheemployerornot.
• Ifindividualswhoreceivemorethan$20permonthintips,whileworkingonejob,reporttheirtipincometotheiremployer,thetipswillbeincludedinwageson FormW-2,box1.
• Theindividualisnotrequiredtoreporttipincomeof$20orlesspermonthwhileworkingforoneemployer.Sincethesetipsaretaxable,asktaxpayersiftheyhaveanytipincomethatwasnotreportedtotheiremployer.
• Noncashtips(forexample,ticketsorpasses)donothavetobereportedtotheemployer,butmustbeincludedastaxableincomeattheirfairmarketvalue.
• Anytipincomenotreportedtotheemployerisaddedtootheramountsonline7ofForm1040.
• Iftipsweremorethan$20amonth,thetaxpayermustalsopayMedicareandsocialsecuritytaxesonthismoney.Ifthesewerereportedtotheemployer,thentheyareincludedinboxes6and7ofFormW-2.Iftheywerenotreportedtotheemployer,thencompleteForm4137forthetaxpayer.
• Tipsoflessthan$20permonthornoncashtipsmustbereportedasincomeonline7ofForm1040,butarenotsubjecttosocialsecurityandMedicaretaxes.
InformationonhowtoreportunreportedtipsandpaysocialsecurityandMedicaretaxesonqualifyingunreportedtipsiscoveredintheOtherTaxeslesson.Also,theVolunteerResourceGuide(Tab2)providesdetailedinformationonhowtoenter unreportedtips.
Direct students to the Volunteer Resource Guide, (Tab 2), How to Enter Unreported Tips.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-118-6
Allocated Tips
Forsomebusinesses,givingemployeestipsiscustomary.Thesebusinessesincluderestaurants,bars,andsimilarbusinesses.Toensurethateveryonereportstheirfairshareofincomefromtips,someemployershavetipallocationprograms.TheseprogramsareapprovedbytheIRS.Ifanemployeereportstipstotheemployerthatwerelessthanthedesignatedsharebasedontheemployer’sformula,theemployerreportsthedifferenceas“allocatedtips”andincludesitontheemployee’sFormW-2.
Allocatedtipsareshownseparatelyinbox8ofFormW-2.SocialsecurityandMedicaretaxesarenotwithheldonallocatedtips.Allocatedtipsarenotincludedintheamountinbox1ofFormW-2.Explaintothetaxpayerthatunlessthetaxpayerkeptawrittenandreliablerecordoftipsactuallyreceivedatthatjobandcanprovetheallocatedamountisinaccurate,theallocatedtipsmustbeincludedinline7ofForm1040.Ifthetaxpayerdidkeepareliablewrittenrecordoftips,thentheirfiguresareusedinplaceoftheamountinbox8whenincludingtipincomeonline7ofForm1040.
Tax Software Hint: Whenallocatedtipsarereportedinbox8ofFormW-2,thesoftwareautomaticallyaddsthemtoline7ofForm1040andalsocompletesForm4137.Ifthisamountisnotcorrect,basedonthetaxpayer’srecords,anadjustmentwillneedtobemadeonForm4137.
AllocatedtipsarealsosubjecttosocialsecurityandMedicaretaxes.ReporttheallocatedtipamountonForm4137,alongwithanyunreportedtipsto calculatesocialsecurityandMedicaretaxes.
Other W-2 Income
What about income received by household employees?
Theterm,“householdemployee”referstoonewhoworksinsomeone’shomeperform-inghouseholddutiessuchascaringforchildren,cleaning,orcooking.Generally,ifataxpayer,workingasahouseholdemployee,earnedlessthan$1,700ayearwhileworkingintheemployer’shome,theemployerisnotrequiredtoprovidethetaxpayerwithFormW-2andnosocialsecurityorMedicaretaxesareowed.RegardlesswhetherFormW-2isissued,theincomemustbeincludedonForm1040,line7.However,iftheemployerwithheldfederalincometaxesfromthetaxpayer’swages,theemployermustissueFormW-2.
Ifyouarepreparingapaperreturnandthetaxpayer’shouseholdemployerisnotrequiredtoissueFormW-2,enter“HSH”andtheamountonthedottedlinenexttoline7,thenincludetheamountinthetotalonline7.
Are scholarships and fellowships taxable income?
Form W-2 and Form 1098-T
Scholarshipsandfellowshipsmaybefully,partially,ornon-taxable.Taxableamountsinclude:
• Paymentforservices
• Moneyusedforpersonallivingexpenses,suchasroomandboard
Emphasize that the volunteer tax preparers will correctly deter-mine this income only by interviewing the taxpayer and noting it on the intake sheet.
Formoreinformationabouttipincome,seePublication531,ReportingTipIncome.
Forfurtherinformationandadefinitionofwhoisahouseholdemployee,seePublication926,HouseholdEmployersTaxGuide.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-11 8-7
IfthetaxpayerreceivedFormW-2forthescholarshiporfellowship,includetheamountonForm1040justasyouwouldforanyotherFormW-2.Thisincomeisincludedinthetotalonline7ofForm1040.
Form1098-Tlistsqualifiedtuitionandrelatedexpensesbilledbytheschool.Verifythattheseamountshavebeenpaid.Italsolistsscholarshipandgrantmoneythestudentreceived.Ifscholarshipsorgrantsexceedthequalifiededucationalcosts,someofthegrantorscholarshipmoneymaybetaxable.
Todetermineifanyscholarshiporgrantreceivedistaxable,ortodetermineifthetaxpayercanclaimaneducationcredit,seePublication970,TaxBenefitsforEducation.Educationcreditswillbediscussedinalaterlesson.
Tax Software Hint: Afteraskingquestionsaboutthescholarship/fellowship
money,recordthetaxableportioninthesoftware.SeetheVolunteerResourceGuide(Tab2)forguidanceonwheretoentertheincome.
Whenpreparingapaperreturn,ifthetaxpayerdidnotreceiveFormW-2fortheschol-arshiporfellowship,reportthetaxableportionofthescholarshiporfellowshiponline7ofForm1040.Write“SCH”andtheamountonthedottedlinenexttoline7ofForm1040andincludetheamountinthetotalforline7.
Are distributions from Educational Savings Accounts, such as a Coverdell ESA and a 529 plan, taxable?
CoverdellESA(section530plan)andQualifiedTuitionProgram(section529plan)areeducationalsavingsaccountsthatincludethefollowingprovisions:
• Moneyiscontributedtoaspecialaccount.
• Thecontributionisneverdeductible.
• Earningsontheafter-taxcontributionsbecometax-deferred.
Whenadistributionismade,noneofthemoneywillbetaxableaslongasitisaqualifieddistribution.Ifitisnotusedforqualifiededucationexpenses,someofthemoneythatwasnevertaxed(theearnings)becomestaxableincomeandmaybesubjecttoanextrapenaltytax.
NEW Effectivefor2009,qualifiededucationexpensesincludebooks,supplies,andequipmentneededforacourseofstudy,whetherornotthematerialsarepurchasedfromtheeducationalinstitutionasaconditionofenrollmentorattendance.
DistributionsfromEducationalSavingsAccountsandQualifiedTuitionPrograms(underSections529and530)arereportedonForm1099-Q.CoverdellESAdistributionscanbeusedtopayforqualifiedelementary,secondary,andpostsecondaryexpenses.QualifiedTuitionProgram(QTP)plandistributionscanonlybeusedtopayqualifiedpostsecondaryexpenses.
Additionalinformationabouteducationalsavingsaccounts,distributions,andqualifiededucationexpensescanbefoundinPublication970,TaxBenefitsforEducation.
Tax Software Hint: Form1099-Qisnotavailableinthesoftwarebecausetheformdoesnotcontainenoughinformationtodeterminehowmuch,ifany,ofthedistri-butionistaxable.
Review these points to check student under-standing.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-118-8
Askthetaxpayerifallthefundswereusedforqualifiededucationalexpenses.(Qualifiededucationalexpenseshavedifferentrequirementsforeachplan.)Ifyes,noneofthedistributionistaxable.Youdonotreportanythingonthereturn.
Referthetaxpayer/beneficiarytoaprofessionaltaxpreparerif:
• Thefundswerenotusedforqualifiededucationexpensesor
• Thedistributionwasmorethantheamountofthequalifiedexpenses
What interest is taxable?
Commonsourcesoftaxableinterestincomearecheckingandsavingsaccounts,certificatesofdeposit(CDs),savingscertificates,U.S.governmentbonds,interestoninsuranceproceeds,andloansthatthetaxpayermakestoothers.
Where do I get interest income information?
Therearemanysourcesofinformationaboutinterestincome.AskthetaxpayertosupplyallForm(s)1099-INTfrominstitutionsthatpayinterest.
OriginalIssueDiscount(OID),long-termobligationsthatpaynointerestbeforematu-rity,areconsideredtobeissuedatadiscountandarefullytaxable.
IfthetaxpayercashedinSeriesEEorSeriesIbonds,theyshouldhaveaform1099-INTfromthebank.Mosttaxpayersdon’treportsavingsbondinterestasitaccrueseveryyear.Theyreportthetotalinterestwhentheycashthebonds.Ifthetaxpayersaystheyhavebeenreportingtheinterestasitaccrueseachyear,seePublication17underInterestIncomefordirectionstoreportthecurrentyearinterest.
IfaU.S.savingsbondisissuedinthenamesofco-owners,suchasthetaxpayerandchild,orthetaxpayerandspouse,interestonthebondisgenerallytaxabletotheco-ownerwhopurchasedthebond.Todeterminewhoisresponsibleforpayingthetaxontheinterestfromtheredemptionofabond,seePublication17underInterestIncome.
• IfthetaxpayerhasSeriesHHbonds,theyreceiveinteresttwiceayear.Askthetaxpayerforthebankstatementsreportingtheinterestreceived.
• Askifthetaxpayerholdsanyloansorseller-financedmortgages.
InterestonqualifiedU.S.Series EE and Series I savingsbondsthatisusedtopayforhighereducationexpensesmaybeeligibleforexclusionfromincomeusingForm8815,ExclusionofInterestFromSeriesEEandIU.S.SavingsBondsIssuedAfter1989.
Somesavingsandloans,creditunions,andbankscalltheirdistributions“dividends.”ThesedistributionsarereallyinterestandarereportedcorrectlyasinterestonForm1099-INT.
Achoicecanbemadetoreportthetaxablepartofthedistribution(ifany)andclaimtheHopeorLifetimeLearningCreditonthewholedistribu-tion.SeePublication17andPublication970,TaxBenefitsforEducation,formoredetails.
Review the circum-stances that require referring a taxpayer to a professional tax preparer.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-11 8-9
What interest income is tax-exempt?
Certaintypesofinterestareexemptfromfederalincometax.However,theymaybetaxablebythestate,soreadtheformcarefully.(Andsometimesthereverseistrue,someinterestmaybetaxableonthefederalreturnandexemptfromstateincometax.)
Interestfrombondsissuedbythefollowingareexemptfromfederalincometax:
• Stateandpoliticalsubdivisions(countyorcity)
• DistrictofColumbia
• U.S.possessionsandpoliticalsubdivisions
• Portauthorities
• Toll-roadcommissions
• Utilityserviceauthorities
• Communityredevelopmentagencies
• Qualifiedvolunteerfiredepartments
• Amountsindicatedonbrokerstatementsastax-exemptinterestortax-exempt dividends
Thetaxpayer’sForm(s)1099-INTmaylistbothtaxableandtax-exemptinterest.Readtheform(s)carefully.SometimesinterestfromPrivateActivityBonds(PAB)isshownonthestatementwithtax-exemptinterestandmustbeincluded.
Althoughtax-exemptinterestisnottaxable,thetaxpayermustreportalltax-exemptinterestonthetaxreturnonline8bofform1040.Insomesituations,tax-exemptinter-est,whilenottaxable,isusedincalculatingthetaxabilityofotherincomeitems,suchassocialsecurityincome.
What about the interest on an IRA?
InterestonaRothIRAisgenerallynevertaxable.
InterestonatraditionalIRAistaxdeferred.DonotincludethatinterestuntilthetaxpayermakeswithdrawalsfromtheIRA.ThetaxpayerwillbeissuedaForm1099-Rtoreportadistribution.SeethelessononRetirementincomefortheproperwaytoreportthisincome.
SeePublication17andPublication590formoreinformationonIRAs.
example
Bobholdsapromissorynoteforacashloanthathemadetohisbrother-in-law,Stan.StanpaysBobprincipalandinteresteachmonth.BobreportsthatinterestonScheduleBofhistaxreturn.
Someinstitutionsissueayear-endstatementwiththetitle “InlieuofForm1099-INTorForm1099-DIV”ratherthanpreparingmultipledocuments.
Ask a volunteer to read the Bob example.
Emphasize that the gain/loss from sale of these bonds is taxable.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-118-10
How do I report the interest income?
Tax Software Hint: RefertotheVolunteerResourceGuide(Tab2),How/Where
toEnterIncome,forinstructionsonenteringinterestincomeintheInterestStatement.
NEW Effectiveforthe2009taxyear,Form1040A,Schedule1,InterestandOrdinaryDividends,isobsolete.Form1040AtaxpayerswilluseForm1040,ScheduleB.
Ifpreparingapaperreturn,firstcompleteScheduleB,PartI,ifthetaxpayerhasanyofthefollowing:
• Over$1500oftaxableinterest
• Nomineeinterest(taxpayerisnomineeforinterestthatactuallybelongsto someoneelse)
• Aseller-financedmortgage
• Tax-exemptinterest
• Adistributionfromaforeigntrustorforeignbankaccount
• Educationalsavingsbondexclusion
Otherwise,youwouldentertheinterestincomedirectlyonForm1040,page1,line8aorline8borForm1040A,line8aor8b.AmountsinForm1099-INT,boxes1and3,arereportedastaxableinterest,andbox8isreportedastax-exemptinterest.BesurethatanyotherentriesontheForm1099-INTareenteredintheirproperplacesonForm1040,e.g.box2goesintheAdjustmentssection,box4goesinthePaymentssection,andbox6goesintheCreditssection.Ifanyotherboxescontainamounts,referthetaxpayertoaprofessionaltaxpreparer.
Tax Software Hint: Regardlessoftheamount,whenenteringinterestincome,usetheInterestStatementasshownintheVolunteerResourceGuide(Tab2).
Taxpayer Interview and Tax Law Application
BarbaraSmithisawindowclerkwiththeUnitedStatesPostalService.ShehasoneFormW-2.
Ask two volunteers to role-play the sample interview.
Direct the class to lis-ten and complete Part IV of the approved intake and interview sheet.
Direct students to How/Where to Enter Income in the Volun-teer Resource Guide (Tab 2).
example
Mikeholdsmunicipalbondsissuedinhisstate,aswellasatraditionalIRAtowhichhemakescontributionseachyear.Foreachofthese,hegetsstatementslistingtheinterestearned.Althoughnottaxable,Mikereportshistax-exemptinterestfromthemunicipalbondsonline8bofhisForm1040.HedoesnotreportanyoftheinterestincomeonhistraditionalIRAonhistaxreturn.
Ask a volunteer to read the Mike example.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-11 8-11
How do I handle dividends?
Thecorporatedistributionsthatvolunteertaxpreparersmayhandleare:
• Ordinarydividends
• Qualifieddividendsanddistributions
• Capitalgaindistributions
TheseareallfoundonForm1099-DIV.
What are ordinary dividends?
Ordinarydividendsarecorporatedistributionspaidoutoftheearningsandprofitsofthecorporation.Anydividendreceivedoncommonorpreferredstockisanordinarydividendunlessthepayingcorporationstatesotherwise.Totalordinarydividendsarereportedinbox1aofForm1099-DIV.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… BarBara responds…
Now we will complete the income section of your return. I believe you told me that you work at the post office?
Are you employed by anyone else?
Let me enter your Form W-2 information… Did you have any disability income?
Now, let’s go on to interest income. Did you earn any interest on checking accounts, savings accounts, or a certificate of deposit?
What about U.S. savings bonds? I know that a lot of postal employees buy them at work.
Are they for educational purposes, or just an investment?
Some people report the interest as it accrues every year. You have to make this decision in the first year after you buy the bonds. Have you ever declared accrued interest from your savings bonds on your federal tax return?
Well, did you redeem any bonds in 2009, or did any of them mature that year?
Okay, then it sounds like your only interest income is from the savings account. Let’s enter that now. [Onpage2oftheapprovedintakeandinterviewsheet,indicateBarbara’sresponsestothesequestions.]
Yes.HereismyW-2.
Noway,theykeepmebusyenoughatthepostoffice!
No,I’mnotdisabled.
Yes,Ihaveasavingsaccountthatearnsinterest.Hereisthe1099.
Yes,Ido,everypayperiod.
No,theyaren’teducational.Idon’thaveanyinformationaboutmybondswithme.WhywouldIneedthat?
Oh,no,never.
Notobothquestions.I’vebeenbuyingthemfor15yearsandtheydon’tbecomefullymaturefor30years.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-118-12
What are qualified dividends?
Qualifieddividendsareordinarydividendsthatareeligibleforalowertaxratethanotherordinaryincome.Theyareshowninbox1bofForm1099-DIV.
SeeForm1040Instructions,Line9b,forthedefinitionofqualifieddividends.
Taxpayerswhohavequestionsaboutwhyadividendis“qualified”or“notqualified,”shouldcontactthecompanythatissuedthedividend.
What are capital gain distributions?
Capitalgaindistributionsarealsocalledcapitalgaindividends.Theycomefrommutualfundsandrealestateinvestmenttrusts(REITs).Theyaretaxedatthelower,long-termcapitalgainsrate,regardlessofhowlongthetaxpayerholdstheshares.Capitalgaindistributionsarereportedinbox2aofForm1099-DIV.
Where do I get dividend information?
MostcorporationsuseForm1099-DIVtoreportdividenddistributionstoeachshare-holder.AskthetaxpayerforanyForm(s)1099-DIV.(IfthetaxpayerdidnotreceiveaForm1099-DIVforadividend,askiftheyreceivedtheinformationontheirsharehold-er’sannualbrokeragestatement.)
How do I report dividend information?
Generally,alldividendincomeisreportedontheseforms:
• Form1040A,lines9aand9b
• Form1040,lines9aand9b
example
RobertheldbothcommonstockandpreferredstockinseveralU.S.corporations.Severalofthempaiddividendsduring2009.InJanuary2010hereceivedForms1099-DIVlistingtheseasordinarydividends.
“Capitalgains”and“Capitalgaindistributions”arenotthesame.Acapitalgainoccurswhentheownerofamutualfundorothercapitalassetsellstheassetformorethanthecostandrealizesacapitalgain.Acapitalgaindistributionistheowner’sportionofthecapitalgainsrealizedwhenthemutualfundorREITsellsassets.Ifthetaxpayerhasactuallysoldtheirmutualfundshares,orothersharesofstock,andyouarenotcertifiedinthisarea,youshouldreferthemtoaVITA/TCEpreparerwhohasbeentrainedtohandlecapitalgainsandlosses.
Ask a volunteer to read the Robert example.
example
During2009,Robertownedsharesinamutualfundandinarealestateinvestmenttrust.Bothmadecapitalgaindistributionsthatyear.InJanuary2010,hereceivedForms1099-DIVlistingthesecapitalgaindistributions.
Ask a volunteer to read the Robert example.
Review examples of Form 1099-Div in Pub-lication 4491-W. Point out where ordinary, qualified, and capital gain distributions are found.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-11 8-13
ScheduleBisneededifthetaxpayer’sordinarydividendsaregreaterthan$1,500,orifthetaxpayerwasthenomineefordividendsthatactuallybelongtosomeoneelse.
Tax Software Hint:LookattheVolunteerResourceGuide(Tab2).FindHow/WheretoEnterIncome.Followtheguidanceforenteringinterestand/ordividendincomeonScheduleB.Ifthetaxpayerhasmultipleaccounts,thesoftwareaddsallthedividendsforyou,preventingmatherrors.Also,correctuseoftheworksheetensuresthattheincomewillbetaxedcorrectlyandthatotherentriesfromForm1099-DIVwillbedistributedtotheproperlocationsonthereturn.
Ifyouarepreparingapaperreturn,besuretheamountsinboxes1aand1bofForm1099-DIVarerecordedonthecorrectlinesonthereturn.BesurethatanyotherentriesontheForm1099-DIVareenteredintheirproperplacesontheForm1040,e.g.box2agoesontheCapitalGainlineintheIncomesectionunlessaScheduleDisrequired,box4goesinthePaymentssection,andbox6goesintheCreditssection.Ifanyotherboxescontainamounts,referthetaxpayertoaprofessionaltaxpreparer.
Ifthetaxpayerhasreceivedaqualifieddividendorcapitalgainsdistribution,andyouarepreparingapaperreturn,theQualifiedDividendsandCapitalGainTaxWorksheetisrequired.TheworksheetcanbefoundinForm1040Instructions.
Taxpayer Interview and Tax Law Application
LeonardStark,Gloria’sspouse,isself-employed.Theyarefilingajointreturn.Leonardandthevolunteerarediscussingdividendincome.
Ask two volunteers to role-play the sample interview.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… leonard responds…
Do you and your wife own shares of stock, mutual funds, or bond funds?
The earnings on the IRAs are tax deferred until you take a distribution. These 1099-DIVs are what we want right now. Are these the only Forms 1099-DIV that you received?
We will enter the information from each of these on the Dividend Statement. It will add everything up and display it as your dividend income. [Onpage2oftheapprovedintakeandinterviewsheet,indicateLeonard’sresponsestothesequestions.]
Yes,IhaveanIRAandIownsharesinseveralmutualfundsandabondfund. MywifehasanIRA.Herearethestatements.
Yes.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-118-14
What should be reported on line 10 of Form 1040?
TaxpayerswhoreceivearefundofstateorlocalincometaxesmayreceiveForm1099-Glistingtheirrefundamountinbox2.Noteveryonemustincludetherefundintheirtaxableincome.
• Taxpayerswhoclaimedthestandarddeductiononthetaxreturnfortheyeartheyreceivedarefundofstateorlocalincometaxesdonothavetoincludetherefundintheirtaxableincome
• Taxpayerswhoitemizeddeductionsandreceivedastateorlocalrefundmayhavetoincludeall,part,ornoneoftherefundintheirfederaltaxableincome
Onlythosetaxpayerswhoitemizeddeductionsandreceivedataxbenefitfordeductingtheirstateorlocalincometaxeshavetoincludetheirstate/localtaxrefundsinincome.Iftheyitemizeddeductionsanddeductedthestatesalestaxinsteadofthestateincometaxwithheld,noneoftherefundistaxable.
Tax Software Hint:RefertotheVolunteerResourceGuide(Tab2)forguidanceonenteringthestatetaxrefundreceivedinaprioryear.Thesoftwarethencalculatesthetaxablepartoftherefund(ifany)online10ofForm1040.
Whenpreparingapaperreturn,completetheStateandLocalIncomeTaxRefundWorksheetinForm1040Instructionswhenrequired.
What is alimony?
Alimonyisapaymenttoorforaspouseorformerspouseunderaseparationordivorceinstrument.Itmayincludepaymentsonbehalfofthespouseorformerspouse,suchasmedicalbills,housingcosts,andotherexpenses.Itdoesnotincludechildsupportorvoluntarypaymentsoutsidetheinstrument.Thepersonreceivingalimonymustincludeitasincome.Thepersonpayingalimonycansubtractitasanadjustmenttoincome.Thiswillbediscussedinalaterlesson.
Only volunteers certi-fying at the intermedi-ate level or above are required to cover this topic. If you are teach-ing a Basic only class, skip to page 8-15 for Vanessa Franklin Prac-tice. Upon completion, proceed to Lesson 13, Unemployment Com-pensation.
Advise the students they will learn about standard and itemized deductions later in this course. example
Bobitemizedhisdeductionsonhis2008federalreturn.Heincludedthetaxeshehadpaidtohisstateduring2008.However,hereceivedarefundin2009ontheoverpaidportionofthosetaxes.Hemustusethestatetaxrefundworksheettoseehowmuchoftherefundtoincludeinhisfederaltaxableincome.
Ask a volunteer to read the Bob example.
Ifthetaxpayerisunsurewhetherapaymentisalimonyorchildsupport,askifthepaymentswillstoponcethechildisgrown.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-11 8-15
Where do I get alimony information?
Askifthetaxpayerreceivedalimonyunderadivorceorseparationinstrument.Ifso,explainthatyouneedtheexactamount,sinceitmayalsobereportedasadeduc-tionbythepayer,andthetwoamountsmustagree.
How do I report alimony?
Tax Software Hint:Online11,enterthealimonyamount.Thereisnoworksheetforreportingalimonyincome,andthesocialsecuritynumberofthepersonpayingthealimonyisnotneeded.
Whenpreparingapaperreturn,recordthealimonyreceivedbythetaxpayeronForm1040,line11.
Practice – Vanessa Franklin
Ourvolunteerisworkingwithourtaxpayer,VanessaFranklin.GotoAppendixA-12andreviewthesampleinterviewtoidentifyVanessa’swageandinterestincome.
Summary
Thislessoncoveredsomegeneralconceptsonincomeforlines7-11ofForm1040includinghowtodeterminewhatisconsideredtaxableandnontaxableincome.ReviewthelistoftaxableandnontaxableincomeintheVolunteerResourceGuide(TabD),Income.
Howtodeterminewhatincomeisconsideredearnedandunearnedwascovered.Earnedincomeisanyincomeaccumulatedbypersonaleffort,suchaswagesorbusi-nessincomereportedonSchedulesCorC-EZ.Unearnedincomeisanyincomeproducedbyinvestments,suchasinterestonsavings,dividendsonstock,etc.
Howtoreportincomewasalsocovered.FollowingisinformationonhowtoreportincomeonLines7-11ofForm1040.
• Line7incomeincludeswages,salariesandtips,andscholarships.ThisincomeisgenerallyreportedtothetaxpayeronFormW-2.
• Lines8aand8b,interestincome,isreportedtothetaxpayeronForm1099-INT.Commonsourcesoftaxableinterestincomearecheckingandsavingsaccounts,certificatesofdeposit(CDs),savingscertificates,U.S.governmentbonds,etc.Interestoncertainbonds(suchasfromstatepoliticalsubdivisions,DistrictofColumbia,portauthorities,etc.)areexemptfromfederalincometax,butmustbereportedonline8b.
• Lines9aand9bareforreportingordinaryandqualifieddividends.DividendsarereportedtothetaxpayeronForm1099-DIV.Ordinarydividendsarecorporatedistri-butionspaidoutoftheearningsandprofitsofacorporation.Qualifieddividendsareordinarydividendsthatareeligibleforalowertaxratethanotherordinaryincome.
Thistrainingcoversalimonypaidunderadivorceorseparationinstrumentexecutedafter1984.Otherrulesapplytoagreementsexecutedbefore1985.Iftheagreementwasexecutedbefore1985,referthetaxpayertoaprofes-sionaltaxpreparer.
Review lesson sum-mary with the class.
Direct students to Appendix A-12.
Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-118-16
• Line10isfortaxpayerswhoitemizeddeductionsinthepreviousyearandreceivedataxbenefitfromdeductingtheirstateorlocalincometaxes.TaxpayerswhoreceiveForm1099-Gmayhavetoincludepartoralloftheirstaterefundonthisline.
• Line11isusedtoreportalimonyreceived.Alimonyisapaymenttoorforaspouseorformerspouseunderaseparationordivorceinstrument.
Notes
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 9: Income – Business; Form 1040, Line 12 9-1
Instructor Notes
Introduction
Thislessonwillhelpyouassisttaxpayerswhohavebusinessincome,includingself-employmentincome.BusinessincomeorlossisreportedonScheduleC-EZ,NetProfitFromBusiness,orScheduleC,ProfitorLossFromBusiness.ScheduleCisoutofscopeforvolunteerpreparers.Thelessonalsocoversthoseself-employedtaxpay-erswhopayself-employmenttaxandparticipateinthesocialsecurityandMedicareprograms.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeabletodetermine:
• Howtoreportbusinessincome
• WhocanuseScheduleC-EZ
• HowtocompleteScheduleC-EZ
Where do I get business income or loss information?
Basedonyourinterviewandthecompletionofthetaxpayer’sapprovedintakeandinterviewsheet,youmaydiscoverthatthetaxpayerorspousehadbusinessincome;thisincludesincomeasaself-employedpersonorindependentcontractor.
Eveniftaxpayerssaytheydidnothaveself-employmentincome,besuretoaskagain,rephrasingyourquestionstoprobedeeper.Manytaxpayershavejobsonthesideorhaveasmallhome-basedbusinessanddonotthinkofthemselvesas“self-employed”iftheymakemostoftheirmoneyfromW-2wages.AskforanyForm(s)1099-MISCthatdocumentthisincome.AlsoaskfordocumentationofanybusinessincomethatwasnotreportedonFormW-2orForm1099-MISC(forexample,checkstubsgeneratedbythetaxpayer’sclient).
Lesson 9: Income – Business; Form 1040, Line 12
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication463□ Publication4491-W□ Form1099-MISC□ ScheduleC-EZ□ ScheduleSE
Someemployersmisclas-sifyworkersasindependentcontractorsandreporttheirearningsonForm1099-MISC.TaxpayerswhobelievetheyhavebeenmisclassifiedshouldcontacttheIRSandaskforhelp.
Review objectives with the class.
Point out the resources cited under What do I need?
Refer students to Publication 4491-W for examples of Form 1099-MISC.
Lesson 9: Income – Business; Form 1040, Line 129-2
How is business income reported?
Businessincomeisreportedoneither:
• ScheduleC-EZ,NetProfitFromBusiness,or
• ScheduleC,ProfitorLossFromBusiness
ThetotalprofitorlossisthentransferredtoForm 1040,line12.
Ifpreparingapaperreturn,completetheitemsonScheduleC-EZ.ThenetprofitwillbereportedonForm1040,line12.ThenetprofitwillalsoneedtobeshownonScheduleSEinordertocalculatetheself-employmenttax.ScheduleSEwillbecoveredinalaterlesson.
Who can use Schedule C-EZ?
ThereareanumberofconditionsthatthetaxpayermustmeetinordertouseScheduleC-EZ.TaxpayerscanuseScheduleC-EZonlyifthey:
• Havelessthan$5,000inbusinessexpenses
• Usethecashmethodofaccounting
• Havenoinventoryatanytimeduringtheyear
• Havepositivenetincome(donothaveanetloss)
• Operateonlyonebusinessasasoleproprietorduringthetaxyear
• Havenoemployeesduringtheyear
• Arenotrequiredtocomputedepreciation(Form4562)
• Donotdeductexpensesforbusinessuseofahome
• Donothaveprioryearunallowedpassiveactivitylossesfromthisbusiness
Inyourprobinginterview,explainthatthereareanumberofconditionsthatthetaxpayermustmeetinordertouseScheduleC-EZ,andthenwalkthrougheachoftheseconditionswiththetaxpayer.Iftaxpayersdonotmeettheseconditions,explainthatvolunteersarenottrainedtohandlethepreparationofScheduleC.Apologizeforbeingunabletocompletethereturn,andexplainthattheyshouldseekhelpfromaprofessionaltaxpreparertocompletetheirreturn.
Definition of TermsBusinessexpenses
Businessexpensesareamountsthatareordinaryandnecessarytocarryonthebusiness.
Cashmethod ofaccounting
Thecashmethodofaccountingreportsallincomewhenreceivedanddeductsallexpenseswhenpaid.
Inventory Inventoryistheitemsthetaxpayerbuysormakesforresale toothers.
Depreciation Thecostofitemsthatareexpectedtolastmorethanayearshouldbespreadoveraperiodofyearsratherthandeductedintheyearofpurchase.Ifthetaxpayerhassuchacost,theyshouldbereferredtoaprofessionaltaxpreparer.
Volunteertaxpreparerswhocompletethislessonmay,atthediscretionofthesite coordinator,assistself-employedindividualswhoqualifytouseScheduleC-EZ.TaxpayerswhomustfileScheduleCshouldseeaprofessionaltaxpreparer.
Emphasize that before starting to prepare the return, the volunteer must determine if the business qualifies to be reported on Sched-ule C-EZ. This means estimating business income and expenses.
Lesson 9: Income – Business; Form 1040, Line 12 9-3
ExErcisE
Taxpayer Interview and Tax Law Application
Asyouusetheapprovedintakeandinterviewsheetwithtaxpayers,askquestionstodetermineiftheyhaveanyself-employmentincome,theiraccountingmethod,andtheirbusinessexpenses,asshowninthissampleinterview:
Question 1:Basedonthisinformation,doesJasonqualify tofilloutaScheduleC-EZ?þ Yes ¨ No
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… Jason responds…
What kind of business do you have and were you the sole owner?
Do you have a record of your business income and expenses for last year?
Do you use the cash method of accounting?
And what were your expenses?
Do you keep any parts in inventory?
And you say you had a good year? Did you have a net loss? In other words, did you make a profit?
Do you plan on deducting expenses for the business use of your home?
Okay, and how much business income did you have? [Onpage2oftheapprovedintakeandinterviewsheet,indicateJason’sresponsestothesequestions.]
Iinstallairconditionersandyes,Iownthebusinessmyself.Nopartnersoranything.
Yeah,I’vegotaseparatecheckingaccountformybusiness.Ihadaprettydecentfirstyearactually.
Yes.Ihaveaprintoutofmyyear-endsummaryhere.
Well,Idotheinstallationsmyself;Idon’thaveanyemployees,soIspendalotofmoneyongas,toolsthatlastlessthanayearandequipmentrepairs. Myexpensesfortheyearwere$2,212.
No,Ipurchasethepartswholesalewhenanorderisplacedwithme.
That’scorrect.Nolosses.
NoIdon’t.
Myreceiptstotaled$30,762.
Ask two volunteers to role-play the sample interview. Ask the rest of the class to listen and take notes.
Assign the exercise.
Review the answer with the class when complete.
Yes. Jason meets all requirements for using Schedule C-EZ.
Lesson 9: Income – Business; Form 1040, Line 129-4
How do I complete Schedule C-EZ?
Part I: General Information
EnterthetypeofbusinessonlineA.EnterthePrincipalBusinessCodeonlineB.A listingofPrincipalBusinessCodescanbefoundinScheduleCInstructionsandinForm1040Instructions.
Tax Software Hint:TofindPrincipalBusinessCodes,bringuptheHelpscreenwhileintheScheduleC-EZ.AlistisavailableunderBusinessCodes.
Enterthebusinessname,ifthereisone,onlineC.IfthebusinesshasanEmployerIdentificationNumber(EIN),enteritonlineD(mostScheduleC-EZbusinessesdonotneedanEIN,sincetheydonothaveemployees.)IfthebusinesshasanaddressthatisdifferentfromtheoneshownonForm1040,enteritonlineE.
Part II: Figure Net Profit
Entertotalgrossreceiptsonline1.Thisincludesalltheincomepaidtothe business,whetherornotitwasreportedonaForm1099-MISC.IfanyoftheincomewasreportedonFormW-2andthe“Statutoryemployee”boxontheformwaschecked,checktheboxonline1ofScheduleC-EZ.
Ifpreparingapaperreturn,totalallincomefromForm1099-MISCandothertaxpayerrecordsandentertheamountonScheduleC-EZ,line1.
Enteronline2thetotalamountofalldeductiblebusinessexpensesthatthetaxpayeractuallypaidduringtheyear.Onlytheportionofthesecoststhatareattributabletothebusinesscanbedeductedasabusinessexpense.Examplesoftheseexpensesincludeadvertising,carandtruckexpenses,commissionsandfees,insurance, interest,legalandprofessionalservices,officeexpense,rentorleaseexpenses,repairsandmaintenance,toolsthatlastlessthanayear,supplies,taxes,travel,theallowablepercentageofbusinessmealsandentertainment,andutilities.Thebaserateofthefirsttelephonelinetoaresidencecannotbededucted,butadditionalcostsincurredforbusinesspurposescanbeincludedasanexpense.Forearnedincomecreditandself-employmenttaxpurposes,thetaxpayermustincludeallallowabledeductionsincomputingnetearnings.
Ifpreparingapaperreturn,totalallthedeductiblebusinessexpensesincludingautoexpenses,calculatedbyusingthestandardmileagerate.RecordtheamountonScheduleC-EZ,line2.Calculatethenetprofitbysubtractingline2fromline1.ThenetprofitisreportedonForm1040,line12.
Tax Software Hint:RefertotheVolunteerResourceGuide(Tab2)forguid-anceonenteringexpensesontheScheduleC-EZ.Thetaxsoftwarewilltotalalltheexpensesandtransferthetotaltoline2.
Direct students to fol-low along in the Vol-unteer Resource Guide (Tab 2) on the page titled Schedule C-EZ Business Income.
example
Kianarunsasmallbusinessfromherhome.Shehasonlyonephonelineandfrequentlymakeslong-distancecallsforbusiness.Thecostofthephonelinecannotbededucted,butKianacandeductthelong-distancechargesforher businesscalls.
Ask a volunteer to read the Kiana example.
Lesson 9: Income – Business; Form 1040, Line 12 9-5
Part III: Information on Vehicles
Ifthetaxpayerhadbusinessexpensesforacarortruck,completethequestionsinPartIII.Businessmilesdonotincludecommutingmilesbetweenhomeandthebusi-nesslocationorbetweenthebusinesslocationandthelunchplace.Businessmilesdoincludetravelbetweenhomeandatemporaryworkplacewhenthetaxpayerhasoneormoreregularplacesofwork.Ifthetaxpayerhasnoregularplaceofemployment,onlythetravelfromonetemporaryplacetoanotheriscounted.SeePublication463,Travel,Entertainment,Gift,andCarExpenses(Chapter4)formoredetails.
Vehicleexpensescanbecalculatedusingactualexpensesorthestandardmileagerate.Actualexpensesincludedepreciation.ThecalculationofdepreciationisoutsidethescopeoftheVITA/TCEprogram.Ifthetaxpayerhasusedactualexpensesinthepast,orwishestouseactualexpensesinthecurrentyear,theymustbereferredtoaprofessionaltaxpreparer.
Thestandardmileagerate(.55/milefor2009)ismultipliedbythenumberofbusinessmilestocalculatethevehicleexpense.Addthetotalvehicleexpensestoallnon-vehicleexpensesinline2.
CompletetheinformationinScheduleC-EZ,PartIII.
What about self-employment tax?
AtaxpayermustfileScheduleSEifheorshehasnetearningsfromself-employmentof$400ormore.ThetaxiscomputedonScheduleSEandtransferredtoForm1040,line56,tobeaddedtoothertaxesowed.TheScheduleSEisattachedtoForm1040,anddiscussedinLesson28,OtherTaxes.
Self-employedpeoplemayclaimanadjustmenttoincomeofhalfofthesocial securityandMedicaretaxestheypay.EntertheamountfromScheduleSE,line6,toForm1040,line27,asanadjustmenttoincome.
Practice – Vanessa Franklin
Recallthatourtaxpayer,VanessaFranklin,isanemployeebutshealsohasherowncosmeticsbusiness.GotoAppendixA-14togathermoreinformationaboutherself-employmentincome.
Summary
Thislessonexplained:
• Wheretogetbusinessincomeandlossinformation
• Howbusinessincomeorlossisreported
• WhocanuseScheduleC-EZ
• HowtocompleteScheduleC-EZ
Refer students to Publication 4491-W for an example of Schedule SE.
Direct students to Appendix A-14.
Review the lesson summary with the class.
Lesson 9: Income – Business; Form 1040, Line 129-6
ExErcisE answEr
Answer 1: Yes. Jason meets all requirements to qualify for completing Schedule C-EZ.
Notes
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-1
Instructor Notes
Introduction
ThislessonwillhelpyouassisttaxpayerswhomustuseScheduleD,CapitalGainsandLosses,toreportcapitalgainsand/orlossesonthesaleofassets.Inthislessonwewilldiscussthesaleofstock,mutualfunds,andthesaleofapersonalresidence.Ifthetaxpayerhassoldanyotherassetsreferhim/hertoaprofessionaltaxpreparer.Thislessonwillhelpyouidentifytheasset’sholdingperiod,adjustedbasis,netshort-termandlong-termcapitalgainsorlosses,thetaxablegainordeductibleloss,thetaxliabil-ity,andtheamountofanycapitallosscarryover.
Todetermineifthetaxpayermustreportthesaleofinvestmentsorthesaleof ahome,usetheinterviewtechniquesandtoolsdiscussedinthelesson,Screening andInterviewing.Theapprovedintakeandinterviewsheetlistsincomefromthesaleofpropertysuchasstock,bonds,orrealestate.Itisimportanttoensurethatallincomeisaccuratelyreportedonthereturn.Asktaxpayersiftheysoldanystock,securities,otherinvestmentproperty,orahomeduringthetaxyear.
Foradditionalinformationonthetopicsdiscussedinthislesson,seePublication544,SalesandOtherDispositionsofAssets,Publication551,BasisofAssets,Publication523,SellingYourHome,andPublication4681,CanceledDebts,Foreclosures,Repossessions,andAbandonments.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determinetheadjustedbasisofstock
• Determineiftheasset’sholdingperiodislong-termorshort-term
• Calculatethetaxablegainordeductiblelossfromthesaleofstock
• Determinewhetherahomeisthetaxpayer’smainhome
• Determineifataxpayermeetstheownershipanduse tests
• Determinewhenthe5-yearownership/usetestperiodissuspended
• Determineifataxpayercanexcludedebtforgivenorcanceledontheirprincipalresidencefromtaxableincome
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13
Review objectives with the class.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-WOptional:□ Publication523□ Publication525□ Publication 544□ Publication 551□ Publication564□ Publication4681□ Publication4731□ Form982□ Form1040Instructions□ Form1040(ScheduleD)□ Form1099-A□ Form1099-B□ Form1099-C□ Form1099-DIV□ Form1099-S
Point out the resources cited under What do I need?
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-2
What information must I have to report a capital gain or loss?
ToreportcapitalgainorlossonForm1040,ScheduleD,youwillneedtoidentify:
• Basisand/orAdjustedBasis:
- Basisistheoriginalcostoftheasset
- Adjustedbasisincludesoriginalcostplusanyincreasesordecreasestothatcost(suchascommissions,fees,depreciation,deductiblecasualtylosses,insurancereimbursements,majorimprovements,etc.)
• Holdingperiod:
- Short-termpropertyisheldoneyearorless
- Long-termpropertyisheldmorethanoneyear
- Long-termcapitalgainsaretaxedatalowerratethanshort-termgains
• Proceedsfromthesale:
- Form1099-Breflectsgrossornetproceedsforastockormutualfunds
- Form1099-Susuallyreflectsgrossproceedsofrealestatetransactions
- Otherevidenceintheabsenceoftheabove
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2),How/WheretoEnterIncomeandCapitalGainorLossTransactionsWorksheet.
What is the basis of stock?
Basis
Inordertocomputegainorlossonasale,taxpayersmustprovidetheirbasisinthesoldproperty.Thebasisofpropertyisusuallyitscost.
• Iftaxpayersneedhelpdeterminingtheirbasisanddonothavetheoriginalpurchasedocuments,referthemtotheirstockbroker.
• Iftaxpayerscannotprovidetheirbasisintheproperty,theIRSwilldeemittobezero.
Specialrulesapplytoinheritedproperty.Theserulesarecoveredinthetopic,“BasisOtherThanCost.”Ifthetaxpayeracquiredthestockbymeansotherthanapurchaseorinheritance,suchasagiftoremployeestockoptionplan(ESOP),anddoesnotknowthebasisofthestock,youwillneedtoreferthemtoaprofessionaltaxpreparer.ThedeterminationofbasisinthesesituationsisbeyondthescopeofVITA/TCE.
Adjusted Basis
Anadjustmenttobasismayincludeadditionalcommissionsorfeespaidtothebrokeratthetimeofpurchaseorsale.
Eventsafterthepurchaseofstockcanrequireadjustments(increasesordecreases)tothepersharebasisofstock.
Stockisboughtandsoldinvariousquantities.Itisimportantforthetaxpayertokeeptrackofthebasispershareofallstockboughtandsold.Eventsthatoccurafterthepurchaseofthestockcanrequireadjustments(increasesordecreases)tothe“per
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-3
share”basisofstock.Theoriginalbasispersharecanbechangedbyeventssuchasstockdividends,stocksplits,andDRIP(dividendreinvestmentplan)accounts.
• Stockdividendsareissuedinlieuofcashdividends.Theseadditionalsharesincreasethetaxpayer’sownershipsotheoriginalbasisisspreadovermoreshares,whichdecreasesthebasispershare.
• Stocksplitsaredecidedbythecorporationasawaytobringdownthemarketpriceofstock.Atwoforonestocksplitwilldecreasethebasispersharebyhalf.Theoriginalbasisof$200for100sharesbecomes$200for200shares.
• DRIPaccountsleavecashdividendswiththecompanyforthepurchaseofadditionalshares.Eventhoughthesesharesarefromthesamecompany,theyretaintheirownindi-vidualbasisseparatefromtheoriginalpurchase.Eachnewpurchasedsharecouldhaveadifferentbasis.
Taxpayersshouldkeeptrackoftheirbasisinmutualfundshares.
• Theoriginalbasisofmutualfundsharesboughtisusuallytheircostorpurchaseprice.Thepurchasepriceusuallyincludesanycommissionsorloadchargespaidforthepurchase.
• Theoriginalcostbasisofmutualfundsharesacquiredbyreinvestingdistributionsistheamountofthedistributionsusedtopurchaseeachfullorfractionalshare.Thisruleappliesevenifthedistributionwasanexempt-interestdividendthatwasnotreportedasincome.
• Thebasisinmutualfundsharesmayneedtobeincreasedorreduced.FormoreinformationrefertoPublication564,MutualFundDistributions.
Basis Other than Cost
Therearetimeswhencostalonecannotbeusedasbasis.Insomecases,thefairmarketvalue(FMV)oradjustedbasisisused.
• PropertyReceivedasaGift–Todeterminethebasisofpropertyreceivedasagift,taxpayersmustknowitsadjustedbasistothedonorjustbeforeitwasgiventothetaxpayer.TaxpayersalsoneedtoknowtheFMVatthetimeofthedonationandtheamountofanygifttaxpaidonthedonation.Determinationoftheadjustedbasisofpropertyreceivedasagiftcanbeverycomplex.ItisbeyondthescopeofVITA/TCE.
example
Alicepaid$1,100for100sharesofABC,Inc.stock(whichincludedthebroker’scommissionof$25).Theoriginalbasispersharewas$11($1,100/100).Shereceived10additionalsharesasatax-freestockdividend.Her$1,100basismustbeallocatedtothe110shares(100originalsharesplusthe10-sharestockdivi-dend).Thisresultsinanadjustedbasisof$10pershare($1,100/110).
Ask a volunteer to read the Alice exam-ple. Answer any stu-dent questions.
Althoughstocksplitsandstockdividendsdonotoccuroften,alwaysasktaxpayersiftheyreceivedanyadditionalsharesfromastocksplitorstockdividend.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-4
• InheritedProperty–ThebasisofinheritedpropertyisgenerallytheFMVofthepropertyonthedateofthedecedent’sdeath.However,thiscanvaryifthepersonalrepresentativeoftheestateelectstouseanalternatevaluationdateorother acceptablemethod.IfthebasisoftheinheritedpropertyisdeterminedbyamethodotherthantheFMVofthepropertyonthedateofthedecedent’sdeath,itisbeyondthescopeofVITA/TCE.Thetaxpayerwillneedtobereferredtoaprofessional taxpreparer.
Foradditionalinformationonhowtofigurethebasis,refertotheBasisofPropertychapterinPublication17,YourFederalIncomeTaxforIndividuals.
How do I determine the holding period?
Long-Term or Short-Term
ScheduleDrequiresentriesforthestockpurchaseandsaledate.TaxpayersmustprovidethedatethestockwasacquiredandForm1099-Bwillindicatethedatethestockwassold.Thesetwodateswilldeterminetheholdingperiod.ScheduleDclassi-fiescapitalgainsandlossesaseitherlong-termorshort-term,dependingonhowlongthetaxpayerownedthestock.
• Stockheldforoneyearorlesshasashort-termholdingperiod
• Stockheldformorethanoneyearhasalong-termholdingperiod
Theholdingperiodbeginsthedayaftertheshareswerepurchasedandincludesthedaythesharesweresold.Ifinvestmentpropertyisinherited,thecapitalgainorlossistreatedaslong-term.Thisistrueregardlessoflowlongthepropertyisheld.
Determiningthecorrectholdingperiodisimportantbecauseshort-termgainsaretaxedatregularincometaxratesandlong-termgainsaretaxedatalowerratethantheotherincomereportedonthereturn.
Stockacquiredasanontaxablestockdividendorstocksplithasthesameholdingperiodastheoriginalstockowned.Theyareconsideredtohavebeenacquiredonthesamedayastheoriginalstock.StockacquiredinaDRIPhasitsownpurchasedate.Theholdingperiodforstockreceivedasataxablestockdividendbeginsonthedateofdistribution.
example
OnFebruary18,2003,Lennybought500sharesofXYZCorporationstockfor$1,500,includinghisbroker’scommission.OnApril6,2009,XYZdistributeda2%nontaxablestockdividend(10shares).Threedayslater,LennysoldallhisXYZstockfor$2,030.
AlthoughLennyownedthe10sharesforonlythreedays,allthestockhasalong-termholdingperiod.Stockacquiredasanontaxablestockdividendhasthesameholdingperiodastheoriginalstockowned.Becauseheboughtthestockfor$1,500andthensolditfor$2,030morethanayearlater,Lennyhasalong-termcapitalgainof$530onthesaleofhis510shares.
example
ErmaboughtstockonJanuary11,2008(tradedate).Herholdingperiodbeganthenextday,January12,2008.IfshesoldthatstockonJanuary11,2009,shewouldownthestockexactlyoneyear,andtheholdingperiodwouldbeshort-term.However,ifshesoldthestockonJanuary12,2009orlater,theholdingperiodwouldbeoneyearandoneday,whichconstituteslong-term.
Ask a volunteer to read the Erma exam-ple. Answer any stu-dent questions.
Ask a volunteer to read the Lenny example. Answer any student questions.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-5
Iftaxpayersdonothavethepurchasedocumentsorotherrecordsshowingdateofpurchaseandcost,referthemtotheirstockbrokerorfinancialplanner.
Foradditionalinformationontheholdingperiodandothertaxconsequencesofsellingortradinginvest-mentproperty,refertotheSaleofPropertyChapterinPublication17.Someoftheseissuesandtransactions,suchaslike-kindexchanges,washsales,andworth-lesssecuritiescanbecomplex.Refertaxpayerswiththeseissuestoaprofessionaltaxpreparer.
Mutual Funds
Amutualfundisaregulatedinvestmentcompanygenerallycreatedby“pooling”fundsofinvestors,whichallowsinvestorstotakeadvantageofadiversityofinvestmentsandprofessionalmanagement.
OwnersofmutualfundsmayreceivebothForm1099-DIVandForm1099-B.Form1099-DIVreportscapitalgainsdistributionsfromsalesofstockheldbythemutualfund.Profitsofthesesalesarereportedtotheshareholdersofthefundascapitalgainsdistri-butions.Iftaxpayers(owners)decidetosellanyoftheirsharesinthemutualfunditself,thenForm1099-Bwillbeissued.Thetaxablegainorlossfromthesaleorexchangeofthetaxpayer’ssharesinamutualfundisreportedonForm1040,ScheduleD.
Ifmutualfunddividendsandcapitalgaindistributionsarereinvestedinnewshares,theholdingperiodofeachnewsharebeginsthedayafterthatsharewaspurchased.Therefore,ifboththenewsharesandtheoriginalsharesaresold,theremaybebothshort-termandlong-termgainsandlosses.
Tofigurethegainorlossonthedispositionofmutualfundshares,whichsharesweresoldandthebasisofthosesharesneedtobedetermined.Ifthesharesinamutualfundwereacquiredallonthesamedayandforthesameprice,figuringtheirbasisisnotdifficult.However,sharesaregenerallyacquiredatvarioustimes,invariousquanti-ties,andatvariousprices.Therefore,figuringthebasiscanbemoredifficult.Taxpayerscanchoosetouseeitheracostbasisoranaveragebasistofigurethegainorloss.Formoreinformationonhowtoreportthesellorexchangeofmutualfundshares,refertoPublication564.
StockSometaxpayersmayownsharesofstocktheyboughtondifferentdatesorfordiffer-entprices.Thismeanstheyownmorethanone“block”ofstock.Eachblockmaydifferfromtheothersinitsbasis(theamountpaidforthestock),itsholdingperiod(long-termorshort-term),orboth.
Indirectingabrokertosellstock,thetaxpayermayspecifywhichblock,orpartofablock,tosell.Thisiscalled“specificidentification.”Ifthetaxpayerdoesnotdothis,thesharessoldaretreatedascomingfromtheearliestblockpurchased(FIFOmethod–orFirstIn,FirstOut).Tobevalid,thespecificationmustbemadebeforeoratthetimeofsale, notafterthesale.
Ingeneral,awashsaleoccurswhenataxpayersellsorotherwisedisposesofstockorsecurities(includingacontractoroptiontoacquireorsellstockorsecurities)atalossand,within30daysbeforeorafterthesaleordispositionthetaxpayerbuys,acquires,orentersintoacontractoroptiontoacquiresubstantiallyidenti-calstockorsecurities.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-6
What information do I need from Form 1099-B?
SaleofstockisreportedtothetaxpayeronForm1099-B,ProceedsFromBrokerandBarterExchangeTransactions.Form1099-Bispreparedbythebrokerwhohandledthesaleofthestock.Ifboxes3,9,10,11,or12haveentries,referthetaxpayertoaprofessionaltaxpreparer.ToseeacopyofForm1099-B,refertotheAdvancedComprehensiveproblemforKentinPublication4491-W.
Sales Date
Inbox1onForm1099-B,thestockbrokerreportsthedatethestockwassold.Use thisdate,alongwiththepurchasedateprovidedbythetaxpayer,todeterminethe holdingperiod.
Sales Price
Inbox2onForm1099-B,thestockbrokerreportsthesalespriceofthestock,andchecksaboxtoindicateiftheamountinbox2isgrossproceedsornetproceeds:
• IfGrossproceedsischecked,askthetaxpayerfortheamountofcommissions/feespaidandaddittothetaxpayer’sbasis
• Ifgrossproceedslesscommissionsandoptionpremiums(netproceeds)ischecked,thebrokeralreadysubtractedthecommissionsandfeesfromtheproceeds
example
Richardsoldstockfor$2,300.Hepaidhisbrokeracommissionof$35onthesaleandreceivednetproceedsof$2,265.Richard’sbrokerhasreportedthegrossproceeds,so:
• Box2ofForm1099-Bshowed$2,300
• Theboxnextto“Grossproceeds”ischecked
Becausebox2showsgrossproceeds,youneedtoaddthebroker’scommissionsandfees($35)toRichard’sbasisinthestock.
Ask a volunteer to read the Richard example. Answer any student questions.
example
In1998,Mariebought100sharesofAntrimCorporationstockfor$2,000.In1999,sheboughtanother100sharesofAntrimfor$2,300.In2009,shesold100sharesofAntrimfor$3,000,butshedidnotidentifythespecificblockatthetimeofsale.
BecauseMariepurchasedtheearliestblockof100sharesat$2,000,theadjustedbasisofthesharesshesoldwas$2,000.Thesalespriceofthe100sharessoldwas$3,000.Mariehadalong-termcapitalgainof$1,000.
However,ifshehadtoldherbrokertosellthe100sharesboughtin1999,theadjustedbasiswouldhavebeen$2,300,givingMariealong-termcapitalgainof$700.
Ask a volunteer to read the Marie example.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-7
ExErcisEs
Ifpreparingapaperreturn,addthebroker’scommissionandfees($35)tothebasisandenterthetotalincolumneinPartIorPartIIofForm1040,ScheduleD.
Tax Software Hint:Youwillneedtoaddthebroker’scommissionsandfees($35)toRichard’sbasisinthestockbeforeenteringtheamountontheCapitalGainorLossTransactionsWorksheet.Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2).
Answersareafterthelessonsummary.
Question 1: Kevinpaidhisbrokera$75feeonthesaleofhisstock.Box2ofhisForm1099-Bshows$925,andtheboxnextto“Grossproceeds”ischecked.WhatistheamountKevinreportsashissalespriceonScheduleD?
A. $925
B.$1,000
C.$850
D.$75
Other Information
Form1099-Bdoesnotreportthedatethestockwasoriginallypurchased,the originalpurchaseprice,oranyadjustmentstothebasis.Somebrokersreportthis informationonataxreportingsupplement.Ifnot,thetaxpayermustprovideyouwiththeinformation.
SomebrokersdonotissuestandardForms1099-B.Insteadtheyissueastatement,some-timesentitleda“1099ConsolidatedStatement,”whichshowsstocksalesandothertypesofdistributions,suchasdividendsandinterest.Thetaxreportingstatementissometimesreferredtoasa“Substitute1099.”
You never adjust the sales price. If box 2 shows gross proceeds, you need to add the broker’s fee to the basis or purchase price of the stock.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-8
ExErcisEs (continued)
How do I enter data on Schedule D, Parts I and II?
InformationfromForm1099-BisenteredonScheduleD.PartIisforshort-termsalesandPartIIisforlong-termsales.
Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2),CapitalGainorLossTransactionsWorksheet.
Whenpreparingapaperreturn,determinetheholdingperiodforeachblockofstocksold.ThiswillindicatewhetherthesaleshouldbereportedinScheduleDPartI(shortterm)orPartII(longterm).Recordtheinformationoneachsaleincolumnsa-eandcalculatethegainorlossforcolumnf.
How do I report capital gain distributions?
CapitalgainsdistributionsarereportedtothetaxpayeronForm1099-DIV.Iftherearenocapitalgainsfromthesaleofproperty,theForm1099-DIVamountisenteredonLine13ofForm1040.
Ifataxpayerhasbotha1099-DIVandaForm1099-B,thencapitalgainsdistributionsareaddedtoScheduleDinPartII,Line13.
Question 2: WhichofthefollowingtaxpayersisrequiredtofileForm1040andScheduleD?
A. Marriah, who received one Form 1099-B and no Forms 1099-DIV
B.Lorraine,whoreceivedForms1099-DIVforcapitalgain distributionsfromthreedifferentmutualfunds
C.Bothoftheabove
Tax Software Hint:Ifthesourcedocuments(Forms1099-DIVand1099-B)arerecordedproperlyinthetaxpreparationprogram,thenthenumberswillbereportedintheproperplaces.TheamountfromForm1099-DIV,box2a,willbeenteredontheDividendStatementforScheduleB(alongwiththeotherinformation)andwillautomati-callycarryovertothecapitalgaindistributionsline(Line13)inPartIIofScheduleD.
example
EldridgereceivedaForm1099-DIV.Box2ashowshereceivedatotalcapitalgaindistributionof$170.
EldridgealsoreceivedaForm1099-Bthatshowsanetsalespriceof$1,200onthesaleof600sharesofABCGroup,Inc.HeboughtthestockonFebruary19,2004,andsolditonAugust25,2009.HisbasisinABC,includingcommission, is$1,455.
EldridgemustuseScheduleDtoreporthiscapitalgaindistributionbecausehesoldstockthatmustbereportedonScheduleD.
Ask a volunteer to read the Eldridge example. Answer any student questions.
Only Marriah sold stock and received Form 1099-B.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-9
ExErcisEs (continued)
How do I complete reporting of capital gain or loss?
CombiningalltheamountsincolumnfonScheduleD,PartI,resultsinanetshort-termcapitalgainorloss.CombiningalltheamountsincolumnfonScheduleD,PartII,resultsinanetlong-termcapitalgainorloss.
Thecombinationofthenetshort-termandnetlong-termcapitalgainsorlossesimpactsthetaxliability.Ifthereisacombinednetcapitallossinexcessof$3,000(orifMarriedFilingSeparately,inexcessof$1,500),thentheexcessiscarriedtothenexttaxyearandforwarduntilexhausted.Carryoverlossesretaintheiroriginalholdingperiod.
Question 3:Stella’scostbasisfor600sharesofKLMCorporationstockshepurchasedinJune2003andsoldinMarch2009was$2,400.Stellasoldthe600sharesfor$4,400andpaida$100commission.Herbrokerreportedthegrossproceedsof$4,400onForm1099-B.Whatwasthesalespriceforthesharesandtheamountofcapitalgain?
A.$4,400salespriceand$2,000gain
B. $4,400 sales price and $1,900 gain
C.$4,500salespriceand$2,100gain
D.$4,300salespriceand$1,900gain
example
Margoboughtstockfor$1,500,plusa$25commission.18monthslatershesoldallthestockfor$2,000andpaida$25commission.HerForm1099-Bshowsthegrossproceedsof$2,000asthesalesprice.
Basis=($1,500+$25+$25)=$1,550
SalesPrice=$2,000
GainorLoss=SalesPrice–Basis=$2,000-$1,550=$450
Margohadalong-termgainof$450.
The sales price was $4,400, which was $1,900 more than the adjusted basis of $2,500 ($2,400 cost + $100 commission) of the shares.
Ask a volunteer to read the Bill example. Answer any student questions.
Ask a volunteer to read the Margo example. Answer any student questions.
Assign the exercise.
Review answer with the class when com-plete.
example
Billbought1,000sharesofstockfor$15,000(includingcommission).Oneyearlaterhesold600sharesofthestockfor$7,800,netproceeds.Billhadanetlossof$1,200asshownbelow:
Basis=($15,000÷1,000)x600=$9,000
SalesPrice=$7,800
GainorLoss=SalesPrice–Basis=$7,800-$9,000=-$1,200
Billhadashort-termlossof$1,200.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-10
How do I calculate and report a carryover of a capital loss?
Ataxpayercannottakenetlossesofmorethan$3,000($1,500formarriedtaxpayersfilingseparately)infiguringtaxableincomeforanysingletaxyear.Theallowablelossisreferredtoasthedeductionlimit.Unusedlossescanbecarriedovertolateryearsuntiltheyarecompletelyusedup.Thecarryoverlossesarecombinedwiththegainsandlossesthatactuallyoccurinthenextyear.
Capital Loss Carryover Worksheet
Tofigureanycapitallosscarryoverfrom2008to2009,usetheCapitalLossCarryoverWorksheetfromthe2009ScheduleDinstructions.Tocompletetheworksheet,youwillneedinformationfromthe2008return.
Iftaxsoftwarewasusedtopreparethe2008return,askthetaxpayerforacopyofthesoftware’sScheduleDWorksheet2(CapitalLossCarryoversfromThisYeartoNextYear)todeterminethecarryoveramountsfrom2008to2009.
• Entershort-termcapitallosscarryovers(fromScheduleDWorksheet2,Line8)onScheduleD,PartI,line6
• Enterlong-termcapitallosscarryovers(fromScheduleDWorksheet2,Line14)onScheduleD,PartII,line13
Ifthetaxpayer’s2009capitallossexceedsthedeductionlimitandtheremaindermustbecarriedforwardto2010,remindthetaxpayertobringacopyofthe2009returnwhenthe2010returnisprepared.Makeanoteontheoutsideofthetaxpayer’staxreturnrecordenvelopetohelpalertnextyear’spreparer.Nextyear,whoeverassiststhetaxpayerwillusetheCapitalLossCarryoverWorksheetinthe2010ScheduleDinstructionsortheprintedcopyoftheScheduleDWorksheet2tofigurehowmuchcapitallossthetaxpayercancarryoverfrom2009to2010.
Ifpreparingapaperreturn,completetheCapitalLossCarryoverWorksheetintheForm1040instructions.ForadditionalinformationonScheduleD,capitalgainsandlosses,andcarryovers,refertotheReportingGainsandLosseschapterinPublication17.
Tax Software Hint:Taxsoftwareautomaticallycalculatesthetaxpayer’scapitalloss.Ifthelossisoverthelimit,taxsoftwarereportsthemaximumallowablededuction.Theremaindercanbecarriedovertofuturetaxyears.
Taxpayer Interview and Tax Law Application
TaxpayersJeremyandJaniceSmithcheckedthe“Yes”boxforinterest/divi-dendincomeontheapprovedintakeandinterviewsheet.Thevolunteerasksfordetails.
Ask two volunteers to role-play the sample interview.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-11
Who must file Schedule D for the sale of a home?
Nowwewilldiscussifthesaleofthetaxpayer’sresi-dencewillneedtobereportedonScheduleD.Youwillneedtoidentifywhetherthehomewasthetaxpayer’smainhome,ifthetaxpayermeetstheownershipandusetests,andifthegainismorethantheallowedexclusionsamount.Foradditionalinformationtohelpyoumakethisdetermination,refertotheSellingYourHomeChapterinPublication17orPublication523.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… Jeremy responds…
Previously we discussed your dividends from the Pembroke Fund, reported on Form 1099-DIV. Did you have any other income from the sale of stock, securities, or other investments?
Do you have a 1099 for that?
[Laterininterview] Earlier, you gave me this 1099-DIV from a mutual fund and these 1099-B forms from the stocks you sold. We already included the capital gain distribution from the mutual fund when we entered the dividends. We’ll enter the stock sale information on Schedule D Capital Gain or Loss Worksheet. I see the broker’s state-ment has the sale details I need, but do you know when you purchased the Purdue stock?
I see the sale date was March 10, 2009. That means the holding period for the stock was more than one year. They call that long-term and it determines both where we enter the information on Schedule D and the tax rate for any gain. Now, do you know the basis for the stock?
That’s what it cost you, including any broker fees or commissions.
Have you had any other costs related to the stock since then, such as additional fees?
That means that the basis for the stock is $10,123. The 1099-B shows that you received gross proceeds of $8,859 when you sold the stock. We’ll put all these numbers into this worksheet in the tax software. As you can see, the software has calculated your net loss; this is the sale price minus the basis, for a net loss of $1,264. After I enter these other transactions from the broker’s statement, we’ll get a final net gain or loss on Schedule D. This will determine the amount that will be reported on Form 1040, line 13. [IndicateJeremy’sresponsestothesequestionsontheapprovedintakeandinterviewsheet.]
Yes,Isoldsomestockthisyear.
Yes,IhavethisForm1099-Bandthisstockbroker’s statement.
IboughtthePurduestockbackonJuly13,1999.
Whatisthat?
Yes,itcost$10,053,plusIhadtopay$35infees.
No,that’sit.Wait,whenIsoldit,Ihadtopay$35more.
Answer any student questions about the conclusions drawn in the interview.
Specialrulesapplytoforeclo-suresandcancellationofdebtincomeonaprincipalresi-dence.UndertheMortgageForgivenessDebtReliefActof2007,taxpayersmayexcludecertaindebtforgivenontheirprincipalresidence.Theserulesarecoveredlaterinthislesson.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-12
Todetermineifthetaxpayermeetsthecriteriaforreportingthesaleofahome,usetheinterviewtech-niquesandtoolsdiscussedintheScreeningandInterviewinglesson.Theintakeandinterviewsheetlistsincomefromthesaleofrealestate.Itisimportanttoensurethatallincomeisaccuratelyreportedonthereturn.Asktaxpayersiftheysoldanyrealestate,suchastheirprincipalresidenceor“mainhome”duringthetaxyear.Thetaxpayermaybeeligibletoexcludeallorpartofthegainfromtheirtaxableincome.
Who must report the sale of a home?
Taxpayersmustreportthesaleofahomewhenoneofthefollowingistrue:
1. Thetaxpayerdoesnotmeettheownershiptest.
2. Thetaxpayerdoesnotmeettheusetest.
3. Duringthetwo-yearperiodendingonthedateofthesale,thetaxpayerhasexcludedthegainfromthesaleofanotherhome.
4. Thegainfromthesaleismorethantheamountthatthetaxpayermayexclude:$250,000forindividualtaxpayers,$500,000forMarriedFilingJointly.
What is considered a “main” home?
Onlyagainfromthesaleofataxpayer’smainhomemaybeexcludedfromthe taxpayer’sincome;againfromasaleofahomethatisnotthetaxpayer’smainhomewillgenerallyhavetobereportedasincome.
Sothefirststepistofindoutifthehomemeetsthedefinitionofa“main”home.Atax-payer’smainhomeiswherethetaxpayerlivesmostofthetime.Itdoesnothavetobeatraditionalhouse;forexample,itmaybeahouseboat,mobilehome,cooperativeapart-ment,orcondominiumandmusthavecooking,sleeping,andbathroomfacilities.Thetaxpayer’smainhomemayalsobearentedhouseorapartment.Taxpayerswhohavemorethanonehomecannotchoosewhichhometodesignateastheirmainhome.
What are the ownership and use tests?
Toclaimtheexclusiononthegainfromthesaleofahome,thetaxpayermustmeettheownershipandusetests.Thismeansthatduringthefive-yearperiodendingonthedateofthesale,taxpayersmusthave:
example
LucilleownsahomeinaColoradoskiarea(theskihome).ShestaysattheskihomemostweekendsandspendstheentiremonthsofDecember,January,andFebruarythere.Whensheisnotattheskihome,shelivesinafour-roomapart-mentthatsherentsinDenver.Foroverhalftheyear,shelivesinDenver.Lucille’smainhomeisherrentalapartmentinDenver,becauseshelivestheremostofthetime,eventhoughshedoesnotowntheapartmentinDenver.
Ask a volunteer to read the Lucille example. Answer any student questions.
Taxpayerswhoclaimedthefirst-timehomebuyercreditandthensoldtheirhomemayhavetorepaythecredit.Formoreinformation,refertoLesson28,OtherTaxes,Lesson29,Payments,andForm5405.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-13
ExErcisEs (continued)
• Ownedthehomeforatleasttwoyears(theownershiptest),and
• Livedinthehomeastheirmainhomeforatleasttwoyears(theusetest)
TherearespecialrulesforArmedForces,intelligencepersonnelandPeaceCorpsvolunteersintheapplicationofthefive-yearperiod.See“Five-yearTestPeriodSuspension”laterinthislesson.
Therequiredtwoyearsofownership/usedonothavetobecontinuous.Taxpayersmeetthetestsiftheycanshowthattheyownedandlivedinthepropertyastheirmainhomeforeitheratotalof24fullmonthsor730days(365x2)duringthefive-yearperiodendingonthedateofsale.Short,temporaryabsencesarecountedasperiodsofuseevenifthepropertyisrentedduringthoseabsences.
Ownershipandusetestscanbemetduringdifferenttwo-yearperiods.However,ataxpayermustmeetbothtestsduringthefive-yearperiodendingonthedateofthesale.
Question 4: Emily,whoissingle,boughtahomein1996.ShelivedinthehomeuntilMay31,2007,whensheacceptedanassignmentwiththePeaceCorpsinVenezuelaandleftthehousevacant.Emilyreturned toherhomeonMay31,2008andlivedthereuntilshe soldthehouseonJanuary10,2009.DoesEmilymeet theownershipandusetest?þ Yes □No
Reduced Exclusion
Taxpayerswhoownedandusedahomeforlessthantwoyears(andsodonotmeettheownershipandusetest)maybeabletoclaimareducedexclusionundercertainconditions.Theseincludesellingthehomeduetoachangeinplaceofemployment(beyondacertaindistance),health,orunforeseencircumstances.Ifanyapply,referthetaxpayertoaprofessionaltaxpreparer.Reducedexclusioncomputations/determina-tionsarebeyondthescopeofVITA/TCE.
example
In2001,Helenlivedinarentedapartment.Theapartmentbuildingwaslaterchangedtoacondominium,andsheboughtherapartmentonDecember1,2006.In2007,HelenbecameillandonApril14ofthatyearshemovedintoherdaugh-ter’shome.OnJuly10,2009,whilestilllivinginherdaughter’shome,shesoldherapartment.
Helencanexcludeallthegainonthesaleofherapartmentbecauseshemettheownershipandusetests.Herfive-yearperiodisfromJuly11,2004,toJuly10,2009,thedateshesoldtheapartment.SheownedherapartmentfromDecember1,2006,toJuly10,2009(overtwoyears).ShelivedintheapartmentfromJuly11,2004(thebeginningofthefive-yearperiod),toApril14,2007(overtwoyears).
Ask a volunteer to read the Helen example. Answer any student questions.
Ask what if Helen had to move in with her daughter one year earlier.
Answer: It would make a difference: She would miss the requirement of two years in a five-year period by 3 months.
Emily meets the owner-ship and use test because she owned and lived in the home for at least two years of the five-year period ending on the date of the sale.
Assign the exercise.
Review the answer with the class when complete.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-14
Prior Exclusions
Inaddition,duringthetwo-yearperiodendingonthedateofthesale,thetaxpayermustnothaveclaimedanexclusiononagainfromthesaleofanotherhome.
Married Homeowners
Theownershipandusetestsareappliedsomewhatdifferentlytomarriedhomeowners.Marriedhomeownerscanexcludeupto$500,000iftheymeetalloftheseconditions:
• Theyfileajointreturn
• Eitherspousemeetstheownershiptest
• Bothindividualsmeettheusetest
• Neitheroneexcludedgaininthetwoyearsbeforethecurrentsaleofthehome
Ifeitherspousedoesnotsatisfyalltheserequirements,theycannotclaimthemaxi-mumexclusion($500,000).Themosttheycanclaimisthetotalofthemaximumexclu-sionseachwouldqualifyforifnotmarriedandtheamountswerefiguredseparately.Forthispurpose,eachspouseistreatedasowningthepropertyduringtheperiodthateitherspouseownedtheproperty.ThiscalculationisoutsidethescopeofVITA/TCE.
Sale of Main Home by Surviving Spouse
Beginningwithmainhomesalesafter2007,themaximumexclusion($500,000)byanunmarriedsurvivingspouseisallowedifthesaleoccursnolaterthan2yearsafterthedateofthedeceasedspouse’sdeath,andallotherrequirementsaremet.
How do I figure the gain (or loss) from the sale of a home?
Onceyou’vedeterminedthatataxpayeriseligiblefortheexclusion,youcanfigurethegain(orloss)onthesalebasedonthesellingprice,amountrealized,basis,andadjustedbasis.Ifthesellingpriceofthetaxpayer’shomeislessthantheallowableexclusion($250,000ifSingle,$500,000ifMarriedFilingJointly),youdonotneedtocalculatethegainonthesaleofthehome.Noneofthegainwillbetaxable.Lossonthesaleofaresidenceisnotreportedonthereturn.Formoreinfor-mation,seetheSellingYourHomesection inPublication17.
IfthetaxpayerusedthehomeforbusinesspurposesorasrentalpropertyafterMay6,1997,referthetaxpayertoaprofessionaltaxpreparer.Thetaxpayercannotexcludethepartofthegainequaltothedepreciationallowedorallow-ableasadeduction.
Alossonthesaleofapersonalresidenceisnotdeductible.
example
Jennifer,whoissingle,boughtherfirsthomeinAugust2007.InDecember2008,thecompanysheworkedfornotifiedherthatshewouldbetransferredtoanothertownbytheendof2009.ShecontinuedtoliveinthehomeuntilJune2009,whenshesolditatagainandmoved500milestothenewtown.Jenniferownedandlivedinthehomelessthantwoyears,soshedoesnotmeettheownershipandusetests.However,shemayqualifytoexcludeallorpartofthegainbecauseshesoldthehomeduetoachangeinplaceofemployment.Jennifershouldbereferredtoaprofessionaltaxpreparer.
Ask a volunteer to read the Jennifer example. Answer any student questions.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-15
ExErcisEs (continued)Assign the exercise.
Review answer with the class when com-plete.
Selling Price
Thesellingpriceisthetotalamounttaxpayers(theseller)receivedfortheirmainhome.Itincludesmoney,allnotes,mortgages,orotherdebtstakenoverbythebuyeraspartofthesale,andthefairmarketvalueofanyotherpropertyorservicesthatthesellerreceived.
IfthetaxpayerreceivedForm1099-S,ProceedsfromRealEstateTransactions,useittofigurethesellingprice.Box1showsthedateofsale(closing)andbox2showsthegrossproceedsreceivedfromthesaleofthehome.FortaxpayerswhodidnotreceiveaForm1099-S,usesaledocumentsandotherrecords.
Amount RealizedTheamountrealizedisthesellingpriceminussellingexpenses(commissions,adver-tisingfees,legalfees,andloanchargespaidbytheseller,suchaspoints).AmountrealizedcanbecalculatedusingWorksheet2,Gainor(Loss),Exclusion,andTaxableGainonSaleofHome,inPublication523.(Asimilarworksheetisavailableinthetaxsoftware.)
Amountrealized=Sellingprice-Sellingexpenses
$246,000=$250,000-$4,000
Question 5: Janmeetstheeligibilityrequirementsforclaimingtheexclusiononthegainfromthesaleofhishome.Thesellingpriceofthehomewas$195,000.Thesellingexpenseswere$15,000.Whatistheamount realizedinthissale?$180,000.
Basis
Thebasisinahomeisdeterminedbyhowthe taxpayerobtainedthehome.Ifataxpayerboughtorbuiltahome,thebasisiswhatitcostthetaxpayertobuyorbuildthathome.Ifthetaxpayerinheritedthehome,thebasisisitsfairmarketvalueonthedateofthedecedent’sdeath,oronthelateralternatevaluationdatechosenbytherepresentativefortheestate.
Adjusted Basis
Theadjustedbasisisthetaxpayer’sbasisinahomeincreasedordecreasedbycertainamounts.
Ifthetaxpayercanexcludetheentiregainfromthesaleofapersonalresidence,the personresponsibleforclosingthesale(forexample,arealestatebrokerorsettlement agent)generallywillnotissueaForm1099-S.IfaForm1099-Sisissuedandyoudeterminethatthegainisexcludable,thesaleshouldbeshownonScheduleDtonotifyIRSthatthegainisexcludable.
The amount realized on Jan’s sale is $180,000 (selling price minus selling expenses).
Alternativevaluationissuesanddeterminingtheadjustedbasisofpropertyreceivedasagiftcanbeverycomplexandareoutsidethescopeofthistraining.Advisethetaxpayertoseekassistancefromaprofessionaltaxpreparer.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-16
Increasesincludeadditionsorimprovementstothehomesuchasinstallingarecre-ationroomorputtingonanewroof.Inordertobeconsideredanincrease,theimprovementmusthaveausefullifeofmorethanoneyear.Repairsthatmaintainthehomeingoodconditionarenotconsideredimprovementsandshouldnotbeaddedtothebasisoftheproperty.
DecreasestobasisincludedeductiblecasualtylossesandgainsataxpayerpostponedfromthesaleofaprevioushomebeforeMay7,1997.Decreasescanalsoincludedepreciationduringthetimethehomewasusedforbusinesspurposesorasrentalproperty.Ifanyofthesedecreasesapply,thetaxpayerneedstobereferredtoaprofessionaltaxpreparer.
Adjustedbasis=Basis+Increases-Decreases
How much of the gain from a home sale can a taxpayer exclude?
Onceyou’vedeterminedthegain(orloss)onthesaleofataxpayer’smainhome,younextfiguretheexclu-sionandanytaxablegainfromthesale.
Ifalltherequirementsaremet,anindividualtaxpayermayexcludeupto$250,000ofthegainfromtaxableincome;taxpayerswhoareMarriedFilingJointlymayexcludeupto$500,000.
NEW Gainfromthesaleorexchangeofamainhomeisnolongerexcludablefromincomeifallocabletoperiodsofnonqualifieduse.Generally,nonqualifiedusemeansanyperiodafter2008whereneitherthetaxpayernorspouse(orformerspouse)usedthepropertyasamainhome(withcertainexceptions).AlistofexceptionstoaperiodofnonqualifiedusecanbefoundinPublication553.Tofiguretheportionofnonqualifieduse,multiplythegainbythefollowingfraction:
Totalnonqualifieduseduringperiodofownershipafter2008
Totalperiodofownership
Thisissuecanbecomplex.Refertaxpayerswith“nonqualifieduse”issuestoaprofes-sionaltaxpreparer.
Where do I report any taxable gain from the sale of a home?
Proceedsfromthesaleofamainhomethatmeetstheownershipandusetestsmustbereportedonlyifthegainisgreaterthanthetaxpayer’sallowedexclusion;onlytheexcessmustbereported.Gainfromthesaleofahomethatisnotthetaxpayer’smainhomewillgenerallyhavetobereportedasincome.
UseWorksheet2,Gainor(Loss),Exclusion,andTaxableGainonSaleofHomeinPublication523tofigurethegainorloss,theexclusion,andthetaxablegainfromasale.Notethatline3istheamountrealized,line4istheadjustedbasis,andline5istheamountofgainorlossfromthesale.
Tofiguretheadjustedbasisofahome,useWorksheet1,AdjustedBasisofHomeSold,inPublication523.
Taxpayerswhoclaimedthefirst-timehomebuyercreditmayberequiredtorepaythecreditintheyearofsale.Therepaymentislimitedtotheamountofgainonthesale.Formoreinfor-mationonhowtoadjustthebasisofthehomeifthefirst-timehomebuyercreditwasreceivedandexceptionstotherepaymentrule,seetheForm5405Instructions.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-17
Inbothcases,thegainistaxablegainandmustbereportedonScheduleD,CapitalGainsandLosses.IfthehomewasusedforbusinesspurposesorasrentalpropertythegainwouldbereportedonForm4797andthetaxpayershouldbereferredtoaprofessionaltaxpreparer.
Iftheamountrealizedislessthantheadjustedbasis,thedifferenceisaloss.Alossonthesaleofyourmainhomecannotbededucted.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2).
Ifpreparingapaperreturn,completeScheduleD,PartII,asshowninthefollowingillustration.
Taxpayer Interview and Tax Law Application
JeremyandJaniceSmithcheckedthe“Yes”boxforsellingsomerealestateontheapprovedintakeandinterviewsheet.Thevolunteerasksfordetails.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… Jeremy responds…
Did you sell a home during 2009?
Well, you may be able to exclude all or part of your gain from that sale, but to find out, I have to ask you a few questions. First, how long did you own the home?
And was it the main place you lived for at least two years of that time?
That’s okay, the rule is that it must be the main place you lived for a total of 24 full months or 730 days during the five-year period prior to the sale. During the two years before you sold the house did you claim an exclusion on a gain from another house?
Yes, I was going to mention that to you because I should get a tax break on that.
Three and a half years. We bought it in January 2006 and sold it in June 2009.
Well, yes, sort of. We lived and worked on a cruise ship from June 2006 to December 2006 and let my brother live there while we were gone.
No, this is my only house.
Ask two volunteers to role-play the sample interview.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-18
What is the Five-year Test Period Suspension?
Taxpayerscanchoosetohavethefive-yeartestperiodforownershipandusesuspendedduringanyperiodthehomeowner(eitherspouseifmarried)servedon“qualifiedofficialextendedduty”asamemberoftheuniformedservicesorForeignServiceoftheUnitedStates,asanemployeeoftheintelligencecommunity,orasanemployeeorvolunteerofthePeaceCorps.Thismeansthatthetaxpayermaybeabletomeetthetwo-yearusetestevenifthetaxpayerand/orspousedidnotactuallyliveinthehomeduringthenormalfive-yearperiodrequiredofothertaxpayers.
Taxpayersareonqualifiedofficialextendeddutyiftheyserveatadutystationatleast50milesfromtheirmainhomeorliveingovernmentquartersundergovernmentorder.Taxpayersareconsideredtobeonextendeddutywhentheyarecalledtoactivedutyformorethan90daysoranindefiniteperiod.
Period of Suspension
Theperiodofsuspensioncannotlastmorethantenyears.Together,theten-yearsuspensionperiodandthefive-yeartestperiodcanbeaslongasfifteenyears.Thesuspensioncanbeusedononlyonepropertyatatime.
Formoreinformationaboutthesuspensionofthefive-yeartestperiod,seeMembersoftheUniformedServicesorForeignService;EmployeesoftheIntelligenceCommunity;orEmployeesorVolunteersofthePeaceCorps,inPublication523.
Ask a volunteer to read the Peter example.
Ask what if Peter had not been on qualified extended duty but merely rented out his home while he lived in another city?
Answer: He would not meet the use test in the five-year period.
example
Peterboughtahomein2000andlivedinitfor2½years.Beginningin2003,hewasonqualifiedofficialextendeddutyintheU.S.Army.Hesoldhishomein2009andhada$12,000gain.Peterwouldnormallynotmeettheusetestinthefive-yearperiodbeforethesale(2004–2009).Petercandisregardthosesixyears.Thetestperiodconsistsofthefiveyearsbeforehewentonqualifiedofficialextendedduty.
Thisextensionoftimecanapplytotaxpayerswhohaverecentlyleftthemilitary.
sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… Jeremy responds…
Did you receive Form 1099-S?
Your paperwork shows a selling price of $580,000. Do you have anything that lists the basis in the home, that is, the value of the home at the time you bought it?
Clearly, with a basis of $300,000, your gain from the sale is $280,000 or less. As a married couple who meets the owner-ship and use tests, you can exclude up to $500,000 from the sale, so you don’t have to report the sale on your return. [IndicateJeremy’sresponsestothesequestionsontheapprovedintakeandinterviewsheet.]
No, but I do have my paperwork from the sale. My real estate broker said I wouldn’t need that form because I was within the limits.
Yes, I bought it for $280,000 and put in $20,000 of improvements – mostly new bathrooms.
Answer any student questions about the conclusions drawn in the interview.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-19
ExErcisEs (continued)
Question 6: Johnpurchasedahomein1999.Throughyourinterviewprocess,youdiscoverthathesoldhismainhomein2009.Johnhadnotlivedinthehomeforsixyears.WhichofthefollowingconditionswouldallowJohntoexcludehisgain?
A.JohnwentonsabbaticalforfouryearsandbackpackedthroughEurope.
B.Johnlivedwithaco-workerforfouryearsandlethisbrotheroccupyhishome.
C. John was deployed to Europe on official extended military duty for five years.
D.Johnmarriedandhisbridehadherownhome.Thecouplechosetoliveinthewife’shomeandrentoutJohn’shome,untilitwassold.
How is a cancellation of debt for a principal residence reported on the return?
Asegmentofthecancellationofdebtissueisinscopeforthevolunteertaxpreparer.Cancellationofvarioustypesofdebtcouldresultinareportableitemonthetaxpayer’sreturn.VITA/TCEvolunteersarelimitedtothetypethatinvolvesthetaxpayer’smain,personalresidence.Allothercancellationofdebtissuesshouldbereferredtoaprofes-sionaltaxpreparer.Thetopicthatfollowswillhelpyourecognizewhenyouwillbeabletohelptaxpayersandwhenyoumustreferthemtoaprofessionaltaxpreparer.
Cancellationofindebtednessissuesfrequentlyinvolveautoloans,creditcarddebt,debtformedicalcare,professionalservices,installmentpurchasesoffurnitureorotherpersonalproperty,mortgages,andhomeequityloans.Generally,ifadebtforwhichataxpayerispersonallyliableiscanceledorforgiven,otherthanasagiftorbequest,thetaxpayermustincludethecanceledamountinincome.Adebtincludesanyindebted-nessforwhichataxpayerisliableorwhichattachestothetaxpayer’sproperty.
UndertheMortgageForgivenessDebtReliefActof2007,taxpayersmayexcludecertaindebtforgivenorcanceledontheirprincipalresidence.Thisexclusionisappli-cabletothedischargeof“qualifiedprincipalresidenceindebtedness.”Ifthecanceleddebtqualifiesforexclusionfromgrossincome,thedebtormayberequiredtoreducetaxattributes(certaincredits,losses,andbasisofassets)bytheamountexcluded.
ThetaxpayermayalsohaveareportabletransactiononScheduleDifthepropertywasforeclosedonorabandoned.Whenthisoccurs,thetaxpayerwillgenerallyreceiveForm1099-A,AcquisitionorAbandonmentofSecuredProperty,fromthelender.Form1099-Awillhaveinformationneededtodeterminethegainorlossduetotheforeclo-sure/abandonment.Ifthedebtiscanceled,thetaxpayermayalsoreceiveForm1099-C,CancellationofDebt.Iftheforeclosureandcancellationofdebtoccurinthesamecalendaryear,thelenderhastheoptionoffilingForm1099-Conlybyreportingaddi-tionalinformationincertainboxesontheForm1099-C.Youwilllearnmoreabouttheseformsandhowtoreporttheinformationonthetaxpayer’sreturnlaterinthislesson.
The only circumstance that will allow the taxpayer to exclude the gain is if he can extend the five-year period due to official extended military duty.
Assign the exercise.
Review answer with the class when com-plete.
Emphasize only can-cellation of qualified principal residence indebtedness is within scope for the volunteer program.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-20
What are the exceptions and exclusions to the general rule for cancellation of debt income?
Cancellationofdebtincomemaybeeliminatedbyapplyingexceptionsorreducedbyapplyingexclusionstothegeneralrule.
Exceptions:Thereareseveralexceptionstotheinclusionofcanceleddebtinincome.Theseexceptionsapplybeforethenextsectiononexclusions.Theexceptionsare:
• Amountsotherwiseexcludedfromincome(e.g.,giftsandbequests)
• Certainstudentloans(e.g.,doctors,nurses,andteachersservinginruralorlowincomeareas)
• Deductibledebt(e.g.,homemortgageinterestthatwouldhavebeendeductibleonScheduleA)
• Pricereducedafterpurchase(e.g.,debtonsolventtaxpayer’spropertyisreducedbytheseller;basisofpropertymustbereduced)
Exclusions: Thereareseveralexclusionsfromthegeneralruleofinclusionofcanceleddebtinincome.Form982,ReductionofTaxAttributesDuetoDischargeofIndebtedness,isrequiredtobefiledwiththetaxpayer’sreturntoshowtheamountofthecanceleddebtexcluded.Theexclusionsare:
• Dischargeofdebtthroughbankruptcy
• Dischargeofdebtofinsolventtaxpayer
• Dischargeofqualifiedfarmindebtedness
• Dischargeofqualifiedrealpropertybusinessindebtedness
• Dischargeofqualifiedprincipalresidenceindebtedness
Theissuesinvolvedintheseexclusionscanbecomplicatedandcomplex.Only the exclusion for discharge of “qualified principal residence indebtedness” is within scope for the VITA/TCE program. UsePublication4731,ScreeningSheetforCancellationofDebt,toassistinidentifyingthosetaxpayerswithcancellationofdebtissuesthatcanbeassistedatVITA/TCEsites.Thisexclusionprovision,addedbytheMortgageForgivenessDebtReliefActof2007,isin-scopeforthevolunteerprogramONLYifthecriteriaonthescreeningsheetaremet.AcopyofthescreeningsheetcanbefoundintheVolunteerResourceGuide(TabD).
What questions are on the screening sheet?
VITA/TCEvolunteersmayassisttaxpayerswithcanceledorforgivenmortgagedebtissuesonalimitedbasisatvolunteersites.Thescreeningsheetwillassistinidentify-ingtaxpayerswhofallwithinthescopeofthevolunteerprogram.TaxpayerswithmorecomplexissuesshouldbereferredasnotedinStep6ofthescreeningsheet.
BorrowerswhosedebtiscanceledinwholeorinpartwillreceiveForm1099-C,CancellationofDebt,fromtheirlender.Box2ofForm1099-Cshowstheamountofdebtforgivenorcanceled.
RefertothescreeningsheetforForm1099-C,CancellationofDebt,forstep-by-stepguidancetodetermineifthecancellationofdebtiswithinscope.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-21
publication 4731screening sheet for Form 1099-c, cancellation of DebtFor Volunteers with advanced certification only
1step
2step
3step
4step
5step
6step
DidthetaxpayerreceiveForm1099-C,CancellationofDebt,fromtheirlenderonlyinrelationtoahomemortgageloanandistheinformationshownontheformcorrect?
Didthetaxpayereverusethehomeinatradeorbusinessorasrentalproperty?
Wasthedebtcanceledasaresultofabankruptcycase?
Askthefollowingquestionstodetermineifthedischargeddebtis“qualifiedprincipalresidenceindebtedness”:a. Wasthemortgagetakenouttobuy,build,orsubstantially
improvethetaxpayer’sprincipalresidence?(NOTE:Aprinci-palresidenceisgenerallythehomewherethetaxpayerlivesmostofthetime.Ataxpayercanhaveonlyoneprincipalresi-denceatanyonetime.)
b.Wasthemortgagesecuredbythetaxpayer’sprincipalresi-dence?
c. Wasanypartofthemortgageusedtopayoffcreditcards,purchaseacar,payfortuition,payforavacation,paymedi-cal/dentalexpenses,orusedforanyotherpurposeotherthantobuy,build,orsubstantiallyimprovetheprincipalresidence?
d.Wasthemortgageamountmorethan$2million($1millionifMarriedFilingSeparately)?
YES–GotoStep2 NO–GotoStep6
YES–GotoStep6 NO–GotoStep3
YES–GotoStep6 NO–GotoStep4
YES–GotoStep4b NO–GotoStep6
YES–GotoStep4c NO–GotoStep6
YES–GotoStep6 NO–GotoStep4d
YES–GotoStep6 NO–GotoStep5
Additional Resources: • Publication523,SellingyourHome• Publication525,TaxableandNontaxableIncome(CanceledDebts)
• Publication4681,CanceledDebts,Foreclosures,Repossessions,andAbandonments
• Publication4702,MortgageForgivenessPowerPoint
• Publication4705,OverviewofMortgageDebtForgiveness
• Form982,ReductionofTaxAttributesDuetoDischargeofIndebtedness(andSection1082BasisAdjustment)andInstructions
Thedischargeddebtis“qualifiedprincipalresidenceindebtedness.”TheMortgageForgivenessDebtReliefActof2007,asextendedintheEmergencyEconomicStabilizationActof2008,allowsindividualstoexcludefromgrossincomeanydischargesof“qualifiedprincipalresidenceindebtedness”madeafter2006andbefore2013.ThevolunteershouldcompletetheapplicablelinesonForm982,andfileitwiththetaxpayer’sreturn.Iftheresidencewasdisposedof,thetaxpayermayalsoberequiredtoreportthedisposition(sale)onScheduleD.
Thesetaxissuesareoutsidethescopeofthevolunteerprogram.Thetaxpayermayqualifytoexcludeallorsomeofthedischargeddebt.However,therulesinvolvedinthemortgagedebtreliefexclusionsarecomplex.Refer the taxpayer to:• www.irs.govforthemostup-to-dateinformation• AnIRSRepresentative:1-800-829-1040• AnIRSTaxpayerAssistanceCenter(TAC)• TheTaxpayerAdvocateService(TAS):1-877-777-4778, TTY/TDD1-800-829-4059.TASmayhelpiftheproblemcannotberesolvedthroughnormalIRSchannels.
• Ataxprofessional
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-22
What is qualified principal residence indebtedness?
Qualifiedprincipalresidenceindebtednessisanydebtincurredinacquiring,construct-ing,orsubstantiallyimprovingaprincipalresidenceandwhichissecuredbytheprin-cipalresidence.Qualifiedprincipalresidenceindebtednessalsoincludesanydebtsecuredbytheprincipalresidenceresultingfromtherefinancingofdebtincurredtoacquire,construct,orsubstantiallyimproveaprincipalresidencebutonlytotheextenttheamountofthedebtdoesnotexceedtheamountoftherefinanceddebt.
Exclusion limit: Themaximumamountthatcanbetreatedasqualifiedprincipalresi-denceindebtednessis$2million($1millionifMarriedFilingSeparately).Canceledqualifiedprincipalresidenceindebtednesscannotbeexcludedfromincomeifthecancellationwasforservicesperformedforthelenderoronaccountofanyfactornotdirectlyrelatedtoadeclineinthevalueoftheresidenceorthetaxpayer’sfinancialcondition.
Applicable Tax Years: TheMortgageForgivenessDebtReliefActof2007allowsfortheexclusionofdischargedqualifiedprincipalresidenceindebtednesscanceledin2007,2008,and2009.TheEmergencyEconomicStabilizationActof2008extendedtheexclusionfortaxyears2010through2012.
Criteria for VITA/TCE Program: Youmayassisttaxpayerswhomeetthefollowingrequirementsforexcludingcanceleddebtfromincome:
• Thehomewasneverusedinabusinessorasrentalproperty
• Thedebtwasnotcanceledbecausethetaxpayerfiledbankruptcy
• Thedebtmustbeamortgageusedonlytobuy,build,orsubstantiallyimprovethetaxpayer’sprimaryresidence,i.e.,thismoneywasnotusedtopayoffcreditcards,medical/dentalexpenses,vacations,etc.
• Themortgagewassecuredbythetaxpayer’sprimaryresidence
• Themortgagewasnotmorethan$2,000,000($1,000,000ifMarriedFilingSeparately)
Ifthetaxpayersdonotmeettheserequirements,theystillmayqualifyfortheexclu-sion.However,theissuesmaybecomplexandbeyondthescopeofVITA/TCE.Suchtaxpayersshouldbereferredtoaprofessionaltaxpreparer.UsePublication4731,ScreeningSheetforCancellationofDebt,tohelpyouidentifythosetaxpayersthatcanbeassistedataVITA/TCEsite.AcopyofthescreeningsheetcanbefoundintheVolunteerResourceGuide(TabD).
example
Tomrefinancedhispersonalresidenceandusedtheloanproceedsfromtheequityinhishometopayoffcreditcardsandbuyacar.Thisdebtisnot“qualifiedprincipalresidenceindebtedness.”
example
Bobrefinancedhispersonalresidenceandusedtheloanproceedsfromtheequityinhishometobuildanewmasterbedroomsuiteonthemainlevelofhishouse.Thisdebtis“qualifiedprincipalresidenceindebtedness.”
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-23
What is the difference between recourse and nonrecourse debt?
Debtforwhichaborrowerispersonallyliableisrecoursedebt.Allotherdebtisnonre-coursedebt.
• Recourse debtholdstheborrowerpersonallyliableforanyamountnotsatisfiedbythesurrenderofsecuredproperty.Ifalenderforeclosesonpropertysubjecttoarecoursedebtandcancelstheportionofthedebtinexcessofthefairmarketvalue(FMV)oftheproperty,thecanceledportionofthedebtwillbetreatedasordinaryincomefromcancellationofindebtednessandwillberequiredtobeincludedingrossincomeunlessthecancellationofindebtednessqualifiesforoneoftheexcep-tionsorexclusionsfromgrossincomeundersomeprovisionoftheInternalRevenueCode.Inadditiontocancellationofindebtednessincome,thetaxpayermayrealizeagainorlossonthedispositionoftheproperty.Thisisdeterminedbythedifferencebetweenthetaxpayer’sbasisinthepropertyandtheFMVofthepropertyatthetimeoftheforeclosure.
• Nonrecourse debt issatisfiedbythesurrenderofthesecuredpropertyregard-lessofthefairmarketvalue(FMV)atthetimeofsurrenderandtheborrowerisnotpersonallyliableforthedebt.Ifpropertysubjecttononrecoursedebtisabandoned,foreclosedupon,subjectofashortsale,orrepossessedbythelender,thecircum-stanceswillbetreatedasasaleofthepropertybythetaxpayer.Indeterminingthegainorlossonthedispositionoftheproperty,thebalanceofthenonrecoursedebtatthetimeofthedispositionofthepropertywillbetreatedasanamountrealized.
How is a foreclosure and canceled debt reported on a return?
Aforeclosureorrepossessionistreatedasasale.Generally,youfigurethegainorlossfromthesalethesamewayasagainorlossfromanyothersale.Butthesellingpriceofthehomeusedtofiguretheamountofthegainorlossdepends,inpart,onwhetherthetaxpayerwaspersonallyliableforrepayingthedebtsecuredbythehomeasshowninthefollowingchart:
IF the taxpayer was... THEN the taxpayer’s selling price includes...
notpersonallyliableforthedebt(nonrecoursedebt)
thefullamountofdebtcanceledbytheforeclosureorrepossession
personallyliableforthedebt(recoursedebt)
theamountofcanceleddebtuptothehome’sfairmarketvalue;thetaxpayermayalsohaveordinaryincome
Generally,whenalenderacquiresataxpayer’spersonalresidencethroughabandon-mentorforeclosureandcancelsaportionofthedebt,thetaxpayerhasagainorlossonthedisposition/saleofthepropertyreportableonScheduleD,CapitalGainsandLosses.Ifthetaxpayerispersonallyliableforthedebtandthecanceleddebtismorethanthehome’sfairmarketvalue,thetaxpayerwillhavecancellationofdebtincome.Thisamountisreportableasordinaryincomeonline21ofForm1040oronForm982,ReductionofTaxAttributesDuetoDischargeofIndebtedness,ifthedebtcanceledquali-fiesas“excludable”fromgrossincome.
Alossonthesaleordisposi-tionofapersonalresidenceisnotdeductible.AgainmayqualifyfortheSection121exclusion($250,000or$500,000forMarriedFilingJointlytaxpayers)foragainonthesaleofapersonal residence.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-24
How do I handle the information from Form 1099-A and Form 1099-C?Whenapersonalresidenceisabandonedorforecloseduponandthelendercancelsaportionoftherecoursedebt,thetaxpayerwillgenerallyreceiveForm1099-A,AcquisitionorAbandonmentofSecuredProperty,andForm1099-C,CancellationofDebt.Ifinthesamecalendaryear,thedebtiscanceledinconnectionwithaforeclosureorabandonmentofsecuredproperty,thelenderhastheoptionofissuingForm1099-Conly.ThefilingrequirementsofForm1099-Aaremetbythelendercompletingbox5,Wasborrowerpersonallyliableforrepaymentofthedebt?andbox7(fairmarketvalueofproperty)onForm1099-C.
Taxpayersoftenquestionthetaxabilityofaforeclosureandcanceleddebtbecausetheydidnotreceivemoneyinhandandfeelthat,bygivingbackthepropertyalone,theyarerelievedfromanyfurtherobligation.Youwillneedtoexplainthatthebenefittothetaxpayeristherelieffromthepersonallyliabledebt.InformationinPublication17canassistyouwiththeexplanation.AdditionalresourcesincludePublication523,SellingYourHome,Publication525,TaxableandNontaxableIncome,Publication544,SalesandDispositionsofAssets,andPublication4681,CanceledDebts,Foreclosures,Repossessions,andAbandonments.
Form 1099-A and Schedule D: Whenaresidencethatissecurityforamortgageistakenbythelender(foreclosure)orgivenupbytheborrower(abandonment),itistreatedashavingbeensold.ThismayresultinagainorlossthathastobereportedonthereturnsubjecttotherulesforaSaleofResidence.Thereportablegainorlossisdeterminedbycomparingthetaxpayer’sadjustedbasiswiththeamountconsideredthesellingprice.
Form 1099-A
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-25
Form1099-Aisissuedbythelender.Inadditiontodebtorinformation,theformreportsthebalanceofthedebtoutstandingandthefairmarketvalueoftheproperty.Thisformwillhaveinformationneededtodeterminetheamountofthegainorlossduetotheforeclosureorabandonment.Information shown on Form 1099-A should be reported on Schedule D whether it is a gain or loss. Failure to file Schedule D may result in an IRS notice to the taxpayer.Thesalespriceiscomputedbasedonwhetherthetaxpayerispersonallyliable(recourseloan)ornotpersonallyliable(nonre-courseloan).Ifthetaxpayerispersonallyliable,thenthesalespriceisthelesserofthebalanceofthedebtoutstanding(box2ofForm1099-A)orfairmarketvalue(box4ofForm1099-A).Ifthetaxpayerisnotpersonallyliable,thenthefullamountofthedebtoutstandingasreflectedinbox2ofForm1099-Aisreportedasthesellingprice.
ReviewthefollowingexamplesofapartiallycompletedScheduleDthatillustrateshowtheinformationshownonForm1099-Awouldbereflectedonapaperreturn.Generally,ifthereisalossonthesaleofaprincipalresidenceortheentiregainisexcludedundertheSection121exclusion($250,000or$500,000forMarriedFilingJointlytaxpayers),thesaledoesnothavetobereportedonScheduleD.However,whenForm1099-Aisissuedbythelender,thetaxpayershouldreportthesaletoaccountforthebasisinthehome.FailuretoreportthetransactiononScheduleDmayresultinanIRSnoticetothetaxpayer.
Schedule D – Foreclosure results in gain – Section 121 Exclusion for part of gain
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-26
Schedule D – Foreclosure results in gain – Section 121 Exclusion applied to total gain
Schedule D – Foreclosure results in loss (non-deductible)
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-27
Lossesonapersonalresidenceareneverdeductible.Gains,allorpart,maybeexcludedundertherulesregardingthesaleofapersonalresidence(Section121exclusion).
Form 1099-C and Form 982: LendersorcreditorsarerequiredtoissueForm1099-Ciftheycanceladebtowedtothemof$600ormore.Generally,anindividualtaxpayermustincludeallcanceledamounts(eveniflessthan$600)onthe“OtherIncome”lineofForm1040.However,ifthecanceleddebtisrelatedtothetaxpayer’sprinci-palresidence,thetaxpayermaybeabletoexcludealloraportionofcanceleddebtifitis“qualifiedprincipalresidenceindebtedness.”Theamountexcludedduetothe“dischargeofqualifiedprincipalresidenceindebtedness”isreportedonForm982.
Form 1099-C
Inadditiontodebtorinformation,Form1099-Creportstheamountofdebtcanceledandthedatecanceled.Ifbox6forbankruptcyischeckedorifanamountisincludedinbox3forinterest,thenthetaxpayershouldbereferredtoaprofessionaltaxpreparer.
Form982mustbefiledwiththetaxpayer’sreturntoreporttheexcludedamountofdischargeindebtednessandthereductionofcertaintaxattributes.Taxpayersexclud-ingonlydischargeddebtfrom“qualifiedprincipalresidenceindebtedness”onlymustcompleteafewlinesonForm982;checkbox1eandincludetheamountfromForm1099-C,box2,onForm982,line2.Ifthetaxpayerkeptownershipofthehome,completeline10btoreflectthebasisadjustmenttotheprincipalresidencefortheexcludedcanceleddebt.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-28
Tax Software Hint:Ifthetaxpayermeetsalltherequirementstoexcludetheincomefromthecancellationofdebt,usethe“Addaform”processtoaddForm982.
Coordination with Form 1099-A:Ifapersonalresidenceisabandoned/foreclosedanddebtiscanceledinthesameyear,thetaxpayermayreceiveForm1099-ConlywiththerequiredfilinginformationfromForm1099-Ashowninboxes5and7ofForm1099-C.Generally,thegrossforeclosurebidpriceisconsideredtobethefairmarketvalue(FMV).Foranabandonmentorvoluntaryconveyanceinlieuofforeclosure,theFMVisgenerallytheappraisedvalueoftheproperty.Thesalespriceisthelesserofthebalanceoftheprincipaldebtoutstandingorfairmarketvalue(Box7ofForm1099-C).
Mortgage Workouts and Form 1099-C: Homeownerswhosemortgagedebtispartlyforgiventhroughaloanmodificationor“workout”whichallowsthemtocontinueowningtheirresidence,willreceiveForm1099-Creportingthedebtcanceledinbox2.Sincethetaxpayerkeptownershipofthehome,thereisnogainorlosstobereportedonScheduleD.However,ifthecanceleddebtmeetstherequirementsof“qualifiedprin-cipalresidenceindebtedness,”Form982mustbecompletedtoreporttheamountexcludedfromgrossincomeandthereductionoftaxattributes.Checkbox1eonForm982.TheamountfromForm1099-C,box2,shouldbeenteredonline2.Inaddition,theamountonline2shouldbeenteredonline10btoreportthereductiontothebasisofthetaxpayer’shome.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-29
Taxpayerswhoarenotpersonallyliableforthedebt(nonrecoursedebt)donothaveordinaryincomefromthecancellationofthedebtunlessthelender:
• Offeredadiscountfortheearlypaymentofthedebt,or
• Agreedtoaloanmodificationthatresultedinthereductionoftheprincipalbalanceofthedebt
Ifalenderofferstodiscount(reduce)theprincipalbalanceofaloanthatispaidoffearlyoragreestoaloanmodification(“workout”)thatincludesareductionintheprinci-palbalanceofaloan,theamountofthediscountortheamountoftheprincipalreduc-tion is canceled debt whetherornotthetaxpayerispersonallyliableforthedebt.Theamountofthecanceleddebtmustbeincludedinincomeunlesstheexceptionsorexclusionsdiscussedearlierapply.
Form982shouldbecompletedandattachedtothetaxreturniftheexclusionfor“qual-ifiedprincipalresidenceindebtedness”isapplicable.
Verify Information:YouwillneedtoverifywiththetaxpayerthattheinformationonForm1099-AandForm1099-Ciscorrect.Payparticularattentiontotheamountofdebtforgivenandthefairmarketvaluereported.Advisethetaxpayertocontactthelenderimmediatelyifanyoftheinformationisnotcorrect.
example
FrankboughthishomeonMay14,2003.Hisbasisinthehomewas$200,000.Afterhelosthisjoblastyear,hewasn’tabletomakethepayments.Thebankfore-closedinJune2009,andFrankmovedout.Atthetimeoftheforeclosure,thefairmarketvalueofthehomewas$125,000andtheprincipalbalanceofthemortgagewas$195,000.Allofthedebtwasincurredtopurchasethehome.
FrankreceivedthisForm1099-C.
example (continued)
Frankhasqualifiedprincipalresidenceindebtedness.HistaxreturnshouldincludeScheduleDtoshowthebasisofthehomedisposedofthroughforeclosure,andForm982toexcludethedebtcancellationfromincome.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-30
example (continued)
IfFrankhadbeenabletonegotiateawork-outwithhismortgagelender(reducingtheamountheowedonthemortgageandstayinginthehome),hewouldnothavecompletedScheduleD(becausehedidn’tdisposeoftheasset).HisForm982wouldbesimilartotheoneshown,buthewouldalsohaveenteredtheamountofdebtforgivenonline10b(orhisbasisinthehome,whicheverwassmaller),andhisbasisinthehomewouldbedecreasedbythatamount.
Tax Software Hint:Whenusingtaxsoftware,youmayhavetoforcethenetamountincolumn(f)tozero(-0-)inalosssituation.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-31
ExErcisEs (continued)
Question 7: MarypurchasedhermainhomeinJune2004for$175,000.In2009,shelostherjobandwasnolongerabletomakehermortgagepayments.InJuly,Marymovedoutofthehometolivewithrelatives.OnJuly15,2009,thebankforeclosedonthehome.OnNovember15,2009,thebankdiscontinueditscollec-tionactivityandcanceledtheremainingdebt.Thefairmarketvalueatthetimeofforeclosurewas$100,000becauseofthepoorhousingmarket,butMarystillowed$150,000onthemortgage.Noneoftheloanproceedswereusedforanypurposeotherthantobuy,build,orsubstantiallyimprovetheprincipalresidence.
DoesMary’smortgagedebtqualifyfortheprincipalresidenceindebtednessexclu-siononForm982?þ Yes □NoIsScheduleDrequired? þ Yes □No
Assign the exercise.
Review answer with the class when com-plete.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-32
ExErcisEs (continued)
Question 8: TomandGracewerehavingdifficultymakingtheirmortgagepaymentsin2009afterTombecameillandcouldn’tworkfulltime.Ratherthangothroughtheexpenseofaforeclosure,thelenderagreedtoreducetheprincipalontheirloanandrefinancetheloanwithabetterinterestrateandlowerpayments.Theprincipalbalancebeforethe11/1/2009workoutwas$130,000,andthelenderreducedtheloanto$110,000.Noneoftheloanproceedswereusedforanypurposeotherthantobuy,build,orimprovetheprincipalresidence.
DoesTomandGrace’sdebtcancellationqualifyfortheprincipalresidenceindebt-ednessexclusiononForm982?þ Yes □NoIsScheduleDrequired? □ Yes þ No
Question 9:FredwenttohislocalVITAsitetohavehis2009taxreturnprepared.ThevolunteerwentthroughhisrecordsandnoticedhehadForm1099-Creflectingacanceleddebtof$50,000.
UsingPublication4731,ScreeningSheetforCancellationofDebt,forassistingtaxpayerswithForm1099-Casaguide,thevolunteerlearnedFredlosthisjobin2009andcouldnolongermakehismortgagepayments.Thebankforeclosedonhishome.Duetothehousingmarketslump,thevalueofFred’shomehaddeclined.Hismortgagebalancewasmorethanthefairmarketvalueofthehome.ThebanksoldFred’shomeandcanceledtheremainingdebt($50,000)notcoveredbythesalesprice.
Uponfurtherquestioning,thevolunteerlearnedFredhadrefinancedhishome2yearsagoandusedtheequityinthehometopayoffsomecreditcardsandtakeatriptoLasVegas.
ShouldthevolunteerassistFredwiththepreparationofhisreturnattheVITAsite?□ Yes þ No
Assign the exercise.
Review answer with the class when com-plete.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-33
Summary
Thislessoncoveredhowtoreportthesaleofstockandthetaxableportionofasaleofaresidence.Italsocoveredhowtoreportthecancellationofdebtincomeonataxpay-er’sprincipalresidence.
AtaxpayermustuseScheduleDtoreportcapitalgainsandlossesonthesaleofassets.Youlearnedhowtoidentifytheasset’sholdingperiod,adjustedbasis,netshort-termandlong-termcapitalgainsorlosses,thetaxablegainordeductibleloss,andtheamountofcapitallosscarryover.
Qualifiedtaxpayersmaybeabletoexcludeaportionofthegainonthesaleoftheirmainhomeiftheymeettheownershipandusetests.Taxpayerscanchoosetohavethefive-yeartestperiodforownershipandusesuspendedduringanyperiodthehome-owner(eitherspouseifmarried)servedonqualifiedofficialextendeddutyasamemberoftheuniformedservicesorforeignserviceoftheUnitedStates,asanemployeeoftheintelligencecommunity,orasanemployeeorvolunteerofthePeaceCorps.Alossonthesaleofaprincipalresidenceisnotdeductible.
UndertheMortgageForgivenessDebtReliefActof2007,taxpayersmayexcludecertaindebtforgivenorcanceledontheirprincipalresidence.Thisexclusionisappli-cabletothedischargeof“qualifiedprincipalresidenceindebtedness.”Ifthecanceleddebtqualifiesforexclusionfromgrossincome,thedebtormayberequiredtoreducetaxattributes(certaincredits,losses,andbasisofassets)bytheamountexcluded.
VITA/TCEtaxpreparerswithAdvancedcertificationmayassisttaxpayerswithcanceledorforgivenmortgagedebtissuesonalimitedbasis.UsePublication4731,ScreeningSheetforForm1099-C,whichprovidesquestionsandstep-by-stepguidanceforthevolunteertaxreturnpreparer.
TheworksheetsinPublication523helpyoufigurethetaxablegainfromthesaleofahomeusingsellingprice,amountrealized,basisandadjustedbasis,alongwiththemaximumallowedexclusion.
Youmaynotbeabletocompletetheentireexerciseifsomeofthetechnicalissuesintheexercisearenotcovereduntillaterlessonsintheadvancedpartofthetraining.Intheseinstances,completeasmuchoftheexerciseasyoucan.Comebacklatertofinishtheexerciseafteryoucoverallthetechnicaltopics.
Assign the workbook exercise and review as a class when done (optional).
Review the lesson summary with the class.
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 1310-34
ExErcisE answErs
Answer 1: A. You never adjust the sales price. If box 2 shows gross proceeds, you need to add the broker’s fee to the basis or purchase price of the stock.
Answer 2: A. Only Marriah sold stock and received Form 1099-B.
Answer 3: B. The sales price was $4,400, which was $1,900 more than the adjusted basis of $2,500 ($2,400 cost + $100 commission) of the shares.
Answer 4: Yes. Emily meets the ownership and use test because she owned and lived in the home for at least two years of the five-year period ending on the date of the sale.
Answer 5: The amount realized on Jan’s sale is $180,000 (selling price minus selling expenses).
Answer 6: C. The only circumstance that will allow the taxpayer to exclude the gain is if he can extend the five-year period due to official extended military duty.
Answer 7: Yes. The volunteer would need to complete Schedule D and Form 982. Although there is a loss, it cannot be deducted, and, per the instructions it is reported as zero on Schedule D. The mortgage debt cancellation is not included in income on the tax return because it is covered by the qualified principal residence indebtedness exclusion on Form 982.
Answer 8: Yes. The volunteer would complete Form 982. The $20,000 in debt cancellation is covered by qualified principal residence indebtedness exclusion on Form 982 and is not counted as income on the tax return. In addition to completing box 1e and line 2, the volunteer would also need to complete line 10b to report the reduction in the basis of the home. Schedule D is not required because Tom and Grace did not dispose of the home.
Answer 9: No. Fred’s situation is outside the scope of the volunteer program since a portion of his refinanced debt was used for purposes other than to buy, build, or substantially improve his principal residence. Fred should be referred per the guid-ance on the screening sheet.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-16 11-1
Instructor Notes
Lesson 11: Income – Retirement Income; Form 1040, Lines 15-16
Introduction
Thislessonwillhelpyouidentifyandreportthetaxableportionofretirementincomereceivedbythetaxpayer.Todothis,youmustunderstandthetypesofretirementincomeandtheformsusedtoreportthem.Youshouldalsobeabletorecognizewhentaxpayersshouldadjusttheirwithholdinganddeterminewhichformtouse.
Thislessondoesnotcoversocialsecuritybenefitsortier1railroadretirementbenefits(socialsecurityequivalentbenefits),whicharediscussedintheSocialSecurityBenefitslesson.
Formoreinformationonthetopicsdiscussedinthislesson,seePublication575,PensionandAnnuityIncome;Publication590,IndividualRetirementArrangements(IRAs);Publication721,TaxGuidetoU.S.CivilServiceRetirementBenefits;andPublication939,GeneralRuleforPensionsandAnnuities.
Objectives
Attheendofthislesson,usingyourresourcematerials,youwillbeableto:
• Calculatethetaxableportionofdifferenttypesofretirementincome
• Determinehowtoreportretirementincomeonthetaxreturn
• Determinewhenanadjustmenttowithholdingshouldbemade
What is retirement income?
Retirementincomecanincludesocialsecuritybenefitsaswellasanybenefitsfromannuities,retirementorprofitsharingplans,insurancecontracts,IRAs,etc.Retirementincomemaybefullyorpartiallytaxable.Forinformationaboutsocialsecuritybenefitsandtier1railroadretirementbenefits,seetheSocialSecurityBenefitslesson.
Where can I get information about a taxpayer’s retirement income?
Todetermineifthetaxpayermustreportretirementincome,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.Reviewthetaxpayer’scompletedintakeandinterviewsheet,particularlytheIncomesection.Ifthetaxpayerhadretirementincome,youmayneedtoaskaddi-tionalquestionstoclarifythetypeofplan,whethertheincomewasbefore-taxorafter-taxdollars,etc.Thisisexplainedlaterinthislesson.
Review objectives with the class.
Point out the resources cited under What do I need?
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-WOptional:□ Publication575□ Publication590□ Publication721□ Publication 919□ Publication939□ Form1040Instructions□ Form1099-R□ Form5329□ Form8606□ FormW-2□ FormW-4P□ FormW-4V□ SimplifiedMethod
Worksheet
Lesson 11: Income – Retirement Income; Form 1040, Lines15-1611-2
Beconsideratewhenprobingfortheinformationyouneedtocompletethereturn.Whentaxpayerscannotprovidetherequiredinformation(andhavenotretainedthepacketof“retirementpapers”theyreceivedwhentheyretired),suggestthattheycontacttheirformeremployerorannuityadministrator.Youmayevengivethetaxpayerawrittenlistofquestionsthatneedtoberesolved.
Form 1099-R Series
Retirementincomecanbereportedon:
• Form1099-R,DistributionsFromPensions,Annuities,RetirementorProfit-SharingPlans,IRAs,InsuranceContracts,etc.,
• FormCSA1099-R,StatementofAnnuityPaid(civilserviceretirementpayments),
• FormCSF1099-R,StatementofSurvivorAnnuityPaid,and
• FormRRB1099-R,AnnuitiesorPensionsbytheRailroadRetirementBoard
IfForm1099-RisforanIRA-typedistribution,itwillbeindicatedinbox7.
ExamplesoftheseformscanbefoundinPublication4491-W.Theseformsindicatesuchinformationastheamountreceived,thetaxableportion,andthetaxpayer’scost(investment)intheplan.Ifthetaxableamountisindicated,Intermediatecertifiedvolun-teerscancompletethereturn.Ingeneral,ifthetaxableamountisnotindicated,volun-teerscertifiedinAdvanced,Military,and/orInternationalmustcalculatethetaxableportionusingtheSimplifiedMethodWorksheet.
What if the taxable portion is already calculated?
Inmanyinstances,thepayerwillcomputethetaxableportionofthedistributionandreportitinbox2aofForm1099-R.TaxpayerswithFormRRB-1099-RcanonlybehelpedbyvolunteerscertifiedintheAdvanced,Military,orInternationalcourses,becausethetaxableportionisnotshownontheform.
Tax Software Hint: RefertotheVolunteerResourceGuide(Tab2),1099-RPensionandAnnuityIncome.
Ifpreparingapaperreturn,recordtheamountsasfollows:
• Thegrossamount(box1ofForms1099-R,CSA-andCSF-1099-R)shouldbeshownonForm1040,line16a,oronForm1040A,line12a
• IftheIRA/SEP/SIMPLEboxischeckedonForm1099-R,reportthegrossamountonForm1040,line15a,oronForm1040A,line11a
• Thetaxableamount(box2aofForms1099-R,CSA-andCSF-1099-R)shouldbeshownonForm1040,line16b,oronForm1040A,line12b
• IftheIRA/SEP/SIMPLEboxischeckedonForm1099-R,reportthetaxableamountonForm1040,line15b,oronForm1040A,line11b
Anyamountinbox4ofForms1099-R,CSA-andCSF-1099-RshouldbeenteredinthePaymentssectionofthetaxreturn.
Emphasize the need to be considerate in prob-ing for information.
Display or refer to the 1099-R Pension and Annuity Income illus-tration in the Volunteer Resource Guide (Tab 2).
Emphasize that the Intermediate level cov-ers Pension income where the taxable amount is predeter-mined; the Advanced level covers computing the taxable amount.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-16 11-3
What if the taxable portion is not calculated?
Ifthepayerdidnotincludeanamountinbox2aofForm1099-R,CSA-orCSF-1099-R,oriftaxpayershaveFormRRB1099-R,youwillneedtocomputethetaxableportionofthedistribution.ThefollowingwillhelpyoudeterminetheadditionalinformationthatisneededtocalculatethetaxableportionofdistributionsfromIRAs,pensions,or annuities.
What do I need to know about retirement income distributions?
Retirementplansarefundedbyeitherbefore-taxorafter-taxcontributions.“Before-tax”simplymeansthattheemployeedidnotpaytaxesonthemoneyatthetimeitwascontributed,i.e.,thetaxpayerhasnocostbasisintheplan.“After-tax”meanstheemployeepaidtaxesonthemoneywhenitwascontributed,i.e.,thetaxpayerhas a costbasisintheplan.
Ifthetaxpayermadeallcontributionstoaplanwithbefore-taxdollars,theentiredistributionwillbefullytaxable.Thefundsaretaxedatthetimeofthedistribu-tionbecauseneitherthecontributionsnortheearn-ings/investmentgainswerepreviouslytaxed.Thisiscommonin401(k)andThriftSavingsplans.
Ifthetaxpayermadeallcontributionstoaplanwithafter-taxdollars,thenthedistribu-tionswillbepartiallytaxable.Theportionofthedistributionthatisconsideredareturnoftheafter-taxdollarswillnotbetaxedagain.Itisconsideredareturnofthetaxpayer’scostbasis(anamountforwhichtaxeshavealreadybeenpaid).Theportionofthedistributionthatrepresentstheearnings/investmentgainsistaxablesinceithasnotbeenpreviouslytaxed.Thisiscommoninemployerretirementplans.
Ifthetaxpayerdidnot contrib-utetotheretirementplan,allthedistributionsarefullytaxable.
Employee Contributions
Contributions Taxability of Distributions
Before-Tax After-Tax Fully PartiallyNo n/a n/a Yes —Yes Yes — Yes —Yes — Yes — Yes
Ask a volunteer to read the Mark example.
example
Markretiredin2009afterworking30yearsforaconstructioncompany.Eachweek,hecontributedtotheCarpenter’sPensionPlan.Everyyear,Markpaidtaxonthegrossamountofhissalary,includinghispensioncontribution.Thismeanshispensioncontributionsweremadewithdollarsthathadalreadybeentaxed.Nowthatheisreceivingpaymentsfromthepension,hewillnotbetaxedontheportionthatrepresentshiscontribution;hewillbetaxedontheportionthat representsearnings.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-1611-4
How do I find the taxable portion of IRA income?
Individual Retirement Arrangements
IRAdistributionsarereportedonForm1099-Rwithacheckinbox7.Earningsandinvestmentgainsinataxpayer’sIRAgenerallyaccumulatetaxfreeortaxdeferreduntiltheyarewithdrawnasfully-orpartially-taxabledistributions.TherearefourkindsofIRAs,eachwithdifferenttaximplications:
• TraditionalIRA
• RothIRA
• SavingsIncentiveMatchPlansforEmployees(SIMPLE)IRA
• SimplifiedEmployeePension(SEP)IRA
Traditional IRA
DistributionsfromtraditionalIRAsarefullytaxableunlessnondeductiblecontributionshavebeenmade.SeetheAdjustmentslessonforadditionalinformation.Form8606,NondeductibleIRAs,isusedtokeeptrackofnondeductiblecontributions.Taxpayerswhomadenondeductiblecontributionsshouldbereferredtoaprofessionaltaxpreparer.
Roth IRA
DistributionsfromaRothIRAaretaxfreeandmaybeexcludedfromincomeifthefollowingrequirementsaremet:
• Thedistributionismadeafterthe5-yearperiodbeginningwiththefirsttaxableyearforwhichacontributionwasmadetoaRothIRAsetupforthetaxpayer’sbenefit,and
• Thedistributionis:
- Madeonorafterage591/2,or
- Madebecausethetaxpayerwasdisabled,or
- Madetoabeneficiaryortoanestate,or
- Topaycertainqualifiedfirst-timehomebuyeramounts (uptoa$10,000lifetimelimit)
WhenyoulearnaboutIRAaccountsintheAdjustmentstoIncomelesson,besuretonotethedifferencebetween“contri-butions”and“deductions.”Simplyput,contributionsaretheamountsdepositedintoanIRAaccount,anddeductionsaretheportionofthecontribu-tionthatisdeductedonthetaxreturn;thatportionmaybetotalorpartial.
example
Richardcontributed$500ayeartoatraditionalIRA.Eachyear,hedeductedthesecontributionsfromhisincome.ThisyearhereceivedhisfirstdistributionfromthetraditionalIRA.Itisfullytaxable:Richardwillpayincometaxonthedistributionshereceives,whichrepresentthecontributionshemadeanddeducted,aswellastheearningsonthesecontributionsovertheyears.
Ask a volunteer to read the Richard example.
Review the definitions in the tip.
Read the tip to the class.
Taxpayersmaynotalwaysunderstandwhytheymustpaytaxesontheirretirementincome.Whenthisisthecase,takethetimetoclearlyexplainwhatretirementfundsaretaxedandwhy.Itisusuallyagoodideatoquestiontaxpayersaboutthenatureoftheircontributionstoensurethattheywillnotbetaxedtwiceonthesamefunds.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-16 11-5
ExErcisEs
Assign the exercises.
Review the answers with the class when complete.
Iftheaboverequirementsarenotmet,theRothIRAdistributionscouldbepartiallytaxableandsubjecttoa10%additionaltax.Refertaxpayersinthissituationtoaprofessionaltaxpreparer.
Savings Incentive Match Plans for Employees (SIMPLE) IRA
Someemployersoffertheiremployees(includingself-employedindividuals)the chancetocontributepartoftheirpaytoanIRAaspartofaSIMPLEplan.Theemployerisalsogenerallyrequiredtomakecontributionsonbehalfofeligibleemployees.Generally,SIMPLEIRAcontributionsarenotincludedinanemployee’sincomewhenpaidintoanIRA,andthedistributionsarefullytaxablewhentheemployeereceivestheminlateryears.
Simplified Employee Pension (SEP) IRA
Someemployersoffertheiremployees(includingself-employedindividuals)thechancetocontributepartoftheirpaytoanIRAaspartofaSEPplan.Generally,SEPIRAcontributionsarenotincludedinanemployee’sincomewhenpaidintotheIRA.Becauseofthis,distributionsaregenerallyfullytaxablewhentheemployeereceivestheminlateryears.
Answersfollowthelessonsummary.
Question 1: DistributionsfromallIRAsdiscussedinthistopicarefullytaxablewiththeexceptionoftheRothIRA.□ True þ False
Question 2: MaryopenedaRothIRA3yearsago.In2009,shetookthefullamountofherRothIRAasa distributiontohelpherpurchaseherfirsthome.The entiredistributionisexcludedfromhertaxableincome. □ True þ False
Question 3: AmycontributedtoaRothIRAfor5years.Inyear6(atage60),shetookadistributionfromherIRA.Theentiredistributionisexcludedfromhertaxableincome. þ True □False
Taxpayersareconsidereddisablediftheycannotengageinanysubstantialgainfulemploy-mentbecauseofaphysicalormentalcondition.Aphysicianmustdeterminethatthecondi-tioncanbeexpectedtoresultindeathortobeoflong,continued,andindefiniteduration.
Review the different ways each type of IRA is handled.
ThenexttwotopicsareoutofscopeforVITA.Thedefinitionsareincludedforyour informationonly.
Nondeductible contribu-tions to traditional IRAs are not taxed when distrib-uted.
She did it before the 5-year period ended.
It was made six years after her first contribution and after age 59½.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-1611-6
How are IRA distributions reported?
Traditional IRA
IfIRA/SEP/SIMPLEischeckedinbox7ofForm 1099-R,askthetaxpayer:
• WasthisadistributionfromatraditionalIRA?
• Werethecontributionsdeductedfromincomeintheyeartheyweremade?
Ifso,theentiredistributionistaxable.ReportitonForm1040A,lines11aand11boronForm1040,lines15aand15b.Ifnot,thedistributionispartiallytaxable.Inthatcase,referthetaxpayertoaprofessionaltaxpreparer.
Roth IRA
DistributionsfromaRothIRAarenottaxableaslongastheymeetallthecriteriadiscussedpreviously.Ifthedistributiondoesnotmeetthecriteria,thenallorpartofthefundswillbetaxable;referthetaxpayertoaprofessionaltaxpreparer.
How are rollovers handled?
Generally,arolloverisatax-freedistributiontothetaxpayerfromoneretirementaccount(traditionalIRAoremployer’spensionplan)thatrollsoverintoasimilarretire-mentaccountwithin60days.
Form1099-Rwillbeissuedtothetaxpayerbythefinancialinstitution.Ifitwasadirectrolloverbytheinstitutiontoanotherinstitution,box7willcontaincodeG.IfthereisnocodeG,thenthetaxpayermusthaveredepositedthefullamountintoanappropriateaccountwithin60days.Ifthiswasnotdone,thedistributionmaybepartiallyorfullytaxable;referthetaxpayertoaprofessionaltaxpreparer.
Tax Software Hint:Additionalinformationmustbeenteredforretirement
accountrollovers.RefertotheVolunteerResourceGuide(Tab2),1099-RExclusionWorksheet.
Ifyouarepreparingapaperreturn,theamountofthedistributionisreportedonForm1040A,line11aoronForm1040,line15a.Toshowthatthisisaqualifiedrolloverandnoneoftheamountistaxable,enterzeroonForm1040A,line11boronForm1040,line15b,andwrite“Rollover”nexttoline11bor15b.
DistributionsfromaSIMPLEIRAandfromaSEPIRAaregenerallyfullytaxableandareoutofscopeforVITA/TCE.
AnearlydistributionfromatraditionalorRothIRAmaybesubjecttoa10%additionaltax.Refertolesson28,OtherTaxes,formoreinformation.
Point out the explana-tions of box 7 codes in the software, or on the back of Form 1099-R.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-16 11-7
ExErcisEs (continued)
Assign the exercise.
Review the answer with the class when complete.
Excluded from income because it was rolled over into an IRA.
Question 4: AndrewchangedjobsandreceivedForm1099-Rfromhispreviousemployerin2009.Theamountinbox1is$11,200.Andrewdepositedtheentire$11,200intohisIRAwithin30daysofreceivingthecheck(rollover).
Whichofthefollowingstatementsistrue?
A.Theentiredistributionisincludibleasincome
B. The entire distribution is excludible from income
C.Thedistributioniseligiblefortheten-yeartaxoption
D.Thedistributioniseligibletobetaxedataspecialrate
What if the distribution is used for charitable purposes?
Thetaxpayercanhaveaqualifiedcharitabledistribution(QCD)madetoanorganiza-tioneligibletoreceivetax-deductiblecontributions.Ifallrequirementsaremet,thisactionwillexcludeanypartofthedistributionthatwouldnormallybetaxable.Form1099-Rwillbeissuedtothetaxpayer;thereisnodistributioncodeforbox7thatidenti-fiesaQCD.
TherequirementsforaQCDinclude:
• Thetaxpayermustbeatleast70½yearsoldatthetimeofthedistribution.
• OnlydistributionsfromtraditionalIRAsareeligibleforthistreatment.
• Thedistributionmustbemadebythetrusteedirectlytotheeligibleorganization.
• Theamountcannotbemorethan$100,000.(Onajointreturn,thespouseiseligibleforthesameamount.)
• TheamountcannotbeincludedwithothercharitablecontributionsonScheduleA.
Thetaxpayermayhavemarkedtheboxfor“Charitablecontributions”ontheapprovedintakeandinterviewsheet.IfthereisaForm1099-RforatraditionalIRAaccountandthetaxpayer(orspouse)isatleast70½yearsold,askifanyofthefundswereadirecttransfertoacharitableorganization.
Taxpayersshouldhaveawrittenacknowledgmentfromtherecipientstating:
• Theorganization’sname
• Theamount
• Thedate
• Astatementindicatingtherewasnopersonalbenefittothetaxpayer
Thisamountcountstowardtherequiredminimumdistribution.
Ifanypartofthedistributionisareturnofafter-taxcontributions,Form8606,NondeductibleIRAs,mayneedtobecompleted.Form8606requiresbasisinforma-tioninIRAsfromprioryearsandcanbecomplex.IfForm8606isrequired,referthetaxpayertoaprofessionaltaxpreparer.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-1611-8
Tax Software Hint: Youmustindicateinthesoftwareifaqualifiedcharitablecontributionwasmade.RefertotheVolunteerResourceGuide(Tab2),1099-RExclusionWorksheet.
Ifyouarepreparingapaperreturn,enterthetotaldistributiononForm1040,line15a.Write“QCD”nexttotheamountonline15b.ThiswillindicatethatallorpartofthedistributionisnottaxablebecauseitmettherequirementsofaQCD.
How do I find the taxable portion of pensions and annuities?
Fully Taxable Pensions and Annuities
PensionandannuityincomeisreportedonForm1099-R(box7isunchecked),FormCSA1099-R,andFormRRB1099-R.Ingeneral,pensionorannuitypaymentsarefullytaxable,ifthefollowingistrue:
• Taxpayersdidnotpayanypartofthecostoftheirpensionsorannuities
• Employersdidnotwithholdpartofthecostfromthetaxpayers’paywhiletheyworked
• Employerswithheldpartofthecostfromthe taxpayer’sbefore-taxpaywhiletheyworked
Partially Taxable Pensions and Annuities
Therearetwomethodsusedtofigurethetaxableportionofeachpensionorannuitypayment:theGeneralRuleandtheSimplifiedMethod.Unlessanexceptionapplies,retireesmustusetheSimplifiedMethodforannuitypaymentsfromaqualifiedplan. IfataxpayertellsyoutheyhavebeenusingtheGeneralRuletofigurethetaxableportionforpastyears,referthemtoaprofessionaltaxpreparer.
TheSimplifiedMethodisusedtocalculatethetax-freeportionofeachpensionorannu-itypayment.TheSimplifiedMethodWorksheetcalculatesthetaxpayer’scostbasisforeachmonthlypayment.Thenumberofmonthlypaymentsisbasedonthetaxpayer’sage(andthespouse’sageifajoint/survivorannuityisselectedbythetaxpayer)ontheannuitystartdate.
Taxpayer’scostbasis÷Numberofmonthlypayments=MonthlyTax-FreePortion
Tax Software Hint: RefertotheVolunteerResourceGuide(Tab2),1099-RExclusionWorksheet.
Ifpreparingapaperreturn,usetheSimplifiedMethodWorksheetfoundintheForm1040AandForm1040Instructionstocalculatethetaxableportiontobereportedonline12b/16bofthereturn.Donotforgettoincludeanyamountsinbox4ofForm1099-RinthePaymentssectionofthetaxreturn.
Display the Volunteer Resource Guide (Tab 2), 1099-R Exclusion Worksheet illustration of the Simplified Gen-eral Rule.
Emphasize to stu-dents that the ages of both taxpayers must be used with a joint/survivor annuity.
SocialsecuritybenefitsandIRAdistributionsarenotreportedonthepensionlineofthetaxreturn.
example
Sueworkedforasoftwaredevelopmentcompanyfor20years.Sheretiredin2009andbeganreceivingpensionincomethesameyear.Suenevercontributedtothepensionplanwhileshewasworking;heremployermadeallofthecontributions.Herpensionisfullytaxable.
Ask a volunteer to read the Sue example.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-16 11-9
ExErcisEs (continued)
TocalculatethetaxableportionofapensionorannuityusingtheSimplifiedGeneralRule,youwillneedcertaininformation:
• Thecostintheplan(box9bofForm1099-R)
• Thetaxpayer’sageonthedatetheannuitybegan(andthespouse’sageifjoint/survivorannuityisselected)
• Totaloftax-freeamountsfrompreviousyears,availablefromthetaxpayer’sprioryearworksheet
IfthetaxpayerhasmorethanoneForm1099-Rthatisnotfullytaxable,calculatethetax-freeportionforeachformseparately.
Question 5:Dottyworkedforthelocaltireplantfor32years.SheretiredinJuneof2009andreceivesamonthlypensionof$1,679.(ShereceivedsixpaymentsforJulythroughDecember2009.)Dottynevercontributedtothepensionplan;heremployermadeallofthecontributions.Howmuchofherpensionistaxable?
A.$12,074
B.$11,074
C. $10,074
D.$1,679
Disability Pension Income
Generally,taxpayerswhoretireondisabilitymustincludealloftheirdisabilitypaymentsinincome.Disabilitypaymentsaretaxedaswagesuntilthetaxpayerreachesthemini-mumretirementage–this age is set by the employer.Afterthetaxpayerreachestheminimumretirementage,disabilitypaymentsaretreatedaspensionincometodeter-minetaxability.
Minimumretirementageisgenerallytheearliestageatwhichtaxpayersmayreceiveapension,whetherornottheyaredisabled.
Employersmayreportdisabilityincomeononeofthefollowingforms:
• FormW-2,ifthetaxpayerhasnotreachedtheminimumretirementagesetbytheemployer
• Form1099-R,ifthetaxpayerhasreachedtheminimumretirementage
example
Melvinretiredfromamanufacturingplantin2009.Whilehewasworkingattheplant,hisemployerwithheldmoneyfromeachpaycheckandsentittotheEngineer’sPensionFund.Melvinwillreceiveamonthlypensionpaymentfortherestofhislife.MelvinwillusetheSimplifiedMethodWorksheettodeterminethetax-freepartofmonthlypayments.
Ask a volunteer to read the Melvin example.
The amount is fully tax-able because she never paid income taxes on employer contributions.
Assign the exercise.
Review the answer with the class when complete.
Ifdisabilitypayistreatedaswages,itmightaffectEarnedIncomeTaxCredit.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-1611-10
ExErcisEs (continued)
Ifboththetaxpayerandtheemployerpayforadisabilityinsuranceplan,onlytheamountthetaxpayerreceivesbecauseoftheemployer’spaymentsistaxableasincome.Thetaxpayer’semployershouldbeabletogivespecificdetailsaboutthepensionplanandtheamountthetaxpayerpaidforthedisabilitypension.
Ifpreparingapaperreturnandthetaxpayerhasnotreachedtheminimumretirementage,reportthedisabilityincomeaswagesonline7ofForm1040AorForm1040.Ifthetaxpayerhasreachedtheminimumretirementage,reportthedisabilityincomeasataxablepensionontheappropriatelinesofForm1040AorForm1040.
Question 6: AnnieJois47yearsoldandhasretiredondisabilityfromherjob.Whileloadingcargoforatractor-trailercompany,alargeboxfellonherandleftherpara-lyzed.Shereceivesamonthlypaymentfromherformeremployer’spensionplan.Shehasnotreachedtheminimumretirementagesetbyhercompany’spensionplan.OnwhichlineofherForm1040shouldyoureportherdisabilityincome?
A.Line63
B.Line16a
C.Line16b
D. Line 7
Retired Public Safety Officers
Eligiblepublicsafetyofficerscanelecttoexcludefromincomedistributionsofupto$3,000madedirectlyfromagovernmentretirementplantotheproviderofaccident,health,orlong-termdisabilityinsurance.SeeInsurancePremiumsforRetiredPublicSafetyOfficersinPublication575formoreinformation.
Tax Software Hint: Ifthetaxpayeriseligiblefortheexclusion,refertotheVolunteerResourceGuide(Tab2),1099-RExclusionWorksheet.
What other retirement income issues are there?
Thereareafewotherissuesrelatedtoreportingretirementincomethatyoumayencounter.SomeofthefollowingdistributionsaresubjecttovariousadditionaltaxesthatarecomputedonForm5329,AdditionalTaxesonQualifiedPlans(IncludingIRAs)andOtherTax-FavoredAccounts.ThecompletionofthisformisnotincludedintheVITA/TCEtraining.RefertaxpayerswhomustcompleteForm5329toaprofessionaltaxpreparer.
Lump-Sum Distributions
Alump-sumdistributionisthedistributionorpaymentwithinonetaxyearofanemploy-ee’sentirebalancefromallqualifiedpension,stockbonus,orprofit-sharingplansthattheemployermaintains.Thedistributiondoesnotincludedeductiblevoluntaryemployeecontributionsandcertainamountsforfeitedorsubjecttoforfeiture.DistributionsfromIRAsortax-shelteredannuitiesdonotqualifyaslump-sumdistributions.
Annie Jo is below minimum retirement age so the income is reported as wages.
Assign the exercise.
Review the answer with the class when complete.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-16 11-11
Toqualifyasalump-sumdistribution,thepaymentmusthavebeenmade:
• Becausetheplanparticipantdied
• Aftertheparticipantreachedage591/2
• Becausetheparticipant(notincludingaself-employedindividual)separatedfromservicewiththeemployeror
• Aftertheparticipant,ifself-employed,becametotallyandpermanentlydisabled
Lump-sumdistributionsarereportedonForm1099-Rlikeanyotherpensiondistribu-tion.Somelump-sumdistributionsqualifyforspecialtaxtreatments.IfForm1099-R,box7indicatesadistributioncodeofA,itisalump-sumdistributionandqualifiesforspecialtaxtreatments.Taxpayerswiththissituationshouldbereferredtoaprofes-sionaltaxpreparer.
Premature Distributions
Aprematuredistributionisanearlywithdrawalfromaretirementfund,forpurposesotherthanretirement,byataxpayerwhoisunder591/2.Earlydistributionscanbesubjecttoanadditional10%tax.Thetaxappliestothetaxableportionofthedistribu-tionorpayment.
Certainearlydistributionsareexcludedfromtheearlydistributiontax.Ifthedistributioncodeinbox7ofForm1099-Ris2,3,or4,thetaxpayerdoesnothavetopaythe additionaltax.
Ifthedistributioncodeinbox7is1,thetaxpayerwillbesubjecttotheadditional10%tax,unlessanexceptionapplies.Ifpreparingapaperreturn,enter10%ofthetaxableamountintheOtherTaxessectionofForm1040andwrite“No”onthelinetoindi-cateForm5329isnotrequired.However,ifafterreviewingPublication17,IndividualRetirementArrangements(IRAs)orRetirementPlans,PensionsandAnnuities,youdeterminethatthetaxpayermeetsoneoftheexceptionsanddoesnothavetopaytheadditionaltax,referthetaxpayertoaprofessionaltaxpreparer.
Minimum Distributions
Toavoidanadditionaltax,participantsinretirementplansmustbegintakingaRequiredMinimumDistribution(RMD)byapreviouslyspecifieddate.ThatdateisApril1ofthecalendaryearfollowingtheyearinwhichthetaxpayerseitherreachedage70½,orretired,whicheverislater.ForIRAs,itdoesnotmatterifthetaxpayerisemployed.TheserulesdonotapplytoRothIRAs.ThetrusteeofthequalifiedplanwillcontactthetaxpayerattheappropriatetimetobeginRMD.
AfterthestartingyearforRMDs,taxpayersmustreceivetheminimumdistributionforeachyearbyDecember31ofthatyear.(Thestartingyearistheyearinwhichthetaxpayerreaches70½orretires.)Ifnodistributionisreceivedduringthetaxpayer’sstartingyear,therequiredminimumdistributionsfortwoyearsmustbereceivedthefollowingyear,oneofwhichmustbetakenbyApril1.
Thisinformationisprovidedforyourinformationonly,tohelpyouansweranyquestionsataxpayermayaskaboutRMD.RMDdistributionsarereportedonForm1099-Randincludedonthereturnusingtheproce-durespreviouslydiscussed.
Review the criteria for a lump-sum distribution.
Ifthetaxpayerdoesnotreceivetheminimumdistribu-tion,anadditionaltaxmaybeimposed.Thetaxis50%ofthedifferencebetweentheminimumdistributionandtheamountactuallydistributedforthetaxyear.
Ask a volunteer to read the caution.
Check student under-standing of this sec-tion.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-1611-12
NEW Temporary Waiver of Required Minimum Distributions (RMDs) for 2009
For2009,taxpayersarenotrequiredtotakeanRMDfromtheirIRAsordefinedcontri-butionplans.Thiswaiverappliestoplanparticipantsaswellastobeneficiaries.Thewaiveralsoappliestotaxpayerswhoturned701/2in2009anddelayedtheir2009RMDuntilApril1,2010.ThewaiverdoesnotapplytoRMDsfor2008,evenifthetaxpayerturned701/2in2008andchosetotakethe2008RMDbyApril1,2009.
Withdrawal of Excess IRA Contributions
AnexcessIRAcontributionistheamountcontributedtoatraditionalIRAduringtheyearthatismorethanthesmallerof:
• $5,000($6,000ifage50orolder),or
• Thetaxablecompensationfortheyear
Thetaxpayermaynotknowthatacontributionisexcessuntilthetaxreturniscompletedaftertheendoftheyear.Whenthissituationisidentified,theexcessamount,withanyearningsonthatamount,mustbewithdrawnbytheduedateofthereturn(includingextensions).Iftheexcessamountisnotwithdrawnbytheduedateofthereturn,thetaxpayerwillbesubjecttoanadditional6%taxonthisamount.
Thewithdrawnexcesscontributionisnotincludedinthetaxpayer’sgrossincomeifbothofthefollowingconditionsaremet:
• Nodeductionwasallowedfortheexcesscontribution
• Allinterestorotherincomeearnedontheexcesscontributioniswithdrawnbytheduedateofthereturn,includingextensions
example
Ralphretiredin2003.Heturned70½in2008.HemustbegintakingminimumdistributionsfromhisqualifiedplansbyApril1,2009.
example
Myrnawas72whensheretiredin2008.Shemustbegintakingminimumdistribu-tionsfromherqualifiedplansbyApril1,2009.Thewaiverdoesnotapplytoherrequiredminimumdistributionfor2008,eventhoughshehasuntilApril1,2009totakeit.
Ask a volunteer to read the examples.
example
Samretiredin2005.Heturned701/2in2009.ThetemporarywaiverofRMDsfor2009appliestoSam.
example
Irvingwasstillemployedwhenheturned72onMarch12,2009.HewasrequiredtobegintakingminimumdistributionsfromhistraditionalIRAafterage70½eventhoughhewasnotyetretired.Heturned70½onSeptember12,2007andbegantakingminimumdistributionsbeforeApril1,2008.IrvingisnotrequiredtotakeanRMDfromhisIRAin2009duetothetemporarywaiver.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-16 11-13
ExErcisEs (continued)
Assign the exercises.
Review the answers with the class when complete.
However,taxpayersmustincludetheearningsontheexcesscontributionasincomeonthereturn.Thisincomeisreportedonthereturnfortheyearinwhichtheexcesscontri-butionwasmade.Thewithdrawalofinterestorotherincomemayalsobesubjecttoanadditional10%taxonearlydistributions.
Question 7: Taxpayerswhowithdrawexcesscontribu-tionsbytheendofthetaxyeararenotsubjecttoan additional6%taxontheexcesscontribution. þ True □FalseQuestion 8:Helenturned71onMarch17,2009.Sheretiredin2001.Shehasnevertakenanydistribution fromhertraditionalIRAaccounts.Thebanktoldherthatshenowneedstotakeaminimumdistributionof$1,479peryear.Helenisrequiredto:
A.Takeadistributionof$1,479byDecember31,2009
B. Take a distribution of at least $1,479 by April 1, 2009
C.Takeadistributionof$2,958byDecember31,2009
D.Nottakeanydistributionsuntil2010
How do I determine when an adjustment to withholding should be made?
Afterthecompletionofthereturn,ifthetaxpayerowes$1,000ormoreonthetaxreturn,youshoulddiscusstheirwithholdingandestimatedtaxoptionswiththem. ThisiscoveredinmoredetailintheConcludingtheInterviewlesson.
SometimestaxpayersarenotawarethattheycanrequestfederalincometaxtobewithheldfromtheirretirementincomebyfilingFormW-4P,WithholdingCertificateforPensionorAnnuityPayments.Thisformissenttothepayer.Also,FormW-4V,VoluntaryWithholdingRequest,isusedtorequestwithholdingfromsocialsecuritybenefits.ThisformissenttotheSocialSecurityAdministration.
Foradditionalhelp,taxpayerscanrefertoPublication919,HowDoIAdjustMyTaxWithholding?,orvisittheIRSWebsiteatwww.irs.govandusethe“WithholdingCalculator.”Ataxpayerwhochoosesnottohavetaxwithheldmayhavetopayesti-matedtaxeachquarter.Failuretohaveenoughfederalincometaxpaidthroughouttheyearcanresultinalargeamountoftaxbeingowedwhenthereturnisdue.Itcanalsoresultinapenalty.Form1040-ES,EstimatedTaxforIndividuals,isusedtocalculatetheestimatedquarterlypaymentandprovidesvoucherswithwhichtoremitthepayments.
The $1,479 is for tax year 2008, the year Helen reached 70½ years old. Due to the temporary waiver, an RMD is not required for 2009.
They must withdraw excess contributions/earn-ings by the return due date to avoid the tax.
Taxpayerswhoreceiveaverylargerefundmaymakebetteruseoftheirfundsifthewith-holdingislowered.Explainwaystheycanreducetheirwithholding.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-1611-14
ExErcisEs (continued)
Question 9: Faithcomestoyoursitetogether2009taxreturndone.Whenyoufinishherreturn,youexplaintoherthatsheowes$985,andthatsheneedstopaythisamountbyApril15,2010.Shesaysthatshewillpaytheamount,butwantstoknowifthereissomewaytohavemoretaxwithheldfromherpensionsothatshedoesn’towesomuchattheendoftheyear.Whichformshouldshecompletetoincreasethewithholdingfromherpension?
A. Form W-4P
B.FormW-4V
Summary
Thislessonhelpedyouidentify,calculate,andreportthetaxableportionofretirementincomereceivedbythetaxpayer.Itreviewedthetypesofretirementincomeandtheformsusedtoreportthem.Youlearnedwhentaxpayersofretirementagearerequiredtotakeaminimumdistributionfromaretirementplanandwhentheymayneedtoadjusttheirwithholding.
Youmaynotbeabletocompletetheentireexerciseifsomeofthetechnicalissuesintheexercisearenotcovereduntillaterlessonsintheintermediateandadvancedpartsofthetraining.Intheseinstances,completeasmuchoftheexerciseasyoucan.Comebacklatertofinishtheexerciseafteryoucoverallthetechnicaltopics.
Assign the exercise.
Review the answer with the class when complete.
Review the lesson summary.
Assign the workbook exercise and review as a class when done (optional).
This form is used to request a change in with-holding on a pension.
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-16 11-15
ExErcisE answErs
Answer 1: False. In addition to Roth IRAs, nondeductible contributions to traditional IRAs are also not taxed when they are distributed.
Answer 2: False. Mary’s distribution was not made after the 5-year period begin-ning with the first taxable year she made a contribution to her Roth IRA. Therefore, the earnings/investment gains portion of the distribution will be taxable income. (She may also owe an additional tax on early distributions. This will be discussed in Lesson 28.)
Answer 3: True. Amy’s distribution can be excluded from her taxable income because it was made more than five years after the beginning of the taxable year of her first contribution, and it was made on or after age 59½.
Answer 4: B. Andrew can exclude the entire distribution from income because it was rolled over into an IRA within the allowed 60-day period.
Answer 5: C. Dotty’s entire pension amount of $10,074 (6 x $1,679) is fully taxable because she has never paid income taxes on her employer’s contribution to her pension.
Answer 6: D. Because Annie Jo has not reached the minimum retirement age set by her employer, you should report her disability income as wages on line 7 of her Form 1040.
Answer 7: True. Taxpayers must withdraw excess contributions and any earnings by the due date of the return (including extensions) to avoid the additional 6% tax on the excess contribution.
Answer 8: B. Taxpayers are required to begin receiving distributions from their qualified plan by April 1 of the calendar year following the year in which they reach age 70½. Helen was 70½ by the end of 2008. She should take a distribution of $1,479 for tax year 2008 by April 1, 2009. Due to the temporary waiver, an RMD is not required in 2009.
Answer 9: A. Generally, Form W-4P, Withholding Certificate for Pension and Annuity Payments, is used to request a change in withholding on a pension.
Lesson 11: Income – Retirement Income; Form 1040, Lines15-1611-16
Notes
Lesson 12: Income – Rental and Schedule K-1s 12-1
Instructor Notes
Introduction
ThislessonwillhelpyouidentifyandreportcertainincomefromScheduleK-1s;Form1041,Form1065,andForm1120S.Thistopicisin-scopeforthefirsttimethisyearforAdvanced,MilitaryandInternationalcourses.
ThislessonalsocoversrentalincomeandexpensesfortheMilitaryandInternationalcourses.
TodetermineifataxpayerneedstofileScheduleE,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.Theapprovedintakeandinterviewsheetlistsincomefromrentalproperty,butdoesnotlistincomefromScheduleK-1s.Itisimpor-tanttoensurethatallincomeisaccuratelyreportedonthereturn.AsktaxpayersiftheyrentedouttheirhomeorotherpropertyduringthetaxyearoriftheyreceivedaScheduleK-1(Form1041,Form1065,orForm1120S)fromatrust,partnership,orScorporation.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• IdentifyScheduleK-1incomeitemsthatarewithinthescopeoftheVITA/TCEprogram
• DeterminehowtoreportScheduleK-1incomeitems
• Determinewhichtypesofrentalincomemust bereported
• Identifyhowtoreportrentalexpenses
Lesson 12: Income – Rental and Schedule K-1s
Review objectives with the class.
Point out the resources cited under What do I need?
Thislessondoesnotapplytotaxpayerswhoareintheactualbusinessofrentingproperties.
Theat-riskandpassiveactivityissuesinthislessonarebeyondtheusualscopeofvolun-teertraining,withtheexceptionofassistingmilitaryandothergovernmentemployeeslivingabroadandwithlimitedaccesstobothresourcesandprofessionalpreparers.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Publication 541□ Publication527□ Publication 551□ ScheduleA□ ScheduleEOptional:□ Publication925□ Publication946□ Form8582□ ScheduleK-1(Form1041
andInstructions)□ ScheduleK-1(Form1065
andInstructions)□ ScheduleK-1(Form1120S
andInstructions)
Lesson 12: Income – Rental and Schedule K-1s12-2
NEW Schedule K-1s
What is reported on Schedule K-1?
ScheduleK-1isusedtoreportthetaxpayer’sshareofincome,otherdistributions,deductions,andcreditsfrompartnerships,Scorporations,andsomeestatesandtrusts.AccuratefilingoftheformsisimportantbecausetheIRSmatchesincomefromScheduleK-1toothertaxreturns.Theincome,otherdistributions,deductions,andcreditswillbereportedonForms1041,1065,or1120S.
How and where can income be reported?
IncomereportedonScheduleK-1willbeincludedonthetaxpayer’sreturninvariousplacesdependinguponthetypeofincome.IncomereportedonScheduleK-1thatiswithinthescopeoftheVITA/TCEprogramincludes:
• Interestincome(ScheduleB)
• Dividendincome(ScheduleB)
• Netshort-termcapitalgainsandlosses(ScheduleD)
• Netlong-termcapitalgainsandlosses(ScheduleD)
• Tax-exemptinterestincome(Form1040,line8b)
Schedule K-1 (Form 1041)
Thefiduciaryofadomesticdecedent’sestate,trust,orbankruptcyestateusesForm1041toreportincome,gains,losses,etc.oftheestateortrust.
TaxpayersreceiveForm1041,ScheduleK-1toreporttheincomefrominterest,divi-dends(ordinaryandqualified),andcapitalgains(netshort-termandnetlong-term).Thetaxpayer’sincomefromthesesourcesshouldbereportedontheappropriateformsandschedulesaslistedonpage2ofForm1041,ScheduleK-1.
Tax Software Hint:ThenameandidentificationnumberoftheestateortrustarereportedinPartIIIofScheduleE.Forsoftwareentries,seetheVolunteerResourceGuide(Tab2),Income.
Schedule K-1 (Forms 1065 and 1120S)
PartnershipsuseForm1065,ScheduleK-1toreportthetaxpayers’shareofthepart-nership’sincome,deductions,credits,etc.Althoughthepartnershipisnotsubjecttoincometax,thetaxpayerisliablefortaxontheirshareofthepartnershipincome,whetherthatincomeisdistributedornot.
CorporationsuseForm1120S,ScheduleK-1toreportthetaxpayers’shareofthecorporation’sincome(reducedbyanytaxthecorporationpaidontheincome),aswellasanydeductions,credits,etc.Thetaxpayerisliablefortaxontheirshareofthecorporation’sincome,whetherthatincomeisdistributedornot.
Anyotherincome,deduc-tions,credits,etc.reportedonScheduleK-1isoutofscopeforVITA/TCEandthetaxpayershouldbereferredtoaprofes-sionaltaxpreparer.
Lesson 12: Income – Rental and Schedule K-1s 12-3
TaxpayersreceiveaScheduleK-1(Form1065orForm1120S)reportingtheirshareofincomefrominterest,dividends(ordinaryandqualified),andcapitalgains(netshort-termandnetlong-term)frompartnershipsandcorporations.Page2ofScheduleK-1liststheappropriateformsandscheduleswherethetaxpayer’sincomefromthesesourcesshouldbereported.
Tax Software Hint:ThenameandidentificationnumberofthepartnershiporScorporationarereportedinPartIIofScheduleE.Forsoftwareentries,seetheVolunteerResourceGuide(Tab2),Income.
What is rental income?
Rentingaroomorahometoatenantisanincome-producingactivity.U.S.citizensandresidentaliensmustreportrentalincome,regardlessofwhethertherentalpropertyislocatedintheU.S.orinaforeigncountry.Grossrentalincomemayincludeotherpaymentsinadditiontothenormalandordinaryrentsreceived,suchas:
• Advancedrent
• Securitydeposits
• Paymentsforbreakingalease
• Expensespaidbythetenant
• Fairmarketvalueofpropertyorservicesreceivedinexchangeforrentalpayments
Thetaxpayer’smethodofaccountingaffectswhentherentalincomeisreported.Thecashmethodreportsincomewhenreceivedandexpenseswhenpaid;theaccrualmethodreportsincomewhenearnedandexpenseswhenincurred.Mostindividualsusethecashbasismethod.
Tax Software Hint:UseScheduleEtoreport
rentalincomeonlywhentaxpayerisnotinthebusi-nessofrentingproperty.Forsoftwareentries,seetheVolunteerResourceGuide(Tab2),ScheduleE–RentalIncomeandLoss.
What qualifies as a rental expense?
Taxpayerswhoresideinhomestheyowngenerallyreportmortgageinterestandprop-ertytaxesasitemizeddeductionsonScheduleA.However,whenataxpayerrentsoutahome,thosebecomerentalexpensesalongwiththecostofrepairs,maintenance,andcertainotheroperatingexpenses.
Itisimportantthatpropertyberentedatfairrentalvalue.Ifapropertyisrentedatlessthanfairrentalvalue,theincomeandexpensesarereportedinadifferentmannerthandiscussedinthislesson.Refertaxpayerswhorenttheirprop-ertyatlessthanfairrentalvaluetoaprofessionaltaxpreparer.
ScheduleK-1sarenotfiledwiththetaxreturn.AdvisetaxpayerstokeepScheduleK-1swiththeirrecords.
Thesecuritydepositisnotincludedinincomewhenthetaxpayerplansonreturningthedepositattheendofthelease.However,ifthesecuritydepositisintendedtoserveasthelastmonth’srent,thenitshouldbeincludedinincomewhenreceived.
Lesson 12: Income – Rental and Schedule K-1s12-4
ExErcisEs
What about mortgage interest and property taxes?
Mortgageinterestandpropertytaxesaredeductibleasrentalexpenses.Iftheresi-dence(oraportionoftheresidence)wasusedasrentalpropertyforanypartoftheyear,thetaxpayermustallocatethepropertytaxandmortgageinterestdeductionsbetweenScheduleAandScheduleE.
Ingeneral,taxpayersuseScheduleA,ItemizedDeductions,toreporttheportionofthemortgageinterestandpropertytaxesthatapplytotheiruseofthehome.Thatportioncanbebasedonapercentageoftime(4monthsasaresidenceand8monthsusedasrental)orbasedonanarea(1,500sq.ft.asaresidenceand500sq.ft.astherentalportion).Forthepartoftheyearand/ortheportionofthehomethatisrentedout,taxpayersreportrentalincomeandexpenses(includingaportionofthemortgageinterest,propertytaxes,andotherexpensesthatrelatetotherentaltime/portionofthehome,etc.)onScheduleE,SupplementalIncomeandLoss.
Ifanypartofthepropertytaxisdesignatedforlocalbenefitsthatincreasethevalueoftheproperty,suchasmaintainingstreetsandsidewalks,thatportionofthetaxisaddedtothebasisofthepropertyratherthanasanordinaryrentalexpenseoranitemizeddeduction.
MortgageinterestisreportedtothetaxpayeronForm1098,MortgageInterestStatement.Thisstatementmayalsoincludepropertytaxes.Ifitdoesnot,thetaxpayerwillhaveadocumentfromthelocaltaxingauthority.
Question 1: JohnPrincetonwastransferredoverseasandbeganrentingouthisresidenceonSeptember1ofthetaxyear.HowmuchofhismortgageinterestandpropertytaxesshouldbereportedonhisScheduleE?
A.Allofit
B.Eight-twelfths(2/3or67%)
C. Four-twelfths (1/3 or 33%)
D.Noneofit
Generally,mortgageinterestexpenseisfullydeductible.However,refertaxpayerswithrental-relatedinterestexpensesotherthanmortgageinteresttoaprofessionaltaxpreparer.
example
PaulKingmanlivedinhishomethroughSeptember,whenhewasnotifiedhewasbeingtransferredoverseas.HerentedhishomebeginninginOctober.ThetotalamountofKingman’smortgageinterestforthetaxyearwas$2,400andhisprop-ertytaxeswere$600.Reportninemonths(Jan–Sept)ofmortgageinterestandpropertytaxesasitemizeddeductionsonScheduleA,i.e.$1,800and$450,andtheotherthreemonths(Oct-Dec)asexpensesonScheduleE,i.e.$600and$150.
Ask a volunteer to read the Paul example. Answer any student questions.
John lived in the home for 8 of 12 months. He rented the home 4 of 12 months. The amount he can claim on Schedule E is 4/12.
Assign the exercise.
Review the answer with the class when complete.
Lesson 12: Income – Rental and Schedule K-1s 12-5
What about property insurance?
Thepropertyinsurancetaxpayerspayontheirresidenceisdeductibleasarentalexpenseforthetimeitisconsideredrentalproperty.Iftheresidenceisrentedforpartoftheyear,onlytheamountthatcoverstherentaltimeisdeductible.Ifaportionoftheresidenceisrented,thedeductibleportionmustbeallocatedanddeductedonScheduleE.
Insurancepremiumspaidmorethanoneyearinadvancecannotbedeductedinoneyear.Alltaxpayersmustprorateadvancedpremiumpaymentsovertheperiodcoveredbythepolicy.Theonlyportiondeductibleinthecurrentyearisthatamountwhichcoversthecurrentyear.
What are other deductible rental expenses?
Inadditiontomortgageinterestandpropertytaxes,deductiblerentalpropertyexpensesincludetheseitemslistedonScheduleE:
• Advertising
• Autoandtravelexpensestocheckontheproperty
• Cleaningandmaintenance
• Commissionspaidforcollectingrentalincome
• Insurancepremiums
• Propertytaxes
• Mortgageinterestandpoints
• Legalandprofessionalfees
• Propertymanagementfees
• Repairs
• Utilitiespaidforthetenant
• Otherrental-relatedexpenses,suchasrentalofequipmentandlongdistancephonecalls,condominium/cooperativemaintenancefees,etc.
Can auto and travel expenses be deducted as rental expenses?
Taxpayerscandeductordinaryandnecessarytravelandtransportationexpensesattributabletotheproductionofrentalincome.IfthetravelwasintooroutsideoftheU.S.,thetaxpayershouldsubstantiatethepleasurevs.businessportionsofthetripand allocatetheexpensesaccordingly.
Taxpayerswhousetheirpersonalautomobileforrental-relatedtripsmayuseeitherthestandardmileagerateortheactualexpensemethodforbusinessmileage.Thestan-dardmileagerateofoperatingyourcarforrental-relatedtripsis55centsamile.
Thestandardmileagemethodmultipliesthemilesdrivenforbusinessbyastandardcost.Taxpayersmayusethestandardmileagerateonlyiftheymeetoneoftheserequirements:
• Thevehiclewasownedandusedthestandardmethodthefirstyearthevehiclewasputintoservice
• Thevehiclewasleasedandusedthestandardmethodforthelifeofthelease
Whenatenantdoesnotpaytherent,acash-basislandlordcannottakeadeductionfortheunpaidrent.Taxpayerscannottakeadeductionforapaymenttheydidnotincludeinincome.
Lesson 12: Income – Rental and Schedule K-1s12-6
ExErcisEs (continued)
Thestandardmileagerateformilesdrivenforbusinesspurposesis55centspermile.Theactualexpensemethodfiguresthedeductionbasedonavarietyoffactors,includinggasoline,oil,repairs,insurance,rent-als,andmayeveninvolvedepreciationorthevalueofavehicleprovidedbythetaxpayer’semployer.
Are repairs and improvements deductible?
Taxpayersoftenmisunderstandwhenanexpensequalifiesasarepairoranimprove-ment.Arepairkeepsthepropertyingoodoperatingcondition;thecostisacurrent-yeardeduction.Animprovementaddstothelifeormaterialvalueoftheproperty,oradaptsittonewuses;thecostmustbedepreciatedover therecoveryperiodfortheimprovement.Thetotal costofanimprovementincludesmaterial,labor,andinstallation.
Tax Software Hint:Forsoftwareentries,goto
ScheduleE-RentalIncomeandLossintheVolunteerResourceGuide(Tab2).
Question 2:Allofthefollowingareexamplesofdeductiblerentalexpensesexcept:
A.Carpetcleaningfees
B.Chargesforphonecallsmadetothepropertymanager
C.Gasandelectricbillspaidforthetenant
D. Repairs made to the homeowner’s personal resi-dence
Question 3: Whichofthefollowingrentalexpensesmustberecoveredby takingdepreciation?
A.Homeinsurancepremiums
B.Painting
C. Installing a backyard fence
D.Repairingabrokenfurnace
Repairs (Deduction) Improvements (Depreciation)Painting AddingaroomFixinggutters InstallinganewfenceRepairingdriveways PuttinginplumbingorwiringReplacingwindowglass ReplacinghotwatertankRepairingtheroof PuttingonanewroofRepairingappliances Replacing/addingmajorappliances
Costs and fees must relate to the rental property to be deductible as rental expenses.
Fencing adds to the value of the property so it can-not be deducted as a rental expense; it must be depre-ciated over the useful life of the improvement.
Assign the exercises.
Review the answers with the class when complete.
Thislessondiscussesonlythestandardmileagerate.Ifthetaxpayerwishestousetheactualmethod,referthemtoaprofessionaltaxpreparer.
AdditionalinformationonrentalincomecanbefoundinPublication527,ResidentialRentalProperty,andPublication946,HowtoDepreciateProperty.
Lesson 12: Income – Rental and Schedule K-1s 12-7
ExErcisEs (continued)
How do I handle depreciation of rental property?
Thecostofpropertywithausefullifeofoneyearormore,andusedinatradeorbusi-nessorheldfortheproductionofincome(suchasrent),isrecoveredbydeductinganexpensecalleddepreciation.
“Depreciableproperty”includesbuildings,machinery,furniture,equipment,vehicles,andanycostforadditionsorimprovementstorentalproperty.Thevalueofland,however,isnotdepreciable:therefore,thecostofclearing,grading,planting,orotherlandimprovementsarealsonotdepreciable.
Theannualamountofdepreciationonpropertyreducesthetaxpayer’sbasisinthatproperty.Taxpayersshouldclaimthecorrectamountofdepreciationeveryyear.Eveniftheydidnotdeductthedepreciationduringanytaxyear,theymuststillreducetheirbasisinthepropertybytheamountofdepreciationthattheyshouldhavededucted.
What factors affect depreciation?
Thefactorsthataffectthedepreciationamountare:
• Depreciationmethod
• Basisoftheproperty
• Recoveryperiodfortheproperty
Depreciation Method
Themostcommonmethodsfordeterminingdepreciationare:
• Propertyplacedinservicebefore1981:Straightlineordecliningbalance
• Propertyplacedinserviceafter1980butbefore1987:ACRS(AcceleratedCostRecoverySystem),and
• Propertyplacedinserviceafter1986:MACRS(ModifiedAcceleratedCostRecoverySystem)
ThistrainingfocusesontheMACRSmethod.
Question 4: Taxpayershavetheoptionofnotclaimingadepreciationdeductiontheyareentitledtoandavoidreducingthebasisintheirdepreciableproperty. □ True þ False
Question 5:Allofthefollowingpropertymaybedepre-ciableEXCEPT___.
A.Furniture
B.Buildings
C. Land
D.Vehicles
Taxpayers should claim the correct amount of depreciation every year.
The value of land is not depreciable; furniture and vehicles are depre-ciable property.
Assign the exercises.
Review the answers with the class when complete.
Point out if taxpayers don’t claim the correct amount of deprecia-tion every year, they must still reduce their basis by the amount of depreciation they could have deducted.
Lesson 12: Income – Rental and Schedule K-1s12-8
ExErcisEs (continued)
Question 6:Whichmethodofdepreciationisusedfor propertyplacedinserviceafter1986?
A.Straightline
B. MACRS
C.ACRS
D.Decliningbalance
What is considered the basis and adjusted basis for depreciation purposes?
Generally,thebasisfordepreciationisthepurchasepriceoftheproperty,includingthecostofimprove-ments,butnotincludingthevalueofthelandonwhichitsits.Whenpropertyisconvertedfrompersonalusetorentaluse,thebasisisthelesseroftheadjustedbasisorfairmarketvalue(FMV)atthetimeofconversion.Thetotaloftheyearlydeductionsfordepreciationcannevertotalmorethanthebasisoftheproperty.
Thebasisofpropertymustbeincreasedordecreasedtoreflectcertainadjustmentsbeforethedepreciationdeductioniscomputed.Tofindtheadjustedbasis,addthepurchasepriceofahometothecostofanyimprovementsminus:
• Anycasualtylossesordepreciationpreviouslydeducted,and
• Landvalue
Thebasisofdepreciablepropertyshouldalsobeadjustedwhenitisacquiredinapurchasewithatrade-in.Again,thevalueofanyassociatedlandmustbeassessedandexcludedfromthebasisoftheproperty.
What are considered recovery periods?
Therecoveryperiodofpropertyisthenumberofyearsoverwhichthetaxpayerrecov-ersitscostorotherbasis.TheMACRSmethodusestheclasslifeofpropertytodeter-minethelengthoftimethepropertywillbedepreciated.
example
CarlosandVanettapurchasedahousein1985for$100,000.Thevalueofthebuildingwas$85,000.Theymadenoimprovements.In2009,theyweretransferredoverseasanddecidedtorentoutthehome,whichwastheirpersonalresidence.Thevalueofthehouseandlandin2009was$125,000.Thebasisfordepreciationis$85,000.
Ask a volunteer to read the Carlos and Vanetta example. Answer any student questions.
Fortaxpayerswhobuilttheirownhomeoracquireditasaninheritanceorgift,thebasismaynotbetheoriginalcost.Formoreinformation,seePublication551,BasisofAssets.
MACRS (modified ACRS) is the method used for property placed in service after 1986.
Lesson 12: Income – Rental and Schedule K-1s 12-9
ExErcisEs (continued)
Question 7:ThepurchasepriceofWayne’srentalproperty,includingland,was$255,000,whenthevalueofthelandwasassessedat$155,000.Hespent$50,000onimprovementstothebuilding,andanother$10,000onlandscaping.WhatisWayne’sbasisfordepreciationintheproperty?
A.$305,000
B.$255,000
C.$160,000
D. $150,000
How do I figure the MACRS deduction?
TofiguretheMACRSdeduction,youneedtoknowtheproperty’s:
• Placedinservicedate
• Recoveryperiod
• Depreciablebasis
What is the placed in service date?
Fordepreciationpurposes,propertyisconsideredplacedinservicewhenitisinaconditionorstateofreadinessandavailabilityforuse.Aproperty’sdepreciationdeduc-tionisproratedintheyearitisplacedinservice.However,adepreciationdeductionmaynotbeclaimeduntilthepropertyisactuallyusedeitherinbusinessorfortheproductionofincome.
What are considered recovery periods under MACRS?
Therecoveryperiodofthepropertydependsontheclassthepropertyisin.Eachitemofdepreciablepropertyisassignedtoapropertyclass.Propertyclassesarebasedontheproperty’sclasslifeanddetermineitsrecoveryperiod.UnderGeneralDepreciationSystem(GDS),therecoveryperiodofanassetisgenerallythesameasitspropertyclass.AtableisavailableinPublication527,ResidentialRentalProperty,tohelpdeterminethecorrectrecoveryperiodforanitem.
example
AsetofmajorappliancesthatMarkNewcombusedinhisrentalpropertyhadanadjustedbasisof$500.Heacquiredasetofnewapplianceswithafairmarketvalueof$2,000bytradingintheoldappliancesandpaying$1,000incash.Althoughthefairmarketvalueofthenewapplianceswas$2,000,Mark’sbasis fordepreciationpurposesis$1,500(the$500adjustedbasisplushis$1,000 cashpayment).
Ask a volunteer to read the Mark example.
Wayne’s basis for depreciation is $150,000 ($255,000 minus $155,000 plus $50,000). The basis does not include land-scaping expenses.
Assign the exercise.
Review the answer with the class when complete.
SeePublication946,HowtoDepreciateProperty,AppendixAforTablesofDepreciation,whichshowtherecoveryperiodsfordifferentpropertyclasses.
Lesson 12: Income – Rental and Schedule K-1s12-10
ExErcisEs (continued)
UnderMACRS:
• Ahomeconvertedin1986,orlater,toarentalpropertywouldbedepreciatedoverarecoveryperiodof27.5years
• Astoveusedinthissamerentalwouldbeassigneda5-yearrecoveryperiod
PropertylocatedoutsidetheU.S.hasalongerrecoveryperiodthanpropertyintheU.S.,andthetaxpayermustusetheAlternativeDepreciationSystem(ADS)underMACRS.ADSgenerallyincreasesthenumberofyearsoverwhichthepropertyisdepreciatedandthereforedecreasestheannualdeduction.Residentialrentalpropertylocatedinaforeigncountryisdepreciatedovera40-yearrecoveryperiod.
Question 8:Whichofthefollowingpropertieswouldgenerallyhavetheshortestrecoveryperiodfordepreciation?(UsethetableinPublication527.)
A.ArentalhomelocatedintheU.S.
B. A washing machine in a rental unit located in the U.S.
C.Improvementstoarentalunitlocatedoutside theU.S.
D.ArentalhomelocatedoutsidetheU.S.
Taxpayer Interview and Tax Law Application
Asyouusetheapprovedintakeandinterviewsheetwithataxpayer,askquestionstodetermineiftheyhaveanyrentalincomeandexpenses.UsetheInterviewTipstohelpobtainadditionalinformation,asshowninthissampleinterview.
The recovery period of an appliance is shorter than that of a home; property inside the U.S. has a shorter recovery period than property outside the U.S.
Assign the exercise.
Review the answer with the class when complete.
Direct students to review the differ-ent types of property classes in Publication 527, Recovery Periods Under GDS.
Ask two volunteers to role-play the sample interview. Ask the rest of the class to listen and take notes.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… tony responds…
I see you were stationed overseas last year from March through December. Did you rent out your home during that time?
We only need to deal with last year. Now, during January of last year you were the only one living in the house?
For January, we’ll report a twelfth of your mortgage interest and property taxes as itemized deductions on Schedule A. For February through December, we’ll report your mortgage interest, most property taxes, the cost of maintenance and repairs, and other expenses on Schedule E.
Now, how much did you receive in rent and other payments from February through December?
Yes.FromFebruary1throughtheendoftheyear.Actually,thetenantwasthereforthirteenmonths– hejustmovedout.
Yes,that’sright.Howdoesallthataffectmytaxes?
O.K.
Therewasrentof$1,200eachmonth,andthelastmonth’s cleaningdeposit.
Lesson 12: Income – Rental and Schedule K-1s 12-11
How do I handle rental property that the taxpayer also uses?
Whentherentalpropertyisaportionofthetaxpayer’sresidence,therentalincomeandexpensesmustbeallocatedseparatelyfromthetaxpayer’spersonalexpenses.
How do I differentiate between rental expenses and personal use expenses?
ExpensesthatapplytoonlytherentalpartofapropertyarebusinessexpensesandshouldbereportedinfullonScheduleE.Thecostofinstallingasecondphonelinestrictlyforatenant’suse,forexample,isdeductibleasarentalexpense.However,thetaxpayercannotdeductanypartofthecostofthefirstphoneinapartially-rented property,eveniftenantsuseit.
Expensesthatbenefittheentirepropertymustbedividedbetweenrentaluseandpersonaluse;therentalportionisreportedonScheduleE.Ifdeductionsareitemized,thepersonalportionofhomemortgageinterestandpropertytaxmaybereportedonScheduleA.Thetaxpayercanchooseanyreasonablemethodtoallocatetheexpenses.Themostcommonmethodsarebasedonthenumberofroomsinthe dwellingoronthetotalareaofthedwelling.
OnScheduleE,reportexpensesthatapplyexclusivelytotherentalroomandtheallowedpercentageofexpensesthatbenefittheentirehouse.Forexample,iftherentedportionis10%oftheproperty:
• 100%ofthecosttowallpaperthetenant’sroom
• 10%ofpropertytaxes,utilities,mortgageinterest,anddepreciation
sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… tony responds…
I have Form 1098 for your mortgage interest and the invoice for your property taxes. I’ll need the amount of your homeowners insurance for the year. Did you have any other expenses related to renting, such as repairs or improvements?
We’ll report the paint job on Schedule E as an expense. We’ll also work out the depreciation on both the house and the refrigerator.
Yes,justbeforeIleftthecountry,Ispent$1,000havingtheplacepaintedandIinstalledanew refrigerator.
Point out that taxpay-ers who rent out part of a property allocate mortgage interest and property taxes separately on both schedules.
example
Gloriarentsoneroominherhousetoatenant.Thetotalsquarefootageofherhouseis1,200squarefeet.Therentalroommeasures10feetby12feet(120squarefeet,or10%ofthetotalhouse).Shemaydeduct:
•100%ofanyexpensesthatrelateonlytotherentalportionofthehouse,suchasrepairsorupgradestotherentedroom
•10%ofanyqualifiedexpensethatbenefitstheentirehouse
Ask a volunteer to read the Gloria example.
Lesson 12: Income – Rental and Schedule K-1s12-12
ExErcisEs (continued)
Assign the exercise.
Review the answer with the class when complete.
WhentaxpayerscanitemizepersonaldeductionsonScheduleA,theycanreportthedeductibleexpensesthatbenefittheentirehouseminusthepercentagethatappliestothetenant’sroom.InGloria’scase,ifsheistreatingtherentalportionas10%oftheresidence,shecandeductthefollowingonScheduleA:
• 90%ofthemortgageinterest
• 90%ofthepropertytaxes
Question 9:Fortaxpayerswhorentpartofapropertyinwhichtheylive,whichexpensesarereportedonlyonScheduleEandnotonScheduleA?
A.Homeinsuranceandmortgageinterest
B.Propertytaxesandrepairs
C. Utilities and home insurance
D.Depreciationandpropertytaxes
How should taxpayers report rental expenses that exceed their rental income when they live in the home?
Thewaytaxpayersreportrentalexpensesdependsonhowmuchtheyusetheprop-erty.Howtaxpayersreportrentalexpensesthatexceedtheirrentalincomedependsonhowmuchtheyusetheproperty.
Taxpayerswhodonotusetherentalhomeastheirresidenceshould:
• Includetherentasincome,and
• Deductalltherentalexpenses,evenifexpensesexceedincome
Taxpayerswhorentouttheirresidence15daysormoreduringtheyearshould:
• Includetherentasincome,and
• Deducttherentalexpensesuptotherentalincome;expensesthatexceedrentalincomemaynotbedeductible
Taxpayerswhorentouttheirresidencefewerthan15daysduringtheyearmaynot includetherentasincomeordeductrentalexpenses.
Are there any limitations?
Deductibilitylimitationsapplytorentalexpensesforadwellingthetaxpayerusesasahomemorethanthegreaterof:
• 14days,or
• 10%ofthenumberofdaysduringthetaxyearthepropertyisrentedatfairmarketvalue
.
The rental portion of utilities, home insurance, repairs, and depreciation are rental deductions claimed on Schedule E, but the personal portions are not reported on Schedule A.
Aresidenceordwellingunitmightbeahouse,apartment,condominium,mobilehome,boat,orsimilarproperty.Thelimitationsdonotapplytohotels,motels,inns,orsimilardwellingunits.
Lesson 12: Income – Rental and Schedule K-1s 12-13
ExErcisEs (continued)
Are there any exceptions?
Taxpayerswhousedadwellingunitastheirmainhomemaynothavetocountallthattimeas“daysofpersonaluse”if,for12ormoreconsecutivemonths,theyrentedortriedtorentthedwellingunitatafairrentalprice.Inthiscase,daysofpersonalusedonotincludethetimethetaxpayerusedthepropertyashisorhermainhomebeforeorafterrentingitorofferingitforrent.
Thisexceptionappliesforthepurposesofdeterminingwhethertolimitthedeductibil-ityofrentalexpenses.Itdoesnotapplywhendividingexpensesbetweenrentalandpersonaluse.
Anydaythetaxpayerspentworkingsubstantiallyfulltimerepairingandmaintainingtherentalpropertyisnotcountedasadayofpersonaluse,evenifthetaxpayer’sfamilymembersusedthepropertyforrecreationpurposesonthesameday.
Question 10:Whichofthefollowingtaxpayerscannotdeductanyoftheir rentalexpenses?
A.Julio,whorentedouthishouseeightmonthslastyear.Afterthetenantsmovedout,helethissisterandbrother-in-lawstayinthehousetwomonthsrent-free.
B.Marcel,whorentedaroomofhiscondoallyearandlivedtherehimself11months.
C.Cherice,whoofferedaroomforrentinherhomeallyear,buthadonlyonerenterwhostayedjustonemonth.
D. Lois, who rented her home 12 days, then allowed her father to live there rent-free the rest of the year while she worked overseas.
Ask a volunteer to read the Latricia example. Answer any student questions.
example
Latriciaconvertedthebasementofherhomeintoaone-bedroomapartment.Sherentedtheapartmentoutatafairrentalpricetocollegestudentsduringthenine-monthschoolyear.DuringJune,Latricia’sbrotherstayedintheapartmentrent-free.(Thisisconsideredpersonaluse.)LimitationsapplytoLatricia’srentalexpensedeductionsbecausetheapartmentwasusedforpersonalpurposesfor30days,whichwasmorethanthegreaterof:
•14days,or
•10%ofthe270daysitwasrented(27days)
Direct students to review the Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home in Publication 17, Chapter 9, Rental Income and Expenses.
example
OnFebruary28,2008,Trentmovedoutofthehousehehadlivedinforsixyearsbecauseheacceptedajobinanothertown.HerentedhishouseatafairrentalpricefromMarch15,2008,toMay14,2009.OnJune1,2009,hemovedbacktotownandmovedbackintohishouse.Becauseherentedhispropertyfor12ormoreconsecutivemonths,hisuseofthehouseisnotcountedaspersonaluse.Sincethesedaysarenotcountedasdaysofpersonaluse,thelimitationsondeductionsdonotapply.
Ask a volunteer to read the Trent exam-ple. Answer any stu-dent questions.
Assign the exercise.
Review the answer with the class when complete.
Lois rented her home out fewer than 15 days dur-ing the year and used it for personal purposes by allowing her father to live there rent-free.
Lesson 12: Income – Rental and Schedule K-1s12-14
Tax Software Hint:Ifthepropertywasusedasarentalfortheentireyear,theincomeandexpensescanbereportedonScheduleE.Ifthepropertywasusedpartiallyasarentalandpartiallyasaresidence,someexpensesmayneedtobeallocated.Forsoftwareentries,gototheVolunteerResourceGuide(Tab2),ScheduleE–RentalIncomeandLoss.
How do I handle rental losses?
Deductingallrentalexpensesanddepreciationfromtherentreceivedmayresultinanetloss.Rentallossesarenotalwaysfullydeductible.Therearetworestrictionsonhowmuchalosscanoffsetothersourcesofincome:
• At-riskrule
• Passiveactivitylaw
What is the At-Risk Rule?
Theat-riskruleplacesalimitationontheamountthetaxpayercandeductaslossesfromactivitiesoftendescribedastaxshelters.Generally,anylossfromanactivitysubjecttotheat-riskrulesisallowedonlytotheextentofthetotalamountthetaxpayerhasatriskintheactivityattheendofthetaxyear.
What is the Passive Activity Law?
Thepassiveactivitylawstatesthatpassiveactivitylossescanbedeductedonlyfrompassiveactivityincome.Passiveincomedoesnotincludesalary,dividends,orinvest-ments,butisgenerallyattributedtosuchthingsasrentalincome.Therefore,lossesthatexceedrentalincome(thepassiveactivity)arenotdeductible.
Passive vs. Active
Thelimitsondeductingrentallossesareaffectedbythedegreetowhichrentingoutthepropertyisapassiveactivityorinvolvesactiveparticipation:
• Passiverentalactivitymeansreceivingincomemainlyfromtheuseofpropertyratherthanforservices.
• Activeparticipationmeansmakingsignificantmanagementdecisions,suchasapprovingrentalterms,repairs,expenditures,andnewtenants.Taxpayerswhousealeasingagentorpropertymanagercouldbeconsideredactiveparticipantsiftheyretainfinalmanagementrights.
Exception
Rentalactivitiesaregenerallyconsideredpassiveactivities.Forthisreason,rentallossesarenotfullydeductible.However,anexceptiontothepassiveactivityruleprovidesthattaxpayerswhoactivelyparticipateintherentalactivitycanuseupto$25,000oftheirrentallossestooffsetanyothernonpassiveincome($12,500formarriedtaxpayersfilingseparatelyandlivingapartfortheentireyear).Examplesofnonpassiveincomearesalaries,wages,commissions,tips,self-employmentincome,interest,dividends,annuities,andsomeroyalties.
Lesson 12: Income – Rental and Schedule K-1s 12-15
ExErcisEs (continued)
What is active participation?
Itisconsideredactiveparticipationwhentaxpayersownatleast10%oftherentalpropertyandmakemanagementdecisionsinasignificantandbonafidesense.Managementdecisionsincludeapprovingnewtenants,decidingonrentalterms,approvingexpendi-ture,andsimilardecisions.
Phase-Out of Offset
Theamountallowedtooffsetnonpassiveincomeis:
• Reducedoncethetaxpayer’sadjustedgrossincome(AGI)exceeds$100,000($50,000formarriedfilingseparately)
• CompletelyphasedoutwhenAGIexceeds$150,000($75,000formarried filingseparately)
RefertaxpayerswithanAGIover$100,000totheIRSoraprofessionaltaxpreparer.
Question 11:Whichrestrictionlimitsthedeductibilityofrentallosstotheamountofrentalincome?
A.Phase-OutofOffset
B. Passive activity law
C.Activeparticipationrule
How are passive rental losses reported?
TaxpayersuseForm8582tofiguretheamountofanypassiveactivitylossallowedforthecurrenttaxyear.Form8582summarizeslossesandincomefromallpassiveactivities.
Generally,taxpayersarenotrequiredtofileForm8582iftheyhave:
• Onlyonepassivelossgeneratedfromarentalactivity,and
• Anadjustedgrossincome(AGI)oflessthan$100,000
Tax Software Hint:ThetaxsoftwarewillautomaticallygenerateandcompleteForm8582ifrequired.IfanyquestionsariseregardingwhethertofileorhowtocompleteForm8582,referthetaxpayertotheIRSoraprofessionaltaxpreparer.
example
SallyJenkins,aU.S.citizen,livesinEuropeandispaid$25,000inwagesbytheU.S.Government,and$100ofinterestincome.SherentedoutherU.S.homeandincurred$1,000inrentallossforthetaxyear.Althoughhersistercollectstherent,Sallymakesallofthedecisionsastowhom,andforwhatamount,thepropertywillberented.WhileSallyisinEurope,shepayshersistertomanagetheproperty.Sally’srentallossof$1,000maybeoffsetagainsthergrossincomeof$25,100becausesheisconsideredtobeanactiveparticipantintherentalactivity.
Ask a volunteer to read the Sally example. Answer any student questions.
Formoreinformation,seePublication925,PassiveActivityandAt-RiskRules.
Passive activity losses can be deducted only from passive activity income. Taxpayers who are not active participants may not deduct rental losses that exceed rental income.
Assign the exercise.
Review the answer with the class when complete.
Lesson 12: Income – Rental and Schedule K-1s12-16
ExErcisEs (continued)
Question 12:WhichtaxpayerismostlikelyrequiredtofileForm8582,PassiveActivityLossLimitations?
A.Chelsea,whoownstworentaldwellingswithnonetlossandhasanAGIof$111,000
B.Lance,whoownsonerentaldwellingwithalossof$1,444,andhasanAGIof$34,000
C. Sean, who owns one rental dwelling with a loss of $800, and has an AGI of $103,000
Summary
Thetaxpayer’sincomeinterest,dividends(ordinaryandqualified),andcapitalgains(netshort-termandnetlong-term)shouldbereportedontheappropriateformsandschedulesaslistedonpage2ofForm1041,ScheduleK-1.
TaxpayersreceiveaScheduleK-1(Form1065orForm1120S)reportingtheincometheyreceivedfrominterest,dividends(ordinaryandqualified),andcapitalgains(netshort-termandnetlong-term)frompartnershipsandcorporations.Page2ofScheduleK-1liststheappropriateformsandscheduleswherethetaxpayer’sincomefromthesesourcesshouldbereported.
RentalincomeanddeductiblerentalexpensesarereportedonPartIofScheduleE,SupplementalIncomeandLoss.U.S.citizensandresidentaliensmustreportrentalincomeforthemonthstheirhomeisrented,regardlessofwhethertherentalpropertyislocatedintheU.S.orinaforeigncountry.
Whenrentingoutpartoftheproperty,certainexpensesmustbedividedbetweenrentaluseandpersonaluse;somearereportedonScheduleAandsomeonScheduleE.
Taxpayerswhodonotuseadwellingunitasahome(forpersonalpurposes)shouldincludealltherentintheirincomeanddeductalltherentalexpenses.Thosewhorentouttheirhomes:
• 15daysormoreduringtheyearmaynotbeabletodeductrentalexpensesthatexceedrentalincome
• Fewerthan15daysduringtheyearshouldnotreportanyoftheincomeordeductanyoftherentalexpenses
Becauserentalactivitiesaregenerallyconsideredpassiveactivities,rentallossesarenotfullydeductible.However,taxpayerswhoactivelyparticipatedintherentingofthepropertymaydeductupto$25,000oftheirrentallosses,upto$12,500formarriedtaxpayersfilingseparatelyandlivingapart.
Thepassiveactivitylawstatesthatpassiveactivitylossescanbedeductedonlyfrompassiveactivityincome.TaxpayerswithrentallossesmayberequiredtofileForm8582,PassiveActivityLossLimitations.
Sean wouldn’t have to file Form 8582 if his AGI was less than $100,000 and he only had one pas-sive rental loss.
Assign the exercise.
Review the answer with the class when complete.
Review the lesson summary with the class.
Lesson 12: Income – Rental and Schedule K-1s 12-17
ExErcisE answErs
Assign the workbook exercise and review as a class when done (optional).
Answer 1: C. You would deduct four-twelfths (33%) of his mortgage interest and taxes on Schedule E, and report the other 67% on Schedule A.
Answer 2: D. Repairs made to the homeowner’s personal residence are not deductible as rental expenses. However, the other expenses are deductible, along with repairs made to rental property, legal and professional fees, and property management fees.
Answer 3: C. Fencing adds to the value of the property, so the cost cannot be deducted as a rental expense. Instead, it must be depreciated over the useful life of the improvement.
Answer 4: False. Taxpayers should claim the correct amount of depreciation every year. If they don’t, they still must reduce their basis in the property by the amount of depreciation that they could have deducted.
Answer 5: C. The value of land is not depreciable; furniture and vehicles are depreciable property.
Answer 6: B. MACRS (modified ACRS) is the method used for property placed in service after 1986.
Answer 7: D. Wayne’s basis for depreciation is $150,000 ($255,000 minus $155,000 plus $50,000). The basis does not include landscaping expenses.
Answer 8: B. The recovery period of an appliance, based on its class life, is shorter than that of a home, and property located inside the U.S. has a shorter recovery period than property outside the U.S.
Answer 9: C. The rental portions of utilities, home insurance, repairs, and depre-ciation are rental deductions on Schedule E, but the personal portions are not a deductible expense reported on Schedule A. Taxpayers who rent out part of a prop-erty allocate mortgage interest and property taxes separately on both schedules.
Answer 10: D. Lois rented her home out fewer than 15 days during the year and used it for personal purposes by allowing her father to live there rent-free.
Answer 11: B. Passive activity losses can be deducted only from passive activity income. Taxpayers who are not active participants may not deduct rental losses that exceed rental income.
Answer 12: C. If Sean had an AGI of less than $100,000, he wouldn’t have to file Form 8582 because he had only one passive rental loss.
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 12: Income – Rental and Schedule K-1s12-18
Notes
Lesson 13: Income – Unemployment Compensation; Form 1040, Line 19 13-1
Instructor Notes
Introduction
Thislessonwillhelpyouassisttaxpayerswhohaveunemployment compensationpayments.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Identifyunemploymentcompensationincome
• Determinehowtoreportunemployment compensationonthetaxreturn
What is unemployment compensation?
Unemploymentcompensationgenerallyincludesanyamountreceivedunderan unemploymentcompensationlawoftheUnitedStatesorofastate.Inmostcases, itistaxable.
Where can I get unemployment compensation information?
Beginwiththeunemploymentquestionontheapprovedintakeandinterviewsheet. AskthetaxpayerforanyForm(s)1099-G,CertainGovernmentPaymentsthatdocu-mentunemploymentcompensationpaymentsfromeachgovernmententity.
Inmoststates,ataxpayercanelecttohavefederalincometaxeswithheldfromtheirunemploymentcompensationbenefits.Besuretoreviewbox4ofForm1099-Gforanyfederalincometaxwithheld.
How do I report unemployment compensation?
Thetotalforallamountsofunemploymentreceivedinbox1ofForm(s)1099-Gshouldbeenteredon:
• Line3ofForm1040EZ
• Line13ofForm1040A
• Line19ofForm1040
TheamountofwithholdingfromForm1099-G,box4shouldbeenteredon:
• Line7ofForm1040EZ
• Line38ofForm1040A,or
• Line61ofForm1040
Lesson 13: Income – Unemployment Compensation; Form 1040, Line 19
Review objectives with the class.
Point out the resources cited under What do I need?
Ask the students to determine if unemploy-ment compensation is earned income.
Refer students to the Volunteer Resource Guide (Tab H).
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Optional:Form1099-G
Lesson 13: Income – Unemployment Compensation; Form 1040, Line 1913-2
NEW What’s different for 2009?
UndertheAmericanRecoveryandReinvestmentAct,everytaxpayerwhoreceivesunemploymentbenefitsduring2009iseligibletoexcludethefirst$2,400ofthesebenefits.Foramarriedcouple,theexclusionappliestoeachspouse,separately.Ifbothspousesreceiveunemploymentbenefitsduring2009,eachmayexcludethefirst$2,400ofbenefitstheyreceivefromtheirincome.
Iffilingapaperreturn,thereisnoworksheetorformrequiredtotakethisexclusion.Thetaxableamountisentereddirectlyonpage1ofForm1040.IfMarriedFilingJointlyandbothspousesreceivedunemployment,deduct$2,400fromeachspouse’stotalbenefit,thenaddthetwoamountstogetherandenteronthetaxreturn.Ifonetaxpayerreceivedlessthan$2,400inunemployment,theirtaxableamountis$0.
Tax Software Hint:Toreviewinformationrelatedtothesoftware,gotothe
VolunteerResourceGuide(Tab2).
Practice – Vanessa Franklin
Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin. GotoAppendixA-16todetermineifVanessahastoreportanyunemployment compensation.
Summary
Thislessonexplained:
• Howtoidentifyunemploymentcompensation
• Howtoreportunemploymentcompensation
• Howtoexcludethefirst$2,400ofunemploymentcompensationforeachtaxpayer
Review lesson sum-mary.
Direct students to Appendix A-16.
Assign the workbook exercise and review as a class when done (optional).
example
MikeandhiswifeAnabothreceivedunemploymentcompensationduringthetaxyear.Mikereceived$4,000,andAna’sbenefitstotaled$1,800.Mike’staxableamountis$1,600($4,000-$2,400),butAna’staxableamountis$0becauseshereceivedlessthan$2,400.Thetotalunemploymentcompensationincomereportedontheirtaxreturnwillbe$1,600.
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 14: Income – Social Security Benefits; Form 1040, Line 20a 14-1
Instructor Notes
Introduction
Thislessonwillhelpyouassisttaxpayerswhohavesocialsecurityandequivalentrail-roadretirementbenefits.Thesebenefitsmayormaynotbetaxable.
Toproperlyreportincome,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.TheapprovedintakeandinterviewsheetlistsSocialSecurityandRailroadRetirementBenefitsintheIncomesection.
Askthetaxpayeraboutthereceiptofeitherofthesebenefits.TheSocialSecurityAdministrationissuesFormSSA-1099,SocialSecurityBenefitStatement,tosocialsecuritybenefitrecipients.TheRailroadRetirementBoardissuesFormsRRB-1099,PaymentsbytheRailroadRetirementBoard,andRRB-1099-R,AnnuitiesorPensionsbytheRailroadRetirementBoard.
SeePublications575,PensionandAnnuityIncome,and915,SocialSecurityandEquivalentRailroadRetirementBenefits,foradditionalinformationonthetopicsdiscussedinthislesson.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determinethetaxableportionofsocialsecurityandrailroadretirementbenefits
• Reportsocialsecurityandrailroadretirementbene-fitsonthetaxreturn
What are social security and railroad retirement benefits?
Social Security Benefits
SocialsecuritybenefitsarepaymentsmadeunderTitleIIoftheSocialSecurityAct.Theyincludeold-age,survivors,disabilityinsurance(OASDI)benefitsandsomework-ers’compensationbenefits.
Socialsecuritybenefitsincludemonthlyretirement,survivor,anddisabilitybenefits.Theydonotincludesupplementalsecurityincome(SSI).Certaingovernmentretireeswhoreceiveapensionfromworkarenotcoveredbysocialsecurity.
Someportionofthesocialsecuritybenefitsreceivedmaybetaxable.Generally,ifsocialsecuritybenefitsaretheonlysourceofincome,thenthebenefitsarenottaxable.Inthisinstance,taxpayersmaynotberequiredtofileareturn.However,ifthetaxpay-ersareMarriedFilingSeparatelyandlivedwiththeirspouseatanytimeduringthetaxyear,85%ofthebenefitswillbetaxable.
Lesson 14: Income – Social Security Benefits; Form 1040, Line 20a
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-WOptional:□ Publication575□ Publication 915 □ FormRRB-1099□ FormRRB-1099-R□ FormSSA-1099□ SocialSecurityBenefits
Worksheet
Review objectives with the class.
Point out the resources cited under What do I need?
Lesson 14: Income – Social Security Benefits; Form 1040, Line 20a14-2
Railroad Retirement Benefits (RRBs)
RailroadRetirementBenefits(RRBs)arebenefitspaidtorailroademployeesworkinginjobsthatarecoveredbytheRailroadRetirementAct(RRA).TheRRAbenefitshavetwocomponents:tier1(socialsecurityequivalentbenefits)andtier2(treatedasaqualifiedemployeeplan).Thetier2benefitsarereportedonFormRRB1099-R.ThesefundsarediscussedinthepreviouslessononRetirementIncome.
How are these benefits reported to the taxpayer?
Form SSA-1099
SocialsecuritybenefitsarereportedonFormSSA-1099.Box5showstheamountofnetbenefits.TaxpayerswhodidnotreceiveFormSSA-1099,orhavemisplacedit,cangetaprintoutofbenefitsfromtheirlocalsocialsecurityofficeorrequestareplacementbyaccessingtheSocialSecurityAdministration’swebsiteatSSA.gov.
Form RRB-1099
Tier1railroadretirementbenefitsareequaltothesocialsecuritybenefitthatarailroademployeeorbeneficiarywouldhavebeenentitledtoreceiveunderthesocialsecu-ritysystem.Thesebenefitsarecalled“socialsecurityequivalentbenefits”and,fortaxpurposes,aretreatedlikesocialsecuritybenefits.TheyareshownontheBLUEFormRRB-1099.Box5showsthenetsocialsecurityequivalentbenefitsfortier1.
When are social security benefits and tier 1 RRBs taxable?
Partofthefollowingbenefitsreceivedbythetaxpayermaybetaxable:
• Socialsecuritybenefits
• Railroadretirementbenefits,tier1(socialsecurityequivalentportion)
Tocorrectlycalculatethetaxableportion,youneedtoknowtheamountinbox5ofFormSSA-1099orRRB-1099.Thetaxableamount,ifany,ofataxpayer’ssocialsecuritybenefitsdependsuponfilingstatusandotherreportableincome.Generally,ifsocialsecurity(orsocialsecurityequivalent)benefitswerethetaxpayer’sonlysourceofincome,thebenefitsarenottaxableandthetaxpayerdoesnotneedtofileafederalincometaxreturn.Ifthetaxpayerreceivedsocialsecuritybenefitsandotherincome,completetheSocialSecurityBenefitsWorksheettocalculatethetaxableportion.
Aportionofthebenefitsistaxableiftotalincome(includingtax-exemptinterest),plusone-halfofthebenefitsreceived,ismorethancertainbaseincomeamounts,whichvarybaseduponthetaxpayer’sfilingstatus.AportionofthebenefitsarealsotaxableifthetaxpayerisMarriedFilingSeparatelyandlivedwithhisorherspouseatanytimeduringtheyear.
example
Jacobisaretiredrailroadswitchyardoperator.Usingtheapprovedintakeandinter-viewsheet,thevolunteerdeterminedJacobreceivedRailroadRetirementBenefits.HereceivedFormRRB-1099andFormRRB-1099-R.TheamountfromFormRRB-1099willbeaddedtoanyamountofSocialSecuritybenefits.
Thetaxableportionofsocialsecuritybenefitsisnevermorethan85%ofthenetbenefitsthetaxpayerreceived.Inmanycases,thetaxableportionislessthan50%.
Review how each type of retirement benefit is reported.
Lesson 14: Income – Social Security Benefits; Form 1040, Line 20a 14-3
Ifthetaxpayerfilesajointreturn,combinetheincomeandbenefitsofbothspouseswhencompletingtheworksheet.Evenifonespousereceivednosocialsecuritybenefits,includethatspouse’sotherincomewhencompletingtheworksheet.Ifbothspousesreceivedbenefits,combineboththeirbenefitsandincomewhencompletingtheworksheetforthereturn.
How do I report social security or railroad tier 1 benefits?
Tax Software Hint:Thetaxsoftwarewillperformallthecalculationstodeter-minethetaxableamountbasedonotherinformationonthereturn.Besuretoenterallincome,includingtax-exemptinterest,inorderforthesoftwaretocorrectlycalculatetaxabilityofbenefits.GototheVolunteerResourceGuide(Tab2),RailroadRetirement,CivilService,andSocialSecurityBenefits,forsoftwareentries.
Ifyouarepreparingapaperreturn,firstcompletetheotherincomeandcertainadjust-mentitemsonForm1040,page1.Next,calculatethetaxableamountofsocialsecu-ritybenefitsbyenteringthebox5amountsfromallFormsSSA-1099andRRB-1099intotheSocialSecurityBenefitsWorksheetintheForm1040Instructions.OnForm1040,enterthetotalamountofbenefitsreceivedonline20aandthetaxableportiononline20b.Ifnoneofthebenefitsaretaxable,enter“0”onForm1040,line20b.Ifthetaxpayerisitemizingdeductions,includeMedicarepremiums(PartBandD)fromtheFormsSSA-1099andRRB-1099onScheduleA.Additionally,besuretoreportanyfederalincometaxwithholdingontheappropriatelineofForm1040,page2.
example
WandaandDanarebothretiredandwillfileajointreturn.WandareceivedFormSSA-1099withanamountof$4,300appearinginbox5.Danretiredfromtherail-road,andbox5ofhisFormRRB-1099showsanamountof$6,800.WandaandDanwillusethecombinedbenefitsof$11,100andonlyoneworksheettocalculateifanyoftheirbenefitsaretaxable.
Ask a volunteer to read the Wanda and Dan example.
TheAmericanRecoveryandReinvestmentAct(ARRA)of2009providesa$250paymenttorecipientsofcertainbenefitsreceivedfromtheSocialSecurityAdministrationortheRailroadRetirementBoard.Thiseconomicrecoverypaymentisnottaxable,butitdoesreduceanymakingworkpaytaxcredittherecipientmaybeentitledto.TheeconomicrecoverypaymentiscoveredinLesson29,Payments.
CompletetheSocialSecurityBenefitsWorksheetintheForm1040Instructionstodetermineifanyportionofthebenefitsistaxable.
Lesson 14: Income – Social Security Benefits; Form 1040, Line 20a14-4
ExErcisEs
Answersfollowthelessonsummary.
Question 1: Hankcomestoyoursitetogetsomehelpwithhistaxreturn.Heisupsetbecausehisneighbortoldhimthathewouldhavetopaytaxonallofhissocialsecuritybenefitsthisyear.AftertalkingtoHank,youlearnthathiswifediedin2008.In2009,hesoldhisfarmandmovedintoseniorhousing.Thesaleofthefarmcreated$31,896oftaxableincomeforHank.Hisneighbortoldhim,withthatmuchincome,theentire$11,724ofhissocialsecuritybenefitswouldbetaxable.WhatisthemaximumtaxableamountofHank’sbenefits?
A.$31,896
B.$20,172
C.$11,724
D. $9,965
What are lump-sum benefit payments?
Sometaxpayersmayhavereceivedalump-sumbenefitpaymentin2009.Thispaymentcouldbeforthecurrenttaxyearandforpriortaxyears.Box5ofthetaxpay-er’sFormSSA-1099orFormRRB-1099willincludethelump-sumpayment.Theformwillalsoshowtheyear,oryears,ofthepayment.TheadditionalinformationwillbeshowninDescriptionofAmountinbox3onFormSSA-1099orinboxes7-9on FormRRB-1099.
Whenfiguringthetaxableportionofsocialsecuritybenefits,twooptionsareavailableforlump-sumbenefitpayments:
• Thefirst optionallowsthetaxpayertoreportthewholepaymentin2009,theyearitwasreceived.Whenthetaxpayerchoosesthisoption,completetheSocialSecurityBenefitsWorksheetasusualbyincludingtheentirelump-sumpaymentonline1.
• Thesecond optionistotreatthepaymentasreceivedintheearlieryearoryears.Thisisdonebyfiguringwhetheranypartofthesebenefitsistaxable,basedontheearlieryear’sincome.Anypartthatistaxableisthenaddedtoanytaxablebenefitsforthecurrentyear(2009)andincludedonForm1040,line20b.
Ifthetaxpayerchoosestospreadthepaymentsbacktoearlieryears,only2009incomewillbeadjusted.Thetaxpayerdoesnotfileamendedreturnsfortheearlieryears.However,aspecialproceduremustbeusedtofigurethetaxableportionofthebenefitsassignedtotheearlieryears.Iftaxpayerswanttousethisoption,referthemtoaprofessionaltaxpreparerortoPublication915.
Assign the exercise.
Review the answer when complete.
Up to 85% of a tax-payer’s benefits can be taxable.
Lesson 14: Income – Social Security Benefits; Form 1040, Line 20a 14-5
ExErcisEs (continued)
Question 2: JoanpresentsyouwithherFormSSA-1099,whichincludesalump-sumbenefitpaymentforboth2008and2009.Forwhichoptionwouldyoureferhertoaprofessionaltaxpreparer?
A.Averagingthebenefitoverthenumberofyears
B. A special procedure used to figure the taxable portion of the benefits assigned to the earlier years
C.Reportingthewholepaymentin2009
D.Reportinghalfthepaymentin2008andtheotherhalfin2009
Summary
Thislessonexplainedhowtodeterminewhetherincomefromtaxpayers’socialsecuritybenefitsandrailroadretirementbenefitsistaxable.
Generally,ifsocialsecuritybenefitswerethetaxpayer’sonlysourceofincome,thebenefitsarenottaxableandthetaxpayerdoesnotneedtofileafederalincometaxreturn.Ifthetaxpayerreceivedsocialsecuritybenefitsandotherincome,theSocialSecurityBenefitsWorksheetmustbecompletedtocalculatethetaxableportion.
Whenfiguringthetaxableportionofsocialsecuritybenefits,twooptionsareavail-ableforlump-sumbenefitpayments.Thetaxpayermayreportthewholepaymentintheyearitwasreceivedortreatthepaymentasreceivedintheearlieryearoryears.TaxpayerswhowanttousethelatteroptionshouldbereferredtoaprofessionaltaxpreparerorPublication915.
Ifyouareunabletocompletetheentireexercise,completeasmuchofitasyoucan.Comebacklatertofinishtheexerciseafteryoucoveredallthetechnicaltopicsinlaterlessons.
Review the lesson summary with the class.
Assign the workbook exercise and review as a class when done (optional).
Assign the exercise.
Review the answer when complete. Emphasize that B and C are the only options available under the cur-rent tax law. Answers A and D are not allow-able options.
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 14: Income – Social Security Benefits; Form 1040, Line 20a14-6
ExErcisE answErs
Answer 1: D. $9,965 or 85% of the net benefits is the maximum amount that could ever be taxable.
Answer 2: B. There are only two options available for figuring the taxable portion of social security benefits paid as lump-sum benefit payments. The first option allows the taxpayer to report the whole payment in the year it was received. The other option is a special procedure that must be used to figure the taxable portion of the benefits assigned to the earlier years. Refer taxpayers who want to use this option to a professional tax preparer or to Publication 915.
Notes
Lesson 15: Income – Other Income; Form 1040, Lines 21-22 15-1
Instructor Notes
Introduction
Thislessonwillhelpyoudetermineotherformsofincomeandhowtoreportothersourcesofincome.PartofthelessonisforallcourselevelsandpartisonlyfortheInternationallevel.
TheInternationalpartofthislessonwillhelpyoureportincomeearnedfromworldwidesources.Todothis,youneedtobeabletoidentifythetypeofincomeand,ifreportable,convertittotheequivalentU.S.dollarvalueoftheforeigncurrency.Thisrequiresusingthecontemporaneousexchangerateor,ifnotknown,anaverageannualexchangerate.
Thislessonwillhelpyoudeterminewhoiseligiblefortheforeignearnedincomeexclu-sionandhowtocalculatetheexcludibleamountbyusingForm2555,ForeignEarnedIncome,orForm2555-EZ,ForeignEarnedIncomeExclusion.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeabletodetermine:
• Othertypesofincomeandhowtoreportothersourcesofincome
• Howtoproperlyreportincomeearnedfromworld-widesources
• WhoiseligiblefortheforeignincomeexclusionandhowtocalculatetheexcludibleamountusingForm2555,ForeignEarnedIncomeorForm2555-EZ,ForeignEarnedIncomeExclusion
How do I handle other income?
“Otherincome”isanythingthatdoesnothaveitsownlineonForm1040.Hereareexamples:
• Prizesandawards
• Gamblingwinnings,includinglotteriesandraffles
• Jurydutyfees
• AlaskaPermanentFunddividends
Ifyouareunsureaboutsourcesofotherincome,consulttheVolunteerResourceGuide(TabD)andPublication17,OtherIncome,ordiscusstheincomeitemwithyourSiteCoordinator.
Toensurethatalltaxableincomehasbeenincluded,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.
Lesson 15: Income – Other Income; Form 1040, Lines 21-22
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication 54□ Publication4491-W□ Form1040Instructions□ Form2555□ Form2555-EZ□ Optional:Publication525
Totalgamblingwinningsmustbereportedonline21ofForm1040.Ifthetaxpayeralsohadgamblinglosses,thelossescanonlybedeductedonScheduleA.(SeetheItemizedDeductionslessonformoreinformation.)
Review objectives with the class.
Point out the resources cited under What do I need?
Lesson 15: Income – Other Income; Form 1040, Lines 21-2215-2
How do I report other income?
Inmostcases,ifataxpayerhas“otherincome”theymustfileForm1040andreporttheincomeonline21.
Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2).
What is worldwide income?
U.S.citizensandU.S.residentaliensarerequiredtoreportworldwideincomeonaU.S.taxreturnregardlessofwheretheyliveandeveniftheincomeistaxedbythecountryinwhichitwasearned.FilingrequirementsarethesameasforU.S.citizensandU.S.residentalienslivingintheUnitedStatesandapplywhetherincomeisfromwithinoroutsidetheU.S.
U.S.citizensandU.S.residentalienslivingabroadmaybeabletoclaimtaxbenefitssuchastheforeignearnedincomeexclusionandtheforeigntaxcredit.
Incomeistreatedthesameonthereturnregardlessofthecountryfromwhichitisderived.SimilarincomeearnedinsideoroutsidetheU.S.isgenerallytaxedinthesamewayonthereturn.Likewise,incomeearnedintheU.S.andnottaxedwillbetreatedinthesamewayifearnedoutsidetheU.S.ThelinesonwhichincomeisreportedonForm1040arethesamewhethertheU.S.citizenorU.S.residentalienislivingwithinoroutsideU.S.boundaries.
example
In2009,AlfredoKendallearned$40,000whileworkinginDallas,Texas,forDadeCorporation.InSeptember2009,hetransferredtotheirofficeinStuttgart,Germany.WhileinGermany,heearned$30,000(U.S.dollars).AllofAlfredo’swages,includingtheincomeheearnedinGermany,isincludedinhisgrossincome;enter$70,000online7ofhisForm1040.
ForeignincomemightbereportedtothetaxpayeronformsorinwaysthatarenotusedintheUnitedStates.Questionthetaxpayercloselytoensurethatthetaxpayerisreportingallworldwideincome.Reviewtheincomerecordstoensurethatinclud-ibleamountsareaccurateandcomplete.
Ask a volunteer to read the Alfredo example.
Lesson 15: Income – Other Income; Form 1040, Lines 21-22 15-3
ExErcisEs
Answersarelistedfollowingthelessonsummary.
Question 1:MartaBremer,aU.S.citizen,livesinMussbach,Germany.Her2009incomeincluded$22,000inwagesearnedinGermany.Sheearned$300ininter-estfromherU.S.bank.WhatisMarta’stotalincome?
A. $0
B. $22,300
C. $300
D. $22,000
Question 2:MaryCarleton,aU.S.citizen,livesinBelgium.Her2009incomeincluded$10,000inwagesfromherBelgianemployer,$200ininterestfromherU.S.bank,$8,000inalimonypayments,and$7,000inchildsupportpaymentsfromherex-spouse.WhatisMary’stotalincome?
A. $8,000
B. $10,200
C. $18,200
D. $25,200
How do I convert foreign income to U.S. dollars?
Exchange rates
AllamountsontheU.S.taxreturnmustbestatedinU.S.dollars.ConvertincometaxpayersreceivedinforeigncurrencyintoU.S.dollarsusingtheappropriateexchangerate.U.S.exchangeratesarestatedintwoways:
• UnitsofforeigncurrencytooneU.S.dollar:0.74855Euro=1U.S.dollar
• U.S.dollarstooneunitoftheforeigncurrency:1.33592U.S.dollar=1Euro
ToconvertasumofmoneyintoU.S.dollars,dividetheamountofforeigncurrencybytheexchangeratefortheforeigncurrencytooneU.S.dollar.
example
Ryanreceived3,000Euros(€3000)onadaythattheexchangeratewas0.74855EurostooneU.S.dollar.Basedonthisexchangerate,thevalueofRyan’s€3000is:€3000÷0.74855=$4,007.75
Her gross income includes wages and interest.
Only her child support payments are nontaxable.
Assign the exercises.
Review answers with the class when com-plete.
Ask a volunteer to read the Ryan example.
Theexchangeratesusedherearejustexamples.Youshouldusetheexchangeratesineffectwhentheincomewasactuallyreceived.
Lesson 15: Income – Other Income; Form 1040, Lines 21-2215-4
ExErcisEs (continued)
Inotherwords: Amountofforeigncurrency
=AmountinU.S.dollarsExchangerateofforeigncurrencytooneU.S.dollar
3,000Euros =$4,007.75
0.74855
Question 3:Carynreceived200Eurosonadaythattheexchangerate was.75514EurostooneU.S.dollar.InU.S.dollars,shewouldhave____.
A. $264.85
B. $377.57
C. $115.03
D. $11.50
Question 4:Givenanexchangerateof.7000,howmuchis36,000EurosworthinU.S.dollars?
A. $252.00
B. $25,200.00
C. $51,428.57
D. $61,614.00
Which exchange rate should I use?
Theexchangerateforaparticularcurrencyislikelytochangeeveryday,sotheexchangerateisdeterminedbythedateoftransaction.Thedateoftransactioniseitherthedateonthecheckorthedatethemoneyiscreditedtothetaxpayer’saccount.
However,thetaxpayercanusetheaverageannualexchangerateif:
• Theyhavereceivedforeignincomeevenlythroughouttheyear,and
• Theforeignexchangeratewasrelativelystableduringtheyear
Taxpayersmayusethemonthlyaverageexchangeratesiftheyearnedforeignincomeevenlyforoneormoremonths,butlessthantwelvemonths.
example
EdwardHallworkedinDallasforLubbockIncorporatedfromJanuaryuntilSeptember2009.OnSeptember29,hewastransferredtoLubbock’sMexicoCityoffice,wherehewillbeworkingforthreemoreyears.InMexico,heispaidinMexicanpesos.Becausehereceivedthemajorityofhis2009salaryinU.S.currency,heshouldnotusetheannualaverageexchangeratefortheMexicosourceincome.Ifhedoesnotknowtheexchangerateatthetimehereceived thefunds,hecanusethemonthlyaverageexchangerateforOctober,November,andDecember.
Divide 200 Euros by .75514.
Divide 36,000 Euros by .7000 exchange rate.
Assign the exercises.
Review answers with the class when com-plete.
Ask a volunteer to read the Edward example.
Lesson 15: Income – Other Income; Form 1040, Lines 21-22 15-5
Where to obtain exchange rates
Inmid-January,theIRSdistributesexchangeratesforvariouscurrenciestoitsworld-wideoffices,includingtheprioryear’saverageannualexchangerateinformation.
Toobtainexchangerates,calltheIRSInternationalofficeat215-516-2000(nottoll-free)ortheoverseasIRSoffices.ThephonenumbersoftheseofficesarelistedinPublication54,TaxGuideforU.S.CitizensandResidentAliensAbroad.Exchangeratescanalsobefoundatwww.irs.govbytyping“foreigncurrencyrates”inthesearchbox.Youmayalsocontactbanksthatprovideinternationalcurrencyexchangeservices.
Becausetaxpayersshouldusetheratethatmostnearlyreflectsthevalueofthe foreigncurrencyatthetimetheyreceivetheincome,taxpayersmayuseanexchangeratethatisdifferentfromtheratespostedinIRSworldwideofficesiftheyfindittobeatruerepresentation.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2).
What is the foreign earned income exclusion?
Certaintaxpayerscanexcludeincomeearnedin,andwhilelivingin,foreigncountries.For2009,themaximumexclusionamountis$91,400.TheforeignearnedincomeexclusiondoesnotapplytowagesandsalariesofU.S.militarymembersandcivilianemployeesoftheU.S.Government.
Fortaxyearsbeginningafter2005,nonexcludedincomeistaxedforboththeregulartaxandtheAMT(AlternativeMinimumTax)attheratesthatwouldapplyiftaxableincomeincludedtheforeignearnedincomeexclusionandforeignhousingexclusion.
TheForeignEarnedIncomeTaxWorksheetfromtheForm1040Instructionsmustbeusedtocalculatethetax.Thetaxsoftwarewilldothisautomatically.
Ifthetaxpayerqualifiestoexcludeforeignearnedincome,theexcludableamountwillbereportedasanegativeamountonForm1040,line21.SincetheforeignearnedincomewouldhavebeenreportedonForm1040,line7astaxablewagesoronline12asself-employmentincome,theexclusion(negativeamount)willreducethetotalincomecalculatedonline22.
When do I choose the exclusion?Theforeignearnedincomeexclusionisvoluntary.Itisnotalwaysanadvantagetoclaimtheexclusion.Iftaxpayerswishtoclaimtheexclusion,theymustfileeitherForm2555-EZorForm2555withatimelyreturn(includingextensions).Ifthetaxpayerisnoteligiblefortheforeignearnedincomeexclusion,anytaxespaidonthisincometoaforeigngovernmentmaybeeligiblefortheforeigntaxcredit.SeethelessonForeignTaxCreditformoreinformation.
Direct students to the tax software tab men-tioned here.
Point out that vol-unteers should help taxpayers determine if taking the exclusion will benefit them.
Form6251,AlternativeMinimumTax,isoutofscope.Referthetaxpayertoaprofes-sionaltaxpreparerifForm6251isapplicable.
Lesson 15: Income – Other Income; Form 1040, Lines 21-2215-6
ExErcisEs (continued)
Oncethetaxpayerchoosestoexcludeforeignearnedincome,thatchoiceremainsineffectforthatyearandalllateryearsuntilrevoked.Taxpayersmayrevoketheexclu-sionforanytaxyearbyattachingastatement.Whentheexclusionisrevoked,thetaxpayermaynotclaimtheexclusionagainforthenextfivetaxyearswithouttheapprovaloftheIRS.
What are the eligibility requirements?
Toclaimtheforeignearnedincomeexclusion,taxpayersmust:
• Demonstratethattheirtaxhomeisinaforeigncountry
• Meeteitherthebonafideresidencetestorthe physicalpresencetest
• Haveincomethatqualifiesasforeign earnedincome
Therequirementsareappliedseparatelytoeachindivid-ual.Ifahusbandandwifeareworkingoverseas,eachmustmeetallrequirementstoqualifyfortheexclusion.Iftheydoqualify,eachisentitledtoanexclusionofupto$91,400(onqualifiedincome)for2009.
Question 5:MirandahaslivedinPuertoRicosince2001.Issheeligiblefortheforeignearnedincomeexclusion? ¨ Yes þ No
How do I determine the tax home?
Toclaimtheforeignearnedincomeexclusion,thetaxpayer’staxhomemustbeinaforeigncountry.Thetaxhomeisdefinedasthecountryinwhichthetaxpayerisperma-nentlyorindefinitelyengagedtoworkasanemployeeoraself-employedindividual,regardlessofwherethefamilyhomeismaintained.
Fortaxpayerswhoworkabroadbutdonothavearegularplaceofbusinessbecauseofthenatureofthework,theirtaxhomeistheplacewheretheyregularlylive.ThetaxhomeformembersoftheU.S.ArmedForcesisthepermanentdutystation,eitherland-orship-based.Generally, most U.S. military members and their dependents do not qualify for the foreign earned income exclusion.
example
JohnandMaryarebothinthearmedforcesandhavebeenpermanentlystationedinGermanysinceAugust2004.Theirtaxhomefor2009isGermany.
Theterms“foreign,”“abroad,”and“overseas”donotincludePuertoRico,U.S.VirginIslands,AmericanSamoa,Guam,theCommonwealthoftheNorthernMarianas,WakeIsland,theMidwayIslands,andJohnstonIsland.
Puerto Rico is not a foreign country.
Assign the exercise.
Review answer with the class when com-plete.
Ask a volunteer to read the John and Mary example.
Lesson 15: Income – Other Income; Form 1040, Lines 21-22 15-7
ExErcisEs (continued)
Question 6:AlanhaslivedandworkedinChinasinceAugust16,2002.For2009,Chinaishistaxhome. þ True ¨ False
What is a regular place of abode?
Forpurposesoftheforeignearnedincomeexclusion,iftaxpayersworkoverseasforanindefiniteperiodoftime,andtheirregularplaceofabodeistheU.S.,thetaxpayerscannotdesignatetheforeigncountryasthetaxhome.
“Regularplaceofabode”isdefinedasone’shome,habitation,domicile,orplaceofdwelling.Itdoesnotnecessarilyincludeone’sprincipalplaceofbusiness.
Ifthetaxpayermaintainsaplaceofbusiness,orisassignedtooverseasemploymentinaforeigncountryforanindefiniteperiod,and does not maintain a regular place of abode in the U.S.,thetaxhomeisoverseasandthetaxpayermaybeeligiblefortheforeignearnedincomeexclusion.
How do I determine whether the U.S. is the taxpayer’s regular place of abode?
AskthreequestionstodeterminewhetheraU.S.homeisthetaxpayer’sregularplaceofabode:
1. DidyouuseyourhomeintheU.S.asaresidencewhileyouworkedatyourjobintheU.S.justbeforegoingabroadtoyournewjob,anddidyoucontinuetomaintainwork(contacts,jobseeking,leaveofabsence,ongoingbusiness,etc.)inthatareaintheU.S.duringthetimeyouworkedabroad?
2. AreyourlivingexpensesduplicatedatyourU.S.andforeignhomesbecauseyourworkrequiresyoutobeawayfromyourU.S.home?
3. DoyouhaveafamilymemberormemberslivingatyourU.S.home,ordidyoufrequentlyuseyourU.S.homeforlodgingduringtheperiodyouworkedabroad?
Iftheanswertotwoofthequestionsis“no,”thetaxpayerisconsideredtobeindefi-nitelyassignedtothenewlocationabroadandiseligiblefortheforeignearnedincomeexclusion.
Iftheanswertoallthreequestionsis“yes,”andthejobdurationisforlessthanoneyearwiththetaxpayerreturningtotheU.S.home,thetaxpayerisconsidered“tempo-rarilyaway”fromhome.Inthiscase,thetaxpayerdoesnotqualifyfortheforeignearnedincomeexclusion,butmayqualifytodeductaway-from-homeexpenses.
Iftheanswertotwoofthethreequestionsis“yes,”withthesameexpectationofjobdurationandreturntotheU.S.home,thelocationofthetaxhomedependsonthefactsandcircumstances.
Generally, the tax home is the country in which taxpayers maintain their place of business.
Assign the exercise.
Review answer with the class when com-plete.
Point out that detailed information on deter-mining the taxpayer’s abode and tax home is in Publication 54.
Lesson 15: Income – Other Income; Form 1040, Lines 21-2215-8
ExErcisEs (continued)
ExErcisEs (continued)
Question 7:Stanisemployedonanoff-shoreoilrigintheterritorialwatersofaforeigncountryandworksa28-dayon/28-dayoffschedule.HereturnstohisfamilyresidenceintheU.S.duringhisoffperiods.DoesStan’semploymentsatisfythetaxhometest?¨ Yes þ No
What is the period of stay requirement?
Theperiodofstayistheamountoftimethetaxpayerstaysintheforeigncountry.Tomeettheperiodofstayrequirement,thetaxpayermustbeeither:
• AU.S.citizenorU.S.residentfromataxtreatycountrywhoisabona fide resident ofaforeigncountry(orcountries)foranuninterruptedperiodthatincludesanentiretaxyear,or
• AU.S.citizenorU.S.residentalienwhoisphysicallypresentinaforeigncountryorcountriesforatleast330fulldaysduringanyperiodof12consecutivemonths
What is the bona fide residence test?
Tomeetthebonafideresidencetest,taxpayersmustshowthattheyhavesetuppermanentquartersinaforeigncountryforanentire,uninterruptedtaxyear.Simplygoingtoanothercountrytoworkforayearormoreisnotenoughtomeetthebonafideresidencetest.Ataxpayermustestablisharesidenceintheforeigncountry.
AbrieftriptotheU.S.willnotpreventthetaxpayerfrombeingabonafideresident,aslongastheintentiontoreturntotheforeigncountryisclear.
Question 8:Zach,aU.S.citizen,hashomesintheU.S.andinSpain,wherehehasworkedforthelasttwoyears.Zach’swife,whoisalsoaU.S.citizen,liveswithhiminSpain.ZachvisitstheU.S.frequently.DoesZachmeetthebonafideresidencetestinSpain? þ Yes ¨ No
example
CharlesisamilitaryspousewhohaslivedandworkedinEnglandsince2003.HismotherstilllivesintheU.S.CharlescametotheU.S.fortwoweeksin2009tobewithhismotheraftershehadsurgery.Charles’triptotheU.S.doesnotaffecthisstatusasabonafideresidentofaforeigncountry.
Having established perma-nent residence in Spain with his wife, he meets the test.
Ask a volunteer to read the Charles example.
Assign the exercise.
Review answer with the class when com-plete.
He is considered to have an abode in the United States.
Assign the exercise.
Review answer with the class when com-plete.
example
Henryisamemberofthearmedforces.HewasassignedtoapostinJapanin2009.Thisassignmentwasforanindefiniteperiodthatexceedsoneyear.Margaret,hiswife,accompaniedhimtoJapanandhasforeignearnedincome.TheyhavenotusedtheirhomeintheU.S.asaplaceofresidenceforoverayear.Therefore,theirtaxhomefor2009isJapan.
Ask a volunteer to read the Henry example.
Lesson 15: Income – Other Income; Form 1040, Lines 21-22 15-9
What is the physical presence test?
Ifthetaxpayerdoesnotmeetthebonafideresidencetestthentheymayqualifyunderthephysicalpresencetestrules.Toqualify,thetaxpayermustbephysicallypresentinaforeigncountry330fulldaysduringaperiodoftwelveconsecutivemonths.
Inorderforadaytocountforthetest,itmustbeafulldayinaforeigncountry.WhenarrivingfromtheU.S.,orreturningtotheU.S.,anydayinwhichpartofthetimeisspentintheU.S.oroverinternationalwatersdoesnotcountasaqualifyingdayinaforeigncountry.
Thetaxpayermaymoveaboutfromoneplacetoanotherinaforeigncountryortoanotherforeigncountrywithoutlosingfulldays.Ifanypartofthetaxpayer’stravelisnotinanyforeigncountryandtakeslessthan24hours,youareconsideredtobeinaforeigncountryduringthatpartoftravel.SeePublication54,PhysicalPresenceTestcolumnforadditionalinformation.
Figuring the 12 Month Period
Any12monthperiodmaybeusedifthe330fulldaysinaforeigncountryfallwithinthatperiod.Ifnecessary,morethanoneperiodmaybeused,includingperiodsthatoverlap.SeePublication54forclarificationonthephysicalpresencerules.
What is qualifying income?
Toqualifyfortheexclusion,incomemustbeearnedincome.
How does earned income qualify for the exclusion?
Toqualifyfortheexclusion,theearnedincomemustbeforservicesperformedinaforeigncountry.AmountspaidbytheUnitedStatesoritsagenciestoitsemployeesdo not qualify fortheexclusion.Thisincludesmilitarypayandpaymentforsuchactivitiesaspostexchanges,commissaries,andofficersclubs.
Earnedincomedoes not include:
• Dividends
• Interest
• Capitalgains
• Alimony
• Socialsecuritybenefits
• Pensions
• Annuities
example
IfataxpayerleftEnglandbyshipat10:00p.m.onJuly6andarrivedinLisbonat6:00a.m.onJuly8,thetaxpayerwouldloseJuly6,7,and8asfulldaysbecausethetriptookmorethan24hours.Inthisexample,ifthetaxpayerremainedinLisbon,thefirstfulldaywouldbeJuly9.
Ask a volunteer to read the taxpayer example.
Lesson 15: Income – Other Income; Form 1040, Lines 21-2215-10
ExErcisEs (continued)
What are sources of earned income?
Toqualifyfortheexclusion,servicesmustbeperformedinaforeigncountry.Wherethepaymentscomefromorwheretheyaredepositedisnotafactorindeterminingthesourceoftheincome.
Ifataxpayerworkspredominantlyinaforeigncountry,butdoessomeworkintheU.S.,anadjustmentmustbemadetothetotalforeignearnedincome.
Question 9:JuanitalivesinScotland.SheisretiredandherincomeconsistsofU.S.socialsecurity,apension,andseveralstockdividends.Doesshequalifyfortheforeignearnedincomeexclusion?¨ Yes þ No
When do I complete and file Form 2555 or Form 2555-EZ?
Ifthetaxpayerqualifiestoexcludeforeignearnedincome,Form2555orForm2555-EZmustbecompleted.Publication54,TaxGuideforU.S.CitizensandResidentAliensAbroad hasanillustrationofataxreturnwithForm2555completedforthehusbandandForm2555-EZcompletedforthewife.
TobeabletouseForm2555-EZ,thetaxpayermust:
• BeaU.S.citizenorresidentalienwhohaswagesandsalaries,butnot self-employmentincome
• Havetotalforeignearnedincomeof$91,400orless
• Havenobusinessormovingexpensedeductions
TaxpayerswhodonotmeettheserestrictionsshouldfileForm2555toclaim theexclusion.
example
EarlworksandlivesintheBahamas.In2009,heworked50weeksintheBahamas.HeattendedabusinessmeetinginFloridaforoneweek,andwasonvacationforoneweek.One-fiftiethor2%ofhiswagesarenotforeignearnedincome,becauseoftheweekspentworkinginFlorida.
Social security benefits, pension, and dividends are not earned income, so she does not qualify.
Ask a volunteer to read the Earl example.
Assign the exercise.
Review answer with the class when com-plete.
example
Margaret,aU.S.resident,isamemberofthearmedforcesandhaslivedinJapansince2007.Hermilitarypayisnoteligiblefortheforeignearnedincomeexclusion.Inhersparetime,sheisaself-employedDJinTokyo.Theincomefromherself-employmentmayqualifyfortheexclusion.
Ask a volunteer to read the Margaret example.
Lesson 15: Income – Other Income; Form 1040, Lines 21-22 15-11
ExErcisEs (continued)
Question 10:MalloryisaU.S.citizenwhohas$34,000offoreignearnedincome(wages).Shehasnootherincome.Whichformshouldshefile?
A.Form2555
B. Form 2555-EZ
How do I complete Form 2555-EZ?
TaxpayerswhoareeligibletofileForm2555-EZshouldcompletePartsI,II,andIVoftheform.CompletePartIIIifthetaxpayerwasintheUnitedStatesoranyofitsposses-sionsduringthetaxyear.
How do I complete Form 2555?
UsethefollowingguidelineswhencompletingForm2555.
• PartIiscompletedbyalltaxpayers
• PartIIiscompletedbytaxpayerswhoqualifyunderthebonafideresidencetest
• PartIIIiscompletedbyalltaxpayerswhoqualifyunderthephysicalpresencetest
• PartIViscompletedbyalltaxpayers–listallforeignearnedincome
• PartViscompletedbyalltaxpayers
• PartVIiscompletedbytaxpayersclaimingthehousingexclusionand/orhousingdeduction
• PartVIIiscompletedbytaxpayersclaimingtheforeignearnedincomeexclusion
• PartVIIIiscompletedbytaxpayerswhohavedeductionsallowedinfiguring adjustmentstogrossincomethatareallocabletotheexcludedincome.Thethreemostcommondeductionsthatmayaffecttheexclusionare:
- One-halfself-employmenttaxplusallexpensesonScheduleC-EZ(self-employ-mentincomemaybeexemptfromincometaxbutnotself-employmenttax)
- Itemizeddeductions
- Movingexpenses
Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2).
example
Michaelandhiswife,Eva,havebeenstationedinAustraliasince2006.MichaelisamemberoftheArmedForcesandEvaoperatesahomedaycarebusiness.TheirtaxhomeisAustralia,andtheymeetthebona-fideresidencetest.Evawantstoexcludeherself-employmentincomefromU.S.taxation.
Becauseherincomeisfromself-employment,shewillneedtocompleteForm2555insteadofForm2555-EZtoexcludetheincome,andmustcompleteScheduleSEtopaysocialsecurityandMedicare.
Her earned income is less than $91,400.
Ask a volunteer to read the Michael and Eva example.
Assign the exercise.
Review answer with the class when com-plete.
Display the Form 1040 page in the tax soft-ware and demonstrate the link to Form 2555 or Form 2555-EZ.
Lesson 15: Income – Other Income; Form 1040, Lines 21-2215-12
Taxpayer Interview and Tax Law Application
LookattheapprovedintakeandinterviewsheetfortaxpayersJackandJillHill(seeMilitaryPracticeExercises,Exercise16,inPublication4491-W.)
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… JIll says…
That is possible. First, we will have to determine if you meet the requirements. Were you working as a military or civilian employee of the U.S. Government?
Great, that would qualify, but Jack’s military pay won’t. [VolunteerlinkstoForm2555-EZonthetaxsoftware.] Let’s see. You are a U.S. Citizen. You earned wages in a foreign country and the total was less than $91,400. You have no self-employment income or business/moving expenses and since you lived on base, you won’t have a foreign housing exclusion. OK, we can use Form 2555-EZ.
Now we have to determine if you meet the bona fide resi-dence or physical presence test and if your tax home is in a foreign country.
Don’t worry, I just need to ask you a few questions. How long did you say you were in Germany?
No problem then. You were living in Germany for the entire year so you are considered a bona fide resident in 2009. Since your home and place of employment were both in Germany, you meet the tax home test. Now, what was your address while you were living in Germany?
What did you do for Bavaria Advertising?
Do you have Bavaria Advertising’s address?
Were you present in the U.S. during 2009? I have to enter the dates on this form. [Onpage2or4oftheapprovedintakeandinterviewsheet, indicateJill’sresponsestothesequestions.]
Willwebeabletoexcludeanyofmyincomeonourtaxreturn?IworkedforBavariaAdvertisinginMunichthispastyearandmade$24,000inU.S.dollars.Iheardthatyoudon’thavetopaytaxesonincomeearnedinaforeigncountryandI’veneverdonethisbefore.
No,BavariaAdvertisingisaforeigncompanyownedbyafamilyrightthereinMunich.
Yeah,thatallsoundsright.
Isurehopeyouknowwhatyouaredoing,itsoundscomplicatedtome.
WemovedonbaseinGermanyonMarch3,2008andjustreturnedtothestatesonJanuary10,2010.
1567AlbionStreet,Munich.
Iwasacopywriter.
Isuredo,itisrighthereonthisstatement.
Notin2009.Butwedidcomehomefortheholidaysin2008.
Direct students to find the approved intake and interview sheet in Publication 4491-W.
Ask two volunteers to role-play the sample interview.
Lesson 15: Income – Other Income; Form 1040, Lines 21-22 15-13
Summary
Totalincomefromallsourcesisenteredon:
• Line22(Form1040,lines7-21)
• Line15(Form1040A,lines7-14)
• Line4(Form1040EZ,lines1-3)(totalincomeisthesameasadjustedgrossincome)
Taxpayersaresometimesalarmedathowhightheirtotalincomeis.Ifthishappens,reassurethetaxpayerthatthereturnisnotfinishedyet!Itisverylikelythatadjust-ments,deductions,andcreditswillconsiderablyreducethetotaltaxowed.
Line21,OtherIncome,includesanytaxableincomeforwhichthereisnotaspecificlineidentifiedinLines7through20ofForm1040.
U.S.citizensandresidentaliensaretaxedonworldwideincome.TheymustfileaU.S.taxreturnevenifalltheincomeisfromforeignsources,andeveniftheypaytaxestoanothercountry.
Whentaxpayerslivingabroadreceiveincomeinforeigncurrency,theamountsreportedonthereturnmustbeconvertedintoU.S.dollars.Theexchangeratesusedshouldreflecttheclosestaccuraterate.
Ifthetaxpayeriseligibletoexcludesomeorallofhis/herforeignearnedincome,thenForm2555orForm2555-EZwillbecompleted.Theexcludibleamountwillbeenteredasanegativenumberonline21tooffsettheincomereportedonline7orline12.
Review the lesson summary with the class.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 15: Income – Other Income; Form 1040, Lines 21-2215-14
ExErcisE answErs
Answer 1: B. Marta’s gross income includes her wages and interest, both of which should be reported on her tax return.
Answer 2: C. Mary’s gross income includes her wages, interest, and alimony, all of which should be reported on her tax return. Her child support payments are her only nontaxable income.
Answer 3: A. Dividing 200 Euros by the .75514 exchange rate comes to $264.85.
Answer 4: C. Dividing 36,000 Euros by the .7000 exchange rate comes to $51,428.57.
Answer 5: No. Miranda is not eligible for the foreign earned income exclusion because Puerto Rico is not a foreign country.
Answer 6: True. Generally, the tax home is the country in which taxpayers main-tain their place of business. Because Alan works in China, it is considered to be his tax home. For taxpayers who do not have a regular place of business because of the nature of the work, their tax home is the place where they regularly live.
Answer 7: No. Stan is considered to have an abode in the United States and does not satisfy the tax home test in the foreign country. He is not eligible for the foreign earned income exclusion.
Answer 8: Yes. Since Zach went to Spain to work and has established a perma-nent residence there with his wife, he meets the bona fide residence test.
Answer 9: No. Social security benefits, pension, and dividends do not qualify as earned income; therefore, Juanita does not qualify for the foreign earned income exclusion.
Answer 10: B. Since Mallory’s earned income is wages (not self-employment) and is less than $91,400, she can file Form 2555-EZ.
Lesson 16: Military Income 16-1
Instructor Notes
Introduction
ThislessonwillhelpyoudeterminewhichincomeitemsreceivedbycurrentandformermembersoftheU.S.ArmedForcesarereportableonthereturn,andthestatusofanymedicalseparationpayorpayrelatedtoserviceinacombatzone.
Communitypropertylawsmayimpacttheincomereportedbysomemilitarymembersontheirreturns.
Toidentifythesetypesofincome,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeabletodetermine:
• WhichincomeitemsreceivedbymembersoftheU.S.ArmedForcesarereportableonthetaxreturn,and
• Thestatusofanymedicalseparationpayorpayrelatedtoserviceinacombatzone
What are the types of income?
U.S.ArmedForcesmembersreceivemanydifferenttypesofpayandallowances.Someareincludibleingrossincomewhileothersareexcludiblefromgrossincome.
RefertotheVolunteerResourceGuide(TabD)fordetailedlistsofthesetypesofmili-tarypayandtodetermineiftheyareincludedingrossincome,orexcluded.
What income is includible?
Includibleitemsaresubjecttotaxandmustbereportedonthetaxpayer’staxreturn.TheitemslistedinTable1ofPublication3areincludedingrossincome,unlessthepayisforserviceinacombatzoneorinaqualifiedhazardousdutyarea.Allincludiblemilitaryincomewillgenerallybeshowninbox1ofFormW-2andreportedonline7ofForm1040.
Lesson 16: Military Income
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication3□ Publication525□ Publication527□ Publication 555□ Publication4491-W
Iftheamountshowninbox1ofFormW-2differsfromthelastLeaveandEarningsStatementfor2009,advisethetaxpayertocontactthelocalaccountingandfinanceorpayrollofficeforanexpla-nation.
Review objectives with the class.
Point out the resources cited under What do I need?
Direct students to Publication 3 for this section and the exercises.
Lesson 16: Military Income16-2
ExErcisEs
What income is excludible?
ExcludibleincomedoesnothavetobereportedasincomeonForm1040,Form1040A,orForm1040EZ.Theexclusionapplieswhetherornottheitemisfurnishedinkindorisareimbursementorallowance.
Forexample,theBasicAllowanceforHousing(BAH)canbeexcludedfromgrossincomeasaqualified militarybenefit.Excludibleincomewillnotbeincludedintheamountinbox1onFormW-2.
Answersfollowthelessonsummary.
Question 1: Youneedtoaccountforenlistmentandreenlistmentbonuses separatelywhenpreparingaservicemember’staxreturnbecausetheincomeinformationisnotshownonFormW-2.RefertoPublication3.□ True þ False
Question 2: WhichofthefollowingitemsisexcludiblefromU.S.ArmedForcesmembers’income?
A. Studentloanrepayments
B. Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) income
C. Basicpay
D. Hardshipdutypay
What is military separation with disability severance pay?
Disabilityseverancepayhasvaryingeffectsonaservicemember’sincomeandtaxes.
What is severance pay?
U.S.ArmedForcesmemberswhohavebeenseparatedfromtheserviceafteryearsofserviceorformedicalreasonsaregivenseverancepay,whichisgenerallytaxableaswages.IfthememberreceivesdisabilityseverancepayandislaterawardedVeteran’sAffairs(VA)disabilitybenefits,100%ofthedisabilityseverancebenefitmaybeexcludedfromincome.TheVAmakesthedeterminationthatthememberisentitledtomedicaldisabilitybenefits,andthedeterminationprocesscantakeseveralmonths,andsometimesyears.
What is VA disability compensation?
VAdisabilitycompensationisamonetarybenefitpaidtoveteranswhoaredisabledbecauseofinjuryordiseaseincurredoraggravatedduringactivemilitaryservice. Theserviceoftheveteranmusthavebeenterminatedthroughseparationordischargeunderhonorableconditions.Disabilitycompensationvarieswiththedegreeofdisabilityandthenumberofdependents,andispaidmonthly.Thebenefitsarenotsubjecttofederalorstateincometax.
Both allowances are non-taxable income.
Bonuses are reflected on Form W-2.
Assign the exercises.
Review answers with the class when com-plete.
IfU.S.ArmedForcesmemberswereprovidedacommuterhighwayvehicle(suchasavan)bytheiremployer,referthemtoPublication525,TaxableandNontaxableIncome,andtoaprofessionaltaxpreparer.
Lesson 16: Military Income 16-3
ExErcisEs (continued)
What happens after a service member receives a letter of determination?
OncetheVAsendsaletterofdetermination,allfuturepensionpaymentsfromthegovernmentareoffsetbythedisabilityamountpaiddirectlyfromtheVA.DisabilitypaymentsreceiveddirectlyfromtheVAarenottaxableandarenotincludedinForm W-2orForm1099-R.TheamountofthedisabilitybenefitiscalculatedbytheVA,basedonthepercentageofdisabilityandotherfactors.
Althoughpensionpaymentsmadebeforetheletterofdeterminationwasissuedhavealreadybeentaxed,theletterexemptsfromtaxesthesameamountofpreviouspensionpayments.U.S.ArmedForcesmemberswhohavealreadyfiledataxreturnandreportedthatpensionincomeshouldfileForm1040X,AmendedU.S.IndividualIncomeTaxReturnandattachacopyoftheletterofdetermination.
Question 3: DisabilitypaymentssentdirectlyfromtheVAtothedischargedservicemember_____.
A. Aretaxable
B. Appearonthetaxpayer’sFormW-2or1099-R
C. Are not included on the taxpayer’s Form W-2 or 1099-R
D. MaybeginbeforetheVAissuestheletterofdetermination
What is a combat zone?
AcombatzoneisanyareathePresidentoftheUnitedStatesdesignatesbyExecutiveOrderasanareainwhichtheU.S.ArmedForcesareengagingorhaveengagedincombat.AnareabecomesacombatzoneandceasestobeacombatzoneonthedatesthePresidentdesignatesbyExecutiveOrder.Publication3liststhespecificareasanddates.
example
AnitaZapatawasanactivedutyservicememberwhowasseparatedduetoamedicalcondition,andbeganreceivinghermilitarypensioninFebruary2008.Herearethepaymentsshereportedonher2008taxreturn:
Payments Amount
• Disabilityseverancepay $10,000
• Servicepension $33,000
• Activedutypay $5,000
In2009,theVAdeterminedthatshewasretroactivelyentitledtoaVAdisabilitypensionof$837eachmonthfromthedateofherdischarge(February2008).Shecanamendher2008taxreturntoexclude$9,207($837x11months)ofthepensionshereceivedplustheentire$10,000disabilityseverancepayment.
Shemustattachacopyofherletterofdeterminationtotheamendedreturn.Her2009Form1099-RwillnotincludethenontaxableVAdisabilityretirementsreceivedduring2009.
Point out the need to file an amended return under the conditions described here.
Ask a volunteer to read the Anita example.
Answer any student questions.
Disability payments are paid directly from the VA and not listed on Form W-2.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 16: Military Income16-4
HazardousdutyareasaredeterminedbyCongress.MembersoftheArmedForcesdeployedoverseas,awayfromtheirpermanentdutystation,insupportofoperationsinaqualifiedhazardousdutyarea,orperformingqualifyingserviceoutsidethequalifiedhazardousdutyarea,aretreatedasiftheyareinacombatzoneforfederalincome taxpurposes.
What is the combat zone exclusion?
MembersoftheU.S.ArmedForceswhoserveinacombatzonemayexcludecertainpayfromtheirincome.Theentitlementtothepaymusthavefullyaccruedinamonthduringwhichtheyservedinthecombatzoneorwerehospitalizedduetowounds,disease,orinjuryincurredwhileservinginthecombatzone.Theydonothavetoreceivethepaywhileinacombatzone,inahospital,orinthesameyeartheyservedinacombatzone.
Thefollowingsectionistohelpyouunderstandwhenpayisconsideredexcludableascombatpay.Youwillnotbemakinganydecisionsaboutwhatisexcludable.Theinformationonthemilitarymember’sFormW-2indicatestheamountofcombatpaywithacodeQ.Ifmilitarymembersfeeltheamountisincorrect,referthemtothelocalaccountingandfinanceorpayrollofficeforclarification.DonotchangeanyamountsontheFormW-2wheninputtinginthetaxsoftware.
What qualifies as service in a combat zone?
Serviceinacombatzoneincludesperiodsthatmilitarymembersareabsentfromdutybecauseofillness,wounds,orleave.If,asaresultofservinginacombatzone,militarymembersbecomeprisonersofwaroraremissinginaction,theyareconsideredtobeservinginthecombatzoneaslongastheykeepthatstatusformilitarypaypurposes.
When does service outside a combat zone qualify as service inside a combat zone?
Militaryserviceoutsideacombatzoneisconsideredtobeperformedinacombatzoneiftheservice:
• Isindirectsupportofmilitaryoperationsinthecombatzone,and
• Qualifiesamemberforhostilefire/imminentdangerpayduetodangersorrisksfromthecombatzone
Militarypayreceivedforthisservicewillqualifyforthecombatzoneexclusioniftheotherrequirementsaremet.
What is nonqualifying presence in a combat zone?
Thefollowingmilitaryservicedoesnotqualifyasserviceinacombatzone:
• Presenceinacombatzonewhileonleavefromadutystationlocatedoutsidethecombatzone
• Passageoverorthroughacombatzoneduringatripbetweentwopointsthatareoutsideacombatzone,and
• Presenceinacombatzonesolelyforamember’spersonalconvenience
Emphasize that vol-unteers will not need to determine what income is excludible. Form W-2 information can only be changed by the payroll office, which then must issue a correct Form W-2.
U.S.servicemembersareconsideredtobeservinginacombatzoneiftheyareeitherassignedonofficialtemporarydutytoacombatzoneor theyqualifyforhostilefire/imminentdangerpaywhileinacombatzone.
Lesson 16: Military Income 16-5
ExErcisEs (continued)
Question 4: Whichofthefollowingmayqualifyasserviceinacombatzone?
A. Temporary duty in a combat zone
B. Travelingthroughacombatzonebetweentwopointsoutsideofthecombatzone
C. Presenceinacombatzonewhileonleavefromadutystationlocatedoutsidethecombatzone
D. Directsupportofaqualifiedhazardousdutyarea,butnotentitledtohostilefire/imminentdangerpay.
What is the amount of the combat zone exclusion?
• Enlistedmembers,warrantofficers,orcommissionedwarrantofficerswhoserveinacombatzoneduringanypartofamonth(evenifit’sonlyoneday)canexcludeallofthatmonth’smilitarypay,includingawardsandre-enlistmentbonusesforwhichthememberbecomeseligiblewhileinthecombatzone.Militarypayearnedwhilehospitalizedduetowounds,disease,orinjuryincurredinthecombatzonecanalsobeexcluded.
• Commissionedofficers(includinglimiteddutyofficers)mayexcludepayaccordingtotherulesforenlistedmembers.However,theamountoftheexclusionislimitedtothehighestrateofenlistedpayplustheamountofimminentdanger/hostilefirepayreceivedforeachmonthduringanypartofwhichtheyservedinacombatzoneorwerehospitalizedasaresultoftheircombatzoneservice.
Combatpayisnotincludedinbox1wagesontheservicemember’sFormW-2,buttheamountisshowninbox12ofFormW-2,withcodeQ.IfservicemembersbelievethetaxablewagesonFormW-2areincorrect,theyshouldcontactthefinanceofficetorequestacorrectedFormW-2.NontaxablecombatpaysometimesincreasesChildTaxCreditortheEarnedIncomeTaxCredit.Ifusingthetaxsoftware,besuretoenterallfieldsonFormW-2.Iffilingapaperreturn,besuretoconsiderthecombatpayamountwhencalculatingthesecredits.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab1).
example
Sgt.BobbyOsagewasnotassignedtoacombatzonebuthediddutythatwasqualifiedforhostilefirepay.Hecanexcludethatincome.
Includes qualifying for hostile fire/imminent danger pay while serving in direct support of a combat zone.
Ask a volunteer to read the Sgt. Osage example.
Ask what if Sgt. Osage did not qualify for hostile fire pay but had to pass through a combat zone on the way to his assignment.
Answer: His pay dur-ing that trip is includ-able.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 16: Military Income16-6
Taxpayer Interview and Tax Law Application
TheMilitaryComprehensiveProblemintheworkbookhasanexampleofFormW-2withcombatpayexcluded.Here’showavolunteermighthelpataxpayerthathascombatpay:
What are the laws regarding community property?
ThecommunitypropertystatesareArizona,California,Idaho,Louisiana,Nevada,NewMexico,Texas,Washington,andWisconsin.Specialrulesapplytomarriedtaxpayerswhofileseparatelyorwhoweredivorcedduringthetaxyearandweredomiciledinacommunitypropertystate.
How do community property laws affect Armed Forces pay?
Marriedtaxpayerswhochoosetofileseparately,whensubjecttocommunitypropertyrules,havetofigurecommunityincomeandseparateincomeforstateandfederalincometax.
Statecommunitypropertylawsapplytoactivemilitarypay.Generally,thepayiseitherseparateorcommunityincomebasedonthemaritalstatusanddomicileofthecouplewhiletheservicememberwas/isinactivemilitaryservice.
Formilitarymembersresidingincommunitypropertystates,thekeywordisdomicile.Domiciledescribessomeone’slegal,permanentresidence.Itisnotalwayswherethepersonpresentlylives.
Whetheranitemissubjecttocommunitypropertylawsdependsonwhetherthepaymentisclassifiedasactivepayorretired/retainerpay:
• Statecommunitypropertylawsapplytoactivemilitarypay.Generally,thecharacterofthepayasseparatefromcommunityincomeisdeterminedbythemaritalstatusanddomicileoftheservicememberandspousewhilethememberisonactive militaryservice.
• ArmedForcesretiredorretainerpaymentsmaybesubjecttocommunitypropertylaws.FormoreinformationseePublication555,CommunityProperty.
Ask two volunteers to role-play the sample interview.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… mrs. FannIn responds…
Let’s talk for a minute about where your husband was stationed.
The combat pay is not taxable, but it’s shown on your husband’s W-2 – here in box 12, with Code Q. I will enter that into the system with the rest of the W-2 information, because combat pay can increase some tax credits. I can show on the tax return that he was in the combat zone, but I don’t need to know the exact dates. Is he serving in Operation Iraqi Freedom?
Myhusbandwasinacombatzoneforpartoftheyear.DoIneedtotellyouthedatesoranything?
That’sright.
Point out that responses to these questions would be noted on page two of the approved intake and interview sheet.
Lesson 16: Military Income 16-7
ExErcisE answErs
Summary
SpecialrulesmaygovernwhethercertainincomereceivedbymembersoftheU.S.ArmedForcesisincludibleorexcludiblefromtaxableincomereportedonthereturn:
• Medicalseparationwithdisabilityseverancepay
• Combatzoneexclusion
• Communitypropertylaws
Answer 1: False. The payments and withholdings for the enlistment and reenlist-ment bonuses are reflected on the service member’s Form W-2.
Answer 2: B. The basic allowance for housing (BAH) and basic allowance for subsistence (BAS) are both nontaxable income.
Answer 3: C. Once the VA sends the letter of determination, all pension payments are offset by the disability amount paid directly from the VA, which is not taxable and not included in any Form W-2.
Answer 4: A. Military members are considered to be serving in a combat zone if they are either assigned on official duty to a combat zone or they qualify for hostile fire/imminent danger pay while serving in direct support of a combat zone.
Review the lesson summary with the class.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 16: Military Income16-8
Notes
Lesson 17: Adjustments to Income 17-1
Instructor Notes
Lesson 17: Adjustments to Income
Introduction
ThislessoncoverstheAdjustedGrossIncomesectionofthetaxreturn.Taxpayerscansubtractcertainexpenses,payments,contributions,fees,etc.fromtheirtotalincome.Thefigureremainingaftercomputingthetaxpayer’sadjustmentstoincomeistheiradjustedgrossincomeor“AGI.”ThelineitemsundertheAdjustedGrossIncomesectionofthetaxreturnareallIntermediatetopics,exceptthepenaltyonearlywith-drawalofsavings,whichisaBasictopic.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• IdentifywhichadjustmentsarewithinthescopeoftheVITA/TCEProgram
• CalculateandaccuratelyreporttheadjustmentstoincomethatarewithinthescopeoftheVITA/TCEProgram
How do I determine if the taxpayer has adjustments to income?
Toidentifytheadjustmentstoincomethatataxpayercanclaim,youwillneedtoaskthetaxpayeriftheyhadthetypesofexpenseslistedontheAdjustedGrossIncomesectionofthetaxreturn.Todeterminethetaxpayer’sadjustmentstoincome,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.Reviewthetaxpayer’sanswersontheirapprovedintakeandinterviewsheet.
Review objectives with the class.
Point out the resources cited under What do I need?
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-WOptional:□ Publication504□ Publication590□ Publication970□ Form1040Instructions□ Form1040(SchSE)□ Form1098-E□ Form1099-INT□ Form1099-OID□ Form8606□ IRADeductionWorksheet
Lesson 17: Adjustments to Income17-2
Duringthetaxyeardidthetaxpayerorspouse:
• Haveanyexpensesasaneducator?
• Receiveincomefromself-employment?
• Payapenaltyforearlywithdrawalofsavings?
• Payalimony?
• MakecontributionstoatraditionalIRA?
• Paystudentloaninterest?
• Receiveincomefromjurydutythatwasturnedovertoanemployer?
• Paycollegetuition?
ThereareotheradjustmentstoincomeonForm1040.Ingeneral,thesearebeyondthescopeoftheVITA/TCEprogram.Ifyoubelieveataxpayercouldbenefitfromoneoftheseotheradjustments,encouragethetaxpayertoconsultaprofessionaltaxpreparer.
YoucanseethetaxsoftwareentryscreenforAdjustmentstoIncomeintheVolunteerResourceGuide(Tab3).
How do I handle educator expenses?
Who is eligible?
Eligibleeducatorscandeductupto$250ofqualifiedexpensespaidin2009.Ifthetaxpayerandspousearebotheligibleeducators,theycandeductupto$500,butneithercandeductmorethantheirfirst$250.Anyexcessexpensesmaybetreatedasanitemizedemployment-relateddeductiononScheduleA.
Atthispointintheinterview,youwillknowifthetaxpayerand/orspouseareeducators.Probealittledeepertoseeiftheyqualifyforthisadjustment.Askquestionssuchas:
• Areyouoryourspouseateacher,instructor,counselor,principal,oraideinaschool?(Cannotbeahomeschool)
• Whatgradeorgradesdoyouteach?(MustbeK-12)
• Wereyouemployedforatleast900hoursduringtheschoolyear? (Requiredminimum)
What expenses qualify?
Ifthetaxpayerorspouseisaneligibleeducator,askfordocumentationofqualifiedexpenses.Advisetaxpayerswhodonothavereceiptswiththem,theymusthavereceiptsforverificationiftheygetaudited.Expensesthatqualifyincludebooks,supplies,equipment(includingcomputerequipment,software,andservices),andothermaterialsusedintheclassroom.Expensesthatdonotqualifyarehomeschooling,nonathleticsuppliesforphysicaleducation,orhealthcourses.
Direct students to Form 1040 – Adjust-ments to Income in tax software, in the Volun-teer Resource Guide (Tab 3).
Lesson 17: Adjustments to Income 17-3
What other rules apply?
Continuetoprobetolearnifthetaxpayerorspousereceivedreimbursementthatwouldreducetheamountoftheireducatorexpenses.Forexample,ask:
• DidyoureceivereimbursementthatisnotlistedonFormW-2?
• Didyouredeemtax-freeinterestonU.S.SeriesEEandISavingsBonds?
• DidyoureceivenontaxableearningsfromaQualifiedTuitionProgram(QTP)orCoverdellEducationSavingsAccount(ESA)?
Educatorexpensesarereducedbyanyoftheseapplicablereimbursements.
How do I report this?
Educatorexpensesareenteredonline23ofForm1040.Don’tforgettoreducethetotaleducatorexpensesbyanyreimbursements,nontaxablesavingsbondinterest,ornontaxabledistributionsfromanESAorQTP.
Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab3),AdjustmentstoIncome.
example
Debbieisapart-timeartteacheratanelementaryschool.In2009,shespent$185onqualifiedexpensesforherstudents.Becauseshehasonly440hoursofdocumentedemploymentasaneducatorin2009,shecannotdeducthereducatorexpenses.
example
Gloriaisa5thand6thgradeteacherwhoworksfull-timeinayear-roundschool.Shehad1,800hoursofemploymentin2009.Shespent$262onsuppliesforherstudents.Ofthatamount,$212wasforeducationalsoftware.Theother$50wasforpamphletsforaunitsheteachessixthgradersonreproductivehealth.Onlythe$212isaqualifiedexpense.Shecandeduct$212.
example
Evelynmanagedtowork1,000hoursasaneducatorin2009whilecompletinggraduatestudies.Shespent$200tobuyqualifiedschoolsuppliesforherstudents.Shecovered$400ofherowneducationalexpensesfromherCoverdellESA.Shecannottakethedeductionforeducatorexpenses.
Ask a volunteer to read the two examples.
Ask a volunteer to read the Evelyn example.
Lesson 17: Adjustments to Income17-4
Taxpayer Interview and Tax Law Application
Bobteacheselementaryschool.HiswifeJanetteacheshighschoolchemistry.Hereishowavolunteerhelpedthemdetermineiftheycantakethedeductionforeducatorexpenses.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… Janet & BoB respond…
You’ve already mentioned that you both work full-time as teach-ers, so you may be able to deduct some of the money you spent on qualified educator expenses. Did you bring your receipts?
Can you tell me what you purchased? Janet, maybe you could go first.
Your receipts add up to $382. Now, we can count only the first $250 of educator expenses, but because you are married and filing jointly, we can count up to $250 for Bob. Bob, tell me about your expenses.
Yours total $263. Now, did either of you receive any reimburse-ment that is not listed on Form W-2?
That would bring your total down to $213.
No, I’m sorry, each person’s expenses have to stand alone. Did either of you receive any reimbursement that is not listed on a Form W-2, from any other source?
Did you redeem U.S. series EE and I Savings Bonds in 2009?
We would complete a form to see what percentage of the tax-free interest should be applied as a reimbursement. One more thing: did you receive distributions from a qualified tuition program or a Coverdell education savings account?
Okay, we can claim $213 for Bob and the maximum $250 for Janet. That gives you a total of $463 on your joint return. Any questions before we go on?
[OntheapprovedIntakeandInterviewSheet,indicatethatthe taxpayersareentitledtotheEducatorExpenseAdjustment.]
[Janet]Yes,allteacherskeepcarefulrecordsoftheirexpenses.HerearemyreceiptsandhereareBob’s.
Sure.Threeareforquickreferencecardsformychemstudents.Andtwoareforspecialreagentsthedepart-mentdoesn’tstock.
[Bob]Thesefourareforartsupplies–paintandbrushes,asyoucansee–andthesetwoareforspecialpapersandsculptingclay.
[Janet]No,wepaidtheseexpensesoutofourownpockets.
[Bob]Wait,nowthatIthinkaboutit, Igotreimbursed$50fortheclay.
[Janet]Can’tweapplysomeofmyexcessexpensetoBobandbringhistotalupto$250?
No.
No,wedidn’t.Whatifwehad?
[Bob]No,neitherofthose.
[Janet]No,Ithinkweunderstand.
Ask two volunteers to role-play the sample interview.
Lesson 17: Adjustments to Income 17-5
How do I handle self-employment tax?
Self-employedtaxpayerscansubtracthalfoftheirself-employmenttaxfromtheirincome.(ThisisequaltotheamountinsocialsecuritytaxandMedicaretaxthatanemployerpaysforanemployee,andwhichisexcludedfromanemployee’sincome.)
If,basedontheinterview,youestablishthatthetaxpayerand/orspousehas self-employmentincome,workwiththetaxpayertocalculatetheself-employmenttaxusingForm1040(ScheduleSE),Self-EmploymentTax;thisiscoveredinLesson28,OtherTaxes.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab3).
How do I handle penalties for early withdrawal?
Taxpayerscanadjusttheirincometodeductpenaltiestheypaidforwithdrawingfundsfromadeferredinterestaccountbeforematurity.Askifthetaxpayerand/orspousemadeanyearlywithdrawalsduringthetaxyear.Ifso,asktoseeForm1099-INT,InterestIncome,orForm1099-OID,OriginalIssueDiscount,documentingthepenalty.
Ifyou’reusingtaxsoftware,youshouldhaveenteredtheearlywithdrawalpenaltyamountwhenyouenteredtheinterestreceivedontheelectronicInterestStatement-ScheduleB.Ifpreparingapaperreturn,enterthepenaltyamountonline30ofForm1040.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab3).
How do I handle alimony paid?
Alimonyisapaymenttoaspouseorformerspouseunderadivorceorseparationinstrument.Thepaymentsdonothavetobemadedirectlytotheex-spouse.Forexam-ple,paymentsmadeonbehalfoftheex-spouseforexpensesspecifiedintheinstru-ment,suchasmedicalbills,housingcosts,andotherexpensescanqualifyasalimony.Alimonydoesnotincludechildsupportorvoluntarypaymentsoutsidetheinstrument.Thepersonpayingalimonycansubtractitasanadjustmenttoincome;thepersonreceivingalimonymusttreatitasincome.
example
In2009,Gloriawithdrew$5,000earlyfromaone-year,deferred-interestcertificateofdeposit.Shehadtopayapenaltyofthreemonths’interest.Shecanclaimthispenaltyamountasanadjustmenttoincome.
Ask a volunteer to read the Gloria example.
Remind students that child support pay-ments are not deduct-ible for the taxpayer and are not taxable to the recipient.
Lesson 17: Adjustments to Income17-6
ExErcisEs
AsummaryofthealimonyrequirementscanbefoundintheAdjustmentssectionoftheVolunteerResourceGuide(TabE).
Whenyouconducttheinterview,askifthetaxpayerpaidalimonyunderadivorceorseparationinstrument.Ifso,explainthatyouneedtheexactamount,aswellasthesocialsecuritynumberoftherecipient,becausetherecipientmustreportthepaymenttotheIRSasincomeandthetwoamountsmustagree.
Foradditionalinformationonalimony,refertotheAlimonychapterinPublication17andPublication504,DivorcedorSeparatedIndividuals.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gotothe
VolunteerResourceGuide(Tab3).
Answersareattheendofthelessonsummary.
Question 1: Victoriadivorcedin2006,Herdivorcesettlementstatesthatshemustpayherex-husband$15,000ayear.Sheisalsorequiredtopayhisongoingmedi-calexpensesforaconditionheacquiredduringtheirmarriage.In2009,themedicalexpenseswere$11,345.Howmuchcanshedeductasanadjustmenttoincome?
A. $15,000
B. $11,345
C. $26,345
D. $3,655
How do I handle IRA contributions?
“IRA”standsfor“IndividualRetirementArrangement.”Itisapersonalsavingsplanthatofferstaxadvantagestosetasidemoneyforretirement.Thissectiondiscusses“tradi-tional”IRAs.AtraditionalIRAisanyIRAthatisnotaRothorSIMPLEIRA.SeetheIndividualRetirementArrangements(IRAs)chapterinPublication17,andPublication590,IndividualRetirementArrangements,formoreinformationonalltypesofIRAs.
SomeofthefeaturesofatraditionalIRAare:
• TaxpayersmaybeabletodeductsomeoralloftheircontributionstotheIRA(dependingoncircumstances).
• Generally,amountsinanIRA,includingearningsandgains,arenottaxed untildistributed.
• Contributionsmaybeeligiblefortheretirementsavingscontributionscredit.
Assign the exercise.
Review answer with the class when com-plete.
Direct students to the Alimony chapter in Publication 17, and Publication 504, Divorced or Separated Individuals.
She can deduct the full amount because it is all required by the divorce instrument.
example
Anthonyhasbeendivorcedforthreeyears.Underhisdivorceinstrument,hepaidhisex-wife$12,000in2009.Asafavor,healsomade$2,400inpaymentstocoverpartofhervehicleleasesoshecouldkeepsteadyemployment.Hecantakethe$12,000asanadjustmenttoincome.Hecannotcounttheleasepaymentsbecausethosewerepaymentsnotrequiredbythedivorceinstrument.
Ask a volunteer to read the Anthony example.
Lesson 17: Adjustments to Income 17-7
example
FredhasatraditionalIRAaccount,andaRothIRAaccount.In2009,Fredcontrib-uted$2,200tohistraditionalIRA,and$1,000tohisRothIRA.ThemostFredwillbeabletodeductisthe$2,200contributiontohistraditionalIRA.
Ask a volunteer to read the Fred example.
AlthoughcontributionstoaRothIRAcan’tbededucted,thetaxpayermaybeeligiblefortheretirementsavingscontributionscredit,discussedinthelessononMiscellaneousCredits.
What are the eligibility requirements for an IRA contribution?
Thetaxpayer,andthetaxpayer’sspouseifapplicable,mustmeettheseeligibilityrequirementsinordertomakeanIRAcontribution:
• TypesofIRAs:VerifythetypesofIRAstowhichthetaxpayerandspousecontrib-uted.OnlycontributionstotraditionalIRAsaredeductible.
• Agelimit:TaxpayerscancontributetoatraditionalIRAonlyiftheyarelessthan70-1/2yearsofageattheendofthetaxyear.Checkthetaxpayer’sbirthdate(andspouse’sifapplicable)indicatedontheapprovedintakeandinterviewsheet.Tomeettheagerequirementfor2009,ataxpayermusthavebeenbornon,orafter,July1,1939.
• Compensation:Individualsmusthavetaxablecompensation(wages,self-employ-mentincome,commissions,taxablealimony,andtaxablescholarshipsorfellowships).
• Timelimits:Contributionsmustbemadebythe duedateforfilingthereturn,notincludingexten-sions.Verifywiththetaxpayerandspousethat theymadethecontribution(s)(orwillmakethem) byApril15,2010.
How much can a taxpayer contribute to an IRA?
ThereisalimittotheamountthatataxpayercancontributetoanIRAeachyear. Thetotalcontribution(combinedcontributionstoallaccounts,includingRothandtradi-tionalIRAs)cannotbemorethanthesmallerof:
• $5,000($6,000forapersonwhoisage50orolderbytheendofthetaxyear)
• Theindividual’staxablecompensation
What is the compensation requirement?
Compensationisgenerallytheincomeataxpayerhasearnedfromworking;italsoincludesalimony,andotherformsofincome.(SeePublication17formoreinformationoncompensation.)TaxpayerscannotmakeIRAcontributionsthataregreaterthantheircompensationfortheyear.
Iftaxpayersfileajointreturn,andonespouse’scompensationislessthantheotherspouse’scompensation,themostthatcanbecontributedforthatspouseisthelesserof:
• $5,000($6,000ifage50orolder),or
Besurethetaxpayerknowsthatifacontributionisreportedonthe2009returnbutisnotmadebythedead-line,thetaxpayermustfileanamendedreturn.
Lesson 17: Adjustments to Income17-8
ExErcisEs (continued)
• Thetotalcompensationincludibleinthegrossincomeofbothspousesfortheyear,reducedby:
- TraditionalIRAcontributionsforthespousewiththegreatercompensation
- AnycontributionfortheyeartoaRothIRAforthespousewiththegreatercompensation
Inotherwords,aslongastheyfileajointreturn,marriedtaxpayers’combinedIRAcontributionscannotexceedtheircombinedcompensation,andneitherspousecancontributemorethan$5,000(or$6,000for50andolder)totheirownIRA.
AlthoughapersonmayhaveIRAaccountswithseveraldifferentfinancialinstitutions,thetaxlawtreatsalloftheirtraditionalIRAaccountsasonesingleIRA.
Question 2:Stanis47;hecontributed$1,000toaRothIRA.WhatisthemaximumhecancontributetoatraditionalIRA?
A. $3,000
B. $4,000
C. $1,000
D. $2,000
Question 3: BobandCarolaremarriedandbothare55yearsold.TheybothworkandeachhasatraditionalIRA.In2009,Bobearned$2,000andCarolearned$50,000.Iftheyfileseparatereturns,whatisthemaximumthatBobcancontrib-utetohisIRA?$2,000
Question 4:IfBobandCarol(fromQuestion3)filejointly,whatisthemaximumtheycancontributetoBob’sIRA?$6,000WhatisthemaximumtheycancontributetobothoftheirIRAs?$12,000
Ask a volunteer to read the Gene and Sue example.
Review the example to ensure that all stu-dents understand it.
Ask a volunteer to read the Bill example.
example
GeneandSuearemarriedandarebothover50yearsold.Geneearned$70,000andSueearned$1,500.In2009,Genecontributed$3,500tohistraditionalIRAand$2,000toaRothIRA,makinghistotalcontributions$5,500.TofigurethemaximumcontributiontoSue’sIRA,useatotalcompensationof$66,000(thatis,$71,500-$5,500).IfGeneandSuefilejointly,theycancontributeupto$6,000toSue’sIRAeventhoughherowncompensationwasjust$1,500.
example
Billis29.HehasatraditionalIRAaccountatCityHomeSavingsBank,andanothertraditionalIRAaccountthroughhisstockbroker.HealsoopenedaRothIRAthroughhisstockbroker.Billcancontributetoanyorallofhisaccountsthisyear,butthecombinedcontributionsfor2009cannotexceed$5,000.
$4,000 + $1,000 = $5,000 maximum for 2009.
If Married Filing Sep-arately, he can contrib-ute no more than his $2,000 compensation.
If Married Filing Jointly, they can con-tribute a maximum of $12,000, up to $6,000 each.
Assign the exercises.
Review answer with the class when com-plete.
Lesson 17: Adjustments to Income 17-9
Special rules for certain military personnel
CurrentorformermembersoftheArmedForcesmayqualifyforadditionalretirementbenefits.UndertheHeroesEarnedRetirementOpportunities(HERO)Acttaxpayerscancounttax-freecombatpaywhendeterminingwhethertheyqualifytocontributetoeitheraRothortraditionalIRA.Beforethischange,membersoftheArmedForceswhoseearningscameentirelyfromtax-freecombatpayweregenerallybarredfromusingIRAstosaveforretirement.
When can IRA contributions be deducted?
MakesureyouarediscussingatraditionalIRAwiththetaxpayer.DeductionscannotbetakenforcontributionstoothertypesofIRAs.Thetaxpayer’sdeductionforIRAcontributionsmaybe“phasedout”(thatis,reducedoreliminated)dependingontheirincome,filingstatus,andwhetherthetaxpayeriscoveredbyaretirementplanatwork.ThedifferencebetweenthepermittedcontributionsandtheIRAdeduction,ifany,isthetaxpayer’snondeductiblecontribution.Form8606,NondeductibleIRAs,mustbecompletedforanynondeductiblecontributions.
Iftaxpayersdonotreportnondeductiblecontributions,allofthecontributionstoatradi-tionalIRAwillbetreatedashavingbeendeducted.Thismeansalldistributionswillbetaxedwhenwithdrawnunlessthetaxpayercanshow,withsatisfactoryevidence,thatnon-deductiblecontributionsweremade.
Form8606requiresbasisinformationinIRAsfromprioryearsandcanbecomplex. IfForm8606isrequired,referthetaxpayertoaprofessionaltaxpreparer.
How do I determine the deduction amount?
YouwillhelptaxpayersdetermineiftheyqualifytodeductallorpartoftheirtraditionalIRAcontributionsfromtheirincome.ThefactorsthataffectwhethertraditionalIRAcontributionsaredeductibleinclude:
• Whetherthetaxpayer(orspouse,iffilingajointreturn)iscoveredbyaretirementplanatwork.ReviewthetablesintheAdjustmenttaboftheVolunteerResourceGuide(TabE).ThesetablesarealsointheIRAchapterofPublication17.
• Thetaxpayer’sModifiedAdjustedGrossIncome(MAGI)beforetakingthededuction.Ifthetaxpayerorspouseiscoveredbyaretirementplan,thedeductionamountwillbereducedoreliminatediftheMAGIonthetaxreturnisaboveacertainlimit.UsetheIRADeductionWorksheetfromForm1040InstructionstofiguretheirMAGIwith-outthededuction.
How do I complete the IRA Deduction Worksheet?
Ifthetaxpayerandspousemeetthegeneraleligibilityrequirements,continuetheinter-viewbyusingtheIRADeductionWorksheet,foundintheForm1040Instructions,asyourguide.
Retirement coverage at work
Askifthetaxpayerand/orspousewerecoveredbyaretirementplanatworkatanytimeduring2009(worksheetstep1).Ifso,theirdeductionmaybelimited.Employeescoveredbyaretirementplanwillhavebox13onFormW-2checked.
Display or direct students to the Tradi-tional IRA Deduction Phaseout Charts in the Adjustment section (Tab E) of the Volun-teer Resource Guide.
Display or direct stu-dents to find the IRA Deduction Worksheet in the Form 1040 Instructions.
Lesson 17: Adjustments to Income17-10
Ifthetaxpayer(orspouse,onajointreturn)isnotcoveredbyaretirementplan,step1bontheIRADeductionWorksheetwilldirectyoutoline7oftheworksheet,whereyouenterthemaximumIRAcontributionlimit—thatis,themostthetaxpayercandeduct.Forajointreturn,completeworksheetline7bforthespouse.
Filing status and income
Ifthetaxpayerorspouseiscoveredbyaretirementplan,theworksheetwillshowtheincomelimitsfordeductingIRAcontributions,basedonthefilingstatusofthereturn.TheworksheetwillalsohelpyoucalculatetheMAGI,bysubtractingcertainotheradjustmentstoincomefromthetotalincomeonthereturn.Noticethattheincomelimi-tationamountonline2maybedifferentforeachspouseonajointreturn,butthattheMAGIcomputationisthesame.Thisisbecauseifonespouseiscoveredbyaretire-mentplanbuttheotherisnot,thenon-coveredspousewillhaveahigherincomelimitbeforetheirIRAdeductionisphasedout.
IftheMAGIisgreaterthantheincomelimits,line6oftheworksheettellsyouthatthedeductioncannotbetaken.Ifthisisthecase,explaintothetaxpayersandansweranyquestionstheymayhaveaboutwhythedeductioncannotbetaken.Thecontributionmaystillbemade,itisjustnotdeductible.
Ifthedeductionisallowed,continuethecalculationtodetermineifthetaxpayerisenti-tledtoafulldeductionorapartialdeduction.Theentryonline7a(andline7bifajointreturn)representsthemaximumallowabledeductionforthattaxpayer.
Line8oftheworksheetasksyoutoentertheearnedincomeshownonthereturn.Thiscalculationdeter-minestheamountofcompensationearnedbythetaxpayer(s).Ifthetaxpayersaremarriedandfilingjointly,andtheircompensationislessthanthemaxi-mumIRAcontributionallowed,youwillhavetogotoPublication590tofiguretheirdeduction.Otherwise,continuewiththeworksheet.
Next,online11,enterthetotalcontributionstotradi-tionalIRAsthatweremade(orwillbemade)byApril15,2010.Theworksheetthenhelpsyoufiguretheamountthatcanbedeductedfromincome.
How do I report the IRA deduction?
Reportthedeductiononline32ofForm1040.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab3).
What if the taxpayer has excess IRA contributions?
AnexcessIRAcontributionisanamountcontributedtoatraditionalIRAthatismorethanwhicheverofthefollowingisthesmalleramount:
• Thetaxablecompensationfortheyear,or
• $5,000($6,000ifage50orolder)
Ifthetaxpayer’sIRAcontribu-tionismorethanthelesserof$5,000($6,000ifage50orolder)ortheircompensation,advisethetaxpayerthattheirexcesscontributions(andallrelatedearnings)shouldbewithdrawnfromtheIRAbeforetheduedate.Iftheexcesscontributionsarenotwith-drawn,anadditionaltaxwillbeassessed.Thistaxonexcesscontributions is discussed in thelessononOtherTaxes.
Point out the caution.
Confirm that students understand.
Confirm that all stu-dents are following this process on the IRA Deduction Work-sheet.
Lesson 17: Adjustments to Income 17-11
Thetaxpayermaynotknowthatacontributionqualifiesas“excess”untilthetaxreturniscompleted.Whenthissituationisidentified,theexcessamount,withanyearningsonthatamount,mustbewithdrawnbytheduedateofthereturn(includingextensions).Iftheexcessamountisnotwithdrawnbytheduedateofthereturn,thetaxpayerwillbesubjecttoanadditional6%taxonthisamount.ThisadditionaltaxiscoveredinLesson28,OtherTaxes.
Thewithdrawnexcesscontributionisnotincludedinthetaxpayer’sgrossincomeifbothofthefollowingconditionsaremet:
• Nodeductionwasallowedfortheexcesscontribution
• Allinterestorotherincomeearnedontheexcesscontributioniswithdrawn
However,taxpayersmustincludetheearningsontheexcesscontributionasincomeonthereturn.Thisincomeisreportedonthereturnfortheyearinwhichthewithdrawalwasmade.
How do I handle student loan interest?
Thestudentloaninterestdeductionisgenerallythesmallerof$2,500ortheinterestpaymentspaidthatyear.Thisamountisgraduallyreduced(phasedout)oreliminatedbasedonthetaxpayer’sfilingstatusandMAGI.
TheselimitsareshownundertheAdjustmentstaboftheVolunteerResourceGuide(TabE).
What type of interest qualifies?
Generally,studentloaninterestispaidduringtheyearonaloanforqualifiedhighereducationexpenses.Theloanmustmeetallthreeoftheseconditions:
• Itwasforthetaxpayer,thetaxpayer’sspouse,orapersonwhowasthetaxpayer’sdependentwhentheloanwasobtained
• Itwaspaidwithinareasonableperiodoftimebeforeorafterobtainingtheloan
• Itwasforaneligiblestudent
Interestdoesnotqualifyiftheloanwasfromarelatedperson,aqualifiedemployerplan,orifthetaxpayerisnotlegallyliablefortheloan.
Ask a volunteer to read the Robert example.
Display or direct students to the Effect of MAGI on Student Loan Interest Deduc-tion Chart in the Adjustment section (Tab E) of the Volun-teer Resource Guide.
example
Roberthastakenhisfirstjobaftercompletinglawschool.HisfilingstatusisSingle.Hepaid$3,000ininterestonhisstudentloansin2009.Withalladjustmentstoincome(exceptstudentloaninterestadjustment),hisMAGIis$49,000.Hecandeduct$2,500ofhisstudentloaninterestasanadjustmenttoincome.
example
Veronicaandherhusbandarefilingjointly.TheirMAGIis$120,000.Shecompletedherdoctoraldegreein2008andpaid$2,400instudentloaninterestin2009.DuetotheirhighMAGI,theirdeductionmustbecalculated;itwillbelessthanthefullamountofinterestthatshepaid.
Ask a volunteer to read the Veronica example.
Ask what if their MAGI is $100,000? $150,000?
Answers: Deduc-tion not affected for $100K; eliminated for $150K.
Lesson 17: Adjustments to Income17-12
ExErcisEs (continued)
Question 5: ToddandJanethaveaMAGIof$45,000.Theyarefilingjointly.Twoyearsago,theytookoutaloansoTodd’smothercouldearnherRNdegreeatnightschool.Toddcouldnotclaimherasadependentonhisreturn.Thisyear,theypaid$1,000ininterestontheloan.Howmuchcantheydeductfromtheirincome?
A. $0
B. $1,000
C. $1,500
D. $2,500
Who is eligible for the deduction?
Generally,ataxpayercanclaimthedeductionifallthefollowingaretrue:
• ThetaxpayerisnotusingtheMarriedFilingSeparatelyfilingstatus
• Thetaxpayerwillnotbeclaimedasadependentonsomeoneelse’sreturn
• Thetaxpayerislegallyobligatedtopayinterestonaqualifiedstudentloan
• Thetaxpayerpaidinterestonaqualifiedstudentloan
• Theinterestisonaloantopaytuitionandotherqualifiedhighereducationexpensesforthetaxpayer,thetaxpayer’sspouse,orsomeonewhomthetaxpayercouldclaimasadependentwhentheloanwastakenout
• Theeducationexpenseswerepaidorincurredwithinareasonableperiodoftimebeforeoraftertheloanwastakenout
• Thepersonforwhomtheexpenseswerepaidorincurredwasaneligiblestudent
Conductaprobinginterviewtoverifythatthetaxpayermeetsallthesetestsforthededuction.
What are qualified higher education expenses?
Qualifiedexpensesinclude:tuitionandfees;roomandboard;books,suppliesandequipment;andothernecessaryexpenses(suchastransportation).
Qualifiedexpensesmustbereducedbycertainothereducationalbenefits.Askthetaxpayeriftheexpenseswereoffsetbyanyofthefollowing:
• Employerprovidededucationalassistancebenefits
• Tax-freedistributionsfromaCoverdellESAorfromaqualifiedtuitionprogram
• U.S.savingsbondinterestexcludedfromincomebecauseitisusedtopayqualifiedhighereducationexpenses
• Certainscholarshipsandfellowships
• Veteran’seducationalassistancebenefits
• Anyothernontaxablepayments(otherthangifts,bequests,orinheritances)receivedforeducationalexpenses
Assign the exercise.
Review answer with the class when com-plete.
His mother is not their dependent.
Lesson 17: Adjustments to Income 17-13
No double benefit allowed
Taxpayerscannotdeductasinterestonastudentloananyamountthatisanallowabledeductionunderanyotherprovisionofthetaxlaw(forexample,ashomemortgageinterest).
What is an eligible educational institution?
Aneligibleeducationalinstitutionisgenerallyanyaccreditedpublic,nonprofit,orprivatepost-secondaryinstitutioneligibletoparticipateinthestudentaidprogramsadministeredbytheDepartmentofEducation.Itincludesvirtuallyallaccredited,public,nonprofit,andprivatelyownedprofit-makingpost-secondaryinstitutions.Ifthetaxpayersdonotknowifaneducationalinstitutionisaneligibleinstitution,theyshouldcontacttheschool.AsearchabledatabaseofallaccreditedschoolsisavailableontheU.S.DepartmentofEducationwebsiteathttp://ope.ed.gov/accreditation/.
Who is an eligible student?
Aneligiblestudentissomeoneenrolledatleasthalf-timeinaprogramleadingtoadegree,certificate,orotherrecognizededucationalcredential.Thestandardforwhatishalfthenormalfull-timeworkloadisdeterminedbyeacheligibleeducationalinstitution.
Where can I get the information?
Ifthetaxpayerpaid$600ormoreininteresttoasinglelender,thetaxpayershouldreceiveForm1098-E,StudentLoanInterestStatement,oranotherstatementfromthelendershowingtheamountofinterestpaid.Thisinformationwillassistyouincomplet-ingthestudentloaninterestdeduction.
Tofigurethedeductionwhenpreparingapaperreturn,usetheStudentLoanInterestDeductionWorksheetintheForm1040Instructions.Youneeddocumentationofallqualifiedstudentloaninterestpaidduringthetaxyear.
SeePublication970,TaxBenefitsforEducation,formoreinformationontheStudentLoanInterestDeduction.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab3),AdjustmentstoIncome.
Ask a volunteer to read the Jeremy example.
example
Thisyear,Jeremypaidinterestonaloanthatallowedhis21-year-olddaugh-ter,Kate,tocompleteaprograminholisticmedicineasafull-timestudentattheSouthwesternCollegeofSynergisticTherapy.Althoughshequalifiesashisdepen-dent,andtheloanpaidforbooks,supplies,andequipment,thecollegeisnotaccredited.Therefore,Jeremycannotdeducttheinterestonthestudentloan.
Lesson 17: Adjustments to Income17-14
Ask two volunteers to role-play the sample interview while the class listens for key information.
Taxpayer Interview and Tax Law Application
HereishowavolunteerhelpedBrendadetermineifshecantakethedeductionforherstudentloaninterest.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… Brenda responds…
In reviewing your intake and interview sheet, I see you did not indicate if you had any educational expenses. Did you pay any student loan interest this year?
Well, you might be able to take a deduction for that. Since you are filing as Single, and your income before adjustments is not more than $55,000, your income is not more than the limit for your filing status. Can you show me a statement from the lender?
The interest amounts add up to $2,600. Now, if your interest payments qualify for the deduction, the most we can claim is $2,500. Do you have any questions about that?
I just need to ask a few questions to see if you qualify, okay? Earlier we decided that you can’t be claimed as a dependent on someone else’s return, so that’s no problem. Can you tell me what you used the loan to pay for?
Did you receive any educational assistance, like from your employer or the Veteran’s Administration?
How about tax-free withdrawals from a Coverdell educational savings account, another qualified tuition program, or from U.S. savings bonds?
Did you get any other nontaxable payments, not counting gifts, bequests, or inheritances, which were specifically for educational expenses?
It looks like you can claim the maximum deduction of $2,500. [IndicateontheapprovedintakeandinterviewsheetwhetherBrendaiseligibleforthisadjustment.]
Yes,IjustgraduatedayearagoandI’llbepayingthoseloansforawhile.
Ihavetwoloans,herearethe statements.
No,Iunderstand.
Mytuitionandfees,andmybooks.
No.
No,noneofthose.
Heavens,no,IwishIhad!
Review with the class the key points they noticed during the interview.
Lesson 17: Adjustments to Income 17-15
How do I handle tuition and fees?
Taxpayerscandeductupto$4,000inqualifiedtuitionandrelatedexpensespaidduringthetaxyear.Theamountofthedeductionisdeterminedbythetaxpay-er’sfilingstatus,modifiedAGI(MAGI),andotherfactors.SeetheVolunteerResourceGuide(TabE),Adjustments,foratableshowinghowtheincomelimi-tationsapply.
Form8917,TuitionandFeesDeduction,willhelpyoucomputethetaxpayer’sMAGIforthisdeduction.
Who is eligible for this deduction?
Thedeductioncanbeclaimedforthetaxpayer,thetaxpayer’sspouse(iffilingajointreturn)andanydependent(forwhomthetaxpayerclaimsadependencyexemption)whoattendedaneligibleeducationalinstitutionduringthetaxyear.
ThetuitionandfeesdeductioncannotbeclaimedbymarriedtaxpayerswhofileasMarriedFilingSeparatelyorbyanindividualwhoisadependentofanothertaxpayer.
Inordertoclaimadeductionforexpensespaidforadependentwhoistheeligiblestudent,thetaxpayermusthavepaidthequalifiedexpensesandclaimanexemp-tionforthedependent.Ifthestudentiseligibletobeclaimedasadependent(eveniftheyarenotactuallyclaimed),andpaidhisorherownexpenses,noonecantaketheadjustment.However,ifthestudentwouldnotqualifyasadependent,heorshecanclaimthededuction,eveniftuitionandfeeswerepaidbyanotherperson.Inthatcase,thestudentcantreattheamountspaidfortuitionandfeesasagift.
TaxpayerswhoarenoteligiblefortheTuitionandFeesAdjustmentbecauseofthedependencyissuemaybeeligibleforaneducationtaxcredit,coveredintheEducationCreditslesson.
example
Leonardhadatotalincomeof$24,000thisyear.HewillfileasSingleandmeetsalltherequirementstotakethededuction.Hepaid$4,427intuitionandfees.BecausehisgrossincomeiswellbelowtheMAGIlimit,hewillbeabletodeductthemaximumamount($4,000)forhistuitionandfeespayments.
example
JuanitaismarriedbutusestheMarriedFilingSeparatelystatus.Shecannotdeductanytuitionandfees.
Thedefinitionofqualifiededucationexpensesforthetuitionandfeesdeductionisexpandedforstudentsattend-ing an eligible educational institutioninMidwesterndisas-terareas.SeePublication970foradditionalinformation.
example
Josephis30andearnsabout$5,000eachyear,sohisparentscannotclaimhimasadependenteventhoughhelivesathomeandgoestoschoolfulltime.OnlyJosephcantaketheTuitionandFeesadjustment,evenifhisparentspayhiseducationexpenses.
Lesson 17: Adjustments to Income17-16
What are qualified tuition and expenses?
Generally,qualifiededucationexpensesareamountspaidfortuitionandfeesrequiredforthestudent’senrollmentorattendanceataneligibleeducationalinstitution.Itdoesnotmatterwhethertheexpenseswerepaidincash,bycheck,creditcard,orwithborrowedfunds.
Qualifiededucationexpensesdonotincludepaymentsfor:
• Insurance,roomandboard,medicalexpenses(includinghealthfees),transportation,orsimilarpersonal,living,orfamilyexpenses.
• Course-relatedbooks,supplies,nonacademicactiv-itiesandequipmentunlessitispaidasaconditionofenrollmentorattendance
• Anycourseorothereducationinvolvingsports,games,hobbies,andnoncreditcoursesunlessthecourseorothereducationispartofthestudent’sdegreeprogram
AskthetaxpayerifthequalifiedtuitionandexpenseswereoffsetbydistributionsfromqualifiedstatetuitionprogramsandfromCoverdellESAs,aswellasinterestfromsavingsbondsusedforhighereducationexpenses.Subtractthesefromthetotalpaymentsfortuitionandfees.
Tohelpyoufigurethetuitionandfeesdeduction,thetaxpayershouldhavereceivedForm1098-T,TuitionStatement.Generally,aneligibleeducationinstitutionmustsendForm1098-TorasubstitutetoeachenrolledstudentbyJanuary31.However,theformonlyreports“amountbilled”or“paymentsreceived.”Youmuststillquestionthetaxpayertodeterminetheamountofqualifiedexpensesactuallypaid,andadjustthisamountbyanynon-taxableitems,suchasscholarshipsortuitionprogramdistributions.
What is an eligible educational institution?
Aneligibleeducationalinstitutionisgenerallyanyaccreditedpublic,nonprofit,orprivatepost-secondaryinstitutioneligibletoparticipateinthestudentaidprogramsadministeredbytheDepartmentofEducation.Itincludesvirtuallyallaccredited,public,nonprofit,andprivatelyownedprofit-makingpost-secondaryinstitutions.Iftaxpayersdonotknowifaneducationalinstitutionisaneligibleinstitution,theyshouldcontacttheschool.
example
Carlyis18andclaimedbyherparentsasadependent.Shetookoutstudentloansandpaidallofherowntuitionandfees.Carlycannottakethededuction,becausesheisadependent.Carly’sparentscan’tclaimthedeductioneitherbecausetheydidnotpaytheeducationexpenses.Carly’sparentsshouldlookintotheeducationcredits.
Therulesforclaimingcourse-relatedbookexpensesaredifferentforthetuitionandfeesdeductionandtheAmericanopportunitycredit.SeeLesson24,EducationCredits,formoreinformation.
ThedefinitionofqualifiededucationexpensesforthetuitionandfeesdeductionwasexpandedforstudentsinMidwesterndisasterareas.SeePublication970formoreinformation.
Lesson 17: Adjustments to Income 17-17
How do I determine the amount of the deduction?
UseForm8917,TuitionandFeesDeduction,tofiguretheMAGIandtheresultingdeductionamount.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab3),AdjustmentstoIncome.
How do I determine the best education benefit for the taxpayer?
Iftaxpayersclaimthetuitionandfeesadjustmenttoincome,theycannotclaimtheeducationtaxcredit.TheeducationcreditsincludetheAmericanopportunityandlifetimelearningcredits,whicharediscussedinmoredetailintheEducationCreditslesson.Formosttaxpayers,thetaxcreditismorebeneficialthantheadjustment.However,itisimportanttocalculateandcomparetheeducationbenefitstodeterminewhichoneisbetterforthetaxpayer.
Completetheentiretaxreturnseparatelyusingfirstthetuitionandfeesdeduction,thentheeducationcredit.Comparethereturnsandchoosethebestoneforthetaxpayer.
Is pay for jury duty an adjustment to income?
Asyoulearnedearlier,jurydutypayreceivedbytaxpayersisincludedinOther incomeonForm1040,line21.Someemployeesreceivetheirregularwagesfromtheiremployerswhiletheyareservingonajuryinsteadofworkingattheirjobs.
Often,employeesmustturntheirjurydutypayovertotheiremployers.Thismaybeclaimedasanadjustmenttoincome.
What about other adjustments to income?
ThereareadditionaladjustmentstoincomeonForm1040.Ingeneral,thesearebeyondthescopeoftheVITA/TCEprogram.Ifyoubelieveataxpayercouldbenefitfromoneoftheseadjustments,encouragethetaxpayertoconsultaprofessionaltaxpreparer.
How do I determine Adjusted Gross Income?
Thetaxpayer’stotaladjustedgrossincome(AGI)istheamountthatisusedtocomputesomelimitations,suchasthemedicalanddentaldeductiononScheduleAandthecreditforchildanddependentcareexpenses.Tofindthetaxpayer’sAGI,followtheinstructionsontheForm1040:
1. AddtheamountsinthefarrightcolumnoftheIncomesection(lines7through21)andentertheresultonline22.Thisisthetaxpayer’stotalincome.
2. AddtheAdjustmentstoIncome(theamountsinlines23through35)andentertheresultonline36.ThesearethetotalAdjustments.
3. Subtractline36fromline22.ThisistheAGI.
Display or refer stu-dents to Form 1040 to follow along.
Demonstrate how to use software to com-pare adjustments to credits.
Lesson 17: Adjustments to Income17-18
Taxpayer Interview and Tax Law Application
HereishowavolunteerhelpedDanielawiththeadjustmentstoincomecoveredin thislesson.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… danIela responds…
Daniela, we’ve totaled your income, so we can go on to Adjustments to Income. We might find ways to reduce the income that you’re taxed on. Do you have any questions before we go on?
Now, let’s review the expenses listed on your intake and interview sheet and the deductions listed in the Adjustments to Income section of Form 1040. Do you have a Health Savings Account?
Okay. We can skip moving expenses because you haven’t moved for your job. That brings us to self-employment tax. As you can see, tax software has calculated half of your self-employment tax and shows it here as an adjustment to income. The same with the penalty for an early withdrawal, right? Since I put that in when I entered your inter-est income, it already shows up as an adjustment.
Did you pay any alimony?
Now, did you contribute to an IRA?
Good for you. You can contribute up to $5,000 this year – will you be contributing any more before April 15? You can put money in your IRA for 2009 right up until the deadline for filing the return.
Was it a traditional, Roth IRA or a SIMPLE IRA?
There we go; it is what we call a traditional IRA. You certainly are under 70½ years of age. Were you covered by any kind of employer retirement plan at any time during 2009?
Because you weren’t covered by a retirement plan, you will be able to deduct the full $2,000 you contributed. [ThevolunteerreviewsallexpenseslistedontheapprovedintakeandinterviewsheetandmovesdowneachlineoftheAdjustmentssectionofForm1040,asksmorequestions,anddeterminesthatDanieladoesnotqualifyfortheremainingadjustments.]
We’ve entered all the adjustments that apply to you. Here is your total income… here are your total adjustments… and here is what we call your Adjusted Gross Income, that will carry over to the second page of the return where we will determine your deduc-tions and exemption amounts. [Ontheapprovedintakeandinterviewsheet,notethatyouhaveaddressedthisadjustment.]
No,itallmakessense.
No,Idon’t.
Cool!
No,I’veneverevenbeenmarried.
Iputin$2,000rightafterChristmas.
Idon’tthinkso,butthat’sgoodtoknow.
ItwasjustaplainoldIRA.Here’sthestatement.
No,none.
That’sgreat!Thisprogrammakesitreallyeasy!.
Ask two volunteers to role play the sample interview while the class listens for key information.
Review with the class the key points they noticed during the interview.
Lesson 17: Adjustments to Income 17-19
Practice - Vanessa Franklin
Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin. GotoAppendixA-17andreviewthesampleinterviewwithVanessarelatedtoanyadjustmentstoincomethatshecanclaim.Returntothislessonafteryouhavereviewedthisinformation.
Summary
Inthislesson,youlearnedhowtoidentifyandworkwiththeseadjustmentstoincome:
• Educatorexpenses
• One-halfofself-employmenttax
• Penaltyonearlywithdrawalofsavings
• Alimonypaid
• IRAdeduction
• Studentloaninterestdeduction
• Tuitionandfeesdeduction
• JuryDutyPayturnedovertothetaxpayer’semployer
Ifyoubelieveataxpayercouldbenefitfromanadjustmentthatwasnotcoveredinthislesson,encouragethetaxpayertoconsultaprofessionaltaxpreparer.
Inthislesson,yousawthattaxsoftwaremakesitmucheasiertoworkwithadjustmentsbyprovidingeasyaccesstoelectronicworksheetsandbydoingmanycalculationsforyou.
Review the lesson summary with the class.
Direct students to Appendix A-17.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 17: Adjustments to Income17-20
ExErcisE answErs
Answer 1: C. She can deduct the full $26,345 because it is all required by the divorce instrument.
Answer 2: B. He can deduct no more than the $4,000 contribution to the traditional IRA.
Answer 3: If Married Filing Separately, Bob can contribute no more than $2,000, the amount of his compensation.
Answer 4: They can contribute up to $6,000 to Bob’s IRA account. If Married Filing Jointly, they can contribute a maximum of $12,000.
Answer 5: A. Because Todd’s mother is not their dependent, they can deduct $0 of the interest they paid.
Lesson 18: Military Moving Expenses 18-1
Instructor Notes
Lesson 18: Military Moving Expenses
Introduction
ThislessonwillhelpyoudeterminewhichmembersoftheU.S.ArmedForcesareentitledtoanadjustmenttoincomeformovingexpenses.Todothis,youwillneedtodeterminequalifyingmoves,allowancesandreimbursements,anddeductiblemovingexpenses.
Todetermineifthetaxpayerhasincurredmovingexpenses,usetheinterviewtech-niquesandtoolsdiscussedintheScreeningandInterviewinglesson.Althoughtheapprovedintakeandinterviewsheetmaynotlistmovingexpenses,itisimportanttoaskprobingquestionstoseeifthetaxpayermayhavesomedeductiblemovingexpenses.
Todeductmovingexpensesasanadjustmenttoincome,thetaxpayergenerallymustmeetcertaintimeanddistancetests.However,amemberoftheArmedForcesonactivedutywhomovesbecauseofapermanentchangeofstationdoesnothavetomeetthesetests.
UnreimbursedmovingexpensesaredeductedusingForm3903,MovingExpenses.ArmedForcesmembersreceiveavarietyofmovingreimbursementsandallowancesthatmustbeconsideredwhendeterminingiftheexpensesaredeductible.Thetravelvoucherwillcontainmuchoftheinformationneededtocomputethededuction.
SeePublication521,MovingExpenses,foradditionalinformationonthetopicsdiscussedinthislesson.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determineifamovequalifiesasapermanentchangeofstation(PCS)
• Identifydeductiblemovingexpenses
• Determinewhenallowancesandreimbursementsmustbeincludedinincome
Review objectives with the class.
Point out the resources cited under What do I need?
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form3903Optional:□ Publication3□ Publication521□ Form1040Instructions
Lesson 18: Military Moving Expenses18-2
ExErcisEs
What is a permanent change of station?
Onlyexpensesincurredasaresultofapermanentchangeofstation(PCS)are deductible.Apermanentchangeofstationincludesamovefrom:
• Hometotheareaofthefirstpostofduty
• Onepermanentpostofdutytoanother
• ThelastpostofdutytohomeortoanearerpointintheU.S.TheArmedForcesmembermustmovewithinoneyearofendingactivedutyorwithintheperiodallowedundertheJointTravelRegulations.
What does a permanent change of station include for spouses and dependents?
IftheArmedForcesmovesservicemembersandtheirspousesordependentstoorfromseparatelocations,themovesaretreatedasasinglemoveandthequalifiedexpensesofbothmovesarecombinedanddeductedonthesametaxreturn.
Question 1: Whichofthefollowingisapermanentchangeofstation?
A.AmovebyanAirForcepilottoanairbaseforasix-monthdetail
B.AmovebyanArmysergeanttohishometwoyearsafterheendedactiveduty
C. A move by a new enlistee from her home to her first post of duty
D.AtemporarymovebyaU.S.Marinetoattendasix-monthtrainingprogram
What expenses are included in the moving expense adjustment?
Qualifyingexpensesaremilitarymovingexpensesthatfallintothefollowingtwo categories.Thecostof:
• Movinghouseholdgoodsandpersonaleffects
• Reasonabletravelandlodgingexpenses
Toqualifyas“reasonable,”theroutetakenmustbetheshortest,mostdirectroute available,fromtheformerhometothenewhome.Additionalexpensesforstopoversorsidetripsarenotdeductibleasmovingexpenses.
Qualifyingexpensesthatexceedgovernmentallowancesandreimbursementsaredeductible.
UsePublication521asaresourceforadditionalinformation.Thispublicationhasdetailedinformationondeductibleandnondeductiblemovingexpenses.ItalsocontainsaspecialsectiononmembersoftheArmedForces.
This is defined as a PCS.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 18: Military Moving Expenses 18-3
How do I handle military reimbursements?
Youneedtodeterminewhetheranymovingallowancesorreimbursementsprovided bythegovernmentshouldbeincludedinaserviceperson’sincome,andhowto accuratelyreportthedeductiononForm1040.
What is a DITY move?
Typically,ArmedForcesmembersmovetheirownhouseholditems,inapersonalorrentedvehicle.ThisiscalledaDoItYourself(DITY)move;themostcommonformofmilitarymove.TheArmedForcesprovidesanincentivepaymentequalto95%oftheestimatedcosttothegovernmentforDITYmoves.Whenthemoveiscompleted,theArmedForcesmemberprovidesreceiptsandpaperworktosubstantiateauthorizedexpenses.Thenetfinancialprofitistaxable,andisreportedonaseparateFormW-2.
How do I report a DITY move?
DITYpaymentsareenteredasincomeonline7ofForm1040.
ArmedForcesmembersmaynottakeamovingexpensedeductionbasedontheexpensesapprovedbythefinanceofficewhensettlingtheDITYmove,astheyhavealreadybeenusedtoreducetaxableincome.
What forms of reimbursement are not included as income?
Certainformsofreimbursementprovidedbythegovernmentarenot to be included as incomeontheArmedForcesmember’staxreturn.
• MovingorstorageservicesfurnishedtotheArmedForcesmember
• Nontaxableallowancessuchas:
- Dislocationallowance
- Temporarylodgingallowance
- Mileageallowanceinlieuoftransportation
- Perdiemallowance
example
CaptainJonesreceivesordersforaPCS.Hechoosestopackanddrivehis householdgoodstothenewdutystationinhisownvehicle.TheAirForce estimatesthatthemovewouldhavecostthegovernment$2,500.CaptainJones’actualexpensesforthemovewere$1,750.Hereceivesapaymentfor$2,375(95%ofthegovernment’sestimate)butBox1onFormW-2willshowonly$625($2,375minus$1,750)fortheDITYmove.CaptainJonescannotdeductanyofhisexpenses,sincehe’salreadybeenreimbursed.
Ask a volunteer to read the Captain Jones example.
Lesson 18: Military Moving Expenses18-4
ExErcisEs (continued)
Question 2: Sgt.BishopreceivedFormW-2for$1,000asaresultofaDITYmovetoanewPermanentDutyStation(PDS).Thegovernmentpaidheramileageallow-anceof$300,alodgingallowanceof$200,andadislocationallowanceof$1,200.HowmuchshouldSgt.Bishopincludeinhergrossincomeonline7ofForm1040?
A.$1,500
B. $1,000
C.$300
D.$200
How do I calculate the adjustment?
Deductionscanonlybeclaimedfortheamountofexpensesnotcoveredbyanontax-ablereimbursementormovingallowance.Ifthetaxpayerhasallowableexpensesthatexceedtheamounttheywerereimbursed,Form3903shouldbecompleted.Form3903isnotneededifallthetaxpayer’sreimbursementswerenontaxableallowancesthatweregreaterthantheirexpenses.
Tax Software Hint: Forsoftwareentries,gotoForm1040,AdjustmentstoIncomeintheVolunteerResourceGuide(Tab3).
Taxpayer Interview and Tax Law Application
RefertotheMilitaryComprehensiveProblem-FannininPublication4491-Wforanexampleofareturnwithmilitarymovingexpenses.Here’showavolunteercouldhelpMrs.Fannindetermineifshehadanydeductiblemovingexpenses:
Only the $1,000 DITY payment is taxable as gross income.
Assign the exercise.
Review answer with the class when com-plete.
Display or direct stu-dents to Form 3903.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… mrs. FannIn responds…
You said you just moved here during June of this year. Was this a PCS move?
If your expenses were more than the Armed Forces reimbursed you for, you may be able to use the difference to reduce your gross income. We’ll complete Form 3903 to see how it comes out. Did you bring your travel voucher with you?
Did you drive directly here, or did you take any side trips?
The IRS will let you take a standard 24 cents a mile, or we can use actual expenses, if you kept track. The stan-dard rate would be $240.
Yes,myhusbandwastransferredhereshortlybeforehedeployed.Ihavefamilycloseby,soI’dratherstayherewhilehe’soverseas.
It’srighthere.Wedroveourowncar1,000milestogethere,andpaid$120forgas.Wepaid$300formotelsand$165formealsontheway.Themilitarymovedourhouseholdgoods,andwedidn’thaveanyoverweight.
Wecamerightheresowecouldsettleinbeforehedeployed.
Ionlykeptthegasreceipts,sothestandardwouldprobablybebest.
Ask two volunteers to role-play the sample interview while the class listens for key information.
Lesson 18: Military Moving Expenses 18-5
When should an Armed Forces member claim the deduction?
ArmedForcesmemberswhousethecashmethodofaccountingandwhoarereim-bursedfortheirexpensescandeducttheexpenseseitherintheyeartheywerepaidorintheyearthereimbursementwasreceived.Theycanchoosetodeducttheexpensesintheyearofreimbursementeveniftheypaidtheexpensesinadifferentyear.
Ifexpensesaredeductedandthereimbursementisreceivedinalateryear,thereim-bursementmustbeincludedinincome.
ArmedForcesmemberswhousethecashmethodofaccounting(themostcommon)candeductmovingexpensesintheyearofreimbursementiftheexpenseswerepaidintheyear:
• Beforetheyearofreimbursement,or
• Immediatelyaftertheyearofreimbursementbutbytheduedate,including extensions,forfilingthereturnforthereimbursementyear
sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… mrs. FannIn responds…
The IRS allows lodging costs, but not food. So your total allowable expenses would be $540, which includes $300 for the motels and $240 for your mileage expenses. The travel voucher shows a total of $400 in reimbursements – did you receive any other reimbursements or allowances?
Then you’ll get to deduct $140, the amount you spent that was more than your reimbursements. [Ontheapprovedintakeandinterviewsheet,besuretonotethatyou’veaddressedthisadjustment.]
No,that’sit.
Review with the class the key points they noticed during the interview.
Lesson 18: Military Moving Expenses18-6
ExErcisEs (continued)
Question 3: InDecember2009,PettyOfficerWhartonmovedfromCaliforniatoWashington.ThemovequalifiedasaPCS.Heincurred$800inmileageexpensesand$1,600inlodging.Hepaid$1,400toshiphouseholdgoodsovertheallowedweightlimit,and$500toshiphisdog.Thefollowingmonth,hefiledhistravelvoucherandreceived$2,400mileageandtravelallowance.Healsoreceiveda$1,500dislocationallowance.
Forwhattaxyear(s)canPettyOfficerWhartonclaimhismovingexpensesonForm3903?
A.2009only
B.2010only
C. Either 2009 or 2010
Taxpayer Interview and Tax Law Application
GregwasrelocatedtoanotherAirForcebase.Here’showavolunteercouldhelpGregdetermineifhehadanydeductiblemovingexpenses:
He can claim the expenses in the year he paid the expenses or the year he was reimbursed.
Assign the exercise.
Review answer with the class when com-plete.
Ask two volunteers to role-play the sample interview while the class listens for key information.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… greg responds…
So, you were transferred from Maxwell Air Force Base to Scott Air Force Base last year, right?
Did you receive any other allowances?
Well the reimbursements were not reported on your W-2. You can only deduct expenses that are larger than your combined reimbursements and allowances. First, let’s add all your qualified expenses. How much was your travel and lodging?
Any other expenses?
Only the travel and lodging en route can be claimed on Form 3903, line 2. The security deposit and meals are not deductible expenses. Your reimbursement and dislocation allowances add up to $1,400. Since that’s more than your expenses, you don’t have anything to deduct. But, you don’t have to include any of the excess reimbursement as income, either.
Yes,Iwasreimbursed$400fortravelexpensesonthewaytoScottAirForceBase.
Yes,Ialsoreceiveda$1,000 dislocationallowance.
Ispent$575ontravelandlodgingandanother$200formealsalongtheway.
Yes,Igavea$350securitydeposittomynewlandlord.
Review with the class the key points they noticed during the interview.
Lesson 18: Military Moving Expenses 18-7
ExErcisE answErs
Summary
ThislessondescribedthetypesofArmedForcesmovesthatqualifyfortaxbenefits,whatkindsofexpensesaredeductible,andhowtouseForm3903tocomputethemovingexpensededuction.TheseexpensesaredeductibleasanadjustmenttoincomeonForm1040,line26.
Youmaynotbeabletocompletetheentireexerciseifsomeofthetechnicalissuesintheexercisearenotcovereduntillaterlessons.Intheseinstances,completeasmuchoftheexerciseasyoucan.Comebacklatertofinishtheexerciseafteryoucoveredallthetechnicaltopics.
Answer 1: C. A move by a new enlistee from her home to her first post of duty is considered a PCS.
Answer 2: B. The $1,000 DITY payment should be included as gross income on line 7. However, nontaxable allowances such as dislocation allowances, temporary lodging allowances and mileage allowances provided by the Armed Forces should not be included as gross income on the service member’s tax return, even if they exceed allowable expenses.
Answer 3: C. Because Petty Officer Wharton paid for moving expenses in the year prior to the year of reimbursement, he can claim all of his moving expenses on Form 3903 in either the year he paid, or the year he was reimbursed.
Review the lesson summary with the class.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 18: Military Moving Expenses18-8
Notes
Lesson 19: Standard Deduction and Tax Computation 19-1
Instructor Notes
Lesson 19: Standard Deduction and Tax Computation
Introduction
Thisisthefirstofninelessons(lessons19through27)coveringtheTaxandCreditssectionofthetaxpayer’sreturn.AftercompletingthislessononstandarddeductionsandLesson20,ItemizedDeductions,youwillbeabletosubtracttheappropriatedeductionfromthetaxpayer’sadjustedgrossincometofiguretheirtaxableincome.
Mosttaxpayerscanfindtheirstandarddeductionbylookingattheamountslistedunder“Allothers”totheleftofForm1040,line40a.SometaxpayersmayneedtousethestandarddeductionworksheetintheForm1040InstructionsandothersmayberequiredtouseScheduleLtofiguretheirstandarddeduction.
ObjectivesAttheendofthislesson,usingyourresource materials,youwillbeableto:
• Determinethestandarddeductionamountfor mosttaxpayers
• Determinethestandarddeductionamountfortaxpayersclaimedasdependents
• IdentifywhenScheduleLorthestandarddeduc-tionworksheetisrequiredtocomputethestandarddeduction
• Identifyhowtaxableincomeandincometaxarecomputedandreported
What are deductions?
Deductionsaresubtractionsfromataxpayer’sadjustedgrossincome(AGI).Theyreducetheamountofincomethatistaxed.Mosttaxpayershaveachoiceoftakingastandarddeductionoritemizingtheirdeductions.Whentaxpayershaveachoice,theyshouldusethetypeofdeductionthatresultsinthelowertax.Usetheinterviewtech-niquesandtoolsdiscussedinearlierlessonstoassistyouindeterminingifthestan-darddeductionwillresultinthelargestpossibledeductionforthetaxpayer.
What is a standard deduction?Astandarddeductionformosttaxpayersisapredefineddollaramountbasedonthetaxpayer’sfilingstatus.Anincreasedstandarddeductionisavailabletotaxpayerswhoare65orolder,blind,paidrealestatetaxes,orpurchasedanewmotorvehicleduringpartof2009.Therearelimitationsonthestandarddeductionfortaxpayerswhocanbeclaimedasadependentonsomeoneelse’sreturn.TheVolunteerResourceGuide (TabF)includesreferencesforcalculatingthestandarddeduction.
Display or refer to the Standard Deduction for Most People Chart in the Volunteer Resource Guide (Tab F).
Review objectives with the class.
Point out the resources cited under What do I need?
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form1040□ ScheduleL□ Optional: Publication501
Lesson 19: Standard Deduction and Tax Computation19-2
Assign the exercises. Have students use the Standard Deduction for Most People chart to complete them.
Point out the footnote below the chart.
Review answers with the class when com-plete.
Ask a volunteer to read the Chase example.
ExErcisEs
UsetheStandardDeductionforMostPeoplechartintheVolunteerResourceGuide(TabF)tocompletethefollowingexercises.Answersareattheendofthelessonsummary.
Question 1: Michaelissingle,22,cannotbeclaimedbyanothertaxpayer,andhasnoitemizeddeductions.Whatishisstandarddeductionforthetaxyear?
A. $5,700
B.$7,850
C.$3,000
Question 2: Nicoleis35,hastwochildrenandqualifiesfortheHeadofHouseholdfilingstatus.Shewillnotitemizeanydeductionsthistaxyear.Whatisherstandarddeductionforthetaxyear?
A.$5,700
B. $8,350
C.$11,150
What is an itemized deduction?
Itemizeddeductionsallowtaxpayerstoreducetheirtaxableincomebasedonspecificpersonalexpenses.Ifthetotalitemizeddeductionsaregreaterthanthestandarddeduc-tion,itwillresultinalowertaxableincomeandlowertax.Ingeneral,taxpayersbenefitfromitemizingdeductionsiftheyhavemortgageinterest,verylargeunreimbursedmedi-calordentalexpenseswhencomparedtotheirincome,orotherlargeexpensessuchascharitablecontributions.Itemizeddeductionswillbecoveredinthenextchapter.
Who cannot take the standard deduction?
Sometaxpayerscannottakethestandarddeductionandmustitemize.Duringtheinter-view,findoutifthetaxpayeris:
• FilingasMarriedFilingSeparatelyandthespouseitemizes
• Anonresidentordual-statusalienduringtheyear(andnotmarriedtoaU.S.citizen orresidentattheendoftheyear)
Ifeithersituationapplies,thetaxpayermustitemizepersonaldeductions.
Tax Software Hint:Taxsoftwarewillautomaticallycalculatethestandarddeduc-tionbasedontheinformationcollectedontheMainInformationSheet.Ifthetaxpayercannottakethestandarddeduction,thetaxsoftwarewillpromptthepreparertoitemizedeductions.
example
ChaseisMarriedFilingSeparately.Herspouse,Grant,willbeitemizinghis deductions.Chasecannotusethestandarddeduction;shewillhavetoitemize herdeductions.
State that itemized deductions will be covered in the next chapter.
Lesson 19: Standard Deduction and Tax Computation 19-3
IftaxpayerscannottakethestandarddeductionbecausetheyarefilingMarriedFilingSeparatelyandthespouseitemizesorisanonresidentordualstatusalien,theboxonline39bonpage2ofForm1040mustbechecked.
How does age or blindness affect the standard deduction?
Thestandarddeductionishigherifthetaxpayerand/orspouseis65orolder.Itisalsohigherifoneorbothareblind.Thisinformationisreportedinthecheckboxeslocatedonpage2ofForm1040.Themorecheckboxesmarked,thehigherthestandarddeduction.Besuretoverifythetaxpayer’sand/orspouse’sageandlevelofblindnessasdescribedbelow.
Tax Software Hint: TaxsoftwarewillautomaticallychecktheseboxesbasedonentriesontheMainInformationSheet.Forsoftwareentries,gototheVolunteerResourceGuide(Tab1),MainInformationScreen.
Who qualifies as 65 or older?
Taxpayersareentitledtoahigherstandarddeductioniftheyare65orolderattheendoftheyear.Theyarealsoconsideredtobe65onthedaybeforetheir65thbirthday. Inotherwords,apersonbornonJanuary1ofanycalendaryearisconsideredtobe65onDecember31ofthepreviouscalendaryear.Therefore,taxpayersareentitledtoahigherstandarddeductionfor2009iftheywerebornbeforeJanuary2,1945.
Thestandarddeductionforadecedentisthesameasifthetaxpayerhadlivedtheentireyear,withoneexception:ifthetaxpayerdiedbeforetheir65thbirthday,thehigherstandarddeductionforbeing65doesnotapplytothedecedent.
Who qualifies as blind?
Ataxpayermustbetotallyorpartiallyblindonthelastdayoftheyeartoqualifyasblind.Taxpayersareentitledtoahigherstandarddeductioniftheyareconsideredtotallyorpartiallyblindandtheydonotitemizetheirdeductions.Ataxpayerwhoclaimstobepartiallyblindmusthaveacertifiedstatementfromaneyedoctororregisteredoptometristthatstateseitheroftheseconditions:
• Thetaxpayercannotseebetterthan20/200inthebettereyewithglassesorcontactlenses,or
• Thefieldofvisionisnotmorethan20degrees
Refer students to Form 1040, line 39a.
Read the example of Sherman.
Ask a volunteer to read the Armando example.
If a taxpayer dies at any time during the year, the taxpayer is entitled to a full stan-dard deduction and personal exemptions. In Armando’s case, he is entitled to a year’s standard deduction and personal exemp-tion – as if he had lived through December 31.
example
Shermanis73yearsoldandblind.HefilesasSingleusingForm1040.Onpage2,line38,youenterhisAGIof$37,800fromline37.BecauseShermanisover65yearsoldandblind,youshouldentera“2”online39a.
example
ArmandodiedonNovember24,2009.Hewouldhavebeen65ifhehadreachedhisbirthdayonDecember12,2009.Hedoesnotqualifyforahigherstandarddeductionforbeing65,eventhoughhewasbornbeforeJanuary2,1945.
Display or refer to the Standard Deduction Chart for People Born Before January 2, 1945 or Who Are Blind in the Volunteer Resource Guide (Tab F).
Point out how to compute the standard deduction by using the chart.
Ifvisioncanbecorrectedbeyondthoselimitsonlybycontactlensesandthetaxpayercanonlywearthelensesbrieflybecauseofpain,infection,orulcers,thetaxpayercantakethehigherstandarddeductionforblind-ness.
Lesson 19: Standard Deduction and Tax Computation19-4
ExErcisEs (continued)
Iftheeyeconditionwillneverimprovebeyondtheselimits,thestatementshouldincludethatfact.Taxpayersshouldkeepthestatementintheirrecords.
What if only one spouse is over 65 or blind?
Taxpayerscantakethehigherstandarddeductionifonespouseis65orolder,orisblind,andif:
• Thetaxpayerfilesajointreturn,or
• Thetaxpayerfilesaseparatereturnandcanclaimanexemptionforthespousebecausethespousehadnogrossincomeandanexemptionforthespousecouldnotbeclaimedbyanothertaxpayer
What is the standard deduction based on age or blindness?
Standarddeductionamountsfortaxpayerswhoare65orolder,and/orareblind,increasesby$1,100or$1,400ifsingleorheadofhouseholdforeachboxcheckedforageorblindness.ItcanalsobecomputedusingtheStandardDeductionChartforPeopleBornBeforeJanuary2,1945orWhoAreBlindintheVolunteerResourceGuide(TabF).
UsetheStandardDeductionChartforPeopleBornBeforeJanuary2,1945orWhoAreBlindintheVolunteerResourceGuide(TabF)tocompletethefollowingexercises.Answersareatthe endofthelessonsummary.
Question 3: RoderickwasbornDecember30,1945. Doeshequalifyasbeing65orolder?¨ Yes þ No
Question 4: BrianneandherhusbandClarkarebothovertheageof65andarelegallyblind.Theywillfileajointreturnandwillnotitemizetheirdeductions.Whatistheirstandarddeduction?
A.$11,500
B.$13,600
C. $15,800
example
Robertis78.Helosthiswife10yearsago,soheisfilingasSingle.Heisnotblindandhecannotbeclaimedasadependentonsomeoneelse’sreturn.Hisstandarddeductionis$7,100.
example
RudyandIvyareboth76.Ivyisblind.TheyarefilingasMarriedFilingJointly.Neithercanbeclaimedasadependentonsomeoneelse’sreturn.Theirstandarddeductionis$14,700.
Ask a volunteer to read the examples.
Ask what if Ivy’s fil-ing status was Married Filing Separately.
Answer: Her standard deduction would be $7,900.
Ask students to break into groups and com-plete exercises 3-6.
Point out the footnote below the chart used in the exercises.
Ask groups to share their answers with the class when finished.
Roderick is only 64. To qualify for the higher standard deduction, his birthday must be before January 2, 1945.
Calculation: $11,400 + (4 x $1,100) = $15,800
Theseamountsdonotapplyifthetaxpayer(orspouseifMarriedFilingJointly)canbeclaimedasadependentonsomeoneelse’sreturn.
Lesson 19: Standard Deduction and Tax Computation 19-5
ExErcisEs (continued)
Question 5: LeticiadiedMay1,2009.Her65thbirthdaywasonApril3,2009.Doesshequalifyasage65? þ Yes ¨ No
Question 6: Jasonwasbornin1967.Heissingleandlegallyblind.Whatishisstandarddeduction?
A. $7,100
B.$5,700
C.$3,650
What about individuals who can be claimed as dependents?
Thestandarddeductionisgenerallylowerforanindividualwhocanbeclaimedasadependentonanotherperson’staxreturn.Thedeductionisgenerallylimitedtothegreaterof:
• $950,or
• Theindividual’searnedincomefortheyear,plus$300(butnotmorethantheregu-larstandarddeductionamount)
Tax Software Hint: Taxsoftwarewillautomaticallycalculateadependent’sstan-
darddeduction,aslongastheboxindicatingthatthetaxpayercanbeclaimedasadependentonanotherperson’staxreturnhasbeencheckedontheMainInformationSheet.Forsoftwareentries,gototheVolunteerResourceGuide(Tab1),MainInformationScreen.
What about taxpayers who paid real estate taxes but do not itemize?
Forthe2009taxyear,taxpayerswhofileusingthestandarddeductionwillbeentitledtoanadditionalstandarddeductionforpayingcertainstateandlocalrealestateprop-ertytaxesthatwouldnormallybedeductibleonScheduleA,line6,ifthetaxpayerwasitemizingdeductions.Singletaxpayerswillbeentitledtoamaximumof$500andjointtaxpayerswillbeentitledtoamaximumof$1,000.
Duringyourinterview,reviewwiththetaxpayerandverifytheiranswerstotheques-tionsregardinghomemortgageinterestandrealestatetaxesinPartVoftheapprovedinterviewandintakesheet.
Leticia was 65 when she died in 2009. She qualifies for the higher standard deduction given to those 65 or older.
Display the approved intake and interview sheet.
Point out the check box for a dependent being claimed by another taxpayer.
example
Janetissingle,22,afull-timestudent,andnotblind.Herparentsclaimedherasadependentontheir2009taxreturn.Shehasnoitemizeddeductions,soshewilltakethestandarddeduction.Shehasinterestincomeof$120,taxeswithheldof$35,andwagesof$780.Herstandarddeductionis$1,080($780+$300).
Ask a volunteer to read the Janet example.
Lesson 19: Standard Deduction and Tax Computation19-6
NEW ScheduleL,StandardDeductionforCertainFilers,wasdevelopedfor2009.ScheduleLmustbecompletedtocalculatethetaxpayer’srealestatetaxesdeductionwhentheyareusingthestandarddeduction.
What if the taxpayer purchased a new motor vehicle?
NEW Taxpayerswhopurchasedanewqualifiedmotorvehiclein2009maybeentitledtodeductstateandlocalsalesandexcisetaxespaidontheirincometaxreturns. Aqualifiedmotorvehicleincludesapassengerautomobile,lighttruck,ormotorcyclewithagrossvehicleweightratingof8,500poundsorless.Aqualifiedmotorvehiclecanalsobeamotorhome.Tobeeligible,theoriginaluseofthequalifiedmotorvehiclemustbeginwiththetaxpayer.ThevehiclemustbepurchasedafterFebruary16,2009,andbeforeJanuary1,2010,toqualifyforthededuction.
Taxpayerswholiveinstatesthatdonothavestatesalestaxesarestillentitledtodeductotherfeesortaxesimposedbythestateorlocalgovernment.Thefeesortaxesthatqualifyareforthepurchaseofanewmotorvehicleandarebasedonthevehicle’ssalespriceorasaper-unitfee.
Thedeductionislimitedtothetaxespaidonthefirst$49,500ofthepurchasepriceofeachvehicle.Thereisnolimitonthenumberofcarsforwhichthetaxpayercanclaimthededuction,providedeachcarisaqualifiedvehicleunderthelaw.Theamountofthedeductionisphasedoutfortaxpayerswhosemodi-fiedadjustedgrossincomeisbetween$125,000and$135,000forsingletaxpayersandbetween$250,000and$260,000forjointtaxpayers.Thedeductionmaynotbetakenon2008returnsandmustbeclaimedonScheduleL.
Duringyourinterview,verifyifthetaxpayermarkedthecheckboxforbuyinganewvehicleinPartIIIoftheapprovedinterviewandintakesheet.
Tax Software Hint: AllapplicablerealestatetaxespaidandqualifiedtaxespaidonanewmotorvehiclemustbeincludedonScheduleL.Theamountswillcarryovertothestandarddeductionamountifitismoreadvantageousforthetaxpayertousethestandarddeduction.
How do I determine which deduction is best for the taxpayer?
Iftaxpayersarenotrequiredtoitemize,theyshouldtakethehigherofthestandarddeductionortheitemizedexpensesdeduction.Ingeneral,taxpayerswillbenefitfromitemizingtheirdeductionsiftheyhavemortgageinterest,qualifiedcharitablecontribu-tions,orifunreimbursedmedical/dentalexpensesarelargecomparedtotheirincome.Duringtheinterview,askthetaxpayerifanyofthefollowingwereapplicableduringthetaxyear:
• Largeout-of-pocketmedicalanddentalexpenses
• Stateandlocalincometaxes,realestatetaxes,and/orpersonalpropertytaxes
Donotconfusethesalestaxdeductiononanewvehiclewiththe“CashforClunkers”program.Thatprogram,theCarAllowanceRebateSystem(CARS),ishandledthroughtheNationalHighwayTrafficSafetyAdministration,notonataxreturn.Formoreinforma-tiongotowww.cars.gov.
Purchasesmadeinstateswithoutsalestaxes,suchasAlaska,Delaware,Hawaii,Montana,NewHampshire,andOregon,canalsoqualifyforthededuction.
Lesson 19: Standard Deduction and Tax Computation 19-7
• Mortgageinterest
• Giftstocharity
• Casualty,theft,andcertainothermiscellaneousdeductions
Ifthetaxpayer’sexpensesqualify,itemizingmaybeabetterchoice.
Tax Software Hint:Taxsoftwareautomaticallycalculatesthetaxpayer’sstan-darddeductionanddisplaystheamountonpage2oftheForm1040screen.Thetaxsoftwarewillautomaticallyselectthedeductionmethodthatgivesthetaxpayerthebestresult.Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),Form1040,Page2–Deductions.
How are taxable income and tax determined?
Taxableincomeandtaxaredeterminedbyusingthetaxpayer’sadjustedgrossincome,exemptionamount,andstandarddeductionoritemizeddeductions.
How is taxable income determined?
Taxableincomeisdeterminedbysubtractingcertainitemsfromtheadjustedgrossincome(AGI).Theseinclude:
• Personalanddependencyexemptions,and
• Standardoritemizeddeductions
Tax Software Hint: Taxsoftwareautomaticallycalculatestheexemptionamountanddisplaystheresultonline42,applyinganylimitations.
How is the tax determined?
Taxisbasedontheamountoftaxableincome. Thereareseveralmethodsforfindingthetaxamount.Mosttaxpayersuseeitherthetaxtables ortheTaxComputationWorksheet.
• Iftaxableincomeislessthan$100,000,usethetaxtables
• Iftaxableincomeis$100,000ormore,usetheTaxComputationWorksheet
ThetaxtablesarelocatedintheappendixofPublication4491-W,VITA/TCEWorkbook,Publication17,YourFederalIncomeTaxforIndividuals,andForm1040Instructions.
Emphasize that these amounts play an impor-tant role in determin-ing the taxpayer’s tax liability and diligent care should be taken to ensure that they be figured correctly.
Refer students to the Volunteer Resource Guide (Tab 4) to view how to link to the Schedule A Worksheet.
example
Adais25yearsoldandhasanadjustedgrossincomeof$14,000.Sheisentitledtoclaimanexemptionforherselfintheamountof$3,650andherfilingstatusissingle.Sheisnotblind.Hertaxableincomeis$4,650.($14,000AGI-$3,650Exemption-$5,700StandardDeduction)
Read Ada’s example.
Ask what if Ada’s fil-ing status was Head of Household.
Answer: Her tax-able income would be $2,000 if she used the filing status of Head of Household.
CasualtyandtheftlossesareoutsidethescopeoftheVITA/TCEprogramandarementionedhereforawarenessonly.Taxpayerswiththeseissuesshouldbereferredtoaprofessionaltaxpreparer.
Aseparateworksheetisusedtocalculatethetax(insteadofthetaxtables)fortaxpay-erswithcertaintypesofincome,suchascapitalgains,qualifyingdividends,orforeignearnedincome.
Lesson 19: Standard Deduction and Tax Computation19-8
TaxpayersmustusetheScheduleDTaxWorksheettofiguretheirtaxesifthefollowingapplies:
• TheyhavetofileScheduleD,and
• ScheduleD,line18orline19,ismorethanzero
Tax Software Hint: Regardlessofthetaxpayer’ssituation,figuringthetaxiseasywithtaxsoftware.Theprogramhasalltheinformationnecessarytocomputethetaxonthereturnbasedonpreviousinformationthathasbeeninput.Itisimportanttoenterallincome,deductionandcreditinformationcorrectlyinorderforthetaxsoftwaretocomputethetaxaccurately.
Practice – Vanessa Franklin
Takealookathowavolunteerhelpedourtaxpayer,VanessaFranklin:GotoAppendixA-19andreviewthesampleinterviewwithVanessarelatedtodeductionsandtaxcomputation.
Summary
Youshouldbeabletoidentifythosewhocantakethestandarddeduction,andhowthedeductionisaffectedbytheirfilingstatus,age,blindness,realestatetaxes,purchaseofanewmotorvehicle,andstatusasadependent.Allofthiswillmakeiteasierforyoutohelptaxpayersunderstandhowtheirdeductioniscomputedanditsimpactontheirtax.
Youshouldalsounderstandthatthetaxcomputationisbasedontaxableincome.Thetaxmaybefurtherreducedbytaxcreditstobecoveredinanupcominglesson.
Youarenowreadytoworkwithitemizeddeductionsinthenextlesson.
Review the lesson summary.
State that itemized deductions is an inter-mediate topic, and that volunteers must certify at that level to complete returns for taxpayers that itemize. These taxpayers must be referred to a prop-erly certified volunteer.
Direct students to Appendix A-19.
Assign the workbook exercise and review as a class when done (optional).
example
Mr.andMrs.Brownarefilingajointreturn.Theirtaxableincomeis$25,300.Findtherangethatincludestheirincome:$25,300-$25,350.Thenreadacrosstothecolumnthatappliestotheirfilingstatus:MarriedFilingJointly.Theirtaxis$2,964.
Read the example of Mr. and Mrs. Brown.
Ask what if the Browns’ taxable income was $29,000.
Answer: Their tax would be $3,519.
Ifthetaxpayerreceivedaqualifieddividendorcapitalgainsdistributionandyouarepreparingapaperreturn,youshouldfigurethetaxpayer’stotaltaxusingtheworksheetinForm1040Instructions.
Ask students to locate the tax tables in Publi-cation 17.
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 19: Standard Deduction and Tax Computation 19-9
ExErcisE answErs
Answer 1: A. $5,700
Answer 2: B. $8,350
Answer 3: No. Roderick is only 64. To qualify for the higher standard deduction, his birthday must be before January 2, 1945.
Answer 4: C. $15,800. This is calculated by multiplying $1,100 by 4 (both are blind, both are 65) to get $4,400, which is then added to the couple’s standard deduction of $11,400.
Answer 5: Yes. Leticia qualifies for the higher standard deduction given to those 65 or older because she was 65 when she died in 2009.
Answer 6: A. $7,100
Notes
Lesson 19: Standard Deduction and Tax Computation19-10
Notes
Lesson 20: Itemized Deductions 20-1
Instructor Notes
Lesson 20: Itemized Deductions
Introduction
Thislessonwillassistyouindeterminingifataxpayershoulditemizedeductions.Generally,taxpayersshoulditemizetheirdeductionsiftheirtotalallowabledeductionsarehigherthanthestandarddeductionamount.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determineifataxpayershoulditemizedeductions
• Determinethetypeofexpensesthatqualifyas itemizeddeductions
• Accuratelyreportitemizeddeductionson ScheduleA,ItemizedDeductions
• Explaintherecordkeepingrequirementsfor claimingcharitablecontributions
Who must itemize?
Taxpayerswhohaveastandarddeductionofzeroshoulditemizetheirdeductions.Taxpayerswhonormallyfallwithinthiscategoryaretaxpayerswhoare:
• Married,filingaseparatereturn,andtheirspouseisitemizing
• Filingareturnforashorttaxyearduetoachangeintheannualaccountingperiod
• Consideredtobenonresidentaliensordualstatusaliensduringtheyear
What are itemized deductions?
Itemizeddeductionsaresubtractionsfromataxpayer’sadjustedgrossincome(AGI)thatreducetheamountofincomethatistaxed.Mosttaxpayershaveachoiceoftakingastandarddeductionoritemizingdeductions.Taxpayersshouldusethetypeofdeduc-tionthatresultsinthelowesttax.
How do I decide if a taxpayer should itemize deductions?
Ingeneral,taxpayerswhohavemortgageinterestoraverylargeamountofunreim-bursedmedical/dentalexpensescomparedtotheirincomewouldbenefitfromitemizingtheirdeductions.
Ifyouthinkthetaxpayermaybenefitfromitemizing,enterthequalifiedexpensesonScheduleA.Thetaxsoftwarewillautomaticallyselectthelargerofitemizedversusstandarddeduction.UsetheInterviewTipsintheVolunteerResourceGuide(TabF)todetermineifitemizingdeductionswouldbemorebeneficialforthetaxpayer.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4012□ Publication4491-W□ Form1040□ ScheduleAOptional:□ Publication502□ Publication526□ Publication529□ Publication530□ Publication936
Review objectives with the class.
Point out the resources cited under What do I need?
Lesson 20: Itemized Deductions20-2
Itemizeddeductionsincludeamountspaidforqualified:
• Medicalanddentalexpenses
• Certaintaxesyoupaid
• Mortgageinterest
• Giftstocharity
• Casualtyandtheftlossesandcertainmiscellaneousdeductions
Tax Software Hint:Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),Form1040,Page2-Deductions.
How do I handle medical and dental expenses?
Taxpayersmustbeabletoitemizeinordertodeductmedicalanddentalexpenses.Taxpayerscandeductonlytheamountofunreimbursedmedicalanddentalexpensesthatismorethan7.5%oftheiradjustedgrossincome(AGI).
Tax Software Hint: ReviewtheItemizedDeductionsDetailWorksheetforScheduleA–ItemizedDeductionsintheVolunteerResourceGuide(Tab4).
Which medical and dental expenses are deductible?
Whose expenses are covered?
Qualifiedmedicalanddentalexpensespaidbythetaxpayerduringthetaxyearcanbeincludedfor:
• Thetaxpayer
• Thetaxpayer’sspouse,and
• Dependentsclaimedatthetimethemedicalserviceswereprovidedoratthetimetheexpenseswerepaid
ReviewWhoseMedicalExpensesCanYouInclude?intheMedicalandDentalExpenseschapterofPublication17.
Thestandardmileagerateallowedforout-of-pocketexpensesforacarwhenusedformedicalreasonsis24centspermile.
example
StewartandCarmenaredivorced.Theirson,Raymond,liveswithCarmen,whoclaimshimasadependent.CarmenpaidforanddeductedRaymond’sstandardmedicalanddentalbills.StewartdeductedtheemergencybillhepaidwhenRaymondbrokehisarm.
Ifachildofdivorcedorsepa-ratedparentsisclaimedasadependentoneitherparent’sreturn,eachparentmaydeductthemedicalexpensesthattheyindividuallypaidforthechild.
Amarriedtaxpayer,filingseparately,whosespouseitemizesdeductionsisnotallowedtoclaimthestandarddeduction;ifonespouseitemizes,theothermustitemize(eveniftheamountis“0”).
Ask students to review the table of deduct-ible and nondeductible expenses shown in the Medical and Dental Expenses chapter of Publication 17.
Read the Stewart and Carmen example.
Review the tip.
Review the tips for medical and dental expenses.
CasualtyandtheftlossesareoutsidethescopeoftheVITA/TCEprogram.Refertaxpayerswiththeselossestoaprofes-sionaltaxpreparer.
Lesson 20: Itemized Deductions 20-3
ExErcisEs
What types of expenses are covered?
UnreimbursedmedicalanddentalexpensesandeligibleLong-TermCarepremiumspaidduringthetaxyeararedeductible.Besuretheexpenseswerenotpaidwithpre-taxdollarsorreimbursedbyaninsurancecompany.
Answersareattheendofthelessonsummary.
Question 1: BillandKathyFerrisfileajointreturn.Theypaidthemedicalanddentalbillslistedbelow.ThetotalofBillandKathy’squalifiedmedicalexpensesis $3,250.
How do I handle taxes that may be deductible?Taxpayerscandeductcertaintaxesiftheyitemizetheirdeductions.Tobedeductible,thetaxmusthavebeenimposedonthetaxpayerandpaidbythetaxpayerduringthecurrenttaxyear.Taxesthataredeductibleincludethefollowing:
• Stateandlocaltaxes:Taxpayerscannotdeductbothstateandlocalincometaxesandgeneralsalestaxesinthesameyear.Theymustelecttodeductoneortheother.
- Stateandlocalincometaxesincludewithheldtaxes,estimatedtaxpayments,orothertaxpaymentssuchasaprioryearrefundofastateorlocalincometaxthatthetaxpayerchosetohavecreditedtotheirestimatedstateorlocalincometaxes.
- Generalsalestaxescanbedeterminedbyusingthetaxpayer’sactualexpensesorthestateandlocalsalestaxtableslocatedintheForm1040,ScheduleAInstructions.
Ifyouandataxpayerdisagreeastowhetheraparticularexpenseisdeductible,thenpolitelyreferthetaxpayertothesitecoordinator.Thetaxpayermaybecorrect,butyoushouldnotdeductanexpenseunlessyouaresureitisdeductible.
Medical Expenses Amount DeductibleUnreimburseddoctors’bills $500 $500Unreimbursedorthodontistbillforbraces $1,200 $1,200Hospitalinsurancepremiums $300 $300Lifeinsurancepremiums $500Unreimbursedprescriptionmedicines $100 $100Vitamins $70Hospitalbill(beforeinsurancecompany’sreimbursementof$1,000)
$2,000 $1,000
Smoking-cessationprogram $150 $150Total $4,820 $3,250
Assign the exercise.
Review answer with the class when com-plete.
The total of qualified medical and dental expenses is $3,250, which does not include life insurance premiums, vitamins, or reimbursed hospital expenses.
Ask students to turn to the Taxes chapter of Publication 17 and review the table, Which Taxes Can You Deduct?
Point out the col-umn on what can be deducted.
Lesson 20: Itemized Deductions20-4
• Realestatetaxes
- State,local,orforeignrealestatetaxesthatarebasedontheassessedvalueofthetaxpayer’srealproperty,suchasthetaxpayer’shouseorland,aredeductible.
- RealestatetaxesaregenerallyreportedonForm1098,MortgageInterestStatement,orasimilarstatementfromthemortgageholder.Ifthetaxesarenotpaidthroughthemortgagecompany,thetaxpayershouldhavearecordofwhattheyhavepaidduringtheyear.
- Somerealestatetaxesarenotdeductible,includingtaxesforlocalbenefits,item-izedchargesforservices,transfertaxes,rentincreasesduetohigherrealestatetaxes,andhomeownersassociationfees.
• NEW Motorvehicletaxes:ARRAprovidesadeductionforstateandlocalsalesandexcisetaxespaidonthepurchaseofnewcars,lighttrucks,motorhomes,andmotorcycles.Italsoprovidesforthedeductionofothertaxesandfeesinstateswithnosalestax.Formoreinformation,refertoLesson19,StandardDeductionandTaxComputation.
- TaxpayerswhopurchasedanewqualifiedpassengervehicleafterFebruary16,2009andbeforeJanuary1,2010qualifyforthenewmotorvehicletaxesdeduction.
- Taxpayerswholiveinstatesthatdonothavestatesalestaxesarestillentitledtodeductotherfeesortaxesimposedbythestateorlocalgovernment.Thefeesortaxesthatqualifyareforthepurchaseofanewmotorvehicleandarebasedonthevehicle’ssalespriceorasaper-unitfee.
- Thedeductionislimitedtothetaxespaidonaqualifiednewcar,lighttruck,motorhome,ormotorcyclewithapurchasepriceofupto$49,500.
- Theamountofthedeductionisphasedoutfortaxpayerswhosemodifiedadjustedgrossincomeisbetween$125,000and$135,000forsingletaxpayers,andbetween$250,000and$260,000formarriedtaxpayersfilingjointly.
• ForeignincometaxescanbedeductedonincomethatisnotexemptfromU.S.taxundertheforeignearnedincomeexclusionortheforeignhousingexclusion.
• Othertaxes:Anyotherqualifieddeductibletaxesthatarenotincludedabove.
• Personalpropertytaxesaredeductibleiftheyarestateorlocaltaxesthatare:
- Chargedonpersonalproperty
- Basedonlyonthevalueofthepersonalproperty,and
- Chargedonayearlybasis,evenifcollectedmoreorlessthanonceayear
Which expenses are not deductible?
Notalltaxesaredeductibleandsomeitemsaren’tactuallyclassifiedastaxes.SeetheTaxeschapterinPublication17.
example
SupposeWaynebringsinrecordsshowingthefollowingtaxpayments:stateincometax,$2,000;realestatetaxes,$900;salestaxonanewcar,$1,600;home-owners’associationfee,$250.Wayne’stotaltaxdeductionis$4,500($2,000+900+1,600=$4,500).The$250homeowners’associationfeeisnotdeductible.
Ask a volunteer to read the Wayne example.
Ask students to review the Publication 17 chapter on Taxes for expenses that are not deductible.
Lesson 20: Itemized Deductions 20-5
ExErcisEs (continued)
How do I deduct the taxes?
State and local income taxes
IfthetaxpayercandeductstateandlocalincometaxesonScheduleA,includetaxwithheld,estimatedtaxpaymentsmadeingoodfaithtoastateorlocalgovernment,andtaxpaymentsforanearlieryearpaidduringthecurrenttaxyear.Donot includepenaltiesorinterest.
Real estate taxes
RealestatetaxesarereportedonForm1040,ScheduleA.
NEW Motor Vehicle Taxes
SalesandexcisetaxeswillbecalculatedonScheduleA,NewMotorVehicleTaxDeductionWorksheet.Theamountfromline11oftheworksheetiscarriedoverandreportedonline7ofScheduleA.
Other taxes
Othertaxes,includingpersonalpropertytaxes,arereportedonline8ofScheduleA.
Foreign Income Taxes
Generally,incometaxesthatwerepaidtoaforeigncountrycanbetakenasanitemizeddeductiononline8ofScheduleA,orasacreditagainstU.S.incometaxonForm1040.Moreinformationwillbeprovidedonthiscreditinsubsequentlessons.Youshouldcompareclaimingtheforeigntaxespaidasanonrefundablecredittotakingitasanitemizeddeductionandusewhicheverresultsinthelowesttax.
Question 2:WhichofthefollowingtaxesaredeductibleonScheduleA?
A. Federalincometax
B. State, local, and foreign income tax and real estate tax
C. Taxonalcoholandtobacco
D. Foreignsalestax
Question 3: Forataxtobedeductible,ataxmustbe____.(Selectallthatapply.)
A. Imposedduringthetaxyear
B. Imposed on the taxpayer
C. Paid during the tax year
D. Paid by the taxpayer
Taxpayerswhoowntheirhomebutchoosetotakethestandarddeductionareeligibleforanadditionalstan-darddeductionof$500iffilingSingle($1,000ifMarriedFilingJointly)forrealestatetaxespaid.
Ifbox5aofScheduleAischecked,completeline7toincludeanydeductiblenewmotorvehicletaxes.Ifbox5bischecked,includethenewmotorvehicletaxesonthatline.Donotcompleteline7andcheckbox5b.
StateandlocaltaxwithheldissometimesshownonFormW-2ineitherbox17or19.
Assign the exercises.
Review answers with the class when com-plete.
Lesson 20: Itemized Deductions20-6
How do I handle interest?
Interestistheamountyoupayfortheuseofborrowedmoney.Certaintypesofinterestaredeductibleasitemizeddeductions.Homemortgageinterest,points(paidasaformofinterest),andinvestmentinterestcanbedeductedonScheduleA.Investmentinterestisoutsidethescopeofthevolunteerprogramandshouldbereferredtoaprofessionaltaxpreparer.
Generally,thetaxpayerreceivesForm1098,MortgageInterestStatement,whichshowsthedeductibleamountofhomemortgageinterestpaidbythetaxpayer.Onlytaxpayerswhoarelegallyliableforthedebtcandeducttheinterestintheyearitispaid.RememberthattaxpayersmayhavemorethanonemortgageormayhaverefinancedduringtheyearandmayhavemultipleMortgageInterestStatements.
Ask students to review the amount deductible in the Interest Expense chapter in Publication 17.
Usingtheflowchart–IsMyHomeMortgageInterestFullyDeductible?–inPublication17willhelpyoudetermineiftheinterestshouldbeincludedonScheduleA.
Membersoftheclergyandmilitarycandeductqualifiedmortgageinteresteveniftheyreceiveanontaxablehousingallowance.
example
From1991through1998,AlfredoandCindyKendallobtainedhomeequityloanstotaling$91,000.AlfredoandCindyusedtheloanstopayoffgamblingdebts,overduecreditpayments,andsomenondeductiblemedicalexpenses.
ThecurrentbalanceofAlfredoandCindy’shomeequityloanis$72,000.Thefairmarketvalueoftheirhomeis$230,000,andtheycarry$30,000ofoutstandingacquisitiondebt(theamountusedtobuy,build,orimprovetheirhome).
IfAlfredoandCindyfileajointreturn,theycandeducttheinterestontheirloansbecause:
•Thetotaloftheseloansthroughout2009($72,000)doesnotexceed$100,000,and
•Thetotalamountofthehomeequity($72,000)isnotmorethanthehome’sfairmarketvalueminusanyoutstandingacquisitiondebt($230,000-$30,000=$200,000)
Ask a volunteer to read the Alfredo and Cindy example.
Answer any student questions.
Lesson 20: Itemized Deductions 20-7
What about points?
Pointsarethechargespaidbyaborrowerand/orsellertoalendertosecurealoan.Theyarealsocalled:
• Loanoriginationfees(includingVAandFHAfees)
• Maximumloancharges
• Premiumcharges
• Loandiscountpoints
• Prepaidinterest
Onlypointspaidasaformofinterest(fortheuseofmoney)canbedeductedonScheduleA.Thisinterest,evenifitqualifiesforhomemortgageinterest,mustgener-allybespreadoverthelifeofthemortgage.However,iftheloanisusedtobuyorbuildataxpayer’smainhome,thetaxpayermaybeabletodeducttheentireamountintheyearpaid.SeetheInterestExpensechapterofPublication17formoreinformation.
Pointspaidtorefinanceamortgagearegenerallynotdeductibleinfulltheyearthetaxpayerpaidthem,unlessthepointsarepaidinconnectionwiththeimprovementofamainhomeandcertainconditionsaremet.
When are points fully deductible?
Bewareofcertainchargesthatsomelenderscallpoints.Pointspaidforspecificservices,suchasappraisalfees,preparationfees,VAfundingfees,ornotaryfeesarenot interest and are notdeductible.
What about qualified mortgage insurance premiums?
QualifiedmortgageinsuranceisprovidedbytheDepartmentofVeteransAffairs,theFederalHousingAdministration,theRuralHousingService,andprivatemortgageinsurance(PMI)companies.Taxpayerscantreatqualifiedmortgageinsurancepremi-umspaidoraccruedduringthetaxyearashomemortgageinterest.Theinsurancecoveragemustrelatetohomeacquisitiondebt,theinsurancecontractmusthavebeenissuedafter2006,andthetaxpayermusthavepaidthepremiumsbefore2010forcoverageineffectduring2009.PMIisdeductibleonline13ofScheduleA.
What qualifications are required to deduct PMI?
• PaidoraccruedJanuary1,2009toDecember31,2009
• Borrowersobtainedmortgagetobuy,build,orimprovetheirhome
• IfAGIismorethan$100,000($50,000ifMarriedFilingSeparately),theamountofmortgageinsur-ancepremiumsthatwouldotherwisebedeductibleisreducedoreliminated
AtaxpayermaybeabletodeductinterestonamainhomeANDasecondhome.Ahomecanbeahouse,cooperativeapartment,condominium,mobilehome,housetrailer,orhouseboatthathassleeping,cookingandtoiletfacilities.
UsetheflowchartintheInterestExpensechapterofPublication17tohelpyoudetermineifthepointsarefullydeductible.
Direct students to the flow chart in the Inter-est Expense chapter of Publication 17.
ReviewtheInterestExpensechapterofPublication17forspecialrulesandlimitationsfordeductingmortgageinsur-ancepremiumsashomemortgageinterest.
Lesson 20: Itemized Deductions20-8
ExErcisEs (continued)
Ask students to go to the Contributions chapter in Publication 17 and review the first column in Table 24-1.
Assign the exercise.
Review the answer with the class when complete.
Refinance points and personal interest are not deductible.
What types of interest are not deductible?
Interestthatcannotbedeductedincludes:
• Interestoncarloanswherethecarisusedfornonbusinesspurposes
• Otherpersonalloans
• Creditinvestigationfees
• Loanfeesforservicesneededtogetaloan
• Interestonadebtthetaxpayerisnotlegallyobligatedtopay
• Financechargesfornonbusinesscreditcardpurchases
Question 4: JoeandAngelafileajointreturn.Duringtheyear,theymadetheinterestpaymentslistedbelow.ThetotalofJoeandAngela’sfullydeductibleinterestforthetaxyearis$ 2,180 .
Interest Payments Amount DeductibleQualifiedinterestontheirhomemortgage,reportedonForm1098
$2,180 $2,180
Credit card interest $400Pointspaidtorefinancetheirmortgageforabetterinterestrate(noneofthepointsqualifyasinterest)
$1,500
Interest on a car loan $2,000Total $4,880 $2,180
How do I handle gifts to charity?
Acharitablecontributionisadonationorgifttoaqualifiedorganization.Taxpayersmustitemizetheirdeductionstodeductacharitablecontribution.Taxpayerscandeductcontributionstothefollowingtypesofqualifying organizations:
• Organizationsthatoperateexclusivelyforreligious,charitable,educational,scien-tific,orliterarypurposes
• Organizationsthatworktopreventcrueltytochildrenoranimals
• Organizationsthatfosternationalorinternationalamateursportscompetitioniftheydonotprovideathleticfacilitiesorequipment
• Warveterans’organizations
• Certainnonprofitcemeterycompaniesorcorpora-tions
• TheUnitedStates,oranystate,theDistrictofColumbia,aU.S.possession(includingPuertoRico),apoliticalsubdivisionofastateorU.S.possession,oranIndiantribalgovernmentoranyofitssubdivisionsthatperformsubstantialgovern-mentfunctions
To be deductible, contributions mustbemadetoaqualifyingorganization,notanindividual.
Turntothetable–ExamplesofCharitableContributions–AQuickCheck–inthechapterContributionsinPublication17.
Lesson 20: Itemized Deductions 20-9
Deductibleitemsinclude:
• Monetarydonations
• Dues,fees,andassessmentspaidtoqualifiedorganizationsabovethevalueofbenefitsreceived
• Fairmarketvalueofusedclothingandfurnitureingoodcondition
• Costandupkeepofuniformsthathavenogeneralusebutmustbewornwhileperformingservicesdonatedtoacharitableorganization
• Unreimbursedtransportationexpensesthatrelatedirectlytotheservicesthetaxpayerprovidedfortheorganization
• Partofacontributionabovethefairmarketvalueforitemsreceivedsuchasmerchandiseandticketstocharityballsorsportingevents
• Transportationexpenses,includingbusfare,parkingfees,tolls,andeitherthecostofgasandoilorastandardmileagedeductionof14centspermile
Which gifts to charity are not deductible?
Organizationsthatdonotqualifyfordeductiblecontributionsinclude:
• Businessorganizations,suchastheChamberofCommerce
• Civicleaguesandassociations
• Politicalorganizationsandcandidates
• Socialclubs
• Foreignorganizations
• Homeowners’associations
• Communistorganizations
Amountsthatmaynotbedeductedinclude:
• Costofraffle,bingo,orlotterytickets
• Tuition
• Valueofaperson’stimeorservice
• BlooddonatedtoabloodbankorRedCross
• Cardepreciation,insurance,generalrepairs,ormaintenance
• Directcontributionstoanindividual
• Sicknessorburialexpensesformembersofafraternalsociety
• Partofacontributionthatbenefitsthetaxpayer,suchasthefairmarketvalueofamealeatenatacharitydinner
Review gifts to charity that are deductible.
Ask students to give examples.
Review gifts to charity that are not deductible.
Ask students to give examples.
Lesson 20: Itemized Deductions20-10
What limits apply to charitable deductions?
Taxpayerswhosetotalcontributionsaremorethan20%oftheirAGImaybeabletodeductonlyapercentageoftheircontributions,andmustcarryovertheremaindertoalatertaxyear.Thepercentagevariesdependingonthetypeofgiftandthetypeofchar-itableorganization.MoreinformationontheselimitationsisavailableinPublication17.Individualsaffectedbylimitsoncharitabledeductionsshouldbereferredtoaprofes-sionaltaxpreparer.
What records should the taxpayer keep for charitable contributions?
Taxpayers must keep records toprovetheamountofthecashandnoncashcontri-butionstheymakeduringtheyear.Cash,check,andnoncashcontributionsshouldbereportedonScheduleA,line16andline17respectively.Foreachcontribution,telltaxpayersthattheycannotdeductacashcontribution,regardlessoftheamount,unlessoneofthefollowingrecordsofthecontributioniskept:
• Abankrecord,suchasacanceledcheck,abankcopyofacanceledcheck,orabankstatementcontainingthenameofthecharity,thedate,andtheamount
• Awrittencommunicationfromthecharity,whichmustincludethenameofthecharity,dateofthecontribution,andamountofthecontribution
Out-of-Pocket Expenses
Forunreimbursedexpensesrelatedtodonatedservices,thetaxpayermusthave:
• Adequaterecordsoftheexpenses
• Organization’swrittenacknowledgementanddescriptionofthetaxpayer’sservices
Onlyout-of-pocketexpensesthataredirectlyrelatedtothedonatedservicescanbededucted.Thevalueoftimeorservicesdonatedcannotbededucted.
What records should the taxpayer keep for noncash contributions?
example
Susanrana10KorganizedbytheChamberofCommercetobenefitaqualifiedcharitableorganization.Shepaidtheraceorganizersa$30entryfeeandreceiveda“free”t-shirtandpancakebreakfastaftertherace.
Susandidnotmakeacontributiontothequalifyingorganization.ShepaidtheChamberofCommerce,whichallottedfundstothebenefitingorganization.Therefore,noneofSusan’sentryfeeistaxdeductible.Iftheracehadbeenorga-nizedbythequalifyingorganizationitself,partofherentryfeemayhavebeendeductible.
Ask a volunteer to read the Susan example.
EffectiveforcontributionsmadeafterAugust17,2006,deductionsaredisallowedforthecharitablecontributionofclothingandhouseholditemsiftheitemsarenotingoodusedconditionorbetter.
Review the tips.
Remind students to ask about noncash con-tributions.
Lesson 20: Itemized Deductions 20-11
ExErcisEs (continued)
Noncash Contribution Deductions Less Than $250
Foreachsinglecontributionoflessthan$250,tellthetaxpayertokeep:
• Receiptorotherwrittencommunicationfromtheorganizationorthetaxpayer’sownreliablewrittenrecordsforeachitem,showing:
- Nameandaddressoforganization
- Dateandlocationofthecontribution
- Reasonablydetaileddescriptionofthedonatedproperty
- Fairmarketvalueofthedonatedproperty
Noncash Contribution Deductions of At Least $250 but Not More Than $500
Foreachsinglecontributionofatleast$250andnotmorethan$500,thetaxpayermusthaveallthedocumentationdescribedfornoncashcontributionslessthan$250.Inaddition,theorganization’swrittenacknowledgementmuststatewhetherthetaxpayerreceivedanygoodsorservicesinreturnandadescriptionandgoodfaithestimateofanysuchitems.
Noncash Contribution Deductions of More Than $500
Taxpayersmustreportnoncashcontributionsof$500ormoreonForm8283andthetaxpayershouldbereferredtoaprofessionaltaxpreparer.
Question 5: Juliamadethefollowingcontributionslastyear:
• $600toSt.Martin’sChurch(thechurchgaveheraletterverifyingtheamount)
• $32toGirlScouts(notforcookies!)
• $40toafamilywhosehouseburned
• $50forlotteryticketsatafundraiser
• $100forplayingbingoatherchurch
TheamountthatJuliacanclaimasdeductiblemonetary contributionsis$ 632 .
What are casualty and theft losses?
Thedeductionforcasualtyandtheftlossesiscomplex,withmanyrulesandexcep-tions,soyoushouldreferthetaxpayertoaprofessionaltaxpreparer.
Ifthetaxpayerisreducingthefairmarketvaluebyapprecia-tion,ordonatingcapitalgainproperty,referthetaxpayertoaprofessionaltaxpreparer.
Assign the exercise.
Review answer with the class when com-plete.
Bingo, lottery tickets, and donations to indi-viduals in need are not deductible.
Lesson 20: Itemized Deductions20-12
What are miscellaneous deductions?
What types of miscellaneous expenses are deductible?
Miscellaneousitemizeddeductionsareexpensesataxpayerpaysinorderto:
• Produceorcollectincome
• Manage,conserve,ormaintainpropertyheldforproducingincome
• Determine,contest,pay,orclaimarefundofanytax
Forsomemiscellaneousdeductions,onlytheportionthatexceeds2%ofthetaxpayer’sAGIcanbededucted.OthermiscellaneousdeductionsaredeductibleregardlessofAGI.
Which deductions are subject to the 2% limit?
Deductionssubjecttothe2%limitarereportedonlines21through27ofScheduleA.Examplesinclude:
• NEW Creditordebitcardconveniencefeesincurredwhenpayingincometax,chargedbythecardprocessor
• Unionduesandfees
• Professionalsocietydues
• Uniformsnotadaptabletogeneraluse(SeetheMiscellaneousDeductionschapterinPublication17foradiscussion)
• Smalltoolsandsuppliesusedforbusiness
• Professionalbooks,magazines,andjournals
• Employment-relatededucationalexpenses(ReviewDoesYourWork-RelatedEducationQualify?intheTaxBenefitsforWork-RelatedEducationchapterinPublication17)
• Expensesoflookingforanewjobinyourpresentoccupation
• Investmentcounselfees
• Investmentexpenses
• Safedepositboxrentalforinvestmentdocuments
• Taxcounselandassistance
• FeespaidtoanIRAcustodian
Tax Software Hint: Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),ScheduleA-ItemizedDeductions.
Which deductions are exempt from the 2% limit?
Deductionsthatarenotsubjecttothe2%limitarereportedonline28ofScheduleA.Examplesinclude:
• Gamblinglossestotheextentofgamblingwinnings(taxpayermusthavekeptarecordoftheirlosses)
• Work-relatedexpensesforindividualswithadisabil-itythatenablethemtowork,suchasattendantcareservicesattheirworkplace
Review the list of deductions.
Answer any student questions.
Gamblinglossesinexcessofwinningsarenotdeductible.Thefullamountofwinningsmustbereportedasincomeandthelosses(uptotheamountofwinnings)canbeclaimedasanitemizeddeduc-tion.
Lesson 20: Itemized Deductions 20-13
ExErcisEs (continued)
What types of miscellaneous expenses are not deductible?
Thetypesofmiscellaneousexpensesthatarenotdeductibleinclude:
• Politicalcontributions
• Thecostofentertainingfriends
• Lostormisplacedcashorproperty
• Travelasaformofeducation
Question 6:Philiphadtheexpensesshownbelow.WhatisthetotalofPhilip’squalifiedmiscellaneousitemizedexpenses?$ 695 .
Expense Amount DeductibleIncometaxpreparationfee $100 $100Safedepositboxrental(tostorebonds) $75 $75Lifeinsurancepremiums $300Creditcardconveniencefeeforincometaxpayment
$70 $70
Lossonsaleofpersonalhome $1,800Investmentjournalsandnewsletters $250 $250Investmentexpenses $200 $200Attorneyfeesforpreparationofawill $100Total $2,895 $695
Practice - Vanessa Franklin
Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-21andreviewthesampleinterviewswithVanessarelatedtoLesson20.
Returntothislessonafteryouhavereviewedthisinformation.
Summary
Medical and Dental Expenses
Deductiblemedicalanddentalexpensesarereportedandcalculatedonlines1through4ofScheduleA.
Qualifiedmedicalanddentalexpensesarethosethetaxpayerpaidduringthetaxyearforthetaxpayer,spouse,anddependents.
Taxes
Deductibletaxesarereportedonlines5through9ofScheduleA.Taxpayerscandeductthefollowing:
• Stateandlocalincometaxes
• State,local,orforeignrealestatetaxes
• Stateandlocalpersonalpropertytaxpayments
Anattorneyfeeforawillisconsideredapersonallegalexpense,soitisnotdeductible.
Assign the exercise.
Review answer with the class when com-plete.
Refer students to the Publication 17 chapter on Miscellaneous Deductions for addi-tional non-deductible expenses.
Review the lesson summary with the class.
Direct students to Appendix A-21.
Lesson 20: Itemized Deductions20-14
For2009,thereisanadditionaldeductionforstateandlocalsalesandexcisetax(includingcertainfeesinstatesthatdonothaveasalestax)onthepurchaseofquali-fiedmotorvehicles.Aqualifiedmotorvehiclemustbenewandincludesapassengerautomobileorlighttruck,amotorcycle,oramotorhome.
Interest
Deductibleinterestisreportedonlines10through15ofScheduleA.
Generally,thetaxpayerreceivesForm1098,MortgageInterestStatement,whichshowsthedeductibleamountofinterestpaidbythetaxpayer.Tobedeductible,theinterestmustbepaidbythetaxpayerduringthetaxyear.Onlytaxpayerswhoarelegallyliableforthedebtcandeducttheinterest.
Onlypointspaidasaformofinterest(fortheuseofmoney)canbedeductedonScheduleA.Thisinterest,evenifitqualifiesforhomemortgageinterest,mustgener-allybespreadoverthelifeofthemortgage.However,iftheloanisusedtobuyorbuildataxpayer’smainhome,thetaxpayermaybeabletodeducttheentireamountintheyearpaid.SeePublication17formoreinformation.
Pointspaidtorefinanceamortgagearegenerallynotdeductibleinfulltheyearthetaxpayerpaidthem,unlessthepointsarepaidinconnectionwiththeimprovementofamainhomeandcertainconditionsaremet.
Gifts to Charity
Qualifiedcharitablecontributionsarereportedonlines16through19ofScheduleA.
Thecontributionstoqualifying organizations thattaxpayerscandeductinclude:• Monetarydonations
• Dues,fees,andassessmentspaidtoqualifiedorganizationsabovethevalueofbenefitsreceived
• Fairmarketvalueofusedclothingandfurniture
• Costandupkeepofuniformsthathavenogeneralusebutmustbewornwhileperformingdonatedservicesforacharitableorganization
• Unreimbursedtransportationexpensesthatrelatedirectlytotheservicesthetaxpayerprovidedforthequalifyingorganization
• Partofacontributionabovethefairmarketvalueforitemsreceivedsuchasmerchandiseandticketstocharityballsorsportingevents
Taxpayers are required to keep receipts and records of all their contributions.
Miscellaneous Deductions
Forsomemiscellaneousdeductions,onlytheportionthatexceeds2%ofthetaxpayer’sAGIcanbededucted.OthermiscellaneousdeductionsaredeductibleregardlessofAGI.SeePublication17forthechapteronMiscellaneousDeductionsnotsubjecttothe2%limitation.
Lesson 20: Itemized Deductions 20-15
ExErcisE answErs
Answer 1: The total of qualified medical and dental expenses is $3,250, which does not include life insurance premiums, vitamins, or reimbursed hospital expenses.
Answer 2: B. State, local, foreign income tax, and real estate taxes are all deduct-ible on Schedule A.
Answer 3: B, C, and D. Taxpayers cannot deduct a tax they did not owe, did not pay, or that they paid during another year. However, the tax may have been imposed in a prior year.
Answer 4: $2,180. The only interest that is fully deductible for the tax year is Joe and Angela’s home mortgage interest. The points they paid to refinance are not deductible in full for the tax year, and the other interest paid was personal interest and is not deductible.
Answer 5: The amount that Julia can claim as deductible cash contributions is $632 (donations to her church and to the Girl Scouts). Bingo, lottery tickets, and donations to individuals in need are not deductible.
Answer 6: $695, which includes tax preparation fee, safe deposit box rental, credit card convenience fees, investment journals and newsletters, and investment expenses.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 20: Itemized Deductions20-16
Notes
Lesson 21: Military Employee Business Expenses 21-1
Instructor Notes
Introduction
Thislessonwillhelpyoudetermineandclaim qualifiedemployeebusinessexpensesformembersoftheArmedForces,suchasuniforms,educationandtravelthatarerelatedtoworkingasamemberoftheArmedForces.Theseexpenses,withoneexception,maybereportedonForm2106orForm2106-EZandwillbedeductedonScheduleAasaMiscellaneousItemizedDeductionsubjecttothe2%limitorincertaincasesasanadjustmenttoincome.
Objectives
Attheendofthislesson,usingyourresourcetools,youwillbeableto:
• Determineifthetaxpayerhasmilitarybusinessexpensesthatcanbededucted
• Identifywhichformtousetoreportmilitarybusinessexpenses
What are military employee business expenses?
Militaryemployeebusinessexpensesareneces-sarybusiness-relatedexpensesincurredbyactivemembersoftheU.S.ArmedForces.TheU.S.ArmedForcesincludescommissionedofficers,warrantofficers,andenlistedpersonnelinallregularandreserveunitsunderthecontroloftheSecretariesoftheDefense,Army,Navy,AirForce,andCoastGuard.ItdoesnotincludemembersoftheMerchantMarinesortheAmericanRedCross.
What are qualified uniform expenses?
Qualifieduniformexpensesarethecostandupkeepofuniformsandcertainarticlesthatare:
• Specificallyrequiredasaconditionofemployment,and
• Notadaptabletogeneraluseasregularclothing
Forexample,althoughmembersoftheArmedForcesarerequiredtowearuniformswhentheyareonduty,theyaregenerallyallowedtoweartheiruniformsinplaceofregularcivilianclothingwhentheyareoffduty.Therefore,inthiscase,membersofthemilitarycannotclaimadeductionfortheuniformcostandupkeep.
Lesson 21: Military Employee Business Expenses
Althoughtheapprovedintakeandinterviewsheetdoesnotlistmilitaryemployeebusinessexpenses,itisimportanttoensurethatservicememberstakeadvantageofdeductionstowhichtheyareentitled.Asktaxpayersiftheyhadanyunreimbursedmilitary work-relatedexpenses.
Review objectives with the class.
Point out the resources cited under What do I need?
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication3□ Publication4491-W□ Form2106□ Form2106-EZ□ ScheduleAOptional: □ Publication463□ Publication970□ Form2106Instructions
Lesson 21: Military Employee Business Expenses21-2
ExErcisEs
However,whenmilitaryregulationsprohibitoff-dutywearofcertainuniforms,servicememberscandeductthecostandupkeepofthoseuniforms.Servicemembersmustreducethedeductibleexpensesbyanynontaxableuniformallowanceorreimburse-menttheyreceive.
Inaddition,costsforrequireditemsthatdonotreplaceregularclothing,suchasinsigniaofrank,corpsdevices,epaulets,aiguillettes,andswords,canbededucted.
Are professional dues deductible?
Professionalduespaidtoprofessionalsocietiesthataredirectlyrelatedtotheirtradeorbusinesscanbedeductedbyservicemembers.
However,servicememberscannotdeductamountspaidtoanofficers’cluboranoncommissionedofficers’club.
Answersareafterthelessonsummary.
Question 1:Whichofthefollowingexpensescanbededucted?
A.Thecostofadressblueuniform(withoutshoulderboardsorgoldstripe onpants),includingcape;off-dutywearallowed
B.ThecostofafullArmygreenuniform(withoutbraid)thatcanbewornanytime
C. The cost of battle dress uniforms and utility uniforms that can be worn only while on duty or while traveling to and from duty
D.Noneoftheabove
Question 2:Whichofthefollowingexpensescanbededucted?
A. Cost of epaulets
B.Costandupkeepofareservist’suniformthatcanbewornoffduty(nouniformallowancereceived)
C.Alloftheabove
Question 3:Lt.ClayisonactivedutyfortheU.S.Navy.HespecializesintheinstallationandmaintenanceofsonardetectionsystemsonNavyships.Asavolunteer,healsodrawsillustrationsandcartoonsforhisbase’sinternalnewsletter.Hereceivesnocompensationforhisillustrations.IsthemembershipfeehepaystotheProfessionalIllustrators’Societyadeductibleexpense?¨ Yes þ No
example
Lt.Allen,anelectricalengineeratMaxwellAirForceBase,candeductprofessionalduespaidtotheAmericanSocietyofElectricalEngineers.
Thesamerulesapplyforactivedutypersonnelandreservists.
Q1 & 2: Items replacing regular clothing and insig-nia of rank and epaulets are tax deductible.
Illustrations are not part of official duties and can’t be deducted as an employee business expense.
Read the Lt. Allen example.
Assign the exercises.
Review answers with the class when com-plete.
Lesson 21: Military Employee Business Expenses 21-3
ExErcisEs (continued)
Can service members claim work-related educational expenses?
Servicememberscanclaimeducationalexpensesasanemployeebusinessexpenseiftheeducation:
• Isrequiredbytheiremployer,thelaw,orregulationstokeeptheircurrentsalary,status,orjobiftheserequirementsserveabusinesspurposeoftheemployer;or
• Maintainsorimprovestheskillsrequiredintheirpresentwork
Theseexpensesaredeductiblewhetherornottheeducationmayleadtoadegree.
However,servicememberscannotclaimanemployeebusinessexpensefor educationthatis:
• Neededtomeettheminimumeducationalrequirementsfortheirtradeor business, or
• Partofaprogramofstudythatwillqualifythemforanewtradeorbusiness
Question 4: TrueorFalse?Foreducationalexpensestobeclaimedasanemployeebusinessexpensededuction,theeducationmusthelptheservicememberqualifyforadegree.
¨ True þ False
Question 5:Whichofthefollowingcanbeclassifiedasawork-relatededucationexpense?
A.Costofalaptopanddesklampforstudying
B. Expenses incurred by a flight operations officer to take an advanced piloting course
C.Costofcivilianclothestoweartoacoursetakenoffbase
D.ExpensesincurredbyaNavydisbursingclerktolearntelevisionrepair
What about travel and transportation expenses incurred for educational expenses?
Servicememberswhohavequalifieddeductibleeducationalexpensesmaydeductthecostoftravelandtransportationforthateducation.Thisincludesthecostofgoingfromworktoschool,ortravelexpensesiftheservicemembertravelsovernightmainlytoobtainwork-relatededucation.Servicememberscannotdeducttheround-tripcost
Thissectionrelatesonlytoexpensesthatmaybededuct-ibleonScheduleAsubjecttothe2%AGIlimitation.Servicememberscandeterminewhethertheexpensesalsoqualifyasaneducationcredit,thenclaimthemwheretheyaremostbeneficial.
example
Sgt.Ventura,anArmypilot,incurrededucationalexpensestoobtainanaccountingdegree.HecannotdeducthisaccountingdegreeexpensesonScheduleAbecausethedegreewillqualifyhimforanewtradeorbusiness.
Q4 & Q5: Educa-tional expenses may be claimed as item-ized deductions if it improves the skills used in the service member’s current job.
Point out that qualified educational expenses can be deducted as an educational credit or as a certain miscella-neous itemized deduc-tion. Students should calculate the various ways and claim these expenses where they are most beneficial.
Ask a volunteer to read the Sgt. Ventura example.
Ask what if Sgt. Ven-tura took an advanced aviation course.
Answer: He could deduct the expenses because he met the minimum job qualifica-tions and the course improved his skills in his current position.
Assign the exercises.
Review answers with the class when com-plete.
Lesson 21: Military Employee Business Expenses21-4
ExErcisEs (continued)
ofgoingfromhometoschoolunlesstheyareregularlyemployedandgotoschoolonatemporarybasis(notreasonablyexpectedtolastmorethanoneyear)forwork-relatededucation.
Question 6: MajorManchesterisstationedinManila.Onweekends,shedrivestoTaaltotakelessonsintraditionalPhilippinedance.CanMajorManchesterdeductthesetravelexpenses?¨ Yes þ No
What are travel expenses?
Travelexpensesareunreimbursedwork-relatedexpensesincurredwhileservicemembersaretravelingawayfromhome.Theymustbeordinaryandnecessaryexpensessuchasairfare,carrental,taxifare,lodging,andmeals.Expensesforpersonaltravel,leave,orlibertycannotbededucted.
When are travel expenses deductible?
Fortravelexpensestobedeductible:
• Theremustbeawork-relatedpurposeforthetravel
• Theymustbedeemedasthe“ordinaryand necessary”costsoftravelingawayfromhome
• Theexpensesmustbegreaterthanthetotalofanyadvances,allowances,orreimbursementsservicemembersreceived
What is meant by “away from home”?
“Awayfromhome”hasaslightlydifferentmeaningformilitarythanforciviliantaxpay-ers.Forservicemembers,“home”isthedutystationtowhichtheyarepermanentlyassigned,whichcanbeashiporabase.Itincludestheentirecityorgeneralareawherethepostofdutyislocated.
Servicepersonnelareconsideredtobeawayfromhomeiftheyareawayfromtheirpermanentdutystationsforaperiodsubstantiallylongerthanan ordinaryday’swork.Servicemembersmaydeductbusiness-relatedtravelexpensesincurredwhile travelingawayfromhome.
The cost of traveling to Taal cannot be deducted on weekends because the travel is not work-related.
SeePublication970foraddi-tionalinformationregardingEducationalExpenses.
IfArmedForcesmembersdonotclaimreimbursementforexpensestheyareentitledto,nodeductionforthoseexpensesmaybeclaimed.
ForNavypersonnelassignedtopermanentdutyaboardashipthathasregulareatingandlivingfacilities,theshipisconsideredtobe“home”fortravelexpensepurposes.
Servicememberscannotdeductthecostoftravelthatisitselfaformofeducation,evenifitisdirectlyrelatedtotheirduties.
Assign the exercise.
Review answer with the class when com-plete.
Refer tax preparers to Publication 3 for a listing of deductible “away from home” travel expenses.
Lesson 21: Military Employee Business Expenses 21-5
ExErcisEs (continued)
Examplesofwork-relatedtravelexpensesformembersoftheArmedForcesinclude:
• Expensesincurredwhileontemporaryduty(TDY)ortemporaryadditionalduty(TAD)if“awayfromhome”(ship,base,orstation)
• Expensesofareservistawayfromhomeovernighttoattenddrills
• Mealsandlodgingofareservisttemporarilycalledtoactiveduty
• Travelexpenses,includingmealsandlodging,incurredinconnectionwith deductibleeducationalactivities
• Travelexpensesincurredwhencarryingonofficialbusinesswhileon“nocost”(tothegovernment)orders
Question 7:Whichofthefollowingindividualsisentitledtodeducttravelexpenses?
A.Sgt.Bullock,whocommutesfromhishometohispermanentpostofdutyinthesamecity
B.Capt.Hinds,whotakesataxitoworkfromhishometohispermanent postofduty
C. Major Forrest, a reservist who is called to temporary duty and must attend an overnight meeting away from home
D.PFCJenkins,whoisassignedtopermanentdutyaboardashipthatprovidesmealsandlodging
What are temporary active duty reservists’ expenses?
Militaryreserviststemporarilycalledtoactivedutywhomustremainawayfromhome toperformtheirdutiesmayclaimunreimbursedtravelexpensessuchasmealsandlodging.Thisapplies:
• Aslongasthedutyoccurredundercompetentorders,and
• Whetherornotthereservistwascompensated
Toclaimunreimbursedtravelexpenses,reservistsmust:
• Bestationedawayfromthegeneralareaoftheirjoborbusiness,and
• Returntotheirregularjobsoncereleased
ExpensesaredeductibleonlyifthereservistspayformealsandlodgingattheirofficialmilitarypostandonlytotheextenttheexpensesexceedBasicAllowanceforHousing(BAH)andBasicAllowanceforSubsistence(BAS).
Costs of traveling overnight to attend a reservists’ meeting can be deducted.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 21: Military Employee Business Expenses21-6
What is the 100-mile rule for reservists?
Militaryreservistswhomusttravelmorethan100milesawayfromhomeandstayovernighttoattendadrillorreservemeetingmaybeabletodeducttheirtravelexpensesasanadjustmenttoincomeratherthanasamiscellaneousitemizeddeduction.Theamountofexpensesthatcanbedeductedislimitedtothe:
• Federalrateforperdiem(forlodging,meals,andincidentalexpenses)
• Standardmileagerate(forcarexpenses)plusanyparkingfees,ferryfees,and/ortolls
For2009,thestandardmileagerateformilesdrivenforbusinesspurposesis55centspermile.Anyexpenseinexcessoftheseratesandexpensesthatdonotqualifyfortheadjustmenttogrossincomedeductioncanbeclaimedonlyasamiscellaneousitemizeddeductionsubjecttothe2%limit.
Tax Software Hint:Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),ScheduleA-ItemizedDeductions(continued).
What is the deduction for meals?U.S.servicepersonnelcandeductthecostofmealsandbusiness-relatedentertain-mentincurredduringbusinesstravelawayfromtheirpermanentdutystation.
Mealsandentertainmentexpensesarefiguredseparatelyfromotherbusinesstravelexpenses.Theyaremultipliedbyapercentage:50%formosttaxpayersand80%forthosesubjecttoDepartmentofTransportationhoursofservice.
Taxpayersmayreporttheactualamountsformeals,entertainment,andincidentalexpensesortheymayuseastandardamounttoclaimmealsandincidentalexpenses.Ineithercase,theservicemembermustproviderecordstoprovethetime,place,andbusinesspurposeofthetravel.
MilitaryReservistsincludemembersoftheU.S.ArmedForces(Army,Navy,MarineCorps,AirForce,CoastGuardReserve),theU.S.ArmyNationalGuard;theU.S.AirNationalGuard;ortheReserveCorpsoftheU.S.PublicHealthService.
Forinformationonusingthestandardmealallowanceinsteadofactualexpenses,seePublication463,Travel,Entertainment,Gift,andCarExpenses.
example
MaryisintheArmyReserve.Shelivesinatownthatis120milesfromBaseA,whereshenormallyreportsforReservedrillsormeetings.During2009,sheocca-sionallytraveledtoBaseB,whichwasonly40milesfromherhome.
MarymayclaimthetravelexpensessheincurredgoingtoBaseAasanadjustmenttoincome.Mary’sremainingexpensesfortraveltoBaseBmayqualifyasanitem-izeddeductiononScheduleA.Thisdeductionwillbesubjecttothe2%AGIlimitation.
Ask a volunteer to read the Mary example.
The100-mileruleisanexcep-tiontoForm2106require-mentsandqualifiesasanadjustmenttoincome,whichisanabove-the-linededuction.
Lesson 21: Military Employee Business Expenses 21-7
ExErcisEs (continued)
Forservicepersonnelwhoarefullyreimbursedbythegovernmentformealsunderanaccountableplanthatexcludesreimbursementfromgrossincome,thereisnoamounttodeductand,therefore,noamountsubjecttothe50%limit.
What are local transportation expenses?
Localtransportationexpensesaretypicallydefinedastheordinaryandnecessarycostsincurredingettingfromoneplacetoanothertoperformwork-relatedduties whilenottravelingawayfromhome.Thiscanincludetravelingfromonejobto another.However,theexpensesofgettingtoandfromthetaxpayer’sregularplaceofworkarenotdeductible.
Allowablelocaltransportationexpensesinclude:
• Thecostofdrivingandmaintainingone’sownvehicle
• Travelbyrentalcars,bus,rail,ortaxi
Are car expenses deductible?
Servicepersonnelwhousetheirownvehiclestotravelforworkareentitledtodeductactualexpensesorthestandardmileageratetofigurethedeductiblecostsofoperatingtheirvehiclesforbusinesspurposes.
Actualexpensesincludethecostofgas,oil,repairs,insurance,anddepreciationonthevehicle.Ifataxpayerchoosestouseactualexpensesinsteadofthestandardmileagerate,referthemtoaprofessionaltaxpreparer.
Question 8:Whichofthefollowingcostsareconsideredtobealocal transportationexpense?
A.Dailymealstakenduringaweek-longtrainingsessionwhileonduty
B.Gasolineusedtodrivetoandfromone’sregularplaceofwork
C. Taxi fare to travel while on duty to a local work-related convention
D.Elaboratelunchtotreattop-rankingmilitaryofficial visitingbase
Are expenses related to temporary work locations deductible?
Expensesincurredwhilecommutingtoworkarenotdeductible.However,servicememberswhoareassignedtotemporaryassignmentsinthesametradeorbusinessastheirregularplaceofbusinesscandeducttheexpensesofthedailyroundtripbetweentheirhomeandthetemporarylocation,ifnotreimbursedbytheiremployer.
ThestandardmileageratecanbefoundonForm2106,PartII,SectionB,andForm2106-EZ,PartII.
Taxi fare is an allowable transportation expense when used to travel on work-related business.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 21: Military Employee Business Expenses21-8
Servicememberscandeductordinaryandnecessarycostsoftravelingtotemporaryworkassignments:
• Travelingfromoneworkplacetoanotherwithinthecityorgeneralareathatistheirtaxhome
• Visitingclientsorcustomers
• Goingtoabusinessmeetingawayfromtheirregularworkplace
Expensesincurredwhiletravelingawayfromhomeovernightaredeductibleastravelexpenses,notlocaltransportationexpenses.
Who needs to complete Form 2106?
Iftheservicememberhasjob-relatedtravel,meals,orlocaltransportationexpenses,orotherexpensesthataregreaterthanreimbursements,Form2106mustbeusedtocalculatetheitemizeddeduction.
Form2106isnotrequiredifthetaxpayerisclaim-ingonlyjob-relatedexpensesforuniforms,profes-sionalduesoreducation,andnoreimbursementwasreceived.
TodeterminewhetherservicemembersneedtocompleteForm2106,considerthefollowingfactors:
• Didtheservicememberhavework-relatedtravel,meals,orlocaltransportationexpenses?
• Didtheservicememberreceiveanallowanceorreimbursementfromthemilitary?
• Didtheamountoftravelexpensesexceedtheamountofthereimbursementorallowance?
ForservicememberswhoarenotrequiredtofileForm2106,entermiscellaneousdeductionssubjectto2%ofAGIdirectlyonScheduleA,line21.
Tax Software Hint: Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),ScheduleA-ItemizedDeductions(continued).
example
Sgt.PurdueattendedameetingofanArmedForcesreserveunit.ThemeetingisconsideredtobeasecondplaceofbusinessbecauseitisheldononeofSgt.Purdue’sregularworkdays.Hecandeducttheexpenseoftravelingfromhishomeandregularworklocationtothemeetinglocation.
2106-EZcanonlybeusedbyemployeeswhoreceivednoreimbursementfromtheiremployerandwhousethestandardmileagerate.Inmostcases,militarymemberswithwork-relatedtravelexpenseswillhavereceivedreimburse-mentandwillneedtouseForm2106.
Ask a volunteer to read the Sgt. Purdue example.
Read the Capt. Glen-dale example.
Ask what if he did not return the extra $75.
Answer: If the $75 was not included on his Form W-2, he would have to include it on line 7 of Form 1040.
example
Capt.GlendaletraveledfromhisdutystationinCaliforniatoWashington,DC,foraconference.Hewasawayforfivedays.TheArmyadvanced$700toCapt.Glendaleforthetrip.Hisactualexpenseswere$625.WhenhefiledhistravelvoucherwiththeArmy,hereturnedtheextra$75.HedoesnothavetocompleteForm2106.
Lesson 21: Military Employee Business Expenses 21-9
Taxpayer Interview and Tax Law Application
Let’sseehowavolunteerhelpsMary,anArmyReservist,determinehowtodeductheremployeebusinessexpenses:
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… mary responds…
You were in the Reserves, as well as working your full-time civilian job. Did you have any expenses associated with that?
Oh, good. The expenses you have for traveling more than 100 miles away as a reservist can be deducted, even if you can’t itemize. Did you have to pay for lodging or meals or parking?
Did you get any reimbursement?
The most we’ll be able to deduct on the meals is 50%, but you can take all of the lodging, plus your mileage. It’s differ-ent for the drills at the other base, since they’re not as far from your home. Did you leave from your regular job to go to that base, or would it be on a day off?
Since you are driving from one job to another, that’s deduct-ible too. But only if you can itemize, and it’s over 2% of your AGI. Did you have any other work-related expenses?
Did you get reimbursed for any part of that?
Then you’ll be able to deduct the $100 you paid out of pocket – but only if you can itemize and exceed that 2% limit.
All right, the expenses for traveling more than 100 miles for reserve duties adds up to $1,188, along with the hotel rooms at $648, and half the meals at $90 totals $1,926 – we’ll deduct that right on the front of the return. The other mileage from trips to Baker add up to $176 and the $100 out of pocket for the class will give us a total of $276 for your Schedule A if you can itemize. Now let me ask you some questions about your car so I can complete this form… [OnMary’sapprovedintakeandinterviewsheet,indicatethatyou’veaddressedtheseitems.]
Well,myunitusuallymeetsatAnderson,whichisabout120milesfromhere.Ihadnineroundtripsduring2009,pluswemetatBakerfourtimes.That’sonly40milesaway.Here’smymileagerecord.
Ipaid$72forahotelroomeachtime,andIateatthemessforabout$20eachtrip.
No,Ihavetopayforitmyself.
No,thosewereshortmeetingsonweek-nights,soIwouldjustdrivestraightfromwork.
I’matraumanurse,andIhavetotakecontinuingeducationcourseseachyeartostaycertified.Theclassescost$500onceIpaidforthebooks.
Themilitarygivesmeanallowance,butthatonlycovered$400.
Ask two volunteers to role-play the sample interview.
Lesson 21: Military Employee Business Expenses21-10
Ofthe$2,202onForm2106,line10,$1,926willbeenteredonForm1040,line24,andtheremaining$276willbeenteredonScheduleA,line21.
Lesson 21: Military Employee Business Expenses 21-11
Summary
Thislessonexplaineddeductionsofspecialinteresttothemilitaryandhowtoclaimthem.
Travelexpensesmustbeordinaryandnecessaryexpensesoftemporarilytravelingawayfromhomeforaperson’sjobandmustbegreaterthanthetotalofanyadvances,allowances,andreimbursementsreceivedforsuchexpenses.
• Travelandtransportationexpensescanbetakenasmiscellaneousitemizeddeduc-tionsonScheduleA,subjecttothe2%AGIlimit.
• Travelexpensesformeals,lodging,andincidentalsareonlydeductibleiftheyareincurredwhiletemporarilyawayfromhomeonbusiness.Assignmentsthatlast,orarerealisticallyexpectedtolast,morethanoneyeararenotconsideredtemporary.
• Commutingandotherpersonalexpensesarenotdeductible.
• Travelcostsassociatedwithdeductibleeducationalexpensesaretreatedlikeotherbusinesstravelcosts.
Form2106andScheduleAareusedtofigureandclaimtheitemizeddeductionsforemployeebusinessexpensesthatexceedreimbursement.ServicemembersarerequiredtofileForm2106toclaimjob-relatedtravel,transportation,meals,orenter-tainmentexpenses,orwhentheyhavebeenpaidbytheiremployerforanyexpensesbeingdeductedonScheduleA,line21.
NationalGuardandReservememberswhotravelmorethan100milesawayfromhomeandstayovernighttoattenddrillorreservemeetingscandeducttravelexpensesasanadjustmenttoincome.AllotherdeductiblemiscellaneousitemizeddeductionsdiscussedinthislessonaredeductedonScheduleAasaMiscellaneousItemizedDeduction,subjecttothe2%AGIlimit.
Toclaimtheseexpenses,aservicemembermustitemizeusingForm1040,ScheduleA,ItemizedDeductions.
Review the lesson summary with the class.
Lesson 21: Military Employee Business Expenses21-12
ExErcisE answErs
Answer 1: C. The cost of battle dress uniforms and utility uniforms that can be worn only while on duty or while traveling to and from duty.
Answer 2: A. The cost of items not replacing regular clothing such as insignia of rank and epaulets are deductible.
Answer 3: No. Lt. Clay’s illustrations are not part of his official duties, and cannot be deducted as an employee business expense.
Answer 4: False. The education does not have to lead to a degree as long as it helps maintain or improve skills or knowledge needed for the taxpayer’s current job.
Answer 5: B. Educational expenses may be claimed as miscellaneous item-ized deductions if the education improves the skills used in the service member’s current job.
Answer 6: No. Major Manchester cannot deduct the cost of traveling to Taal on weekends because the travel is not work-related.
Answer 7: C. Only Major Forrest can deduct the costs of traveling overnight to attend a reservists’ meeting.
Answer 8: C. Taxi fare to travel on work-related business while not away from home is an allowable local transportation expense.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 22: Business Travel Expenses 22-1
Instructor Notes
Introduction
Thislessonprovidesinformationondeductingtheordinaryandnecessarybusiness-relatedexpensesataxpayermayhavefortravel,entertainment,gifts,ortransportation.Anordinaryexpenseisonethatiscommonandacceptedinthetaxpayer’sfieldoftrade,business,orprofession.Anecessaryexpenseisonethatishelpfulandappropriateforataxpayer’sbusiness.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Computebusiness-relatedtraveldeductions
• DetermineifataxpayermustfileForm2106
What qualifies as a deductible business travel expense?
Deductibletravelexpensesincludeordinaryandnecessarybusinessexpensesassoci-atedwithataxpayer’sjob.Theseareexpensesincurred while conducting business and cannotincludepersonalexpensesforfamilymembers,suchassightseeingornonbusi-nessentertainment.
Examplesofdeductiblebusinesstravelexpensesinclude:
• Faresfortaxis,trains,airplanes,etc.
• Rentalcarexpenses
• Costsofoperatingandmaintaininganautomobile
• Baggagecharges
• Mealsandlodging
• Cleaningandlaundryexpenses
• Telephoneexpenses
• Tipsandgratuities
• Othernecessaryandordinaryexpensesrelatedtotravel
Lodgingandtransportationconnectedwithovernighttravelawayfromone’staxhomearedeductible,buttheexpenseofcommutingtoandfromworkisnotconsideredabusinesstravelexpense.
Lesson 22: Business Travel Expenses
Review objectives with the class.
Point out the resources cited under What do I need?
Review list of deductible business travel expenses.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Form1040□ Form2106□ Form2106Instructions□ Form2106-EZ□ ScheduleA□ Optional: Publication463
Lesson 22: Business Travel Expenses22-2
What is considered a taxpayer’s tax home?
Generally,the“taxhome”istheentirecityorgeneralareawherethetaxpayer’smainplaceofbusinessorworkislocated,regardlessofwherethefamilyhomeismain-tained.Ifthetaxpayerregularlyworksinmorethanoneplace,thetaxhomeisthegeneralareawherethemainplaceofbusinessorworkislocated.Onecannotdeductexpensesfortravelawayfromone’staxhomeforanyperiodoftemporaryemploymentofmorethanoneyear.
Who is eligible for home leave?Section903oftheForeignServiceActof1980providesthattheheadofaforeignaffairsagencymayorderamemberoftheForeignServicewhoisacitizenoftheUnitedStatestotakehomeleaveuponcomple-tionof18monthsofcontinuousserviceabroad,andshallsoorderassoonaspossibleaftercompletionofthreeyearsofcontinuousserviceabroad.BecausemembersoftheForeignServicearerequiredbylawtotakealeaveofabsence,theyareallowedtodeductamountspaidfortravel,meals,andlodgingwhileonhomeleaveasemployeebusinessexpenses.ThetaxpayerswhoareeligibleforthisleavewilldeducttheseexpensesonForm2106,EmployeeBusinessExpenses,justlikeanemployeewhoisconductingbusinessawayfromhome.Aswithalldeductibleemployeebusinessexpenses,recordsandreceiptsmustbemaintainedtosupportthedeductionsthataretaken.AnyexpensespaidforonbehalfofaForeignServicemember’sfamilyarepersonalexpensesandthereforearenotdeductible.
example
JocelynLane’spermanentdutystationfortheU.S.ForeignServiceisinKorea.HerhusbandandchildrencouldnotaccompanyherandhaveremainedattheirhomeintheUnitedStates.Aftertwoyearsofcontinuousduty,shecomesbacktotheUnitedStatesforfiveweeksofmandatoryhomeleave.Shecandeductthecostofhertransportation,lodging,andmealswhiletravelinghome.Shecanalsodeducthermealsandtransportationoncesheishomeonleave,andhertransportation,lodging,andmealswhiletravelingbacktoherofficeinKorea.
example
BartonPierceliveswithhisfamilyinChicago,butworksinMilwaukeewherehestaysinahotelandeatsinrestaurants.AlthoughhereturnstoChicagoeveryweekend,hemaynotdeductanyofhistravel,meals,orlodginginMilwaukeebecauseitishistaxhome.HistravelonweekendstohisfamilyhomeinChicagoisnotforhiswork,sotheseexpensesarealsonotdeductible.
UnitedStatesForeignServiceemployeeswhoareonmandatory“homeleave”areallowedtodeductamountspaidfortravel,meals,andlodgingwhileonhomeleave.However,amountspaidonbehalfofthetaxpayer’sfamilywhileonhomeleavearepersonallivingexpensesandarenotdeductible.
Ask a volunteer to read the Jocelyn Lane example.
Lesson 22: Business Travel Expenses 22-3
Are reimbursements reported?Taxpayersmustreportbothbusinesstravelexpensesaswellasanyemployer-providedreimbursement.Insomecases,thisresultsinanetexpenseofzero.Inothercases,excessreimbursementsmaybetaxableincome.Whentaxpayerscombinepersonalandbusinesstravel,theymuststrictlyseparatetheexpenses.
What records must the taxpayer have?
Taxpayersmustkeeprecordsinordertodeducttravelexpenses,whichincludemeals(unlessusingthestan-dardmealallowance),entertainment,gifts,oruseofanautomobileorotherlistedproperty.Therecordsmustdocumentthetime,place,businesspurpose,business relationship(forentertainmentandgifts),andamountsofeachexpense.Generally,taxpayersmusthavereceiptsforalllodgingexpenses,regardlessoftheamount,andforanyotherexpensesof$75ormore.
Are there alternative methods for figuring some expenses?
Therearealternativewaysofreportingsomeexpenses,suchas:
• Vehicleexpensescanbereportedbyusingtheactualexpensemethodorthestan-dardmileagerate
• Mealsandincidentalexpensescanbereportedbyusingtheactualamountsorastandardamountcanbeusedtoreporttheseexpenses
What are vehicle expenses?
Vehicleexpensesareexpensesincurredwhentaxpayersusetheirvehiclesforbusi-nesspurposes.Ifataxpayerhasqualifiedvehicleexpenses,figurethoseinPartIIofForm2106.
Oneofthetwofollowingmethodscanbeusedtofigureataxpayer’sdeductibleexpenses.
• Theactualexpensemethodfiguresthedeductionbasedonavarietyoffactorsincludinggasoline,oil,repairs,insurance,andrentals.Itmayeveninvolvedepreciationorthevalueofavehicleprovidedbythetaxpayer’semployer.
example
BobSmithtraveledtoaconferenceinCleveland,OhiothatlastedfromWednesdaythroughFriday.Hisemployerreimbursedhimforhistransportationtoandfromtheconference,hisrentalcarexpenses,andhismeals.HepostponedhistravelhomeuntilSundayafternoonsohecouldvisitaluxuryspainCoshocton,Ohio.Hemayreporttheexpensesfortheconferenceandthereimbursement,buthecannotclaimanycostsrelatedtovisitingthespa.
Ask a volunteer to read the Bob Smith example.
Thislessondiscussesonlythestandardmileagerate.Ifthetaxpayerwishestousetheactualmethod,referthemtoaprofessionaltaxpreparer.
Taxpayerswhotravelforbusi-nessshouldkeeprecordsofallexpensesandanyadvancesreceivedfromtheiremployer.Alog,diary,note-book,oranyotherwrittenrecordsarenecessarytokeeptrackofexpenses.
Lesson 22: Business Travel Expenses22-4
ExErcisEs
• Thestandardmileagemethodisverysimple:itmultipliesthemilesdrivenforbusi-nessbyastandardcost.For2009,thestandardmileagerateformilesdrivenforbusinesspurposesis55centspermile.Taxpayersmayusethestandardmileagerateonlyiftheymeetoneoftheserequirements:
- Ownedthevehicleandusedthestandardmethodthefirstyearthevehiclewasputintoservice
- Leasedthevehicleandisusingthestandardmethodforthelifeofthelease
Ifthetaxpayerreportsvehicleexpenses,regardlessofthemethodused,completetheGeneralInformationsectioninPartIIofForm2106.Aswithotherbusinessexpenses,thetaxpayermustkeeprecordstoprovethetime,place,andbusinesspurposeofthetravel.
How are meals, entertainment, and incidental expenses figured?
Mealsandentertainmentexpensesarefiguredsepa-ratelyfromotherbusinesstravelexpenses.Theyaremultipliedbyapercentage:50%formosttaxpayersand80%forthosesubjecttoDepartmentofTransportationhoursofservice.
Taxpayersmayreporttheactualamountsformeals,entertainmentandincidentalexpenses.Alternatively,theymayuseastandardamounttoclaimmealsandincidentalexpenses.
Ineithercase,thetaxpayermusthaverecordstoprovethetime,place,andbusinesspurposeofthetravel.
Answersareafterthelessonsummary.
Question 1:Whichofthefollowingistrueformealsandentertainmentexpenses?
A.Taxpayersmaydeductmealexpensesforfamilymembersifthetravelcanbeproventobeprimarilybusinessrelated.
B.Taxpayerscandeduct100%ofmealandentertainmentexpensesthatarenotsubjecttoDOThoursofservice.
C. Taxpayers may report the actual amounts for meals and entertainment and for incidental expenses or use the standard method.
D.Alloftheabove.
Question 2:TrueorFalse:Taxpayerswhocanusethestandardmethodforcalculatingbusinessmileageneednotproducerecordsprovingthetime,place,andbusinesspurposeofthetravel.¨ True þ False
SeetheinstructionsforForm2106todetermineifataxpayerissubjecttoDOThoursofservice.
SeePublication463fordetailsonhowtofiguredeductionsusingthestandardmealallow-ance,includingspecialrulesforpartialdaysortravelandfortransportationworkers.
Assign the exercises.
Review answers with the class when com-plete.
All business expenses must be supported by records.
Refer students to Form 2106, General Informa-tion section.
Lesson 22: Business Travel Expenses 22-5
How do I report business expenses?
BusinessexpensesarereportedonForm2106,EmployeeBusinessExpenses,orForm2106-EZ,UnreimbursedEmployeeBusinessExpenses.TheresultfromForm2106or2106-EZisreportedasamiscellaneousitem-izeddeductiononScheduleAofForm1040.
Tax Software Hint: Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),ScheduleA-ItemizedDeductions(continued).
Summary
Whenyouhelptaxpayerscalculatebusiness-relatedtravelexpenses,youmustiden-tifydeductibleexpenses.Theseareaffectedbythetaxpayer’s“taxhome”andotherfactors.Also,ataxpayercannotdeductexpensesforafamilymemberwhoaccompa-niesthemforpleasureonabusinesstrip.
NotalltaxpayersmustfileForm2106;somemayfileForm2106-EZandothersdonotneedtofileeitherform.Besurethetaxpayerhasproperrecordsforexpenses,andcorrectlyreportsanyreimbursementamounts.
Refer students to Form 2106-EZ to determine who can use that form, and the Who Should File Form 2106 flow-chart, in Form 2106 Instructions.
ThefinaldeductionamountonForm2106maybereducedwhenyouapplythe2%AGIlimitonScheduleA.
Specialrulesapplytofiguringthefinalamountforbusinesstravelexpensedeductionsforministers,armedforcesreservists,certainstateandlocalofficials,qualifiedperformingartists,anddisabledemployees.SeeForm2106Instructionstodetermineifataxpayerwillqualifyunderanyofthesecategories.
Review lesson sum-mary with the class.
Lesson 22: Business Travel Expenses22-6
ExErcisE answErs
Answer 1: C. Taxpayers may report the actual amounts for meals/entertainment and for incidental expenses or use the standard method for one or the other.
Answer 2: False. All business expenses must be supported by records.
Notes
Lesson 23: Credit for Child and Dependent Care 23-1
Instructor Notes
Lesson 23: Credit for Child and Dependent Care Expenses
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form2441andinstructionsOptional: □ Publication503□ Form1040Instructions
Introduction
Thislessoncoversthecreditforchildanddependentcareexpenses.Sometaxpayersmaynotbeawareofthiscredit.Yourtimeandeffortmayresultinalower taxforthetaxpayer.
Todetermineifataxpayeriseligibleforthecredit,usetheinterviewtechniquesandtoolsdiscussedintheinterviewlesson.WhetherthetaxpayerisfilingForm1040orForm1040A,calculatethecreditusing Form2441.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determineifataxpayeriseligibleforthecredit
• Calculatetheamountofthecredit
What is the child and dependent care credit?
Thecreditallowstaxpayerstoreducetheirtaxbyaportionoftheirchildanddependentcareexpenses.Thecreditmaybeclaimedbytaxpayerswho,inordertoworkorlookforwork,paysomeonetotakecareoftheirqualifyingperson.Aqualifyingpersonisa:
• Dependentchildunder13
• Spousewhoisunabletocareforhimself/herself
• Dependentwhoisunabletocareforhimself/herself
Thecreditrangesfrom20to35%ofthetaxpayer’sexpenses.Thepercentageisbasedonthetaxpayer’searnedincomeandadjustedgrossincome.Theamountofthecreditcannotbemorethantheamountofincometaxonthereturn.Itcanreduceanindi-vidual’staxto$0,butitwillnotgivethetaxpayerarefund.Thistypeofcreditiscalleda“nonrefundable”credit.
Sometaxpayersreceivedependentcarebenefitsfromtheiremployers,whichmayalsobecalled“flexiblespendingaccounts”or“reimbursementaccounts.”Taxpayersmaybeabletoexcludethesebenefitsfromtheirincome.Employer-provideddependentcarebenefitsappearinbox10ofthetaxpayer’sFormW-2.
Becausethechildanddependentcarecreditisanonrefundablecredit,onlytaxpayerswithtaxableincomecanclaimthecredit.However,alltaxpayerswhoreceiveemployer-provideddependentcarebenefitsarerequiredtocompletePartIIIofForm2441todetermineiftheycanexcludeallorpartofthesebenefitsfromtheirtaxableincome.
Don’tconfusethiscreditwiththechildtaxcredit!
Review objectives with the class.
Point out the resources cited under What do I need?
Explain what is meant by “nonrefundable” credit.
Lesson 23: Credit for Child and Dependent Care23-2
How do I determine if a taxpayer is eligible?
Theinformationgatheredfromanapprovedintakeandinterviewsheet,alongwiththedecisiontreeintheVolunteerResourceGuide(TabG)willhelpyoudeterminethetaxpayer’seligibility.Besuretoaskwhetherthetaxpayerhaspaidforanytypeofdependentcare,forexample,foraspouseorotherdependent.
TheVolunteerResourceGuidedecisiontreecoversthefiveeligibilityteststhetaxpayermustmeettoqualifyforthecredit:
• Qualifyingpersontest
• Earnedincometest
• Work-relatedexpensetest
• Jointreturntest
• Provideridentificationtest
UsethedecisiontreequestionsintheVolunteerResourceGuide(TabG)asaguideforyourinterviewwiththetaxpayer.Keepinmindthatthetaxpayermustpassallfiveoftheteststoqualifyforthecredit.
What is the qualifying person test?
Thetaxpayer’schildanddependentcareexpensesmustbeforthecareofoneormorequalifyingpeople.RefertotheVolunteerResourceGuide(TabG),ChildandDependentCareCreditExpenses,todeterminewhoisaqualifyingperson.Anyofthefollowingarequalifyingpersons:
• Aqualifyingchildwhoisthetaxpayer’sdependentandunderage13whenthecarewasprovided.Onlythecustodialparentcantakethechildanddependentcarecredit.Ifthechildisnotbeingclaimedasadependentbythetaxpayerbecausethenoncustodialparentistakingtheexemptionunderthespecialrulesforchildrenofdivorcedandseparatedparents,onlythecustodialparentmaytreatthechildasaqualifyingpersonforthiscredit.
• Someonewhowasphysicallyormentallyunabletocareforhim-orherselfandforwhomthetaxpayercouldclaimadependencyexemption,exceptif:
- thepersonhad$3,650ormoreofgrossincome
- thepersonfiledajointreturn
- thetaxpayerorspouse,ifMarriedFilingJointly,couldbeclaimedasadependentonsomeoneelse’s2009return.
• Spouseswhowerephysicallyormentallyunabletocareforthemselvesandlivedwiththetaxpayermorethanhalftheyear.
example
Jimpaidsomeonetocareforhiswife,Janet,sohecanwork.Janetisphysicallyunabletocareforherself.Jimalsopaidtohavesomeonepreparemealsfortheir12-year-olddaughter,Jill.BothJanetandJillarequalifyingpersonsforthecredit.
SeetherulesforQualifyingChildandthespecialrulesforchildrenofdivorcedand separatedparentsinPublication17,PersonalExemptionsandDependents.
Display or refer stu-dents to the Child and Dependent Care Expenses – Decision Tree in the Volunteer Resource Guide (Tab G).
Review the eligibility tests with the students.
Emphasize to students that only the parent with whom the child lives can take this credit.
Ask a volunteer to read the Jim example.
Lesson 23: Credit for Child and Dependent Care 23-3
What questions should I ask?
AskthequestionsfromthedecisiontreeintheVolunteerResourceGuide(TabG) andtheapprovedintakeandinterviewsheet.Thesampleinterviewshownuses thesequestions.
EventhoughDorothy’sdaughterisover13,shemeetsthequalifyingpersontestbecauseshecannotcareforherself.
Onceyou’vedeterminedifthetaxpayerhadeligibleexpensesforthechildanddepen-dentcarecredit,confirmtheappropriateboxontheapprovedintakeandinterviewsheetischecked.
What is the earned income test?
Thetaxpayer(andspouse,ifmarried)musthaveearnedincomeduringtheyear.Earnedincomeincludes:
• Wages
• Salaries
• Tips
• Othertaxableemployeecompensation
• Netearningsfromself-employment
• Strikebenefits
• Disabilitypayreportedaswages
RefertotheEarnedIncomeTableintheVolunteerResourceGuide(TabH)forthelistofearnedincome.
What if spouses are full-time students or are unable to care for themselves?
Ataxpayer’sspouseistreatedashavingearnedincomeforanymonththespouseisphysicallyormentallyunabletocareforhimself/herself,orisafull-timestudent.Thespouse’sincomeisconsideredtobe$250foreachmonthifthereisonequalifyingpersoninthehome,or$500eachmonthiftherearetwoormorequalifyingpeople.Afull-timestudentisdefinedasenrolledandattendingaschoolforthenumberofhoursorclassestheschoolconsidersfulltime.Thespousemustbeastudentforsomepartoffivecalendarmonthsduringtheyear.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… dorothy responds…
I see you indicated on your intake sheet that you had child and dependent care expenses.
You may qualify for the child and dependent care credit. Let me ask you a few questions about that. Which of your dependents received the care?
Now, she is 16 years old, correct?
Yes,Idid.
Mydaughter.
Yes,butshehaswhatthedoctorscallprofoundmentalretardation.Shejustcan’ttakecareofherself.
Ask two volunteers to role-play the sample interview.
Point out the definition of a student.
Lesson 23: Credit for Child and Dependent Care23-4
If,inthesamemonth,boththetaxpayerandthetaxpayer’sspousearefull-timestudentsorarenotabletocareforthemselves,onlyonespousecanbeconsideredtohaveearnedincomeofeither$250foronequalifyingpersonor$500fortwoqualifyingpersonsforthatmonth.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab5),Form2441-CreditforChildandDependentCareExpenses.
What questions should I ask?
AskthequestionsfromthedecisiontreeintheVolunteerResourceGuide(TabG)andtheapprovedintakeandinterviewsheet.Hereishowavolunteermightinterviewataxpayeraboutthistest.
Dorothyandherhusbandmeettheearnedincometestbecauseherhusbandwasafull-timestudentforatleastfivemonths,andisconsideredtohaveearnedincomeforthosemonths.
What is the work-related expense test?
Expensesareconsideredwork-relatedonlyifbothofthefollowingaretrue:
• Theexpensesallowthetaxpayer(andspouse,ifmarried)toworkorlookfor work,and
• Theexpensesareforaqualifyingperson’scare,andtoprovideforthatperson’swell-beingandprotection
Formarriedtaxpayers,generallybothmustworkorbelookingforwork.Taxpayers’spousesaretreatedasworkingduringanymonththespouseswerefull-timestudentsorwerephysicallyormentallyunabletotakecareofthemselves.
Thereisalimitontheamountofwork-relatedexpensesthatcanbeusedtofigure thecredit.Thelimitis$3,000foronequalifyingpersonand$6,000fortwoormorequalifyingpersons.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… dorothy responds…
I believe you mentioned earlier that you and your husband both work, is that correct?
Did you both work while your daughter was in daycare?
So, he was a full-time student for the first six months of the tax year?
No. That does not disqualify you.
Yes.
Yesandno.Myhusbandjustchangedcareers.Hewenttoschoolthefirsthalfoftheyear,buthebeganworkingfull-timewithinamonthoffinishinghisprograminJuly.
Yes.Doesthatdisqualifyus?
Ask two volunteers to role-play the sample interview.
Lesson 23: Credit for Child and Dependent Care 23-5
What are examples of work-related expenses?
Thefollowingexpensescountaswork-related:
• Costofcareoutsidethehomefordependentsunder13,forexample,preschoolorhomedaycare,before-orafter-schoolcareforachildinkindergartenorhighergrade
• Costofcareforanyotherqualifyingperson,forexample,dependentcare
• Householdexpensesthatareatleastpartlyforthewell-beingandprotectionofaqualifyingperson,forexample,theservicesofahousekeeperorcook
What expenses do not qualify as work-related?
Expensesthatdonotqualifyaswork-relatedincludeamountspaidforfood,cloth-ing,education,orentertainment.However,smallamountspaidfortheseitemscanbeincludediftheyareincidenttoandcannotbeseparatedfromthecostofcare.Examplesofchildcareexpensesthatdonotqualifyaswork-relatedinclude:
• Education,forexample,expensestoattendkindergartenorahighergrade
• Thecostofsendingachildtoanovernightcamp
• Thecostoftransportingaqualifyingpersonfromthetaxpayer’shometothecarelocationandback
What about taxes paid for household employees?
Taxpayerswhopaidsomeonetocomeintotheirhomestoprovidecarefortheir dependentorspousemayberequiredtopayhouseholdemploymenttaxes.Thesetaxesmaybeconsideredawork-relatedexpense.RefertoEmploymentTaxesforHouseholdEmployersinPublication17formoreinformation.
Generally,ifthehouseholdemployeeearnedlessthan$1,700forthetaxyear,and thetaxpayerdidnotwithholdanyincometax,thetaxpayerisnotrequiredtopayemploymenttaxesorprovidetheemployeewithFormW-2.Refertaxpayerswhodidnotpayemploymenttaxesfortheirhouseholdemployees,andareunsureabouttheserequirements,toPublication926,HouseholdEmployer’sTaxGuide,ortoaprofes-sionaltaxpreparer.
example
Kristatakesher3-year-oldchildtoanurseryschoolthatprovideslunchand educationalactivitiesaspartofitspreschoolchildcareservice.Shecancountthetotalcostwhenshefiguresthecredit.
example
Rogertakeshis10-year-oldchildtoaprivateschool.Inadditiontopayingforthecostoftheeducation,Rogeralsopaysanextrafeesothathischildcanattendabefore-schoolandafter-schoolprogram,sothatRogercangotowork.Rogercancountthecostofthebeforeandafterschoolprogramwhenfiguringthecredit,butnotthecostoftheeducation.
Ask a volunteer to read the Krista example.
Ask a volunteer to read the Roger example.
Lesson 23: Credit for Child and Dependent Care23-6
What if the taxpayer makes payments to a relative?
Paymentstorelativesmayqualifyaswork-relatedexpensesifthetaxpayerdoesnotclaimtherelativeasadependent.Donotcountamountspaidto:
• Adependentwhomthetaxpayer(orspouse,ifmarried)canclaimasan exemption,or
• Thetaxpayer’schildwhoisunderage19attheendoftheyear,evenifheorsheisnotthetaxpayer’sdependent
• Apersonwhowasthetaxpayer’sspouseatanytimeduringtheyear
• Theotherparentofthetaxpayer’squalifyingchildwhoisunderage13.
What questions should I ask?
ContinueaskingquestionsfromthedecisiontreeintheVolunteerResourceGuide (TabG)andtheapprovedintakeandinterviewsheet.Hereishowavolunteermightinterviewataxpayeraboutthework-relatedtest.
Dorothypassesthework-relatedexpensetestbecausetheexpensesarepaidsothatsheandherhusbandcanwork,andarenotpaidtoadependentrelative.
What is the joint return test?
Generally,married coupleswhowishtotakethechildanddependentcarecredit mustfileajointreturn.However,taxpayerscanbeconsideredunmarriediftheyfileaseparatereturnand:
• arelegallyseparatedonthelastdayofthetaxyear,or
• livedapartfromtheirspouseforthelast6monthsoftheyearandpaidmorethanhalfofthecostofprovidingahomewhichwasalsothemainhomeofthequalifyingpersonformorethanhalftheyear
Ataxpayerwhosespousediedduringthetaxyear,andwhohasnotremarried,must generallyfileajointreturntoclaimthecredit.
Atthispoint,youwillhavealreadydeterminedthefilingstatusandcanrelyonthattodetermineifthetaxpayerpassesthejointreturntest.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… dorothy responds…
Did the caregivers assist your daughter only when you and your husband were at work?
Do you pay your mother to care for your daughter?
That’s wonderful. You’re all very fortunate. So all your expenses were only to allow you to work – or in your husband’s case to go to school or look for work prior to becoming employed?
That’sright.Wecouldn’taffordanymorehelpthanthat.Alllastyear,theyarrivedjustbeforeweleftforworkandtheyleftwhenmymothercameat2p.m.
No,wedon’t.Shejustdoesitbecausesheloveshergranddaughter.
Yes,exactly.
Display or refer stu-dents to the questions on the decision tree in the Volunteer Resource Guide (Tab G).
Ask two volunteers to role-play the sample interview.
Ask if Married Filing Separately can claim this credit.
Answer: No
Lesson 23: Credit for Child and Dependent Care 23-7
ExErcisEs
What is the provider identification test?
Theprovideridentificationtestrequiresthattaxpayersprovidethename,addressandtaxpayeridentificationnumber(TIN)ofthepersonororganizationwhoprovidedthecarefortheirchildordependent.
Ifthecareproviderisanindividual,theTINisthesameastheprovider’ssocialsecu-ritynumber.Iftheproviderisanorganization,thenitistheemployeridentificationnumber(EIN).Certaintax-exemptorganizationsarenotrequiredtohaveanEIN.SeePublication17formoredetails.
Taxpayerswhocannotprovidealloftheprovider’sinformationorwhohaveincorrectinformationmaystillbeabletotakethecreditiftheycanshowthattheyusedduediligenceintryingtoobtainthecorrectinformation.RefertothesectionsentitledDueDiligenceandProviderRefusalinPublication17formoreinformation.Returnsthatdonotincludetheproviderinformationcannotbefiledelectronically.
UsethedecisiontreeintheVolunteerResourceGuide(TabG)toanswerthefollowingquestions.Theanswersappearattheendofthelesson.
Question 1:Audreyisastay-at-homemom.Herhusbandworksandhad earnedincomeforthetaxyear.Theyhaveayoungsonwithautismwhomustbesupervisedatalltimes.Audreyvolunteersatalocalautisminformationhotline12hoursaweek.Sheandherhusbandpayacaregivertostaywiththeirsonduringthosehours.
Dotheyqualifyforthechildanddependentcarecredit?□ Yes þ No
Question 2: Whydon’tAudreyandherhusbandqualifyforthecredit? (Selectallanswersthatapply.)
• The caregiver expense is not work-related
• Theirsonisnotaqualifyingperson
• Thecaregiver’sdutiesdonotqualifyaswork-related
• They do not pass the earned income test
Taxpayer Interview and Tax Law Application
Bill,61,andHelen,62,aremarriedandhavelivedtogetherfortwentyyears.EarlierintheinterviewwithBill,youlearnedthatHelenistoosicktoworkandneeds24hourcare.Youwonderwhetherhecantakethechildanddependentcarecredit.Billisclaim-inghisgranddaughterasadependent,asnotedintheFamily/DependentInformationsectionofhisapprovedintakeandinterviewsheet.Sheis18andtakescareofherself.
ApplythequestionsfromthecreditforchildanddependentcareexpensesdecisiontreeintheVolunteerResourceGuide(TabG)tofindoutwhetherBillcantakethecredit,asshowninthesampleinterviewtofollow.
The care does not allow them to work or look for work; also, only the hus-band had earned income.
Assign the exercises.
Review the answers with the class when complete.
Ask two volunteers to role-play the sample interview.
Lesson 23: Credit for Child and Dependent Care23-8
Billdoesnotpassthework-relatedexpensestestbecausehisexpenseswerepaidtoadependentrelative.
How do I determine the amount of the credit?
Ifpreparingapaperreturn,followtheinstructionsonForm2441.Todeterminetheamountofthecredit,multiplythework-relatedexpenses(afterapplyingtheearnedincomeanddollarlimits)byapercentage.Thepercentagedependsonthetaxpayer’sadjustedgrossincome.
Tax Software Hint: Thetaxsoftwareperformsmuchofthecreditcomputationfor
you.Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab5),Form2441-CreditforChildandDependentCareExpenses.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… BIll responds…
For the credit for child and dependent care, I’d like to ask you some questions about the care provided for your wife, Helen. You may qualify for the credit.
Why don’t you tell me about your wife’s illness and care?
I’m sorry that she is so ill. That must be difficult for both of you. [ThevolunteerhasalreadydeterminedearlierinthetaxreturnpreparationprocessthatBillhasearnedincomefromhisfull-timeteachingjob.Soheskipsthesequestionsinthedecisiontreeandmovesaheadtothenextrelevantquestion.]
Did you pay someone to take care of your wife so that you could go to work?
Oh, I see. Well unfortunately, I was wrong. You won’t be able to take the credit for your wife because you are claiming Lucy as a dependent.
You’re welcome. Just trying to help! [Ontheapprovedintakeandinterviewsheet,indicatethatthetaxpayerdoesn’tqualifyforthiscredit,andwhy.]
Oh,okay.
Well,shehaschroniclungdisease;shecan’ttakecareofherselfatall.Weneedtohavesomeoneinthehome24hoursaday.
Yes,itis…well,sometimesshehasgooddays,andI’mthankfulforthat.
Yes,IpaymygranddaughterLucy,whojustgraduatedfromhighschool,totakecareofHelen.
Oh,that’sokay.Thanksforlookingintoitforme.
Lesson 23: Credit for Child and Dependent Care 23-9
How do I complete Form 2441?
Form2441isdividedintothreeparts:
• PartIisforgeneralinformationaboutthecareprovider
• PartIIiswherethechildanddependentcarecreditiscalculated
• PartIIIiswhereinformationisenteredifthetaxpayerreportsemployer-provideddependentcarebenefits
AlltaxpayerscompletePartIfirst.TaxpayerswhodidnotreceivedependentcarebenefitsfromtheiremployersthencompletePartII.TaxpayerswhodidreceivethesebenefitscompletePartIII,thenPartII.
What about employer-provided dependent care benefits?
Sometaxpayersreceivedependentcarebenefitsfromtheiremployers.Taxpayersmaybeabletoexcludethesebenefitsfromtheirincome.Dependentcarebenefitsincludeamountstheemployerpayseitherdirectlytothetaxpayerortothecareprovider.Employer-provideddependentcarebenefitsappearinbox10ofthetaxpayer’s FormW-2.
Thetaxpayermaystillbeabletoclaimachildanddependentcarecredit,buttheamountofexcludedbenefitsisnotincludedinwork-relatedexpensesandalsoreducesthedollarlimitforthecredit.Taxpayerswhoreceivedependentcarebenefitsmust completePartIIIofForm2441,eveniftheyarenoteligibleforachildanddependentcarecredit.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab5),Form2441-CreditforChildandDependentCareExpenses.
What limits apply to this credit?
Thetaxpayer’sexpensesaresubjecttoanearnedincomelimit.Theamountof work-relatedexpensesusedtofigurethecreditcannotbemorethan:
• Thetaxpayer’searnedincomefortheyear,or
• IfMarriedFilingJointly,thesmallerofthetaxpayerorspouse’searnedincomefor theyear
example
Paulahasonedependentchild,Jenny,whois6yearsold.Shepaid$2,900inqualifiedexpenses.Box10ofPaula’sFormW-2showsshereceived$1,400duringtheyearfromheremployer’sdependentcareassistanceprogram.Becauseshereceiveddependentcarebenefits,PartIIIofForm2441mustbecompletedbeforecompletingPartII.
Ask a volunteer to read the Paula example.
Refer students to the Volunteer Resource Guide (Tab 2), Form W-2 Instructions, to see box 10.
Remind students to apply the limits.
Lesson 23: Credit for Child and Dependent Care23-10
Inadditiontotheearnedincomelimit,thereisadollarlimitontheamountofwork-relatedexpensesthatcanbeusedtofigurethecredit.Thislimitis$3,000foronequalifyingpersonor$6,000fortwoormorequalifyingpersons.Ifthetaxpayerreceiveddependentcarebenefitsfromanemployer,theamountofthebenefitsexcludedfromincomemustbesubtractedfromthedollarlimit.
Tax Software Hint: Thetaxsoftwareguidesyouthroughapplyingthelimitsandcomputingthecredit.Ifthetaxpayerreceivedemployer-paidbenefits,besuretocompletePartIIIofForm2441beforecalculatinganycreditonPartII.Thetaxsoftwarecalculatesthecreditbymultiplyingthework-relatedexpensesbyapercentagedeter-minedbythetaxpayer’sadjustedgrossincome.
How do I avoid common errors?
WhenForm2441iscomplete,double-checkyourentriesfortheprovider’sname,IDnumberandamountspaid.Ifthetaxpayerhadanamountinbox10ofanyformW-2,besurethatyouhavecompletedPartIIIofForm2441.
Ontheapprovedintakeandinterviewsheet,makesurethePartVboxischeckedtoindicatethatthetaxpayerwaseligibleforthedependentcarecredit.Noteanythingunusualthatthequalityreviewermayneedtoknowwhenreviewingthispartofthe taxreturn.
Practice - Vanessa Franklin
Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-25andreviewthesampleinterviewwithVanessarelatedtoLesson23.
Direct students to Appendix A-25.
example
Maryhasthreequalifyingchildren.Shereceived$4,800independentcarebenefitsthroughheremployer.WhenMaryfigureshercredit,herwork-relatedexpenseswillbelimitedto$1,200($6,000-$4,800).
Ask a volunteer to read the Mary example.
Lesson 23: Credit for Child and Dependent Care 23-11
ExErcisE answErs
Review the lesson summary with the stu-dents.
Summary
Thecreditforchildanddependentcareexpensesisanonrefundablecreditthatallowstaxpayerstoreducetheirtaxliabilityforaportionoftheexpenses.
Themaximumexpenseamountsare$3,000foronequalifyingpersonand$6,000fortwoormorequalifyingpersons.
Themaximumcreditrateis35%ofthetaxpayer’sexpenses.Ataxpayermustsatisfythefiveeligibilityteststoqualifyforthecredit.Thetestsarethe:
• Qualifyingpersontest
• Earnedincometest
• Work-relatedexpensetest
• Jointreturntest
• Provideridentificationtest
ThecreditiscalculatedonForm2441ofbothForms1040and1040A.
Answer 1: No, they do not qualify.
Answer 2: The correct answer is “the caregiver expense is not work-related” and “they do not pass the earned income test.” Audrey is not using the caregiver’s services to look for work or to perform work. In addition, both spouses must have earned income during the year to qualify. Only the husband had earned income for the tax year.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 23: Credit for Child and Dependent Care23-12
Notes
Lesson 24: Education Credits 24-1
Instructor Notes
Introduction
Thislessoncoverstwotaxcreditsavailabletohelpthetaxpayeroffsetthecostsofhighereducationbyreducingtheamountofincometax.Thislessonsuggestsprobingquestionsyoucanaskbasedonanapprovedintakeandinterviewsheet,theVolunteerResourceGuide(TabG),andontherulesforclaimingeducationcredits.
Duringtheinterview,asktaxpayersiftheyareawareoftheeducationcredits,andgiveabriefdescription.Next,gatherinformationtodetermineifanycreditscanbeclaimed.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determinewhoqualifiesforaneducationcredit
• Determinewhichcreditthetaxpayercanclaim
What are education credits?
Educationcreditsareamountsthatwillreducetheamountoftaxdue.Theamountisbasedonqualifiededucationexpensesthatthetaxpayerpaidduringthetaxyear.
NEW Therearetwodifferenteducationcredits:theHopecreditandthelifetimelearningcredit.TheHopecreditisbeingexpandedforthe2009and2010taxyears,toallow40%oftheHopecredittoberefund-able.ThemodifiedversionoftheHopecreditisnowreferredtoastheAmericanopportunitycredit. Therearegeneralrulesthatapplytothesecredits, aswellasspecificrulesforeachcredit.
Who can take an education credit?
Ataxpayercantakeeducationcreditsforthetaxpayer,spouse,and/ordependents(claimedonthetaxreturn)whowereenrolledatorattendedaneligiblepost-secondaryeducationalinstitutionduringthetaxyear.
Lesson 24: Education Credits
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form8863□ Form1040Instructions□ Optional:Publication970
Review objectives with the class.
Point out the resources cited under What do I need?
IfthecreditisbeingclaimedforastudentattendingschoolinaMidwesternDisasterArea,refertoPublication970foradditionalinformation.
Lesson 24: Education Credits24-2
What basic requirements must the taxpayer meet?
Inordertoclaimaneducationcredit,verifythatthefollowingaretrueforthetaxpayers:
• Theycannotbeclaimedasadependentonsomeoneelse’staxreturn.
• TheyarenotfilingasMarriedFilingSeparately.
• Theiradjustedgrossincome(AGI)isbelowthelimitationsfortheirfilingstatus.
• Theywerenotnonresidentaliensforanypartofthetaxyear,oriftheywere,theyelectedtobetreatedasresidentaliens.
RefertotheVolunteerResourceGuide(TabG),EducationCredits,forthebasicrequirements.
How do I handle dependents?
Thetaxpayermustclaimthedependentonthereturninordertoclaimthecreditfor thestudent’squalifiedexpenses.RefertotheEducationCreditsTipsintheVolunteerResourceGuide(TabG),demonstratedbythefollowingexample:
What is an eligible institution?
Aneligibleinstitutionisanycollege,university,vocationalschoolorotherpost-second-aryeducationalinstitutioneligibletoparticipateinastudentaidprogramadministeredbytheU.S.DepartmentofEducation.Theschoolshouldbeabletotellthestudentifitisaneligibleeducationinstitution.
What are qualifying expenses?
Qualifiededucationexpensesaretuitionandcertainrelatedexpensesrequiredforenrollmentorattendanceataneligibleeducationalinstitution.
NEW NewforonlytheAmericanopportunitytaxcredit(Hopecreditexpanded),thedefinitionforcertainrelatedexpenseshasbeenrevisedfor2009and2010taxyears.Thechangewillbediscussedlaterinthelesson.Askthetaxpayerfordetailsoneachperson’seducationexpenses.Asktoseedocumentation,suchasreceiptsortheForm1098-T,TuitionStatement,issuedbytheschool.Identifytheexpensesthatqualifyforeducationcredits.
example
ErmaBradleyhasagrandsonnamedKevin.Heisclaimedasadependentonhisparent’sjointreturn.ErmapaidKevin’stuitiondirectlytotheuniversity.Forpurposesofclaiminganeducationcredit,Kevinistreatedasreceivingthemoneyasagiftandpayingforthequalifiedtuitionandrelatedexpenses.Sincehisparentsareclaiminghimontheirreturn,theymaybeabletousetheexpensestoclaimaneducationcredit.Alternatively,ifheisclaiminghimselfonhisreturn,hemightbeabletoclaimtheexpensesasifhepaidthemtotheschool.
Ask a volunteer to read the Erma example.
Discuss expenses paid by a third party with the students.
Direct students to the Volunteer Resource Guide (Tab G), Educa-tion Credits Tips.
Advise students that books are now quali-fied expenses for the American opportunity credit.
Define the term required for the students.
Lesson 24: Education Credits 24-3
Which expenses do not qualify?
Donotincludeexpensessuchas:
• Roomandboard,insurance,medicalexpenses(includingstudenthealthfees),transportationcosts,orothersimilarpersonal,living,orfamilyexpenses
• Anycourseofinstructionorothereducationinvolvingsports,games,orhobbies,unlessthecourseispartofthestudent’sdegreeprogramor(forthelifetimelearningcredit)helpsthestudenttoacquireorimprovejobskills
Are any amounts excluded from qualified expenses?
Certaintax-freefundsusedtopaytuitioncannotbeusedtofigurethecredit.Onceyouhaveidentifiedeachpersonclaimingacredit,andtheirqualifiedexpenses,askifthestudentreceivedanyoftheseuntaxededucationalbenefitsduringtheyear:
• Pellgrants
• Employer-providededucationalassistance
• Veterans’educationalassistance
• Tax-freeportionsofscholarshipsandfellowships
• Anyothernontaxablepaymentsreceivedaseducationalassistance(otherthangiftsorinheritances)
• Refundsoftheyear’squalifiedexpensespaidonbehalfofastudent(forexample,thestudentdroppedaclassandreceivedarefundoftuition)
Subtractthetax-freeeducationalassistance,refunds,andbenefitsfromthestudent’squalifiedexpenses.Thesetax-freebenefitsarelistedintheEducationCreditsInterviewTipsintheVolunteerResourceGuide(TabG).
MoststudentswillreceiveForm1098-Tfromtheeducationalinstitution.Theformshouldshowtheamountsthestudentpaidfortuitionandrelatedexpenses,theamountsofscholarshipsandgrantsreceived,andwhetherthestudentwasatleastahalf-timestudentoragraduatestudent.Verifywiththetaxpayerthattheamountinbox1or2ofForm1098-Tisactuallytheamountpaidinthecurrenttaxyearforqualifiedexpenses.
example
WhenJaniceenrolledforherfreshmanyearofcollege,shehadtopayasepa-ratestudentactivityfeeinadditiontohertuition.Thisactivityfeeisrequiredofallstudents,andisusedsolelytofundon-campusorganizationsandactivitiesrunbystudents,suchasthestudentnewspaperandthestudentgovernment.Noportionofthefeecoverspersonalexpenses.Althoughlabeledasastudentactivityfee,thefeeisrequiredforJanice’scollegeenrollmentandattendance;therefore,itisaqualifiedexpense.
Ask a volunteer to read the Janice example.
Ask a volunteer to read the Jackie example.
example
Jackiepaid$3,000fortuitionand$5,000forroomandboardataneligibleuniversity.The$5,000paidforroomandboardisnotaqualifiedexpensefortheeducationcredits.
Direct students to the Education Credits Tips in the Volunteer Resource Guide (Tab G).
Lesson 24: Education Credits24-4
What about payments for the next academic year?
Thetaxpayerscanclaimpaymentsprepaidfortheacademicperiodthatbeginsinthefirstthreemonthsofthecalendaryear.RefertotheVolunteerResourceGuide(TabG),EducationCredits.
What rules apply to each credit?
How do the credits compare?NEW Fortaxyears2009and2010,thereareseveralnewdifferencesbetweenthetwocredits.TheAmericanopportunitycredit(Hopeexpanded):
• Ispermittedforthefirstfouryearsofpost-secondaryeducation.
• Hasbeenexpandedsothatqualifiedtuitionandrelatedexpensesnowincludesexpensesforcoursematerials—books,supplies,andequipmentneededforacourseofstudy,whetherornotthematerialsarepurchasedfromtheeducationalinstitutionasaconditionofenrollmentorattendance.
• Generally,40%ofthecreditisnowarefundablecredit,whichmeanstaxpayerscanreceiveupto$1,000eveniftheyowenotaxes.
example
JoanSmithreceivedForm1098-T,shownabove,fromthecollegesheattends. Itshowshertuitionwas$9,500andthatshereceiveda$1,500scholarship.Shehadnootherscholarshipsornontaxablepayments.Hermaximumqualifyingexpensesfortheeducationcreditwouldbe$8,000($9,500-$1,500).
example
Thomaspays$1,500inDecember2009forqualifiedtuitionforthewintersemesterthatbeginsinJanuary2010.Hecanusethe$1,500paidinDecember2009tocomputehiscreditfor2009.Hecannotcountitagainin2010.
Ask a volunteer to read the Joan example.
Ask a volunteer to read the Thomas example.
Lesson 24: Education Credits 24-5
Lifetimelearningcredit:
• Thereisnolimitonthenumberofyearsforwhichthetaxpayercanclaimthecreditbasedonthesamestudent’sexpenses.
• Course-relatedbooks,supplies,fees,andequipmentareincludedinqualifiededucationexpensesonlyifthefeesandexpensesmustbepaidtotheinstitutionasaconditionofenrollmentorattendance.
• Noportionofthecreditisrefundable.
American Opportunity Tax Credit — Hope Expanded
TaxpayerscantaketheAmericanopportunitycreditforastudentiftheycananswerallofthesequestionsasindicatedbelow:
• Asofthebeginningofthetaxyear,wasthestudentstillinthefirstfouryearsofpost-secondarystudy?Yes
• Wasthestudentenrolledin2009inaprogramthatleadstoadegree,certificate,orothercredential?Yes
• Wasthestudenttakingatleastone-halfthenormalfull-timeworkloadforthecourseofstudy,foratleastoneacademicperiodbeginningin2009?Yes
• Hasthestudentbeenconvictedofafelonyforpossessingordistributingacontrolled substance?No
TheAmericanopportunitycreditcanbeupto$2,500pereligiblestudent,dependingontheamountofeligibleexpensesandtheamountoftaxonthereturn.Thecreditis100%ofthefirst$2,000and25%ofthesecond$2,000ofeligibleexpensesperstudent,uptotheamountoftax.FortypercentoftheAmericanopportunitycreditisnowarefundablecredit,whichmeansthetaxpayercanreceiveupto$1,000evenifnotaxesareowed.TheAmericanopportunitycreditisavailableforthefirstfouryearsofcollegepereligiblestudent(generally,fresh-manthroughsenioryearsofcollege).
Lifetime Learning Credit
Thelifetimelearningcreditcanbetakenifthetaxpayerandtheexpensesmeettherequirementsdescribedunder“Whatbasicrequirementsmustthetaxpayermeet?”RefertotheVolunteerResourceGuide(TabG),EducationCreditsTips,forthebasic
Ifthestudentdoesn’tmeetalloftheconditionsfortheAmericanopportunitycredit,thetaxpayermaybeabletotakethelifetimelearningcreditforpartorallofthestudent’squalifiedexpenses.
Forstudentsattendinganeligible educational insti-tutionintheMidwesternDisasterAreas,thecreditsareexpanded.PartIIofForm8863isnowrenamedHopecredit.SeePublication970foradditionalinformation.
Refer students to the Comparison Chart in the Education Tips of the Volunteer Resource Guide (Tab G).
example
Tobyamassedmanyreceiptsforbooksandsupplieshisfirstyearatcollege. Hespent$1,291forrequiredbooks,labsupplies,androck-huntingequipmentheneededforhisintroductorychemistryandgeologycourses.Theschoolhasnopolicyrequiringthatthesebooksandequipmentbepurchasedfromthecollegeinordertoenroll.Forthe2009and2010taxyears,thesearequalifiedexpensesfortheAmericanopportunitycredit.
Ask a volunteer to read the Toby example.
Discuss the fact that these are now qualified expenses because of recent tax law changes.
Lesson 24: Education Credits24-6
ExErcisEs
requirements.Thestudentneednotbeenrolledhalf-timeorinadegreeprogram,andafelonydrugconvictiondoesnotdisqualifythestudent.
Thelifetimelearningcreditcanbeupto$2,000pertaxreturn,dependingontheamountofeligibleexpensesandtheamountoftaxonthereturn.Thecreditis20%ofthefirst$10,000ofeligibleexpensespaidforallstudents,uptotheamountoftaxonthereturn.
UsetheEducationCreditsTipsintheVolunteerResourceGuide(TabG)andtheComparisonTableinPublication17toanswerthefollowingquestions.Answersareattheendofthelessonsummary.
Question 1: Bobisafull-timestudentandisafifthyearsenior.DoeshequalifyfortheAmericanopportunitycredit? □ Yes þ No
Question 2:Janiceworksfulltimeandtakesonecourseamonthatnightschool.Someofthecoursesarenotforcredit,buttheyaremeanttoadvancehercareer.Whichcreditisappropriateforher?□Americanopportunityþ Lifetime
Question 3:Clarkisanolderstudentwhohasgonebacktocollegehalftimeafterserving18monthsinprisonforfelonydrugpossession.Whichcreditisappropriateforhim?□Americanopportunityþ Lifetime
Can a taxpayer take multiple credits?
Taxpayerscannottakemultiplecreditsonthesamestudent’sexpenses.Forexample:
• DonotfiguretheeducationcreditsbasedonexpensesthathavealreadybeentakenonScheduleA,ScheduleC-EZ,ortuitionandfeesdeduction.
• DonottakebothanAmericanopportunitycreditandalifetimelearningcreditforthesamestudentinthesameyear.
Tax Software Hint:Toreviewinformationrelatedtosoftwareentries,gototheVolunteerResourceGuide(Tab5),Form8863,EducationCredits.
How do I determine the amount of the credit?
Herearethegeneralstepsinfiguringtheamountofeducationcredits:
1. Reviewthelistofqualifyingstudentsandexpenses,anddecideiftheAmericanopportunitycreditorlifetimelearningcreditismoresuitable.(Seetherequirementdiscussedearlier.)
Assign the exercises.
Review answers with the class when com-plete.
example
JillattendsWanda’sSchoolofBeauty,aneligibleinstitution.Shepays$4,400forthecourseofstudy,whichincludestuition,equipment,andbooksrequiredforthecourse.Theschoolrequiresthatstudentspayforthebooksandequipmentwhenregisteringforthecourse.Theentire$4,400wouldbeaneligibleeducationalexpense.
Ask a volunteer to read the Jill example.
Lesson 24: Education Credits 24-7
2. IntheAmericanopportunityorlifetimelearningcreditssectionsofForm8863,entereachqualifyingstudentandsocialsecuritynumber.Besurethestudentisthetaxpayer,spouse,ordependent(andisdeclaredassuchonthereturn).
3. Entereachstudent’squalifiedexpenses.Besurethatthese:
- Includeonlyqualifiedexpenses
- Arereducedbyuntaxedbenefits
- Donotexceedthelimitforthecredit
4. Findthetotalsforeachsectionandapplythelimits,thentransfertheamountstoPartsIVandVtodeterminetherefundableandnonrefundablecredits.Applytheincometestanddothecalculations.(Taxsoftwaredoesthisstepforyou.)
Tax Software Hint:Whencompletingthework-sheetforaneducationcredit,thesoftwarehelpsyoucreateanaccurateclaim.Theprogramdetectsifthetaxpayerisenteredasastudentbutcanbeclaimedasadependentbysomeoneelse(asshownonthemaininformationsheet).
Taxpayer Interview and Tax Law Application
Hereishowourvolunteerhelpedtaxpayer,BarbaraSmith,determinewhicheducationcreditsappliedtoherfamily.
IfyoufindtaxpayersclaimedaneducationcreditinaprioryearandtheywererefundedpartoralloftheexpensestheyusedtoclaimtheAmericanopportunityorlifetimelearningcredit,theymayhavetorepayallorpartofthecredit.ThisisbeyondthescopeoftheVITA/TCEprogram.InformationcanbefoundinPublication970.Advisethetaxpayertoconsultaprofessionaltaxpreparer.
Review the separate parts of Form 8863.
Review the caution about education credits claimed in prior years.
Direct students to the Volunteer Resource Guide (Tab 5), Form 8863, Education Credits.
Ask two volunteers to role-play the sample interview.
Thesoftwarewillnotcatchothererrors,suchastakingmorethanonebenefitforthesametaxpayer.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… BarBara responds…
Barbara, are you familiar with education credits?
Yes, they apply to certain expenses for post-secondary education. Did anyone in the family attend college or vocational school during the tax year?
There are two kinds of credits – here’s a chart comparing the two education credits. [Explainsthedifferences.]
I think you’re right. You both meet the basic requirements, since you are both on the return and meet the income limits. Did you bring any receipts for education expenses?
Theyhavesomethingtodowithtuition.
Mydaughter,Carla,isafreshman,goingtocollegefulltime,andIamtakingclassesatCityCollege.
LookslikeAmericanopportunityforCarlaandLifetimeforme!
Yes,theseareforCarla’stuition,fees,andbooksforthetaxyear.Theseareforextra-curricularfieldhockey.
PartIIofForm8863isusedtoclaimtheHopecreditfortaxpayersintheMidwesternDisasterArea.
Lesson 24: Education Credits24-8
Which education benefit is better for the taxpayer?
Taxpayershaveseveraloptionsforusingeducationexpensestoreducetaxes.Theyare:
• BusinessexpensesonScheduleC-EZ
• ItemizeddeductiononScheduleA(employee-relatedexpensesonly)
• Americanopportunitycreditorlifetimelearningcredit
• Tuitionandfeesdeduction
Computealloftheabovetodeterminewhichgivesthetaxpayerthelowesttax.Donotclaimmultipledeductionsforthesameeducationexpense,butusethecreditmostbeneficialtothetaxpayer.
Toensurethatthetaxpayer’sreturnisaccurate,youwillneedtocomparethetaxeffectsofthevariouseducationbenefits.
How can I avoid common errors?
IfyoucompleteForm8863,makesurethatyouhaveenteredthenames,SSNsandeducationexpenseamountcorrectly.Checkthatyouhavenotclaimedmorethanonetaxbenefitforthesametaxpayer,ortakenacreditordeductionforexpensespaidwithatax-freebenefitlikeascholarship.
Ontheapprovedintakeandinterviewsheet,makesurethatPartVischeckedtoindi-catethatthetaxpayerhadeducationexpenses.Noteanythingunusualthatthequalityreviewermayneedtoknowwhenreviewingthispartofthetaxreturn.Forexample,youcouldnoteifsomeexpenseswerepaidwithanon-taxablescholarship.
sample IntervIeW (contInued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… BarBara responds…
This year, we don’t just count expenses that have to be paid to the school as a condition of enrollment, so her books will qualify but her field hockey costs will not. Did she receive any tax free benefits, from an employer, a scholarship, Pell grant, anything like that?
We don’t need to count the gift. The American opportunity credit is available for a student’s first four years of college, so that might be the best for you to claim. Now let’s look at your expenses.
Are these to improve your job skills?
Are all of these required expenses?
You’ll be eligible for the lifetime learning credit. [Ontheapprovedintakeandinterviewsheet,indicatethatyou’ve addressededucationbenefits.]
Only$5,000fromhergrandfather.
AllIhavearetuitionandfeesfortwoclassesinaccounting,springandfallsemesters.
Yes,butmybossdoesn’treimburseme.
Yes.
I’msogladyouwereheretohelpme!
Demonstrate how to use the software to quickly compare edu-cation benefits.
Lesson 24: Education Credits 24-9
ExErcisE answErs
Practice – Vanessa Franklin
Let’stakealookathowavolunteerhelpedtaxpayerVanessaFranklin.GotoAppendixA-27toreviewthesampleinterviewwithVanessarelatedtotheEducationCreditslesson.ReturntothelessonafterdeterminingwhichcreditisbetterforVanessa.
Summary
Youarenowreadytohelptaxpayersdeterminewhicheducationtaxcreditsarebestforthem.Whenyougettothissectionofthereturn,alwayschecktheapprovedintakeandinterviewsheetandaskprobingquestionsbasedonthetaxpayer’sinformationandontherulesforclaimingeducationcredits.
Therearetwoeducationcreditsthatmayreduceataxpayer’stax:
• Americanopportunitycredit(Hopecreditexpanded)
• Lifetimelearningcredit
EducationexpensescanbeusedwiththosecreditsoronScheduleC-EZ,tuitionandfeesdeductions,orScheduleA.Choosethemethodthatwillgivethetaxpayerthelowesttax.TheAmericanopportunitycreditcanbeclaimedforstudentsintheirfirstfouryearsofcollegeandmaybemorebeneficialthanthelifetimelearningcredit.Remember,fortaxyears2009and2010,40%oftheAmericanopportunitycreditisnowarefundablecredit,whichmeanstaxpayerscanreceiveupto$1,000eveniftheyhavenotaxliability.
Oneofyourrolesasavolunteeristohelptaxpayersmaximizethebenefitsthattheyareentitledtounderthetaxlaw.Stayalerttowaystheycanusetheireducationexpensestolowertheirtax.
Question 1: No, Bob does not qualify for the American opportunity credit because he is in his fifth year of post-secondary education
Question 2: Lifetime
Question 3: Lifetime
Review the lesson summary with the class.
Direct students to Appendix A, page 27.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 24: Education Credits24-10
Notes
Lesson 25 : Foreign Tax Credit 25-1
Instructor Notes
Introduction
ThislessonwillshowyouhowtohelpU.S.citizensandresidentaliensfileaclaimfortheforeigntaxcredit.Thiscreditappliestothosewhohavepaidoraccruedforeigntaxestoaforeigncountryonforeign-sourcedincomeandwhoaresubjecttoU.S.taxonthesameincome.
Tohelpthesetaxpayers,youmustdeterminewhichtaxesandtypesofforeignincomeareeligiblefortheforeigntaxcreditandaccuratelycomputethecreditusingForm1116.
IftheforeigntaxpaidisreportedonaForm1099-INToraForm1099-DIV,theentireForm1116maynotneedtobecompleted.
IftheforeigntaxpaidisaresultoflivingandworkingoutsidetheU.S.,thenallthequestionsonForm1116needtobeaddressed.Inthissituation,U.S.ArmedForcesmembersmayneedtoprovideadditionaldocumentstothemilitarylegalassistanceofficerorseekassistancefromaprofessionaltaxpreparer.
Toidentifyqualifyingforeignincomeandtaxes,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.Useanapprovedintakeandinterviewsheettoasktaxpayersquestionsrelatedtocreditsthatmaybereportable.Althoughtheforeigntaxcreditisnotspecificallylistedontheapprovedintakeandinter-viewsheet,asktaxpayersiftheypaidanytaxtoaforeigncountry.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determinewhichtaxesandtypesofforeignincomeareeligiblefortheforeigntaxcredit
• AccuratelycomputethecreditusingForm1116
• Calculateandreporttheforeigntaxcreditasanonrefundablecredit
What if the foreign tax credit is reported on Form 1099-INT or Form 1099-DIV?
TaxpayerswhoreceiveForm1099-INTorForm1099-DIVmayhaveamountsreportedinbox6,indicatingthatforeigntaxeshavebeenpaidontheirbehalfbytheissuerofthedocument.Ifthisistrueandthetotaloftheseamountsfromalldocumentsisnotmorethan$300(or$600forfilingstatusMarriedFilingJointly),thentaxpayersmaychoosetoenterthetotalamountontheappropriatelineofForm1040,page2insteadoffilingForm1116.Iftheamountsaremorethan$300(or$600forfilingstatusMarriedFilingJointly)andtheydonotmeettheotherconditionstomaketheelection,thentaxpayersmustfileForm1116.
Lesson 25: Foreign Tax Credit
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication 514□ Publication4491-W□ Form1116□ Form1116Instructions
Review objectives with the class.
Point out the resources cited under What do I need?
Lesson 25: Foreign Tax Credit25-2
ExErcisEs
SometaxpayersmaychoosetheelectiontoclaimtheforeigntaxcreditwithoutfilingForm1116,ifcertainconditionsaremet.AdditionalinformationcanbefoundinForm1040Instructions,Form1116Instructions,Publication17,andPublication514.
TheamountofthecreditisshownonForm1040,line47.ThecompletionofForm1116isnotrequired.
TaxpayerswhomustcompleteForm1116becausetheycannotqualifyfortheelection,mustbereferredtoavolunteerwithanInternationalcertificationoraprofessionaltaxpreparer.
Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab5).
Answersareafterthelessonsummary.
Question 1: TrueorFalse?Toclaimtheelection,ataxpayerwhoisfilingSinglemusthaveforeigntaxeslistedinBox6of1099-DIVor1099-INTthatareequaltoorlessthan$300.þ True ¨ FalseQuestion 2: Clydecomestoyoursiteseekinghelpwithhisforeigntaxcredit.HeissingleandhisForms1099-DIVshowatotalof$423offoreigntaxpaid.CanClydemaketheelec-tion?¨ Yes þ No
Question 3: JudyandMarkaremarriedandwillfileajointreturn.TheirForms1099-DIVshowaforeigntaxpaidof$590.Cantheymaketheelection?þ Yes ¨ No
TheremainingsectionsofthislessonaredirectedatvolunteersseekinganInternationalcertification.AllothersmayproceedtoLesson26,ChildTaxCredit.
What is the foreign tax credit (FTC)?
U.S.citizensandresidentscomputetheirU.S.taxesbasedontheirworldwideincome.ThissometimesresultsinU.S.citizenspotentiallyhavingtopaytaxtwiceonthesameincome:oncetothegovernmentoftheforeigncountrywheretheincomewasearned,andagaintotheU.S.government.
Assign the exercises.
Review answers with the class when com-plete.
Clyde’s foreign taxes exceed $300.
Their combined foreign taxes are less than $600.
Ask a volunteer to read the example about Ryan.
Ask what if Ryan had paid a total of $532 in foreign taxes.
Answer: He would have to complete Form 1116.
example
Ryan,whoissingle,receivedForm1099-DIVthatshows$219offoreigntaxespaid(box6)in2009.AccordingtoRyan,hepaidnootherforeigntaxes.HeiseligibletoclaimtheforeigntaxcreditanddoesnothavetocompleteForm1116.
Lesson 25 : Foreign Tax Credit 25-3
Theforeigntaxcredit(FTC)wascreatedtohelptaxpayersavoidthisdoubletaxation.Taxpayerswhopaidincome,warprofits,orexcessprofitstaxestoanyforeigncountryorU.S.possessionmaybeabletotakeacreditagainsttheirU.S.taxesfortaxespaidtoothercountries.Likeothernonrefundablecredits,theFTCallowstaxpayerstotakeadollar-for-dollarreductionintheamountofU.S.taxowed.However,therearecasesinwhichnotalltaxespaidtoaforeigngovernmentonforeign-sourcedincomecanbeusedinthecomputationoftheforeigntaxcredit.
Inmostcases,itistothetaxpayer’sadvantagetotaketheforeigntaxcredit.Ingeneral,ifthecreditischosen,youmusttakethecreditforallqualifiedforeigntaxes.However,ifthetaxpayerpaidforeigntaxesthatdonotqualifyforthecredit,theymaybeabletotaketheitemizeddeductiononthenon-qualifyingitemsas“OtherTaxes”onScheduleA.Inthissituation,referthetaxpayertoaprofessionaltaxpreparer.Formoreinformation,seePublication514,ForeignTaxCreditforIndividuals.
Forapaperreturn,entertheforeigntaxpaiddirectlyonline47ofForm1040,keepinginmindthe$300/$600limitations.
What qualifies taxpayers for the credit?
Toqualifyforthecredit,thefollowingrequirementsmustbemet.Ataxpayermust:
• Haveincomefromaforeigncountry
• Havepaidtaxesonthatincometothesameforeigncountry
• Nothaveclaimedtheforeignearnedincomeexclusiononthesameincome(seetheforeignearnedincomeexclusionsectionofLesson15,Income–OtherIncome)
Inaddition,theforeigntaxmust:
• Bepaidtoaforeigncountryonincomederivedfromthatcountry
• BesimilartotheU.S.incometax
• Providenoeconomicbenefittothetaxpayerpayingthetax
Foradditionalinformation,seetheinstructionsforForm1116andrefertoPublication514.
Theforeignearnedincomeexclusionisdifferentfromtheforeigntaxcreditandtaxpayerscanchoosetheapproachthatresultsinthelowesttaxpaidoverall.
•Theexclusionrulesallowaportionoftheforeignearnedincometobeexcludedfromtaxableincomesoitisnottaxed
•ThecreditrulesaddtheforeignincometothetaxableincomeandthenreducestheU.S.taxduebysomeportionoftaxespaidtotheforeigngovernment(s)
•Youshouldtrybothmethodstoseewhichresultsinthelowesttax
Point out an example of an “economic ben-efit” such as health services paid for by the foreign tax.
AcreditforforeigntaxescanbeclaimedonlyforforeigntaximposedbyaforeigncountryorU.S.possession.
Lesson 25: Foreign Tax Credit25-4
Foreigntaxesthatqualifyfortheforeigntaxcreditgenerallyincludetaxeson:
• Wages
• Dividends
• Interest
• Royalties
• Annuities
Foreigntaxesforwhichanindividualmaynottakeacreditincludetaxes:
• Onexcludedincome
• Onforeignoil-relatedincome
• Onforeignmineralincome
• Onforeignoilandgasextractionincome
• Forwhichthetaxpayercantakeonlyanitemizeddeduction
• Frominternationalboycottoperations,and
• OfU.S.personscontrollingforeigncorporationsandpartnerships
example
EvaisaU.S.citizenwholivesinHongKong.EvaownsherhomeinHongKongandpaid$2,000inrealestatetaxesand$1,000inpersonalpropertytaxes.Shealsopaid$300inincometaxestothegovernmentofHongKong.Shecannotclaimaforeigntaxcreditforeithertherealestatetaxesorthepersonalpropertytaxesbecausetheyarenotincometaxes.Evacancomputeaforeigntaxcreditonthe$300inincometaxespaidtoHongKong.
Note:EvacandeducttherealestatetaxesthatshepaidasanitemizeddeductiononherU.S.taxreturn.Shecanitemizetheforeignpersonalpropertytaxonlyifitisbasedonthevalueofthepersonalproperty.
Read the example about Eva.
Ask what if Eva paid $200 in taxes on income she earned in Hong Kong.
Answer: She could apply for the credit without filing Form 1116, as long as all the foreign-source income is from Forms 1099-DIV or 1099-INT.
example
RobbKendallandhiswifeareU.S.citizenswhoresideinFrance.TheirForm1040,ScheduleB,InterestandOrdinaryDividends,lists$500interestfromaU.S.bankand$600interestfromaFrenchbank.Theypaidincometaxesonbothamountstobothcountries.OntheirU.S.taxreturn,theycancomputeaforeigntaxcredittooffsetthetaxestheyowetotheU.S.ontheinterestreceivedfromtheFrenchbank.TheywouldneedtocheckwiththeFrenchtaxingauthoritiestodetermineiftheycanclaimasimilartaxcreditontheirFrenchtaxreturntooffsetthetaxespaidtotheU.S.ontheinterestincomeearnedintheU.S.
Ask a volunteer to read the Kendall example.
Ask what if they had no interest income from the French bank.
Answer: They would not be able to claim the credit for taxes paid on the U.S. interest. Only foreign-source income qualifies for the credit.
SeePublication514,ForeignTaxCreditforIndividuals,formoredetailedinformation.
Lesson 25 : Foreign Tax Credit 25-5
ExErcisEs (continued)
Question 4:AnneisaU.S.citizenlivinginJapan.Shelistedwages,interestincome,anddividendincomeonherU.S.taxreturn.ShepaidtaxesoneachofthesetypesofincometoJapan.Annecancomputeaforeigntaxcreditonwhichofthefollowingtypesofincome?
A.WagesfromherjobintheU.S.
B.InterestincomefromaU.S.bank
C. Interest income from a Japanese bank
D.DividendincomefromaU.S.corporation
Question 5: Jean,aU.S.citizen,receivedaninheritanceuponthedeathofanuncleinSpain,andpaidaninheritancetaxtotheSpanishgovernment.CanJeancomputeaforeigntaxcredittooffsettheinheritancetaxshepaidinSpain? □ Yes þ No
What is “economic benefit”?
Asmentionedearlier,theforeigntaxpaidcannotprovideaspecificeconomicbenefitforthetaxpayerandbeincludedintheforeigntaxcreditcomputation.Thismeansthatthetaxcannotbeapaymentthatresultsinanindividualreceiving:
• Goods
• Services
• Feesorotherpayments
• Therighttouse,acquireorextractresources,patentsorotherpropertythattheforeigncountryownsorcontrols
• Dischargesofcontractualobligations
Assign the exercises.
Review answers with the class when com-plete.
An inheritance does not qualify as income under U.S. tax law.
AccordingtoPublication514,ForeignTaxCreditforIndividuals,ataxpayerisconsideredtoreceiveaspecificeconomicbenefitifheorsheconductsabusinesstransactionwithapersonwhoreceivesaneconomicbenefitfromaforeigncountry,andunderthetermsandcondi-tionsofthetransaction,thetaxpayerdirectlyorindirectlyreceivessomepartofthebenefit.
example
LawrenceisabusinessownerwholivesinChina,whichhasatwo-tierincometaxsystem:
•Everyoneistaxedaccordingtotheirincome
•Businessownerspayadditionaltaxontheirprofits
Thesecondtierentitlesbusinessownerstocertainreducedfeesandotherbene-fits,suchasabilitytorentspaceinagovernmentbuilding.BecauseofthespecificeconomicbenefitsLawrencereceives,hecannotusethesecond-tiertaxpaymentstocomputeaforeigntaxcreditonhisU.S.taxreturn.However,thefirst-tierincometaxesaresimilartoU.S.incometaxesandcanbeusedtofigurehisforeigntaxcredit.
Ask a volunteer to read the example about Lawrence.
Ask students if they have any questions about the example and “economic benefits.”
Lesson 25: Foreign Tax Credit25-6
ExErcisEs (continued)
Country Restrictions
Taxespaidtooraccruedbycertaincountriesdonotqualifyfortheforeigntaxcredit.Thesearecountries:
• ThathavebeendesignatedbytheSecretaryofStateasrepeatedlyprovidingsupportforactsofinternationalterrorism,
• WithwhichtheU.S.hasseveredordoesnotconductdiplomaticrelations,or
• WhosegovernmenttheU.S.doesnotrecognize,unlessthatgovernmentiseligibletopurchasedefensearticlesorservicesundertheArmsExportControlAct
IncometaxespaidtogovernmentstheU.S.doesnotrecognizearenoteligiblefortheforeigntaxcredit.Atthetimeofthiswriting,thefollowingcountriesarenotrecognized:
• Cuba
• Iran
• NorthKorea
• Sudan
• Syria
Question 6: AdelelivedandworkedinIranuntilAugust2009,whenshewastrans-ferredtoItaly.Shepaidtaxestoeachcountryontheincomeearnedinthatcountry.CanAdeletakeaforeigntaxcreditonherU.S.taxreturnforthetaxespaidonincomesheearnedinIran? □ Yes þ No
Question 7: Write“Q”nexttoeachtaxthatqualifiesfortheforeigntaxcreditor“NQ”nexttothosethatdonot.AssumethetaxpayerisaU.S.citizenorresidentlivinginanon-sanctionedforeigncountry,andthatthetaxisbeingpaidtoaforeigngovernmentonforeign-sourcedincome.
Q Dividendtaxes
NQ Foreignoil-relatedincometax
Q Interestincometax
NQ Realestatetaxes
Q Incometaxonwagesfromaforeigncountry
NQ TaxespaidonincomeearnedinSyria
Foreignincomeearnedin sanctioned countries is subjecttoU.S.tax.AseparateForm1116mustbecompletedforforeignincomefromasanctionedcountry,usingthe“Section901(j)income”cate-gory.Thisisbeyondthescopeofthevolunteerprogram;referthetaxpayertoaprofessionaltaxpreparer.
Ask students to break into groups and com-plete the exercises.
Review answers with the class when com-plete.
Income from Iran does not qualify for the credit.
Lesson 25 : Foreign Tax Credit 25-7
What categories of income qualify for the credit?
AtthetopofForm1116,PartI,taxpayersareaskedtoindicatethetypeofforeignincometheyreceived.Twooftheseincomecategoriesfallwithinthescopeofthevolunteerprogram:
• Passivecategoryincome
• Generalcategoryincome
Passive Category Income
Passivecategoryincomeincludespassiveincomeandspecifiedpassivecategoryincome,assumingtheincomeisfromanothercountryandthetaxpayerhaspaidtaxesonit.
Passiveincomegenerallyincludesthefollowing:
• Dividends
• Interest
• Royalties
• Rents
• Annuities
• Netgainfromthesaleofpropertythatproducessuchincome,ornon-income-producing investmentproperty
Forexample,ataxpayerwholivesinaforeigncountryandpaystaxesoninterestincomecouldclaimtheforeigntaxcreditandcheckboxa,“Passivecategoryincome,”onForm1116.
Foradditionalinformationonpassiveincomeandspecifiedpassivecategoryincome,seePublication514,ForeignTaxCreditforIndividuals.
General Category Income
Generalcategoryincomeconsistsofwagesearnedinaforeigncountrythatanindivid-ualdoesnotexclude,orexcludesonlypartof,undertheforeignearnedincomeexclu-sion.Additionally,foreignincomethatdoesnotcomeunderanyoftheothercategoriesonForm1116cantypicallybeincludedasgeneralcategoryincome.
AseparateForm1116must becompletedforeachtype ofincome;eachForm1116canincludeincomeearnedinasmanyasthreeforeigncountries.
Point out the tip on types of income.
Wagesandsalariesareconsidered to be general categoryincome,whichisdiscussedlaterinthistopic.Passivecategoryincomemayqualifyasgeneralcategoryincomeiftheforeigngovern-menttaxesitataratehigherthanthehighestU.S.taxrate;see“High-taxedIncome”below.
example
RobertpaidtaxestoSpainanddidnotelecttoclaimtheforeignearnedincomeexclusion.HecanclaimaforeigntaxcreditforthetaxespaidtoSpainonhisearn-ingsfromSpain.
Ask a volunteer to read the example about Robert.
Ask what if Robert did claim the foreign earned income exclu-sion.
Answer: He could not claim the foreign tax credit on that income.
Lesson 25: Foreign Tax Credit25-8
ExErcisEs (continued)
High-taxed Income
SomepassivecategoryincomecanbeincludedingeneralcategoryincomeifitistaxedbyaforeigngovernmentataratehigherthanthehighestU.S.incometaxrate.In2009,thehighestU.S.incometaxratewas35%incometax.Therefore,ifataxpayerpaysmorethan35%incometaxontheforeign-sourcedpassiveincomeforwhichheorsheclaimedthecredit,thecreditiscomputedundergeneralcategoryincome.
Question 8:ReginalivesinSingaporeandisaU.S.citizen.ShehasbothdividendincomeandinterestincomefromcountriesoutsidetheUnitedStates.Herforeignbankwithholds15%ofherinterestincomeforincometaxes.Shealsopaysforeignincometaxesonherdividendincome,atarateof40%.ForthepurposesofForm1116,howshouldthefollowingtypesofincomebeclassified?
InterestIncome: A DividendIncome: B
A.Passivecategoryincome
B.Generalcategoryincome
Question 9: BernardisaU.S.citizenwholivesinBarbados.In2009,hepaid17%incometaxoninterestincomefromhisbankaccountinBarbados.ForthepurposesofForm1116,Bernard’sforeigninterestincomeshouldbeclassifiedas:
A. Passive category income
B.Generalcategoryincome
Taxpayer Interview and Tax Law Application
Thereareseveralfactorstoconsiderwhendeterminingifataxpaidtoaforeigngovernmentiseligiblefortheforeigntaxcredit.Youwillneedtoaskthetaxpayerques-tionstodetermine:
• Wastheincomeforeign-sourced?
• Whattypeoftaxwaspaidtotheforeigngovernment?
• Willthetaxpayerreceivesomekindofspecificeconomicbenefitfromthepaymentofthistax?
Here’showavolunteerhelpedBonniedetermineifshequalifiedfortheforeigntaxcredit:
Assign the exercises.
Review answers with the class when com-plete.
40% is more than 35% so the dividend income goes on Form 1116 as “general category income.”
17% is less than 35% so his interest income is treated as “passive category income.”
Ask two volunteers to role-play the sample interview.
example
BrendaisaU.S.citizenwholivesinaforeigncountryandpays45%incometaxonherinterestincomeinthatcountry.Shecanlistthisincomeunderthe“Generalcategoryincome”headingonForm1116,sincetherateofincometaxpaidonthispassiveincomeishigherthanthehighestU.S.incometaxrate.
Ask a volunteer to read the example about Brenda.
Lesson 25 : Foreign Tax Credit 25-9
Do I have to file Form 1116?
Ifthefollowingthreeconditionsaremet,thetaxpayercanmaketheelectiontoreportforeigntaxonForm1040,line47,withoutfilingForm1116.Thetotalqualifiedforeigntaxesmustbe:
• $300orless($600orlessifMarriedFilingJointly),and
• Derivedfrompassiveincome(interest,dividends,royalties,etc.),and
• ReportedonForms1099-INT/1099-DIV
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab5).
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… BonnIe responds…
The income you earned in Argentina does not qualify for the foreign earned income exclusion. Let’s see if you can claim a credit on the income taxes you paid to Argentina.
That’s why the foreign tax credit was created. Since you earned income and paid taxes on that income to Argentina, but did not claim the foreign earned income exclusion, you may qualify for the credit.
There are a few more requirements. We must determine how much of the foreign tax is similar to U.S. income tax and whether or not you received an economic benefit in exchange for those taxes.
Wages and bank interest are taxable on your U.S. income tax return. What type of tax does Argentina charge on that income?
So it’s similar to the U.S. tax. Did you receive any kind of bene-fit, such as goods or services, or the right to use properties, as a result of paying taxes on either your wages or your interest?
Then we can include both in the claim for the credit. [Ontheapprovedintakeandinterviewsheet,indicatethatyouhaveaddressedthiscredit.]
Yes,IhopeIcanavoidpayingtaxestwiceonthatincome!
That’sarelief!
Whatdoesthatmean?
It’sthesamekindoftax,apercentageofyourincome,excepttheywithholdallofitrightfromyourpayorbankaccount.
Noneatall.
Lesson 25: Foreign Tax Credit25-10
How do I complete Form 1116?
Ifthetaxpayerdoesnotqualifyfortheelection,Form1116mustbecompleted.TheamountoftheforeigntaxcreditistheportionofU.S.incometaxliabilitybasedongrosstaxableforeignincome.Certainexpensescanbedeductedonthetaxreturntoreduceforeigngrossincome.Someofthesesituationsarecomplicated,andbeyondthescopeoftheVITA/TCEprogram,suchas:
• Expensesdirectlyrelatedtotheforeignincome,suchasemployeebusinessexpenses
• Investmentinterestexpense
• Foreignlosses,suchasthosefromsellingforeignassetsoralossfromabusinessorpartnership
Ifthetaxpayerhasanyofthesetypesofdeductions,referthemtoaprofessionaltaxpreparer.
UsethefollowingguidelinesifyouprepareForm1116forthetaxpayer:
• Topportion:OnlyreportonetypeofincomeoneachForm1116.Incomefromuptothreeforeigncountriesmaybereportedonthesameformaslongasitisthe same type of income.
• PartI,line1a:EnterallforeignincomethatistaxablebyboththeforeigncountriesandtheU.S.
• PartI,line3a:IfthetaxpayerisnotitemizingdeductionsonScheduleA,enterthestandarddeductionamountonline3a.Ifthetaxpayeritemizes,enterthetotalofmedicalexpenses,realestatetaxesandgiftstocharityfromScheduleA.Thetaxsoftwarewillnotautomaticallyenterthisfield.
• PartII:Checktheappropriatebox,(h)or(i),toindicatewhethertheforeigntaxwasactuallypaidduring2009(“paid”)orifthetaxwasbilledinoneyearbutpaidinanother(“accrued”).Ataxpayerusingthecashbasiscanchoosetouseeitherthecashoraccrualmethodtodeterminetheforeigntaxcredit.However,iftheaccrualmethodischosen,thetaxpayermustcontinuetousetheaccrualmethodfortheforeigntaxcreditonallfuturereturns.
• PartII,columnj,enterdatetaxeswerepaidoraccrued.
• PartII,columnskthroughn–amountsareenteredinforeigncurrency;columnsothroughr–amountsareenteredinU.S.dollars;columns–totalU.S.dollaramountsonly.ConversionratesarediscussedintheOtherIncomelesson.
• PartIII:Figurethecreditinthissection.Ifthetaxpayerhasacarrybackorcarryover,referthemtoaprofessionaltaxpreparer.
• PartIV:OnlyneededifthetaxpayerhadtousemorethanoneForm1116duetomorethanonetypeofincomeand/orreportingfundsfrommorethanthreecountries.
• ThetaxsoftwareperformsthecalculationsinPartsIIIandIV.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab5).
Advise students to enter the date as the last date of the year (e.g., 12/31/2009) if the taxes were withheld throughout the year.
Lesson 25 : Foreign Tax Credit 25-11
Summary
TaxpayerswhopaidtaxestoanyforeigncountryorU.S.possessionmaybeabletotakeanonrefundableforeigntaxcredit(FTC)fortaxespaid.Generally,toclaimtheFTC,taxpayersarerequiredtofileForm1116,ForeignTaxCredit(Individual,Estate,Trust,orNonresidentAlienIndividual).
However,taxpayersdonothavetofileForm1116iftheymeetcertainrequirements.TheVITA/TCEProgrammayhelptaxpayerswhoarenotrequiredtofileForm1116.(InternationalVITAsitesareexceptedfromthisrule.)
Toqualifyfortheforeigntaxcredit,thetaxpayer,income,andtaxesmustallmeetspecificrequirements.TheforeigntaxcreditiscomputedandreportedonForm1116.PartIofForm1116isusedtofigurethetaxableincomefromforeignsourcesineachincomecategory;aseparatecopyofForm1116mustbecompletedforeachcategoryofincome.
Theforeigntaxcreditisdifferentfromtheforeignearnedincomeexclusion.Ifthetaxpayerusestheforeignearnedincomeexclusion,foreigntaxpaidontheexcludedincomecannotbeusedtoclaimtheforeigntaxcredit.Taxpayerscanchoosetheapproachthatresultsinthelowesttaxpaidoverall.
TheforeigntaxcreditisreportedonForm1040,line47.
Review the lesson summary with the class.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 25: Foreign Tax Credit25-12
ExErcisE answErs
Answer 1: True.The$300limitationappliestowhetherornotataxpayerhastocompleteForm1116.AtaxpayerdoesnothavetofileForm1116ifthetotalforeigntaxespaidarelessthanorequalto$300($600ifMarriedFilingJointly).
Answer 2: No.ClydeneedstocompleteForm1116becausehisforeigntaxesexceed$300.Clydewillneedtoseektheassistanceofaprofessionaltaxpreparer.
Answer 3: Yes.Iftheforeigntaxesforamarriedcouplewhofilesajointreturnarelessthanorequalto$600,thenthecoupleisnotrequiredtocompleteForm1116.JudyandMarkdonothavetocompleteForm1116becausetheirforeigntaxesarelessthan$600.
Answer 4: C.OnAnne’staxreturn,shecancomputeaforeigntaxcredittooffsetthetaxesshepaidtoJapanontheinterestreceivedfromtheJapanesebank.
Answer 5: No.Aninheritancedoesnotqualifyasincomefromaforeigncoun-try.UnderU.S.taxlaw,inheritancesarenottaxabletothebeneficiaries.JeanisnoteligibletoclaimaforeigntaxcreditfortheinheritancetaxesshepaystotheSpanishgovernment.
Answer 6: No.AdelecannottakeaforeigntaxcreditforthetaxespaidonincomesheearnedinIran.However,thisincomeistaxableintheU.S.,sincesheisaU.S.citizen.
Answer 7:
Q-Dividendtaxes
NQ-Foreignoil-relatedincometax
Q-Interestincometax
NQ-Realestatetaxes
Q-Incometaxonwagesfromaforeigncountry
NQ-TaxespaidonincomeearnedinSyria
Answer 8:InterestIncome–A;DividendIncome–B(high-taxedincomeisconsid-eredgeneralcategoryincome)
Answer 9: A.Since17%(thetaxrateBernardpaid)isnotmorethan35%(thehighestU.S.incometaxrate),Bernard’sincomefallsunder“passivecategoryincome”onForm1116.
Lesson 26: Child Tax Credit 26-1
Instructor Notes
Lesson 26: Child Tax Credit
Introduction
Thislessoncoversacreditthatfirsttookeffectin1998.Thechildtaxcreditisuniquebecauseifataxpayercannotbenefitfromthenonrefundablecredit,thetaxpayermaybeabletoqualifyfortherefundableadditionalchildtaxcreditonForm8812.Inthischapter,wewilllearnaboutbothcreditsandtheirrelationshiptoeachother.Sometaxpayersmaynotbeawareofthesecredits.Yourtime,effort,andunderstandingofthiscreditmayresultinalowertaxforthetaxpayer.
ThechildtaxcreditisenteredintheNonrefundableCreditssectionofthetaxreturn;theadditionalchildtaxcreditisenteredinthePaymentssection.Form1040EZfilerscannottakethecredit.
Anapprovedintakeandinterviewsheetandtheinter-viewtipsintheVolunteerResourceGuide(TabG), arecriticaltoolsneededtodetermineeligibilityfor thecredit.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determinethetaxpayer’seligibilityforthecredit(s)
• Determinewhichtaxpayercanclaimtheadditionalcredits
What is the child tax credit?
Thechildtaxcreditisanonrefundablecreditthatallowstaxpayerstoclaimataxcreditofupto$1,000perqualifyingchild,whichreducestheirtaxliability.
What is the additional child tax credit?
Taxpayerswhoarenotabletoclaimthefullamountofthechildtaxcreditmaybeabletotaketherefundableadditionalchildtaxcredit.CompletingForm8812,AdditionalChildTaxCredit,mayresultinarefundevenifthetaxpayerdoesn’toweanytax.
Who can claim the child tax credit?
Tobeeligibletoclaimthechildtaxcredit,thetaxpayermusthaveatleastonequalifyingchild.RefertotheVolunteerResourceGuide(TabG)forthedefinitionofaqualifyingchildforpurposesofclaimingthechildtaxcredit.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication972□ Publication4491-W□ Form8812andInstructions□ Optional:Form1040
Instructions
Don’tconfusethesecreditswiththechildanddependentcaretaxcredit!
Review objectives with the class.
Point out the resources cited under What do I need?
Direct students to the Child Tax Credit Inter-view Tips in the Vol-unteer Resource Guide (Tab G).
Lesson 26: Child Tax Credit26-2
Does the child have to be the taxpayer’s dependent?
NEW Tobeaqualifyingchildforthechildtaxcreditfor2009,thechildmustbeclaimedasthetaxpayer’sdependent.
Are there special rules for children of divorced, separated, or never married parents?
Therearespecialrulesforchildrenofdivorcedorseparatedparents,aswellasforchil-drenofparentswhohavenevermarried.Inmostcasesthecustodialparent(theparenthavingcustodyofthechildforthegreaterpartoftheyear)mayclaimthedependencyexemptionforthequalifyingchild.Custody,forthispurpose,meansthechildlivesintheparent’smainhome.Thenoncustodialparent,however,maybeentitledtoclaimthedependencyexemptionforachildandthusthechildtaxcreditandadditionalchildtaxcredit.ReviewtheChildTaxCreditInterviewTipsintheVolunteerResourceGuide(TabG)foradditionalinformation.
Remember,acustodialparent’sreleaseofthedepen-dencyexemptionwillalsoreleasethechildtaxcreditandtheadditionalchildtaxcredit,ifeitherapplies,tothenoncustodialparent.NoncustodialparentsmustattachForm8332orasimilarstatementtotheirreturneachyeartheexemptionisclaimed.
What is the amount of the credit?
Themaximumamounttaxpayerscanclaimforthechildtaxcreditis$1,000foreachqualifyingchild.TheamountactuallyclaimedonForm1040dependsonthetaxpayer’staxliability,modifiedadjustedgrossincome(MAGI)andfilingstatus.Theamountofthecreditmaybereducedifthetaxpayer’s:
• Taxliabilitylessthemajorityofthenonrefundablecreditsislessthanthemaximumchildtaxcredit,or
example
MaryandRalphgotadivorcein2002.Theyhaveonechildtogether,Amy,wholiveswithMary.AllareUScitizensandhaveSSNs.MaryandRalphprovidemorethanhalfofAmy’ssupport.Mary’sAGIis$31,000andRalph’sAGIis$39,000.Amyis12.Thedivorcedecreedoesnotstatewhocanclaimthechild.
Ralph,thenoncustodialparent,canclaimthedependencyexemptionandchildtaxcreditifMarysignsForm8332.Marycanstillclaimtheearnedincomecredit,HeadofHousehold,andchildanddependentcarecreditforAmyassumingshequalifiesforthem.
example
Ed’sson,Jeff,turned17onDecember30,2009andhasavalidSSN.Heisaciti-zenoftheUnitedStates.AccordingtotheChildTaxCreditInterviewTips,heisnotaqualifyingchildforthechildtaxcreditbecausehewasnotundertheageof17attheendof2009.
Read the Ed and Jeff example.
Ask a volunteer to read the Mary and Ralph example.
NEW Taxpayerswithdivorcedecreesordivorceagree-mentsexecutedafter2008mustuseForm8332orsimilarstatement;theycannotsimplysubstitutepagesfromthedivorcedecree.
Lesson 26: Child Tax Credit 26-3
ExErcisEs
• MAGIisabovethelimitforthetaxpayer’sfilingstatus;reviewPublication17,ChildTaxCreditchapterforthelimitsonthecredit
Reviewsteps6and7intheVolunteerResourceGuide(TabG)todeterminewhichworksheetmustbeusedtofigurethecredit.Ifthetaxpayeranswersyestosteps6and7,thentheworksheetinPublication972mustbeusedtofigurethecredit.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gotothe
VolunteerResourceGuide(Tab1),MainInformationScreen.
What is MAGI?
Typically,thetaxpayer’sMAGI(ModifiedAdjustedGrossIncome)isthesameastheirAGIfromline37ofForm1040,orline21ofForm1040A.Formoreinfor-mationonMAGIasitappliestothechildtaxcredit,refertoPublication17.
UsetheChildTaxCreditinterviewtipsfromtheVolunteerResourceGuide(TabG)tocompletetheexercises.Answersareattheendofthelessonsummary.
Question 1: PaulandMariearemarriedwithtwodependentchildren.TheywillfileajointForm1040fortheyear.Thechildrenarequalifyingchildrenforpurposesofthechildtaxcredit.PaulandMarie’sMAGIis$112,000andtheirtaxliabilityis$6,200.Basedonthisinformation,PaulandMarie:
A. Are not eligible for the maximum credit and can use the Child Tax Credit Worksheet in the Form 1040 Instructions to figure their child tax credit
B. WillhavetousePublication972tofiguretheir childtaxcredit
C. Areeligibletoclaimafullchildtaxcredit
D. Arenoteligibletoclaimanyamountforthechildtaxcredit
example
StanfilesasHeadofHouseholdandhasthreechildrenwhoqualifyforpurposesofthechildtaxcredit.Stan’sMAGIis$54,000andhistaxliabilityis$4,680.Staniseligibletotakethefull$1,000perchild($3,000)becausehisMAGIislessthan$75,000andhistaxliabilityisgreaterthan$3,000.
example
MayandBobfileasMarriedFilingJointlyandhavetwochildrenwhoqualifyforthechildtaxcredit.TheirMAGIis$86,000andtheirtaxliabilityis$954.EventhoughtheirAGIislessthanthethresholdlimitof$110,000,theycanonlyclaim$954,reducingtheirtaxtozero.Astheycouldn’tclaimthemaximumchildtaxcredit,MayandBobmayalsobeeligiblefortheadditionalchildtaxcredit.
Ask a volunteer to read the examples.
Remind students that using incorrect work-sheets will reduce the taxpayers refund.
Ifthetaxpayer’staxliabilityiszero,theycannottakethecreditbecausethereisnotaxtoreduce.However,thetaxpayermaybeabletotaketheadditionalchildtaxcredit,discussedlaterinthislesson.
Taxpayers with AGI above the MAGI phaseout can calculate the credit using the CTC Worksheet in the Form 1040 Instruc-tions rather than Publica-tion 972, if preparing a paper return.
Assign the exercises.
Review answers with the class when com-plete.
Lesson 26: Child Tax Credit26-4
ExErcisEs (continued)
Question 2:Laura’sadoptedsonJackis12.Heisaciti-zenoftheUnitedStates,andlivedwithLaurafortheentiretaxyear,duringwhichtimeLauraprovidedfullfinancialsupport.IsJackaqualifyingchildforthechildtaxcredit?þ Yes □NoQuestion 3:Whichoneofthefollowingindividuals(allofwhomhavetwoqualifyingchildrenforthepurposesofthechildtaxcredit)areeligibletoclaimthemaximum$1,000perchildforthechildtaxcreditontheirtaxreturn?
A. Fiona,whoisMarriedFilingSeparatelywithaMAGIof$60,000
B. Ken,aQualifyingWidowerwithaMAGIof$30,000 andtaxliabilityof$490
C. Nick, who is Single with a MAGI of $70,000 and a tax liability of $5,000
D. Julie,whoisMarriedFilingJointlywithaMAGIof$116,000
How do I determine taxpayer eligibility for the credit?
Todeterminewhetherachildmeetsthecriteriaofqualifyingchildforthechildtaxcreditoradditionalchildtaxcredit,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.BeginbyreviewingtheFamilyandDependentInformationsectionofthetaxpayer’sapprovedintakeandinterviewsheet.Verifythatthechild:
• Isunder17onDecember31ofthetaxyear
• Livedwiththetaxpayerformorethan6monthsoftheyear(rememberthespecialrulesfordivorced,separated,ornevermarriedparents)
• Didnotprovideoverhalfofhisorherownsupport
• Meetstherelationshipcriteria
• IsaU.S.citizen,U.S.National,orresidentoftheUnitedStates
IftheFamilyandDependentInformationsectionisincomplete,orthetaxpayerisunsureofhowtorespond,youmaywanttousetheChildTaxCreditInterviewTips intheVolunteerResourceGuide(TabG).Itprovideshelpfulprobingquestionstoaskthetaxpayer.
Tax Software Hint: TheentriesforeachqualifyingchildontheMainInformationSheetwillhelpthesoftwaredetermineifthechildiseligibleforthechildtaxcredit.Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab1),MainInformationScreen.
Review the rules for eligibility.
Jack meets the require-ments in interview steps 1-4.
Nick’s MAGI is not affected by the $75,000 limit; his tax liability is more than $1,000 per child.
Lesson 26: Child Tax Credit 26-5
How do I calculate the child tax credit?
Tocalculatethecredit,youmustfirstdeterminewhichworksheettouse.ReviewtheChildTaxCreditinterviewtipsintheVolunteerResourceGuide(TabG)todeterminewhichworksheetthetaxpayermustuse.
Tax Software Hint: Ifyouareusingtaxsoftware,thesystemwillautomaticallycalculatethecredit,providedyouhavecorrectlycompletedthe:
• DependentsectionoftheMainInformationSheet
• Taxpayer’sreturnthroughtheretirementsavingscontributioncreditline
• PartIofForm5695,andScheduleR
Ifyouhaveaquestionabouttheamountthatappearsasthechildtaxcredit,thetaxpayer’scompletedChildTaxCreditWorksheetmayhelpyouunderstandthedeter-mination.
What is the additional child tax credit?
What is the amount of the credit?
Thiscreditisforcertainindividualswhogetlessthanthefullamountofthechildtaxcredit.Theadditionalchildtaxcreditmaygivetaxpayersarefundeveniftheydonotoweanytax.
NEW Likethechildtaxcredit,theadditionalchildtaxcreditallowseligibletaxpayerstoclaimupto$1,000foreachqualifyingchildaftersubtractingtheallowableamountofchildtaxcredit.Thecreditisgenerallybasedonthelesserof:
• 15%ofthetaxpayer’staxableearnedincomethatisover$3,000,or
• Theamountofunusedchildtaxcredit(causedwhentaxliabilityislessthan allowedcredit)
Who can take the additional child tax credit?
Taxpayerswhodon’tgetthefull$1,000ofthechildtaxcreditmayqualifyfortheadditionalchildtaxcredit.ReviewtheAdditionalChildTaxCreditTipintheVolunteerResourceGuide(TabG)toseetherequirementstoclaimthecredit.
example
RememberMayandBobwhohavetwoqualifyingchildren,aMAGIof$86,000,andataxliabilityof$954?Becausetheirtaxliabilityislessthanthefullamountofthecredit(intheircase$2,000)theymaybeabletotaketheadditionalchildtaxcreditofupto$1,046($2,000-$954).
Review the require-ments again with the students.
Read the May and Bob example.
Lesson 26: Child Tax Credit26-6
ExErcisEs (continued)
Thereisanothermethodtocomputetheadditionalchildtaxcreditfortaxpayerswiththreeormorequalifyingchildren.Thesetaxpayersmaybenefitifthey:
• HadsocialsecurityorMedicaretaxeswithheldfromtheirpay
• Wereself-employedandpaidself-employmenttax
• Paidtaxontipsnotreportedtotheiremployer
• Didnotreceivethemaximumavailablechildtaxcredit
Theamountofthetaxpayer’searnedincomecreditisnotafactorinthiscalculationonForm8812.
How do I calculate the additional child tax credit?
Form8812,AdditionalChildTaxCredit,isusedtocalculatetheadditionalchildtaxcredit.ThecreditwillappearontheadditionalchildtaxcreditlineofthePaymentsectionofForm1040.
Tax Software Hint:Ifyouareusingthetaxsoftware,thesystemwillautomati-callycalculatethecreditandplacethatentryontheappropriatelineofthepaymentsection.
Question 4:JoseandYolandaAlamedaareMarriedFilingJointlyandhavefivedependentchildrenundertheageof17.JoseandYolandabothhavevalidSSNs.TheirchildrenhaveIndividualTaxpayerIdentificationNumbers(ITINs).Thechildrenarequalifyingchildrenforpurposesofthechildtaxcredit,butnottheearnedincomecredit.JoseandYolanda’sAGIis$8,850andtheirtaxliabilityis$0.TheirsocialsecurityandMedicaretaxesare$677.Theirearnedincomecreditamountis$457.Aretheyeligibletotaketheaddi-tionalchildtaxcredit?þ Yes □No
How do I avoid common errors?
Whenconsideringthechildtaxcredit,itiscriticaltoensurethatthetaxpayerhasbeeninterviewedthoroughlytocorrectlyidentifyeligiblechildren.Ifpreparingapaperreturn,besuretousetheworksheetstofigurethecredit,anddetermineiftheadditionalchildtaxcreditshouldbeincluded.
Tax Software Hint: OncetheCTCblockontheMainInformationSheetischecked,thesoftwarewillcomputetheamountofthecreditautomatically.
Practice - Vanessa Franklin
Takealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-28andreviewthesampleinterviewswithVanessarelatedtolesson26.
Their tax liability (0) was less than their allowable child tax credit ($5,000). They may qualify for the additional child tax credit.
Assign the exercise.
Review answer with the class when com-plete.
Remind students to use the correct worksheet.
Direct students to Appendix A-28.
Lesson 26: Child Tax Credit 26-7
ExErcisE answErs
Review the lesson summary with the class.
Summary
Thechildtaxcreditisanonrefundablecreditthatallowsqualifyingtaxpayerstoreducetheirtaxliabilitytothelesseroftheamountofthecreditortheiradjustedtaxliability.
Ifataxpayerisnotabletobenefitfromthemaximum$1,000perqualifyingchild,thetaxpayermaybeeligiblefortheadditionalchildtaxcredit,whichisarefundabletaxcredit.
Answer 1: A. Paul and Marie’s MAGI is over the threshold of $110,000. They are not eligible to claim a full child tax credit. They can use the Child Tax Credit Worksheet in the Form 1040 Instructions to calculate the credit, if preparing a paper return.
Answer 2: Yes. Jack is a qualifying child for the child tax credit because he was under the age of 17 at the end of 2009; he meets the relationship requirement, lived with Laura for at least 6 months of the year; and Laura provided his complete support.
Answer 3: C. Nick may be able to take the full $1,000 credit for each of his qualify-ing children because his MAGI is not affected by the threshold limit of $75,000 for his single filing status. In addition, his tax liability of $5,000 is more than the amount of $1,000 per child for the credit.
Answer 4: Yes. Jose and Yolanda qualified for the initial child tax credit. However, they couldn’t benefit from it because their tax liability (0) was less than their allow-able child tax credit ($5,000). Even though their AGI is more than $3,000, they have more than three children and paid social security and Medicare taxes. This makes them eligible to qualify for the additional child tax credit. Keep in mind the Earned Income Credit amount will affect the final calculation.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 26: Child Tax Credit26-8
Notes
Lesson 27: Miscellaneous Credits 27-1
Instructor Notes
Lesson 27: Miscellaneous Credits
Introduction
Thislessonprovidestheinformationyouneedtobeabletoprepareareturnwithcertainnonrefundablecredits.TheBasicCourseincludesRetirementSavingsContributionCreditandCreditfortheElderlyortheDisabled.Theothermiscella-neouscreditscoveredinthislessonarepartoftheIntermediate,Advanced,Military,orInternationalCourses.
ThesecreditsarereportedintheTaxandCreditssectionofForm1040,U.S.IndividualIncomeTaxReturn.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Determineifataxpayerqualifiesfortheretire-mentsavingscontributionscreditandaccu-ratelycompleteForm8880,CreditforQualifiedRetirementSavingsContributions
• CalculatethenonbusinessenergypropertycreditbycompletingForm5695,ResidentialEnergyCredits
• CalculatethecreditfortheelderlyorthedisabledbycompletingScheduleR(Form1040or1040A)CreditfortheElderlyortheDisabled
• Identifythealternativemotorvehiclecreditandmortgageinterestcreditasrequiringaprofessionaltaxpreparer
RemembertousetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.Usetheinformationfromanapprovedintakeandinter-viewsheet,alongwiththedocumentsprovidedbythetaxpayertodetermineeligibilityforthesecredits.
What is a nonrefundable credit?
Anonrefundablecreditisadollarfordollarreductionofthetaxliability.Arefundablecreditisaddedtothefederalincometaxwithheldandanyestimatedtaxpayments.Ifthetotalismorethanthetotaltax,theexcesswillberefundedtothetaxpayer.Anonre-fundablecreditcanonlyreducethetaxliabilitytozero.Allthecreditsdiscussedinthislessonarenonrefundablecredits.
Generally,nonrefundablecreditsareappliedagainstfederaltaxintheordertheyarelistedonForm1040,page2,intheTaxandCreditssection.
Review objectives with the class.
Point out the resources cited under What do I need?
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form1040□ ScheduleR,Forms1040or
1040A□ Form5695□ Form5695Instructions□ Form8880□ Optional: Form1040
Instructions
Effectiveforthe2009taxyear,Schedule3isobsolete.ScheduleRisusedwithbothForm1040andForm1040A.
Lesson 27: Miscellaneous Credits27-2
Tax Software Hint:Thesoftwarewillcalculatethesecredits,butthecorrectinformationmustbeinput.Thevolunteertaxpreparermustmakethecorrectdetermi-nationsbyusinganapprovedintakeandinterviewsheetandresourcematerials.
What is the retirement savings contributions credit?
Theretirementsavingscontributionscreditisanonrefundablecreditaqualifyingtaxpayermayclaimiftheymadeacontributiontoaqualifiedplan.
Ifthecontributionistaxdeferred,thetaxpayerobtainsthebenefitofthetaxdeferralandacreditagainsttheirtaxes.A“double”benefitsuchasthisisrarelyallowed.Forexample,ataxpayermaybeabletoclaimthiscreditandadeductionforanIRAcontri-bution.ThecreditiscalculatedonForm8880,CreditforQualifiedRetirementSavingsContributions,andreportedintheTaxandCreditssectionofForm1040.
Who is eligible for the retirement savings contributions credit?
GototheVolunteerResourceGuide(TabG),Credits.Reviewtheflowchartforqualifi-cationsfortheRetirementSavingsContribution-DecisionTree.
What is the modified AGI limit?NEW For2009,taxpayersmaybeabletoclaimtheretirementsavingscontributioncreditiftheirmodifiedAGIisnotmorethan:
• $55,500forMarriedFilingJointly
• $41,625forHeadofHousehold
• $27,750forSingle,MarriedFilingSeparately,orQualifyingWidow(er)
What are qualified plans for the purpose of the retirement savings contributions credit?
Inordertobeeligibleforthecredit,thetaxpayermusthavecontributedtoaqualifiedplan.PlansthatqualifyarelistedintheOtherCreditschapterofPublication17.
How do I know if the taxpayer has made a qualifying contribution?
Whenyoureviewpage2oftheapprovedintakeandinterviewsheet,payspecialatten-tiontoPartV,ExpensesandbesuretoaskifthetaxpayermadeacontributiontoanIRAorotherretirementaccount.Theotherqualifyingplancontributionswillbelistedonthetaxpayer’sFormW-2inbox12andprecededbyoneofthefollowingcodes:D,E,F,G,H,AA,BBorS.ForMilitarypersonnel,theremaybeanamountinbox14codedwithQorE.
Tax Software Hint:IfFormW-2isenteredintothesoftwarecorrectlyandcompletely,theprogramwilldothecreditcalculation.Ifbox14amountsarecontributionstoaretirementplanthatqualifyfortheretirementsavingscontributionscredit,checkthequalifies for Form 8880box.ReviewtheVolunteerResourceGuide(Tab2),FormW-2Instructions,forthesoftwareentries.
Someemployersallowedemployeestocontributeafter-taxmoneytoaRoth401(k).Theseafter-taxcontributionsarelistedonFormW-2inBox12withacodeAAorBB.
Direct students to this page in the Volunteer Resource Guide.
Point out the types of plans that qualify as listed in Publication 17.
Lesson 27: Miscellaneous Credits 27-3
Tax Software Hint:IfthetaxpayercontributedtoaRothoratraditionalIRA,whetheritisdeductibleornot,linktotheIRAdeductionworksheetandentertheinfor-mation.ReviewtheVolunteerResourceGuide(Tab3),Form1040-AdjustmentstoIncome,forthesoftwareentries.
What may reduce an eligible contribution for purposes of the credit?
Eligiblecontributionsarereducedbythefollowingdistributionsreceivedduringthe testingperiod:
• Anydistributionthatisincludedinthetaxpayer’sgrossincomefromaqualifiedretirementplanorfromaneligibledeferredcompensationplan
• AnydistributionfromaRothIRAthatisnotaqualifiedrollovercontribution
Thetestingperiodincludes:
• Thetaxyear,and
• Thetwoprecedingtaxyears,and
• Theperiodbetweentheendofthetaxyearandtheduedateofthereturn,includingextensions
Married Filing Jointly
Formarriedtaxpayersfilingajointreturn,bothspousesmaybeeligibleforacreditonamaxi-mumannualcontributionamountof$2,000each.Ifeitherspousehasadistributionduringthetestingperiod,bothspousesmustreducetheireligiblecontributionbythatamount.
How do I determine the amount of the credit? Form8880isusedtofiguretheamountofthecredit.
Tax Software Hint:IfthetaxpayermeetstheageandincomerequirementsandacontributionwasindicatedonFormW-2ortheIRAworksheet,Form8880willdisplayintheformstree,highlightedinred.Youwillneedtoaddressafewfieldsbeforethe
example
JoseandLucyaremarriedandwillfileajointreturn.Theircombinedadjustedgrossincomewas$39,000.Theyeachcontributed$3,000toa401(k)plan.Theydidnotreceiveanydistributionsduringthethree-yearperiodandcannotclaimanyothercredits.JoseandLucyareeacheligibleforacreditbasedonthemaximumeligibleannualcontributionamountof$2,000each.
Ask a student to read the Jose and Lucy example.
Youmustquestionthetaxpayertodetermineiftherehavebeenanydistributionsinthetestingperiod.
example
JoeandMaryaremarriedandfiledjointreturnsfor2007and2008,andplantodosoin2009.Joereceivedataxabledistributionfromaqualifiedplanin2007andataxabledistributionfromaneligibledeferredcompensationplanin2008.MaryreceiveddistributionsfromaRothIRAin2008.
BothJoeandMarymadeeligiblecontributionstoanIRAin2009andotherwisequalifyfortheretirementsavingscredit.Theymustreducetheamountoftheirqual-ifyingcontributionsin2009bythetotalofthedistributionstheyreceivedin2007and2008.ThiscalculationiscompletedonForm8880.
Ask a student to read the Joe and Mary example.
Ask what if only Joe had taken a distribution.
Answer: Both Joe and Mary would have to reduce their eligible contributions by the amount of Joe’s distribution.
Lesson 27: Miscellaneous Credits27-4
ExErcisEs
Ed, Bert, and Carl do not qualify because their AGIs are over the limit for their filing statuses.
Assign the exercise.
Review the answer with the class when complete.
Ask two volunteers to read the Ryan inter-view.
Display Form 8880.
Direct students to the page in the Volunteer Resource Guide noted in the Tax Software Hint.
RefertoForm8880intheVolunteerResourceGuide(Tab5),RetirementSavingsContributionsCredit.
returniscompleted.ReviewtheVolunteerResourceGuide(Tab5),RetirementSavingsContributionsCredit,forthesoftwareentries.
Thecreditcanbeaslowas10%orashighas50%ofamaximumannualcontributionof$2,000perpersondependingonfilingstatusandadjustedgrossincome.
Question 1: Whichofthefollowingtaxpayers,whocontributedtotheiremployers’401(k)plans,ispossiblyeligiblefortheretirementsavingscredit?
A.Ed,whoissingleandhasanadjustedgrossincomeof$35,200
B. Sybil, who is married, files jointly, and has an adjusted gross income of $49,500
C.Bert,whoismarried,filesseparately,andhasanadjustedgrossincomeof$28,300
D.Carl,whoisaqualifyingwidowerwithadependent child,andhasamodifiedAGIof$29,000
Taxpayer Interview and Tax Law Application
OurvolunteerisworkingwithRyan,ataxpayeratthesite.ShehasalreadydeterminedthatRyan’sfilingstatusisSingle,noonecanclaimhimasadependent,hisAGIis$25,000,andheis28yearsold.RefertotheVolunteerResourceGuide(TabG),RetirementSavingsContributionsCredit-DecisionTree,asshedeterminesifRyaniseligibleforthecredit.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… ryan responds…
Ryan, I see from your Form W-2 that you contributed $1,500 to your employer’s 401(k) plan. Did you make contributions to any other qualified plans, such as an IRA?
That’s a great benefit. Were you a full-time student during 2009?
Well, it looks like you qualify for the credit. I will complete Form 8880 to see how much the credit will be.
Did you receive any distributions from your retirement plan in 2009, 2008 or 2007 – or do you plan to take any distributions before the tax filing deadline?
No, loans don’t count against you, so you’ll get to use the full amount of your contribution in the calculation of your credit. The software shows that your credit is $150. That will reduce your amount of total tax, so you’ll end up with a bigger refund.
No,Iputallmysavingsintothe401(k)becausemyemployermatchesit.
No,I’vebeenoutofschoolforseveralyears.
Great!
Well,in2008Itookoutaloanagainstmy401(k)touseasadownpaymentonacar.I’vealreadypaiditbackthroughpayrolldeductions.Doesthatcount?
I’lltakeeverypenny!
Lesson 27: Miscellaneous Credits 27-5
What are Residential Energy Credits?
Individualswhomakepurchasesforqualifiedenergyefficientimprovementsoranenergyefficientpropertyfortheirmainhomemaybeallowednonrefundabletaxcredits.Therearetwotypesofenergycredits:
• Nonbusinessenergypropertycredit
• Residentialenergyefficientpropertycredit
Form5695isusedtocomputethecredits.
NEW AsaresultofARRA,therearechangestotheresidentialenergycreditsfor2009.Besuretotakenoteofthesechangestoensurethepreparationofanaccuratetaxreturn.
Taxpayersmustowntheirhometoqualifyforthesecredits.ReviewPartIII,LifeEvents,oftheapprovedintakeandinterviewsheet,toseeifanypurchasesofenergyefficientitemsareindicated–theseitemsmayqualifytaxpayersforthenonbusinessenergypropertycredit.
Tax Software Hint:TaxsoftwarewilldoallthemathcalculationsandenterthetotalontheappropriatelineofForm1040.Remember,anytimeyouneedhelpandwanttoseetheforminstructions,clickanywhereontheformtoaccessthehelpfeature.
What is the nonbusiness energy property credit?
Thiscredit,whichexpiredafter2007,hasbeenreinstated.Taxpayersmaybeabletoclaimanonbusinessenergypropertycreditof30%ofthecostofcertainenergy-efficientpropertyorimprovementsplacedinservicein2009.Thispropertycanincludehigh-efficiencyheatpumps,airconditioners,andwaterheaters.Italsomayincludeenergy-efficientwindows,doors,insulationmaterials,andcertainroofs.Thecredithasbeenexpandedtoincludecertainasphaltroofsandstovesthatburnbiomassfuel.
ReviewForm5695andtheForm5695Instructionstoidentifytheitemsthatqualifyforthiscredit.
Lesson 27: Miscellaneous Credits27-6
Display or refer to the Volunteer Resource Guide (Tab G). Point out the income limits on the page titled, Credit for the Elderly or the Disabled.
Thetotalamountofthecreditthatcanbeclaimedin2009and2010islimitedto$1,500.ThecreditisclaimedonPartIofForm5695.
Ifthetaxpayeriseligibleforthecreditfortheelderlyorthedisabled,computethatcreditfirst.
What is the residential energy efficient property credit?
Taxpayersmayqualifyforanenergycreditforquali-fiedsolarelectricpropertycosts,qualifiedsolarwaterheatingpropertycosts,qualifiedsmallwindenergypropertycosts,andqualifiedgeothermalheatpumppropertycosts.ThiscreditisclaimedonPartIIofForm5695.ThisinformationisoutofscopefortheVITA/TCEprogramandisincludedforyourawarenessonly.Refertaxpayerswiththeseexpensestoaprofessionaltaxpreparer.
How do I handle the Credit for the Elderly or the Disabled?
ThecreditfortheelderlyorthedisablediscalculatedonScheduleRandreportedintheTaxandCreditssectionofForm1040.ThiscreditcanalsobeclaimedonForm1040A.
Who qualifies for the credit for the elderly or the disabled?
Individualswhoqualifyfortheelderlyorthedisabledcreditare:
• Age65orolder,or
• Underage65,retiredonpermanentandtotaldisability,receivingtaxabledisabilityincome,andhavenotreachedthemandatoryretirementagetheircompanyhasset
Besidesbeingaqualifiedindividual,theirtotalincomemustbewithincertainlimits.TheincomelimitscanbefoundintheVolunteerResourceGuide(TabG),CreditfortheElderlyortheDisabled,FigureBIncomeLimits.
Mandatory retirement ageistheagesetbyataxpayer’semployeratwhichthetaxpayerwouldhavebeenrequiredtoretire,hadthetaxpayernotbecomedisabled.
Generally,disabilityincomecomesfromanemployer’sdisabilityinsurance,healthplan,orpensionplan.Thepaymentsreplacewagesforthetimethetaxpayermissedworkbecauseofthedisability.Theplanmustprovidefordisabilityretirementforthepaymentstobeconsidereddisabilityincome.
Ataxpayerwithapermanentandtotaldisabilityisunabletoengagein“substantial,gain-fulactivity,”orinotherwords,paidemployment.Taxpayerswhocandosuchworkarenotconsidereddisabled.Workinginashelteredworkshopsetting,however,isnotconsideredsubstantial,gainfulactivity.
IRSprovidesguidanceforpropertythatqualifiesfortheenergycredits.Homeownersgenerallycanrelyonmanu-facturers’certifications. Refertowww.irs.govorwww.energystar.govformoreinfor-mation.
Lesson 27: Miscellaneous Credits 27-7
ExErcisEs (continued)
Assign the exercise.
Review the answer with the class when complete.
Ask a volunteer to read John’s example.
Ask what if John’s nontaxable social security benefits were $4800 and he had other nontaxable pension income of $300.
Answer: He would still not be eligible.
Explain that few tax-payers qualify for the credit.
Fewtaxpayersqualifyforthiscreditbecausethecreditcalculationincludesthetaxpay-er’snontaxablesocialsecurity,veterans’benefits,orotherexcludablepension,annuity,ordisabilitybenefits.Mosttaxpayers’socialsecuritybenefitsaloneexceedthelimit.
How do I determine the amount of the credit?
ScheduleRisusedtocalculatethecredit,andhasthreeparts:
• PartI,FilingStatusandAge
• PartII,StatementofPermanentandTotalDisability,ensuresthattaxpayerswhoareunder65haveobtainedacompletedphysician’sstate-mentthatprovestheyarepermanentlyandtotallydisabled
• PartIII,FigureYourCredit
Ifthetaxpayeris65orover,orunder65andretiredonpermanentandtotaldisability,completeScheduleRtodeterminetheamountofthecredit,ifany.
Tax Software Hint: TaxsoftwarewillcompletemostofScheduleRbasedonthedatafromtheMainInformationSheetandincomeamountsenteredonthereturn.ItwilldeterminewhetherthetaxpayeriseligibleforthecreditandtransferthecreditamounttotheappropriatelineonForm1040.GototheVolunteerResourceGuide(Tab5),NonrefundableCreditsforsoftwareentries.
Question 2:Whichoneofthefollowingitemswouldautomaticallydisqualifysomeonewhoisunder65yearsoldfromclaimingthecreditfortheelderlyorthedisabled?
A.Participatinginshelteredemployment
B.Receivingtaxabledisabilitybenefitsduringtheyear
C.Failingtoattachaphysician’sstatementtothetaxreturn
D. Earning at least minimum wage by performing productive work
Sincetaxsoftwareautomati-callycalculatesthecreditfortheelderlyorthedisabled,itiscriticalthatallsocialsecurityandrailroadretirementbenefitstreatedassocialsecuritybeenteredontheworksheetforline20aofForm1040.Amountsmustbeenteredevenifnosocialsecurityistaxable.
example
Johnisunmarriedandfilingasinglereturn.Heis67yearsoldandreceived$12,000innontaxablesocialsecuritybenefitsinthetaxyear.HisAGIis$9,000.EventhoughJohnisaqualifiedindividual,heisnoteligibletoclaimthecreditsincehisnontaxablesocialsecuritybenefitsexceed$5,000.
Someone under 65 and not yet retired on perma-nent and total disability is ineligible for the credit.
Lesson 27: Miscellaneous Credits27-8
Taxpayer Interview and Tax Law Application
Determining Albert’s Eligibility
Albertcomesintothetaxcenter.HehasalmostcompletedhisForm1040Abutwantstoknowifhecanclaimthecreditfortheelderlyorthedisabled.Followalongintheconversation.
RefertotheVolunteerResourceGuide(TabG),CreditfortheElderlyortheDisabled.FigureBshowsthatAlbert’sAGI($15,430)isunderthelimitforasinglefiler($17,500),andhisincomefromnontaxablesocialsecurityorpensionbenefits($4,430)isalsowithinthelimitforasinglefiler($5,000).
What about the Alternative Motor Vehicle Credit?
Form8910,AlternativeMotorVehicleCredit,isusedtoclaimacreditforalternativemotorvehiclesthatmeetcertainrequirements.Thistopicisoutofscopeforthevolun-teerprogramandisincludedforawarenessonly.Refertaxpayerswhochoosetoclaimthiscredittoaprofessionaltaxpreparer.
What is the Mortgage Interest Credit?
Taxpayerswhoholdqualifiedmortgagecreditcertificates(MCCs)underaqualifiedstateorlocalgovernmentprogrammayclaimanonrefundablecreditformortgageinterestpaid.Thetaxpayermusthaveadocumenttitled,“MortgageCreditCertificate,(MCC).”Theamountofthecreditislistedonthecertificate.
ThistopicisintroducedintheVITA/TCEtrainingforinformationalpurposesonly.Refertaxpayerswhochoosetoclaimthiscredittoaprofessionaltaxpreparer.
Emphasize that Sched-ule R must be com-pleted to determine if the taxpayer can claim the credit.
Display the table for the Credit for the Elderly or the Disabled.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… alBert responds…
Are you either a U.S. citizen or a resident alien?
Are you over 65?
Are you retired on permanent and total disability?
Sounds like you may qualify. What is your adjusted gross income?
How much did you receive in social security?
Did you receive any other pension benefits that might not be taxable?
And your filing status is Single, so it looks like you might be able to claim the credit. If you would like for me to do your return, I will go back through it step-by-step to make sure.
Yes,I’maU.S.citizen.
No,I’monly54,notevenoldenoughforretirement.ButIhadtostopworkinglastyearbecauseofmydisability.
Yes.Infact,IstartedreceivingdisabilityretirementbenefitslastAugust.
$15,430.
Igot$4,430insocialsecuritybenefits.
No,Ijustgetmydisabilitychecksandsocialsecurity.
Point out that claiming the Alternative Motor Vehicle Credit requires a professional tax pre-parer.
Point out that claiming the Mortgage Interest Credit requires a pro-fessional tax preparer.
Ask two students to role-play the sample interview.
Lesson 27: Miscellaneous Credits 27-9
How are the total nonrefundable credits reported?
ThetotalofallnonrefundablecreditsisreportedontheapplicablelineintheTaxandCreditssectionofForm1040.
Tax Software Hint: Basedonyourentriesforallthecredits,thesoftwarecalcu-latesthetotalofthetaxpayer’screditsandenterstheamountontheTotalCreditsline.Remember,thenonrefundablecreditscannotexceedthetaxpayer’sfederalincometax.
Practice – Vanessa Franklin
GotoAppendixA-30,todetermineifVanessaisabletotaketheCreditforQualifiedRetirementSavingsContributions.
Summary
Retirement Savings Contributions Credit
TaxpayerswhocontributedtocertainretirementplansorIRAsmaybeeligibleforanonrefundablequalifiedretirementsavingscontributionscredit.
BesuretoaskthetaxpayerifIRAcontributionsweremade.Carefullyreviewthetaxpayer’sForm(s)W-2forpre-taxretirementplancontributionsandaccuratelyinputtheamountsintothetaxsoftware.Thesoftwarecalcu-latestheretirementsavingscreditbasedontheinfor-mationthatisinput.
Theamountofthecreditisdeterminedbythetaxpay-er’sfilingstatus,adjustedgrossincome,andthetaxpayer’squalifiedretirementcontributions.
Form8880isusedtocalculatethecredit.
Residential Energy Credits
Residentialenergycreditsareavailabletotaxpayersformakingenergy-savingimprovementstotheirhome.PartI,Form5695,isusedtoclaimthenonbusinessenergypropertycredit.RememberthatPartII,Form5695,ResidentialEnergyEfficientPropertyCreditisoutofscopeforthevolunteerprogram.
Credit for the Elderly or the Disabled
Elderlyindividuals,age65orolder,andindividualsunderage65whoretiredonperma-nentandtotaldisability,maybeabletoclaimaspecialnonrefundablecreditontheirtaxreturnsiftheyareU.S.citizensorresidentaliens.Fewtaxpayersqualifyforthiscreditbecausemosttaxpayers’socialsecuritybenefitsexceedtheincomelimits.
TheVolunteerResourceGuideprovidesaflowchartfordeterminingbasiceligibilityandaquickreferencetableofincomeandsocialsecuritylimits.ScheduleR,CreditfortheElderlyortheDisabled,isusedtocalculatethecredit.
Review the lesson summary with the class.
Direct students to Appendix A-30.
IRAcontributionsmadebythetaxpayerareoftenover-looked.Besuretoasktaxpay-ersiftheymadetraditionalorRothIRAcontributions.IRAcontributionsmayqualifythetaxpayerfortheretirementsavingscontributionscredit.
Lesson 27: Miscellaneous Credits27-10
ExErcisE answErs
Alternative Motor Vehicle Credit
Taxpayersmaybeabletoclaimacreditforanalternativemotorvehicleplacedinserviceforbusinessorpersonaluse.Refertaxpayerswhochoosetoclaimthiscredittoaprofessionaltaxpreparer.
Mortgage Interest Credit
ThemortgageinterestcreditiscalculatedonForm8396.Refertaxpayerswhochoosetoclaimthiscredittoaprofessionaltaxpreparer.
Answer 1: B. Sybil qualifies for the credit because her adjusted gross income is under $55,500, which is the threshold limit for Married Filing Jointly.
Answer 2: D. Someone who still engages in substantial, gainful activity and has not yet retired on permanent and total disability is ineligible for the credit. A physician’s statement is not required to be attached to the return, but it must be completed and kept with the taxpayer’s records. Individuals under 65 must have received taxable disability benefits during the year to qualify for the credit.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 28: Other Taxes 28-1
Instructor Notes
Lesson 28: Other Taxes
Introduction
ThislessoncoverstheOtherTaxessectionofthereturn.Youwilldetermineifthetaxpayerowesadditionaltaxes.Whenyouconcludethislesson,yourfindingswillbethetaxpayer’stotaltax.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Identifythedifferenttypesofothertaxeson a return
• Determineifataxpayerisliableforothertaxesthatarewithinscopeofthevolunteerprogram
• Determinehowtoreporttheseadditionaltaxesonthetaxreturn,andcompletetheapplicableformsorschedules
What are Other Taxes?
“OtherTaxes”areseparatefromtheincometaxfiguredfromthetaxtablesorusingtheTaxComputationWorksheet.Theyinclude:
• Self-employmenttax
• SocialsecurityandMedicaretaxesontipincome
• AdditionaltaxesonIRAsandotherqualified retirementplans
• Advanceearnedincomecreditpayments
Theseamountsareusuallycalculatedontheirownformorschedule.Thetaxesareaddedafterthenonre-fundablecreditsarecalculated;thenonrefundablecreditsdonotreducetheothertaxes.
HouseholdemploymenttaxesarealsoincludedintheOtherTaxessectionofthetaxreturn.Thistopic,however,isbeyondthescopeofthevolunteerprogram.Taxpayerswhomustfilehouseholdemploymenttaxesshouldbereferredtoaprofessionaltaxpreparer.
Review objectives with the class.
Point out the resources cited under What do I need?
Refer to the Other Taxes section of Form 1040.
Emphasize the caution.Ifyouarenotcertifiedto
prepareareturnincludingadditionaltaxesonIRAsandotherqualifiedretire-mentplans,refertaxpayerswiththisissuetoamoreexperiencedvolunteeroraprofessionaltaxpreparer.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form4137□ FormW-2□ ScheduleSEOptional: □ Publication334□ Publication531□ Form1040Instructions□ Form5329andInstructions□ FormW-5
Lesson 28: Other Taxes28-2
Tax Software Hint:ThesoftwaremakesmostofthecalculationsanddisplaystheresultingtaxonForm1040.
What is self-employment tax?
Self-employment(SE)taxissocialsecurityandMedicaretaxcollectedprimarily fromindividualswhoworkforthemselves.ItissimilartothesocialsecurityandMedicaretaxeswithheldfromthepayofmostwageearners.PaymentsofSEtaxcontributetothetaxpayer’scoverageunderthesocialsecuritysystem.Socialsecuritycoverageprovidesthetaxpayerwithretirement,disability,survivor,andhospital insurance(Medicare)benefits.
Who must pay self-employment tax?
SEtaxmustbepaidifeitherofthefollowingapplies:
• Thetaxpayerhadincomeasachurchemployeeof$108.28ormore.
• Thetaxpayerreceivesnetearningsfromself-employmentincomeintheamountof$400ormore(excludingchurchemployeeincome).
Generally,taxpayerswhoareindependentcontractorsandreceiveForm1099-MISCmustfileScheduleC/C-EZandScheduleSE.Sincethepayerdoesnotwithholdtaxesfromindependentcontractors’pay,itisthetaxpayer’sresponsibilitytopayincomeandSEtax.
ScheduleSEcontainstwowaystocomputethetax:thelongversionandtheshortversion.Theinstructionsontheformguideyouindecidingwhichversionthetaxpayerneeds.TheshortversionisusedmoreoftenintheVITA/TCEprogram,butyoushouldunderstandbothversions.
How do I figure and report this tax?
Asavolunteer,youmaybequalifiedtoassistself-employedtaxpayerswhoneedtocompleteScheduleC-EZ,NetProfitfromBusiness(coveredinanearlierlesson).Whenassistingataxpayerwithself-employmentincome,firstcompleteScheduleC-EZ.Then,ifpreparingapaperreturn,followtheScheduleSEinstructionstocalcu-latetheself-employmenttax.Finally,enterone-halfoftheself-employmenttaxasanadjustmenttoincomeonForm1040,page1.Thisissimilartothebenefitthatemploy-eesreceivebecausetheiremployerspayhalfofthetotalamountpaidtotheSocialSecurityAdministration.
Tax Software Hint: Thesoftwareautomaticallytransferstheappropriateinforma-tionfromScheduleC-EZtoScheduleSE,andcalculatestheself-employmenttaxandtheadjustmentofone-halfoftheself-employmenttax.
Confirm that volun-teers understand who must pay self-employ-ment tax.
Display or refer to Schedule SE.
Demonstrate how to figure the tax using tax software or the sched-ules.
Lesson 28: Other Taxes 28-3
What about taxes on unreported tip income?
Alltipincomeissubjecttofederalincometax.However,tipsoflessthan$20permonththatarenotreportedtotheemployerarenotsubjecttosocialsecurityandMedicaretaxes.
Individualswhoreceive$20ormorepermonthintipsfromanyonejobmustreporttheirtipincometotheiremployer.TheemployerreportsthesetipsaspartofthewagesonFormW-2,box1.TheemployerwithholdssocialsecurityandMedicaretaxesandfederalincometaxonthatincome.
What about allocated tips?
Anemployermay“allocate”tipstoanemployeeiftheemployeeworkedinarestau-rant,cocktaillounge,orsimilarbusinessandreportedtipsthatwerelessthantheemployee’sshareof8%offoodanddrinksales.Iftheemployerallocatestipstoemployees,theamountisreportedonFormW-2,box8.ThisamountistobeincludedonForm1040.SocialsecurityandMedicaretaxesarenotwithheldonallocatedtips.TheemployeepaysthesocialsecurityandMedicaretaxesbycompletingForm4137,SocialSecurityandMedicareTaxonUnreportedTipIncome.
Iftheemployeecanshow,usingPublication1244,Employee’sDailyRecordofTipsandReporttoEmployer,orsomesimilardailytiprecord,thattheactualtipsreceivedaredifferentfromtheallocatedamount,thentheactualamountisreportedonForm1040.TheactualtipsreceivedarealsoreportedonForm4137tocalculatesocial securityandMedicaretaxes.
What about tips that the employee did not report to the employer?
Iftheemployeereceived$20ormoreinunreportedcashandchargetipsinanymonthfromanyjob,theemployeemustreportthatincomeonForm1040andpaythesocialsecurityandMedicaretaxesonthatincome.But,iftheemployeereceivedlessthan$20intipsinanymonthfromanyjob,theyarenotrequiredtoreportthemtotheemployer.However,theseamountsdoneedtobeincludedonForm1040.TheywillnotbesubjecttosocialsecurityorMedicaretaxes.
Ifataxpayerisfilingapaperreturnandonlyhasunreportedtipsoflessthan$20permonth,Form4137isnotrequiredsincesocialsecurityandMedicaretaxisnotappli-cable.
Tax Software Hint: AlltipsarereportedonForm4137becausethesoftwarecalculatessocialsecurityandMedicaretaxesonlyontheapplicabletips.ThesoftwarewillthenaddunreportedtipstoLine7onForm1040.
Display or refer to Form 4137. Direct stu-dents to review box 8 on Form W-2.
Lesson 28: Other Taxes28-4
ExErcisEs
How do I figure and report these taxes?
Tofigurethetax,determineifduringanymonththetaxpayerreceived$20ormoreincashandchargetipsthatwerenotreportedtotheemployer.DetermineifthatincomewasreportedonForm1040;ifitwasn’t,enteritontheappropriateform.
Tofigurethetaxonapaperreturn,useForm4137andfollowtheinstructionsontheform.ReportthetaxamountontheapplicablelineontheForm1040.
Tax Software Hint: Thetaxsoftwarewillcomputethecorrecttaxonallocatedandunreportedtipincome.GototheVolunteerResourceGuide(Tab2),HowtoEnterTips,forsoftwareentries.
Answersfollowthelessonsummary.
Question 1: Jodyhadasummerjobatacoffeehut.Shemade$18intipsinMay,$755inJune,$600inJuly,and$45inAugust.Untilaco-workertoldher,shedidn’trealizeshehadtoreporthertipstotheiremployer.Shethenreported$1,000intipstoherboss.
Whatamountoftipswillhavetobeaddedtoincomeonline7ofJody’sForm1040?
A. $1,418
B. $1,000
C. $418
D. $18
Question 2: WhatamountofunreportedtipsdoesJodyhavetopaysocialsecurityandMedicaretaxesonwhenshefileshertaxreturn?
A. $1,418
B. $400
C. $45
D. $18
On all but the tips in May because they amounted to less than $20.
Direct students to the How to Enter Unre-ported Tips page in the Volunteer Resource Guide (Tab 2).
Display or refer to Form 4137 and assist volunteers in complet-ing the form.
Assign the exercises and review with the class.
The difference between tips received and tips reported to her employer.
Aspartofyourinterview,explaintotaxpayersthatsometimespeopledonotreal-izetheyowetaxesontipstheydonotreporttotheiremployer.Alsoexplainthetaxespaidonthosetipsactuallyboostthetaxpayer’sfuturesocialsecu-ritybenefits.
example
Carlawaitstablesatacafé.Heremployerreportsalltipsthatcustomersaddtotheircreditcardtabs,butsheleavesituptoCarlatokeeptrackofhercashtips.Carlareceivesmorethan$20permonthincashtips.Carlakeepsarecordbut,becauseshedoesn’treporthercashtipstoheremployer,theyarenotincludedonherFormW-2.CarlaincludestheunreportedtipsasincomeonForm1040,line7.CarlaalsousesForm4137tocalculateandpaythesocialsecurityandMedicaretaxesonthosetips.
Ask a volunteer to read the Carla example.
Emphasize that both cash and charge tips are taxable and aren’t treated differently for tax purposes.
Ask what if Carla worked only 2 months as a waitress and received $15 per month in tips.
Answer: She must report the tip income on her return, but pays no social security or Medicare tax on them.
Lesson 28: Other Taxes 28-5
What about taxes on IRAs and other qualified retirement plans?
Contributions to and Distributions from IRAs and Qualified Plans
TraditionalIRAsandother“qualifiedplans”allowindividualstodeferpayingtaxesonmoneytheycontributeandontheearningsuntilthefundsaredistributed.
Iftherulesforcontributionsanddistributionsarenotfollowed,additionalpenaltytaxesmaybedue.Forexample,thetaxpayermustpayincometaxdueplusanadditionaltaxifanyofthefollowingapply:
• Adistributionistakenbeforetheindividualreachestheageof59½andisnotrolledoverintoanotherqualifiedplanorIRAandnootherexceptionapplies
• Minimumdistributionsarenotwithdrawnwhenrequired
• Excesscontributionsarenotremovedbytheduedateofthereturnincludingextensions
TheadditionaltaxforeachsituationisoutlinedonForm5329,AdditionalTaxesonQualifiedPlans(IncludingIRAs)andOtherTax-FavoredAccounts.Whilecomple-tionofForm5329isoutofscopefortheVITA/TCEprogram,volunteersshouldbeawareoftheexceptionstotheadditionaltaxforprematuredistributions.Taxpayersfrequentlyuseaprematuredistributionforhouseholdexpensesorbillsthatarenotonthelistofexceptions.Inthiscase,youcanassistthembecausethisdoesnotrequirecompletionofForm5329.TaxpayerswhomayqualifyforanexceptionmustcompleteForm5329andshouldbereferredtoaprofessionaltaxpreparer.
Refertotheapprovedintakeandinterviewsheet,PartIV–Income,forthequestionregardingpensionorIRAdistributions.Iftheansweris“yes,”askthetaxpayerforanyForm1099-Rthatreportsthesepayments.
Review the penalty conditions to make sure students under-stand them.
Frequently,taxpayerswhoreceiveForm1099-Rwithcode1inbox7aresubjecttothe10%additionaltaxforprematuredistributionbecausethemoneywasspentforitemsthatdonotmeetanyoftheexceptions.
RefertothePublication17chaptersRetirementPlans,Pensions,andAnnuitiesorIndividualRetirementArrangementsforthelistofexceptionstotheadditionaltaxonqualifiedretirementplans.
example
Johnis39yearsoldandreceivedForm1099-Rwithcode1inbox7.Heusedthemoneytopayforcarrepairs.Fortheadditionaltax,Johnenters10%ofthetaxableamountontheapplicablelineofForm1040.Johnalsoenters“no”totheleftofthislinetoindicatethatForm5329isnotrequired.
Review the example with the class.
IfForm1099-Rcorrectlyshowscode1inbox7indicatinganearlydistribution,theadditionaltaxappliesunlessthetaxpayerqualifiesforanexception.Guidelinespermitentering10%ofthetaxableamountdirectlyonForm1040,ontheapplicablelineforadditionaltaxonIRAsorotherqualifiedretirementplans.“No”isenteredtotheleftofthislinetoindicateForm5329isnotrequired.TaxsoftwaredoesthisautomaticallybasedonentriesonForm1099-R.
Lesson 28: Other Taxes28-6
IRAdistributions,pensions,andannuitiesarecoveredintheRetirementIncomelesson.IfyouarenotcertifiedabovetheBasicLevel,refertaxpayerswiththeseissuestoamoreexperiencedvolunteerortoaprofessionaltaxpreparer.
What are Advance Earned Income Credit Payments?
Whenataxpayerqualifiesfortheearnedincomecredit(EIC),theamountofthecreditisreportedinthePaymentssectionofForm1040.TheEICisarefundabletaxcredit.Itreducesthetaxpayer’stotaltaxpaymentandcouldresultinataxrefundforthetaxpayer.TheEICwillbediscussedinLesson30.
TaxpayerscanchoosetogetpaymentsofEICinadvance,aspartoftheirpaychecks,insteadofwaitingtogetitallatoncewhentheyfiletheirtaxreturn.Toreceiveadvanceearnedincomecredit(AEIC)payments,thetaxpayermusthave,orexpecttohave,aqualifyingchildandsubmitFormW-5,EarnedIncomeCreditAdvancePaymentCertificate,totheiremployer.Theemployerwillincludeaportionoftheearnedincomecreditintheemployee’sregularpay.Farmworkersareexcluded.TheamountofadvanceEICisreportedontheemployee’sFormW-2,box9.IfadvanceEICisreceived,thetaxpayerisrequiredtofileataxreturn,evenifthetaxpayer’sgrossincomeisbelowtheamountrequiredtofile.
How does AEIC affect tax?
AEICisEICthatwaspaidtothetaxpayerduringthetaxyear.TheAEICamountmustbereportedonForm1040intheOtherTaxessection.Onthesamereturn,theEICamountmustbereportedinthePaymentssection.
TheAEICisaddedtothetotaltaxandEICissubtractedfromthetotaltax.Reportingthenumbersinthiswayensuresthatthetaxpayerreceivesalltheearnedincomecredittowhichtheyareentitled.Ifthisisthecaseforataxpayeryouarehelping,besuretoexplainthisandansweranyquestions.ThisusuallyresultsinthetaxpayersreceivinganadditionalamountofEICwhenthetaxreturnisfiled.However,taxpayersmayowetaxiftheirincomechangedduringtheyear.
example
Claireliveswithher2year-oldandknowsthatshequalifiesforEICin2009.ShecompletesFormW-5toreceiveaportionofthecreditaspartofherpaycheckduring2009,ratherthanwaitingtoreceivethefullamountafterfilingher2009return.
Review the meaning of refundable credit with the class.
Ask a volunteer to read the Claire example.
Ask what if Claire had only $5,000 in income; would she need to file a tax return.
Answer: Yes, because she received the AEIC.
example
WhenthevolunteerhelpedClairepreparehertaxreturn,theAEICamountof$550wasreportedintheOtherTaxessection.The$1,776inEICforwhichshequali-fiedwasreportedinthePaymentssection.Asaresult,hertaxreturnreflectedtheadvancepaymentofherEICandsheisallowedtheremaining$1,226aspartofher2009refund.
Ask a volunteer to read the Claire example.
Lesson 28: Other Taxes 28-7
ExErcisEs (continued)
Tax Software Hint: BesurethatFormW-2isenteredinitsentirety.Informationfrombox9willautomaticallydisplayontheapplicablelineonForm1040.TheAEICboxischeckedtoreflectthatthisentryisforadvanceearnedincomecredit.GototheVolunteerResourceGuide(Tab2),FormW-2Instructions,forsoftwareentries.
Question 3: Gloriahadadvanceearnedincomecredit(AEIC)paidtoherduringtheyear.Theamountinbox9ofherFormW-2was$700.
GloriaqualifiedforanEICamountof$1,025.Herincometaxwas$200andherwithholdingwas$1,000.Therewerenootherpayments,creditsorothertaxes.Whatisthefinalamountonhertaxreturn?Choosethebestanswerbelow.
A.Gloriaowestaxof$1,125
B.Gloriahasanoverpaymentof$2,025
C. Gloria has an overpayment of $1,125
D.Gloriahasanoverpaymentof$1,825
Question 4: RamonhastwochildrenandexpectstoqualifyforEICin2009.Heneededthecashassoonaspossible.HearrangedtoreceiveadvanceEICpaymentsthroughout2009,ratherthanwaitingtofilehis2009returntogettheentireEICamount.InwhatsectionofhistaxreturnaretheAEICpaymentsreported?
A. Income
B. Other Taxes
C. Payments
D. AdjustmentstoIncome
What about repayment of the first-time homebuyer credit?
Thefirst-timehomebuyercreditiscoveredinLesson29,Payments.However,certainsituationsmayrequirethecredittoberepaidandreportedintheOtherTaxessectionofForm1040.
Ifthetaxpayerreceivedthefirst-timehomebuyercreditforahomepurchasedin2009anditceasestobethetaxpayer’smainhomewithinthe36-monthperiodbeginningonthepurchasedate,thetaxpayergenerallymustrepaythecredit.
Ifthetaxpayerreceivedthefirst-timehomebuyercreditforahomepurchasedin2008,thetaxpayergenerallymustrepaythecreditovera15-yearperiodin15equalinstall-ments.Therepaymentperiodbeginsin2010andthetaxpayermustincludethefirstinstallmentasadditionaltaxonthe2010taxreturn.However,ifthehomeceasestobethetaxpayer’smainhomebeforethe15-yearperiodisup,thetaxpayermustrepayallremainingannualinstallments.
Review the Tax Soft-ware Hint.
($1,025+$1000)-($200+$700)=$1,125
Assign the exercises and review the answers with the class.
Lesson 28: Other Taxes28-8
Thehomeceasestobethetaxpayer’smainhomeinsituationswherethetaxpayersellsthehome,convertstheentirehometobusinessorrentalproperty,thehomeisdestroyed,condemned,ordisposedofunderthreatofcondemnation,orthelenderforeclosesonthemortgage.Therearecertainexceptionstotherepaymentrule.SeethegeneralinstructionsforForm5405,First-TimeHomebuyerCreditandRepaymentoftheCredit,fordetails.
Thecreditisrepaidbyincludingitasadditionaltaxonthereturnfortheyearthehomeceasestobethetaxpayer’smainhome.Ifthetaxpayerisrequiredtorepaythecredit,itiscalculatedonForm5405andreportedonthetotaltaxlineonForm1040.
How do I figure total tax?
TheOtherTaxessectionofForm1040providesatotalofthetaxpayer’sincometaxplustheothertaxesthatmayapplytothetaxpayer.Addingtheamountsontheselinestogethergivesthetotaltax.Thisamounttakesintoaccountthetaxonallincome,adjustmentstoincome,deductions,nonrefundabletaxcredits,andothertaxes.Thenextstepisenteringthetaxpaymentsandfindingthetaxesowedortheamountover-paidthatwillresultinarefund.
Tax Software Hint:Thetaxsoftwarewillcalculatethetotaltaxautomatically.GototheVolunteerResourceGuide(Tab6),Form1040,Page2-OtherTaxesandPayments,forsoftwareentries.
Practice – Vanessa Franklin
Let’stakealookathowataxpreparerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-32andreviewtothesampleinterviewwithVanessarelatedtolesson28.
Summary
ThislessonexplainedhowtocompletetheOtherTaxessectionofthereturn. “Othertaxes”arenotcalculatedusingtheincometaxtablesortheTaxComputationWorksheet.Theyinclude:
• Self-employmenttax
• SocialsecurityandMedicaretaxesonunreportedtipincome
• AdditionaltaxesonIRAsandotherqualifiedretirementplans
• Advanceearnedincomecreditpayments
Tax Software Hint:Theseamountsarecalculatedonseparateformsorsched-ules.Thetaxsoftwareprovidesalloftheformsandperformsmostofthecalculations.
Review the lesson summary.
Direct students to Appendix A-32.
Display or refer to the Other Taxes section of Form 1040 so students understand how other taxes affect total tax computation.
Lesson 28: Other Taxes 28-9
ExErcisE answErs
Assign the workbook exercise and review as a class when done (optional).
Answer 1: C. Jody’s combined tips for May, June, July and August were $1,418, and she reported only $1,000 to her employer. She needs to add $418 to line 7 of her tax return.
Answer 2: B. Jody does not have to pay Social Security and Medicare on the tips she received in May, because they amounted to less than $20 for the month.
Answer 3: C. Gloria has an overpayment of $1,125.
Answer 4: B. Other Taxes
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 28: Other Taxes28-10
Notes
Lesson 29: Payments 29-1
Instructor Notes
Introduction
ThislessonisoneofseverallessonsthatcoverthePaymentssectionofthereturn.Thispartofthereturnincludesadditionalchildtaxcredit,therefundableeducationcredit,payments,andearnedincomecredit.Afterfinishingtheselessons,youwillbeabletocompletethePaymentssectionofthetaxpayer’sreturn.Thislessoncoverscertainrefundablecreditsandpaymentsmadebythetaxpayer.Theseinclude:
• FederalincometaxwithheldfromFormsW-2andForms1099
• Estimatedtaxpaymentsforthecurrenttaxyearandamountsappliedfromtheprioryear’staxreturn
• NEW Makingworkpayandgovernmentretireecredits
• NEW First-timehomebuyercredit
• Amountspaidwitharequestforextensiontofile
• Excesssocialsecurityandtier1RRTAtaxwithheld
Additionalchildtaxcreditandtherefundableeducationcredithavealreadybeencovered.Earnedincomecreditwillbecoveredinthenextlesson.
ObjectivesAttheendofthislesson,usingyourresourcematerials,youwillbeableto:
• Identifythefollowingtypesofpaymentsandcreditsthatareapplicableformostlow-andmoderate-incometaxpayers:
- FederalincometaxwithheldfromFormsW-2,WageandTaxStatement
- FederalincometaxwithheldfromForms1099
- Estimatedtaxpaymentsandamountsappliedfromtheprioryear’sreturn
- Makingworkpayandgovernmentretireecredits
- Firsttimehomebuyercredit
- Amountpaidwitharequestforanextensiontofile
- Excesssocialsecurityandtier1RRTAtaxwithheld
• Reportthesepaymentsandcreditscorrectlyonthetaxpayer’sreturn
Lesson 29: Payments
Review the objectives with the class.
Identify the new tax law provisions in this lesson: making work pay and government retiree credits and the first-time homebuyer credit (amended).
Lesson 29: Payments29-2
Theinformationyouobtainfromanapprovedintakeandinterviewsheetwillhelpyoudeterminethepaymentsandcreditsthatshouldbereportedonthetaxpayer’sreturn.
RefertotheOtherTaxesandPaymentssectionoftheVolunteerResourceGuide(Tab6)toidentifyandreviewthePaymentssectionofthereturn.
How do I report federal income tax withheld?
TheFederalincometaxsystemisa“payasyougo”system.Thatmeanstaxispaidasincomeisearnedorreceivedduringtheyearandisreferredtoaswithhold-ingcredit.
Incometaxisgenerallywithheldfromthefollowingtypesofincome:
• Salariesandwages
• Tips
• Taxablefringebenefits
• Sickpay
• Pensionsandannuities
• 401(k)andIRAdistributions
• Gamblingwinnings
• Unemploymentcompensation
• Certainfederalpaymentssuchassocialsecuritybenefits
Ifthetaxpayerhasincometaxwithheldduringthecurrenttaxyear,theywillreceiveoneofthefollowingformsshowingtheamountwithheld:
• FormW-2,WageandTaxStatement
• FormW-2G,CertainGamblingWinnings
• OneofseveraldifferenttypesofForms1099
ThetotalfederalincometaxwithheldisreflectedinthePaymentssectionofForm1040,page2onthelineforfederalincometaxwithheld.
Forahouseholdemployee,anemployershouldwithholdfederalincometaxonlyifthehouseholdemployeeaskstheemployertowithholditandtheemployeragrees.
Thewithholdingfromallincomedocumentsisincludedonthereturn,butnotallincomestatementsarerequiredtobeattached.Refertopage1ofForm1040forthefollowingguidance:“AttachForm(s)W-2here.AlsoattachFormsW-2Gand1099-Riftaxwaswithheld.”
NEW Makingworkpayandgovernmentretireecreditsarenew.Themakingworkpaycreditappliestotaxyears2009and2010.Thegovernmentretireecreditisaone-timecreditfor2009.Reviewtherulesforthesenewcreditstoensureyouprepareanaccuratereturn.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ FormW-2□ Form1040□ Form1040Instructions□ Form1040-ES□ Forms1099□ Form4868□ Form5405□ ScheduleM□ ScheduleMInstructionsOptional: □ Publication505□ Publication 919
Lesson 29: Payments 29-3
Tax Software Hint: BythetimeyoureachthePaymentssection,youhavealreadyenteredinformationfromthetaxpayer’sForm(s)W-2andForm(s)1099intothetaxsoftware,includingthefederalincometaxwithheld.ThetaxsoftwarecalculatesthetotalanddisplaysitonthePaymentssectionofthereturn.
What about estimated taxes and amounts applied from the prior year’s return?
What are estimated tax payments?
Manytaxpayershaveincomefromself-employment,dividends,interest,capitalgains,rent,androyal-ties.The“payasyougo”systemalsoappliestothisincome.Ifthetaxdueonthisincomeexceedscertainlimits,estimatedtaxmustbepaidbythetaxpayer.Estimatedtaxpaymentsaredueonaquarterlybasis.Ifestimatedpaymentsarenotpaidwhentheyarerequired,apenaltycouldbeimposed.Thisalsoappliesiftaxpayersdonothaveenoughincometaxwithheldfromtheirsalaryorwages.
Where do I get this information?
Thislessoncoverswheretofindtheinformationontheapprovedintakeandinterviewsheetandwherethesepaymentsareenteredonthetaxform.Lessons31and33willprovidemoredetailsonestimatedtaxes.Ontheapprovedintakeandinterviewsheet,determineifthereisincomefromsourcessuchasself-employmentorinvestmentincomeforwhichtaxesmaynothavebeenwithheld.Wheninterviewingthetaxpayerask,“DidyoupayestimatedtaxestotheIRSduring2009?”Iftheansweris“yes,”asktoseethetaxpayer’srecordofpayments,suchasForm1040-ES,EstimatedTaxforIndividuals.Lookforthetaxpayer’sresponsetothisquestionontheapprovedintakeandinterviewsheet.
Iftaxpayersneedmoreinformationaboutestimatedtaxes,referthemtoForm1040-ES,whichincludesinstructionsandaworksheetforcomputingtheamountofestimatedtaxes.
example
FredaworkedasaclerkandreceivedaFormW-2thatreportedfederalincometaxwithholdingof$1,000.ShealsoreceivedForm1099-INTfromherbank,whichreflectedfederalincometaxwithholdingof$50.Thecorrecttotalwithholdingreportedonherreturnwouldbe$1,050($1,000+$50).
Ask a volunteer to read the Freda example.
Refer students to the Payments section of Form 1040 to illustrate the Freda example.
Estimatedtaxincludesthetaxpayer’sincometaxandself-employmenttax.Self-employmenttaxisthesocialsecurityandMedicaretaxesowedbyself-employed workers.
SuggestthetaxpayerobtainForm1040-ESfordetailsaboutestimatedtaxes.Formscanbeobtainedbydownload-ingfromwww.irs.govorcallingtoll-free,1-800-829-3676.
Ifataxpayerpaidsubstantiallymoreorlessthanrequiredinestimatedtax,encouragethemtorecalculateit.TheycanadjusttheirestimatedtaxpaymentsbyfollowingtheinstructionsandworksheetonForm1040-ES..
SeeLessons31and33 formoreinformationonesti-matedtaxes.
Lesson 29: Payments29-4
What about tax payments applied from a previous year?
Taxpayerswhooverpaytheirincometaxesinoneyearcanapplyallorpartoftheiroverpaymenttothenextyear’staxbyindicatingtheamounttheywanttoapplytothenextyear’sestimatedtaxes.
Where do I get this information?
Askthetaxpayer:
•Didlastyear’sreturnshowanoverpayment?
•Didyouapplyanypartoftheoverpaymenttothistaxyear?
Iftheansweris“yes”tobothquestions,asktoseethe2008taxreturntodocumenttheamountoftaxappliedto2009.Addthisamounttotheestimatedtaxpaymentsandenterthetotalontheapplicableline.Youwillbeconfirminginformationprovidedbythetaxpayerthatshouldbeincludedontheapprovedintakeandinterviewsheet.
Tax Software Hint: Forsoftwareentriestorecord2009estimatedtaxpayments,gototheVolunteerResourceGuide(Tab6)FormACH1040/ESandrefertothehintinthemargin.
Taxpayer Interview and Tax Law Application
Let’sseehowourvolunteerhelpedataxpayer,Ernie,withthispartofthe Paymentssection.
What is the making work pay credit?
NEW MakingworkpayisanewcreditthatispartoftheARRAlegislation.Itisavail-ablefortaxyears2009and2010andcutstaxesforworkingfamilies.Themakingworkpayprovisionprovidesarefundabletaxcreditofupto$400forworkingindividualsand$800formarriedtaxpayersfilingjointreturns.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… ernIe responds…
Let’s complete the Payments section of your return. The tax software added up all the income tax withheld from your Forms W-2 we entered earlier. I know you had a little self-employment income and I see you responded “yes” to the question on estimated tax payments on the intake and interview sheet. Is that correct?
Do you have a record of your payments, perhaps on a Form 1040-ES?
Good, you paid each quarter. We’ll enter those payments. While we’re here, did last year’s return show an overpayment?
Did you apply any of that to your 2009 taxes?
Okay, we’ll enter that too. Now we show the total of the withholding from your W-2s, your estimated tax paid and the refund amount from last year’s return applied to this year.
Yes,Idid.
Yeah,hereitis.
Yes,hereitis:$150.
Yes,allofit.
Good!
Ask two volunteers to role-play the Ernie sample interview.
Remind students not to confuse the making work pay credit with the recovery rebate that was on the 2008 return.
Lesson 29: Payments 29-5
Thecreditisfullyrefundable,meaningthatonceitisappliedagainstanytaxowed,theremainderisrefundedtothetaxpayer,unlikemanyothertaxcredits.
Thecreditiscalculatedatarateof6.2%ofearnedincomeandwillphaseoutfortaxpayerswithmodifiedadjustedgrossincome(MAGI)inexcessof$75,000or$150,000formarriedcouplesfilingjointly.
Fortaxpayerswhoreceiveapaycheckandaresubjecttoincometaxwithholding,thecreditwashandledbyemployersthroughautomaticallyreducedwithholding.TheIRSissuedupdatedwithholdingtablesthatwereeffectivebyApril1,2009. Thoughalleligibletaxpayerswillneedtoclaimthecreditwhentheyfiletheir2009incometaxreturn,thebenefitisreflectedinreducedincometaxwithholdingintaxpay-ers’paychecks.
Self-employedtaxpayerscanclaimthecreditwhentheyfiletheirreturn.
Formosttaxpayerswhoareemployees,thereducedwithholdingshouldequalthecredittakenonthetaxreturn.
Who is not eligible for the making work pay credit?
Taxpayersmusthaveearnedincometoqualifyforthemakingworkpaycredit.Therefore,thosewhohavepensionincomewithoutearnedincomearenoteligibleforthiscredit.Inaddition,thefollowingarenoteligibleforthemakingworkpaycredit:
• Individualswhocanbeclaimedasadependentonsomeoneelse’staxreturn.
• Individualswhodonothaveavalidsocialsecuritynumber.
Anexceptionismadefortaxpayerswhodonothaveasocialsecuritynumberandfileajointreturn,aslongastheirspousehasavalidsocialsecuritynumber.
How does the $250 economic recovery payment affect the making work pay credit?
OneoftheprovisionsofARRAisthe$250paymentmadetocertainrecipientsofsocialsecuritybenefits,supplementalsecurityincome(SSI),railroadretirementbenefits,orveteransdisabilitycompensationorpensionbenefits.Onajointreturn,theamountmaybe$500ifbothspousesreceivedthe$250payment.Thispaymentismadedirectlyfromthepayerofthebenefit,notfromIRS.
This$250economicrecoverypaymentisnottaxableincome.However,taxpayerswhohavereceivedthispaymentandwhoalsohaveearnedincomemustreducethemakingworkpaycreditbytheamountofthe$250economicrecoverypayment.ThecalculationismadeontheScheduleM.
Sometaxpayersmaynotbeentitledtotheentirecredit.Forexample:Ifearnedincomeislessthan$6,451($12,903forMarriedFilingJointly)theamountofthemakingworkpaycreditwillbelessthan$400(or$800forjointfilers).ThecalculationismadeonScheduleM.
RefertotheVolunteerResourceGuidebeginningonpage10foraquickreferenceonthe2009ARRAmakingworkpaycredit.
Lesson 29: Payments29-6
What is the government retiree credit?NEW Thegovernmentretireecreditisavailableforcertainfederal,state,andlocalgovernmentretireeswhoreceiveagovernmentpensionorannuityfromworknotcoveredbysocialsecurity.Thiscreditisaone-time$250creditwhichcanbeclaimedonthe2009taxreturn.Iffilingajointreturnandbothspousesaregovernmentretirees,thecreditis$500.
Taxpayersmusthaveavalidsocialsecuritynumberinordertobeeligibleforthiscredit.Anexceptionismadefortaxpayerswhodonothaveasocialsecuritynumberandfileajointreturn,aslongastheirspousehasavalidsocialsecuritynumber.
Themakingworkpaycreditmustbereducedbyanygovernmentretireecredit.ThiscalculationismadeonScheduleM.
How are these credits claimed on the tax return?
Anewform,ScheduleM,MakingWorkPayandGovernmentRetireeCredits,wasdevelopedforthe2009taxyearandwillbeusedtocalculatethecredits.TheamountofthecreditsisenteredinthePaymentssectionofForm1040.
How will the making work pay credit affect taxpayers?
Certaintaxpayersneedtochecktheirwithholdingtoseeifenoughisbeingwithheld.
Sometaxpayersarenoteligibleforthemakingworkpaycredit.However,theincometaxwithholdingontheirpayisbasedonthereducedwithholdingtablesissuedinthespringof2009.Thismayresultinasmallerrefundorinsomecasesthetaxpayermayowemoneyontheirreturn.Youcanassistthetaxpayertoavoidthissituationforthe2010taxyearbyhelpingthemadjusttheirwithholding.SeeLesson31,RefundandAmountofTaxOwed,formoreinformation.
What is the first-time homebuyer credit?
NEW Thepriorlawforthefirst-timehomebuyercredithasbeenamended.Thefirst-timehomebuyercreditincreasedtoamaximumof$8,000($4,000forMarriedFilingSeparately).Generally,forhomespurchasedin2009,therepaymentrequirementhasbeenremoved.Thisisarefundablecreditwhichmeansthatevenifthetaxpayerdoesnotoweanytax,themoneywillberefundedtothetaxpayer.
Generally,thecreditisthesmallerof:
• $8,000($4,000ifMarriedFilingSeparately),or
• 10%ofthepurchasepriceofthehome
example
BarryisretiredandstartedreceivingsocialsecurityinJanuary2007.Heworksparttimeatthelocalhardwarestore.Hereceivedaneconomicrecoverypaymentof$250inJune2009.WhenBarrycompleteshisreturnfor2009hemustreducethemakingworkpaycreditonScheduleMbythe$250economicrecoverypayment.
Direct students to Schedule M in the Volunteer Resource Guide, page 10, under the ARRA section - making work pay credit.
Lesson 29: Payments 29-7
Thecreditisreducedoreliminatedforhigher-incometaxpayers.Itisphasedoutbasedonmodifiedadjustedgrossincome(MAGI).ForMarriedFilingJointlytaxpayers,thephase-outbeginsat$150,000.Forothertaxpayers,thephase-outrangestartsat$75,000.ThismeansthatthefullcreditisavailableformarriedcouplesfilingajointreturnwithaMAGIof$150,000orlessandforothertaxpayerswithaMAGIof$75,000orless.
Form5405,First-TimeHomebuyerCreditandRepaymentoftheCredit,isusedtoclaimthecredit.
Which home purchases qualify for the first-time homebuyer credit?
Tobeconsideredafirst-timehomebuyer,thetaxpayercannothaveownedahomeinthelast3years,and,oncetheybuythehome,theymustliveinitfor3yearstoavoidrepaymentofthecredit.
Also,forhomesboughtin2009,taxpayerscanmakeanelectiontoclaimthecreditontheiroriginaloramended2008taxreturnortheir2009taxreturn.
OnlythepurchaseofamainhomelocatedintheUnitedStatesqualifiesandonlyforalimitedtime.Amainhomeiswherethetaxpayerlivesmostofthetime.Itcanbeahouse,houseboat,housetrailer,cooperativeapartment,condominium,orothertypeofresidence.Vacationhomesandrentalpropertyarenoteligible.AtaxpayermustbuythehomeduringtheperiodafterDecember31,2008andbeforeDecember1,2009.Forahomethatataxpayerconstructs,thepurchasedateisthefirstdatethetaxpayeroccu-piesthehome.
Who is not eligible for the credit?
Ifanyofthefollowingdescribethetaxpayer,thecreditcannotbetaken,evenifthetaxpayerbuysamainhome:
• Taxpayer’sincomeexceedsthephase-outrange.ThismeansMarriedFilingJointlytaxpayerswithMAGIof$170,000andaboveandothertaxpayerswithMAGIof$95,000andabove.
• Taxpayerbuysthehomefromacloserelative,includingthetaxpayer’sspouse,parent,grandparent,childorgrandchild.
• Taxpayerbuysthehomefromarelatedentity,includingacorporationorpartnershipinwhichthetaxpayerdirectlyorindirectlyownsmorethana50%interest.
• Taxpayersellsthehome,oritceasestobethetaxpayer’smainhome,beforetheendof2009.
• Taxpayerisanonresidentalien.
• ThehomepurchasedislocatedoutsidetheUnitedStates.
• Taxpayeracquiredthehomebygiftorinheritance.
• Taxpayerownedanothermainhomeatanytimeduringthethreeyearspriortothedateofpurchase.
Reviewtheapprovedintakeandinterviewsheettodeter-mineifthetaxpayer(andspouse,ifmarried)qualifiesforthiscredit.
Direct students to review the term “refundable credit” and explain how it affects a taxpayer’s tax return.
Display or refer stu-dents to Form 5405.
Taxpayers(includingspouseifmarried)whoownedaprin-cipalresidenceatanytimeduringthethreeyearspriortothedateofpurchase,arenoteligibleforthecredit.
Lesson 29: Payments29-8
What more should I know about this credit?
Undercertaincircumstances,thefullamountofthecreditmustberepaid.
Taxpayersmustrepaythecreditinfullifthehomeceasestobetheirmainhomewithinthe36-monthperiodbeginningonthepurchasedate.Thisincludessituationswherethetaxpayersellsthehome,convertsthehometobusinessorrentalproperty,orthehomeisdestroyed,condemned,ordisposedofunderthreatofcondemnation.Taxpayersmustrepaythecreditbyincludingitasadditionaltaxonthereturnfortheyearthehomeceasestobetheirmainhome.
Thereferencetocondemnationisforawarenessonly.Thetopicofcondemnationisoutofscopeforthevolunteerprogram.Taxpayerswiththisissueshouldbereferredtoaprofessionaltaxpreparer.
RefertoLesson28,OtherTaxes,andForm5405andInstructionsfortheproceduresforrepayingthecredit.
What about amounts paid with an extension to file?
Taxpayerscangetanautomaticsix-monthextensionoftimetofilebysubmittingForm4868,ApplicationforAutomaticExtensionofTimeToFileU.S.IndividualIncomeTaxReturn.ThisformextendsthetimetofileuntilOctober15.Thisisonlyanextensiontofile,notanextensiontopay.IftaxpayersdonotpaythetaxduebyApril15,2010,theywilloweinterestandmaybechargedpenalties.
Later,whentaxpayersfiletheirreturn,theyreportthepaymentmadewithForm4868ontheapplicablelineinthePaymentssectionofForm1040.
example
TerrypurchasedhisfirsthomeonMarch5,2009.InNovember2009hedecidedtosellthehome.Terrydoesnotqualifyforthefirst-timehomebuyer’screditsincehedidnotownthehomeforthethree-yearperiodafterpurchase.
example
JamesandKathypurchasedtheirfirsthomeonJune2,2009andqualifyforthefirst-timehomebuyer’scredit.IfJamesandKathyconverttheirhometorentalprop-ertyinAugust2010theywouldhavetorepaythecreditontheir2010taxreturn,theyearitceasedbeingtheirprincipalresidence.
Foreclosureofahomeisconsideredasaleordisposi-tionrequiringrepaymentofthecreditifitoccurswithinthethreeyearperiod.RefertoPublication523,SellingYourHomeorwww.irs.govformoreinformation.
Lesson 29: Payments 29-9
How can taxpayers file the extension?Taxpayersmayfiletheextensiononpaperorelectronically.Theextensionmustbemailedortransmittedbytheduedateofthereturn.
Youcanhelptaxpayersfileforanextensionusingthetaxsoftware.
Tax Software Hint: Forsoftwareentries,gototheVolunteerResourceGuide(Tab6)toreviewthestep-by-stepproceduresforfilingforanextensionusingthetaxsoftware.
What are other payments?
What other types of payments are there?
YouwillnoticethatthePaymentssectionofForm1040alsoliststhesecredits:
• Form2439,NoticetoShareholderofUndistributedLong-TermCapitalGains
• Form4136,CreditforFederalTaxPaidonFuels
• Form8801,RefundableCreditforPriorYearMinimumTax
• Form8885,HealthCoverageTaxCredit
Refertaxpayerswhochoosetoclaimanyofthesecreditstoaprofessionaltaxpreparer.Thesetopicsareoutofscopeforthevolunteerprogram.
What is excess social security and tier 1 RRTA tax withholding?
Ataxpayermayhavemorethanoneemployerandacombinedincomeovertheamountforthesocialsecuritywagebase.Thismeansthetaxpayermayhavepaidmoreinsocialsecuritytaxthanisrequired.TheForm1040Instructionsincludeawork-sheettocalculatetheexcessamount.ThisexcessamountisenteredontheapplicablelineinthepaymentsectionofForm1040andisarefundablecredit.
Tax Software Hint:ThesoftwarewillcalculatethisautomaticallybasedontheamountenteredforeachFormW-2.Therefore,itisimportanttoaccuratelyenteralltheinformationfromeachFormW-2intothesoftware.
How do I find the total payments?
Figuringthetotaltaxpaymentsiseasy.AddthelinesinthePaymentssection.EnterthetotalonthetotalpaymentslineofForm1040.
Tax Software Hint:Thesoftwaretotalsallpaymentsautomatically.
Ask a student to read the Bernice example.
example
OneofBernice’sFormsW-2waslostinthemail.Sherequestedacopyfromherformeremployer,butitdidnotarrivebyApril15.Shefiledforanextension, calculatedtheamountoftaxesowedbasedonherfinalpaystubfromthatemployer,andpaidthe$243thatwasdue.WhenshefinallyreceivedherFormW-2,shefiledherreturnandreportedthe$243ontheapplicablelineinthePaymentssectionofForm1040.
Refer students to the Filing for an Extension Using the Tax Software section in the Volunteer Resource Guide (Tab 6). Walk through the steps for filing an extension in tax software.
Inform students that the payments listed are not the typical types of payments for people who qualify for assis-tance in the VITA/TCE program, thus they are beyond the scope of volunteer training.
Lesson 29: Payments29-10
Practice - Vanessa Franklin
Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-35andreviewthesampleinterviewwithVanessarelatedtoLesson29.ReviewthePaymentssectionofVanessa’sreturninAppendixB-5.Returntothislessonafteryouhavereviewedthisinformation.
Summary
ThePaymentssectionofthetaxreturniscriticaltoanaccuratereturn.Itlistsallthetaxpaymentsthetaxpayermadeduringtheyear,andthetaxpayer’srefundablecredits.Youmustbeabletoidentifythetypesofpaymentsandcreditsthatapplytoindividualswhoqualifyforvolunteerreturnpreparationassistance.
Notes
Review the lesson summary.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s)orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Direct students to Appendix A- 35.
Lesson 30: Earned Income Credit (EIC) 30-1
Instructor Notes
Introduction
ThislessoncoverstheEarnedIncomeCredit(EIC).Thereareseveralcommonerrorsassociatedwithclaimingthiscreditonthereturn.Publication4012,VolunteerResourceGuide,andtheapprovedintakeandinterviewsheetarecriticaltoolsinavoidingthesemistakes.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• DetermineifataxpayeriseligiblefortheEarnedIncomeCredit
• CalculatetheEarnedIncomeCredit
What is the EIC?
TheEarnedIncomeCredit(EIC)isarefundabletaxcreditformostpeoplewhoworkbutdonotearnhighincomes.ThepurposeoftheEICistoreducetheirtaxburdenandtosupplementthewagesofworkingfamilieswhoseearningsarelessthanthemaxi-mumsfortheirfilingstatus.Eligibletaxpayerscanreceivearefundofthiscredit,eveniftheyhavenofilingrequirement,owenotax,andhadnoincometaxwithheld.
NEW TheEICcanbeaveryvaluablecredit.For2009,theEarnedIncomeCreditexpandstoallowfamiliestoclaimcreditforthreeormorechildren,uptoamaximumof$5,657.TheEICamountsareadjustedforinflationeveryyear.
TaxpayerswithatleastonequalifyingchildmaychoosetoreceivepartoftheirEarnedIncomeCreditinadvance.TheycandothisbyfillingoutFormW-5withtheiremployer.Apartofthecreditisgiventothemintheirpaychecksduringtheyear.ThisisreferredtoastheAdvanceEarnedIncomeCredit.ThisamountisreportedonFormW-2,box9.TurntotheVolunteerResourceGuide(Tab2),FormW-2Instructions.Locatebox9onthesampleFormW-2intheboxmarked“AdvanceEICpayment.”
IfthetaxpayerreceivedadvanceEICasshowninbox9onFormW-2,areturnmustbefiledtoreporttheadvancedpaymentandclaimanyadditionalEIC.
YoucanlearnmoreaboutAdvanceEICintheOtherTaxeslesson.
TheEICisenteredinthePaymentssectionofthetaxreturn.IntheVolunteerResourceGuide(Tab6),turntothepagetitledOtherTaxesandPayments.FindthelinesonForm1040wheretheAEICandtheEICareenteredonthereturn.
Lesson 30: Earned Income Credit (EIC)
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication596□ Publication4491-W□ Form1040□ Form1040Instructions□ ScheduleEIC
Review objectives with the class.
Point out the resources cited under What do I need?
Direct students to the sample Form W-2 in the Volunteer Resource Guide (Tab 2).
Lesson 30: Earned Income Credit (EIC)30-2
How does a taxpayer qualify for the EIC?
TherearegeneralsetsofrulesforclaimingtheEarnedIncomeCredit:
• Rulesforeveryone
• Rulesfortaxpayerswithaqualifyingchild
• Rulesfortaxpayerswhodonothaveaqualifyingchild
What rules apply to everyone?ThetaxpayermustmeetalltherulestoqualifyfortheEarnedIncomeCredit.TurntothecharttitledSummaryofEICEligibilityRequirementsintheVolunteerResourceGuide(TabH).ReviewPartA,RulesforEveryone,andPartD,EarnedIncomeandAGILimitations.
What is “earned” income for EIC purposes?
Earnedincomeiswages,salaries,tips,andothertaxableemployeepay.TurntotheEarnedIncomeTableintheVolunteerResourceGuide(TabH)forexamplesofearnedincome.
Onetypeofpaymentconsideredearnedincomeis“taxablelong-termdisabilitybenefitsreceivedpriortominimumretirementage.”Disabledtaxpayerscansometimesreceiveadisabilitypensionfromthecompanyeventhoughtheyareyoungerthanthemini-mumretirementage.Minimumretirementageisgenerallytheageatwhichtaxpayerscanfirstreceiveapensionorannuityfromtheircompanyiftheyarenotdisabled.
TaxpayersusuallyreceiveForm1099-Rreportingthepension.
TurntotheVolunteerResourceGuide(Tab2),1099-RPensionandAnnuityIncome.FindthepageshowingapictureofForm1099-R.Adistributioncodeof“3”inbox7indi-catesthisisadisabilitypension.
Askifthetaxpayerisstillundertheplan’sminimumretirementage.Iftheyare,reportthisincomeonline7ofForm1040orForm1040A.Iftheyareatorabovethecompa-ny’sminimumretirementage,reportthisasyouwouldaregularpension.Sometimesthecompanyneverchangesthecode3inbox7toindicatethatthisisnowregularpensionincome.
IndividualTaxpayerIdentificationNumbers(ITINs)andAdoptionTaxpayerIdentificationNumbers(ATINs)cannotbeusedwhenclaimingtheEIC.Ifacoupleisfilingajointreturn,bothspousesandallqualifyingchildrenmusthavevalidsocialsecuritynumbers.However,ifavalidnumberisobtainedlaterandthetaxpayermeetsallthequalifications,anamendedreturnmaybefiledclaimingtheEIC.
ThereisalimittotheamountofinvestmentincomeapersoncanreceiveandstillqualifyfortheEIC.For2009,theamountis$3,100.Investmentincomeincludessuchitemsastaxableinterestanddividends,tax-exemptinterest,capitalgainnetincome,andincomefromresidentialrentalproperty.
BothearnedincomeandadjustedgrossincomemustbebelowthelimitsinorderforthetaxpayertoqualifyfortheEIC.Theseamountsareadjustedforinflationeveryyear.
Direct students to the Summary of EIC Eli-gibility Requirements chart in the Volunteer Resource Guide (Tab H).
Review the rules with the students.
Direct students to Form 1099-R in the Volunteer Resource Guide (Tab 2).
Lesson 30: Earned Income Credit (EIC) 30-3
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2),1099-RPensionandAnnuityIncome.
What about combat pay?
Combatpayisnevertaxabletothesoldier.MembersoftheU.S.ArmedForceswhoservedinacombatzonemayelecttoincludetheirnontaxablecombatpayintheirearnedincomeforthepurposesofcomputingthiscreditonly.Doingthismayincreaseordecreasethetaxpayer’sEIC.FiguretheEICamountwithandwithoutthepaybeforemakingtheelection.Iftheelectionismade,allofthenontaxablecombatpaymustbeincluded.Ifbothspousesfilingajointreturnhavecombatpay,theycanindividuallychoosetomaketheelectiononthetaxreturn.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab6),ScheduleEIC-Worksheet.
What about self-employment income?Netearningsfromself-employmentareconsideredearnedincome.Formosttaxpayerswithinthescopeofthevolunteerprogram,“netearnings”forEICpurposeswillbetheamountreportedonline12ofForm1040,minusthedeductionforone-halfofself-employmenttaxthatisreportedintheAdjustedGrossIncomesectionofthetaxreturn.
Reminder: Non-wageincomereceivedfordoingwork(suchasforsidejobsorcontractlabor)isself-employmentincome,evenfortaxpayerswhodonotthinkofthemselvesas“self-employed.”Allself-employmentincomeshouldbereportedonScheduleC-EZ,NetProfitfromBusiness.SincetheVITAprogramonlyinstructspreparersonhowtofileScheduleC-EZ,taxpayerswithalossorotherreasontofileScheduleCwillneedtoseektheassistanceofaprofessionaltaxpreparer.
What about household employee income?
DomesticemployeessuchasmaidsareonlyissuedFormW-2iftheirearningsaremorethan$1,700.Theincomeshouldbeaddedtoline7onForm1040andForm1040Aandline1ofForm1040EZ.IfthereisnoFormW-2,youshouldwriteHSHnexttotheamountonthecorrespondingline.ThisincomeshouldalsobeincludedinthecomputationoftheEIC.
VITAvolunteerspreparingpaperreturnsshouldbesuretousetheEICworksheets(inForm1040Instructions)andcomparewhichmethodwouldprovidethetaxpayerwiththemostbeneficialcredit.
example
Jeff’sself-employmentincomereportedonForm1040,line12is$2,000.Thedeductionforone-halfofhisself-employmenttax,whichisrecordedintheadjust-mentssectionofForm1040,is$141.
HisincomeforEICpurposesis$2,000-$141=$1,859.
VolunteersmustremembertoincludeallallowableexpenseswhencompletingScheduleC-EZ.
Nontaxablecombatpayisshowninbox12ofFormW-2,designatedwithcodeQ.
Ask a volunteer to read the Jeff example.
Lesson 30: Earned Income Credit (EIC)30-4
ExErcisEs
Earned income not qualifying for the EIC
OneincomeitemthatisreportedonFormW-2,butdoesnotqualifyasearnedincomeforEICpurposes,isincomereceivedforworkwhileaninmateinapenalinstitu-tion(includingworkperformedwhileinaworkreleaseprogramorwhileinahalfwayhouse).Whenpreparingapaperreturn,refertotheVolunteerResourceGuide(TabH)tofindthislistedintheEarnedIncomeTable.MakeanoteintheVolunteerResourceGuidethatthisparticularincomeissubtracted fromotherearnedincomeontheEICworksheetinthesectiontitledEarnedIncome.EntertheinitialsPRI andtheamountonthedottedlinenexttoForm1040line7.
Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab6),ScheduleEICWorksheet.
UsetheSummaryofEICEligibilityRequirementsChartintheVolunteerResourceGuide(TabH)toanswerthefollowingquestions.Answersfollowthelessonsummary.
Question 1:AtaxpayerisfilingasMarriedFilingSeparately.CanthistaxpayerqualifyfortheEIC?□ Yes þ No
Question 2: Ataxpayerhasinterestincomeof$3,200.Hisearnedincomeisonly$7,000.Heissingle,hasavalidsocialsecuritynumberandisnotthequalifyingchildofanyoneelse.DoeshequalifyfortheEIC?□ Yes þ No
What are the rules for taxpayers with qualifying children?
ThetaxpayermustfileForm1040orForm1040AtoclaimtheEICwithaQualifyingChild.ThetaxpayerhasaqualifyingchildforEICpurposesifthechildmeetsall thetestsoutlinedintheVolunteerResourceGuide(TabH).AshortversionoftherulesisshowninPartB,RulesIfYouHaveaQualifyingChild.AdetailedversionisonthenextpageoftheVolunteerResourceGuide.
UsingtheInterviewTips(EICwithaQualifyingChild)fromtheVolunteerResourceGuide(TabH),basedonwhatwehavelearnedsofaraboutRobynandherfamily:
Step1isYES
Step2isYES
Step3isYES
Step4isNO
Step5isYES
example
Robynis25yearsold.Sheandher2-year-oldson,Aiden,livedwithRobyn’smotherallyear.Aidenhasavalidsocialsecuritynumber.
Married Filing Sepa-rately does not qualify for the EIC.
His investment income exceeds $3,100 for 2009.
Assign the exercises.
Review answers with the class when com-plete.
Review these rules with the students.
Remind students of the new tax law change allowing earned income credit for three or more qualifying children.
Read the Robyn example.
Direct students to the EIC with a Qualifying Child Interview Tips in the Volunteer Resource Guide (Tab H).
Lesson 30: Earned Income Credit (EIC) 30-5
Forstep6,checktoseeifAidencanbeanyoneelse’squalifyingchild,forEICpurposes.
WhoelselivedinthehousethatisrelatedtoAiden?Robyn’smotheralsoliveswiththem.GothroughthestepstoseeifAidencanbeaqualifyingchildforRobyn’smother.
What are the rules for a qualifying child of more than one person?NEW Onlyonetaxpayercanclaimachildthatmeetstheconditionstobeaqualifyingchildofmorethanoneperson.ReviewtheQualifyingChildofMorethanOnePersonrulesintheVolunteerResourceGuide(TabH).
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab1),MainInformationSheet.
What are the rules for taxpayers without qualifying children?
TaxpayerscanfileForm1040EZ,Form1040A,orForm1040toclaimtheEICwithoutaqualifyingchild.ReviewtherulesintheVolunteerResourceGuide(TabH),underPartC,RulesIfYouDoNotHaveaQualifyingChild.
Direct students to Qualifying Child of More than One Per-son in the Volunteer Resource Guide (Tab H).
Ask the students if they understand the new rule regarding a qualifying child.
ForEICpurposes,aqualifyingchilddoesnothavetobethetaxpayer’sdependentunlessthechildismarried.Forexample,thecustodialparent(theparentthechildlivedwithformorethanhalftheyear)canqualifyfortheEIC.ThenoncustodialparentcannotqualifyforEICbecausethechilddidnotlivewiththatparentformorethanhalfoftheyear.Itdoesnotmatterthatthecustodialparentdoesnotclaimthedependencyexemptionforthechildinthecaseofdivorcedorseparatedparents.
Listthechildrenfromyoungesttooldestinthesoftware.
Foracouplefilingajointreturn,onlyonetaxpayerhastomeettheagerequirement.
Reviewthequestionontheapprovedintakeandinter-viewsheet:Canyourparentsorsomeoneelseclaimyouoryourspouseontheirtaxreturn?Didthetaxpayercheckyesorno?
Clarify the age require-ment for joint filers.
Read the Tom and Martha example.
example
TomandMarthaareamarriedcouple.Tomis66andMarthais58yearsold.Ifallotherrulesaremet,theywouldqualifyfortheEIC.
Ifthechildmeetsthecondi-tionstobethequalifyingchildofmorethanoneperson,onlyonepersoncanclaimthechildasaqualifyingchild.
Lesson 30: Earned Income Credit (EIC)30-6
ExErcisEs (continued)
UsingtheinterviewtipsintheVolunteerResourceGuide,determineifeachofthesetaxpayershasaqualifyingchildorcanclaimtheEIC.Eachchildhasavalidsocialsecuritynumber.
Question 3: Maureen’s20-year-olddaughter,Angie,livedwithherforeightmonthsoftheyear.Angieisnotmarried andisafull-timecollegestudent.IsAngieaqualifyingchildfortheEIC?þ Yes □NoQuestion 4: StartinginFebruaryofthetaxyear,SamhascaredforLisa,the10-year-olddaughterofhisstepson. DoesLisameettheEICrequirementsforaqualifyingchild?þ Yes □NoQuestion 5: ThreechildrenlivewithMira,whocaresforthemasherown:Twila,the3-year-olddaughterofMira’scousin;Chez,Mira’snewlyadopted2-year-oldsonfromEurope,whohaslivedwithMirasinceNovemberofthetaxyear;andDwight,Mira’s20-year-oldson,whoattendscommunitycollegeparttime.Whichofthemarequalifyingchildren?□Twila□Chez□Dwightþ None
Question 6: Amarriedcoupleisfilingjointly.Theyareraisingtheir10-year-oldgranddaughterbecausetheirdaughterisservingalongprisonterm.Theyarealsocaringforanunrelated8-year-oldboywhowasplacedwiththemasafosterchildbytheStateDepartmentforFamilyandDependentChildren.TheyhavewagesandanAGIof$41,463.Assumingtheymeetallothertests,cantheyclaimtheEIC?þ Yes □NoQuestion 7:Imaginethatthemarriedcoupleinthepreviousquestionwasinadifferentsituation:Whatiftheywereonlycaringfortheirgranddaughter?WouldtheybeabletoclaimtheEIC?□ Yes þ No
Question 8:Margie’sdaughter,Aimee,turned23earlyinthetaxyearwhileattendingcollegefulltime.MargieisfilingasHeadofHousehold.MargiehasanAGIof$29,231.Assumingthatsheandherdaughterpassallothertests,canMargieclaimtheEIC?þ Yes □NoQuestion 9:RobandLauraaredivorced.Lauraisthecusto-dialparentforDawn,wholivedwithherallyear.LaurasignedForm8332,allowingRobtoclaimthedependencyexemp-tionforDawnuntilsheturns18.CanRobclaimDawnfortheEIC?□ Yes þ No
Twila fails the relation-ship test; Chez fails the residency test; Dwight fails the age test.
Both children meet the relationship, age, and residency tests.
With just one qualify-ing child, their income would be more than $40,463; they could not claim the EIC.
She meets all the eli-gibility tests to be a qualifying child.
She is a descendent of Sam’s stepson and meets the other eligibil-ity requirements.
Assign the exercises.
Review answers with the class when com-plete.
Dawn fails the resi-dency test; she is the qualifying child of Laura. Form 8332 has no relevance to EIC.
Margie meets the gen-eral eligibility require-ments and Aimee meets the Qualifying Child rules.
Lesson 30: Earned Income Credit (EIC) 30-7
Theapprovedintakeandinterviewsheetasksavolun-teerifthetaxpayerwaspreviouslydisallowedtheEIC.Thevolunteerwouldanswerthequestionbasedontheirexplanationofthequestionduringtheir conversation.
How do I answer the question, “Based on the inter-view, is the taxpayer qualified for the EIC?”
YouanswerthisquestionafteryouhavecollectedallthefactsusingtheinterviewtipsintheVolunteerResourceGuide(TabH).
Optional Class Exercise
MarkandEvelynBellaremarriedandfileajointreturn.Theyhavean8-year-oldchild,JenniferBell,wholivedwiththemtheentireyearandwhomtheyclaimasadependent.TheBellshaveadjustedgrossincomeof$21,250,whichconsistsofwagesof$21,211andinterestincomeof$39.
Youhavealreadyverifiedtheiridentitiesandsocialsecurityinformation.MarkandEvelynarebothage32andnooneispermanentlyandtotallydisabled.
DoMarkandEvelynqualifyfortheEIC?þ Yes □No
How is the correct Earned Income Credit amount calculated?
ThecreditisdeterminedusingworksheetsandtheEarnedIncomeCredittables.
YouwillalreadyhavedeterminedifyourtaxpayerqualifiesfortheEICfromtheinforma-tionyougatheredtoanswerquestionsontheapprovedintakeandinterviewsheet.
TheEICworksheetscanbefoundinForm1040,1040Aor1040EZInstructions.Everytaxpreparerortheirsiteshouldhaveatleastonesetofinstructionbooklets.
Combat Pay Election
Ifataxpayerhascombatpaylistedinbox12ofFormW-2markedwithcodeQ,andyouarepreparingapaperreturn,youmayneedtopreparetwoEICworksheetstodetermineifthecombatpayshouldorshouldnotbeaddedtoyourtaxpayer’sincome.
Ifthiselectionischosen,writethecombatpayamountbytheEIClineofthepaymentsectionofthetaxreturn.YoucanseethisentryintheVolunteerResourceGuide(Tab6),Form1040–OtherTaxesandPayments.
Where are the EIC tables and how do I use them?
TheEICtablesarelocatedintheappendixofPublication4491-W.AdditionaltablesareinPublication596,Form1040andForm1040A.TheForm1040EZInstructionsonlycontaininformationfortaxpayerswithnochildren.
Let’slookatthosetablesnow.TurntothefirstpageoftheEICtables.
SpecialrulesapplyifthetaxpayerwaspreviouslydeniedEIC.SeetheVolunteerResourceGuide(TabH),DisallowanceoftheEarnedIncomeCredit.
They meet the general requirements and their daughter meets all the qualifying child tests.
Ask students to find the EIC tables in Publica-tion 596 or in the Form 1040 Instructions.
Double-checkthattheheadingonyourpagesays“EarnedIncomeCredit(EIC)Table.”ItiscommontomistaketheTaxTablesfortheEarnedIncomeCredittables.
Lesson 30: Earned Income Credit (EIC)30-8
Class Exercise
AtaxpayerisfilingHeadofHouseholdandhasonequalifyingchild.TheearnedincomeandAGIis$19,000.HowmuchistheEICthispersonisentitledto?
Noticeatthetopofthetableyoufindyouramountinthe“Atleast-Butlessthan”column.Thengoacrossandfindthecorrectfilingstatuscolumn:Single,HeadofHouseholdandQualifyingWidow(er),orinaseparatecolumn,MarriedFilingJointly.Sub-columnsbreakitdownto“Nochildren,Onechild,Twochildren,Threechildren.”TheEICshouldbe$2,627.Ifyoudidn’tgetthisanswer,tryagain.
YouwouldentertheamountontheEarnedIncomeCreditlineinthePaymentssectionofthereturn.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab1),MainInformationSheet“Dependents/Nondependents”entriesand(Tab6),ScheduleEICWorksheet.
Do I need to attach Schedule EIC or the Schedule EIC worksheets to the return?
Ifthetaxpayerhasatleastonequalifyingchild,completeScheduleEIC,EarnedIncomeCreditQualifyingChildInformation,andattachittothetaxreturn.TaxpayerswithnochildrenmakeadirectentryontheEICline.
TaxsoftwarewillprintScheduleEICtobeattachedtothetaxpayer’scopyofthereturn. Ifyouarenotusingasoftwareprogram,besuretoattachScheduleEICtothetaxpay-er’sreturnandgivethemacopyalso.
Donotattachtheworksheetstothereturn.Givethemtothetaxpayerwithhis/hercopyofthereturn.
Practice – Vanessa Franklin
Takealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-35andreviewthesampleinterviewswithVanessarelatedtothislesson.YouwillalsofindanoptionalexerciseofcompletingherEICworksheet.
Summary
TheEarnedIncomeCreditcomputationisbasedonfilingstatus,numberofqualifyingchildren(1-3),earnedincome,andadjustedgrossincome.Certainindividualswithnochildrenmayalsoqualify.
Byusingtheapprovedintakeandinterviewsheet,theinterviewtipsintheVolunteerResourceGuideandcorrectlyfillingouttheEICworksheets,mostoftheerrorsthatarrivefromincorrectlycomputingtheEICcanbeavoided.
TaxpayerswhoreceivedadvanceEICpaymentswillhavetheamountenteredinbox9oftheirFormW-2.Theyarerequiredtofileataxreturn.
TheEICisenteredinthePaymentssectionofthereturn.SeeVanessa’scompletedworksheetsinAppendixB.
Walk through the Class Exercise or assign it and review it with the class when complete.
Display or direct students to the EIC checkbox on the Main Information Sheet in the Volunteer Resource Guide (Tab 1).
Review the lesson summary with the class.
Direct students to Appendix A-35.
Lesson 30: Earned Income Credit (EIC) 30-9
ExErcisE answErs
Answer 1: No. Married Filing Separately does not qualify for the EIC.
Answer 2: No. His investment income exceeds $3,100 for 2009.
Answer 3: Yes. Daughter Angie meets all the eligibility tests to be a qualifying child.
Answer 4: Yes. Lisa is a descendent of Sam’s stepson and meets the other eligibility requirements.
Answer 5: None of the children under Mira’s care are qualifying children for the EIC. Twila does not meet the relationship test, Chez does not meet the residency test, and Dwight does not meet the age test.
Answer 6: Yes. Both children meet the relationship, age and residency tests.
Answer 7: No. With just one qualifying child, the married couple’s income would be more than the limit of $41,463 for 2009, so they cannot claim the EIC.
Answer 8: Yes. Margie meets the general eligibility requirements and Aimee meets the Qualifying Child rules.
Answer 9: No. While Rob can claim his daughter as a dependent, the daughter did not live with him for more than half the year, so she fails the residency test. Dawn is the qualifying child of Laura. If you are filing a paper return, be sure to write Dawn’s information on Schedule EIC.
Optional Class Exercise Answer: Yes, Mark and Evelyn Bell both meet the general eligibility requirements and their daughter meets all the qualifying child tests.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 30: Earned Income Credit (EIC)30-10
Notes
Lesson 31: Refund and Amount of Tax Owed 31-1
Instructor Notes
Introduction
ThislessoncoverstheRefundandAmountYouOwesectionsofthetaxpayer’sreturn.Aftercompletingthislesson,youwilldetermineifthetaxpayerhasoverpaid(arefundisdue)orhasunderpaidtheirtax(balanceisduetothegovernment).Thispartofthereturnisasummaryofthetax,credits,andpayments.
Tocompletethesesectionsofthetaxpayer’sreturn,youwillneedtoconfirmanswersprovidedduringyourinitialinterviewtoPartIII,Item1and2regardingdirectdepositanddirectdebitfromthetaxpayer’sapprovedintakeandinterviewsheet.Also,reviewtheVolunteerResourceGuide(Tab6)and(Tab13).
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Identifytheapplicablesectionandlinesof Form1040fortherefundoramountowed
• Reportthecorrectamountofrefundor amountowed
• Identifytherefundoptionsavailable
• Describethedifferentpaymentoptionsfortheamountowed
• IdentifytheThirdPartyDesigneeportionofthetaxreturnanddetermineitspurpose
How do I know if the taxpayer is due a refund?
Thetaxpayer’stotaltaxappearsontheapplicablelineintheOtherTaxessectionofForm1040.
Thetaxpayer’stotaltaxpaymentsalreadymade,whichincludesrefundablecredits,appearsontheapplicablelineinthePaymentssectionofForm1040.
Ifthepaymentsmadeexceedtheamountoftaxliability,theamountoftheoverpay-mentisshownontheapplicablelineintheRefundsectionoftheForm1040.Thisistheamountthetaxpayerhasoverpaid.
Lesson 31: Refund and Amount of Tax Owed
Review objectives with the class.
Point out the resources cited under What do I need?
Display or refer to this section of Form 1040 so the tax preparers can see how the overpay-ment is shown and the options for the over-payment.
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form1040□ Form8888□ Form9465□ FormW-4□ FormW-4POptional: □ Publication 594□ Publication 4541□ Publication4542□ Form2210andInstructions
Lesson 31: Refund and Amount of Tax Owed31-2
What are the options for an overpayment?
Taxpayerscanchooseto:
• Applyanyportionoftheiroverpaymenttothefollowingtaxyear
• Receivetheirrefundusingdirectdeposit
• Receivetheirrefundasacheck
How do I apply part of the overpayment to the following year?
Fortaxpayerswhowanttoapplyaportionoftheoverpaymenttonextyear’staxes,entertheamounttobeappliedtothefollowingyearontheapplicableline.Byenteringanamountonthisline,thetaxpayeriselectingtoapplyalloraportionofthecurrentyear’soverpaymenttonextyear’sestimatedtax.
Tax Software Hint: Thesoftwareshowstheremainingamounttoberefundedtothetaxpayerontheamounttoberefundedline.
How do I indicate that the entire refund should be sent to the taxpayer?
Fortaxpayerswhowanttheentirerefundsenttothem,leavethelineforamountappliedtoestimatedtaxblankorenter“0.”
Tax Software Hint: Thetaxsoftwareshowstheentirerefundamountontheamounttoberefundedline
Refundchecksareusuallymailedwithin6to8weeksafterthereturnisfiled.However,insteadofgettingapapercheck,taxpayersmaychoosetohavetheirrefunddepositeddirectlyintotheiraccountatabank,creditunion,orotherfinancialinstitution.Inaddi-tion,taxpayerscanrequestthattheirrefundbedepositeddirectlyintoaTreasuryDirectonlineaccounttobuyU.S.Treasurymarketablesecuritiesandsavingsbonds.Detailscanbefoundatwww.treasurydirect.gov.
NEW Forthe2010filingseason,taxpayerscanusetheir2009taxrefundtobuyU.S.savingsbonds,evenwithoutabankaccountoranexistingaccountwithTreasury.Checkwww.irs.govforthelatestinformationandalistofquestionsandanswers.
Encouragetaxpayerstousedirectdeposit,whichismuchfaster,safer,andmoreeffi-cient.Withane-filedreturn,adirectdepositisusuallyreceivedwithin10to14days.
How do I enter the information for direct deposit?
Tax Software Hint: Makesurethetaxpayershowsyouproofofthisbankinfor-mation.Bankdepositslipsarenotareliablesourceforroutingandaccountnumbersfordirectdeposit.Forsoftwareentries,gototheVolunteerResourceGuide(Tab1)MainInformationScreenonDirectDeposit.
GototheVolunteerResourceGuide(Tab13),PointersforDirectDepositofRefunds,whichincludesadiagramshowingwheretofindtheroutingtransitnumber(RTN)anddepositoraccountnumber(DAN)informationonacheck.
Directdepositofataxpayer’srefundistobemadetoanaccount(oraccounts)onlyinthetaxpayer’sname.Advisetaxpayerstheirrefundsmayonlybedepositeddirectlyintotheirownaccounts.
Ask students to find Direct Deposit of Refunds in the Volun-teer Resource Guide (Tab 13), Finishing the Return. Review the main points.
Lesson 31: Refund and Amount of Tax Owed 31-3
Tax Software Hint:GototheVolunteerResourceGuide(Tab1),MainInformationScreen,forsoftwareentriesrelatedtodirectdeposit.Fordirectdepositintooneaccount,thesoftwaremakessuretheinformationwasenteredproperly.Iftheinformationdoesnotmatch,theprogramwillgiveyouawarningduringdiagnosticsinthecompletionphaseofthereturn.
Can the refund be deposited into more than one account?
Taxpayerscanchoosetodividetheirdirectdepositrefundamonguptothreeaccounts.Forexample,apersonexpectingarefundof$500couldchoosetodeposit$200intoacheckingaccount,$200intoasavingsaccount,and$100intoanIRAaccount.
Tax Software Hint:UseForm8888,DirectDepositofRefundtoMoreThanOneAccount,tolisttheRTNandaccountnumberforeachdeposit.Form8888isnotrequirediftherefundistobedepositedintoasingleaccount.GototheVolunteerResourceGuide(Tab6),SplitRefundOptionpageforthesoftwareentries.
What if the taxpayer makes a mistake on the return that increases the amount of the refund?
TheIRSrecommendsusingelectronicfilingtoavoidmatherrorsandothercommonproblemsthatcanrequireadjustmentstoareturnafteritisfiled.Ifanadjustmentresultsinalargerrefundthanexpected,theIRSaddsthedifferencetothelastaccountdesignatedfordirectdeposit.
What if the taxpayer makes a mistake on the return that decreases the amount of the refund?
Ifanadjustmentresultsinasmallerthanexpectedrefund,theIRSusesabottom-upruleanddeductsthedifferencefromthedirectdepositamountdesignatedforthelastaccountshownonForm8888.Ifthedifferenceexceedstheamountdesignatedforthelastaccount,theIRSdeductstheremainderfromtheamountdesignatedtothenextaccount,untiltheamountdueispaid.
Iftheroutingandaccountnumbersarenotvalid,therefundwillbedelayed4-6weeks.Ifthedirectdepositisrejected,apapercheckwillautomaticallybemailedtotheaddressonthereturn.
Ask a student to read the Tax Software Hint.
Whenanadjustmentismadetoataxrefund,theIRSsendsaletterexplaininganyerrorsthatresultedintheadjust-ment,aswellasanychangesmadetotherefundamountandtheamountofeachdirectdeposit.
Ask a volunteer to read the Joan example.
Review the tip for adjustments to split refund requests. Remind volunteers that the IRS issues a notice to the taxpayer explain-ing the adjustment.
example
Joan’sreturnshowsarefundof$300andsheaskstheIRStosplitherrefundamongthreeaccountswith$100toeachaccount.Duetoanerror,herrefundisdecreasedby$150.TheIRSwilladjustherdirectdepositsasfollows:
Requested Actual DirectDeposits DirectDeposits
Account1 $100 $100
Account2 $100 $50
Account3 $100 $0
Lesson 31: Refund and Amount of Tax Owed31-4
Review the caution.
TheIRSwillapplythissamebottom-upruletoadjustdirectdepositsforrefundoffsetsforunpaid federal taxesoriftheearned income credit (EIC) portion of the taxpayer’s refundiswithheldpendingfurtherreview.AftertheEICreview,ifarefundisallowed,itwillbedirect-depositedintheaccountlistedfirstonForm8888.
What happens if the taxpayer owes other debts like student loans or child support?
Iftherefundisdecreasedduetoanoffsettopaystateincometax,childsupport,orcertainfederalnontaxdebts,suchasstudentloans,thenthedecreasewillbetakenfirstfromtheaccountthatappearsfirstonthepaymentfilereceivedfromtheIRS.TheIRSpaymentfileordersaccountsfromthelowesttothehighestroutingnumber.Ifthedebtexceedsthepaymentdesignatedfortheaccountthatappearsfirstonthepaymentfile,FinancialManagementService(FMS)willreducethepaymentdesignatedfortheaccountthatappearsnext.
What should I watch out for?
Double-checktheRTNofthefinancialinstitutionbeforethereturnistransmittedif:
• Youareunfamiliarwiththefinancialinstitution.
• TheRTNisforacreditunionthatispayablethroughanotherfinancialinstitution.ThetaxpayershouldcontacttheircreditunionforthecorrectRTN.
• Ifmorethanoneaccountisselectedfordirectdeposit,besurethattheamountsonForm8888equaltherefundamountonForm1040.
example
Billasksthathisrefundof$780bedepositedintothreedifferentaccounts:$300intoAccount1,$300intoAccount2and$180intoAccount3.However,Billowesfederaltaxesof$290onanearliertaxyear,andafterthisisoffsetonly$490remainstobedirectdeposited.Account3willreceive$0,Account2willreceive$190andAccount1willreceive$300.
example
Melanieisduearefundof$1,000.$700oftherefundisanEarnedIncomeCredit.Sheasksthatherrefundbesplitintothreedifferentaccounts:$500intoAccount1,$300intoAccount2,and$200intoAccount3.Melanie’sEICamountof$700washeldpendingareview.$300wenttoAccount1and$0wenttoAccounts2and3.Later,whentheIRSallowedherEICrefundamount,itwasdepositedintoAccount1.
Ask a volunteer to read the examples.
Point out how each example illustrates the bottom-up rule.
Review the rules for refund adjustments and Form 8888.
Publications4541and4542provideinformationonsplitrefunds,andareavailableelectronicallyonwww.irs.gov.
Financialinstitutionsgener-allydisallowajointrefundtobedepositedintoanindi-vidualaccount.TheIRSisnotresponsibleifafinancialinsti-tutionrefusesadirectdeposit.
Lesson 31: Refund and Amount of Tax Owed 31-5
ExErcisEs
Assign the exercises.
Review answers with the class when com-plete.
Answersfollowthelessonsummary.
Question 1: Althoughdirectdepositsavespostage,itisnofasterthanreceivingarefundthroughthemail.¨ True þ False
Question 2: Whenenteringanaccountnumberfordirectdeposit,makesuretoincludeallspacesandhyphens.¨ True þ False
How do I know if an amount is owed?
Tax Software Hint: Thesoftwareautomaticallycalculatestheamountthatisowedwhenthepaymenttotalislessthantheamountoftax.RefertotheVolunteerResourceGuide(Tab6),Form1040,page2,OtherTaxesandPayments.ReviewthelineforAmountYouOwe.
ExplaintotaxpayersthatthetaxreturnwillbefilednowandthattheyshouldsubmittheirpaymentoftaxesduenolaterthanApril15.
What forms of payment are acceptable?
Thepaymentoptionsare:
• CheckormoneyordersubmittedwithForm1040-V,PaymentVoucher
• Electronicfundswithdrawal
• Creditcard
• ElectronicFederalTaxPaymentSystem(EFTPS)
Tax Software Hint: GototheVolunteerResourceGuide(Tab13),FinishingtheReturn,toreviewtheinformationonbalanceduereturns.Besuretoreadthisreferenceandrefertoitwhenpreparingareturnthathasanamountowed.IfusingElectronicFundsWithdrawal,locatedatthebottomofpage2ofForm1040,indicatethatthetaxpayerwantstopayallorpartoftheirtaxeselectronically.RefertoVolunteerResourceGuide(Tab6)forelectronicfundswithdrawalsoftwareentries.
Direct deposit is faster.
Enter the number from left to right; leave out all spaces and special characters.
Display or refer to this section of Form 1040.
Ask students to find Balance Due Returns in the Volunteer Resource Guide (Tab 13), Finish-ing the Return.
Point out that credit card payments are made to a private ser-vice provider, and a convenience fee will be charged.
ThepaperForm1040-Vincludes instructions and a tableofIRSServiceCenteraddresses.
Ifthetaxpayerpaystheirincometax(includingesti-matedtax)bycreditordebitcard,theycandeducttheconveniencefeechargedbythecardprocessorasamiscellaneousitemizeddeduction(subjecttothe2%AGIfloor).
Explaintotaxpayerswhohaveanamountowedthatthereturnmustbefiledbytheduedateevenifthefullamountcannotbepaid.Aseparatepenaltyforfilingareturnaftertheduedatemaybeapplied.
Emphasize the main points, Tips, and Cau-tions in this section. Volunteers must under-stand the payment options available to taxpayers on returns with an amount owed.
Taxpayersshouldnotmailcashwiththeirreturns.
Lesson 31: Refund and Amount of Tax Owed31-6
ExErcisEs (continued)
What if the taxpayer cannot pay?
Taxpayerswhocannotpaythefullamountowed,shownontheapplicablelineintheAmountYouOwesectionofForm1040,mayrequestthefollowing:
• Payinfullwithin60or120dayswithnofee;interestandpenaltieschargedonpaymentsafterApril15
• MakemonthlyinstallmentpaymentsbyfilingForm9465,InstallmentAgreementRequest
How do I handle Form 9465, Installment Agreement Request?
Thefollowingoutlineskeyinformationrelatedtoaninstallmentagreement.
• Ifthereturnisbeingfiledelectronically,Form9465canalsobeincludedinthee-filedreturn.
• Whenfilingapaperreturn,Form9465shouldbecompletedandattachedtothefrontofthereturnbeforemailing.
• Iftherequestisgranted,thetaxpayermustalsopayafeeof$105or$52,ifpaymentsaremadebyelectronicfundswithdrawal.Ifthetaxpayer’sincomeisbelowcertainlimits,theymayqualifyforareducedfeeof$43.Taxpayerscanalsorequestareduceduserfeeof$43bycompletingForm13844,ApplicationforReducedUserFeeforInstallmentAgreement.TaxpayerscanobtainForm13844atwww.irs.govorbycallingtheIRSformsnumberat1-800-829-3676.
• IftheIRSapprovestheagreement,anoticeisissuedthatprovidesdetailsoftheagreementandrequeststheuserfeeatthattime.
• InsteadofcompletingForm9465,thetaxpayercanfileanOnlinePaymentAgreement(OPA)attheIRSwebpage.Formoreinformation,gotowww.irs.govandsearchfortheterm“OPA”or,onthe“Ineedto…”list,click“SetUpaPaymentPlan.”
Tax Software Hint: Ifthetaxpayerchoosestoapplyforaninstallmentagree-mentusingForm9465,theformcanbee-filed.RefertotheVolunteerResourceGuide(Tab6),Form1040,page2andrefertothelineAmountYouOweandsoftwareentriesforForm9465.
Question 3: Forwhichofthefollowingwillthetaxpayerbechargedaconveniencefee?
A. Directdepositofarefund
B. Electronicfundswithdrawalofataxpayment
C. Using a credit card to make a tax payment
D. Usingapersonalchecktomakeataxpayment
Assign the exercise.
Review answer with the class when com-plete. The automated system
tells users the fee they will be charged, which covers the costs of credit card processing.
Display or refer to Form 9465. The form and the instructions provide specific details on the process of requesting an install-ment agreement.
Emphasize to volun-teers that they can pro-vide a valuable service to the taxpayer if they are thoroughly familiar with the form and pro-cedures.
Point out that, even if taxpayers are granted an installment agree-ment, interest and penalties continue to accrue until the balance is paid.
Ifpayingthetaxwouldcausethetaxpayeranunduehard-ship,thetaxpayercanaskforanextensionoftimetopaybyfilingForm1127byApril15.Formoreinformation,seeForm1127.
Lesson 31: Refund and Amount of Tax Owed 31-7
Ask two volunteers to role-play the sample interview.
Taxpayer Interview and Tax Law Application
Seymour’spaperForm1040showshistotaltaxis$450.Histaxpaymentscometojust$200.Therefore,Seymourowes$250.
How is the estimated tax penalty calculated?
TheestimatedtaxpenaltyiscalculatedonForm2210,UnderpaymentofEstimatedTaxbyIndividuals,Estates,andTrusts,andreportedontheapplicablelineintheAmountYouOwesectionofForm1040.WhilecompletionofForm2210isoutofthescopeoftheVITA/TCEprogram,itisimportantforvolunteerstohaveanawarenessoftheesti-matedtaxpenaltyprovisions.
What is the Estimated Tax Penalty?
Inmostcases,taxpayersmustmakeestimatedtaxpaymentsiftheyexpecttooweatleast$1,000intax(aftersubtractingwithholdingandcredits)andtheirwithholdingandcreditstobelessthanthesmallerof:
• 90%ofthetaxshownonthecurrenttaxreturn,or
• 100%ofthetaxshownontheprioryear’staxreturn(110%forcertainhigherincometaxpayers;seeForm1040-ES)
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… seymour responds…
The amount of tax you owe for 2009 is $250. You can either mail in a check or money order with the payment voucher, use elec-tronic funds withdrawal, or call in a credit card payment. You’ll have to pay an additional convenience fee for using a credit card.
No, we can designate the date that the debit will occur, any time up to April 15. I would just need to see proof of account to verify your bank account information so I can include the routing and account numbers in your electronic return.
Right. And it saves you the trouble of mailing in the voucher with your payment.
You can do that too. Here’s Form 1040-V, which has been completed for you. Make your check or money order payable to “United States Treasury.” If it’s not already printed on the check, make sure it shows your name, address and daytime phone number. Also, print your social security number and “2009 Form 1040” on the front of your check. Then mail the payment with the voucher. I’ll get the mailing address for you.
Just make sure it gets postmarked no later than April 15. I can e-file your tax return right now, but it’s up to you to make sure you send in your payment on time.
Hmm.Howdoeselectronicfundswithdrawalwork?Doesitcomeoutofmyaccountrightaway?
Andthere’snocharge?
Soundsgoodtome.ButIdon’thavemycheckingaccountinforma-tionwithme.MaybeIshouldjustmailinmypayment.
Thatdoesn’tseemtoohard.
Refer to or display this section of Form 1040.
Lesson 31: Refund and Amount of Tax Owed31-8
ExErcisEs (continued)
Anestimatedtaxpenaltymayapplyifthetaxpayerdoesnotmakeestimatedtaxpaymentsasrequired.
NEW For2009,qualifiedindividualswithsmallbusinessesmaybeeligibletomakesmallerestimatedtaxpayments.SeeForm2210,UnderpaymentofEstimatedTaxbyIndividuals,Estates,andTrusts,formoreinformation.
Therearespecialsituationswhenataxpayerwillnothavetopayapenalty.SeeForm2210andInstructionsorPublication17formoreinformation.
Do I have to calculate the estimated tax penalty?
BecauseForm2210iscomplicated,leavetheestimatedtaxpenaltylineblankonForm1040.ThiswillnotpreventtheIRSfromcalculatingthepenaltyifitisdue.Letthetaxpayerknowthatapenaltymaybeowed,andifso,theIRSwillsendanotice.Ifnecessary,thetaxpayercancompletetheForm2210thatwillbeincludedwiththenotice.
Tax Software Hint:For2009,Form2210willbedefaultedinthesoftwareand$0willbereflectedonline9.Thiswillpreventvolunteerpreparersfromcalculatingtheestimatedtaxpenalty.VolunteerpreparersneedtoinformtaxpayerswithabalanceduewhoaremeetingtheestimatedpenaltyrequirementsthattheymayreceiveanoticefromtheIRS.
Question 4: Dion’stotaltaxliabilityis$1,044.Afterwithhold-ing,sheowes$640.ThismeansDionmighthavetopayapenaltyforunderpaymentofestimatedtax. □ True þ False
How can taxpayers make sure the correct amount of tax is withheld?
FormW-4,Employee’sWithholdingAllowanceCertificate,includesthefollowingtypesofinformationtheemployerusestofigurethetaxpayer’scorrectwithholding:
• Maritalstatus(marriedtaxpayersmayrequesttheemployertowithholdatthehighersinglerate)
• Withholdingallowancesthetaxpayerclaims
• Anyadditionalamounttobewithheld
• Qualificationofexemptstatus
example
Mark’stotaltaxis$1,657for2009.Hiswithholdingis$417.Heowes$1,240.His2008taxwas$2,000.Markwillprobablybechargedanestimatedtaxpenaltybecausetheamountheowesisover$1,000andhiswithholdingandcreditsarelessthan90%ofhis2009taxor100%ofhis2008tax.
Ask a volunteer to read the Mark example.
Ask what if Mark’s previous year’s tax was $300.
Answer: The penalty may be waived since his withholding was more than was due the year before.
Review the Tax Soft-ware Hint.
The tax Dion owes is less than $1,000, so she does not have to pay a penalty.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 31: Refund and Amount of Tax Owed 31-9
Theamountoftaxtheemployerwithholdsfromthetaxpayer’swagesdependson:
• Theamountofpaythetaxpayerearns
• Howoftenthetaxpayerispaid
• Thetaxpayer’sinformationenteredonFormW-4
When should taxpayers submit a revised Form W-4 to their employer?
ThetaxpayermaysubmitanewFormW-4whenevertheywanttoincreaseordecreasethewithholdingamount.
Lifeeventssuchasachangeinmaritalstatus,birthofachild,orpurchaseofahomewillchangeexemptions,adjustments,deductions,andcreditsonthetaxreturn.ThesetaxpayersshouldsubmitarevisedFormW-4totheiremployer.
Insomesituations,gettingtherightamountwithheldisdifficultif:
• Thetaxpayersaremarriedandbothwork
• Thetaxpayershavemorethanonejob
• Thetaxlawregardingdeductionsorcreditschanges
Publication919,HowDoIAdjustMyIncomeTaxWithholding?,hasmoreinformationonthistopic.Taxpayerscangotothewithholdingcalculatoronwww.irs.govtohelpcalculatethecorrectwithholding.
How do taxpayers request an increase or decrease in withholding for other income payments?
Taxpayerscanusethefollowingwithholdingformstorequestachangeintheirwithholdingonothertypesofincome.
• FormW-4P,WithholdingCertificateforPensionorAnnuityPayments
• FormW-4S,RequestforFederalIncomeTaxWithholdingfromSickPay
• FormW-4V,VoluntaryWithholdingRequest(generalusedforcertaingovernmentpayments)
RefertoFormW-4instructionstoseetheapplicablelinesataxpayermustcompletetoreviseFormW-4.
example
MarywasclaiminganallowanceforhersononherFormW-4.Marywillnotbeabletoclaimhersonasadependentonnextyear’sreturn.MarywillchangeherFormW-4toreducethenumberofallowancesandsubmitittoheremployer.
example
Johnworkstwofull-timejobs.Hereviewshiswithholdingandrealizeshewillnothaveenoughtaxwithheld.HegiveshisemployerarevisedFormW-4toincreasehiswithholdingsohewillnotowemoneywhenhefileshisreturn.
Itisveryimportanttohelptaxpayerswhoneedassis-tancerevisingtheirwith-holding.Iftaxpayersdidnothaveenoughtaxwithheldin2009,advisethemtosubmitarevisedwithholdingformtoincreasetheamountofincometaxwithheld.
Lesson 31: Refund and Amount of Tax Owed31-10
Which categories of taxpayers may need a withholding “check up” due to making work pay provisions of ARRA?
Taxpayersinoneofthefollowingcategoriesmayneedawithholding“checkup”duetoARRAtaxlawchanges:
• Anemployeewithmultiplejobs
• Amarriedcoupleandbothhusbandandwifework
• Aretireewhoreceivesapensionanddoesnothaveanywageincome
• Anemployeewhodoesnothaveavalidsocialsecuritynumber
• Anemployeewhocanbeclaimedasadependentonsomeoneelse’sreturn
• Anemployeewhoreceivessocialsecuritybenefits,SSI,railroadretirementorveteran’sdisabilitypayments
Thesetaxpayersmayreceiveasmallerrefundorinsomecaseshaveabalancedue.Revisingthewith-holdingshouldbedonetoavoidhavinganamountowed.Volunteersshouldbeabletoprovideassistancetosomeonewhoneedshelpchangingtheirwithholding.Helpfulresourcesincludethewithholdingcalculatoronwww.irs.govandPublication919.
What is the Third Party Designee?
Fortaxpayerswhowanttoallowafriend,familymember,oranotherpersontodiscusstheir2009taxreturnwiththeIRS,the“Yes”boxoftheThirdPartyDesigneeareaofthereturncanbechecked.Youmayseethissituationinthecaseofanindividualgoingoverseas,orelderlyparentswhowishtohavetheiradultchildhandletheiraffairs.Youwillalsoneedtoenterthename,phonenumber,andanyfivenumbersthedesigneechoosesastheirpersonalidentificationnumber(PIN).
Volunteerpreparersmaynot bedesignatedasa“ThirdPartyDesignee.”
RefertotheVolunteerResourceGuide(Tab13),BalanceDueReturns,onhowtoavoidabalancedue.Remembertoadvisetaxpay-erstousethewithholdingcalculatoronwww.irs.govasawaytochecktheirwithholdingfornextyear.
example
Garyisacollegestudentandisclaimedbyhisparentsasadependent.Hehadapart-timejobandfilesareturn.Garyisnoteligibleforthemakingworkpaycreditsincehecanbeclaimedasadependent.Howeverhiswithholdingwasreducedwhenthenewtableswentintoeffect.ItisverylikelyGarywillhaveanamountowedwhenhefileshis2009incometaxreturn.HeshouldsubmitarevisedFormW-4tohisemployersotheywillwithholdmoretaxfromhispayin2010.
example
Pierreissingle,hasanITIN,andworksasanemployeeintheU.S.Heearned$25,000.PierreisnoteligibleforthemakingworkpaycreditbecausehehasanITIN.However,hiswithholdingwasreducedbasedonthenewwithholdingtables.PierreshouldreviseFormW-4tohavehisemployertakeoutmorewithholdingsohewillnotowetaxonhis2010taxreturn.
Lesson 31: Refund and Amount of Tax Owed 31-11
How can I avoid common errors?
Double-andtriple-checktheroutingnumberandaccountnumbersfordirectdepositandelectronicfundswithdrawal.Havethetaxpayercomparethenumberstotheircheckoraccountcard.Ifanerrorismadeinthebankinformation,thetaxpayermustworkwiththebanktoresolveanymisdirectedfunds.
Practice – Vanessa Franklin
Let’sseehowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-37andreviewthesampleinterviewwithVanessarelatedtoLesson31.
Returntothislessonafteryouhavereviewedthisinformation.
Summary
Refunds
Ifthepaymentsmadeexceedtheamountoftax,thentheamountoftheoverpaymentisenteredontheoverpaidlineintheRefundsectionofForm1040.
Taxpayerscanchoosetoapplyanyportionoftheiroverpaymenttothefollowingtaxyear,orreceivetheirrefundasacheckordirectdeposit.DirectdepositscanbesplitamongasmanyasthreedifferentaccountsbyusingForm8888.
Fordirectdepositoftherefund,entertheroutingtransitnumber(RTN)anddepositoraccountnumber(DAN)ontheMainInformationSheetandpage2ofForm1040.Useacheckasproofofaccount.Whenthereturnisprinted,thisinformationwillappearontheapplicablelinesintheRefundsectionofForm1040.
Forthe2010filingseason,taxpayerscanusetheir2009taxrefundtobuyU.S.savingsbonds,evenwithoutabankaccountoranexistingaccountwithTreasury.
Amount Owed
Ifthepaymenttotalislessthantheamountoftaxowed,thetaxsoftwareshowstheamountoftaxowedontheapplicablelineintheAmountYouOwesectionofForm1040andgeneratesacopyofForm1040-V,whichisusedformail-intaxpayments.
ExplaintotaxpayersthatthetaxreturncanbeelectronicallyfilednowbutthattheymustsubmittheirpaymentoftaxesduenolaterthanApril15.Theycanpaywithacheckormoneyorder,withForm1040-V,electronicfundswithdrawal,oracreditcard.
Iftaxpayersareunabletopay,theymayrequestaninstallmentagreementbysubmit-tingForm9465.Thiscanbedonewiththereturn,whetherfiledelectronicallyoronpaper.TaxpayerscanalsousetheOnlinePaymentAgreementfeatureonwww.irs.gov.
Interestandpenaltyischargedonamountsnotpaidbytheduedate.Therearefeesassociatedwithcertainpaymentoptions.
Review the lesson summary with the class.
Direct students to Appendix A-37.
SeePublication17forinformationonwhatthetaxpayerisauthorizingwhendesignatingathird-partydesignee.
Lesson 31: Refund and Amount of Tax Owed31-12
ExErcisE answErs
Estimated Tax Penalty
Ifitappearsthetaxpayerowesanestimatedtaxpenalty,advisethetaxpayerthattheIRSwillcalculatethepenaltyandsendabill.
Adjusting Tax Withholding
Taxpayersmayneedawithholding“checkup”duetomakingworkpayprovisionsofARRA.Helptaxpayerswhoneedassistancerevisingtheirwithholding.Iftaxpayersdidnothaveenoughtaxwithheldin2009,advisethemtosubmitarevisedFormW-4(totheiremployer)orFormW-4P(toapensionpayer).Availableresourcesincludethewithholdingcalculatoronwww.irs.govandPublication919.
Third Party Designee
Taxpayerscanauthorizeafriend,familymember,oranotherpersontodiscusstheirreturnwiththeIRS.VolunteersshouldneverdesignatethemselvesasaThirdPartyDesignee.
Answer 1: False. Taxpayers will receive their refund faster if they use direct deposit.
Answer 2: False. Enter the account number from left to right, leaving out all spaces and special characters.
Answer 3: C. The credit card processor covers its costs by assessing a “conve-nience fee” to taxpayers using this system. Taxpayers will be advised of the amount of this fee when they call the interactive voice response system.
Answer 4: False. The tax Dion owes is less than $1,000, so she does not have to pay a penalty.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 32: Quality Review of the Tax Return 32-1
Instructor Notes
Introduction
Thislessoncoversthefinalstepsinthereturnpreparationprocesswhichincludesconfirmingtheaccuracyofthetaxpayer’sreturn(beforeobtainingtheirsignature).Ifyoutakethestepsidentifiedinthislesson,youwillpreventoratleastminimizetaxpayerinteractionwiththeIRSabouttheirreturn.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Identifythethreemethodsofqualityreview
• Performaqualityreviewusinganapproved qualityreviewsheet
• Performthefinalstepsforcompletingareturn
How is a quality review of a return completed?
Alltaxreturnspreparedatvolunteertaxpreparationsitesmustbequalityreviewed.Thepreferredmethodistoreviewapapercopyofthetaxreturn,alongwithallsourcedocuments,evenifthereturnwaspreparedelectronically.Thetaxpayershouldbepresentforthequalityreview.
Toperformaqualityreviewofataxreturn,useForm8158,QualityReviewSheetoranapprovedalternative,orForm13614-CandthetoolsintheVolunteerResourceGuide.Dependingonthesite,oneofthreemethodsofqualityreviewmaybeusedbyanindi-vidualcertifiedattheIntermediatelevelorabove:
• Acertifieddesignatedreviewer(designatedqualityreview)–thepreferredmethod
• Certifiedpreparersrevieweachother’swork(peerreview)
• Certifiedpreparersreviewtheirownwork(self-review)
Theapprovedqualityreviewsheetisalistofitemsthatmustbeverifiedwhenreviewingtaxforms.Reviewingtheseitemspreventscommonerrorsfromoccurring,suchasincorrectnames,transposedsocialsecuritynumbers,incorrectincome,orincorrectcredits.
Lesson 32: Quality Review of the Tax Return
Review objectives with the class.
Point out the resources cited under What do I need?
What do I need?
□ ApprovedIntakeandInterviewSheet
□ ApprovedQualityReviewSheetorForm8158
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form8879Optional:□ Form8283□ Form8332□ Form8453
QualityReviewersmustbecertifiedattheIntermediatelevelorabove.
Volunteersshouldalwaysreviewtheirwork,evenifitistobereviewedbyanotherparty.
Lesson 32: Quality Review of the Tax Return32-2
How do I conduct a quality review of a return?
First,makesureyoufullyunderstandthetaxpayer’staxsituation.Iftheintakesheetisnotcomplete,thequalityreviewershouldeithercompleteitwiththeassistanceofthetaxpayerorreturnittothepreparertobecompletedwiththetaxpayer.Allapprovedpartner-createdqualityreviewsheetsshouldhaveasimilarchecklist.
Thetaxpayer’ssectioncanbecompletedbythetaxpayer,butshouldbevalidatedpriortothereturnpreparationandduringthequalityreviewprocess.Reviewthetaxreturnwiththetaxpayertoensuretheitemsontheintakesheetwerecorrectlymarkedbythetaxpayerandcorrectlytransferredtothereturn.
Iftheintakesheetdoesnotvalidatewhatislistedonthereturn,eithermaketheappropriatechangesorfollow-upwithadditionalquestionstothereturnpreparer.
Performthereviewwiththetaxpayerimmediatelyaftercompletingthereturnandbeforethetaxpayersignsit.Simplycomparethequestionsontheapprovedqualityreviewsheetwiththeinformationshowninthereturn.
UseCheckYourWork-TheQualityReview(Tab13)andtheJobAidforVolunteersintheVolunteerResourceGuidetoconductthereview.
When should the taxpayer sign the return?
TaxpayerswhofilepaperreturnsmustsignanddatethereturnintheSignHeresectionofForm1040.A return is not considered to be valid, and refunds are not issued, unless the return is signed.
TheVolunteerResourceGuidehascompleteinstruc-tionsonsignatureproceduresfordifferenttypesofsituations.PleasereviewFinishingtheReturnintheVolunteerResourceGuide(Tab13).ReturnSignatureandPINGuidelinesprovidesdetailedguidelinesforobtainingtaxpayersignatures.
Publication17alsocontainsinformationonsignatureprocesses.Besuretoreviewinformationonwhensomeonecansignforthetaxpayer.Rulesforareturnsignedbyapowerofattorneyareveryspecific.
Do I have to enter a site number?
TheIRScapturesawiderangeofimportantstatisticalinformationfromtaxreturns,includingwhichreturnswerepreparedatVITA/TCEtaxpreparationsites.Therefore,itisimportantthatallreturnsbeidentifiedwiththesiteidentificationnumber.
Youmustensurethatthesite’sidentificationnumber(SIDN)hasbeenenteredinthebox“Preparer’sSSNorPTIN.”Do not complete any other information in the Paid Preparer’s Use Only section.
Checkreturnsforaccuracy–reviewsocialsecuritynumbers,double-checkmath,verifyamountstransferredfromschedulesandtaxtables.
MembersoftheArmedForcesmayhavedifferentrulesforsigningjointreturns.SeePublication3.
Alwaysincludethetaxpayerinthequalityreviewprocess.
Returnspreparedbyvolun-teertaxpreparersshouldbesignedbythetaxpayerafterthequalityreviewiscomplete.
Correctionsmustbemarkedontheintakesheetbythepreparerorqualityreviewer.
Remind the students that both spouses must sign and date a Married Filling Jointly return.
Direct students to the signature procedures in the Volunteer Resource Guide (Tab 13).
Lesson 32: Quality Review of the Tax Return 32-3
ExErcisEs
SomeVITA/TCEtaxpreparationsitesprovideyouwithpaperreturnformsthatare pre-printedwiththesite’sidentificationnumber(SIDN),whichisaneight-digitfigurestartingwiththeletter“S,”inthePaidPreparerSectionofthereturn.SomesitesmayprovidelabelsorstampswiththeSIDN.YourSiteCoordinatorprovidesthisnumberalongwithothernecessaryguidelinesforcompletingthereturn.
Ifyoursitedoesnotuseformswiththepre-printedSIDN,youmustprintyoursite’sentireidentificationnumberinthePreparer’sSSNorPTINfield.Atsitesusingtaxpreparationsoftware,thisinformationisusuallyprogrammedtoautomaticallyprintoneachreturn.
Onceyouhaveobtainedthetaxpayer’ssignatureandenteredtheSIDN,youarereadytoassemblethereturn.RefertoLesson33,ConcludingtheInterviewforthesesteps.
Answersfollowthelessonsummary.
Question 1:Ajointreturnrequiresthesignatureof:
A. Atleastonespouse
B. Both spouses
C. Thespousewiththehighestincome
Question 2: WhatistheformnumberoftheIRSquality reviewsheetusedbymostvolunteersforqualityreview?
What are the final steps in the quality review process?
Oncethetaxreturnhasgonethroughtheestablishedsitequalityreviewprocess,assemblethereturnandensurethatallnecessarydocumentationiscomplete.
IfthetaxpayerhaschosennottouseaSelf-SelectPIN,printtwocopiesofForm8879,andobtainthetaxpay-er’ssignatures.Ifthereturnisajointreturn,makesurebothsignaturesareincludedontheform,otherwisethereturnwillnotbeelectronicallytransmitted.ReviewtheVolunteerResourceGuide(Tab13),CheckYourWork-TheQualityReview,forthefinalstepsintheprocess.
Provide the SIDN (if available) and suggest that students write it in the Volunteer Resource Guide.
Both spouses must sign a joint return, even if only one spouse had income.
Form 8158, Quality Review Sheet, which is contained in Form 13614-C.
Assign the exercises.
Review the answers with the class when complete.
Point out “Distributing Copies of Returns” in the Volunteer Resource Guide (Tab 13).
FormembersoftheArmedForceswhoaresigningjointreturns,refertoPublication3.Electronictransmissionisnotalwayspossible.
Lesson 32: Quality Review of the Tax Return32-4
ExErcisEs (continued)
Question 3: Sandra,whois17,iseligibletouseaSelf-SelectPINtosignherreturnusingtaxsoft-ware.Shedidnotfileataxreturnforthepreviousyear.Canshestillfileanelectronictaxreturnforthe2009taxyear?þ Yes □NoQuestion 4: Whatarethethreemethodsof qualityreview?
Practice - Vanessa Franklin
Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-39andreviewthesampleinterviewwithVanessarelatedtothequalityreviewande-filing.Returntothislessonafteryouhavereviewedthesampleinterview.
Summary
Thislessonexplainedthestepsinvolvedinthequalityreviewprocessforpaperandelectronicreturns.Toperformaqualityreviewofataxreturn,useForm13614-C,Form8158,QualityReviewSheet,oranapprovedalternative,andthetoolsintheVolunteerResourceGuide.
Itmayhelptothinkofthese“checksections”ofForm13614-Cintermsofhowtheyrelatetosectionsofthetaxreturn:
• Taxpayer Identity section:Havethetaxpayerverifythatthename,dateofbirth,SSN,andaddressarecorrect,andthatsupportingdocumentationispresent.
• Spouse and Dependent Identity section:Havethetaxpayerverifythatthename,dateofbirth,SSN,arecorrect,andthatsupportingdocumentationispresent.
• Filing Status:Havethetaxpayerverifythatthefilingstatusiscorrect.Haveyouaskedallthequestionstodeterminethiscorrectly?
• Exemptions:Verifythatthedependentsclaimedmeettheteststoqualify.
• Income: Verifythatthetaxpayer’swagesareaccurateandthatallincomefromForm(s)W-2andotherincomedocuments,suchasForm(s)1099,havebeenincluded.MakesurethatallForm(s)W-2areattached.
• Adjusted Gross Income, Tax and Credits, and Other Taxes: Verifythatalladjust-ments,deductions,andcreditsaresupportedbythetaxpayer’sdocumentationandthatalloftheadjustments,deductions,andcreditsnotedontheapprovedintakeandinterviewsheethavebeenaddressed.
• Standard, Additional, or Itemized Deductions:Ensurethatallinformationiscorrectandsupportformsordocumentationispresent.
• Credits:Ensurethatallappropriatecreditshavebeenreportedandsupportformsordocumentationispresent.
Assign the exercises.
Review the answers with the class when complete.
She must enter 0 for her prior year AGI then use the Self-Select PIN or use the Practitioner PIN and sign Form 8879 to file electronically.
Designated quality reviewer (the preferred method), peer review, and self-review.
Direct students to Appendix A-39.
Review lesson sum-mary with the class.
Lesson 32: Quality Review of the Tax Return 32-5
ExErcisE answErs
• Payments:VerifythatanywithholdinglistedfromForm(s)W-2andothersourcedocumentshasbeenincludedandaddedcorrectly.MakesurethatallForm(s)W-2Gand1099areattachediftaxwaswithheld.
• Refund and Amount You Owesections:Checkthatthedirectdepositand/orsplitdepositinformationiscorrect.Didyouexplaintothetaxpayerhowtopaytaxesthataredue?
• Sign Here section:Remindthetaxpayertosignanddatetheappropriateformsbasedonthefilingmethod(e-fileorpaper-prepared)usedatthesite.Forjointreturns,bothspousesmustsignthedocuments.
• Paid Preparer’s Use Onlysection:MakesurethecorrectSiteIdentificationNumber(SIDN)isentered.TheSIDNistheletter“S”followedbyaneight-digitsiteidentifica-tionnumberthatrepresentsyourparticularsite.
Inaddition,forelectronicfiling,youand/orthedesignatedqualityreviewershouldmakesurethatForms8879aresignedwhenthePractitionerPINsignatureoptionisused.UseoftheSelf-SelectPINsignatureoptiondoesnotrequireForms8879.
Answer 1: B. Both spouses must sign a joint return, even if only one spouse had income.
Answer 2: Form 13614-C or Form 8158, Quality Review Sheet.
Answer 3: Yes. Sandra will need to enter zero (“0”) for her prior year’s AGI in order to use the Self-Select PIN, or she may sign Form 8879 in order to file her 2009 tax return electronically.
Answer 4: Designated quality reviewer (the preferred method), peer review, and self-review.
Lesson 32: Quality Review of the Tax Return32-6
Notes
Lesson 33: Concluding the Interview 33-1
Instructor Notes
Lesson 33: Concluding the Interview
Introduction
Inthislesson,youwillreceiveinsightsandinformationforconcludingyourinterviewwiththetaxpayer.
UsingtheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson,suchasactivelisteningandbuildingrapport,sharethefollowingwiththetaxpayers:
• Whichrecords/documentationtheyshouldkeepandwhy
• Whatdocumentationaboutthemismaintainedatthesite–why,howlong,etc.
• Whattheyneedtoknowanddoiftheyoverpaidtheirtaxes(i.e.,refundduedates,increasingthenumberofexemptionsonFormW-4toavoidoverpayments,etc.)
• Whattheyneedtoknowanddoiftheyoweadditionaltaxes(i.e.,paymentduedatesandestimatedtaxpayments,reducingthenumberofexemptionsonFormW-4toavoidadditionalpayments,etc.)
Theseareimportanttaskstoaccomplishafterthetaxreturniscompleted,qualitychecked,andreadytobefiled.Thewaythatyouconcludetheinterviewcanimpacttaxpayers’attitudestowardthetaxpayingexperienceandtheirsatisfactionwiththevolunteertaxreturnassistanceprogram.Itcanalsomakenextyear’staxpreparationeasierfortaxpayersandthevolunteerwhoassiststhem.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Preparethetaxpacketforfiling
• Identifytherecordsthesitemaintains
• Explaintotaxpayerswhichrecordstheyshouldmaintain
• Estimatewhenrefundswillbepaidtothetaxpayer
• Explaintotaxpayerswhattheyshoulddowhentheyowemoneyandwhattheycandotoavoidowingtaxesinthefuture
• Explaintotaxpayershowtoadjustwithholding
• Explaintotaxpayershowandwhentheycanmakeestimatedpayments
• Endtheinterview
Review objectives with the class.
Point out the resources cited under What do I need?
What do I need?
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Publication730□ Form1040-V□ Form9465Optional:□ Publication505□ Publication 919□ Form1040-ES□ Form8332□ Form8879□ FormW-4□ FormW-4P□ FormW-4V
Lesson 33: Concluding the Interview33-2
How do I prepare the e-filing packet?
Mostvolunteertaxassistancesitesusetaxsoftwaretocreateande-filetaxreturns.Evenso,taxpayersmustretainpapercopiesoftheirreturns.FollowthestepsintheVolunteerResourceGuide(Tab13)topreparethepacket.Ingeneral:
1. Usetaxsoftwaretoprinttheentirereturn,includingallforms,schedules,and attachments
2. Makesurethetaxpayer(s)name(s)andsocialsecuritynumber(s)arelegibleoneverysheet
3. Assemblethepacket:
- StartwithForm1040ontop
- Placeeachform,schedule,andattachmentinthepropersequence,basedonthesequencenumbershownintheupperrightcorneroftheform
Who keeps the records?
What forms should the taxpayer keep?
Advisethetaxpayertokeepacopyofthefollowingdocumentsforatleastthreeyears:
• Form1040withallforms,schedules,andattachments
• Allothertax-relateddocuments,includingForm(s)W-2andForm(s)1099
• Ifapplicable:
- Form8332,ReleaseofClaimtoExemptionforChildofDivorcedorSeparatedParents(orsimilarstatement)
- OriginalPowerofAttorney
• Fore-filereturns,thetaxpayermustalsokeepacopyofthesignedForm8879,IRSe-fileSignatureAuthorization.Thisformisnotneedediftheself-selectpersonalidentificationnumber(PIN)methodisused.
IfPublication730,ImportantTaxRecordsEnvelope,oranalternativeisavailable,placethetaxpayer’scopiesintothatenvelope.
Remindtaxpayerstobringtheenvelopetothesitewiththemnextyear.
Direct students to the Finishing the Return tab in the Volunteer Resource Guide (Tab 13) and review the steps for completing a return using the tax software.
Emphasize that every taxpayer must receive a complete copy of their return before leaving.
Emphasize that it will be important for taxpayers to bring this year’s return to next year’s appointment.
Lesson 33: Concluding the Interview 33-3
What tax return data will the site keep?
Ifapaperreturnisfiled,thevolunteersitewillnotkeepcopiesoftaxpayers’returnsoranyothertaxpayer-relateddocumentation.Taxpayersshouldkeepcopiesoftheirrecords.
Fore-filereturns,thesitewillkeepthefollowingdataconfidentialandinasecureloca-tionuntilDecember31ofthecurrentyear,exceptasnoted:
• Amasterbackupdiskcontainingallelectronicallytransmittedreturns
• OnesignedForm8879(whichwillbeheldfor3years)foreachreturntransmitted(unlessSelf-SelectPINprocedureswerefollowed)
• OnecopyofForm(s)W-2and/orForm(s)1099showingfederaltaxwithheld
• AcopyoftheIRSAcknowledgementReportfortransmittedfederalreturns
• AcopyoftheDeclarationControlReport(DCR)fortransmittedreturnsmaybekept
What should I tell the taxpayer about refunds or balances due?
Fortaxpayerswhoareduearefund:
• Reviewthe2010IRSE-fileRefundCycleChartintheVolunteerResourceGuide(Tab14)andprovidetheexpecteddatetheymayreceiveit.(Thecyclechartwillprovideyouwithdatesfordirectdepositandpaperchecks.)
• Makesurethetaxpayerrealizesthatthisisnotaguaranteeddate,sincedelayscanoccur.
FortaxpayerswhoowemoneytotheIRS(alsoknownashavingabalancedue):
• ElectronicFundsWithdrawalcanbesetuptohavepaymentselectronicallywith-drawnfromanaccount.Thismaybesetupusingtaxsoftwareande-filedwiththereturn;seetheVolunteerResourceGuide(Tab6).
• RemindtaxpayerstosendForm1040-Vtotheappropriateaddressiftheywishtomailapayment;fore-filereturns,Form1040-V,PaymentVoucher,willbegeneratedbythee-filesoftwarewhenthetaxreturnresultsinabalancedue.
• RemindtaxpayersthatpaymentmustbemadebyApril15,2010toavoidpenaltiesandinterest.
• Iftaxpayersrequestaninstallmentagreement,remindthemtosubmitForm9465,InstallmentAgreementRequest,assoonaspossible.
• Iftaxpayerscanpayaportionoftheamountowedbytheduedate,theywon’tbecharged interestandpenaltiesonthatportion.
Ifyoursitedoesnothavestor-agecapabilityorwillnotbeopenafterApril15th,makestoragearrangementswithyourlocalIRSSPECcontact.
Ask students to name the data that the site will keep without look-ing at their study guide.
Advise the students to tell the taxpayers not to spend the refund until they actually get it.
Review Tab 13, Bal-ance Due Returns, with the students.
MakethetaxpayerawarethattheIRSchargesafeeforsettingupaninstallmentagreement.
Lesson 33: Concluding the Interview33-4
How can the taxpayer avoid a balance due next year?
Thereareseveralwaystopaytaxesduringtheyearinordertoavoidhavingabalanceduewhenthereturnisfiled.Dependingonthetaxpayer’ssituation,herearesomesuggestions:
• Taxpayerswhoseincomeismostlyfromwagesorpensionscanadjusttheir withholding.
• Taxpayerswhoseincomeismostlyfromself-employmentorinvestmentscanmakeorincreasetheirestimatedpayments.
• Acombinationofincreasedwithholdingandestimatedtaxpaymentsmayworkbestforsometaxpayers.
How can taxpayers adjust their withholding?
TaxpayersreceivingwageincomecanadjusttheirwithholdingbyprovidingtheiremployerwithanewFormW-4,Employee’sWithholdingAllowanceCertificate. BydecreasingthenumberofallowancesclaimedonFormW-4,theamountwithheldfromeachpaycheckwillincrease.
TohelptaxpayersadjusttheirwithholdingusingFormW-4,theIRSWebsiteprovidesahelpfulwithholdingcalculatoratwww.irs.gov–keyword:calculator.Moreinforma-tioncanbefoundintheFormW-4Instructions,Publication17,TaxWithholdingandEstimatedTaxes,orinPublication919,HowDoIAdjustMyTaxWithholding?
TaxpayerscanalsouseFormW-4torequestanadditionaldollaramountbewithheld.FormW-4canalsobeusedtodecreasetheamountoftaxwithheld.Thismaybeusefulfortaxpayerswhoreceivedlargerefundsduetoexcessivewithholding.
Withholdingfrompensionincomeisvoluntary,notautomatic,asitisforwages.Asaresult,manyretireesdonothavetaxwithheldfromtheirretirementpaymentsandareunpleasantlysurprisedbyabalancedueattheendoftheyear.TaxpayerscanrequestwithholdingfrompensionandannuitypaymentsbysubmittingFormW-4P,WithholdingCertificateforPensionandAnnuityPaymentstothepayer.
Withholdingcanberequestedfromcertaingovernmentpayments,suchassocialsecu-rityandunemploymentcompensation,bysubmittingFormW-4V,VoluntaryWithholdingRequesttothepayingagency.
When should the taxpayer make estimated tax payments?
Estimatedtaxistheamountataxpayerexpectstooweforthetaxyearafterdeduct-inganytaxcreditsorfederalwithholding.Taxpayerswithsignificantincomethatisnotsubjecttowithholding(suchasinterest,dividends,capitalgainsorself-employmentincome)willoftenfindtheyneedtomakeestimatedtaxpayments.
ThedecisiontreeinPublication17,YourFederalIncomeTaxforIndividuals,TaxWithholdingandEstimatedTaxescanhelpdetermineifthetaxpayershouldmakeesti-matedtaxpayments.SeeLesson29,Payments,formoreinformation.
Display (if possible) the online withholding calculator and walk through an example.
Lesson 33: Concluding the Interview 33-5
How is estimated tax figured?
UseForm1040-ES,EstimatedTaxforIndividualstocomputetheamountofesti-matedtaxthatshouldbepaidovertheyear.Thisformincludesworksheetstohelpthetaxpayerestimatetheirincomeandtaxliabilityfortheyear.Thecurrentyear’staxreturncanbeusedasastartingpoint,butanyanticipatedchangesshouldalsobetakenintoaccount.Taxpayersmayalsohavetoadjusttheirpaymentsduringthetaxyearifachangeinincomeorthetaxlawwillaffecttheirtaxliability.
Estimatedtaxpaymentsareduefourtimesayear.IfanyduedatefallsonaSaturday,Sunday,orlegalholiday,thepaymentisduethenextbusinessday.Eachduedatecoversaspecifictimeperiod:
For the period… Due date:January1throughMarch31 April15April1throughMay31 June 15June1throughAugust31 September15September1throughDecember31 January15nextyear
Mostofthetaxpayersyouwillassistwillpaytheirestimatedtaxinfourequalinstall-ments.However,ataxpayercanchoosetomakepaymentsforeachperiodbasedontheactualamountofincomereceivedduringthatperiod.Iftaxpayersdonotpayenougheachpaymentperiod,theymaybechargedapenaltyeveniftheyareduetoreceivearefundwhenthetaxreturnisfiled.Generally,thesimplestandsafestproce-dureistomakesurethateachpaymentisatleastone-fourthoftheprioryear’stotaltax,lesstaxwithheldduringtheperiod.Formoreinformationaboutestimatedtaxpayments,refertoPublication17,TaxWithholdingandEstimatedTaxes,orPublication505,TaxWithholdingandEstimatedTax.
How is estimated tax paid?
EstimatedtaxpaymentscanbesentelectronicallytotheIRSbydirectdebitpaymentfromthetaxpayer’scheckingorsavingsaccount,bycreditcard,orbycheckormoneyorderwithForm1040-ES,paymentvoucher.Eachvoucherisnumberedandinscribedwithitsduedate.Remindtaxpayerstobesuretousethecorrectvoucherforeachpayment.Advisetaxpayerstowritetheirsocialsecuritynumberand“2009Form1040-ES”onthecheckormoneyorderpayabletothe“UnitedStatesTreasury.”
Formoreinformation,seetheForm1040-ESinstructions.
example
Mariaisretired,andheronlyincomeisfromapensionandsomeinvestments.Shehadnowithholdingandisnoteligibleforanytaxcredits.Hertaxlastyear,whileshewasstillworkingfulltime,was$2,760.Whenyoucompleteherreturnthisyear,hertaxtotals$1,300.Mariashouldmakeestimatedpayments,sincehertaxafterwithholdingandcreditswillbemorethan$1,000,andherwithholdingislessthan$1,170(90%ofthisyear’stax).IfMariadoesn’twanttomakeestimatedpayments,shecouldsubmitFormW-4Ptorequestwithholdingfromherpensioninstead.
Ask a volunteer to read the Maria example.
Ask what if next year Maria expects to owe far less than $1,000 after tax withheld and credits.
Answer: She does not need to make estimated tax payments unless she wants to.
Point out that all pay-ments sent to the IRS should be made pay-able to United States Treasury, never to IRS.
Lesson 33: Concluding the Interview33-6
How do I close the contact?
Beforeseeingthetaxpayeroff,showasmuchconcernandinterestasyoudidatthestartofyourtimetogether:
• Explainwhatwillhappennext.
• Askthetaxpayer,“Doyouhaveanyquestionsbeforeyouleave?”
• Advisethetaxpayerhowtogetanswerstoquestionsthatmaycomeuplater.
• Ifthetaxpayerseemsinterestedinlearningmoreabouttaxpreparation,encouragethemtoconsidervolunteering.Providethemwithcontactinformationortaketheircontactinformation,dependingonyoursite’sprocedures.
• Ensurethatyouhavethecontactinformationneededtoreachthetaxpayerincasethereareanyproblemswiththee-filingofthereturn.
• Thankthetaxpayerforusingtheservice.
Does the taxpayer have to do anything else?
Ifthereturnwillbee-filed,givethetaxpayerabriefexplanationofhowtheprocessworks:
• TheSiteCoordinatorordesigneewilltransmitallthee-filereturns.
• Thenextday,theSiteCoordinatorordesigneewillreceiveanacknowledgementforeachsuccessfule-file,orarejectnoticeiftherewasaproblemwiththeelectronicfile.ThemostcommonproblemisanameorsocialsecuritynumberthatdoesnotmatchIRSrecords.
• Ifthee-fileisrejected,theSiteCoordinatorordesigneemayneedtocontactthetaxpayertoresolvetheproblem.
• Ifthereturnisnotbeinge-filed,thetaxpayermustmailthesignedcopyofthetaxreturn,alongwithcopyBofallForm(s)W-2,andonecopyofanyForm1099-Rthatshowsfederalwithholding.ThetaxpayermayneedanothercopyofthereturnandForm(s)W-2iffilingastatereturn.Makesurethetaxpayerknowsthecorrectaddressformailingthereturn(s).Remindthetaxpayerthatthereturnmustbepost-markedbythefilingdeadlineofApril15,2010.
Practice – Vanessa Franklin
Let’sconcludeourinterviewwithVanessa.GotoAppendixA-41andreviewthesampleinterviewrelatedtothislesson.Returntothislessonafteryouhavereviewedthisinformation.
Emphasize the impor-tance of having good contact information to resolve problems if there are issues with the e-filing process.
Direct students to Appendix A-41.
Lesson 33: Concluding the Interview 33-7
Summary
Concludingtheinterviewproperlyensuresthateachtaxpayerhasacompleterecordofthereturn,understandswhatwillhappennext,andknowshowtogetanswerstoques-tionsthatcomeuplater.Ifyouhandletheinterviewwell,itcanhelptaxpayersdevelopamorepositiveattitudetowardthetaxexperience,whichcanfostergreateraccuracyinreturnsandtimelinessinfiling.
Youshouldknowhowtoassemblethetaxpacketandhowtoendtheinterview. Thetaxpayershouldleavewithinstructionson:
• Whichrecordsthesiteismaintaining
• Whichtaxrecordstomaintain
• When(approximately)toexpecttherefund
• Howtoavoidhavingabalancedueinthefuture
Review the lesson summary with the class.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 33: Concluding the Interview33-8
Notes
Lesson 34: Military Finishing and Filing the Return 34-1
Instructor Notes
Introduction
ThislessonwillhelpyouaddressspecialfilingconcernsofUnitedStatesservicemembers.Todothisyouneedtodeterminewhereandwhentofileafederaltaxreturn,whoqualifiesforadeadlineextension,andwhoqualifiesforspecialtaxbenefits.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• IdentifythespecialtaxfilingconcernsofmembersoftheArmedForces
• DescribetheextensionstofilethatareavailableformembersoftheArmedForces
• Determinetheeffectontaxesofbeinginacombatzone
• Identifythetaxforgivenessprovisionsrelatedtomilitaryorterroristactions
What type of identifying information should members of the Armed Forces enter on their tax returns?
MembersoftheArmedForcesshouldentertheirnames,socialsecuritynumbers,andpermanenthomeaddressesontheirreturn.However,taxpayerswhoareduearefundanddonotwantitmailedtotheirpermanenthomeaddressshouldenteracurrentmail-ingaddressonthereturn.AmilitarypersonlivingoverseasshoulduseanAPOorFPOaddress.
DirectDepositisafast,simple,safe,andsecure waytoreceivearefundandisidealfortaxpayerswhodonotwantrefundstobemailedtotheirpermanenthomeaddress.Taxpayersentertheirbankrouting andaccountnumbersintheRefundsectionofthereturn.Thetaxpayermuststillprovideapermanenthomeaddress.
What action should be taken when a member of the Armed Forces moves?
TaxpayerswhochangedtheirmailingaddressduringtheyearshouldnotifytheIRSofthechangeonForm8822,ChangeofAddress.
TaxpayerswhomoveafterfilingataxreturnshouldfilloutandmailForm8822totheIRSservicecenterforthestatewheretheirreturnswerepreviouslyfiled.Theservicecentersaddressesarelistedonpage2oftheform.
Lesson 34: Military Finishing and Filing the Return
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication3□ Publication17□ Publication525□ Publication4491-W□ Form1040□ Form4868□ Form8822
Ifthepostalservicedoesnotdelivertothetaxpayer’sstreetaddressandthetaxpayerhasapostofficebox,enterthepostofficeboxnumberonthelineforthepresenthomeaddress.
Review objectives with the class.
Point out the resources cited under What do I need?
Review the tip with the class.
Lesson 34: Military Finishing and Filing the Return34-2
ExErcisEs
Answersareafterthelessonsummary.
Question 1:Tony,whoisduearefund,filedhistaxreturnfromhishomeaddressinFloridaonMarch12.OnMarch30hewastransferredtoPuertoRico.WhereshouldTonysubmithisForm8822,ChangeofAddress?
A. To the IRS service center for Florida
B.TotheIRSservicecenterforPuertoRico
C.Eitheroftheabove
Where and when should members of the Armed Forces file their returns?
Where should the taxpayer file the return?
MembersoftheArmedForcesshouldsendtheirpaper-filedfederalreturnstotheservicecenterforwheretheycurrentlylive.
IfthemilitarymemberisstationedoverseasandhasanAPOorFPOaddress,filethepapertaxreturnwiththeIRSServiceCenterinAustin,Texas,73301-0215,USA.
When should the taxpayer file the return?
Mostindividualtaxreturnscoveracalendaryear,JanuarythroughDecember.
Calendar-yeartaxpayerswholiveintheUnitedStatesorPuertoRicoshouldfiletheirindividualtaxreturnsbyApril 15ofthefollowingyear.
Taxpayerswhohaveabalanceduecanpayby check,moneyorder,electronicfundswithdrawal,orcreditcard.
What can members of the Armed Forces do if they are unable to pay the tax due?
TaxpayerswhocannotpaythetaxduewiththeirtaxreturnshouldattachForm9465,InstallmentAgreementRequest.
IfApril15fallsonaweekendorholiday,thentheduedateisthenextbusinessday.
ManymilitaryfacilitieshaveaVolunteerIncomeTaxAssistancecenterthatwille-filetaxreturns.
He must submit the form to the service center for his previous address.
Assign the exercise.
Review answer with the class when com-plete.
Display or direct stu-dents to Form 9465.
Lesson 34: Military Finishing and Filing the Return 34-3
ExErcisEs (continued)
TheIRSwilltrytoarrangeaninstallmentpaymentagreementthatreflectsthetaxpay-er’sabilitytopaythetaxowed.However,taxpayersshouldpayasmuchaspossiblewiththeirreturntoreducetheamountofinterestandpenaltiesthatwillbeaddedtotheunpaidbalance.
TaxpayerscannowcompleteanOnlinePaymentAgreement(OPA)applicationvia theInternetatwww.irs.gov.Thisapplicationwillallowthetaxpayeroranauthorizedrepresentative(PowerofAttorney)toself-qualify,applyforaninstallment/paymentagreement,andreceiveimmediatenotificationofapproval.
Question 2:TaxpayerswhoattachForm9465,totheirtaxreturnwillavoidinterestchargesonanytaxbalancetheycannotpaybytheduedate.□ True þ False
What are the extension requirements for taxpayers within the U. S.?
DeadlineextensionsareavailabletomembersoftheArmedForceswhoservedinacombatzone.Taxpayerscanreceiveextensionsoftimetofiletheirreturns.DifferentrulesapplytotaxpayerswholiveintheU.S.andthosewholiveoutsidetheU.S.
TheIRSwillchargeinterestontaxesnotpaidby theduedate,evenifanextensionoftimetofileisgranted.Theonlyexceptioniswhenthecombat zoneextensionapplies.
How does a taxpayer get an automatic extension?
TaxpayerslivingintheUnitedStatescanreceiveanautomaticsix-monthextensionoftimetofiletheirfederaltaxreturns.
Togettheautomaticextension,taxpayersmustfileForm4868,ApplicationforAutomaticExtensionofTimeToFileU.S.IndividualIncomeTaxReturn,bytheduedatefortheirtaxreturn(usuallyApril15).Calendar-yeartaxpayerswhotaketheextensionwillhaveuntilOctober15tofiletheirtaxreturn.
SeePublication3,ArmedForcesTaxGuide,forexten-sionsofdeadlinesanddefer-ralsoftaxesduethatmayapplytomembersoftheArmedForces.
The IRS-arranged pay-ment plan will include interest payments.
Display or direct stu-dents to Form 4868.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 34: Military Finishing and Filing the Return34-4
ExErcisEs (continued)
Taxpayerscannotusetheautomaticsix-monthextensionifthey:
• ChoosetohavetheIRSfiguretheirtax,or
• Areunderacourtordertofiletheirreturnsbytheregularduedate
Will the taxpayer owe interest and/or penalties?
AlthoughtaxpayersarenotrequiredtopaytheirtaxduewhensubmittingForm4868,theywilloweinterestonanytaxnotpaidbytheoriginalduedate.Interestwillbechargedfromtheduedatetothedateofpayment.
Inaddition,taxpayersmaybechargedalate-paymentpenaltyiftheamountoftaxpaidbeforetheduedate(fromwithheldtaxesorestimatedtaxpayments)islessthan90%oftheactualtaxowed.
IfForm4868isfiledlate,therequestforanextensionwillbedenied,andtheIRSwillinformthetaxpayerthattherequestwasdenied.
Question 3:Whichofthefollowingcalendar-yeartaxpayerscanreceivean automaticsix-monthextension?
A.Avery,whofiledForm4868inFebruaryandchosetohavetheIRSfigure histaxes
B. Benton, who filed Form 4868 on April 15 and did not include any tax payments
C.Calvin,whofiledForm4868onApril20andincludedataxpaymentthatwasover90%ofwhatheowed
D.Noneoftheabove
How does the taxpayer file the return?
Whenthetaxreturnisactuallyfiled,anypaymentthatwassubmittedwithForm4868shouldbeaddedtothetotalonthetotalpaymentslineofForm1040AorForm1040EZ.
Formoredetailsonpenalties,refertofilinginformationinPublication17.
Benton filed Form 4868 by the return’s due date.
Assign the exercise.
Review answer with the class when com-plete.
Lesson 34: Military Finishing and Filing the Return 34-5
Totheleftoftheline,enter“Form4868”andshowtheamountpaidinordertoreceivecreditforthepayment.
EntertheamountontheAmountpaidwithrequestforextensiontofileline,iffilingForm1040.
What are the extension requirements for taxpayers outside the U.S. and Puerto Rico?
ExtensionrequirementsfortaxpayerswholiveintheUnitedStatesdifferfromthosewholiveoutsidetheU.S.
Who qualifies for an Automatic Two-Month Extension?
U.S.citizensandresidentaliensareallowedanautomatictwo-monthextensiontofiletheirreturniftheyare:
• LivingoutsidetheU.S.andPuertoRicoontheduedateofthereturn,andtheirmainplaceofbusinessorassignedpostofdutyisoutsidetheU.S.andPuertoRico
• MembersoftheArmedForcesandondutyoutsideoftheU.S.andPuertoRicoontheduedateofthetaxreturn
Althoughcalendar-yeartaxpayersinthissituationdon’thavetofileorpayuntilJune15,theywilloweinterestchargedfromtheApril15duedatetothedatethetaxispaid.Inthisinstance,Form4868isnotrequired.
What must taxpayers attach to their return?
Taxpayersusingtheautomatictwo-monthextensionmustattachastatementtotheirreturnstatingthattheymeettherequirements.
What is the extension rule for married taxpayers?
Formarriedtaxpayerswhofilejointly,onlyonespouseneedstomeettherequirementstotakeadvantageoftheautomaticextensiontoJune15.
Formarriedtaxpayerswhofileseparately,onlythespousewhomeetstherequirementsqualifiesfortheautomaticextension.Ifbothspousesmeettherequirements,eachmaytakeadvantageoftheextension.
How can a taxpayer request an additional extension?
TaxpayerswholiveoutsidetheU.S.andPuertoRicoandwhosemainplaceofbusi-nessorassignedtourofdutyisoutsidetheU.S.andPuertoRicocanalsorequestanadditionalextensionbyfilingForm4868bytheautomaticextensiondateofJune15andcheckingtheboxonline8.
TheduedatewillthenbeextendedtoOctober 15.
TravelingoutsidetheUnitedStatesandPuertoRicoontheduedatedoesnotqualifythetaxpayerforanautomatictwo-monthextension.
Point out line 8 on Form 4868.
Lesson 34: Military Finishing and Filing the Return34-6
ExErcisEs (continued)
Question 4: Whichofthefollowingcalendar-yeartaxpayershasuntilJune15tofileataxreturn?(Selectallthatapply.)
A. Weston, who files a joint return with his wife, Sheila. She was stationed in the Philippines from January through May, and they paid their taxes by credit card on April 2.
B.Lilly,wholivesinMexicofromJanuarythroughAprilwork-ingforacompany,returningtohermainbusinessinTexasonMay1.
C.Dwayne,whowasstationedinSouthKoreafrom July1,2009throughJanuary31,2010.
D.Noneoftheabove
Question 5:Pvt.Franklin,aU.S.citizen,isacalendar-yeartaxpayer.WhatwouldtheduedatebeforhimtofileareturnifhisassignedtourisinPuertoRico?
A. April 15
B.June15
D.June16
What are the tax options for combat zone participants?
FormembersoftheArmedForcesservinginacombatzoneorqualifiedhazardousdutyarea,thedeadlineforfilingtaxreturns,payingtaxes,filingclaimsforrefunds,andtakingotheractionswiththeIRSisautomaticallyextended.
ThedeadlinefortakingactionwiththeIRSisextended180daysafterthelaterof:
• Thelastdayinacombatzone/qualifiedhazardousdutyarea
• Thelastdayofanycontinuoushospitalizationforinjuryfromserviceinacombatzoneorqualifiedhazardousdutyarea
Inadditiontothe180-dayextension,thedeadlineisalsoextendedbythenumberofdaysthatwerelefttotaketheactionwiththeIRSwhenthetaxpayerenteredacombatzone(orbeganperformingqualifyingserviceoutsidethecombatzone).Ifataxpayerenteredthecombatzoneorqualifiedhazardousdutyareabeforetheperiodoftimetotakeactionbegan,thedeadlineisextendedbytheentireperiodofthetimetotakeaction.
Generally,spousesofindividualswhoservedinacombatzoneareentitledtothesamedeadlineextension.Therearetwoexceptions:
• Anytaxyearbeginningmorethantwoyearsafterthedatetheareaceasestobeacombatzone
• AnyperiodthequalifyingindividualishospitalizedintheU.S.forinjuriesincurredinacombatzone
Intheseinstances,theextensiondoesnotapplytoaspouse.
Weston and Sheila file jointly so only one must meet the require-ment.
Puerto Rico is not a foreign country.
Lilly’s main business location is in Texas and not Mexico.
Dwayne does not qual-ify for the automatic two-month extension because he was back in the U.S. on the due date.
Assign the exercises.
Review answers with the class when com-plete.
Review these rules with students to ensure they understand their application.
Lesson 34: Military Finishing and Filing the Return 34-7
ExErcisEs (continued)
Publication3willprovideadditionalinformationforcombatzoneextensionofdeadlines.
Question 6: IfamemberoftheArmedForcesservedinacombatzonefromDecember30,2007throughMay31,2009andwasnotinjured,thedeadlineforfilinga2007taxreturnwouldbeextendedbyhowmanydays?
What are other tax options for combat zone participants?
Othersituationsthatcountastimeservedinacombatzoneorqualifiedhazardousdutyareaare:
• Missingstatussuchasmissinginactionorprisonerofwartimecountsastimeserved
• SupportpersonnelincludingRedCross,accreditedcorrespondents,andcivilianpersonnelactingunderthedirectionoftheArmedForces
• HospitalizationoutsidetheU.S.anduptofiveyearsofhospitalizationintheU.S. asaresultofaninjury
When can taxes be deferred?
ReservistscalledtoactivedutyorregularArmedForcesmembersnotinacombatzonemaystillqualifytodeferthepaymentofbacktaxesby:
• Servingtheirinitialperiodofservice(theperiodofactivedutyfollowingrecalltoactivedutyfromaninactivereserveornationalguardunitorforregularmilitary,theperiodfollowinginductionorfirstenlistment),or
• Showingthattheabilitytopaybacktaxeshasbeenmateriallyimpairedbecauseincomehasdroppedasaresultofgoingintomilitaryservice
example
CaptainKristinaJonesenteredacombatzoneonDecember1,2007.SheremainedtherethroughMarch31,2009,whenshedepartedfortheU.S.Shewasnotinjuredanddidnotreturntothecombatzone.Herdeadlinesforfiling2007,2008,and2009returnsare:
•2007taxreturndeadlineisJanuary10,2010.Thisdeadlineisextendedby285days(180plus105)aftertheCaptain’slastdayinthecombatzone.The105additionaldaysarethenumberofdaysinthe3½monthfilingperiodthatwereleftwhensheenteredthecombatzone(January1–April15,2008).
•2008taxreturndeadlineisJanuary10,2010;thedeadlineisextendedby285days(180plus105).
•2009taxreturndeadlineisnotextendedbecausethe180-dayextensionperiodafterMarch31,2009,endsonSeptember27,2009(whichisbeforethestartofthenextfilingperiod,January1–April15,2010).
For 2007, (180 days + 105)
Assign the exercise.
Review answer with the class when com-plete.
Point out the tip about obtaining Publication 3.
Ask a volunteer to read the Captain Jones example.
RequestPublication3ifyoupreparereturnsatamilitarysite.Therearemanyspecialprovi-sionsthatapplytoservicepersonnelandthispublicationisavaluablereference.
Review the rules for combat zone partici-pants and reservists to ensure students under-stand their application.
Lesson 34: Military Finishing and Filing the Return34-8
What are rules for deferment?
ArmedForcesmemberswhohaveacurrentpaymentagreementorreceiveanotice requestingpaymentmustmakeawrittenrequestfordefermenttotheIRS.TheIRSwillrevieweachrequestandadvisethetaxpayerinwritingofitsdecision.
Can other parties assist with a tax return?
Ifataxpayerwantsathird-partydesigneetodiscussataxreturnwiththeIRS,the“Yes”boxinthethirdpartydesigneeareaofthereturnmustbechecked.Also,thetaxpayermustprovidethedesignee’sname,phonenumber,andanyfivenumbersthedesigneechoosesasapersonalidentificationnumber.Volunteersmaynotbenamedasa“ThirdPartyDesignee.”
ApowerofattorneyForm2848mayalsobeusedtograntauthoritytoanindividualtorepresentthetaxpayerbeforetheIRSandtoreceivetaxinformation.Acopymustbeattachedtothereturn.
Usecautionwhenallowingarepresentativetosignforsomeone.SeeSignaturesintheFilingInformationchapterinPublication17formoreinformation.
Ifitisnotpossibletoobtainasignatureforajointreturnfromaspouseservinginthecombatzone,asignedauthorizationtoactonthetaxpayer’sbehalfcanbeaccepted.TheIRSalsoacceptsawrittenstatementexplainingthatthespouseisservinginthecombatzone.Thestatementmustbesignedbythespousewhoisnotservinginthecombatzoneandattachedtothereturn.
What are the tax forgiveness provisions for decedents?
Specialtax-forgivenessprovisionsapplytoindividualswhodie:
• Whileservinginacombatzoneorfromwoundsincurredwhileservinginacombatzone,or
• FromwoundsorinjuriesincurredinaterroristormilitaryactionwhileworkingfortheU.S.govern-ment
Thecombatzonetaxforgivenessprovisionappliesfortheyearofdeathandanyprioryearendingonorafterthefirstdaythattheindividualservedinacombatzone.Anyforgiventaxliabilitythathasalreadybeenpaid,willberefunded.
Thetaxforgivenessprovisionalsoappliestothosetaxpayersservingoutsidethecombatzoneiftheservice:
• Wasindirectsupportofmilitaryoperationsinthezone,and
• Qualifiedthememberforspecialmilitarypayfordutysubjecttohostilefire,imminentdanger,and/orterroristactions
Display or direct stu-dents to the third-party designee section of Form 1040.
Emphasize the importance of using caution when allowing a representative to sign for someone.
Onlythedecedent’spartofthejointincometaxliabilityiseligiblefortherefundortaxforgiveness.
Lesson 34: Military Finishing and Filing the Return 34-9
ExErcisEs (continued)
Question 7: Mr.Morris,acivilianemployeeoftheUnitedStates,diedin2009asaresultofinjurieshesufferedduringaterroristattackin2007.WhatyearsareMr.Morris’incomeliabilitiesforgiven?
A.2007through2008
B.2007through2009
C. 2006 through 2009
What are the rules for filing a return for decedents?
Thepersonalrepresentativemustfilethefinalincometaxreturnfortheyearofdeathandanyreturnsnotfiledforprecedingyears.Asurvivingspousemayhavetofilethereturnsforthedecedent.
Tomakeaclaim,thedecedent’srepresentativemustfile:
• Form1040EZ,Form1040A,orForm1040foreachyearanincometaxreturnhasnotyetbeenfiled
• Form1040Xforeachyearanincometaxreturnhasalreadybeenfiled
Ifanindividualdiedafterthetaxyear,butbeforethereturnforthatyearwasfiled,thereturnforthetaxyearisnotthefinalreturn;itisaregularreturn.Thereturnfortheyearthetaxpayerdiedwillbethefinaltaxreturn.
Thefinaltaxreturnisdueatthesametimethedecedent’sreturnwouldhavebeenduehadthedeathnotoccurred.
Tax Software Hint:Forsoftwareentriesrelatedtofilingadecedent’sreturn,gototheVolunteerResourceGuide(Tab1),MainInformationSheetpages(first2pages).
Forinformationonsigningajointreturnifonespousehasdiedorcannotsignthereturn,seePublication17Index,keyword:Signatures.
Assign the exercise.
Review answer with the class when com-plete.
example
BobdiedinFebruary2009.His2008taxreturn–dueonApril15,2009–isnotthefinaltaxreturn.Thefinaltaxreturnwouldbethe2009Form1040,dueApril15,2010.
Ask a volunteer to read the Bob example.
Lesson 34: Military Finishing and Filing the Return34-10
Summary
ThislessonwillhelpyoudeterminespecialfilingconcernsformembersoftheU.S.ArmedForces.
• Likealltaxpayers,membersoftheArmedForcesshouldsendtheirfederalreturnstotheservicecenterforwheretheycurrentlylive.
• MosttaxpayerswholiveintheU.S.orPuertoRicoshouldfiletheirindividualtaxreturnsbyApril15.
• TaxpayerswhochangedtheirmailingaddressshouldnotifytheIRSofthechangeonForm8822,ChangeofAddress.
• TaxpayerswhocannotpaythetaxduewiththeirtaxreturnshouldattachForm9465,InstallmentAgreementRequest.
• TheextensionrulesvarydependingonwhetherthetaxpayerlivesintheU.S.oroutsidetheU.S.
• FormembersoftheArmedForcesservinginacombatzoneorQualifiedHazardousDutyArea,deadlinesfortakingactionwiththeIRSareautomaticallyextendeduntil180days(plusanytimeremainingtotakeaction)fromthetimethememberleavesthecombatzone/qualifiedhazardousdutyarea.
• TheincometaxliabilityofamemberoftheArmedForcesisforgivenifamemberdiesasaresultofserviceinacombatzoneorfromaterroristormilitaryactionoutsidetheU.S.
• TheterroristormilitaryactionforgivenessalsoappliestoanindividualwhoisaU.S.employeeatdeathanddiesfromwoundsorinjuriesincurredinaterroristormilitaryactionregardlessofwheretheactionoccurred.
Review the lesson summary with the class.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 34: Military Finishing and Filing the Return 34-11
ExErcisE answErs
Answer 1: A. Because he already filed his return from his previous address, Tony should submit Form 8822 to the service center for his previous address.
Answer 2: False. Taxpayers who cannot pay the tax due with their tax return should attach Form 9465, Installment Agreement Request. The IRS will try to arrange an installment payment agreement that reflects the taxpayer’s ability to pay the tax owed. Maximum payments should be made to limit applicable interest and penalty charges on the unpaid tax.
Answer 3: B. To get the extension, taxpayers must file Form 4868 by the return’s due date. They don’t have to pay their tax when submitting Form 4868, but they will owe interest on any tax not paid by the due date.
Answer 4: A. For Weston and Sheila, who file jointly, only one spouse needs to meet the requirements to take advantage of the automatic extension. In scenario B, Lilly does not qualify for the two-month automatic extension since her main place of business is Texas. Dwayne does not qualify for the automatic two-month extension because he was back in the U.S. on the due date.
Answer 5: A. April 15
Answer 6: The deadline for filing the 2007 tax return is 180 days plus the number of days remaining for the Armed Forces member to take action after entering the combat zone. The deadline for 2007 is extended 285 days (180 plus 105) after leaving the combat zone, to March 12, 2010. The 105 additional days are the number of days in the 3-1/2 month filing period that were left when the taxpayer entered the combat zone on December 30th (January 1 - April 15, 2008).
Answer 7: C. 2006, 2007, 2008, 2009
Lesson 34: Military Finishing and Filing the Return34-12
Notes
Lesson 35: Amended Returns 35-1
Instructor Notes
Lesson 35: Amended Returns
Introduction
Thislessonwillhelpyoudeterminehowtoamenda2009returnthatwasoriginallypreparedatthesameVITA/TCEsite.Toamendafederalincometaxreturn,usethelatestrevisionofForm1040X.
Theseareseveralreasonstaxpayersmayneedtoamendareturn,forexample:
• AdditionalFormsW-2,WageandTaxStatement,orForms1099-INT,InterestIncome,arereceivedafterataxpayerhasfiledareturnatyourVITA/TCEsite.
• Taxpayersrealize,afterclaimingapersonalexemption,thattheycanbeclaimedasadependentonanotherperson’staxreturn.
Ifataxpayerrequestsyourhelpinfilinganamendedreturn,firstreviewtheoriginalreturntocorrespondwiththescopeofVITA/TCEregardingamendments.Examinethereturncarefully,lookingforobviouserrors.Thenaskthetaxpayertoidentifyandexplaintheerrors.Trytodetermineiftheoriginalreturnis,infact,inerror.
Askprobingquestions,usingtheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.
Tax Software Hint:Youcanprepareanamendedreturnusingtaxsoftware.However,anamendedreturncannotbefiledelectronically;itmustbemailedtotheIRS.
Objectives
Attheendofthislesson,usingyourresource materials,youwillbeableto:
• Identifywhenitisappropriatetoprepareanamendedreturn,Form1040X,AmendedU.S.IndividualIncomeTaxReturn
• DeterminethetimelimitsforfilingForm1040X
• IdentifyhowtoassembleandsubmitForm1040X
What do I need?
□ ApprovedIntakeandInterviewSheet
□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form1040X□ Form1040XInstructionsOptional: □ Form1040Instructions□ Form8379
Review objectives with the class.
Point out the resources cited under What do I need?
Lesson 35: Amended Returns35-2
When is an amended return required?
Taxpayersshouldfileamendedreturnstocorrectanyerrorsoromissionsonareturntheyhavealreadyfiled.UseForm1040Xtoprepareanamendedreturn.
Anamendedreturnisnotalwaysrequiredwhentheoriginalreturnhasanerror.Forexample,theIRSwillusuallycorrectamatherroronareturn,ortheywillwritethetaxpayerandrequestamissingscheduleorform.Inthesecases,donotamendthereturn.IfthetaxpayerreceivesanoticefromtheInternalRevenueService,referthetaxpayertothecontactpersonandtelephonenumberonthenotice.
Fileanamendedreturniftaxpayers:
• ReceivedanotherFormW-2,acorrectedFormW-2,oranotherincomestatementthatwasnotreportedontheoriginalreturn
• ReceivedanadditionalForm1099(suchasunemploymentcompensation)oracorrectedForm1099thatwasnotreportedontheoriginalreturn
• Claimedtheirownpersonalexemptiononthereturnwhensomeoneelsewasenti-tledtoclaimit
• Claimeddeductionsorcreditstheyshouldnothaveclaimed
• Didnotclaimdeductionsorcreditstheycouldhaveclaimed,or
• Shouldhaveusedadifferentfilingstatus
Is an amended return needed for injured spouse situations?
Whenajointreturnisfiledandonlyonespouseowesapastdueamountsuchaschildsupport,aneducationloan,orprioryear’staxes,theotherspousewhoisnotobligatedforthedebtcanbeconsideredan“injuredspouse.”ThecoupleshouldhavefiledinjuredspouseForm8379withtheiroriginalreturn.Thisformcanbee-filed.IftheydidnotfileForm8379,andoneofthemqualifiesasaninjuredspouse,fileForm8379byitself.DonotattachtheformtoForm1040X.
However,ifthecoupleisfilingForm1040Xforanadditionalrefundnotassociatedwiththeoriginalinjuredspouseclaimandtheydonotwanttheinjuredspouse’sportionoftheoverpaymenttobeappliedtotheoffsetagainstthespouse,thencompleteandattachanotherForm8379toForm1040X.SeePublication17,Form8379,andForm1040Xinstructionsforfurtherinformation.
example
TwoweeksafterBernard’scurrent-yeartaxreturnwasfiled,hereceivedanotherFormW-2inthemail.ThevolunteertaxpreparerreviewsBernard’sfiletobesuretheFormW-2wasn’tincludedontheoriginalreturn.ThevolunteerthenhelpsBernardprepareForm1040XtoincludetheadditionalFormW-2onthecurrent-yearreturn.
Ifthefederalreturnhastobeamended,oftenthestatereturnmustalsobeamended.
Aftertheduedateoftheoriginalreturn,ataxpayercanchangefromMarriedFilingSeparatelytoMarriedFilingJointly,butcannotchangefromMarriedFilingJointlytoMarriedFilingSeparately.However,anexecutormaybeabletomakethischangeforadeceasedspouse.RefertoPublication17formoreinformation.
Point out that math errors are more fre-quent with paper returns than e-file returns.
Ask a volunteer to read the Bernard example.
Review the tips.
Lesson 35: Amended Returns 35-3
How do I start?
Tofileanamendedreturn,youneedacopyoftheoriginalreturnandtheinformationthatneedstobechanged.
• Beginbyresearchingandverifyingthatthechangerequestedbythetaxpayeriscorrect.Reviewtheapprovedintakeandinterviewsheetwiththetaxpayerand usetheVolunteerResourceGuideandPublication17tomakesurethatwhatthetaxpayerwantstochangeiscorrect.
• GetallthefactsbeforepreparingForm1040X.AsktaxpayersiftheyhavereceivedanycorrespondencefromtheIRSmakingchangestotheoriginalreturn,orifthetaxpayerhasamendedthereturnforanotherissue.Youwillneedthisinformationtoproperlyamendthereturn.Forexample,theparentsofacollegestudentcorrectlyclaimedtheirchildasadependent.However,theirchildalsofiledareturnandincor-rectlyclaimedthepersonalexemption.Thechild’sreturnwasprocessedfirst.Inthissituation,theIRSwouldadjusttheparents’returnbyremovingtheexemptionforthechild.Youwillneedthisinformationtocorrectlyamendtheparents’andchild’sreturns.
Let’slookattheformatofaForm1040X,AmendedU.S.IndividualIncomeTaxReturn.
What is Form 1040X?
Form1040Xisnotyearspecific.Youmustspecifytheyearforwhichtheamendedreturnisbeingprepared.WhenpreparingapaperForm1040X,besureyouareusingthelatestversionoftheform.Therevisiondateisintheupperleftcorner.Whenthistrainingmate-rialwasprinted,thelatestrevisiondateofForm1040XwasNovember2009.
Thisformhasbeencompletelyredesigned.Onemajordifferenceisthatthethreecolumnshavebeenreplacedwithjustonecolumn.Theamountenteredisthe“correctamount.”
Form1040X,LineA,AmendedReturnFilingStatus(onpage1),isusedtochangethefilingstatusonthetaxpayer’soriginalreturn.
Ifthetaxpayerisaddingnewformsorchangingexistingforms,thoseformsmustbeattachedtoForm1040X.
Display or direct stu-dents to the top portion of Form 1040X. Reit-erate that this is a new form, updated within the past year.
Point out the column on Form 1040X.
Review the Form 1040X Instructions for all line items.
Optional activity: If a flipchart or white board is available, illus-trate the one-column approach with possible numbers, showing how you come up with the figures.
ThestartingpointinthecolumnisthecorrectedamountswiththeupdatesifanotheramendedreturnwaspreviouslyfiledoriftheIRSchangedsomethingontheoriginalreturn.
Lesson 35: Amended Returns35-4
LineBasksthetaxpayertoselectthecalendaryears2009,2008,2007,or2006;towriteinthecalendaryear(ifitisbefore2006);ortowriteinthefiscalyear(monthandyearended).
ThetaxpayersservedbytheVITA/TCEprogramarecalendar-yeartaxpayers.Thatis,theyreportincomereceivedfromJanuary1throughDecember31.Theyclaimallow-abledeductionspaidfromJanuary1throughDecember31.Ifyouarepreparingapaperreturn,selecttheappropriatecalendaryear.Ifyouareusingtaxsoftwareandtheorigi-nalreturnisonthecomputer,theprogramwillentertheyearautomatically.
Form1040X,LineC,ExplanationofChanges,(onpage1)isusedtoexplainspecificchangesbeingmadeonthereturnandthereasonsforeachchange.Explanationsshouldbeeasilyunderstoodandclearlypointoutthatthetaxpayerqualifiesforthechange.Forexample,“taxpayerreceivedanotherW-2aftertheyfiledtheoriginalreturn,”or“taxpayerqualifiestoclaimchildcareexpensesof$600fortheir10yearolddepen-dentchild,Form2441attached,”or“taxpayermeetsthequalificationstofileasHeadofHouseholdinsteadofMarriedFilingSeparately.”
Lines23-31,Exemptions,areusedonlyifthetaxpayerisincreasingordecreasingthe:
• Numberofexemptionsclaimedonline6dofthereturnbeingamending,or
• ExemptionamountofhousingindividualsdisplacedbyHurricaneKatrinaoraMidwesternDisasterArea.
What are the time frames related to amended returns?
What is the time limit on refunds?
Thereisastatuteoflimitationsonrefundsbeingclaimedonamendedreturns.Ingeneral,ifarefundisexpectedonanamendedreturn,taxpayersmustfilethereturnwithinthreeyearsfromtheduedateoftheoriginalreturn,orwithintwoyearsafterthedatetheypaidthetax,whicheverislater.
Returnsfiledbeforetheduedate(withoutregardtoextensions)areconsideredfiledontheduedate.
Timeperiodsforclaimingarefundaresuspendedforaperiodwhenataxpayeris“financiallydisabled.”Itis,however,veryrarethatataxpayerqualifiesforthatstatus.YoucanreadthedefinitionoffinancialdisabilityinPublication17intheFilingInformationchapter.
example
Robert’s2006taxreturnwasdueApril16,2007.HefileditonMarch20,2007.Heamendsthe2006return,expectingthecorrectiontoresultinarefund.IfhegetsitpostmarkedonorbeforeApril15,2010,itwillbewithinthethree-yearlimitandthereturnwillbeaccepted.Butiftheamended2006returnispostmarkedafterApril15,2010,itwillfalloutsidethethree-yearperiodandhewillnotreceivetherefund.
Display or direct stu-dents to the sections of Form 1040X.
Ask a volunteer to read the Robert example.
Lesson 35: Amended Returns 35-5
Thereareafewexceptionstothethree-yearlimitrule.Forexample,ataxpayermaybeabletoclaimalossonadebtorsecuritiesthatbecameworthlessinaprioryear,aninjuredspouseclaimmaybefiledforuptosevenprioryears,andcertainmilitaryissuesmaygobeyondthethree-yearlimit.Ifyouthinkthetaxpayermayqualifyforanexcep-tiontothethree-yeartimelimitrule,referthetaxpayertoaprofessionaltaxpreparer.
What if taxpayers are due a refund on their amended return?
Iftheamendedreturnindicatesthatthetaxpayerisduearefund,besuretoadvisethetaxpayerthat:
• Thetaxpayermustwaituntiltheoriginalreturnisprocessed(upto8weeksafterfilingtheoriginalreturn).
• Thetaxpayercancashtheoriginalrefundcheck,ifany,whilewaitingforanyaddi-tionalrefund.
• Interestwillbepaidforarefundonanamendedreturnfromtheduedateoftheoriginalreturnorthedatetheoriginalreturnwasfiled,whicheverislater,tothedatetheamendedreturnisfiled.(Thisinterestwillbetaxableonthetaxreturnfortheyearinwhichitisreceived.)
• Generally,ittakes8-12weekstoprocessanamendedtaxreturn.
What if the taxpayer owes money on the amended return?
Iftheamendedreturnindicatesthatthetaxpayerowesmoney,fileForm1040XandinstructthetaxpayertopayanytaxduebytheAprilduedatetoavoidanyinterestandpenalties.
EvenifthetaxpayerisfilingForm1040XandcannotpaythebalanceinfullbytheAprilduedate,besuretohavethemfilethereturnanyway.TheIRSwillcalculateinterestonthebalancedueandsendthetaxpayerabill.Interestiscalculatedbasedontheamountoftaxowed.Interestratescanchangeevery3months.Theinterestiscalculatedforeachdaythebalancedueisnotpaidinfull.Encouragethetaxpayertopayasmuchaspossibletoreduceinterestandpenalties.RefertoForm1040XInstructionsformoreinformationonpaymentoptions.
Point out these excep-tions in Publication 17 for awareness only.
ShowthetaxpayertheForm1040XInstructionsforhowtoincludeallthecorrectinforma-tiononthecheckormoneyorder.
GuidanceissuedonForm1040XdatedJuly2009statedthatthecurrentprocessingtimeforamendedreturnsis12-16weeks.Sincethismaychange,checkwithyourinstructor or Site Coordinator forthelatestinformation.
Lesson 35: Amended Returns35-6
ExErcisEs
Answersareafterthelessonsummary.
Question 1:Johne-filedhis2007Form1040onMarch29,2008.Thenextyear,whilepreparinghis2008return,Johndiscoveredanerrorinhis2007returnwhichresultedinahigherrefund.Johnmailedanamended2007returnonApril19,2009.Isthistoolatetoqualifyfortherefund? □ Yes þ No
Question 2:OnMay6,2011,Brendadiscoversanerroronhertimelyfiled2007taxreturn.Correctionofthiserrorwouldresultinarefund.ShemailsanamendedreturnonMay6,2011.IsthistoolateforBrendatoclaimarefund? þ Yes □No
How do I complete the amended return using tax software?
ThescopeofpreparingamendedreturnsintheVITA/TCEprogramislimited.Generallyyouwillprepareamendedreturnsinsituationswheretheoriginalreturnwaspreparedatthatsamevolunteersite,usingtaxsoftware.
Tax Software Hint:Forsoftwareentries,gotoAmendedReturnsintheVolunteerResourceGuide(Tab14)toreviewthestep-by-stepproceduresforpreparingForm1040X.
Remembertofollowtheinterviewprocessandusetheresearchtoolstoprepareanaccuratereturn.
How do I assemble and submit Form 1040X?
What should be attached?
Remember,Form1040Xcanbepreparedusingtaxsoftwarebutcannotbee-filed.Oncetheamendedreturniscomplete,followthesestepstoassemblethereturnformailingandforthetaxpayer’srecords:
1. Fromthetaxsoftware,printtwocopiesofthefederalamendedreturnand,ifthereisastatereturn,twocopiesofthatform:oneforthetaxpayer’srecordsandonetomailin.
2. Havethetaxpayer(andspouseifMarriedFilingJointly)signanddatethebottomofthesecondpageofForm1040X.Checkthestatereturnforwheretosignandwheretomailthestatereturn.
3. AttachalladditionalorcorrectedForm(s)W-2orForm(s)1099thatthetaxpayerreceivedafterfilingtheiroriginalreturn.BesureyouhaveincludedanyadditionalFederalincometaxwithheld.
4. Attachanyadditionalformsorschedulesneededtoexplainthechanges.DocumenttheexplanationsforamendingthereturninSectionCofForm1040X.
TheRefundorAmountYouOwesectiononForm1040Xmustbefilledoutcarefully.Lookatline17,“Overpayment,ifany,shownonoriginalreturn.”Theorigi-nalrefundisenteredhere.However,iftheIRSadjustedtherefund,enterthatamountinsteadoftheoriginalamount.
Direct students to the Volunteer Resource Guide.
Review the tip with the class.
Assign the exercises.
Review answers with the class when com-pleted.
He mailed within the three-year period allowed for refunds.
Must be postmarked three years from the due date of the return.
Lesson 35: Amended Returns 35-7
ExErcisE answErs
Explainthatnormalprocessingtimeforanamendedreturnisgenerally8-12weeks.Alsotellthetaxpayersthat,iftheyowemoneyandtheyarenotpayingthebalanceduebytheoriginalduedateofthereturn,theIRSwillsendabillthatwillincludeanyinterestorpenaltyamounts.Iftaxpayersindicatetheyareunabletopaythetotalamountdue,encouragethemtopayasmuchaspossible.RefertotheForm1040XInstructionsformoreinformationonpaymentoptions.
Tax Software Hint:RefertothewhitetabsintheVolunteerResourceGuideforsoftwareentriesandmoreinformationonamendedreturns.
Summary
Youcanhelptaxpayersfileanamendedtaxreturnforthecurrent yearusingtaxsoft-ware.IntheVITA/TCEprogram,youcanassisttaxpayersiftheyfiledtheoriginalreturnatthesamevolunteersite.Amendedreturnsshouldbefiledifanyofthefollowingwerereportedincorrectly:
• Filingstatus
• Totalincome
• Deductionsorcredits
Remembertousetheinterviewprocessandresearchtoolstoprepareanaccurateamendedreturn.
Anamendedreturnmustbemailed;itcannotbefiledelectronically.
Arefundcheckonanamendedreturncannotbedirectdeposited;apapercheckismailedtothetaxpayer.
Ifyouareamendingthefederalreturn,youusuallyhavetoamendthestatereturn.
Answer 1: The answer is no – it is not too late. John mailed the amended return before April 15, 2011. That is within the three year period allowed for refunds.
Answer 2: The answer is yes – it is too late. The postmark must be three years from the due date of the return (extended to the next business day). The IRS will disallow Brenda’s amended return requesting a refund because it was filed more than three years after the due date of the original return.
Review the lesson summary with the class.
Assign the workbook exercise and review as a class when done (optional).
Tax law applicaTion using ThE workbook
Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.
Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL<.
Lesson 35: Amended Returns35-8
Notes
Appendix A: Vanessa Scenario, Lesson A-1
Instructor Notes
Appendix A: Vanessa Franklin Taxpayer Scenario
Inthisappendix,youwillpracticetaxreturnpreparationbyassistingourtaxpayer,VanessaFranklin.YouwillreviewVanessa’sdocuments,interviewhertoclarifyissues,andthencompletehertaxreturn,usingtheprocessestaughtineachofthefollowinglessons.YoucanreviewVanessa’scompletedtaxreturninAppendixB.
Let’sgetstarted!Vanessacomestoyoursiteandrequestsassistancewithherreturn.Shehasmanyofthedocumentslistedatthetopofpage1oftheintakeandinterviewsheetandshehascompletedthefirsttwopages.
UsingthejobaidintheVolunteerResourceGuide,yourtaxlawknowledge,andyourscreeningandinterviewskills,you’rereadytoassistMrs.Franklin.
Lesson 3: Filing Basics
Must Vanessa file a return?
Todetermineifataxpayerhasafilingrequirement,youneedtheirage,possiblefilingstatus(es),andgrossincome.
Vanessa’s Age and Marital Status
StartbyreviewingPartsIandIIofherapprovedintakeandinterviewsheet.
3
Ask students Vanessa’s age and marital status. She is 37 and legally married.
Appendix A: Vanessa Scenario, Lesson A-2
Vanessa’s possible filing statuses
Onherapprovedintakeandinterviewsheet,Vanessaindicatedthatsheismarried,buthasnotlivedwithherspouseduringanypartofthelastsixmonths.
Vanessa’s Family and Dependent Information
TodetermineVanessa’spossiblefilingstatuses,youneedtoalsolookatherfamilyanddependentinformation.ShehasindicatedfourpotentialdependentsinPartIIofherapprovedintakeandinterviewsheet.
Youdecidetoasksomequestionstoconfirmandclarifyherinformation.
Sample interview clarifying dependents
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
I’ve reviewed your intake sheet and, to start off with, I want to make sure that you need to file a return based on your filing status, age, and income. So let me verify a few things. You were born on November 12, 1972, correct?
Okay, that makes you 37. I see that you checked “Married” but answered “No” to living with your spouse during the past six months.
But you were still married on December 31st of last year, correct?
Do you and your husband plan to file jointly?
And you have three children you may be claiming as dependents, and possibly your mother as a fourth dependent?
Based on this initial information, there are three filing statuses you may qualify for: Married Filing Separately, Head of Household, or Married Filing Jointly, although you expressed that you don’t want to use the Married Filing Jointly status.
Yes.
Yes,HarveymovedoutinFebruary2009.
Yes,that’sright.
IthinkIwanttofileMarriedFilingSeparately,butI’mnotsure.
Yes,that’sright.
I’drathernotifIdon’thaveto.
3
Ask two volunteers to role-play the sample interview.
Explain why the last six months is relevant.
A-3Appendix A: Vanessa Scenario, Lesson
What are Vanessa’s most likely filing statuses?
VanessamayqualifyforMarriedFilingSeparately,HeadofHousehold,orMarriedFilingJointly.
Vanessa’s Gross Income
Thenextstepistomakesurehergrossincomeforthetaxyearismorethanthegrossincomelimit.ReviewtheVolunteerResourceGuide(TabA),WhoMustFile?
Remember,atthispoint,we’redeterminingifVanessahasafilingrequirementsowewilldoageneralreviewofherincomedocumentation.
Vanessa’s Form W-2
BrieflyreviewVanessa’sFormW-2andPartIVofherapprovedintakeandinterviewsheettodetermineherincomeforthetaxyear.Vanessa’sW-2indicatesshehaswagesof$31,000.
3
Point out to students that Vanessa does not want to file jointly with her spouse.
Point out Vanessa’s wages on her Form W-2.
Appendix A: Vanessa Scenario, Lesson A-4
Onherapprovedintakeandinterviewsheet,Vanessaalsoindicatedthatshehadself-employmentincome.Younextconfirmandclarifythisandanyotherincomesources.RefertotheIncomesectionoftheVolunteerResourceGuide(TabD)forotherincomesourcesyoushouldconsider.
Sample interview probing for other income
MakenotesonVanessa’sapprovedintakeandinterviewsheettocapturewhatshehastoldyou;forexample,indicatethatthe“Yes”onthequestionaboutunemploymentcompensationactuallyreferstoherestrangedhusband.
Chart A – For Most People Who File
ConsultChartA–2009FilingRequirementChartForMostPeopleWhoFileintheVolunteerResourceGuide(TabA).FindVanessa’slikelyfilingstatus(es),age,andincomeonthechart.
WehavenowdeterminedVanessa’sage,herpossiblefilingstatuses,andhavereviewedherpreliminaryincomeinformation.Becausesheisunder65yearsoldandhergrossincomeonherFormW-2exceedstheincomelimitslistedforeachofherpossiblefilingstatuses,weknowthatVanessahasafilingrequirement.
SinceVanessaisrequiredtofileareturn,thetaxsoftware’sMainInformationSheetorthe“Label”sectionofthereturnmustbecompletedwithname,address,andsocialsecuritynumber.IfVanessaisfilingbyherself,onlyherinformationwillbeincluded.
Tax Software Hint: Sinceitisnecessarytousetheprimarytaxpayer’ssocialsecuritynumbertostartanewreturninthetaxsoftware,youshouldnotbeginthisprocessuntilyoufinishtheinitialinterview.
Point out that Vanessa’s $33,400 exceeds the gross income amounts for the filing statuses she may use.
Direct students to the Volunteer Resource Guide (Tab D), Income.
Ask two volunteers to role-play the sample interview.
Direct students to the table in the Volunteer Resource Guide (Tab A).
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Your Form W-2 shows $31,000 as your wages for the tax year. Tell me about your self-employment income.
How much did you earn doing that?
Okay. That is close enough for what we are doing now, but we will need the exact amount later. You indicate that you received unemployment compensation.
Since you’re not going to file a joint return, we won’t put any of his income or expenses on your return. Okay, any other sources of income, for example, bonuses at your job, or any interest reported on a Form 1099?
Okay, so your gross income is about $33,400 based on your W-2 and income from your business.
Isellcosmeticsontheside.Ischedulemakeupworkshopsinpeople’shomesintheeveningsandonweekends.
Notmuchatall,afterIpaidmyexpenses,itwasabout$2,400.
Actually,myhusbandwastheoneonunemploymentforacoupleofmonths.
No,justthewagesandbusinessincome.
3
A-5Appendix A: Vanessa Scenario, Lesson
Restate the impor-tance of confirming the taxpayer’s identity and verifying that the SSN names and numbers match.
Verify Vanessa’s Identity
BeforecompletingthetaxsoftwareMainInformationSheetortheLabelsectionofVanessa’staxreturn,makesureyouverifyheridentity.Vanessapresentsyouwithherdriver’slicenseandthesocialsecuritycardsforalltheindividualslistedonherintakesheet.
Using the Tax Software in Training
RefertoPublication4491-W,Introduction:UseofSoftwareinTraining,forsocialsecu-rityformatrequirementsandotherrequirementsforusingthePracticeLabduringthetraining.
Sample interview to verify identity
Youhavenowcompletedthesefilingbasics:
• Determiningifthereisafilingrequirement
• Verifyingtheidentityofthetaxpayerandconfirminghersocialsecuritynumber
Returntolesson3.
3
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
By the way, thanks for taking the time to complete our intake sheet. It looks like we can assist you with your return. I need proof of your identity and your social security card, as well as social security cards for your children and your mother.
Thanks, I’ll just confirm your entries. First, is all the informa-tion on your driver’s license current and correct? We want to make sure you receive all your tax benefits and that your return is processed smoothly.
Okay then, let’s continue reviewing the intake sheet.
Noproblem!Here’smydriver’slicense. Iwroteeveryone’snameontheintakesheet,justastheyappearonthecards.
Yeah,Ihaven’tmovedsincegettingthatlicense.
Soundsgood.
Thename(s)andnumber(s)onthetaxpayer’sreturnmustmatchtheinformationonthesocialsecuritycard(s).Iftheydonot,thereturnprocessingwillbedelayed.
Ask two volunteers to role-play the sample interview.
Explain why Vanessa’s entries must match the information on the cards.
Appendix A: Vanessa Scenario, Lesson A-6
Lesson 4: Filing Status
Which filing status should Vanessa use?
TaxpayerVanessaFranklincomestoyoursiteandrequestsassistancewithherreturn.PartsIandIIofherapprovedintakeandinterviewsheetindicatethatsheismarriedbutlivesapartfromherhusband.Shehasfourpotentialdependents,herthreechildrenandhermother.Basedonthisinformation,herpossiblefilingstatusesare:
• MarriedFilingJointly
• MarriedFilingSeparately
• HeadofHousehold
VanessadoesnotwanttousetheMarriedFilingJointlystatus,butifshechoosestofileMarriedFilingSeparately,itmayresultinahighertax.
TodetermineifVanessaqualifiesforHeadofHousehold,whichmayresultinalowertaxthanMarriedFilingSeparately,youdecidetoasksomequestionsbasedontheFilingStatusInterviewTipsintheVolunteerResourceGuide(TabB).
Sample interview clarifying filing status
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
I’m going to ask you a few questions that will help us deter-mine the best filing status for you. First of all, you were married at the end of the tax year, but did not live with your spouse during the last 6 months. Is this correct?
Have you obtained a legal separation?
And you don’t plan to file a joint return with him.
There are other options. For now, let’s just assume that you won’t file Married Filing Jointly, and I’ll ask you a few more questions. I see that you have three children. I see that they lived in your home for the entire tax year, is that correct?
Did you pay more than half the cost of keeping up your home last year?
Okay… Now, I need to clarify the number of months you and your husband actually lived apart. Your intake sheet indicates that he has not lived with you during the last six months of the year, is this correct?
Your children may qualify you for the Head of Household status. In order to qualify, they must be your dependents. It looks like they are, but we will be getting to that in a minute. If you qualify for the Head of Household status, it may result in a lower tax for you than Married Filing Separately.
That’sright.We’restillmarried,butweareseparated.
No,Ihaven’tbeentoalawyeryet.
Right.Iwasthinkingoffilingseparately.
Yes,theylivedwithme.
Well,Ipaidforeverythingifthat’swhatyoumean.Onceinawhile,Harveysentsomemoney,butitwasn’tenoughtohelpmuch.
Yes,hemovedoutinFebruaryandwe’vebeenaparteversince.
Thatsoundsgoodtome!
4
Direct students to the Interview Tips for Filing Status (Tab B).
Ask two volunteers to role-play the sample interview.
Ask students to explain why she qualifies for the three filing statuses.
A-7Appendix A: Vanessa Scenario, Lesson
Vanessa’s filing status is Head of Household
VanessaqualifiesasHeadofHouseholdbecausesheislegallymarried,butlivedapartfromherhusbandduringthelastsixmonthsofthetaxyear.Sheis“consideredunmar-riedforheadofhouseholdpurposes”andatleastoneofherchildrenmustbeherdependenttousethisfilingstatus.
Tax Software Hint: NowthatyouhavedeterminedVanessa’sfilingstatus,youcan“StartaNewReturn”inthetaxsoftware.RefertotheVolunteerResourceGuide,Tab1,fordetailedinstructionsaboutthisprocess.
CompletealltherequiredinformationuptotheDependents/Nondependentssection.ConfirmeachentrywithVanessaandmakeanycorrectionsonVanessa’sapprovedintakeandinterviewsheet.
IntheFilingStatussection,checktheboxforHeadofHousehold.Leavetheremainingblocksinthisareablankuntilyouhavediscussedthestatusofherchildren.
ReturntoLesson4.
4
Ask what facts qualify Vanessa to file Head of Household? (See Interview Tips.)
Appendix A: Vanessa Scenario, Lesson A-8
Lesson 5: Personal Exemptions
What personal exemptions can Vanessa claim?
Let’sdetermineifVanessacanclaimanypersonalexemptions.Remember,sheismarriedbutlivesapartfromherhusband.Personalexemptionsareallowedforthetaxpayerandfortheirspouseiftheymeetcertainrequirements.
FirstreviewPartI,YourPersonalInformation,onherapprovedintakeandinterviewsheettoseeifVanessaorherhusbandcanbeclaimedasadependentonsomeoneelse’staxreturn.
Next,askquestionstodetermineifVanessacanclaimanexemptionforherspouse.Todothis,usetheInterviewTipsforPersonalExemptionsintheVolunteerResourceGuide(TabC).
Sample interview clarifying personal exemptions
BecauseVanessacannotclaimherhusbandasanexemption,youwillleavehimoffherreturn,leavingtheboxonForm1040,line 6bunchecked.
Tax Software Hint:Basedonthefilingstatus,HeadofHousehold,thesoftwareautomaticallyenters“1”for“Numberofboxescheckedon6aand6b.”
ReturntoLesson5.
5
Ask if either Vanessa or her husband can be claimed as a dependent.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Let’s see if you can claim an exemption for your spouse. I’m going to ask you a few more questions. First of all, we already know that you were married during part of the tax year. So, does that include December 31st?
You have already indicated that you do not plan to file with your husband.
Did he have income of his own last year?
Well, there’s our answer. Because you’re not filing a joint return, and because he had income, you cannot claim an exemption for your husband.
Yes,that’sright.Eventhoughwedon’tlivetogetheranymore,we’restillmarried.
Right.
Yes,hewasemployedasacookformostofthetaxyear,andcollectedsomeunemploymentcompensation.
Direct students to the Interview Tips for Personal Exemptions.
Ask two volunteers to role-play the sample interview.
A-9Appendix A: Vanessa Scenario, Lesson
Lesson 6: Dependency Exemptions
Which dependency exemptions can Vanessa claim?
Let’sdeterminewhichdependencyexemptionsVanessacanclaim.Dependentscanbethetaxpayer’schildrenorrelatives.BeginbyreviewingPartII,FamilyandDependentInformation,item2,onVanessa’sapprovedintakeandinterviewsheet.Shelistedfourpotentialdependents.
Youseethatherchildrenareunder10yearsofageandhermotheris73yearsold. AllfourlivedwithVanessafor12monthsduringthetaxyearandareU.S.citizens. (Ababybornanytimeduringtheyearisconsideredtohavelivedwiththetaxpayerfortheentiretaxyear.)
Are Vanessa’s children her dependents?
TodetermineifherchildrenBella,Zoe,andZacharyqualifyasdependentsonVanessa’staxreturn,usetheInterviewTipsforDependencyExemptionforQualifyingChildintheVolunteerResourceGuide(TabC).
BasedonVanessa’sanswerstotheinterviewtips,youconcludethatallthreechildrenqualifyasherdepen-dents.However,becausesheandherhusbandareseparated,youneedtogathermoreinformation.
Sample interview clarifying dependency exemptions
Thespecialrulesofdivorced,separated,ornevermarriedparentsmayapplyinthissituation.TheyarelistedinPublication17,inthePersonalExemptionsandDependentschapter.
6
Direct students to the Interview Tips for Dependency Exemption for Qualifying Child (Tab C).
Review steps in the interview tips that may apply to Vanessa’s chil-dren.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… vanessa responds…
It looks like you should be able to claim your children as depen-dents. Is there a court document or an agreement that you have signed to allow their father to claim them?
You’vegottobekidding.Hebetternottrytoclaimthem.
Whenusingtheinterviewtips,youmayfindithelpfultosubstitutethechild’snamefortheword“person.”Askinter-viewquestionsindividuallyforeachchild;asyougainexperi-encewiththesequestions,youwilllearntoobtainthisinformationforeachchildatthesametime.
Appendix A: Vanessa Scenario, Lesson A-10
TohelpdetermineifVanessa’shusband(thenoncustodialparent)canclaimthechil-drenasdependentsonhistaxreturn,usetheInterviewTipsforChildrenofDivorced,SeparatedorNeverMarriedParentsintheVolunteerResourceGuide(TabC).
AftercompletingtheinterviewusingtheinterviewtipsintheVolunteerResourceGuide,youdeterminethatVanessacanclaimthedependencyexemptionforallthreechildrenonhertaxreturn.
Is Vanessa’s mother her dependent?
Now,determineifVanessa’smotherisherqualifyingrelativeforadependencyexemp-tionbyusingtheInterviewTipsforDependencyExemptionforQualifyingRelativeintheVolunteerResourceGuide(TabC).Thistime,substituteAnnabelle’snamefor“theperson.”
Usingtheinterviewtips,youlearnthat,althoughVanessa’smotherreceivesnontaxablesocialsecurity,hertaxableincome(fromasmallpension)islessthantheexemptionamount($3,650for2009).Therefore,Vanessa’smothermeetsthegrossincometest(step5).
Toanswerstep6intheinterviewtips,youneedtohelpVanessamakealistofeachvalidexpenseshepaidforhermotherduringthetaxyear,andcomparethetotalamountwithhermother’stotalincomefortheyear.ThePersonalExemptionsandDependentschapterofPublication17providesaworksheetfordeterminingsupport.
Sample interview clarifying dependency exemptions for “qualifying relative”
Duringtheinterview,youandVanessacomeupwiththenumberslistedbelow.
ThenumbersshowthatVanessadidnotcovermorethanhalfofhermother’s(Annabelle’s)monthlyexpenses.Annabelledidnotpassallfivequalifyingrelativetests,soVanessacannotclaimanexemptionforhermother.RemembertodocumentthatVanessadidnotprovidemorethan50%ofhermother’ssupportinSectionB:
6
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Let’s see if we can add up the monthly expenses that count as support for your mother and figure out if you covered more than half of them, okay?
All right, for each item we’ll write down the amount you contributed in one column, and the amount your mother contributed in the other column. Let’s start with the fair share rental value of her living in your home…
Yes,I’vegotalistoftheexpenseshere.
Okay,mypencil’sready.
Annabelle’s Monthly Expenses Provided by Vanessa Provided by AnnabelleShareoffood $420 $0Clothing $0 $200Shareofrent,utilities $680 $0Medical, dental $0 $1,200Educationexpenses $0 $0Recreationandtransportation $800 $700Furniture,appliances,automobile $0 $0Share of support $1,900 $2,100
Direct students to the Interview Tips for Children of Divorced or Separated Parents. (Tab C).
Ask two volunteers to role-play the sample interview.
Ask students if Vanessa covered more than half her mother’s expenses.
Direct students to the Interview Tips for Dependency Exemption for Qualifying Relative in the Volunteer Resource Guide (Tab C).
Review steps 1, 3, 4, and 5 as applied to Vanessa’s mother.
A-11Appendix A: Vanessa Scenario, Lesson
ForCertifiedVolunteerPreparerCompletionandReminder,onherapprovedintakeandinterviewsheet.
Volunteer Preparer Determinations
Now,youcancompletethedependentquestionsinSectionB.Checkofftheapplicableyes/noresponsesandmakeannotationsasneeded.
Thechildrenarethegrandmother’squalifyingchildren,butthegrandmotherdoesnotpasstheQualifyingChildofMoreThanOnePersonrulebecauseheradjustedgrossincome(AGI)islessthanVanessa’s.
Basedontheinterview,Vanessacanclaimdependencyexemptionsforherthreechildren,butnotforhermother.Vanessa’schildrenarethequalify-ingchildrenofbothVanessaandhermother,Annabelle.Vanessaisentitledtoclaimthechildren,becausesheistheirparent.AnnabellecouldonlyclaimthemifVanessachosenottoclaimthem,andifAnnabelle’sAGIwashigherthanbothparents.
Vanessa’shusbandcannotclaimthechildrenonhisreturnbecausethechil-drendon’tmeettheresidencyrequire-ment,andhedoesnotmeettheteststoclaimthemasdependentsundereitherthequalifyingchildorqualifyingrelativerules.Healsodoesn’thaveadivorcedecreeorwrittenagreementineffectthatwouldallowhimtoclaimthechildren.
AcopyofthecompletedSectionBofVanessa’sapprovedintakeandinterviewsheetisinAppendixB.Ifyouhaveanyincorrectentries,usethejobaidtodetermineyourmistakesoraskyourinstructorforassistance.
Preparing Vanessa’s Return
Atthispoint,youcancompletetheFilingStatusandExemptionssectionsofVanessa’staxreturnorentertheinformationintheMainInformationSheetinthetaxsoftware.Youwillneedvalidsocialsecuritynumbersforeveryonelistedonherreturn.
Tax Software Hint:ThesoftwarewillcalculateVanessa’sexemptiondeduction.ThecompletedExemptionssectionofVanessa’sForm1040isinAppendixB.
Returntolesson6.
Ask students how they would answer ques-tions 1-5 in Section B.
6
Appendix A: Vanessa Scenario, Lesson A-12
Lesson 8: Income – Wages, Interest, Etc.; Form 1040, Lines 7-11
What are Vanessa’s sources of income?
Let’sdetermineVanessa’ssourcesofincomebyreviewingPartIV,Income,ofVanessa’sapprovedintakeandinterviewsheet.Beforebeginningtheinterview,reviewtheIncomesectionintheVolunteerResourcesGuide(TabD)forexamplesofincomesourcesnotlistedinPartlVthatmaybementionedduringtheinterview.
Vanessaanswered“yes”toincomefromwagesandsalary,self-employment,andunemploymentcompensation.Inanearlierpartoftheinterview,youlearnedthattheunemploymentcompensationwasherhusband’s,nothers.
Sample interview clarifying wage and interest income
Becausetheapprovedintakeandinterviewsheetdoesnotlistdetailedinformationaboutwagesandtaxableinterest,youasksomeprobingquestionstolearnmoreaboutherwageandinterestincome.
8
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Now that we have determined your filing status and who you can claim as a dependent on your return, let’s talk about your income. Did you work in 2009?
I see, based on your Form W-2, that’s Bob’s Depart-ment Store. Did you work for anyone else last year?
Great! I wish I could work for myself! So, Bob’s was your only source of wages?
Did you have any interest income, such as interest from a checking account, savings account, or certifi-cate of deposit?
Interest income is reported on Form 1099-INT. Did you receive any of those forms?
Yes,I’vebeenworkingforthesamestoreforyearsandIhavemyowncosmeticsbusiness.
Justmyself.
Yes.
No,Iwentwithacoupleoffreecheckingaccountsthatdon’tpayinterest,oneforpersonaluseandoneformycosmeticsbusiness.
No,I’msureyouhaveeverything.
Ask two volunteers to role-play the interview.
A-13Appendix A: Vanessa Scenario, Lesson
ThevolunteerandVanessacontinuedreviewingtheentriesonVanessa’sapprovedintakeandinterviewsheet,aswellasTablesAandBintheVolunteerResourceGuide(TabD).Vanessa’sresponsesduringtheinterviewdidnotchangeanyofheranswers.
SofaryouhavelearnedthatVanessawasemployedasasalesassociateinaretaildepartmentstorefortheentiretaxyear.Sheearnednotaxableinterestfrombankaccounts.Shestatedthatsheownsacosmeticsbusinessbutyouwillaskherques-tionsaboutthatwhenyouexploreherself-employmentincome.
SeeAppendixBtoreviewtheentriesintheIncomesectionofVanessa’sForm1040.
Tax Software Hint:Thesoftwareautomaticallycomputesthetaxpayer’stotalincomebasedonentriesonForm1040.
ReturntoLesson8.
8
sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Did you cash in any U.S. savings bonds?
Did you receive a state tax refund in 2009?
We’ve identified your total wages as $31,000.
We will account for those earnings later.
No.
No.
Whataboutmycosmeticsbusinessandunemployment?
Appendix A: Vanessa Scenario, Lesson A-14
Lesson 9: Income – Business; Form 1040, Line 12
Can Vanessa file Schedule C-EZ?
InPartIV,Income,ofVanessa’sapprovedintakeandinterviewsheet,sheanswered“yes”toself-employmentincome.Youlearnedthatthiscamefromhercosmetics business.
FamiliarizeyourselfwiththerequirementsforfilingForm1040,ScheduleC-EZ,whichisfoundinPartIoftheschedule.RefertotheVolunteerResourceGuide(Tab2)forafacsimileoftheschedule.Also,reviewtheinstructionsforfilingForm1040,ScheduleC-EZ,beforebeginningtheinterview.
YouneedtoaskadditionalquestionsaboutherbusinessincometodetermineifshecanreportitonScheduleC-EZ.Ifshecannot,youwillneedtoreferhertoaprofes-sionaltaxpreparer.
Sample interview on use of Schedule C-EZ
YoulearnedkeyfactsthatdeterminedthatVanessacanfileScheduleC-EZ.Shehadself-employmentincomeof$2,990andexpensesof$590fromherbusiness.ShehasmetalltherequirementsfortheuseofaScheduleC-EZ,whichiswithinthescopeoftheVITA/TCEprogram.
9
Direct students to the Volunteer Resource Guide (Tab D).
Ask two volunteers to role-play the sample interview.
Ask students what key facts determine that Vanessa can use Schedule C-EZ.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Let’s talk about your income from your personal cosmetics business.
You may be able to file Schedule C-EZ. If you can’t, then I’ll have to refer you to a professional tax preparer. First, during 2009, were your business expenses $5,000 or less?
Okay. And clearly you use the cash method of accounting. Did you carry any inventory during the year?
Am I correct that the bank statement shows you did not have a loss on the business in 2009?
Did you have any employees?
And you aren’t taking any kind of depreciation or amortization on equipment or property owned by the business?
Do you intend on deducting expenses for using your home as your office?
Have you always been the only person involved in this business?
Good, then we can prepare Schedule C-EZ for you!
OK,Ihaveallmystuffrighthere.
Yes,it’srighthere.Imadeasummaryofallmyincomeandexpensesfrommybusinessbankaccount.Thisaccountispurelyformybusiness.
No,theonlythingsIhavearethesamplesforpartiesandindividualconsultations.WhenIgetanorder,IsenditthroughthesupplierandtheproductsgodirectlytothecustomerorIdeliverthempersonally.
That’sright.Isold$2,990lastyearandmyexpenseswere$590.
No,Ididitallmyself.
No,Idon’thaveanythinglikethat!
No,notatall.
Yes.
Great!
A-15Appendix A: Vanessa Scenario, Lesson
Next,youaskprobingquestionstogatherinformationaboutbusinessexpensesyouwillenteronScheduleC-EZ.
Beforeyoucontinuetheinterview,besuretoindicateVanessa’sresponsestothesequestionsonpage2oftheapprovedintakeandinterviewsheet.Inthemarginsof PartIV,item6,enter“Totalincome$2,990,expenses$590.”
Vanessa’scompletedScheduleC-EZisshowninAppendixB.AlsoseeAppendixB,Form1040,Incomesection,forherincomeentries.
Tax Software Hint: ThesoftwarecompletesScheduleC-EZandForm1040basedonyourentriesontheNetProfitfromBusinesssection.
ReturntoLesson9.
9
Ask two volunteers to role-play the sample interview.
sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Do you have any Forms 1099-MISC for income from your cosmetics business?
Good! Does this year-end summary for your business account list all the deposits and expenses for your business?
This makes it easy. We will enter this information into the tax software and it will calculate your net business income or loss. By the way, do you use your vehicle to conduct your business?
Did you keep track of the mileage that went only for your business?
Well, that is a deductible expense. If you do drive anywhere for the business, try keeping a pad of paper in the car and always record your odometer reading, and document the business purpose of the trip.
No,allmyclientsjustwritemepersonalchecksorpayincash.ButIkeepthisbusinessaccountseparatefrommypersonalaccount–it’saloteasierthatway!
Yes,itdoes.
Yes,forpartiesanddeliveries,thatsortofthing.
No.
Isurewill!
Appendix A: Vanessa Scenario, Lesson A-16
Lesson 13: Income – Unemployment Compensation; Form 1040, Line 19
What “other income” must Vanessa report?
RecallthattaxpayerVanessaFranklinismarried,butlivesapartfromherhusband.Youhavealreadyidentifiedherincomefromwagesandfromself-employment.Onherapprovedintakeandinterviewsheetshechecked“Yes”forunemploymentcompensa-tion,butinanearlierpartoftheinterviewsheindicatedthatherhusbandhadreceivedthatincome.
Vanessamayhavereceivedotherincomethatmustbereported.AlistofpossiblesourcesofotherincomeisfoundintheIncomesectionoftheVolunteerResourceGuide(TabD).
Basedontheapprovedintakeandinterviewsheet,youaskadditionalprobingques-tionstovalidateherunemploymententry.
Sample interview clarifying other income
Aftersuchaninterview,besuretorecordanyadditionalinformationyougainedfromthetaxpayer’sresponsesonpage2or4ofForm13614-Corotherapprovedintakeandinterviewsheet.
Completing the return
EnterVanessa’sincomefromwagesonForm1040,line7;enterherbusinessincome(fromScheduleC-EZ)online12.Vanessadoesnothaveanyotherincomeentries.
ReturntoLesson13.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
I recall that your husband received unemployment compen-sation during the tax year, but that the two of you were living apart. Is that correct?
As I may have mentioned before, because you are filing as Head of Household, instead of a joint return, you won’t need to report any of his income. He’ll do that on his own return.
No, you don’t need to report child support payments.
Did you receive any other income in 2009? Here is a list of things that are considered income. Did you receive any of these in 2009? [VolunteershowsVanessaTableA,ExamplesofIncome,intheVolunteerResourceGuide,TabD.]
Okay, that finishes up the Income section. If you’ll look at the screen, this is your total income. Next, we’ll discuss any adjustments to your income.
Yes,that’sright.
Well,Ishouldtellyouthatmyhusbandhassentmeacoupleofcheckstotakecareofthekids.Shouldwedeclarethat?
I’mgladtoknowthat!
Idon’tthinkso.No,I’msureIdidn’t.
13
Direct students to the Volunteer Resource Guide (Tab D).
Ask two volunteers to role-play the sample interview.
A-17Appendix A: Vanessa Scenario, Lesson
Lesson 17: Adjustments to Income
Can Vanessa claim any adjustments to her income?
“Adjustmentstoincome”areamountsthatVanessacansubtractfromhertotalincome.BeforeinterviewingVanessaaboutpossibleadjustmentstoherincome,reviewtheAdjustedGrossIncomesectionofhertaxreturn;Publication17,AdjustmentstoIncomesection;andtheAdjustmentssectionoftheVolunteerResourceGuide(TabE).
Also,reviewVanessa’sapprovedintakeandinterviewsheet,particularlyitems4and6inPartIV(Income),anditems1,2,and3inPartV(Expenses).
InPartIV,Vanessaindicatesthatshehadself-employmentincome.Shecandeductone-halfofherself-employmenttaxasanadjustmenttoherincome.(ThisadjustmentiscalculatedonForm1040ScheduleSEandwillbecoveredinLesson28,OtherTaxes.)
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab3).
Becausetheapprovedintakeandinterviewsheetdoesnotlistallthepossibleopportu-nitiesforadjustmentstoherincome,youmayfindithelpfultoaskVanessaabouteachentryintheAdjustedGrossIncomesectionofForm1040.Ataminimum,youmustvali-datetheresponsesshegaveonherapprovedintakeandinterviewsheet.
Duringtheinterview,Vanessaindicatesthatsheneitherpaidnorreceivedalimony. YouaskherprobingquestionsaboutpossibleIRAcontributions.
Sample interview about IRA contributions
Ask two volunteers to role-play the sample interview.
Direct students to Vanessa’s approved intake and interview sheet.
Direct students to the Volunteer Resource Guide (Tab E).
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… vanessa responds…
I see from box 12 of your W-2 that you put $1,000 into your 401k account. Did you make any contributions to an IRA or any other retirement account?
Okay. When did you make the contribution and what type of IRA was it, traditional or Roth?
Great. It looks like your income is within the limits, so you can deduct the entire IRA contribution.
Did you ever make IRA contributions that you didn’t deduct?
Okay. Now, until April 15, you can still make deductible contributions up to a total of $5,000 and deduct them for this tax year. Are you planning on contributing any more to your IRA account?
Sounds like you’ve thought about it and have a plan.
Yes,Iput$600intomyIRA.
It’satraditionalIRA.IdiditlastMay,Ithink.Yes,here’sthestatement.IalwaystrytoputpartofmytaxrefundintomyIRA.
Thanks!
No,Ijusthavethisoneaccount,andI’vealwaystakenthededuction.
I’llsavepartofmyrefundagain,butIwanttoputthattowardnextyear’sdeduction.
Yes,Ihave.
17
Appendix A: Vanessa Scenario, Lesson A-18
Vanessastatesshecontributed$600toanIRAduringthetaxyear.ThisamountisenteredintheAdjustedGrossIncomesectiononhertaxreturn,alongwiththeone-halfofherself-employmenttaxfromherScheduleSE(Lesson28).The$1,000401Kcontri-butiononherFormW-2willnotresultinanadjustmenttoherincome;ithasalreadybeensubtractedfromtheBox1WagesonherW-2.
BasedonVanessa’sapprovedintakeandinterviewsheet,sheindicatesthatshehadeducationalexpenses.Youprobefurtherbyaskingabouthereducation-relatedexpenses.
Sample interview about Vanessa’s education expenses.
ReturntoLesson17.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Let’s talk about your education-related expenses. Were they for you or your children?
You’re filing as Head of Household and your income is below the limit for taking the full deduction. Do you have a receipt for the tuition payment?
I see $450 for tuition and $80 for books. That totals $530. I just need to ask a few more questions. Did you receive any funds from an educational assistance program from your employer?
Did you make any tax-free withdrawals from a Coverdell educational savings account or another a qualified tuition program, or from U.S. savings bonds?
Did you get any other nontaxable payments, not counting gifts, bequests, or inheritances, that were specifically for educational expenses?
The $100 was a gift, so we don’t count it. Your total payments were $530. We must subtract the $100 employer benefit. That lets you deduct $430 for tuition and fees. Do you have any questions about all this?
There is also a credit for people who are paying for college expenses. You can take one or the other, but not both. When we get to the end of the return, I might ask you some more questions to figure out if the credit would be better for you than this deduction.
[OntheIntakeandInterviewSheet,notethatVanessaqualifiesforthetuitionandfeescredit.Later,youwilldetermineifshewilltakeadvantageofthisbenefit,sinceshemayalsobeeligibleforaneducationcredit.]
Theywereforme.Itookoneclassinthefall.
Yes,thesearethereceiptsfromCityCollege.
Yes,theEAPprovided$100.
No.
Well,mymomgaveme$100tohelpwithtuition.
No,I’mreallygladIcandeductthat.
Okay,I’dappreciatethat.
17
Ask two volunteers to role-play the sample interview.
A-19Appendix A: Vanessa Scenario, Lesson
Lesson 19: Standard Deduction and Tax Computation
Can and should Vanessa take the standard deduction?
Asyourecall,VanessaqualifiestofileasHeadofHouseholdandwasemployedasasalesassociateinaretaildepartmentstorefortheentiretaxyear.Shewasalsoself-employedwithherowncosmeticsbusiness.
Let’sdetermineifitwouldbemorebeneficialforVanessatoitemizeortotakethestandarddeduction.ThedeductionssectionoftheVolunteerResourceGuide(TabF)containshelpfulchartsandinterviewtipsforcompletingthissectionofthetaxreturn.
Sample interview exploring standard deduction
19
Direct students to the Volunteer Resource Guide (Tab F).
Ask two volunteers to role-play the sample interview.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Based on your filing status as Head of Household, your standard deduction is $8,350.
Your intake sheet indicates that you did not have any home mortgage payments such as interest or taxes.
Did you pay any state or local sales or excise taxes in 2009 for a new motor vehicle with a gross vehicle rating of 8,500 pounds or less?
When did you purchase the car? Were you the original owner?
What was the purchase price of your car before taxes?
What was the total amount you paid in taxes for your car?
You also indicated you had medical expenses and charitable contributions last year. Tell me about your medical expenses.
Did you make any charitable contributions?
So at this point, the total amount of your medical expenses and charitable contributions is $1,700. I think we should try itemizing deductions to see if that gives you a higher deduc-tion. No matter how we handle deductions, we still have tax credits to work out and those may reduce your tax.
We’ll do our best!
ShouldIitemizethisyear?
That’scorrect.Wecurrentlyliveinanapart-ment.Imaypurchaseahomenextyear.
Yes,Ididpurchaseanewcarandthesales-personinformedmethatthecarweighedlessthan8,500pounds.Ineededamorereliablecartobuildmycosmeticsbusiness.
IpurchasedthecaronOctober22,2009.Yes,I’mtheoriginalownerofthecar.Itonlyhadfivemilesontheodometer!
Ipaid$15,965beforetaxes.
Ihavethereceipthereinmyfiles.Ipaidatotalof$1,233intaxes.
Well,Ididhavesomemedicalanddentalexpenses,butinsurancecoveredmostofthem.Ionlyspentabout$1,500.Thatamountincludestheexpensesfordeliver-ingBella.
Imadedonationstotaling$200.Ihavethereceiptsinthisenvelope.
Ihopeyou’reright!
Appendix A: Vanessa Scenario, Lesson A-20
Asaresultoftheinterview,yourealizeVanessa’snewcarpurchasemayincreaseherstandarddeduction.Youalsofoundoutshelivesinanapartment.
AftercompletingScheduleL,StandardDeductionforCertainFilers,forthenewcarthatVanessapurchased,youseethatshequalifiesforanadditionalstandarddeductionof$1,233.Vanessa’stotalstandarddeductionis$9,583.SeetheTaxandCreditssectionofVanessa’sForm1040inAppendixBfortheproperlocationofthestandarddeductionentryandthecompletionofScheduleL.
Tax Software Hint: Thetaxsoftwarewillautomaticallycomputethetaxpayer’sstandarddeductionbasedonyourentriesontheMainInformationSheetandScheduleL(ifapplicable).
Should Vanessa itemize her deductions?
Ifataxpayer’srealestatetaxes,homemortgageinterest,andcharitablecontributionsexceedthestandarddeductionamount,probefurtherusingtheitemizeddeductionsworksheetinTab4andtheinterviewtipsinTabFoftheVolunteerResourceGuide.
SinceitdoesnotappearthatVanessa’s$1,700medicalandcharitablecontributionswillexceedherstandarddeductionamount,itseemsmoreadvantageousforVanessatotakethestandarddeduction.
ReturntoLesson19.
Point out the tax soft-ware hint.
Ask students to review Lesson 20 if you are not teaching the lesson as part of the course.
19
A-21Appendix A: Vanessa Scenario, Lesson
Lesson 20: Itemized Deductions
Let’sdetermineifVanessashoulditemizeherdeductions.Vanessaincurredexpensesthatmayincreaseherdeductions.Shecurrentlyqualifiesforthestandarddeductionof$9,583forthetaxyear.
Vanessastatedshepaidmedicaland/ordentalexpensesanddonations,soyoudecidedtoprobefurtherusingtheVolunteerResourceGuide(TabF)–ItemizedDeductionsInterviewTips.
Tax Software Hint: YoumayenterVanessa’sresponsesonScheduleAinthetaxsoftwareasyouconducttheinterview.
Sample interview clarifying medical deductions
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Let’s enter all qualified medical deductions for you and your dependents. How much did you pay in health care premiums?
Yes, health insurance premiums are deductible as long as they aren’t pre-taxed. For this year, we’ll enter each of your medical and dental expenses separately. The total of your receipts comes to $585 so far. Now, let’s see if we can deduct some transportation costs. Can you determine how far you drove for your medical and dental care?
Well, the reimbursement rate for qualified medical travel for the months you traveled in 2009 was 24 cents per mile. When I enter your mileage here, it comes to $24.
We’ll include that amount as well! That brings your total to $2,109. However, in order to claim medical expenses, you need to have paid more than $2,447 in expenses, which is 7.5% of your adjusted gross income. Let’s complete Schedule A and see what happens!
Well,Ididn’thaveanyhealthinsurancelastyear,soIhadtopayforallourcheck-upsandmykids’allergymedicationprescriptionsanddentalfill-ings.Herearemyreceipts.IfIgethealthinsur-ancethisyear,willmypaymentsbedeductibleonmynexttaxreturn?
Allmydentalandmedicalappointmentswere inthesamecenter.Eachroundtripwas20miles,andIhavereceiptsforthefivetripsItookduringtheyearforatotalof100miles.Ipaidabout$1,500whenIhadmydaughterBella.
Whataboutthe$1,500IspentwhenIhadBella?
20
Direct students to the Interview Tips for Itemized Deductions (Tab F).
Ask two volunteers to role-play the sample interview.
Appendix A: Vanessa Scenario, Lesson A-22
Vanessa’s Tax Deductions
Duringthetaxyear,VanessahadsomestateincometaxwithheldasshownonherFormW-2.
Sample interview clarifying state and local income tax deductions
Sample interview clarifying interest deductions
Vanessa’s Gifts to Charity Deductions
Duringthetaxyear,Vanessagaveatotalof$200incontributionstoherchurch.Shegivesyouacopyofthelettershereceivedfromherchurch.Shecanitemizethisdeduction.
Tax Software Hint: Because$200islessthan20%ofVanessa’sAGIof$32,630,youdon’tneedtobeconcernedaboutindicatingwhetherthecontributionsarelimited.Simplyenterthecashandnoncashdonationsseparatelyunder“50%LimitOrganizations.”
Basedonyourfindingsduringtheinterview,youmakethefollowingnotesonVanessa’sapprovedintakeandinterviewsheet.InPartV,Item5youwrite$2,109andbyItem8,youwrite$200.
20
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Did you pay any interest?
I’m sorry, but it isn’t.
Justtheinterestonmycreditcardandmycarpayments.Isthatdeductible?
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
You can itemize the state and local income tax. Your Form W-2 shows you had some state income tax withheld, so that amount will go on Schedule A. Did you pay any state or local sales tax?
Because, if you itemize you can deduct either state and local sales taxes or state or local income taxes, whichever is larger. You paid $1,233 in sales tax on your new car. Did you pay any other sales tax?
In that case, we’ll use the amount you paid in state and local sales taxes and include the sales tax you paid on your new car. Once I complete this section, we can move on to the amount of interest you paid for the year.
No,justwhattheytakefrommypaycheck.Whydoyouask?
NoIdidn’t.
Thatsoundsgreat.
A-23Appendix A: Vanessa Scenario, Lesson
Vanessa’s Miscellaneous Expense Deductions
YoureadthebalanceoftheScheduleAentriestoVanessafromtheformorthetaxsoftware.Shestatedshepaidherbank$35forhersafedepositbox.Theboxwasusedtostoreherinvestmentdocumentswhichmakesthisadeductibleexpense.
Sincethe$35shepaidislessthan2%ofherAGIof$32,630shedoesn’tgetthedeductionformiscellaneousexpenses.
Itemized Deductions Summary
Vanessa’sForm1040,ScheduleA(nextpage)depictshertotalitemizeddeductions.Duringthetaxyear,Vanessapaidmedicalanddentalexpenses,stateincometaxes,andafeeforhersafedepositbox.Shealsocontributedmoneytoherchurch.ThetotalofallheritemizeddeductionsshownonScheduleAis$1,690,whichislessthanherstandarddeductionamountof$9,583,afterincludingthevehiclesalestax.Vanessawilltakethestandarddeduction.
Tax Software Hint: OnVanessa’sForm1040,youseethat:
Line40showsthestandarddeductionforHeadofHousehold($9,583)becausethatamountisgreaterthanthetotalofVanessa’sitemizeddeductions($1,690).
Line41showsVanessa’sAGIreducedbyherstandarddeduction.
Line42showsVanessa’sdeductionforherfourexemptions($14,600).
20
Appendix A: Vanessa Scenario, Lesson A-24 20
ReturntoLesson20.
FOR ILLUSTRATION PURPOSES ONLY
A-25Appendix A: Vanessa Scenario, Lesson
Lesson 23: Credit for Child and Dependent Care
Does Vanessa qualify for the Child and Dependent Care credit?
Bella,Zoe,andZacharyareVanessa’sthreedependentchildren.Let’sdetermineifVanessaiseligibleforthechildanddependentcarecreditbyusingtheCanYouClaimtheCreditforChildandDependentCareExpenses?decisiontreeintheVolunteerResourceGuide(TabG).
Sample interview clarifying Child and Dependent Care credit
Basedonyourfindingsduringtheinterview,youmakethefollowingnoteonVanessa’sapprovedintakeandinterviewsheet.InPartV,Item9youwrite$1,500.
23
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Did you pay for child care during the tax year?
You may be able to take the credit for child and depen-dent care expenses. Let me go over a couple of things with you. I already know that your three dependent chil-dren are under 13, so they qualify.
And I know that you have earned income because you work in a department store. Did you pay for child care so that you could go to this job?
And Zoe’s day care provider is not a relative, correct?
We already know that you are filing as Head of Household, and meet the conditions of “unmarried” for tax purposes. Did you bring the name, address, and tax iden-tification number of the provider with you?
What were your child care expenses for the year?
Does your company provide any dependent care benefits?
Well, your expenses definitely qualify. Now all we have to do is figure out the amount of your child and dependent care credit.
Zachattendsafreeafter-schoolprogram.MymomwatchesBellaalldayandshewatchesZoemostofthetime;Zoegoestopreschoolonedayaweek.
Okay.
Yes.
Thepreschoolisnot.Idon’thavetopaymymom.
Yes,Idid.
Well,Ipaythepreschool$125amonth,sothatwouldbe$1,500fortheyear.
No.
Great!Thanksforyourhelp!
Direct students to the Volunteer Resource Guide (Tab G), Can You Claim the Credit for Child and Depen-dent Care Expenses? decision tree.
Ask two volunteers to role-play the sample interview.
Appendix A: Vanessa Scenario, Lesson A-26
How do I compute the child and dependent care credit?
Vanessaqualifiesforthechildanddependentcarecredit.UseForm2441,availableonwww.irs.gov,tocalculatetheamountofthecredit.VanessapaidKoalaBearsDayCare(EIN82-1111111)$1,500forthetaxyear.KoalaBearsislocatedat456ChapmanAvenueinDenver,Co80202.
BasedonVanessa’sAdjustedGrossIncome,hermaximumcreditiscomputedat26%(.26)ofherallow-ableexpenses,sohercreditcanbeashighas$390.ThisamountiscomparedtoVanessa’stax.Sincehertaxisgreaterthanthechildanddependentcarecreditinthisscenario,thetaxsoftwarehascalculatedVanessa’schildanddependentcarecreditas$390.ThisamountisenteredonherForm1040.Vanessa’scompletedForm2441isinAppendixB.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab5).
ReturntoLesson23.
23
Ask students to complete Parts I and II of Form 2441 using the tax software or Form 2441.
Vanessa’semployerdidnotprovideanydependentcarebenefitsforherchild.Therefore,youdonothavetocompletePartIIIofForm2441forVanessa.Vanessabroughtthedaycareprovider’sinfor-mation.
A-27Appendix A: Vanessa Scenario, Lesson
Lesson 24: Education Credits
Does Vanessa qualify for any of the education credits?
VanessamaybeabletoreducetheamountoftaxdueifshehaseducationexpensesthatqualifyfortheAmericanopportunity(Hopecreditexpanded)orlifetimelearningeducationcredits.ReviewtheinformationintheVolunteerResourceGuide(TabG)regardingthesecredits.
Sample interview clarifying education credits IntheAdjustmentstoIncomelesson,wedeterminedthatVanessawaseligibleforthetuitionandfeesdeductionforaclassshetookinthefall.Now,youmustdetermineifaneducationcreditwouldbeabetterchoice.
Basedontheinterview,Vanessameetstherequirementsforthelifetimelearningcredit.Makeanoteonpage4ofVanessa’sapprovedintakeandinterviewsheetwithyourfindings.
Computing the education credit
BoththeAmericanopportunitycredit(Hopecreditexpanded)andthelifetimelearningcreditarecalculatedonForm8863.Vanessa’scompletedformisshowninAppendixB.
Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab5).
ReturntoLesson24.
24
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Now that the rest of the return is completed, let’s go back and see if the tuition and fees deduction was really the way to go, or if an education credit would be better. Do you know about the education credits?
Instead of deducting an amount from your income and making your tax smaller that way, a credit is subtracted right from the total tax. But the credits are only based on a part of your expenses, instead of the whole amount.
So, Vanessa, why did you take the course?
Then you are only eligible for the lifetime learning credit. I’ve already figured your allowable expenses, so I just have to take off the deduc-tion and try the credit instead. It will just take a minute.
Yes, the lifetime learning credit works better for you. [OntheIntakeandInterviewSheet,indicatethattheeducationcreditwasusedinsteadofthetuitionandfeesdeduction.]
I’veheardalittleaboutthem.
Iunderstandthat.
TheEmployeeAssistanceProgramrecommendedthecoursetomybosstoimprovemyjobskills.
Didmyrefundgoup?
Thanksforchecking.
Direct students to the Volunteer Resource Guide (Tab G), Education Credits.
Ask two volunteers to role-play the sample interview.
Appendix A: Vanessa Scenario, Lesson A-28
Lesson 26: Child Tax Credit
Is Vanessa eligible for the full child tax credit?
Vanessa’sresponsesintheFamilyandDependentInformationoftheapprovedintakeandinterviewsheetindicatethatherchildrenmayqualifyforthechildtaxcredit.Ifshequalifies,thecreditreduceshertaxliabilitybyupto$1,000foreachqualifyingchild.
UsingtheChildTaxCreditandAdditionalChildTaxCreditInterviewTipsintheCreditssectionoftheVolunteerResourceGuide(TabG),youcanconcludethatallthree children:
• Areundertheageof17
• ArechildrenofVanessa
• AreU.S.citizens
• Livedinherhomeformorethan6months
YoualsoconcludethatyoucanusetheChildTaxCreditWorksheetfromtheForm1040instructionstocalculateVanessa’scredit.
ShemadecontributionstoaretirementsavingsaccountandmaybeeligibletocompleteForm8880foranothercredit.
Sample interview clarifying the child tax credit
Computing the Child Tax Credit
EarlierVanessatookthechildanddependentcarecreditandtheeducationcredit.Sinceherremainingtaxislessthanthe$3,000creditallowedforthreequalifyingchil-dren,shecannottakethefullchildtaxcredit.
Tax Software Hint:Sincethiscreditiscalculatedautomaticallybasedontheinformationaboutdependentsandincomealreadyenteredonthereturn,thevolunteerdoesnotneedtomakeanyadditionaltaxsoftwareentries.ThetaxsoftwarewilldisplaythecreditontheNonrefundableCreditsscreen.
26
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
You probably qualify for the child tax credit, but let me ask you a few questions just to be sure.
Let’s see, Zachary, Zoe, and Bella are under age 17, correct?
And we know that they are all U.S. citizens.
They lived with you for the entire year?
And we’ve already established they did not provide any of their own support.
Well, since you are claiming all three of your children as dependents and they meet the status of a qualifying child for the child tax credit, you qualify for this credit.
Okay.
Yes.
That’scorrect.
Yes.
No,ofcoursenot,they’rejustlittlekids!
Direct students to the Tips for the Child Tax Credit (Tab G).
Ask two volunteers to role-play the sample interview.
A-29Appendix A: Vanessa Scenario, Lesson
Sample interview explaining Vanessa’s partial child tax credit
ThepaperversionofVanessa’sForm1040,ChildTaxCreditWorksheetisverysimilartowhatyouseeinthetaxsoftware.Itmayhelpyouunderstandhowthesoftwarecalcu-latesthechildtaxcredit.SeethecompletedworksheetinAppendixB.
Explanation of Additional Child Tax Credit
Makeanoteonpage4ofVanessa’sapprovedintakeandinterviewsheetthatshedoesnotqualifyforthefullnonrefundablechildtaxcreditbecausethecreditwasmorethanhertaxliability.Next,determineifsheiseligiblefortheadditionalchildtaxcredit.
TheAdditionalChildTaxCreditcriteriaareshownasaTipintheCreditssectionoftheVolunteerResourceGuide(TabG).
BecauseVanessadidnotusetheentireamountofthechildtaxcredittooffsethertax,andherearnedincomewasmorethan$3,000,sheiseligibletoclaimtheadditionalchildtaxcredit.
Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tabs5and6).
Vanessa’sadditionalchildtaxcreditis$2,793Toreviewinformationrelatedtothesoft-ware,gototheVolunteerResourceGuide(Tabs5and6).asindicatedonForm1040.
ReturntoLesson26.
26
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Let’s see if you are able to take the full credit. Your modified adjusted gross income of $32,630 qualifies. It is less than the $75,000 limit.
Let’s take a look at your tax. I see your tax on line 46 is $843. After applicable credits, you are still left with a tax amount that is less than the full $3,000 credit for three children.
Well, this credit is limited to the amount of your tax. But you may be eligible for the additional child tax credit. For now, let’s take a look at your Child Tax Credit Worksheet in the tax software and I can show you how this works.
Great!
Whatdoesthatmean?
Direct students to Vanessa’s Form 1040, Child Tax Credit Worksheet.
Ask two volunteers to role-play the sample interview.
Direct students to the Tip for the Additional Child Tax Credit (Tab G).
Appendix A: Vanessa Scenario, Lesson A-30
Lesson 27: Miscellaneous Credits
Does Vanessa qualify for the credit for qualified retirement savings contributions?
Vanessamaybeabletoreducehertaxliabilityifsheisabletotakethiscredit.InPartV,Expenses,ofherapprovedintakeandinterviewsheet,Vanessaanswered“yes”tothequestionaboutcontributionstoanIRAorotherretirementaccount.BasedonherFormW-2,weknowVanessacontributed$1,000intoher401Kplanatwork.Inapreviousinterview,shestatedthatshealsoput$600intoherIRA.Besuretorecordthisinfor-mationonherapprovedintakeandinterviewsheet,asshownhere.
Vanessa’sretirementsavingsmayqualifyherforthecreditforretirementsavingscontributions.GototheVolunteerResourceGuide(TabG)andreviewtheRetirementSavingsContributionsCredit-DecisionTree.YoudecidetoaskVanessaadditionalprobingquestionstodetermineifsheiseligible.
Sample interview clarifying the retirement savings contribution
27
Direct students to the the Retirement Savings Contributions Credit Decision Tree in the Volunteer Resource Guide (Tab G).
Ask for two volunteers to role-play the sample interview.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Since you put money into an IRA and your retirement account at work, let’s see if you’re eligible for the saver’s credit. Your AGI isn’t too high. And you were born before January 2, 1992?
We know that you can’t be claimed as a dependent by some-one else. And, even though you did take a class; you were not considered a full-time student.
During 2007, 2008 or the current tax year, did you take any money out of your IRA account or your 401(k) plan at work, or do you plan to take any distributions before the tax filing deadline?
Good, Now I have all the information I need to make the calcula-tion. Let me finish this up and see how much credit you can get.
Yes,that’sright.
That’scorrect.
No.Itrytoforgetallaboutthem. Onceyoustarttakingitout,it’stoohardtoputitback.
A-31Appendix A: Vanessa Scenario, Lesson
Computing the Credit for Qualified Retirement Savings Contributions
Vanessaqualifiesforthesaver’scredit.UseForm8880,availableinthetaxsoftwareoronwww.irs.gov,tocalculatetheamountofthecredit.
Vanessa’scompletedForm8880isinAppendixB.
Tax Software Hint:YouwillneedtocompleteafewentriesonForm8880.GototheVolunteerResourceGuide(Tab5),RetirementSavingsContributionsCredit,forsoftwareentries.ThesoftwareautomaticallycalculatestheamountofthecreditbasedonentriesfromFormW-2,theIRAworksheet,andtheMainInformationSheet.
ReturntoLesson27.
27
Appendix A: Vanessa Scenario, Lesson A-32
Lesson 28: Other Taxes
Does Vanessa have any additional taxes?
Vanessaanswered“yes”toself-employmentincomeearlierintheinterviewprocess.Let’sdetermineifshehasanyadditionaltaxes.Asyourecall,Vanessahasherowncosmeticsbusiness.
Sample interview clarifying additional taxes
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
We are almost finished with your return. We already reported your self-employment income. Did you know self-employment income is subject to social security and Medicare taxes?
We can use the short version of Schedule SE since you meet the requirements.
Your Schedule SE takes your net profit from your Schedule C-EZ and calculates the amount of social security and Medicare tax on that income. That amount goes on the line for self-employment tax on Form 1040.
That’s right. Schedule SE also calculates one half of the self-employment tax, which is entered into the Adjustments section of Form 1040.
The next tax is for unreported tip income. Do you receive tips at your regular job or as part of your self-employment?
We’ll leave that zero. When we discussed the saver’s credit, you said that you didn’t receive any distributions from an IRA or a retire-ment plan, is that correct?
When I entered your Form W-2 information, I didn’t put anything in box 9, for advance EIC Payment. Let’s double check. Did you receive any advance payments of EIC during 2009?
Did you know that you may choose to receive advance payments of the EIC throughout the year rather than waiting until you file your tax return to receive the full amount?
You need to fill out Form W-5 and give it to your employer. Then you can receive a portion of the credit in your regular paychecks.
No,butthatisgoodtoknow.
Okay.
Iseemyself-employmentincomehere…anditjustcalculatesthetaxhere.
Isee.
No,notatall.
Yes,that’sright.
No,none.
No,Ididn’t.HowdoIdothat?
Thatsoundslikeitcouldhelpoutwiththemonthlybudget.I’llhavetocheckintothat.
Ask two volunteers to role-play the sample interview.
YoumayfindithelpfultoreviewinformationinPublication17,HowtoFigureYourTax,whencompletingtheOtherTaxessectionofthereturnespeciallyifyou’renotusingtaxsoftware.
28
A-33Appendix A: Vanessa Scenario, Lesson
Vanessa’scompletedScheduleSEinAppendixBshowsthatshemustpay$339inself-employmenttaxonherincomefromhercosmeticsbusiness.ThisamountisenteredintheOtherTaxessectionofherForm1040,andthedeductionforone-halfofself-employmenttaxisenteredintheAdjustmentssectiononpage1ofForm1040.
Tax Software Hint: ThesoftwarecompletesScheduleSEautomaticallyand
calculatesanyothertaxes.
ReturntoLesson28.
28
Point out that the self employment tax is reported in the Other Taxes section of Form 1040 (page 2).
sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Now for the last tax: Did you have any household employees in 2009?
Yes, but you do that for free! The Other Taxes section is done. Based on your income, adjustments to income, tax and credits, and other taxes, this amount represents your total tax.
No, actually, because of your withholding and your Earned Income Credit, you are due a refund. Shall we go over that now?
Isuredidn’t–unlessyoucountme!
Oh,doIowethat?
Gladly!
Appendix A: Vanessa Scenario, Lesson A-34
Lesson 29: Payments
Does Vanessa qualify for any additional credits?
Vanessahasearnedincomeandthetotalislessthanthephase-outamountforthemakingworkpaycredit.ShehasavalidSSNandshecannotbeclaimedasadepen-dentbysomeoneelse.Sincealltherequirementsaremetsheiseligibleforthemakingworkpaycredit.ScheduleM,MakingWorkPayandGovernmentRetireeCredits,iscompletedforVanessa.
Vanessachecked“no”onitem12inPartIIIofherapprovedintakeandinterviewsheetregardingestimatedtaxpayments.Let’sseewhatpaymentsVanessamadeduringtheyearandifshewillqualifyforanyadditionalcreditsthatwillreducehertaxliability.HerFormW-2revealshertaxwithholding.
Sample interview clarifying payments
Computing the credit
Basedonherearnedincomeandotherrequirements,Vanessaisentitledtothenewmakingworkpaycredit.
Tax Software Hint: Vanessa’sEICamountisautomaticallycomputedalongwiththefederalincometaxwithheldentryfromherFormW-2andheradditionalchildtaxcreditamountfromForm8812.ThemakingworkpaycreditiscalculatedonScheduleM.
ReturntoLesson29.
29
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
We are in the Payments section. The tax software shows the withhold-ing tax from your Form W-2 of $1,240.
I know you had a little self-employment income. Did you pay estimated tax during 2009?
Looking at your self-employment income and your last year’s return, you probably weren’t required to pay any.
You meet all the requirements for a new credit this year, making work pay. The software calculates it automatically and the credit is $400.
Let me skip the earned income credit entry for now. We decided earlier that you qualify for the additional child tax credit in the amount of $2,793.
We’re not finished yet. Bella, Zoe, and Zachary may qualify you for the earned income credit. The EIC may increase your refund or decrease your tax liability.
You indicated you did not purchase a home this year. Is that right?
Since you did not purchase a home this year, the first-time homebuyer credit does not apply to you.
Okay.
No,Ididnot.
That’sarelief!
IamgladIqualifyforthecredit.Thanks.
That’scorrect.
That’sgood!
Thatisright.
Okay,Isee.NowIknowwhyIhadtoanswerthatquestionontheformIfilledout.
Display the Payments section in the tax soft-ware.
Ask two volunteers to role-play the sample interview.
A-35Appendix A: Vanessa Scenario, Lesson
Ask two volunteers to role-play the sample interview.
Lesson 30: Earned Income Credit (EIC)
Does Vanessa qualify for the EIC?
TodetermineifVanessaqualifiesfortheEIC,youwouldaskquestionsbasedontheEICGeneralEligibilityInterviewTipsfoundintheVolunteerResourceGuide(TabH).Youmayfindithelpfultoreviewthesetipsbeforestartingtheinterview.
Sample interview clarifying EIC
Basedontheinterview,weknowthatVanessameetsthegeneraleligibilityrequire-ments.Next,youneedtodetermineifanyofherchildrenisa“qualifyingchild”forEIC.
Do Vanessa’s children qualify her for the EIC?
TodetermineifVanessa’schildrenBella,Zoe,andZacharyarequalifyingchildrenfortheEIC,youshouldquestionherbasedontheInterviewTipsforEICwithaQualifyingChildintheVolunteerResourceGuide(TabH).
30
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Are you familiar with the EIC?
I need to ask you two questions. Has your request for the credit ever been denied, or the amount reduced by the IRS?
Good! Since your income is less than $43,279, you could qualify for the earned income credit again this year. Let’s see. I already checked and you and the kids all have valid social security cards. And you will file as Head of Household.
Okay. And you are a U.S. citizen, so you weren’t a nonresi-dent alien during the tax year?
Did you have any income from outside the United States?
Very good. Now, because the Income section of your tax return shows that you had no interest, dividend, or capital gains income, we don’t have to worry about your investment income being too high.
And we know that you are not someone else’s qualifying child.
Yes,Igotitlastyear.
Letmethink.“No”tobothquestions.
That’sright.
No,that’sforsure!
No,myonlyincomewasfrommyjobandmycosmeticssales.
Unfortunatelynot.
Yes.
Direct students to the Interview Tips for EIC.
Ask two volunteers to role-play the sample interview.
Direct students to the EIC General Eligibility Interview Tips in the Volunteer Resource Guide (Tab H).
Appendix A: Vanessa Scenario, Lesson A-36
Sample interview clarifying EIC with Qualifying Child credit
Tax Software Hint:ThetaxsoftwarehasalreadycalculatedVanessa’sEIC
computationbasedontheentriesintheMainInformationSheetinthePaymentsectionofherreturn.
Volunteer Preparer Determination
Basedontheinterview,VanessameetstheEICrequirementswithqualifyingchildren.MakeyournotesonPage4ofherapprovedintakeandinterviewsheet.Also,completeSectionB,Item6ofherintakesheet.SeeAppendixBforthecompletedforms.
Optional Exercise
UsingVanessa’sinformationandtheworksheetsfromwww.irs.gov,completeherScheduleEICandcomputeherearnedincometaxcredit.CompareyourworktothecompletedformsinAppendixB.
ReturntoLesson30.
30
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Lets see, we already know the kids have valid social security numbers, that they are your children and they are under the age of 19.
I am guessing none of them are married?
They lived with you in the U.S. for the entire year, so they meet the half-year requirement. To claim children for the EIC, they have to meet age and relationship tests, and live with you in the U.S. for more than half the year. Since your mother lives with you, the kids would also pass those tests for her, although there is a new test for 2009 that she would have to pass to claim the kids.
Great. If you both accidentally claimed the same kids, the IRS would decide who was entitled according to the qualifying child of more than one person rule. As the parent, you would win the tie.
Yes,that’scorrect.
[Laughs]No,they’renotevendatingyet.
No,that’sokay,Ialwaystakethekids.
Optional: Assign optional exercise or walk through it with students.
A-37Appendix A: Vanessa Scenario, Lesson
Lesson 31: Refund and Amount of Tax Owed
Will Vanessa receive a refund or pay additional tax?
WhetherVanessareceivesarefundorowestaxesdependsontwoentriesonherForm1040:theTotalTaxlistedintheOtherTaxesSectionandtheTotalPaymentslistedinthePaymentsSection.
Ifhertotalpaymentsaremorethanhertotaltax,shewillreceivearefund;ifhertotalpaymentsarelessthanhertotaltax,shewilloweanamount.AsyoucanseefromherForm1040,Vanessaoverpaidhertaxesandwillreceivetherefund.
Tohelpyoucompletethispartofthereturn,includingtheDirectDepositandbalancedueguidance,refertoPointersforDirectDepositofRefundsandBalanceDueReturnsintheVolunteerResourceGuide(Tab13).
Tax Software Hint: Thesoftwareautomaticallycalculatesthetaxpayer’srefundoramountowed.
Sample interview on refund options
Ask two volunteers to role-play the sample interview.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Your payments exceeded your tax liability for the year by $6,211. You can receive the entire amount as a refund, or apply any portion of it to your 2010 estimated taxes.
Okay, then we’ll leave the line for Applying Your Refund to Next Year’s Estimated Taxes blank. Now, would you like to receive your refund via direct deposit? It’s much faster than by mail, and there’s no charge.
Great. The IRS will deposit the refund directly to your account, or as many as three different accounts if you want.
As long as you have the routing number and account numbers for each separate account.
Great. Now just to make sure we get the numbers right, I’m going to have you look at them on the screen, and then check them again when the return prints out. So keep those numbers handy.
OK, that should do it. $1,000 in the IRA account and the rest in checking. If your refund changes for any reason, you will receive a notice of explanation from the IRS.
IthinkI’dliketotaketherefund.ZoeandZacharyneedsomenewclothes.
Yes,I’dlikethat.
Really?I’mtryingtoputalittleofeachtaxrefundinmyIRAeveryyear.It’seasiertosaveifIdon’treallyseeit.CanIput$1,000inmyIRAandtherestinchecking?
Ihavethemrighthere.
Sure.
Thatwaseasy.Thankyou.
31
Appendix A: Vanessa Scenario, Lesson A-38
BecauseVanessadoesnotwantanyoftherefundappliedtoher2010estimatedtaxes,youwouldleavethatlineblank.IfVanessawantedtodirectdepositherrefundintooneaccountyouwouldfillintheappropriatelinesintheRefundsectionofthereturn.Whenataxpayerrequestsadirectdepositintoonlyoneaccount,theinformationmustbeenteredtwice:onForm1040andalsointheBankAccountInformationsectionoftheMainInformationSheet.
However,sinceVanessastatessheissplittingherrefundwithpartgoingtoherIRAandtheotherpartgoingintochecking,Form8888mustbecompleted.WhenForm8888iscompleted,donotenteranydirectdepositinformationonPage2ofForm1040.
Tax Software Hint: TocompleteForm8888forVanessa,addtheformtoherreturn.Completetheinformationforbothofherroutingandaccountnumbersandfortheamountthatgoesintoeachaccount.Besurethetwoamountstotaltherefundamount.Youcanprinttheformfortheclient’sreviewbeforesubmittingthereturntotheIRS.
If,insteadofarefund,VanessaowedmoneyandcouldnotpayitbyApril15,shecouldpaybycreditcard,orshecouldrequestapaymentplanwiththeIRS.Theremaybeapplicablefees,penalties,andinteresttoconsider.TheVolunteerResourceGuide (Tab13)BalanceDueReturnsoutlinestheoptions.
ToreviewthesepartsofVanessa’sreturn,gotoAppendixBandexaminetheRefundandAmountYouOwesectionsofherForm1040andherForm8888.
ReturntoLesson31.
Direct students to Appendix B and review Vanessa’s Form 1040, direct deposit items, and Form 8888.
31
A-39Appendix A: Vanessa Scenario, Lesson
Lesson 32: Quality Review of the Tax Return
Vanessa’s Quality Review
VanessaFranklin’staxreturnisreadyforthefinalqualitychecktoensurethathertaxreturniscorrectandcomplete.Beginbyexplainingtoherthepurposeofthequalityreview,alongwiththestepsintheprocess.Next,conducttherevieworsendVanessatoyoursite’squalityreviewer.
UsethequalityreviewsheetinForm13614-C(page3),orotherapprovedqual-ityreviewsheet.TheVolunteerResourceGuide(Tab13),offersassistancewiththisprocess.Seethesection,CheckYourWork–TheQualityReview.
Finally,ifVanessachoosestoe-file,guideherthroughtheprocessofsigningthereturnelectronically.
Sample interview during quality review and e-filing
Direct students to the Check Your Work page in the Volunteer Resource Guide (Tab 13).
Direct students to the Finishing the Return section of the Volunteer Resource Guide (Tab 13).
Ask two volunteers to role-play the sample interview.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
It looks like we are finished here. If you will just give me a couple of minutes to check the work that we have done, we will get this return quality checked and then we will be ready to file your return.
All right, I checked my work. Now I’m going to ask our Quality Reviewer, George, to sit down with you and do the final check. We want this return to be perfect before we send it to the IRS. At this site we always have someone else check each return to make sure you are getting all the credits you deserve and there are no surprises later.
Vanessa this is George, our designated Quality Reviewer. George this is Vanessa Franklin.
OK,thatsoundsgoodtome.
Oh,Ilikethat.
Nicetomeetyou.I’mreallyimpressedthatyouaremakingallthiseffortforme.
32
sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QualIty revIeWer says… vanessa responds…
We want to have the most accurate return possible. We always do a final check on each return we prepare.
Let me review my job aid to make sure that I got everything correct.[OpenstheVolunteerResourceGuidetothe13164-CJobAidandcontinuestheinterview]. OK, now let’s look at the intake sheet that the two of you have been working from, and your return. I will need to confirm some of the information and then check the return to ensure that we have properly utilized all the information.
I see that your address on the return matches your ID. You’re claiming three dependents and yourself on this return. I see that we have the social security cards for each. Let’s talk a minute about your filing status and then we’ll check your income.
Thankyou.
OK.
Thankyouformakingsureevery-thingiscorrect.
Appendix A: Vanessa Scenario, Lesson A-40
Vanessashouldleavethesitewithallofherdocumentsinadditiontoacopyofthereturnandalloftheschedules,forms,andworksheets.
ReturntoLesson32
sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . QualIty revIeWer says… vanessa responds…
[Thereviewcontinues.] I see that you have chosen to take direct deposit and your account numbers match. One last thing, yes the SIDN is on the return. Everything looks good. Thank you for assisting me with this.
I’ll let Maria finish with the rest of the process with you. It was nice to meet you.
Nicemeetingyou,too.
sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Just a couple more things to take care of and we will have you on your way.
Well, here at our site we use a Practitioner PIN. You just sign Form 8879, right here. This will authorize me to electronically file the return for you.
That does it! Now I’ll print you a copy of the tax return for your records.
OK.Doyouwantmetosignthereturnnow?
Wow,that’sit?Ijusthavetosigntheoneform?
Wonderful,thankyouforyourhelp!
32
A-41Appendix A: Vanessa Scenario, Lesson
Lesson 33: Concluding the Interview
How do I conclude the process with the taxpayer?
Basedontheinterviewtipsforthefive-stepinterviewprocessfoundatthefrontoftheVolunteerResourceGuide,you’rereadytoconcludetheinterviewwithVanessa.ThefinalstepincludesadvisingVanessaoftherequire-mentsformaintainingherrecords,howsheshouldaddressanoverpayment,whenshewillreceiveherrefund,andhowtoavoidpayingadditionaltaxinfuturetaxyears.
Beforeparting,askVanessaifshehasanyfinalquestions.YoucanfindmanyanswersontheinsidebackcoveroftheVolunteerResourceGuide;lookfor“FrequentTaxpayerInquiries.”
Sample interview concluding the tax preparation process
ThankVanessaforcomingtoyoursiteandremindherofwhereandhowtocheckthestatusofherreturnonwww.irs.gov.
ReturntoLesson33.
sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…
Here’s a full copy of the tax return to keep for your records.
We keep copy B of your Form W-2 until December 31, and then we shred it. I’ll staple the other copies of the W-2 to your copy of the return. We can put everything in this envelope, and you can put your other records and receipts in there too. If you ever need to review the return, everything will be in one place.
If you bring this copy back with you next year, it will help the volunteer preparer who does your return.
I’ve created the e-file of your return. Later tonight, the Site Coordinator will transmit it to the IRS. If there are any problems with the e-file, she usually finds out the next day. If she needs to call you tomorrow, will you be at one of the phone numbers you gave me earlier?
Great. She’ll only call if she needs information from you to resolve a prob-lem. See this chart in your packet? If everything goes as expected, you can start looking for your direct deposits by this date. [ShowVanessathe2010IRSe-fileRefundCyclechartintheVolunteerResourceGuide,Tab14.]
Give it at least one more week – direct deposits always show up on a Friday. If it’s still not there, you can call the IRS Refund Hotline. The number is right here on your envelope. There are some other IRS numbers on there, too, if you ever need them. Do you have any other questions?
I’m glad I got to meet you. Thanks for coming in!
WhataboutmyW-2?
That’sconvenient.
Okay.
I’llbeatmyworknumberduringtheday,andthere’sanansweringmachineathome.
That’sprettyfast.WhatshouldIdoifit’snotthere?
No,thiswasprettyeasy.
Direct students to the “Frequent Taxpayer Inquiries” on the inside back cover of the Volunteer Resource Guide.
Ask two volunteers to role-play the sample interview.
AskyourSiteCoordinatorifyoumayprovidetaxpayerswithanenvelope(Publication730)theycanusetostoretheirtaxdocuments.Theenvelopeincludesimportantinformationsuchashowtocheckthestatusoftherefund.
33
Appendix A: Vanessa Scenario A-42
Notes
Appendix B: Vanessa’s Tax Documents B-1
Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-2
B-3Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-4
B-5Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-6
RoutingNumber AccountNumber CheckNumber (donotinclude)
B-7Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-8
B-9Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-10
B-11Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-12
B-13Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-14
B-15Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-16
B-17Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-18
B-19Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-20
B-21Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-22
B-23Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-24
B-25Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-26
B-27Appendix B: Vanessa’s Tax Documents
Appendix B: Vanessa’s Tax DocumentsB-28
Index I-1
CoverdellESA. . . . . . . . . . . . . . . . . . . . . . 8-7,17-3,17-16CreditforChildandDependentCare . . . . . . . . . . . . . 23-1Creditforretirementsavingscontributions. . . . . . . . . 27-2Creditfortheelderlyordisabled. . . . . . . . . . . . . . . . . 27-6CTC–QualifyingChild . . . . . . . . . . . . . . . . . . . . . . . . 26-1CTCWorksheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-3
DDeathofaspouse. . . . . . . . . . . . . . . . . 4-2,4-8,5-2,34-9Decedents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-9Deductiblebusinessexpenses. . . . . . . . . . 9-4,21-1,22-1DeductibleIRAcontributions. . . . . . . . . . . . . . . . . . . . 17-6DependencyExemptions.....................6-1,7-8DependencyExemptions–Military. . . . . . . . . . . . . . . . 7-8Dependentcareexpenses......................23-1Dependencytests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9-2,12-6Directdeposit.............. 3-10,31-1,33-3,34-1,35-7Disabled,permanentlyandtotally(defined) . . . . . . . . 11-5Distributions. . . . . . . . . . . . . . . 8-7,8-12,10-8,11-3,28-5, ....................................Form1099-RDITY(Doityourselfmove) . . . . . . . . . . . . . . . . . . . . . 18-3Dividends. . . . . . . . . . . . .8-10,10-3,25-9,Form1099-DIVDividendsreinvestment. . . . . . . . . . . . . . . . . . . . . . . . 10-3DividendReinvestmentProgram(DRIP). . . . . . . . . . . 10-3Divorced/separatedparents–qualifyingchild. . . . 6-2,6-5 ..................................6-10,23-2,26-2Dual-statusaliens. . . . . . . . . . . . . . . . . . . . . . . .19-2,20-1Duplicate/mismatchedSSN/ITIN. . . . . . . . . . . . . . . . . . 3-6Dutystation. . . . . . . . . . . . . . . . . . . . . . . 10-18,15-6,16-4
EEarlywithdrawalofsavings. . . . . . . . . . . . . . . . .17-1,17-5EarnedIncomeCredit(EIC) . . . . . . . . . . . . . . . . . . . . 30-1EconomicRecoveryPayment. . . . . . . . . . . . . . . . . . . 29-5Education Credits . . . . . . . . . . . . . . . . . . .24-1,Form8863Educationexpenses . . . . . . . . . . . . . . . . . . . .17-12,17-16Educatorexpenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 17-2Education institutions.....................17-16,24-2E-file . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-10,31-2,33-2EIC–AdvanceEarnedIncomeCredit. . . . . . . . . . . . . 30-1EIC–Disallowance. . . . . . . . . . . . . . . . . . . . . . . . . . . 30-4EIC–EligibilityRules . . . . . . . . . . . . . . . . . . . . .30-2,30-4EIC–InvestmentIncome . . . . . . . . . . . . . . . . . . . . . . 30-2EIC–QualifyingChildrenRules. . . . . . . . . . . . . . . . . 30-4EIC–Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-7EIC–Worksheet. . . . . . . . . . . . . . . . . . . . . . . . .30-3,30-7Employeebusinessexpense. . . . . . . . . . . . . . . .21-1,22-5
Index
AAccurateReturn–QualityReview.........1-1,2-2,32-1AdditionalChildTaxCredit . . . . . . . . . . . . 26-1,26-5,29-1Additionaltaxes. . . . . . . . . . . . . . . . . . . . . . . . . .28-1,28-5Addresschange............... 34-1,34-10,Form8822Adjustedbasis. . . . . . . . . . . . . . . . . . . . . . . . . .10-2,10-15Adjustedgrossincome . . . . . . . . . . . . . . . 8-3,17-1,17-17AdjustmentstoIncome. . . . . . . . . . . . . . . . . . . . . . . . 17-1Adoptedchild. . . . . . . . . . . . . . . . . . . . . . . . . . 4-7,6-3,7-8AdvanceEarnedIncomeCredit(AEIC). . . . . . . .28-6,28-7Alimony. . . . . . . . . . . . . . . . . . . . . . . . . . . 8-14,15-9,17-5AlternativeMotorVehicleCredit . . . . . . . . . . . . . . . . . 27-8AmendedReturn. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-1AmericanOpportunityTaxCredit. . . . . . . . . . . . . . . . 24-5AmericanRecoveryandReinvestmentAct (ARRA) . . . . . . . . . . . . . . . . . . . . . . . . . . 14-3,20-4,31-10Amountowed................................31-1Annuity...........................11-1,FormW-4PAssemblingthereturn. . . . . . . . . . . . . . . . . . . . . . . . . .33-1ATIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-6,7-9
BBasicAllowanceforHousing(BAH) . . . . . . . . . . . . . . 21-5BasicAllowanceforSubsistence(BAS) . . . . . . . . . . . 21-5Basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1,10-1,11-3Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-8,17-12,31-11BusinessExpenses. . . . . . . . . . . . . . . . . . . 9-2,21-1,22-1BusinessIncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-1BusinessTravelExpenses . . . . . . . . . . . . . . . . . . . . . 22-1
CCapitalgainorloss. . . . . . . . . . . . . . . . . . . . . . . . . . . 10-1Capitalgaindistributions. . . . . . . . . . . . . . . . . . .8-12,10-8Carryoverlosses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-10Cashmethodofaccounting. . . . . . . . . . . . . . . . . . . . . . 9-2Casualtylosses. . . . . . . . . . . . . . . . . . . 10-2,10-16,20-11CertificateofDeposit(CD).......................8-8Charitablecontributions. . . . . . . . . . . . . . . . . . .19-2,20-10ChildTaxCredit(CTC) . . . . . . . . . . . . . . . . . . . . . . . . 26-1Childrenofdivorced/separatedparents........6-11,26-2Combatpay. . . . . . . . . . . . . . . . . . . 16-4,17-9,30-3,30-7Combatzoneparticipants. . . . . . . . . . . . . . . . . . . . . . 34-6Combatzone. . . . . . . . . . . . . . . . . . . . . . . 16-1,16-3,34-6Communityproperty . . . . . . . . . . . . . . . . . . . . . . .4-4,16-6ConcludingtheInterview. . . . . . . . . . . . . . . . . . . . . . . 33-1Corporatedistributions(dividends). . . . . . . . . . . . . . . 8-11Cost basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10-3,11-2Course Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1
IndexI-2
Employerretirementplans...................... 11-3EquivalentRailroadRetirementBenefit. . . . . . . . . . . 14-1Estimatedtax,figuring. . . . . . . . . . . . . . . .29-3,31-7,33-5, .............................Form1040-ESpage2Estimatedtaxpayments . . . . . . . . . . . . . . . . . . .29-3,33-4Estimatedtaxpenalty . . . . . . . . . . . . . . . . . . . . . . . . . 31-7Exchangerates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-3Exemption–ForeignSpouse . . . . . . . . . . . . . . . . . . . . 7-1Extensions. . . . . . . . . . . . . . . . . . . . . . . . .34-3,Form4868
FFellowships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-6FilingBasics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1FilingStatus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4-1,7-1FilingStatus–ResidentAliens. . . . . . . . . . . . . . . . . . . 7-1First-timehomebuyercredit. . . . . . . . . . . . . . . . .28-7,29-6Foreignearnedincome. . . . . . . . . . . . . . . . . . . . . . . . 15-2Foreignearnedincomeexclusion. . . . . . . . . . . . . . . . 15-5Foreignexchangerate.........................15-4ForeignTaxCredit. . . . . . . . . . . . . . . . . . . . . . . .15-2,25-1Form982. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-27Form1040. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8Form1040(ScheduleA). . . . . . . . . . . . . . . . . . . . . . . 20-1Form1040(ScheduleC,ScheduleC-EZ). . . . . . . . . . . 9-1Form1040(ScheduleD). . . . . . . . . . . . . . . . . . . . . . . 10-1Form1040(ScheduleE). . . . . . . . . . . . . . . . . . . . . . . 12-1Form1040(ScheduleEIC). . . . . . . . . . . . . . . . . . . . . 30-8Form1040(ScheduleL). . . . . . . . . . . . . . . . . . . . . . . 19-1Form1040(ScheduleM). . . . . . . . . . . . . . . . . . . . . . . 29-6Form1040(ScheduleR). . . . . . . . . . . . . . . . . . . . . . . 27-1Form1040(ScheduleSE). . . . . . . . . . . . . . . . . . . . . . . 9-2Form1040A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8Form1040EZ..............................3-8,4-1Form1040NR-EZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-3Form1041(ScheduleK-1) . . . . . . . . . . . . . . . . . . . . . 12-1Form1065(ScheduleK-1) . . . . . . . . . . . . . . . . . . . . . 12-1Form1098-T. . . . . . . . . . . . . . . . . . . . . . . 8-6,17-16,24-2Form1099-A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-19Form1099-B. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-5Form1099-C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-19Form1099-DIV. . . . . . . . . . . . . . . . . . . . . . . . . .8-11,10-8Form1099-INT . . . . . . . . . . . . . . . . . . . . . . . . . . .8-9,25-1Form1099-MISC. . . . . . . . . . . . . . . . . . . . . . . . . .3-12,9-1Form1099-OID. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-5Form1099-R. . . . . . . . . . . . . . . . . . . .8-9,11-2,16-3,30-2Form1099-S. . . . . . . . . . . . . . . . . . . . . . . . . . .10-2,10-15Form1116. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-1Form1120S(ScheduleK-1) . . . . . . . . . . . . . . . . . . . . 12-1Form13614-C,Intake/Interview&Quality ReviewSheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1-1,2-2Form13645. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4
Form2120. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-9Form2441. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8-5,23-1Form2555/2555-EZ . . . . . . . . . . . . . . . . . . . . . . . . . . 15-1Form3903. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-1Form4137. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-3Form5405. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-8Form5695. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-8Form8158,QualityReviewSheet. . . . . . . . . . . . . . . . 27-5Form8582. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-15Form8606. . . . . . . . . . . . . . . . . . . . . . . . . 11-4,11-7,17-9Form8812. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-1Form8822. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-1Form8863. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-7Form8879. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32-5,33-3Form8880. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8-5,27-3Form8888. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-3Form8910. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-8Form9465. . . . . . . . . . . . . . . . . . . . . . . . . 31-6,33-3,34-2FormRRB-1099 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-2FormSSA-1099. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-2FormW-2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5,3-2,8-4FormW-2G. . . . . . . . . . . . . . . . . . . . . . . . . . . . .29-2,32-5FormW-4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31-8,33-4FormW-4P . . . . . . . . . . . . . . . . . .11-13,31-9,31-12,33-4FormW-4V . . . . . . . . . . . . . . . . . . . . . . . 11-13,31-9,33-4FormW-4S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-9FormW-7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-6,7-3Fosterchild . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4-7,6-3Fraudulentactivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-12
GGamblingwinnings . . . . . . . . . . . . . . . . . 15-1,20-12,29-2Giftstocharity. . . . . . . . . . . . . . . . . . . . . . . . . .20-8,20-14Governmentretireecredit. . . . . . . . . . . . . . . . . . . . . . 29-6Green card...................................7-2Grossincome . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3-2,8-2
HHeadofHouseholdfilingstatus. . . . . . . . . . . . . . . . . . . 4-5HeadofHouseholdrules. . . . . . . . . . . . . . . . . . . . . . . . 4-5HealthCoverageTaxCredit . . . . . . . . . . . . . . . . .3-5,29-9HelpfromtheIRS. . . . . . . . . . 1-4,1-7,33-4,www.irs.govHoldingperiod. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-1Homemortgageinterest . . 10-20,12-11,19-5,20-6,20-14HopeCredit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-1Householdemployees/employment . . 6-4,8-6,23-5,28-1
IIncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1Income–QualityReview. . . . . . . . . . . . . . . . . . . . . . . 32-1Independentcontractor. . . . . . . . . . . . . . . . . . . . . . . . . . 28-2
Index I-3
IndividualRetirementArrangements(IRA). . . . . . 8-9,11-1, ..................................11-4,17-6,28-5IndividualTIN(ITIN) . . . . . . . . . . . . . . . . . . . . . . . .2-5,3-6Inheritedproperty . . . . . . . . . . . . . . . . . . . . . . . .10-2,10-4Injuredspouserelief . . . . . . . . . . . . . . . . . . 4-5,35-2,35-4Insurancepremiums. . . . . . . . . . . . . . . . . . . . . .12-5,20-7Intake/InterviewSheet(Form13614-C) . . . . . . . .2-2,6-12Interest deduction . . . . . . . . . . . . . . . . . . 12-4,17-11,20-6Interestincome–nontaxable . . . . . . . . . . . . . . . . .8-3,8-9Interestincome–taxable . . . . . . . . . . . . . . . . . . . . . . . 8-8Interviewprocess..............................2-1InterviewTips..............................2-3,2-6InterviewTips–ItemizedDeductions. . . . . . . . . . . . . 20-1Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-2Investmentincome(children’s). . . . . . . . . . . . . . . . . . . 8-2Investmentinterest . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-6Investmentproperty. . . . . . . . . . . . . . . . . . 10-1,10-4,25-7IRAcontributions. . . . . . . . . . . . . . .11-15,17-6,27-9,28-5IRADeductionWorksheet. . . . . . . . . . . . . . . . . . . . . . 17-9ItemizedDeductions. . . . . . . . . . . . . . . . . . . . . . . . . . 20-1ITIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5
J-K-LJobaid(Form13614-C) . . . . . . . . . . . . . . . . . . . .2-2,6-12Juryduty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15-1,17-1LifetimeLearningCredit . . . . . . . . . . . . . . 24-1,24-5,24-8Link&LearnTaxes . . . . . . . . . . . . . . 1-4,1-7,www.irs.govLong-termcarepremiums. . . . . . . . . . . . . . . . . . . . . . 20-3Lump-sumbenefitpayments. . . . . . . . . . . . . . . . . . . . 14-4
MMACRS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12-7,12-9Mailingthereturn. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-6Mainhome. . . . . . . . . . . . . . . . . . . . . . . 10-11,10-16,29-7Makingworkpaytaxcredit . . . . . . . . . . . . . . . .29-4,31-10MarriedFilingJointlyfilingstatus..................4-2MarriedFilingSeparatelyfilingstatus. . . . . . . . . . . . . . 4-3Medicalseparationpay. . . . . . . . . . . . . . . . . . . . . . . . 16-1MilitaryEmployeeBusinessExpenses. . . . . . . . . . . . 21-1MilitaryFilingStatus–Exemptions. . . . . . . . . . . . . . . . 7-1MilitaryFinishingandFilingtheReturn. . . . . . . . . . . . 34-1MilitaryIncome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-1MilitaryMovingExpenses. . . . . . . . . . . . . . . . . . . . . . 18-1Miscellaneous Credits. . . . . . . . . . . . . . . . . . . . . . . . . 27-1Mortgage interest.....12-3,19-2,20-1,20-6,20-14,17-8Mortgage interest credit. . . . . . . . . . . . . . . . . . . . . . . . 27-8Mortgageinsurancepremiums. . . . . . . . . . . . . . . . . . 20-7Motorvehicletaxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 20-4Movingexpenses........................15-11,18-1Multiplesupportagreement. . . . . . . . . . . . . . . . . . . . . . 6-9Mutualfunds. . . . . . . . . . . . . . . . . . . . . . . 8-12,10-2,10-5
N-O-PNewmotorvehiclepurchase. . . . . . . . . . . . . . . . . . . . 19-6NonbusinessEnergyPropertyCredit . . . . . . . . . . . . . 27-5Noncustodialparent...................4-5,6-11,26-2Nonrefundablecredits(defined) . . . . . . . . . . . . .23-1,27-1Nonresidentaliens. . . . . . . . . . . . . . . . . . . . . . . . .7-1,20-1Nontaxableincome. . . . . . . . . . . . . . . 8-2,Publication525Originalissuediscount(OID).................8-8,17-5OtherTaxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-1Overpayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-1Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2Passiveincome. . . . . . . . . . . . . . . . . . . . . . . . .12-14,25-7Payments...................................29-1Paymentoptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-5Penaltyforearlywithdrawal................ 11-11,17-2Pensionincome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-1Permanentlyandtotallydisabled(defined). . . . . . . . . 27-6PersonalExemptions...........................5-1Points,mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-7PracticeLab..................................1-4PrincipalBusinessCode. . . . . . . . . . . . . . . . . . . . . . . . 9-4Prior-yearreturns.............................3-10Proofofidentity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5Provideridentification,childcare. . . . . . . . . . . . . . . . . 23-7Publication4012,VolunteerResourceGuide. . . . . . . . 1-3
QQualifieddividends . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-11QualifiedDividends/CapitalGainsTaxWorksheet . . . 8-13Qualifiededucationexpenses. . . . . . . . . . 8-7,17-16,24-1Qualifyingperson(ChildandDependentCareCredit). 23-2Qualifyingchild(ChildTaxCredit). . . . . . . . . . . . . . . . 26-1Qualifyingchild(dependencyexemption). . . . . . . . . . . 6-2Qualifyingchild(EIC). . . . . . . . . . . . . . . . . . . . . . . . . . 30-4Qualifyingrelative. . . . . . . . . . . . . . . . . . . . . . 4-6,6-1,6-6QualifyingWidow(er)filingstatus . . . . . . . . . . . . . .4-1,4-8QualityReview...............................32-1QualityReviewJobAid. . . . . . . . . . . . . . . . . . . . .2-2,32-2QualityReviewSheet(Form13614-C). . . . . . . . .2-2,32-1
RRailroadretirement . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-1Realestatetaxes. . . . . . . . . . . . . . . . . . . . . . . . .19-5,20-4Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . .3-10,3-13Refund/AmountofTaxOwed. . . . . . . . . . . . . . . . . . . . 31-1Refundinformation . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-1Refundablecredits(defined). . . . . . . . . . . . . . . . . . . . 29-1Refunds/overpayments. . . . . . . . . . . . . . . . . . . . . . . . 31-1RentalIncomeandExpenses. . . . . . . . . . . . . . . . . . . 12-1Rentalproperties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-1Reservistsexpenses. . . . . . . . . . . . . . . . . . . . . . . . . . 21-5
IndexI-4
Residencystatus. . . . . . . . . . . . . . . . . . . . . . . . . . .7-2,7-8ResidentialEnergyCredits . . . . . . . . . . . . . . . . . . . . . 27-9ResidentialEnergyEfficientPropertyCredit. . . . . . . . 27-9RetirementIncome . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-1Retirementplandistributions. . . . . . . . . . . . . . . . . . . . 11-1Retirementsavingscontributioncredit. . . . . . . . . . . . 27-1Rollover. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-6RothIRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-4
SS-corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2Saleofhome. . . . . . . . . . . . . . . . . . . . . . . . . . .10-1,10-11Saleofinvestmentproperty. . . . . . . . . . . . . . . . . . . . . 10-1Saleofstock. . . . . . . . . . . . . . . . . . . . .10-1,Form1099-BSalestaxes. . . . . . . . . . . . . . . . . . . . . . . . 8-14,19-6,20-3Savingsaccounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-7Savingsbond. . . . . . . . . . . . . . . . . . . . . . . . . . . . .8-8,17-3ScheduleK-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-1Scholarships. . . . . . . . . . . . . . . . . . . . . . . 8-6,17-12,24-4ScreeningandInterviewing. . . . . . . . . . . . . . . . . . . . . . 2-1Self-employed,abroad . . . . . . . . . . . . . . . . . . . . . . . . 15-7Self-employmentincome. . . . . . . . . . . . . . . . . . . . . . . . 9-1Self-employmenttax. . . . . . . . . . . . . . 9-1,9-5,17-5,28-1Self-selectPIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-3SIDN(SiteIdentificationNumber). . . . . . . . . . . . . . . . . 1-5Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 32-2,34-8,34-9Singlefilingstatus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-2SiteIdentificationNumber. . . . . . . . . . . . . . . . . . .1-5,32-2Socialsecuritybenefits. . . . . . . . . . . . . . . . . . . . . . . . 14-1Socialsecuritytaxes. . . . . . . . . . . . . . . . . . . . . . . . . . 14-1Socialsecuritynumber(SSN). . . . . . . . . . . . . . . . . . . . 3-5Softwarepracticelab. . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4Sourcesofsupport . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-5Splitrefunds.............................31-4,31-8StandardDeductionandTaxComputation. . . . . . . . . 19-1Standarddeductioncharts......................19-4Standardmileagerate(business). . . . . . . . . . . . . . . . . 9-4Standardmileagerate(charitable) . . . . . . . . . . . . . . . 20-9Standardmileagerate(medicalandmove).........18-3Standardsofconduct...........................1-5Stateandlocalincometaxes................19-6,20-3Stateandlocalrealestatetaxes. . . . . . . . . . . . . . . . . 19-5Stateandlocalrefunds. . . . . . . . . . . . . . . . . . . . . . . . 8-14Student(defined). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-3Student loan interest deduction. . . . . . . . . . . . . . . . . 17-11Substantialpresencetest . . . . . . . . . . . . . . . . . . . . . . . 7-2Supplementalsecurityincome(SSI). . . . . . . . .14-1,31-10Supporttest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6-3,6-9
TTax-exemptinterest. . . . . . . . . . . . . . . . . . . . . . . . .8-3,8-9Taxforgiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-8Taxhome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15-6,22-2Taxpayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-1Taxtables . . . . . . . . . . . . . . . . . . . . . . Publication4491-WTaxableincome. . . . . . . . . . . . . . . . . . . . . . . . . . .8-2,19-7Taxableinterest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-8Taxablepensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-1Taxableretirementincome . . . . . . . . . . . . . . . . . . . . . 11-1Taxationofdistribution. . . . . . . . . . . . . . . . . . . . . . . . . 11-1TaxpayerAdvocate . . . . . . . . . . . . . . . . . . . . . www.irs.govTemporaryabsences. . . . . . . . . . . . . . . . . . . . . .6-8,10-13Temporaryworklocation. . . . . . . . . . . . . . . . . . . . . . . 21-7Testingandcertification. . . . . . . . . . . . . . . . . . . . . .1-1,1-4Theftlosses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-11Third-partydesignee. . . . . . . . . . . . . . . . . . . . . . . . . 31-10Tie-breakerrule. . . . . . . . . . . . . . . . . . . . . . . . . .6-13,30-5TINs(TaxpayerIdentificationNumbers) . . . . . . . . .3-5,3-7Tipincome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8-5,28-3Travelexpenses . . . . . . . . . . . . . . . . . . . . . . . . .21-4,22-1TreasuryDirect. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-2Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12-2,31-17Tuitionandfeesdeduction . . . . . . . . . . . . . . . .17-15,24-8Tuitionstatement(Form1098-T). . . . . . . . . . . .17-16,24-2
U-V-WUnemploymentcompensation. . . . . . . . . . . . . . . . . . . 13-1Uniforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-1Validtaxpayeridentification. . . . . . . . . . . . . . . . . . . . . . 3-5Vehicleexpenses.....................9-5,12-5,22-3Vehiclepurchasededuction.................19-6,20-4VITA/TCEsitelocation. . . . . . . . . . . . . . . . . . . . . . . . . . 1-3Volunteerassessment. . . . . . . . . . . . . . . . . . . . . . . . . . 1-8Volunteerhotline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-7VolunteerIncomeTaxAssistance(VITA). . . . . . . . . . . . 1-1VolunteerProtectionAct . . . . . . . . . . . . . . . . . . . . . . . . 1-5VolunteerQualityAlerts. . . . . . . . . . . . . . . . . . . . . . . . . 1-7VolunteerResourceGuide (Publication4012) . . . . . . . . . . . . . . . . . . . . . . 1-3,2-1,2-3Wagesandsalaries. . . . . . . . . . . . . . . . . . . . . . . .8-4,25-7Walletcard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4Whichformtofile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8Whomustfile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1Whoshouldfile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4Withholdingallowances. . . . . . . . . . . . . . . 29-2,31-8,33-4Worldwideincome. . . . . . . . . . . . . . . . . . . . 7-1,15-2,25-2
Electronic Software Practice Labn Experience using return preparation
software available from the IRS
n Prepare the exercises and problems online
n Prepare tax returns based on the test scenarios online
Online Testingn Stand alone online test and
certification
n Bookmark feature means you don’t have to complete test in one session
– if interrupted, you can return to same place and complete it
n Online tests can be taken two times – each test will be different
n Volunteer Agreement with certification results
Different Coursesn Basic
n Intermediate
n Advanced
n Military
n International
n Puerto Rico
n Foreign Students
Immediate Feedbackn Interactive topic activities that allow
you to complete Worksheets, Forms, and Returns
n Immediate feedback – Tells you why you were correct or why your answer was incorrect
Information Onn Latest tax law
n Interview tips
n Preparing accurate returns using: – Intake & Interview Sheet – Volunteer Resource Guide – Quality Review
Easy to Usen Lessons divided into short topics
n Case scenarios
n Interviews with audio dialog
n Cues to tell you where you are in the course
n Easy to read
n Graphics to reinforce key information
n Links to: – Publications and Forms – Tax & EITC tables – Glossary
What Does Link & Learn Taxes Offer?
Hot topics for volunteers and partnersSite Coordinator’s CornerVolunteer Tax AlertsVolunteer Training ResourcesEITC Information for Partnerse-file Materials and Outreach Products
The Volunteer Resource Center (Keyword: Community Network)
Tax Information for Individuals Keyword: Individuals)
1040 Central (What’s new this filing season)Where’s My RefundEITC Assistant - Available in English and SpanishThe American Recovery and Reinvestment Act of 2009:
Information CenterTax Trails for Answers to common tax questionsAlternative Minimum Tax (AMT) Assistant
www.irs.gov
Your online resource for volunteer and taxpayerassistance
Your direct link to tax information
24/7 www.irs.gov
(
and much more!