2009 publication 4491

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 4491Student Training Guide

Publication 4491 (Rev. 2009) Catalog Number 47499R Department of the Treasury Internal Revenue Service www.irs.gov

Publication 4491 (Rev. 2009) Catalog Number 47499R 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

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

Table of Contents c

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

Table of Contents e

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

Table of Contentsj

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


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.


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.


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


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.


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.


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.


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

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

Thecomponentsforcomplet-inganaccuratereturnarethesamewhetheryoupreparetaxreturnsusingcomputersoftwareorpreparethereturnonpaper.

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.


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.


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.


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.

Remembertorefertaxpayerswithtaxsituationsoutsideyourscopeoftraining,experienceandcertificationtoyourSiteCoordinatorand/oraprofes-sionaltaxpreparer.

Identitytheftisagrowingproblemandyouneedtodoallyoucantopreventtaxpayerinformationfromendingupinthewronghands.


• 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.


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.

Recipientsofgovernmentpropertyandequipmentmustcertifythattheequipmentwillbeusedforvolunteertaxreturnpreparationpurposes.Commercialandcertainpersonalusesofthepropertymayterminatetheagreement.Thisappliestohardwareandsoftware,aswellassupplies.

HandycontactinformationislistednearthebackoftheVolunteerResourceGuide.


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

Lesson 2: Screening and Interviewing 2-1

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?


□ VolunteerResourceGuide□ ApprovedQualityReview

Sheet

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.


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.


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.


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:

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.

Besurenottorecommendaspecificbusinessorapersonwhenencouragingataxpayertouseataxpreparationservice.


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.

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.


ExErcisEs

Asyoucansee,thevolunteerusedtheinterviewtipsandtheinformationfromtheVolunteerResourceGuideinanaturalandpersonalway.Youwilllearnmoreaboutthisapproachinthislesson’ssectiononinterviewtechniques.

Readtheinterviewswiththeseexercisesandanswerthequestions.Answersarelocatedafterthelessonsummary.

Question 1:Fromthelistbelow,markallthethingsthevolunteerdid.

• Greetedtaxpayer

• Introducedhimselforherself

• Madesmalltalk

• Explainedscreeningandtaxpreparationprocesses

• Askedtaxpayertocompletetheapprovedintakesheettothebestoftheirability

• Askedthetaxpayeriftheyhadanyquestions

Question 2:Fromthelistbelow,selectallthethingsthevolunteerdid.

• Reviewedtheapprovedintakeandinterviewsheet

• Askediftaxpayerwasuncertainaboutanyresponses

• Reassured taxpayer that they would help them complete the form

• Encouragedquestions

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!

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.


What techniques can I use to assist me with the interview?

What basic techniques are recommended?

Asyouusetheintakeandinterviewtools,youwillneedtoputthetaxpayerateaseandkeepcommunicationopen.Applyingthesetechniquescanhelpyoudothat:

• Buildingrapport




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?”


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.

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.


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:

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.


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.


ExErcisE answErs

Helpfulinterviewtechniquesare:

• Buildingrapport




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

Introduction

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?


□ VolunteerResourceGuide□ Publication17□ Optional:Publication552

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.

Usethegrosssaleprice,notthenetprofit,whenestimatinggrossincomeforataxpayerwhosoldstockorotherassets.


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?□ Yes □ No

example

Lucy,is36yearsold,single,andhergrossincomeis$20,000.ShemustfileataxreturnandwillusetheSinglefilingstatus.

example

HenriettaandJavieraremarriedandplantofileajointreturn.Henriettais67andhadagrossincomeof$11,000forthetaxyear.Javieris66.Hisgrossincomewas$5,000fortheyear.Sincetheircombinedgrossincomeis$16,000,theydonothavetofileareturn.


ExErcisEs (continued)

Question 2: JanetandHarryaremarriedandusuallyfilejointly.Duringthetaxyear,sheturned66andheturned64.Theirgrossincomewas$16,200.Basedonlyonthisinformation,aretheyrequiredtofileataxreturn?□ Yes □NoQuestion 3: JuanitacanfileasaQualifyingWidowwithDependentChild.Sheis47yearsold.Hergrossincomewas$15,400.Basedonlyonthisinformation,issherequiredtofileataxreturn?□ 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


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.

TheEarnedIncomeTaxCreditmayapplywithorwithoutachild.SeetheEarnedIncomeCreditandChildTaxCreditlessonsfordetailsondeter-miningeligibilityforthesetaxcredits.

SomeCanadianshavebothU.S.andCanadiansocialsecuritynumbers.NeverusetheCanadiannumberonaU.S.taxreturn.


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.


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.



Question 4:Itisyourresponsibilityasavolunteertaxpreparertochecktheaccu-racyofeverysocialsecuritynumberprovidedtoyoubytaxpayers. □ 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.

example

Trudy,asingle22-year-oldfull-timecollegestudent,isclaimedasadependentonhermother’staxreturn.LastyearTrudygrossed$6,100fromherpart-timejobasanadministrativeassistant.TrudyshoulduseForm1040EZ.



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.WhichisthesimplestformthatLennyandLisacanusefortheirtaxreturn?

Question 6: Rayismarried,butheandhiswifeStellaarefilingseparatereturns.Theircombinedincomewas$105,000,butRay’sincomewas$64,000,halfofwhichwasself-employmentincome.Rayisclaimingonlyoneexemptionforhimself,andhewantstoitemizehisdeductions.WhichisthesimplestformthatRaycanuseforhistaxreturn?

example

CynthiaisdivorcedandwillfileasHeadofHousehold.Shehastwochildrenshewillclaimasdependents.Sheownsamedicaltranscriptionbusinessandearned$35,000intaxableincomeforthetaxyear.Sheplanstoitemizeherdeductions.CynthiawillfileForm1040.

example

RamonandJuliaaremarriedandhavetwodependents.TheywillfileMarriedFilingJointly.Theirsourcesofincomeincludesalariesfromtheirjobs,Ramon’spension,andJulia’sIRA.Theircombinedtaxableincomewas$65,000forthetaxyear.RamonandJuliacanfileForm1040or1040A,however,Form1040Aisrecommended.

FortaxpayerswhofiledForm1040EZorForm1040Athepreviousyear,determinewhethertheirsituationhaschanged.ItmaybetotheiradvantagetofileForm1040ifadditionaladjustmentsordeductionswillresultinalowertax!


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.

DetailedinstructionsforcompletingandfilingthereturnarecoveredintheConcludingtheInterviewlesson.



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.Wherecanyoufindthatinformation?

AdditionalinformationonavarietyoftopicscanbeobtainedbycontactingtheIRSat1-800-829-1040,accessingtheirwebsiteatwww.irs.gov,orbyvisitinganIRSTaxAssistanceCenterinyourarea.

Foradditionalrecordkeepinginformation,seePublication552,RecordkeepingforIndividuals.


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).


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.


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

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?


□ VolunteerResourceGuide□ Publication17Optional:□ Publication501□ Publication 555□ Publication971□ Form1040□ Form8379

Taxpayersmayqualifyformorethanonefilingstatus.Choosethefilingstatusthatresultsinthelowesttax(mostbeneficial)forthetaxpayer.UsetheVolunteerResourceGuide(TabB)tohelpdeterminethecorrectfilingstatus(es).

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.


• 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.


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

ThequestionofwhoisitemizingonlycomesintoconsiderationwhenbothtaxpayersarefilingasMarriedFilingSeparately.IfonespousequalifiestofileasHeadofHousehold,thefactthattheotheroneisfilingasMarriedFilingSeparatelyandisitemizingdoesn’tapply.


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).


ExErcisEs

Who is a qualifying person for Head of Household status?

TurntotheVolunteerResourceGuide(TabB),FilingStatus.LookattheDeterminationofFilingStatus–DecisionTree.

Aqualifyingpersonisdefinedas:

• Aqualifyingchild

• Amarriedchildwhocanbeclaimedasadependent

• Adependentparent

• AqualifyingrelativewholivedwiththetaxpayermorethanhalftheyearandisoneoftherelativeslistedintheVolunteerResourceGuide,TabC,InterviewTips,Table2:DependencyExemptionforQualifyingRelativeunderStep1only.

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 □ 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.

Apersonmayqualifyasa“qualifyingrelative”dependent,butnotqualifythetaxpayerforHeadofHouseholdfilingstatus.

ThequalifyingpersonforHeadofHouseholdfilingstatusisalwaysrelatedtothetaxpayer.


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.


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.

AfosterchilddoesnotqualifyataxpayerfortheQualifyingWidow(er)withDependentChildfilingstatus.



Checkyourunderstandingofeachfilingstatus.Feelfreetoreviewthelessonif youarenotsureofananswerandusetheVolunteerResourceGuide(TabB). Theanswersareattheendofthelesson.

Question 2: Jane’shusbanddiedin2009.Sheandherhusbandqualifiedto fileajointreturnin2008,buttheydidnot.Jane’schildrenaregrownandthey maintainhouseholdsoftheirown.Shehasnotremarried.Whatfilingstatus(es) cansheuse?

• Single



• HeadofHousehold


Question 3: Sethlivesaloneandhasnevermarried.Hedoesnotsupporteitherofhisparents.Whatfilingstatus(es)canheuse?

• Single



• HeadofHousehold


Question 4:Tanya’sdivorcebecamefinalinearlySeptemberofthetaxyear.Shehassolecustodyofherthreechildren,wholivedwithhertheentireyear.Thechil-drenareallundertheageof19.Sheprovidedmorethanhalfofthecostofkeepingupthehome.Whatfilingstatus(es)cansheuse?

• Single



• HeadofHousehold


Question 5:Sydney’swifediedinJanuaryof2007.Hefiledajointreturnforthatyearasthesurvivingspouse.In2009,Sydney,whohasnotremarried,stillmain-tainsahomeforhisyoungchildrenallyear,andheprovidestheirsolesupport.Whatfilingstatus(es)canheuse?

• Single



• HeadofHousehold




Question 6: AnearlierquestionreferredtoSydney,whosewifediedinJanuary2007.Hefiledajointreturnforthatyearasthesurvivingspouse.In2009,Sydney,whodidnotremarry,maintainedahomeforhisyoungchildren,andheprovidedtheirsolesupport.WedeterminedthathecouldfileasSingle,HeadofHouseholdorQualifyingWidow(er)withDependentChild.GobacktotheinterviewtipsandusethemtoidentifytherecommendedfilingstatusforSydney.Outlinetheanswerstotheinterviewsteps.Whatfilingstatusshouldheuse?

• Single



• HeadofHousehold



Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin. GotoAppendixA-6todeterminethemostappropriatefilingstatusforher.

Summary

Thislessoncoveredthefivefilingstatuses,aslistedonthereturn,theyare:

• Single



• HeadofHousehold


Iftaxpayersqualifyformorethanonefilingstatus,choosetheonethatresultsinalowertax.Forexample,inmostcases,marriedcouplespaylesstaxiftheyfileajointreturn.

Ingeneral,theHeadofHouseholdstatusisforunmarriedtaxpayerswhopaidmorethanhalfthecostofmaintainingahomeforaqualifyingpersonduringthetaxyear.However,somemarriedtaxpayerswholivedapartfromtheirspouseduringthelastsixmonthsoftheyearandprovidedfordependentchildrenmayqualifytofileasHeadofHousehold.

Awidoworwidowerwithoneormoredependentchild(ren)maybeabletousetheQualifyingWidow(er)withDependentChildfilingstatus,whichisavailablefortwoyearsfollowingtheyearofthespouse’sdeath.


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


Notes

Lesson 5: Personal Exemptions 5-1

Introduction

ThisisthefirstoftwolessonscoveringtheExemptionsectionofthetaxreturn.Identifyingandenteringthecorrectnumberofexemptionsisacriticalcomponentofcompletingthetaxpayer’sreturn,becauseeachallowableexemptionreducestheirtaxableincome.

PersonalexemptionsarereflectedintheExemptionssectionofthetaxsoftwareandonpage1oftheForm1040series.RefertotheVolunteerResourceGuide(Tab1)foradisplayofanentryscreen.

Objectives


• 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?


□ VolunteerResourceGuide□ Publication17□ Optional:Publication501

Theexemptionamountsareindexedforinflationandaregenerallyupdatedeveryyear.

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.


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:


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).

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.


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.


Notes

Lesson 6: Dependency Exemptions 6-1

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


• Determineifataxpayercanclaimanexemptionforadependentbyapplyingthedependencytest

• Determinehowmanyexemptionsataxpayercanclaimfordependents

Personswhoqualifytobeclaimedasadependentmayfileareturnfortaxeswithheld,buttheycannotclaimanyexemptions.

What do I need?


□ 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.

Thetestsforqualifyingrela-tiveareappliedonlywhenthetestsforqualifyingchildarenotmet.


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.

example

Bobis22,afull-timestudentandlivesathomewithhisparentswhenheisnotinthedorm.Heworkedpart-timeandmade$6,000,butthatwasnotoverhalf ofhistotalsupport.Bobmeetstherelationship,age,andsupporttests.Ifhemeetstherestofthetestsforaqualifyingchild,hecanbeclaimedasadependentby hisparents.


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.

example

Dorisis8yearsoldandhadasmallroleinatelevisionseries.Shemade$60,000duringthetaxyear,butherparentsputallthemoneyinatrustfundtopayforcollege.Shelivedathomeallyear.Dorismeetstherelationship,age,andsupporttests.Ifshemeetstherestofthetestsforaqualifyingchild,shecanbeclaimedasadependentbyherparents.

Inthecaseofachildwhowasbornanddiedduringtheyear,anSSNisnotrequiredbutthereturncannotbee-filed.Thetaxreturnmustbemailedin.RefertotheFilingInformationchapterofPublication17.


• 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.


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.


• 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.)

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).


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.


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.

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.


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.

ThetaxpayerswhoprovideMultipleSupportforadependentdecideamongthemselveswhowilltaketheexemptionfortheyear.Volunteertaxpreparersdonotdecide.


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.


How do I enter the exemptions in the tax software?

Thetaxsoftwaredeterminesthetaxpayer’sdependencyexemptionsbasedontheDependents/NondependentsinformationenteredonthetaxsoftwareMainInformationSheet.

Besuretoincludeandverifyallthefamilyanddependentinformationonthetaxpay-er’sapprovedintakeandinterviewsheetbeforeenteringthefollowingdataintotheDependents/Nondependentssectionofthetaxsoftware.

Fordetailedinstructions,refertotheVolunteerResourceGuide(Tab1),MainInformationSheet.


ElaineSmithhasoneFormW-2fromherclerkjobof36years,showingwagesof$37,000.Shehasbeendivorcedfromherhusbandforover20years.Sheisthemainproviderforhertwograndchildrenandtwoofhergrownsons,wholivewithher.Hersonsworkedparttimeandearned$4,000each.Theyarenotdisabled.Thegrandchil-drenarenotthechildrenofthesonsthatlivewithher.Shewouldliketofileataxreturnandclaimhersonsandgrandchildrenasdependents.

Form13614-Cshouldlooklikethis:

example

Thetaxpayerhasa1999divorcedecreethatstatestheycanclaimtheirchildasadependent.Sincethedivorcedecreewascreatedpriorto2009,thedivorcedecreecanbeattachedtothetaxreturnandthetaxpayercanclaimthedependent.

example

Thetaxpayerhasa2009divorcedecreethatstatestheycanclaimtheirchildasadependent.Thetaxpayercannotattachacopyofthedivorcedecreetothetaxreturnevenifitstatesthetaxpayercanclaimthechildasadependent.ThetaxpayermustattachasignedForm8832tothetaxreturninordertoclaimthechildasadependent.


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.


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.


Notes

7-1Lesson 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


• 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?


□ VolunteerResourceGuide□ Publication17□ Publication 519Optional:□ Publication3□ Publication 54□ Form1040NR-EZ□ Form1040NR

Lesson 7: Unique Filing Status and Exemption Situations

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.

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.


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


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.


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.Eventhoughheismarriedandlivingwithhisspouse,canheclaimHeadofHouseholdstatus? □ 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.

Inthissituation,the20091040Instructionssaytoenter“NRA”online4(HeadofHouseholdstatus)ofForm1040.Whenpreparingapaperreturnforsuchanonresidentalientaxpayer,alsowrite“no”onthedottedlinenexttoline64a(EarnedIncomeCredit)ofForm1040.


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.

example

MajorTomBeckleyisaU.S.citizen.HemarriedAnna,aKoreancitizen,in2009,butcamebacktotheU.Swithouther.AnnaisstillinKoreagettingherpaperworkinorder.Shedidnotchoosetofileajointreturnwithhim.MajorBeckleyisfilingasMarriedFilingSeparately.AnnahasnoU.S.-sourcedincomeandcannotbeclaimedasadependentonanyoneelse’sU.S.taxreturn.ShehasanITINfornow.MajorBeckleycanclaimherpersonalexemptiononhistaxreturn.

WhenpreparingapaperreturnforataxpayerwhoisfilingasMarriedFilingSeparately,claimtheexemptionbycheckingbox6b(spouse’sexemption)ofForm1040.Enterthenameofthespouseinthespacetotherightofthebox.EntertheITINorSSNofthespouseinthespaceprovidedatthetopofForm1040.Thisiswherethespouse’sSSNorITINwouldbeenteredifajointreturnwasbeingfiled.


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.

example

Sgt.TerrySummers,aU.S.citizen,ismarriedtoaGermancitizenwhosethreechildrenareGermancitizensanddonothavegreencards.Sgt.Summershasnotadoptedthechildren.TheyallliveinGermany.



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.Thestepchil-drenarestillnotU.S.citizensandtheydonothavegreencards.Theymettheotherdependencytests.Ifhecanclaimthem,hewillapplyforITINsforthem.Canheclaimthestepchildrenasdependentsonhistaxreturn?□ 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.


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.


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


Notes

Lesson 8: Income – Wages, Interest, Etc.; Form 1040 Lines 7-11 8-1

Lesson 8: Income – Wages, Interest, Etc.; Form 1040, Lines 7-11

Introduction

Thisisthefirstofninelessons(lessons8through16)coveringtheIncomesectionofthetaxpayer’sreturn.Acriticalcomponentofcompletingthetaxpayer’sreturnisdistin-guishingbetweentaxableandnontaxableincomeandknowingwheretoreportthedifferenttypesofincomeonForm1040,lines7through22.

Objectives


• Computetaxableandnontaxableincome

• Distinguishbetweenearnedandunearnedincome

• Reportincomecorrectlyonlines7through11ofForm1040

TheincomelessonsfollowtheorderoftheIncomesectionofForm1040.Thefollowingchartwillhelpyouselecttheappropriatetopicforyourcertificationcourse.

What do I need?


□ VolunteerResourceGuide□ Publication17□ Publication4491-WOptional:□ Form1040Instructions□ ScheduleB□ Publication531□ Publication926□ Publication970

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.


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.


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.

example

In2009,Boblefthisoldemployerandtookajobwithanewone.HereceivedtwoFormsW-2,eachlistingadifferentaddress.Hisreturnwilllisthiswagesasthetotaloftheamountsinbox1,buteachFormW-2mustbeenteredintotheprogramseparately.

IfthereisamismatchoftheITINontheForm1040andtheSSNonFormW-2orForm1099,entertheFormW2orForm1099exactlyasshown.UsetheITINonForm1040.Thereturncanbee-filedusingtheITIN.


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.


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

Formoreinformationabouttipincome,seePublication531,ReportingTipIncome.

Forfurtherinformationandadefinitionofwhoisahouseholdemployee,seePublication926,HouseholdEmployersTaxGuide.


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.


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.


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.


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).


BarbaraSmithisawindowclerkwiththeUnitedStatesPostalService.ShehasoneFormW-2.

example

Mikeholdsmunicipalbondsissuedinhisstate,aswellasatraditionalIRAtowhichhemakescontributionseachyear.Foreachofthese,hegetsstatementslistingtheinterestearned.Althoughnottaxable,Mikereportshistax-exemptinterestfromthemunicipalbondsonline8bofhisForm1040.HedoesnotreportanyoftheinterestincomeonhistraditionalIRAonhistaxreturn.


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.


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.

example

During2009,Robertownedsharesinamutualfundandinarealestateinvestmenttrust.Bothmadecapitalgaindistributionsthatyear.InJanuary2010,hereceivedForms1099-DIVlistingthesecapitalgaindistributions.


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.


LeonardStark,Gloria’sspouse,isself-employed.Theyarefilingajointreturn.Leonardandthevolunteerarediscussingdividendincome.

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.


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.

example

Bobitemizedhisdeductionsonhis2008federalreturn.Heincludedthetaxeshehadpaidtohisstateduring2008.However,hereceivedarefundin2009ontheoverpaidportionofthosetaxes.Hemustusethestatetaxrefundworksheettoseehowmuchoftherefundtoincludeinhisfederaltaxableincome.

Ifthetaxpayerisunsurewhetherapaymentisalimonyorchildsupport,askifthepaymentswillstoponcethechildisgrown.


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.


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.


• Line10isfortaxpayerswhoitemizeddeductionsinthepreviousyearandreceivedataxbenefitfromdeductingtheirstateorlocalincometaxes.TaxpayerswhoreceiveForm1099-Gmayhavetoincludepartoralloftheirstaterefundonthisline.

• Line11isusedtoreportalimonyreceived.Alimonyisapaymenttoorforaspouseorformerspouseunderaseparationordivorceinstrument.

Notes

Tax law applicaTion using ThE workbook

Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s),orsupplementsforyourcourseofstudyinPublication4491-W.

Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL&LT.

Lesson 9: Income – Business; Form 1040, Line 12 9-1

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?


□ VolunteerResourceGuide□ Publication17□ Publication463□ Publication4491-W□ Form1099-MISC□ ScheduleC-EZ□ ScheduleSE

Someemployersmisclas-sifyworkersasindependentcontractorsandreporttheirearningsonForm1099-MISC.TaxpayerswhobelievetheyhavebeenmisclassifiedshouldcontacttheIRSandaskforhelp.

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.


ExErcisE


Asyouusetheapprovedintakeandinterviewsheetwithtaxpayers,askquestionstodetermineiftheyhaveanyself-employmentincome,theiraccountingmethod,andtheirbusinessexpenses,asshowninthissampleinterview:

Question 1:Basedonthisinformation,doesJasonqualifytofilloutaScheduleC-EZ?□ 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.


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.

example

Kianarunsasmallbusinessfromherhome.Shehasonlyonephonelineandfrequentlymakeslong-distancecallsforbusiness.Thecostofthephonelinecannotbededucted,butKianacandeductthelong-distancechargesforher businesscalls.


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.


Recallthatourtaxpayer,VanessaFranklin,isanemployeebutshealsohasherowncosmeticsbusiness.GotoAppendixA-14togathermoreinformationaboutherself-employmentincome.

Summary

Thislessonexplained:

• Wheretogetbusinessincomeandlossinformation

• Howbusinessincomeorlossisreported

• WhocanuseScheduleC-EZ

• HowtocompleteScheduleC-EZ


ExErcisE answEr

Answer 1: Yes. Jason meets all requirements to qualify for completing Schedule C-EZ.

Notes




Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13 10-1

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


• 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

What do I need?


□ 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

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


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).

Althoughstocksplitsandstockdividendsdonotoccuroften,alwaysasktaxpayersiftheyreceivedanyadditionalsharesfromastocksplitorstockdividend.


• 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.


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.


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.

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.


ExErcisEs

Ifpreparingapaperreturn,addthebroker’scommissionandfees($35)tothebasisandenterthetotalincolumneinPartIorPartIIofForm1040,ScheduleD.

Tax Software Hint:Youwillneedtoaddthebroker’scommissionsandfees($35)toRichard’sbasisinthestockbeforeenteringtheamountontheCapitalGainorLossTransactionsWorksheet.Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2).


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.”



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,whoreceivedoneForm1099-BandnoForms1099-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.



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.$4,400salespriceand$1,900gain

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.

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.


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.


TaxpayersJeremyandJaniceSmithcheckedthe“Yes”boxforinterest/divi-dendincomeontheapprovedintakeandinterviewsheet.Thevolunteerasksfordetails.


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.

Specialrulesapplytoforeclo-suresandcancellationofdebtincomeonaprincipalresi-dence.UndertheMortgageForgivenessDebtReliefActof2007,taxpayersmayexcludecertaindebtforgivenontheirprincipalresidence.Theserulesarecoveredlaterinthislesson.


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.

Taxpayerswhoclaimedthefirst-timehomebuyercreditandthensoldtheirhomemayhavetorepaythecredit.Formoreinformation,refertoLesson28,OtherTaxes,Lesson29,Payments,andForm5405.



• 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.EmilyreturnedtoherhomeonMay31,2008andlivedthereuntilshesoldthehouseonJanuary10,2009.DoesEmilymeettheownershipandusetest?□ 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).


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.



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.Whatistheamountrealizedinthissale?

Basis

Thebasisinahomeisdeterminedbyhowthe taxpayerobtainedthehome.Ifataxpayerboughtorbuiltahome,thebasisiswhatitcostthetaxpayertobuyorbuildthathome.Ifthetaxpayerinheritedthehome,thebasisisitsfairmarketvalueonthedateofthedecedent’sdeath,oronthelateralternatevaluationdatechosenbytherepresentativefortheestate.

Adjusted Basis

Theadjustedbasisisthetaxpayer’sbasisinahomeincreasedordecreasedbycertainamounts.

Ifthetaxpayercanexcludetheentiregainfromthesaleofapersonalresidence,the personresponsibleforclosingthesale(forexample,arealestatebrokerorsettlement agent)generallywillnotissueaForm1099-S.IfaForm1099-Sisissuedandyoudeterminethatthegainisexcludable,thesaleshouldbeshownonScheduleDtonotifyIRSthatthegainisexcludable.

Alternativevaluationissuesanddeterminingtheadjustedbasisofpropertyreceivedasagiftcanbeverycomplexandareoutsidethescopeofthistraining.Advisethetaxpayertoseekassistancefromaprofessionaltaxpreparer.


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.


Inbothcases,thegainistaxablegainandmustbereportedonScheduleD,CapitalGainsandLosses.IfthehomewasusedforbusinesspurposesorasrentalpropertythegainwouldbereportedonForm4797andthetaxpayershouldbereferredtoaprofessionaltaxpreparer.

Iftheamountrealizedislessthantheadjustedbasis,thedifferenceisaloss.Alossonthesaleofyourmainhomecannotbededucted.

Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2).

Ifpreparingapaperreturn,completeScheduleD,PartII,asshowninthefollowingillustration.


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.


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.

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.



Question 6: Johnpurchasedahomein1999.Throughyourinterviewprocess,youdiscoverthathesoldhismainhomein2009.Johnhadnotlivedinthehomeforsixyears.WhichofthefollowingconditionswouldallowJohntoexcludehisgain?

A.JohnwentonsabbaticalforfouryearsandbackpackedthroughEurope.

B.Johnlivedwithaco-workerforfouryearsandlethisbrotheroccupyhishome.

C.JohnwasdeployedtoEuropeonofficialextendedmilitarydutyforfiveyears.

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.


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.


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–GotoStep4b NO–GotoStep6

YES–GotoStep4c NO–GotoStep6

YES–GotoStep6 NO–GotoStep4d


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


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.”


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.


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


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


Schedule D – Foreclosure results in gain – Section 121 Exclusion applied to total gain

Schedule D – Foreclosure results in loss (non-deductible)


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.


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.


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.


example (continued)

IfFrankhadbeenabletonegotiateawork-outwithhismortgagelender(reducingtheamountheowedonthemortgageandstayinginthehome),hewouldnothavecompletedScheduleD(becausehedidn’tdisposeoftheasset).HisForm982wouldbesimilartotheoneshown,buthewouldalsohaveenteredtheamountofdebtforgivenonline10b(orhisbasisinthehome,whicheverwassmaller),andhisbasisinthehomewouldbedecreasedbythatamount.

Tax Software Hint:Whenusingtaxsoftware,youmayhavetoforcethenetamountincolumn(f)tozero(-0-)inalosssituation.



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?□ Yes □NoIsScheduleDrequired? □ Yes □No



Question 8: TomandGracewerehavingdifficultymakingtheirmortgagepaymentsin2009afterTombecameillandcouldn’tworkfulltime.Ratherthangothroughtheexpenseofaforeclosure,thelenderagreedtoreducetheprincipalontheirloanandrefinancetheloanwithabetterinterestrateandlowerpayments.Theprincipalbalancebeforethe11/1/2009workoutwas$130,000,andthelenderreducedtheloanto$110,000.Noneoftheloanproceedswereusedforanypurposeotherthantobuy,build,orimprovetheprincipalresidence.

DoesTomandGrace’sdebtcancellationqualifyfortheprincipalresidenceindebt-ednessexclusiononForm982?□ Yes □NoIsScheduleDrequired? □ Yes □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 □No


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.





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

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


• 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.

What do I need?


□ 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.


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

example

Markretiredin2009afterworking30yearsforaconstructioncompany.Eachweek,hecontributedtotheCarpenter’sPensionPlan.Everyyear,Markpaidtaxonthegrossamountofhissalary,includinghispensioncontribution.Thismeanshispensioncontributionsweremadewithdollarsthathadalreadybeentaxed.Nowthatheisreceivingpaymentsfromthepension,hewillnotbetaxedontheportionthatrepresentshiscontribution;hewillbetaxedontheportionthat representsearnings.


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.

Taxpayersmaynotalwaysunderstandwhytheymustpaytaxesontheirretirementincome.Whenthisisthecase,takethetimetoclearlyexplainwhatretirementfundsaretaxedandwhy.Itisusuallyagoodideatoquestiontaxpayersaboutthenatureoftheircontributionstoensurethattheywillnotbetaxedtwiceonthesamefunds.


ExErcisEs

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 □ False

Question 2: MaryopenedaRothIRA3yearsago.In2009,shetookthefullamountofherRothIRAasadistributiontohelpherpurchaseherfirsthome. Theentiredistributionisexcludedfromhertaxableincome.□ True □FalseQuestion 3: AmycontributedtoaRothIRAfor5years.Inyear6(atage60),shetookadistributionfromherIRA.Theentiredistributionisexcludedfromhertaxableincome.□ True □False

Taxpayersareconsidereddisablediftheycannotengageinanysubstantialgainfulemploy-mentbecauseofaphysicalormentalcondition.Aphysicianmustdeterminethatthecondi-tioncanbeexpectedtoresultindeathortobeoflong,continued,andindefiniteduration.

ThenexttwotopicsareoutofscopeforVITA.Thedefinitionsareincludedforyour informationonly.


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.



Question 4: AndrewchangedjobsandreceivedForm1099-Rfromhispreviousemployerin2009.Theamountinbox1is$11,200.Andrewdepositedtheentire$11,200intohisIRAwithin30daysofreceivingthecheck(rollover).

Whichofthefollowingstatementsistrue?

A.Theentiredistributionisincludibleasincome

B.Theentiredistributionisexcludiblefromincome

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.


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.

SocialsecuritybenefitsandIRAdistributionsarenotreportedonthepensionlineofthetaxreturn.

example

Sueworkedforasoftwaredevelopmentcompanyfor20years.Sheretiredin2009andbeganreceivingpensionincomethesameyear.Suenevercontributedtothepensionplanwhileshewasworking;heremployermadeallofthecontributions.Herpensionisfullytaxable.



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.

Ifdisabilitypayistreatedaswages,itmightaffectEarnedIncomeTaxCredit.



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.Line7

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.


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.

Ifthetaxpayerdoesnotreceivetheminimumdistribu-tion,anadditionaltaxmaybeimposed.Thetaxis50%ofthedifferencebetweentheminimumdistributionandtheamountactuallydistributedforthetaxyear.


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.

example

Samretiredin2005.Heturned701/2in2009.ThetemporarywaiverofRMDsfor2009appliestoSam.

example

Irvingwasstillemployedwhenheturned72onMarch12,2009.HewasrequiredtobegintakingminimumdistributionsfromhistraditionalIRAafterage70½eventhoughhewasnotyetretired.Heturned70½onSeptember12,2007andbegantakingminimumdistributionsbeforeApril1,2008.IrvingisnotrequiredtotakeanRMDfromhisIRAin2009duetothetemporarywaiver.



However,taxpayersmustincludetheearningsontheexcesscontributionasincomeonthereturn.Thisincomeisreportedonthereturnfortheyearinwhichtheexcesscontri-butionwasmade.Thewithdrawalofinterestorotherincomemayalsobesubjecttoanadditional10%taxonearlydistributions.

Question 7: Taxpayerswhowithdrawexcesscontributionsbytheendofthetaxyeararenotsubjecttoanadditional6%taxontheexcesscontribution. □ True □FalseQuestion 8:Helenturned71onMarch17,2009.Sheretiredin2001.ShehasnevertakenanydistributionfromhertraditionalIRAaccounts.Thebanktoldherthatshenowneedstotakeaminimumdistributionof$1,479peryear.Helenisrequiredto:

A.Takeadistributionof$1,479byDecember31,2009

B.Takeadistributionofatleast$1,479byApril1,2009

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.”Ataxpayerwhochoosesnottohavetaxwithheldmayhavetopayestimatedtaxeachquarter.Failuretohaveenoughfederalincometaxpaidthroughouttheyearcanresultinalargeamountoftaxbeingowedwhenthereturnisdue.Itcanalsoresultinapenalty.Form1040-ES,EstimatedTaxforIndividuals,isusedtocalculatetheesti-matedquarterlypaymentandprovidesvoucherswithwhichtoremitthepayments.

Taxpayerswhoreceiveaverylargerefundmaymakebetteruseoftheirfundsifthewith-holdingislowered.Explainwaystheycanreducetheirwithholding.



Question 9: Faithcomestoyoursitetogether2009taxreturndone.Whenyoufinishherreturn,youexplaintoherthatsheowes$985,andthatsheneedstopaythisamountbyApril15,2010.Shesaysthatshewillpaytheamount,butwantstoknowifthereissomewaytohavemoretaxwithheldfromherpensionsothatshedoesn’towesomuchattheendoftheyear.Whichformshouldshecompletetoincreasethewithholdingfromherpension?

A.FormW-4P

B.FormW-4V

Summary

Thislessonhelpedyouidentify,calculate,andreportthetaxableportionofretirementincomereceivedbythetaxpayer.Itreviewedthetypesofretirementincomeandtheformsusedtoreportthem.Youlearnedwhentaxpayersofretirementagearerequiredtotakeaminimumdistributionfromaretirementplanandwhentheymayneedtoadjusttheirwithholding.

Youmaynotbeabletocompletetheentireexerciseifsomeofthetechnicalissuesintheexercisearenotcovereduntillaterlessonsintheintermediateandadvancedpartsofthetraining.Intheseinstances,completeasmuchoftheexerciseasyoucan.Comebacklatertofinishtheexerciseafteryoucoverallthetechnicaltopics.





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.


Notes

Lesson 12: Income – Rental and Schedule K-1s 12-1

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


• IdentifyScheduleK-1incomeitemsthatarewithinthescopeoftheVITA/TCEprogram

• DeterminehowtoreportScheduleK-1incomeitems

• Determinewhichtypesofrentalincomemust bereported

• Identifyhowtoreportrentalexpenses

Lesson 12: Income – Rental and Schedule K-1s

Thislessondoesnotapplytotaxpayerswhoareintheactualbusinessofrentingproperties.

Theat-riskandpassiveactivityissuesinthislessonarebeyondtheusualscopeofvolun-teertraining,withtheexceptionofassistingmilitaryandothergovernmentemployeeslivingabroadandwithlimitedaccesstobothresourcesandprofessionalpreparers.

What do I need?


□ 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.


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.


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(1/3or33%)

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.


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.



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.Repairsmadetothehomeowner’spersonalresidence

Question 3: Whichofthefollowingrentalexpensesmustberecoveredby takingdepreciation?

A.Homeinsurancepremiums

B.Painting

C.Installingabackyardfence

D.Repairingabrokenfurnace

Repairs (Deduction) Improvements (Depreciation)Painting AddingaroomFixinggutters InstallinganewfenceRepairingdriveways PuttinginplumbingorwiringReplacingwindowglass ReplacinghotwatertankRepairingtheroof PuttingonanewroofRepairingappliances Replacing/addingmajorappliances

Thislessondiscussesonlythestandardmileagerate.Ifthetaxpayerwishestousetheactualmethod,referthemtoaprofessionaltaxpreparer.

AdditionalinformationonrentalincomecanbefoundinPublication527,ResidentialRentalProperty,andPublication946,HowtoDepreciateProperty.



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 □FalseQuestion 5:AllofthefollowingpropertymaybedepreciableEXCEPT___.

A.Furniture

B.Buildings

C.Land

D.Vehicles



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.

Fortaxpayerswhobuilttheirownhomeoracquireditasaninheritanceorgift,thebasismaynotbetheoriginalcost.Formoreinformation,seePublication551,BasisofAssets.



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).

SeePublication946,HowtoDepreciateProperty,AppendixAforTablesofDepreciation,whichshowtherecoveryperiodsfordifferentpropertyclasses.



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.AwashingmachineinarentalunitlocatedintheU.S.

C.ImprovementstoarentalunitlocatedoutsidetheU.S.

D.ArentalhomelocatedoutsidetheU.S.


Asyouusetheapprovedintakeandinterviewsheetwithataxpayer,askquestionstodetermineiftheyhaveanyrentalincomeandexpenses.UsetheInterviewTipstohelpobtainadditionalinformation,asshowninthissampleinterview.

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.


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.

example

Gloriarentsoneroominherhousetoatenant.Thetotalsquarefootageofherhouseis1,200squarefeet.Therentalroommeasures10feetby12feet(120squarefeet,or10%ofthetotalhouse).Shemaydeduct:

•100%ofanyexpensesthatrelateonlytotherentalportionofthehouse,suchasrepairsorupgradestotherentedroom

•10%ofanyqualifiedexpensethatbenefitstheentirehouse



WhentaxpayerscanitemizepersonaldeductionsonScheduleA,theycanreportthedeductibleexpensesthatbenefittheentirehouseminusthepercentagethatappliestothetenant’sroom.InGloria’scase,ifsheistreatingtherentalportionas10%oftheresidence,shecandeductthefollowingonScheduleA:

• 90%ofthemortgageinterest

• 90%ofthepropertytaxes

Question 9:Fortaxpayerswhorentpartofapropertyinwhichtheylive,whichexpensesarereportedonlyonScheduleEandnotonScheduleA?

A.Homeinsuranceandmortgageinterest

B.Propertytaxesandrepairs

C.Utilitiesandhomeinsurance

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

.

Aresidenceordwellingunitmightbeahouse,apartment,condominium,mobilehome,boat,orsimilarproperty.Thelimitationsdonotapplytohotels,motels,inns,orsimilardwellingunits.



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,whorentedherhome12days,thenallowedherfathertolivethererent-freetherestoftheyearwhilesheworkedoverseas.

example

Latriciaconvertedthebasementofherhomeintoaone-bedroomapartment.Sherentedtheapartmentoutatafairrentalpricetocollegestudentsduringthenine-monthschoolyear.DuringJune,Latricia’sbrotherstayedintheapartmentrent-free.(Thisisconsideredpersonaluse.)LimitationsapplytoLatricia’srentalexpensedeductionsbecausetheapartmentwasusedforpersonalpurposesfor30days,whichwasmorethanthegreaterof:

•14days,or

•10%ofthe270daysitwasrented(27days)

example

OnFebruary28,2008,Trentmovedoutofthehousehehadlivedinforsixyearsbecauseheacceptedajobinanothertown.HerentedhishouseatafairrentalpricefromMarch15,2008,toMay14,2009.OnJune1,2009,hemovedbacktotownandmovedbackintohishouse.Becauseherentedhispropertyfor12ormoreconsecutivemonths,hisuseofthehouseisnotcountedaspersonaluse.Sincethesedaysarenotcountedasdaysofpersonaluse,thelimitationsondeductionsdonotapply.


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.



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.Passiveactivitylaw

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.

Formoreinformation,seePublication925,PassiveActivityandAt-RiskRules.



Question 12:WhichtaxpayerismostlikelyrequiredtofileForm8582,PassiveActivityLossLimitations?

A.Chelsea,whoownstworentaldwellingswithnonetlossandhasanAGIof$111,000

B.Lance,whoownsonerentaldwellingwithalossof$1,444,andhasanAGIof$34,000

C.Sean,whoownsonerentaldwellingwithalossof$800,andhasanAGIof$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.


ExErcisE answErs

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.





Notes

Lesson 13: Income – Unemployment Compensation; Form 1040, Line 19 13-1

Introduction

Thislessonwillhelpyouassisttaxpayerswhohaveunemployment compensationpayments.

Objectives


• 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

What do I need?


□ 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).


Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin. GotoAppendixA-16todetermineifVanessahastoreportanyunemployment compensation.

Summary

Thislessonexplained:

• Howtoidentifyunemploymentcompensation

• Howtoreportunemploymentcompensation

• Howtoexcludethefirst$2,400ofunemploymentcompensationforeachtaxpayer

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.




Lesson 14: Income – Social Security Benefits; Form 1040, Line 20a 14-1

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


• 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?


□ VolunteerResourceGuide□ Publication17□ Publication4491-WOptional:□ Publication575□ Publication 915 □ FormRRB-1099□ FormRRB-1099-R□ FormSSA-1099□ SocialSecurityBenefits

Worksheet

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%.


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.

TheAmericanRecoveryandReinvestmentAct(ARRA)of2009providesa$250paymenttorecipientsofcertainbenefitsreceivedfromtheSocialSecurityAdministrationortheRailroadRetirementBoard.Thiseconomicrecoverypaymentisnottaxable,butitdoesreduceanymakingworkpaytaxcredittherecipientmaybeentitledto.TheeconomicrecoverypaymentiscoveredinLesson29,Payments.

CompletetheSocialSecurityBenefitsWorksheetintheForm1040Instructionstodetermineifanyportionofthebenefitsistaxable.


ExErcisEs


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.



Question 2: JoanpresentsyouwithherFormSSA-1099,whichincludesalump-sumbenefitpaymentforboth2008and2009.Forwhichoptionwouldyoureferhertoaprofessionaltaxpreparer?

A.Averagingthebenefitoverthenumberofyears

B.Aspecialprocedureusedtofigurethetaxableportionofthebenefitsassignedtotheearlieryears

C.Reportingthewholepaymentin2009

D.Reportinghalfthepaymentin2008andtheotherhalfin2009

Summary

Thislessonexplainedhowtodeterminewhetherincomefromtaxpayers’socialsecuritybenefitsandrailroadretirementbenefitsistaxable.

Generally,ifsocialsecuritybenefitswerethetaxpayer’sonlysourceofincome,thebenefitsarenottaxableandthetaxpayerdoesnotneedtofileafederalincometaxreturn.Ifthetaxpayerreceivedsocialsecuritybenefitsandotherincome,theSocialSecurityBenefitsWorksheetmustbecompletedtocalculatethetaxableportion.

Whenfiguringthetaxableportionofsocialsecuritybenefits,twooptionsareavail-ableforlump-sumbenefitpayments.Thetaxpayermayreportthewholepaymentintheyearitwasreceivedortreatthepaymentasreceivedintheearlieryearoryears.TaxpayerswhowanttousethelatteroptionshouldbereferredtoaprofessionaltaxpreparerorPublication915.

Ifyouareunabletocompletetheentireexercise,completeasmuchofitasyoucan.Comebacklatertofinishtheexerciseafteryoucoveredallthetechnicaltopicsinlaterlessons.





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

Introduction

Thislessonwillhelpyoudetermineotherformsofincomeandhowtoreportothersourcesofincome.PartofthelessonisforallcourselevelsandpartisonlyfortheInternationallevel.

TheInternationalpartofthislessonwillhelpyoureportincomeearnedfromworldwidesources.Todothis,youneedtobeabletoidentifythetypeofincomeand,ifreportable,convertittotheequivalentU.S.dollarvalueoftheforeigncurrency.Thisrequiresusingthecontemporaneousexchangerateor,ifnotknown,anaverageannualexchangerate.

Thislessonwillhelpyoudeterminewhoiseligiblefortheforeignearnedincomeexclu-sionandhowtocalculatetheexcludibleamountbyusingForm2555,ForeignEarnedIncome,orForm2555-EZ,ForeignEarnedIncomeExclusion.

Objectives


• 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?


□ VolunteerResourceGuide□ Publication17□ Publication 54□ Publication4491-W□ Form1040Instructions□ Form2555□ Form2555-EZ□ Optional:Publication525

Totalgamblingwinningsmustbereportedonline21ofForm1040.Ifthetaxpayeralsohadgamblinglosses,thelossescanonlybedeductedonScheduleA.(SeetheItemizedDeductionslessonformoreinformation.)

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.


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

Theexchangeratesusedherearejustexamples.Youshouldusetheexchangeratesineffectwhentheincomewasactuallyreceived.



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.


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.


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.

Form6251,AlternativeMinimumTax,isoutofscope.Referthetaxpayertoaprofes-sionaltaxpreparerifForm6251isapplicable.



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 □ 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.



Question 6:AlanhaslivedandworkedinChinasinceAugust16,2002.For2009,Chinaishistaxhome.□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.




Question 7:Stanisemployedonanoff-shoreoilrigintheterritorialwatersofaforeigncountryandworksa28-dayon/28-dayoffschedule.HereturnstohisfamilyresidenceintheU.S.duringhisoffperiods.DoesStan’semploymentsatisfythetaxhometest?□ Yes □ 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.DoesZachmeetthebonafideresi-dencetestinSpain?□ Yes □ No

example

CharlesisamilitaryspousewhohaslivedandworkedinEnglandsince2003.HismotherstilllivesintheU.S.CharlescametotheU.S.fortwoweeksin2009tobewithhismotheraftershehadsurgery.Charles’triptotheU.S.doesnotaffecthisstatusasabonafideresidentofaforeigncountry.

example

Henryisamemberofthearmedforces.HewasassignedtoapostinJapanin2009.Thisassignmentwasforanindefiniteperiodthatexceedsoneyear.Margaret,hiswife,accompaniedhimtoJapanandhasforeignearnedincome.TheyhavenotusedtheirhomeintheU.S.asaplaceofresidenceforoverayear.Therefore,theirtaxhomefor2009isJapan.


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.



What are sources of earned income?

Toqualifyfortheexclusion,servicesmustbeperformedinaforeigncountry.Wherethepaymentscomefromorwheretheyaredepositedisnotafactorindeterminingthesourceoftheincome.

Ifataxpayerworkspredominantlyinaforeigncountry,butdoessomeworkintheU.S.,anadjustmentmustbemadetothetotalforeignearnedincome.

Question 9:JuanitalivesinScotland.SheisretiredandherincomeconsistsofU.S.socialsecurity,apension,andseveralstockdividends.Doesshequalifyfortheforeignearnedincomeexclusion?□ Yes □ 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.

example

Margaret,aU.S.resident,isamemberofthearmedforcesandhaslivedinJapansince2007.Hermilitarypayisnoteligiblefortheforeignearnedincomeexclusion.Inhersparetime,sheisaself-employedDJinTokyo.Theincomefromherself-employmentmayqualifyfortheexclusion.



Question 10:MalloryisaU.S.citizenwhohas$34,000offoreignearnedincome(wages).Shehasnootherincome.Whichformshouldshefile?

A.Form2555

B.Form2555-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


example

Michaelandhiswife,Eva,havebeenstationedinAustraliasince2006.MichaelisamemberoftheArmedForcesandEvaoperatesahomedaycarebusiness.TheirtaxhomeisAustralia,andtheymeetthebona-fideresidencetest.Evawantstoexcludeherself-employmentincomefromU.S.taxation.

Becauseherincomeisfromself-employment,shewillneedtocompleteForm2555insteadofForm2555-EZtoexcludetheincome,andmustcompleteScheduleSEtopaysocialsecurityandMedicare.



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.


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.





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

Introduction

ThislessonwillhelpyoudeterminewhichincomeitemsreceivedbycurrentandformermembersoftheU.S.ArmedForcesarereportableonthereturn,andthestatusofanymedicalseparationpayorpayrelatedtoserviceinacombatzone.

Communitypropertylawsmayimpacttheincomereportedbysomemilitarymembersontheirreturns.

Toidentifythesetypesofincome,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.

Objectives


• 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?


□ VolunteerResourceGuide□ Publication3□ Publication525□ Publication527□ Publication 555□ Publication4491-W

Iftheamountshowninbox1ofFormW-2differsfromthelastLeaveandEarningsStatementfor2009,advisethetaxpayertocontactthelocalaccountingandfinanceorpayrollofficeforanexpla-nation.

Lesson 16: Military Income16-2

ExErcisEs

What income is excludible?

ExcludibleincomedoesnothavetobereportedasincomeonForm1040,Form1040A,orForm1040EZ.Theexclusionapplieswhetherornottheitemisfurnishedinkindorisareimbursementorallowance.

Forexample,theBasicAllowanceforHousing(BAH)canbeexcludedfromgrossincomeasaqualified militarybenefit.Excludibleincomewillnotbeincludedintheamountinbox1onFormW-2.


Question 1: Youneedtoaccountforenlistmentandreenlistmentbonuses separatelywhenpreparingaservicemember’staxreturnbecausetheincomeinformationisnotshownonFormW-2.RefertoPublication3.□ True □ False

Question 2: WhichofthefollowingitemsisexcludiblefromU.S.ArmedForcesmembers’income?

A. Studentloanrepayments

B. BasicAllowanceforHousing(BAH)andBasicAllowanceforSubsistence(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.

IfU.S.ArmedForcesmemberswereprovidedacommuterhighwayvehicle(suchasavan)bytheiremployer,referthemtoPublication525,TaxableandNontaxableIncome,andtoaprofessionaltaxpreparer.



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. Arenotincludedonthetaxpayer’sFormW-2or1099-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.


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

U.S.servicemembersareconsideredtobeservinginacombatzoneiftheyareeitherassignedonofficialtemporarydutytoacombatzoneor theyqualifyforhostilefire/imminentdangerpaywhileinacombatzone.



Question 4: Whichofthefollowingmayqualifyasserviceinacombatzone?

A. Temporarydutyinacombatzone

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.


example

Sgt.BobbyOsagewasnotassignedtoacombatzonebuthediddutythatwasqualifiedforhostilefirepay.Hecanexcludethatincome.



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.

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.


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.





Notes

Lesson 17: Adjustments to Income 17-1

Lesson 17: Adjustments to Income

Introduction

ThislessoncoverstheAdjustedGrossIncomesectionofthetaxreturn.Taxpayerscansubtractcertainexpenses,payments,contributions,fees,etc.fromtheirtotalincome.Thefigureremainingaftercomputingthetaxpayer’sadjustmentstoincomeistheiradjustedgrossincomeor“AGI.”ThelineitemsundertheAdjustedGrossIncomesectionofthetaxreturnareallIntermediatetopics,exceptthepenaltyonearlywith-drawalofsavings,whichisaBasictopic.

Objectives


• IdentifywhichadjustmentsarewithinthescopeoftheVITA/TCEProgram

• CalculateandaccuratelyreporttheadjustmentstoincomethatarewithinthescopeoftheVITA/TCEProgram

How do I determine if the taxpayer has adjustments to income?

Toidentifytheadjustmentstoincomethatataxpayercanclaim,youwillneedtoaskthetaxpayeriftheyhadthetypesofexpenseslistedontheAdjustedGrossIncomesectionofthetaxreturn.Todeterminethetaxpayer’sadjustmentstoincome,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.Reviewthetaxpayer’sanswersontheirapprovedintakeandinterviewsheet.

What do I need?


□ 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.


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.



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.


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.


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.


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.


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.

example

Anthonyhasbeendivorcedforthreeyears.Underhisdivorceinstrument,hepaidhisex-wife$12,000in2009.Asafavor,healsomade$2,400inpaymentstocoverpartofhervehicleleasesoshecouldkeepsteadyemployment.Hecantakethe$12,000asanadjustmenttoincome.Hecannotcounttheleasepaymentsbecausethosewerepaymentsnotrequiredbythedivorceinstrument.


example

FredhasatraditionalIRAaccount,andaRothIRAaccount.In2009,Fredcontrib-uted$2,200tohistraditionalIRA,and$1,000tohisRothIRA.ThemostFredwillbeabletodeductisthe$2,200contributiontohistraditionalIRA.

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.



• 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,whatisthemaximumthatBobcancontributetohisIRA?_______

Question 4:IfBobandCarol(fromQuestion3)filejointly,whatisthemaximumtheycancontributetoBob’sIRA?_______WhatisthemaximumtheycancontributetobothoftheirIRAs?_______

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.


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.


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.


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.


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.

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.



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


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.

example

Thisyear,Jeremypaidinterestonaloanthatallowedhis21-year-olddaugh-ter,Kate,tocompleteaprograminholisticmedicineasafull-timestudentattheSouthwesternCollegeofSynergisticTherapy.Althoughshequalifiesashisdepen-dent,andtheloanpaidforbooks,supplies,andequipment,thecollegeisnotaccredited.Therefore,Jeremycannotdeducttheinterestonthestudentloan.



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!


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.


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.


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.



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!.



Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin. GotoAppendixA-17andreviewthesampleinterviewwithVanessarelatedtoanyadjustmentstoincomethatshecanclaim.Returntothislessonafteryouhavereviewedthisinformation.

Summary

Inthislesson,youlearnedhowtoidentifyandworkwiththeseadjustmentstoincome:

• Educatorexpenses

• One-halfofself-employmenttax

• Penaltyonearlywithdrawalofsavings

• Alimonypaid

• IRAdeduction

• Studentloaninterestdeduction

• Tuitionandfeesdeduction

• JuryDutyPayturnedovertothetaxpayer’semployer

Ifyoubelieveataxpayercouldbenefitfromanadjustmentthatwasnotcoveredinthislesson,encouragethetaxpayertoconsultaprofessionaltaxpreparer.

Inthislesson,yousawthattaxsoftwaremakesitmucheasiertoworkwithadjustmentsbyprovidingeasyaccesstoelectronicworksheetsandbydoingmanycalculationsforyou.





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

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


• Determineifamovequalifiesasapermanentchangeofstation(PCS)

• Identifydeductiblemovingexpenses

• Determinewhenallowancesandreimbursementsmustbeincludedinincome

What do I need?


□ 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.Amovebyanewenlisteefromherhometoherfirstpostofduty

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.


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.



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).


RefertotheMilitaryComprehensiveProblem-FannininPublication4491-Wforanexampleofareturnwithmilitarymovingexpenses.Here’showavolunteercouldhelpMrs.Fannindetermineifshehadanydeductiblemovingexpenses:

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.


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.



Question 3: InDecember2009,PettyOfficerWhartonmovedfromCaliforniatoWashington.ThemovequalifiedasaPCS.Heincurred$800inmileageexpensesand$1,600inlodging.Hepaid$1,400toshiphouseholdgoodsovertheallowedweightlimit,and$500toshiphisdog.Thefollowingmonth,hefiledhistravelvoucherandreceived$2,400mileageandtravelallowance.Healsoreceiveda$1,500dislocationallowance.

Forwhattaxyear(s)canPettyOfficerWhartonclaimhismovingexpenseson Form3903?

A.2009only

B.2010only

C.Either2009or2010


GregwasrelocatedtoanotherAirForcebase.Here’showavolunteercouldhelpGregdetermineifhehadanydeductiblemovingexpenses:

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.


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.





Notes

Lesson 19: Standard Deduction and Tax Computation 19-1

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.

What do I need?


□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form1040□ ScheduleL□ Optional: Publication501

Lesson 19: Standard Deduction and Tax Computation19-2

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.


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

example

Shermanis73yearsoldandblind.HefilesasSingleusingForm1040.Onpage2,line38,youenterhisAGIof$37,800fromline37.BecauseShermanisover65yearsoldandblind,youshouldentera“2”online39a.

example

ArmandodiedonNovember24,2009.Hewouldhavebeen65ifhehadreachedhisbirthdayonDecember12,2009.Hedoesnotqualifyforahigherstandarddeductionforbeing65,eventhoughhewasbornbeforeJanuary2,1945.

Ifvisioncanbecorrectedbeyondthoselimitsonlybycontactlensesandthetaxpayercanonlywearthelensesbrieflybecauseofpain,infection,orulcers,thetaxpayercantakethehigherstandarddeductionforblind-ness.



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)tocompletethefollowingexer-cises.Answersareattheendofthelessonsummary.

Question 3: RoderickwasbornDecember30,1945.Doeshequalifyasbeing65orolder?□ Yes □ NoQuestion 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.

Theseamountsdonotapplyifthetaxpayer(orspouseifMarriedFilingJointly)canbeclaimedasadependentonsomeoneelse’sreturn.



Question 5: LeticiadiedMay1,2009.Her65thbirthdaywasonApril3,2009.Doesshequalifyasage65? □ 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.

example

Janetissingle,22,afull-timestudent,andnotblind.Herparentsclaimedherasadependentontheir2009taxreturn.Shehasnoitemizeddeductions,soshewilltakethestandarddeduction.Shehasinterestincomeof$120,taxeswithheldof$35,andwagesof$780.Herstandarddeductionis$1,080($780+$300).


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.


• 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.

example

Adais25yearsoldandhasanadjustedgrossincomeof$14,000.Sheisentitledtoclaimanexemptionforherselfintheamountof$3,650andherfilingstatusissingle.Sheisnotblind.Hertaxableincomeis$4,650.($14,000AGI-$3,650Exemption-$5,700StandardDeduction)

CasualtyandtheftlossesareoutsidethescopeoftheVITA/TCEprogramandarementionedhereforawarenessonly.Taxpayerswiththeseissuesshouldbereferredtoaprofessionaltaxpreparer.

Aseparateworksheetisusedtocalculatethetax(insteadofthetaxtables)fortaxpay-erswithcertaintypesofincome,suchascapitalgains,qualifyingdividends,orforeignearnedincome.


TaxpayersmustusetheScheduleDTaxWorksheettofiguretheirtaxesifthefollowingapplies:

• TheyhavetofileScheduleD,and

• ScheduleD,line18orline19,ismorethanzero

Tax Software Hint: Regardlessofthetaxpayer’ssituation,figuringthetaxiseasywithtaxsoftware.Theprogramhasalltheinformationnecessarytocomputethetaxonthereturnbasedonpreviousinformationthathasbeeninput.Itisimportanttoenterallincome,deductionandcreditinformationcorrectlyinorderforthetaxsoftwaretocomputethetaxaccurately.


Takealookathowavolunteerhelpedourtaxpayer,VanessaFranklin:GotoAppendixA-19andreviewthesampleinterviewwithVanessarelatedtodeductionsandtaxcomputation.

Summary

Youshouldbeabletoidentifythosewhocantakethestandarddeduction,andhowthedeductionisaffectedbytheirfilingstatus,age,blindness,realestatetaxes,purchaseofanewmotorvehicle,andstatusasadependent.Allofthiswillmakeiteasierforyoutohelptaxpayersunderstandhowtheirdeductioniscomputedanditsimpactontheirtax.

Youshouldalsounderstandthatthetaxcomputationisbasedontaxableincome.Thetaxmaybefurtherreducedbytaxcreditstobecoveredinanupcominglesson.

Youarenowreadytoworkwithitemizeddeductionsinthenextlesson.

example

Mr.andMrs.Brownarefilingajointreturn.Theirtaxableincomeis$25,300.Findtherangethatincludestheirincome:$25,300-$25,350.Thenreadacrosstothecolumnthatappliestotheirfilingstatus:MarriedFilingJointly.Theirtaxis$2,964.

Ifthetaxpayerreceivedaqualifieddividendorcapitalgainsdistributionandyouarepreparingapaperreturn,youshouldfigurethetaxpayer’stotaltaxusingtheworksheetinForm1040Instructions.





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


Notes

Lesson 20: Itemized Deductions 20-1

Lesson 20: Itemized Deductions

Introduction

Thislessonwillassistyouindeterminingifataxpayershoulditemizedeductions.Generally,taxpayersshoulditemizetheirdeductionsiftheirtotalallowabledeductionsarehigherthanthestandarddeductionamount.

Objectives


• 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?


□ VolunteerResourceGuide□ Publication17□ Publication4012□ Publication4491-W□ Form1040□ ScheduleAOptional:□ Publication502□ Publication526□ Publication529□ Publication530□ Publication936

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”).

CasualtyandtheftlossesareoutsidethescopeoftheVITA/TCEprogram.Refertaxpayerswiththeselossestoaprofes-sionaltaxpreparer.


ExErcisEs

What types of expenses are covered?

UnreimbursedmedicalanddentalexpensesandeligibleLong-TermCarepremiumspaidduringthetaxyeararedeductible.Besuretheexpenseswerenotpaidwithpre-taxdollarsorreimbursedbyaninsurancecompany.

Answersareattheendofthelessonsummary.

Question 1: BillandKathyFerrisfileajointreturn.Theypaidthemedicalanddentalbillslistedbelow.ThetotalofBillandKathy’squalifiedmedicalexpensesis $ .

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 ?Unreimbursedorthodontistbillforbraces $1,200 ?Hospitalinsurancepremiums $300 ?Lifeinsurancepremiums $500 ?Unreimbursedprescriptionmedicines $100 ?Vitamins $70 ?Hospitalbill(beforeinsurancecompany’sreimbursementof$1,000)

$2,000 ?

Smoking-cessationprogram $150 ?Total $4,820 ?


• 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.



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,andforeignincometaxandrealestatetax

C. Taxonalcoholandtobacco

D. Foreignsalestax

Question 3: Forataxtobedeductible,ataxmustbe____.(Selectallthatapply.)

A. Imposedduringthetaxyear

B. Imposedonthetaxpayer

C. Paidduringthetaxyear

D. Paidbythetaxpayer

Taxpayerswhoowntheirhomebutchoosetotakethestandarddeductionareeligibleforanadditionalstan-darddeductionof$500iffilingSingle($1,000ifMarriedFilingJointly)forrealestatetaxespaid.

Ifbox5aofScheduleAischecked,completeline7toincludeanydeductiblenewmotorvehicletaxes.Ifbox5bischecked,includethenewmotorvehicletaxesonthatline.Donotcompleteline7andcheckbox5b.

StateandlocaltaxwithheldissometimesshownonFormW-2ineitherbox17or19.


How do I handle interest?

Interestistheamountyoupayfortheuseofborrowedmoney.Certaintypesofinterestaredeductibleasitemizeddeductions.Homemortgageinterest,points(paidasaformofinterest),andinvestmentinterestcanbedeductedonScheduleA.Investmentinterestisoutsidethescopeofthevolunteerprogramandshouldbereferredtoaprofessionaltaxpreparer.

Generally,thetaxpayerreceivesForm1098,MortgageInterestStatement,whichshowsthedeductibleamountofhomemortgageinterestpaidbythetaxpayer.Onlytaxpayerswhoarelegallyliableforthedebtcandeducttheinterestintheyearitispaid.RememberthattaxpayersmayhavemorethanonemortgageormayhaverefinancedduringtheyearandmayhavemultipleMortgageInterestStatements.

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)


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.

ReviewtheInterestExpensechapterofPublication17forspecialrulesandlimitationsfordeductingmortgageinsur-ancepremiumsashomemortgageinterest.



What types of interest are not deductible?

Interestthatcannotbedeductedincludes:

• Interestoncarloanswherethecarisusedfornonbusinesspurposes

• Otherpersonalloans

• Creditinvestigationfees

• Loanfeesforservicesneededtogetaloan

• Interestonadebtthetaxpayerisnotlegallyobligatedtopay

• Financechargesfornonbusinesscreditcardpurchases

Question 4: JoeandAngelafileajointreturn.Duringtheyear,theymadetheinter-estpaymentslistedbelow.ThetotalofJoeandAngela’sfullydeductibleinterestforthetaxyearis$ .

Interest Payments Amount DeductibleQualifiedinterestontheirhomemortgage,reportedonForm1098

$2,180 ?

Credit card interest $400 ?Pointspaidtorefinancetheirmortgageforabetterinterestrate(noneofthepointsqualifyasinterest)

$1,500 ?

Interest on a car loan $2,000 ?Total $4,880 ?

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.


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


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.

EffectiveforcontributionsmadeafterAugust17,2006,deductionsaredisallowedforthecharitablecontributionofclothingandhouseholditemsiftheitemsarenotingoodusedconditionorbetter.



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

TheamountthatJuliacanclaimasdeductiblemonetarycontributionsis$ .

What are casualty and theft losses?

Thedeductionforcasualtyandtheftlossesiscomplex,withmanyrulesandexcep-tions,soyoushouldreferthetaxpayertoaprofessionaltaxpreparer.

Ifthetaxpayerisreducingthefairmarketvaluebyapprecia-tion,ordonatingcapitalgainproperty,referthetaxpayertoaprofessionaltaxpreparer.


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

Gamblinglossesinexcessofwinningsarenotdeductible.Thefullamountofwinningsmustbereportedasincomeandthelosses(uptotheamountofwinnings)canbeclaimedasanitemizeddeduc-tion.



What types of miscellaneous expenses are not deductible?

Thetypesofmiscellaneousexpensesthatarenotdeductibleinclude:

• Politicalcontributions

• Thecostofentertainingfriends

• Lostormisplacedcashorproperty

• Travelasaformofeducation

Question 6:Philiphadtheexpensesshownbelow.WhatisthetotalofPhilip’squalifiedmiscellaneousitemizedexpenses?$ .

Expense Amount DeductibleIncometaxpreparationfee $100 ?Safedepositboxrental(tostorebonds) $75 ?Lifeinsurancepremiums $300 ?Creditcardconveniencefeeforincometaxpayment

$70 ?

Lossonsaleofpersonalhome $1,800 ?Investmentjournalsandnewsletters $250 ?Investmentexpenses $200 ?Attorneyfeesforpreparationofawill $100 ?Total $2,895 ?


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.


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.


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.





Notes

Lesson 21: Military Employee Business Expenses 21-1

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.

What do I need?


□ 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.


Question 1:Whichofthefollowingexpensescanbededucted?

A.Thecostofadressblueuniform(withoutshoulderboardsorgoldstripeonpants),includingcape;off-dutywearallowed

B.ThecostofafullArmygreenuniform(withoutbraid)thatcanbewornanytime

C.Thecostofbattledressuniformsandutilityuniformsthatcanbewornonlywhileondutyorwhiletravelingtoandfromduty

D.Noneoftheabove

Question 2:Whichofthefollowingexpensescanbededucted?

A.Costofepaulets

B.Costandupkeepofareservist’suniformthatcanbewornoffduty(nouniformallowancereceived)

C.Alloftheabove

Question 3:Lt.ClayisonactivedutyfortheU.S.Navy.HespecializesintheinstallationandmaintenanceofsonardetectionsystemsonNavyships.Asavolun-teer,healsodrawsillustrationsandcartoonsforhisbase’sinternalnewsletter.Hereceivesnocompensationforhisillustrations.IsthemembershipfeehepaystotheProfessionalIllustrators’Societyadeductibleexpense?□ Yes □ No

example

Lt.Allen,anelectricalengineeratMaxwellAirForceBase,candeductprofessionalduespaidtotheAmericanSocietyofElectricalEngineers.

Thesamerulesapplyforactivedutypersonnelandreservists.



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 □ FalseQuestion 5:Whichofthefollowingcanbeclassifiedasawork-relatededucationexpense?

A.Costofalaptopanddesklampforstudying

B.Expensesincurredbyaflightoperationsofficertotakeanadvanced pilotingcourse

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.



ofgoingfromhometoschoolunlesstheyareregularlyemployedandgotoschoolonatemporarybasis(notreasonablyexpectedtolastmorethanoneyear)forwork-relatededucation.

Question 6: MajorManchesterisstationedinManila.Onweekends,shedrivestoTaaltotakelessonsintraditionalPhilippinedance.CanMajorManchesterdeductthesetravelexpenses?□ Yes □ 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.

SeePublication970foraddi-tionalinformationregardingEducationalExpenses.

IfArmedForcesmembersdonotclaimreimbursementforexpensestheyareentitledto,nodeductionforthoseexpensesmaybeclaimed.

ForNavypersonnelassignedtopermanentdutyaboardashipthathasregulareatingandlivingfacilities,theshipisconsideredtobe“home”fortravelexpensepurposes.

Servicememberscannotdeductthecostoftravelthatisitselfaformofeducation,evenifitisdirectlyrelatedtotheirduties.



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.MajorForrest,areservistwhoiscalledtotemporarydutyandmustattendanovernightmeetingawayfromhome

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).


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.

The100-mileruleisanexcep-tiontoForm2106require-mentsandqualifiesasanadjustmenttoincome,whichisanabove-the-linededuction.



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.Taxifaretotravelwhileondutytoalocalwork-relatedconvention

D.Elaboratelunchtotreattop-rankingmilitaryofficialvisitingbase

Are expenses related to temporary work locations deductible?

Expensesincurredwhilecommutingtoworkarenotdeductible.However,servicememberswhoareassignedtotemporaryassignmentsinthesametradeorbusinessastheirregularplaceofbusinesscandeducttheexpensesofthedailyroundtripbetweentheirhomeandthetemporarylocation,ifnotreimbursedbytheiremployer.

ThestandardmileageratecanbefoundonForm2106,PartII,SectionB,andForm2106-EZ,PartII.


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.

example

Capt.GlendaletraveledfromhisdutystationinCaliforniatoWashington,DC,foraconference.Hewasawayforfivedays.TheArmyadvanced$700toCapt.Glendaleforthetrip.Hisactualexpenseswere$625.WhenhefiledhistravelvoucherwiththeArmy,hereturnedtheextra$75.HedoesnothavetocompleteForm2106.



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.


Ofthe$2,202onForm2106,line10,$1,926willbeenteredonForm1040,line24,andtheremaining$276willbeenteredonScheduleA,line21.


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.


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.




Lesson 22: Business Travel Expenses 22-1

Introduction

Thislessonprovidesinformationondeductingtheordinaryandnecessarybusiness-relatedexpensesataxpayermayhavefortravel,entertainment,gifts,ortransportation.Anordinaryexpenseisonethatiscommonandacceptedinthetaxpayer’sfieldoftrade,business,orprofession.Anecessaryexpenseisonethatishelpfulandappropriateforataxpayer’sbusiness.

Objectives


• 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

What do I need?


□ 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.


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.

Thislessondiscussesonlythestandardmileagerate.Ifthetaxpayerwishestousetheactualmethod,referthemtoaprofessionaltaxpreparer.

Taxpayerswhotravelforbusi-nessshouldkeeprecordsofallexpensesandanyadvancesreceivedfromtheiremployer.Alog,diary,note-book,oranyotherwrittenrecordsarenecessarytokeeptrackofexpenses.


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.


Question 1:Whichofthefollowingistrueformealsandentertainmentexpenses?

A.Taxpayersmaydeductmealexpensesforfamilymembersifthetravelcanbeproventobeprimarilybusinessrelated.

B.Taxpayerscandeduct100%ofmealandentertainmentexpensesthatarenotsubjecttoDOThoursofservice.

C.Taxpayersmayreporttheactualamountsformealsandentertainmentandforincidentalexpensesorusethestandardmethod.

D.Alloftheabove.

Question 2:TrueorFalse:Taxpayerswhocanusethestandardmethodforcalcu-latingbusinessmileageneednotproducerecordsprovingthetime,place,andbusinesspurposeofthetravel.□ True □ False

SeetheinstructionsforForm2106todetermineifataxpayerissubjecttoDOThoursofservice.

SeePublication463fordetailsonhowtofiguredeductionsusingthestandardmealallow-ance,includingspecialrulesforpartialdaysortravelandfortransportationworkers.


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.

ThefinaldeductionamountonForm2106maybereducedwhenyouapplythe2%AGIlimitonScheduleA.

Specialrulesapplytofiguringthefinalamountforbusinesstravelexpensedeductionsforministers,armedforcesreservists,certainstateandlocalofficials,qualifiedperformingartists,anddisabledemployees.SeeForm2106Instructionstodetermineifataxpayerwillqualifyunderanyofthesecategories.


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

Lesson 23: Credit for Child and Dependent Care Expenses

What do I need?


□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form2441andinstructionsOptional: □ Publication503□ Form1040Instructions

Introduction

Thislessoncoversthecreditforchildanddependentcareexpenses.Sometaxpayersmaynotbeawareofthiscredit.Yourtimeandeffortmayresultinalower taxforthetaxpayer.

Todetermineifataxpayeriseligibleforthecredit,usetheinterviewtechniquesandtoolsdiscussedintheinterviewlesson.WhetherthetaxpayerisfilingForm1040orForm1040A,calculatethecreditusing Form2441.

Objectives


• 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!

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.


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.


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.


If,inthesamemonth,boththetaxpayerandthetaxpayer’sspousearefull-timestudentsorarenotabletocareforthemselves,onlyonespousecanbeconsideredtohaveearnedincomeofeither$250foronequalifyingpersonor$500fortwoqualifyingpersonsforthatmonth.

Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab5),Form2441-CreditforChildandDependentCareExpenses.


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?


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.


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.


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.


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.


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 □NoQuestion 2: Whydon’tAudreyandherhusbandqualifyforthecredit? (Selectallanswersthatapply.)

• Thecaregiverexpenseisnotwork-related

• Theirsonisnotaqualifyingperson

• Thecaregiver’sdutiesdonotqualifyaswork-related

• Theydonotpasstheearnedincometest


Bill,61,andHelen,62,aremarriedandhavelivedtogetherfortwentyyears.EarlierintheinterviewwithBill,youlearnedthatHelenistoosicktoworkandneeds24hourcare.Youwonderwhetherhecantakethechildanddependentcarecredit.Billisclaim-inghisgranddaughterasadependent,asnotedintheFamily/DependentInformationsectionofhisapprovedintakeandinterviewsheet.Sheis18andtakescareofherself.

ApplythequestionsfromthecreditforchildanddependentcareexpensesdecisiontreeintheVolunteerResourceGuide(TabG)tofindoutwhetherBillcantakethecredit,asshowninthesampleinterviewtofollow.


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.



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.


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.


Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-25andreviewthesampleinterviewwithVanessarelatedtoLesson23.

example

Maryhasthreequalifyingchildren.Shereceived$4,800independentcarebenefitsthroughheremployer.WhenMaryfigureshercredit,herwork-relatedexpenseswillbelimitedto$1,200($6,000-$4,800).


ExErcisE answErs

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.





Notes

Lesson 24: Education Credits 24-1

Introduction

Thislessoncoverstwotaxcreditsavailabletohelpthetaxpayeroffsetthecostsofhighereducationbyreducingtheamountofincometax.Thislessonsuggestsprobingquestionsyoucanaskbasedonanapprovedintakeandinterviewsheet,theVolunteerResourceGuide(TabG),andontherulesforclaimingeducationcredits.

Duringtheinterview,asktaxpayersiftheyareawareoftheeducationcredits,andgiveabriefdescription.Next,gatherinformationtodetermineifanycreditscanbeclaimed.

Objectives


• 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?


□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form8863□ Form1040Instructions□ Optional:Publication970

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.


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.

example

Jackiepaid$3,000fortuitionand$5,000forroomandboardataneligibleuniversity.The$5,000paidforroomandboardisnotaqualifiedexpensefortheeducationcredits.


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.


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.

example

Tobyamassedmanyreceiptsforbooksandsupplieshisfirstyearatcollege. Hespent$1,291forrequiredbooks,labsupplies,androck-huntingequipmentheneededforhisintroductorychemistryandgeologycourses.Theschoolhasnopolicyrequiringthatthesebooksandequipmentbepurchasedfromthecollegeinordertoenroll.Forthe2009and2010taxyears,thesearequalifiedexpensesfortheAmericanopportunitycredit.


ExErcisEs

requirements.Thestudentneednotbeenrolledhalf-timeorinadegreeprogram,andafelonydrugconvictiondoesnotdisqualifythestudent.

Thelifetimelearningcreditcanbeupto$2,000pertaxreturn,dependingontheamountofeligibleexpensesandtheamountoftaxonthereturn.Thecreditis20%ofthefirst$10,000ofeligibleexpensespaidforallstudents,uptotheamountoftaxonthereturn.

UsetheEducationCreditsTipsintheVolunteerResourceGuide(TabG)andtheComparisonTableinPublication17toanswerthefollowingquestions.Answersareattheendofthelessonsummary.

Question 1: Bobisafull-timestudentandisafifthyearsenior.DoeshequalifyfortheAmericanopportunitycredit? □ Yes □ No

Question 2:Janiceworksfulltimeandtakesonecourseamonthatnightschool.Someofthecoursesarenotforcredit,buttheyaremeanttoadvancehercareer.Whichcreditisappropriateforher?□Americanopportunity□LifetimeQuestion 3:Clarkisanolderstudentwhohasgonebacktocollegehalftimeafterserving18monthsinprisonforfelonydrugpossession.Whichcreditisappropriateforhim?□Americanopportunity□Lifetime

Can a taxpayer take multiple credits?

Taxpayerscannottakemultiplecreditsonthesamestudent’sexpenses.Forexample:

• DonotfiguretheeducationcreditsbasedonexpensesthathavealreadybeentakenonScheduleA,ScheduleC-EZ,ortuitionandfeesdeduction.

• DonottakebothanAmericanopportunitycreditandalifetimelearningcreditforthesamestudentinthesameyear.

Tax Software Hint:Toreviewinformationrelatedtosoftwareentries,gototheVolunteerResourceGuide(Tab5),Form8863,EducationCredits.


Herearethegeneralstepsinfiguringtheamountofeducationcredits:

1. Reviewthelistofqualifyingstudentsandexpenses,anddecideiftheAmericanopportunitycreditorlifetimelearningcreditismoresuitable.(Seetherequirementdiscussedearlier.)

example

JillattendsWanda’sSchoolofBeauty,aneligibleinstitution.Shepays$4,400forthecourseofstudy,whichincludestuition,equipment,andbooksrequiredforthecourse.Theschoolrequiresthatstudentspayforthebooksandequipmentwhenregisteringforthecourse.Theentire$4,400wouldbeaneligibleeducationalexpense.


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).


Hereishowourvolunteerhelpedtaxpayer,BarbaraSmith,determinewhicheducationcreditsappliedtoherfamily.

IfyoufindtaxpayersclaimedaneducationcreditinaprioryearandtheywererefundedpartoralloftheexpensestheyusedtoclaimtheAmericanopportunityorlifetimelearningcredit,theymayhavetorepayallorpartofthecredit.ThisisbeyondthescopeoftheVITA/TCEprogram.InformationcanbefoundinPublication970.Advisethetaxpayertoconsultaprofessionaltaxpreparer.

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.


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!


ExErcisE answErs


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





Notes

Lesson 25 : Foreign Tax Credit 25-1

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


• 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?


□ VolunteerResourceGuide□ Publication 514□ Publication4491-W□ Form1116□ Form1116Instructions

Lesson 25: Foreign Tax Credit25-2

ExErcisEs

SometaxpayersmaychoosetheelectiontoclaimtheforeigntaxcreditwithoutfilingForm1116,ifcertainconditionsaremet.AdditionalinformationcanbefoundinForm1040Instructions,Form1116Instructions,Publication17,andPublication514.

TheamountofthecreditisshownonForm1040,line47.ThecompletionofForm1116isnotrequired.

TaxpayerswhomustcompleteForm1116becausetheycannotqualifyfortheelection,mustbereferredtoavolunteerwithanInternationalcertificationoraprofessionaltaxpreparer.



Question 1: TrueorFalse?Toclaimtheelection,ataxpayerwhoisfilingSinglemusthaveforeigntaxeslistedinBox6of1099-DIVor1099-INTthatareequaltoorlessthan$300.□ True □ FalseQuestion 2: Clydecomestoyoursiteseekinghelpwithhisforeigntaxcredit.HeissingleandhisForms1099-DIVshowatotalof$423offoreigntaxpaid.CanClydemaketheelection?□ Yes □ NoQuestion 3: JudyandMarkaremarriedandwillfileajointreturn.TheirForms1099-DIVshowaforeigntaxpaidof$590.Cantheymaketheelection? □ Yes □ No

TheremainingsectionsofthislessonaredirectedatvolunteersseekinganInternationalcertification.AllothersmayproceedtoLesson26,ChildTaxCredit.

What is the foreign tax credit (FTC)?

U.S.citizensandresidentscomputetheirU.S.taxesbasedontheirworldwideincome.ThissometimesresultsinU.S.citizenspotentiallyhavingtopaytaxtwiceonthesameincome:oncetothegovernmentoftheforeigncountrywheretheincomewasearned,andagaintotheU.S.government.

example

Ryan,whoissingle,receivedForm1099-DIVthatshows$219offoreigntaxespaid(box6)in2009.AccordingtoRyan,hepaidnootherforeigntaxes.HeiseligibletoclaimtheforeigntaxcreditanddoesnothavetocompleteForm1116.


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

AcreditforforeigntaxescanbeclaimedonlyforforeigntaximposedbyaforeigncountryorU.S.possession.


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.

example

RobbKendallandhiswifeareU.S.citizenswhoresideinFrance.TheirForm1040,ScheduleB,InterestandOrdinaryDividends,lists$500interestfromaU.S.bankand$600interestfromaFrenchbank.Theypaidincometaxesonbothamountstobothcountries.OntheirU.S.taxreturn,theycancomputeaforeigntaxcredittooffsetthetaxestheyowetotheU.S.ontheinterestreceivedfromtheFrenchbank.TheywouldneedtocheckwiththeFrenchtaxingauthoritiestodetermineiftheycanclaimasimilartaxcreditontheirFrenchtaxreturntooffsetthetaxespaidtotheU.S.ontheinterestincomeearnedintheU.S.

SeePublication514,ForeignTaxCreditforIndividuals,formoredetailedinformation.



Question 4:AnneisaU.S.citizenlivinginJapan.Shelistedwages,interestincome,anddividendincomeonherU.S.taxreturn.ShepaidtaxesoneachofthesetypesofincometoJapan.Annecancomputeaforeigntaxcreditonwhichofthefollowingtypesofincome?

A.WagesfromherjobintheU.S.

B.InterestincomefromaU.S.bank

C.InterestincomefromaJapanesebank

D.DividendincomefromaU.S.corporation

Question 5: Jean,aU.S.citizen,receivedaninheritanceuponthedeathofanuncleinSpain,andpaidaninheritancetaxtotheSpanishgovernment.CanJeancomputeaforeigntaxcredittooffsettheinheritancetaxshepaidinSpain? □ Yes □No

What is “economic benefit”?

Asmentionedearlier,theforeigntaxpaidcannotprovideaspecificeconomicbenefitforthetaxpayerandbeincludedintheforeigntaxcreditcomputation.Thismeansthatthetaxcannotbeapaymentthatresultsinanindividualreceiving:

• Goods

• Services

• Feesorotherpayments

• Therighttouse,acquireorextractresources,patentsorotherpropertythattheforeigncountryownsorcontrols

• Dischargesofcontractualobligations

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.



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 □NoQuestion 7: Write“Q”nexttoeachtaxthatqualifiesfortheforeigntaxcreditor“NQ”nexttothosethatdonot.AssumethetaxpayerisaU.S.citizenorresidentlivinginanon-sanctionedforeigncountry,andthatthetaxisbeingpaidtoaforeigngovernmentonforeign-sourcedincome.

Dividendtaxes

Foreignoil-relatedincometax

Interestincometax

Realestatetaxes

Incometaxonwagesfromaforeigncountry

TaxespaidonincomeearnedinSyria

Foreignincomeearnedin sanctioned countries is subjecttoU.S.tax.AseparateForm1116mustbecompletedforforeignincomefromasanctionedcountry,usingthe“Section901(j)income”cate-gory.Thisisbeyondthescopeofthevolunteerprogram;referthetaxpayertoaprofessionaltaxpreparer.


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.

Wagesandsalariesareconsidered to be general categoryincome,whichisdiscussedlaterinthistopic.Passivecategoryincomemayqualifyasgeneralcategoryincomeiftheforeigngovern-menttaxesitataratehigherthanthehighestU.S.taxrate;see“High-taxedIncome”below.

example

RobertpaidtaxestoSpainanddidnotelecttoclaimtheforeignearnedincomeexclusion.HecanclaimaforeigntaxcreditforthetaxespaidtoSpainonhisearn-ingsfromSpain.



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: DividendIncome:

A.Passivecategoryincome

B.Generalcategoryincome

Question 9: BernardisaU.S.citizenwholivesinBarbados.In2009,hepaid17%incometaxoninterestincomefromhisbankaccountinBarbados.ForthepurposesofForm1116,Bernard’sforeigninterestincomeshouldbeclassifiedas:

A.Passivecategoryincome

B.Generalcategoryincome


Thereareseveralfactorstoconsiderwhendeterminingifataxpaidtoaforeigngovernmentiseligiblefortheforeigntaxcredit.Youwillneedtoaskthetaxpayerques-tionstodetermine:

• Wastheincomeforeign-sourced?

• Whattypeoftaxwaspaidtotheforeigngovernment?

• Willthetaxpayerreceivesomekindofspecificeconomicbenefitfromthepaymentofthistax?

Here’showavolunteerhelpedBonniedetermineifshequalifiedfortheforeigntaxcredit:

example

BrendaisaU.S.citizenwholivesinaforeigncountryandpays45%incometaxonherinterestincomeinthatcountry.Shecanlistthisincomeunderthe“Generalcategoryincome”headingonForm1116,sincetherateofincometaxpaidonthispassiveincomeishigherthanthehighestU.S.incometaxrate.


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


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.



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.



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.





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

Lesson 26: Child Tax Credit

Introduction

Thislessoncoversacreditthatfirsttookeffectin1998.Thechildtaxcreditisuniquebecauseifataxpayercannotbenefitfromthenonrefundablecredit,thetaxpayermaybeabletoqualifyfortherefundableadditionalchildtaxcreditonForm8812.Inthischapter,wewilllearnaboutbothcreditsandtheirrelationshiptoeachother.Sometaxpayersmaynotbeawareofthesecredits.Yourtime,effort,andunderstandingofthiscreditmayresultinalowertaxforthetaxpayer.

ThechildtaxcreditisenteredintheNonrefundableCreditssectionofthetaxreturn;theadditionalchildtaxcreditisenteredinthePaymentssection.Form1040EZfilerscannottakethecredit.

Anapprovedintakeandinterviewsheetandtheinter-viewtipsintheVolunteerResourceGuide(TabG), arecriticaltoolsneededtodetermineeligibilityfor thecredit.

Objectives


• 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?


□ VolunteerResourceGuide□ Publication17□ Publication972□ Publication4491-W□ Form8812andInstructions□ Optional:Form1040

Instructions

Don’tconfusethesecreditswiththechildanddependentcaretaxcredit!

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.

NEW Taxpayerswithdivorcedecreesordivorceagree-mentsexecutedafter2008mustuseForm8332orsimilarstatement;theycannotsimplysubstitutepagesfromthedivorcedecree.


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. ArenoteligibleforthemaximumcreditandcanusetheChildTaxCreditWorksheetintheForm1040Instructionstofiguretheirchildtaxcredit

B. WillhavetousePublication972tofiguretheirchildtaxcredit

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.

Ifthetaxpayer’staxliabilityiszero,theycannottakethecreditbecausethereisnotaxtoreduce.However,thetaxpayermaybeabletotaketheadditionalchildtaxcredit,discussedlaterinthislesson.



Question 2:Laura’sadoptedsonJackis12.HeisacitizenoftheUnitedStates,andlivedwithLaurafortheentiretaxyear,duringwhichtimeLauraprovidedfullfinancialsupport.IsJackaqualifyingchildforthechildtaxcredit?□ Yes □NoQuestion 3:Whichoneofthefollowingindividuals(allofwhomhavetwoqualifyingchildrenforthepurposesofthechildtaxcredit)areeligibletoclaimthemaximum$1,000perchildforthechildtaxcreditontheirtaxreturn?

A. Fiona,whoisMarriedFilingSeparatelywithaMAGIof$60,000

B. Ken,aQualifyingWidowerwithaMAGIof$30,000 andtaxliabilityof$490

C. Nick,whoisSinglewithaMAGIof$70,000andataxliabilityof$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.


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).



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).Thechil-drenarequalifyingchildrenforpurposesofthechildtaxcredit,butnottheearnedincomecredit.JoseandYolanda’sAGIis$8,850andtheirtaxliabilityis$0.TheirsocialsecurityandMedicaretaxesare$677.Theirearnedincomecreditamountis$457.Aretheyeligibletotaketheadditionalchildtaxcredit?□ Yes □No

How do I avoid common errors?

Whenconsideringthechildtaxcredit,itiscriticaltoensurethatthetaxpayerhasbeeninterviewedthoroughlytocorrectlyidentifyeligiblechildren.Ifpreparingapaperreturn,besuretousetheworksheetstofigurethecredit,anddetermineiftheadditionalchildtaxcreditshouldbeincluded.

Tax Software Hint: OncetheCTCblockontheMainInformationSheetischecked,thesoftwarewillcomputetheamountofthecreditautomatically.


Takealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-28andreviewthesampleinterviewswithVanessarelatedtolesson26.


ExErcisE answErs

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.





Notes

Lesson 27: Miscellaneous Credits 27-1

Lesson 27: Miscellaneous Credits

Introduction

Thislessonprovidestheinformationyouneedtobeabletoprepareareturnwithcertainnonrefundablecredits.TheBasicCourseincludesRetirementSavingsContributionCreditandCreditfortheElderlyortheDisabled.Theothermiscella-neouscreditscoveredinthislessonarepartoftheIntermediate,Advanced,Military,orInternationalCourses.

ThesecreditsarereportedintheTaxandCreditssectionofForm1040,U.S.IndividualIncomeTaxReturn.

Objectives


• 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.

What do I need?


□ 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.


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.

Youmustquestionthetaxpayertodetermineiftherehavebeenanydistributionsinthetestingperiod.

example

JoeandMaryaremarriedandfiledjointreturnsfor2007and2008,andplantodosoin2009.Joereceivedataxabledistributionfromaqualifiedplanin2007andataxabledistributionfromaneligibledeferredcompensationplanin2008.MaryreceiveddistributionsfromaRothIRAin2008.

BothJoeandMarymadeeligiblecontributionstoanIRAin2009andotherwisequalifyfortheretirementsavingscredit.Theymustreducetheamountoftheirqual-ifyingcontributionsin2009bythetotalofthedistributionstheyreceivedin2007and2008.ThiscalculationiscompletedonForm8880.


ExErcisEs

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,whoismarried,filesjointly,andhasanadjustedgrossincomeof$49,500

C.Bert,whoismarried,filesseparately,andhasanadjustedgrossincomeof$28,300

D.Carl,whoisaqualifyingwidowerwithadependentchild,andhasamodifiedAGIof$29,000


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!


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.


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.



Fewtaxpayersqualifyforthiscreditbecausethecreditcalculationincludesthetaxpay-er’snontaxablesocialsecurity,veterans’benefits,orotherexcludablepension,annuity,ordisabilitybenefits.Mosttaxpayers’socialsecuritybenefitsaloneexceedthelimit.


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.Earningatleastminimumwagebyperformingproductivework

Sincetaxsoftwareautomati-callycalculatesthecreditfortheelderlyorthedisabled,itiscriticalthatallsocialsecurityandrailroadretirementbenefitstreatedassocialsecuritybeenteredontheworksheetforline20aofForm1040.Amountsmustbeenteredevenifnosocialsecurityistaxable.

example

Johnisunmarriedandfilingasinglereturn.Heis67yearsoldandreceived$12,000innontaxablesocialsecuritybenefitsinthetaxyear.HisAGIis$9,000.EventhoughJohnisaqualifiedindividual,heisnoteligibletoclaimthecreditsincehisnontaxablesocialsecuritybenefitsexceed$5,000.



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.

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.


How are the total nonrefundable credits reported?

ThetotalofallnonrefundablecreditsisreportedontheapplicablelineintheTaxandCreditssectionofForm1040.

Tax Software Hint: Basedonyourentriesforallthecredits,thesoftwarecalcu-latesthetotalofthetaxpayer’screditsandenterstheamountontheTotalCreditsline.Remember,thenonrefundablecreditscannotexceedthetaxpayer’sfederalincometax.


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.

IRAcontributionsmadebythetaxpayerareoftenover-looked.Besuretoasktaxpay-ersiftheymadetraditionalorRothIRAcontributions.IRAcontributionsmayqualifythetaxpayerfortheretirementsavingscontributionscredit.


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.




Lesson 28: Other Taxes 28-1

Lesson 28: Other Taxes

Introduction

ThislessoncoverstheOtherTaxessectionofthereturn.Youwilldetermineifthetaxpayerowesadditionaltaxes.Whenyouconcludethislesson,yourfindingswillbethetaxpayer’stotaltax.

Objectives


• 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.

IfyouarenotcertifiedtoprepareareturnincludingadditionaltaxesonIRAsandotherqualifiedretire-mentplans,refertaxpayerswiththisissuetoamoreexperiencedvolunteeroraprofessionaltaxpreparer.

What do I need?


□ 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.


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.


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.


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

Aspartofyourinterview,explaintotaxpayersthatsometimespeopledonotreal-izetheyowetaxesontipstheydonotreporttotheiremployer.Alsoexplainthetaxespaidonthosetipsactuallyboostthetaxpayer’sfuturesocialsecu-ritybenefits.

example

Carlawaitstablesatacafé.Heremployerreportsalltipsthatcustomersaddtotheircreditcardtabs,butsheleavesituptoCarlatokeeptrackofhercashtips.Carlareceivesmorethan$20permonthincashtips.Carlakeepsarecordbut,becauseshedoesn’treporthercashtipstoheremployer,theyarenotincludedonherFormW-2.CarlaincludestheunreportedtipsasincomeonForm1040,line7.CarlaalsousesForm4137tocalculateandpaythesocialsecurityandMedicaretaxesonthosetips.


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.

Frequently,taxpayerswhoreceiveForm1099-Rwithcode1inbox7aresubjecttothe10%additionaltaxforprematuredistributionbecausethemoneywasspentforitemsthatdonotmeetanyoftheexceptions.

RefertothePublication17chaptersRetirementPlans,Pensions,andAnnuitiesorIndividualRetirementArrangementsforthelistofexceptionstotheadditionaltaxonqualifiedretirementplans.

example

Johnis39yearsoldandreceivedForm1099-Rwithcode1inbox7.Heusedthemoneytopayforcarrepairs.Fortheadditionaltax,Johnenters10%ofthetaxableamountontheapplicablelineofForm1040.Johnalsoenters“no”totheleftofthislinetoindicatethatForm5329isnotrequired.

IfForm1099-Rcorrectlyshowscode1inbox7indicatinganearlydistribution,theadditionaltaxappliesunlessthetaxpayerqualifiesforanexception.Guidelinespermitentering10%ofthetaxableamountdirectlyonForm1040,ontheapplicablelineforadditionaltaxonIRAsorotherqualifiedretirementplans.“No”isenteredtotheleftofthislinetoindicateForm5329isnotrequired.TaxsoftwaredoesthisautomaticallybasedonentriesonForm1099-R.


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.

example

WhenthevolunteerhelpedClairepreparehertaxreturn,theAEICamountof$550wasreportedintheOtherTaxessection.The$1,776inEICforwhichshequali-fiedwasreportedinthePaymentssection.Asaresult,hertaxreturnreflectedtheadvancepaymentofherEICandsheisallowedtheremaining$1,226aspartofher2009refund.



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.Gloriahasanoverpaymentof$1,125

D.Gloriahasanoverpaymentof$1,825

Question 4: RamonhastwochildrenandexpectstoqualifyforEICin2009.Heneededthecashassoonaspossible.HearrangedtoreceiveadvanceEICpaymentsthroughout2009,ratherthanwaitingtofilehis2009returntogettheentireEICamount.InwhatsectionofhistaxreturnaretheAEICpaymentsreported?

A. Income

B. OtherTaxes

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.


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.


Let’stakealookathowataxpreparerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-32andreviewtothesampleinterviewwithVanessarelatedtolesson28.

Summary

ThislessonexplainedhowtocompletetheOtherTaxessectionofthereturn. “Othertaxes”arenotcalculatedusingtheincometaxtablesortheTaxComputationWorksheet.Theyinclude:

• Self-employmenttax

• SocialsecurityandMedicaretaxesonunreportedtipincome

• AdditionaltaxesonIRAsandotherqualifiedretirementplans

• Advanceearnedincomecreditpayments

Tax Software Hint:Theseamountsarecalculatedonseparateformsorsched-ules.Thetaxsoftwareprovidesalloftheformsandperformsmostofthecalculations.


ExErcisE answErs

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





Notes

Lesson 29: Payments 29-1

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

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?


□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ FormW-2□ Form1040□ Form1040Instructions□ Form1040-ES□ Forms1099□ Form4868□ Form5405□ ScheduleM□ ScheduleMInstructionsOptional: □ Publication505□ Publication 919


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).

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.


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.


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!


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.


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.


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.

Taxpayers(includingspouseifmarried)whoownedaprin-cipalresidenceatanytimeduringthethreeyearspriortothedateofpurchase,arenoteligibleforthecredit.


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.


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.

example

OneofBernice’sFormsW-2waslostinthemail.Sherequestedacopyfromherformeremployer,butitdidnotarrivebyApril15.Shefiledforanextension, calculatedtheamountoftaxesowedbasedonherfinalpaystubfromthatemployer,andpaidthe$243thatwasdue.WhenshefinallyreceivedherFormW-2,shefiledherreturnandreportedthe$243ontheapplicablelineinthePaymentssectionofForm1040.



Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-35andreviewthesampleinterviewwithVanessarelatedtoLesson29.ReviewthePaymentssectionofVanessa’sreturninAppendixB-5.Returntothislessonafteryouhavereviewedthisinformation.

Summary

ThePaymentssectionofthetaxreturniscriticaltoanaccuratereturn.Itlistsallthetaxpaymentsthetaxpayermadeduringtheyear,andthetaxpayer’srefundablecredits.Youmustbeabletoidentifythetypesofpaymentsandcreditsthatapplytoindividualswhoqualifyforvolunteerreturnpreparationassistance.

Notes


Togainabetterunderstandingofthetaxlaw,completethecomprehensiveproblem,practiceexercise(s)orsupplementsforyourcourseofstudyinPublication4491-W.


Lesson 30: Earned Income Credit (EIC) 30-1

Introduction

ThislessoncoverstheEarnedIncomeCredit(EIC).Thereareseveralcommonerrorsassociatedwithclaimingthiscreditonthereturn.Publication4012,VolunteerResourceGuide,andtheapprovedintakeandinterviewsheetarecriticaltoolsinavoidingthesemistakes.

Objectives


• 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?


□ VolunteerResourceGuide□ Publication17□ Publication596□ Publication4491-W□ Form1040□ Form1040Instructions□ ScheduleEIC

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.


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.


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 □NoQuestion 2: Ataxpayerhasinterestincomeof$3,200.Hisearnedincomeisonly$7,000.Heissingle,hasavalidsocialsecuritynumberandisnotthequalifyingchildofanyoneelse.DoeshequalifyfortheEIC?□ Yes □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.


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.

ForEICpurposes,aqualifyingchilddoesnothavetobethetaxpayer’sdependentunlessthechildismarried.Forexample,thecustodialparent(theparentthechildlivedwithformorethanhalftheyear)canqualifyfortheEIC.ThenoncustodialparentcannotqualifyforEICbecausethechilddidnotlivewiththatparentformorethanhalfoftheyear.Itdoesnotmatterthatthecustodialparentdoesnotclaimthedependencyexemptionforthechildinthecaseofdivorcedorseparatedparents.

Listthechildrenfromyoungesttooldestinthesoftware.

Foracouplefilingajointreturn,onlyonetaxpayerhastomeettheagerequirement.

Reviewthequestionontheapprovedintakeandinter-viewsheet:Canyourparentsorsomeoneelseclaimyouoryourspouseontheirtaxreturn?Didthetaxpayercheckyesorno?

example

TomandMarthaareamarriedcouple.Tomis66andMarthais58yearsold.Ifallotherrulesaremet,theywouldqualifyfortheEIC.

Ifthechildmeetsthecondi-tionstobethequalifyingchildofmorethanoneperson,onlyonepersoncanclaimthechildasaqualifyingchild.



UsingtheinterviewtipsintheVolunteerResourceGuide,determineifeachofthesetaxpayershasaqualifyingchildorcanclaimtheEIC.Eachchildhasavalidsocialsecuritynumber.

Question 3: Maureen’s20-year-olddaughter,Angie,livedwithherforeightmonthsoftheyear.Angieisnotmarriedandisafull-timecollegestudent.IsAngieaquali-fyingchildfortheEIC?□ Yes □NoQuestion 4: StartinginFebruaryofthetaxyear,SamhascaredforLisa,the10-year-olddaughterofhisstepson.DoesLisameettheEICrequirementsforaqualifyingchild?□ 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□Dwight□NoneQuestion 6: Amarriedcoupleisfilingjointly.Theyareraisingtheir10-year-oldgranddaughterbecausetheirdaughterisservingalongprisonterm.Theyarealsocaringforanunrelated8-year-oldboywhowasplacedwiththemasafosterchildbytheStateDepartmentforFamilyandDependentChildren.TheyhavewagesandanAGIof$41,463.Assumingtheymeetallothertests,cantheyclaimtheEIC?□ Yes □NoQuestion 7:Imaginethatthemarriedcoupleinthepreviousquestionwasinadifferentsituation:Whatiftheywereonlycaringfortheirgranddaughter?WouldtheybeabletoclaimtheEIC?□ Yes □NoQuestion 8:Margie’sdaughter,Aimee,turned23earlyinthetaxyearwhileattend-ingcollegefulltime.MargieisfilingasHeadofHousehold.MargiehasanAGIof$29,231.Assumingthatsheandherdaughterpassallothertests,canMargieclaimtheEIC?□ Yes □NoQuestion 9:RobandLauraaredivorced.LauraisthecustodialparentforDawn,wholivedwithherallyear.LaurasignedForm8332,allowingRobtoclaimthedependencyexemptionforDawnuntilsheturns18.CanRobclaimDawnfortheEIC?□ Yes □No


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?□ 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.

Double-checkthattheheadingonyourpagesays“EarnedIncomeCredit(EIC)Table.”ItiscommontomistaketheTaxTablesfortheEarnedIncomeCredittables.


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.


Takealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-35andreviewthesampleinterviewswithVanessarelatedtothislesson.YouwillalsofindanoptionalexerciseofcompletingherEICworksheet.

Summary

TheEarnedIncomeCreditcomputationisbasedonfilingstatus,numberofqualifyingchildren(1-3),earnedincome,andadjustedgrossincome.Certainindividualswithnochildrenmayalsoqualify.

Byusingtheapprovedintakeandinterviewsheet,theinterviewtipsintheVolunteerResourceGuideandcorrectlyfillingouttheEICworksheets,mostoftheerrorsthatarrivefromincorrectlycomputingtheEICcanbeavoided.

TaxpayerswhoreceivedadvanceEICpaymentswillhavetheamountenteredinbox9oftheirFormW-2.Theyarerequiredtofileataxreturn.

TheEICisenteredinthePaymentssectionofthereturn.SeeVanessa’scompletedworksheetsinAppendixB.


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.





Notes

Lesson 31: Refund and Amount of Tax Owed 31-1

Introduction

ThislessoncoverstheRefundandAmountYouOwesectionsofthetaxpayer’sreturn.Aftercompletingthislesson,youwilldetermineifthetaxpayerhasoverpaid(arefundisdue)orhasunderpaidtheirtax(balanceisduetothegovernment).Thispartofthereturnisasummaryofthetax,credits,andpayments.

Tocompletethesesectionsofthetaxpayer’sreturn,youwillneedtoconfirmanswersprovidedduringyourinitialinterviewtoPartIII,Item1and2regardingdirectdepositanddirectdebitfromthetaxpayer’sapprovedintakeandinterviewsheet.Also,reviewtheVolunteerResourceGuide(Tab6)and(Tab13).

Objectives


• 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

What do I need?


□ 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.


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.

Whenanadjustmentismadetoataxrefund,theIRSsendsaletterexplaininganyerrorsthatresultedintheadjust-ment,aswellasanychangesmadetotherefundamountandtheamountofeachdirectdeposit.

example

Joan’sreturnshowsarefundof$300andsheaskstheIRStosplitherrefundamongthreeaccountswith$100toeachaccount.Duetoanerror,herrefundisdecreasedby$150.TheIRSwilladjustherdirectdepositsasfollows:

Requested Actual DirectDeposits DirectDeposits

Account1 $100 $100

Account2 $100 $50

Account3 $100 $0


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.

Publications4541and4542provideinformationonsplitrefunds,andareavailableelectronicallyonwww.irs.gov.

Financialinstitutionsgener-allydisallowajointrefundtobedepositedintoanindi-vidualaccount.TheIRSisnotresponsibleifafinancialinsti-tutionrefusesadirectdeposit.


ExErcisEs


Question 1: Althoughdirectdepositsavespostage,itisnofasterthanreceivingarefundthroughthemail.□ True □ FalseQuestion 2: Whenenteringanaccountnumberfordirectdeposit,makesuretoincludeallspacesandhyphens.□ True □ 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.

ThepaperForm1040-Vincludes instructions and a tableofIRSServiceCenteraddresses.

Ifthetaxpayerpaystheirincometax(includingesti-matedtax)bycreditordebitcard,theycandeducttheconveniencefeechargedbythecardprocessorasamiscellaneousitemizeddeduction(subjecttothe2%AGIfloor).

Explaintotaxpayerswhohaveanamountowedthatthereturnmustbefiledbytheduedateevenifthefullamountcannotbepaid.Aseparatepenaltyforfilingareturnaftertheduedatemaybeapplied.

Taxpayersshouldnotmailcashwiththeirreturns.



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. Usingacreditcardtomakeataxpayment

D. Usingapersonalchecktomakeataxpayment

Ifpayingthetaxwouldcausethetaxpayeranunduehard-ship,thetaxpayercanaskforanextensionoftimetopaybyfilingForm1127byApril15.Formoreinformation,seeForm1127.



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.



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.Afterwithholding,sheowes$640.ThismeansDionmighthavetopayapenaltyforunderpaymentofestimatedtax. □ True □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.


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.


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.


How can I avoid common errors?

Double-andtriple-checktheroutingnumberandaccountnumbersfordirectdepositandelectronicfundswithdrawal.Havethetaxpayercomparethenumberstotheircheckoraccountcard.Ifanerrorismadeinthebankinformation,thetaxpayermustworkwiththebanktoresolveanymisdirectedfunds.


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.

SeePublication17forinformationonwhatthetaxpayerisauthorizingwhendesignatingathird-partydesignee.


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.




Lesson 32: Quality Review of the Tax Return 32-1

Introduction

Thislessoncoversthefinalstepsinthereturnpreparationprocesswhichincludesconfirmingtheaccuracyofthetaxpayer’sreturn(beforeobtainingtheirsignature).Ifyoutakethestepsidentifiedinthislesson,youwillpreventoratleastminimizetaxpayerinteractionwiththeIRSabouttheirreturn.

Objectives


• 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

What do I need?


□ 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.


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.


Question 1:Ajointreturnrequiresthesignatureof:

A. Atleastonespouse

B. Bothspouses

C. Thespousewiththehighestincome

Question 2: WhatistheformnumberoftheIRSqualityreviewsheetusedbymostvolunteersforqualityreview?

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.

FormembersoftheArmedForceswhoaresigningjointreturns,refertoPublication3.Electronictransmissionisnotalwayspossible.



Question 3: Sandra,whois17,iseligibletouseaSelf-SelectPINtosignherreturnusingtaxsoftware.Shedidnotfileataxreturnforthepreviousyear.Canshestillfileanelectronictaxreturnforthe2009taxyear?□ Yes □NoQuestion 4: Whatarethethreemethodsofqualityreview?


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.


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.


Notes

Lesson 33: Concluding the Interview 33-1

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


• Preparethetaxpacketforfiling

• Identifytherecordsthesitemaintains

• Explaintotaxpayerswhichrecordstheyshouldmaintain

• Estimatewhenrefundswillbepaidtothetaxpayer

• Explaintotaxpayerswhattheyshoulddowhentheyowemoneyandwhattheycandotoavoidowingtaxesinthefuture

• Explaintotaxpayershowtoadjustwithholding

• Explaintotaxpayershowandwhentheycanmakeestimatedpayments

• Endtheinterview

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.


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.

MakethetaxpayerawarethattheIRSchargesafeeforsettingupaninstallmentagreement.


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.


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 June15June1throughAugust31 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.


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.


Let’sconcludeourinterviewwithVanessa.GotoAppendixA-41andreviewthesampleinterviewrelatedtothislesson.Returntothislessonafteryouhavereviewedthisinformation.


Summary

Concludingtheinterviewproperlyensuresthateachtaxpayerhasacompleterecordofthereturn,understandswhatwillhappennext,andknowshowtogetanswerstoques-tionsthatcomeuplater.Ifyouhandletheinterviewwell,itcanhelptaxpayersdevelopamorepositiveattitudetowardthetaxexperience,whichcanfostergreateraccuracyinreturnsandtimelinessinfiling.

Youshouldknowhowtoassemblethetaxpacketandhowtoendtheinterview. Thetaxpayershouldleavewithinstructionson:

• Whichrecordsthesiteismaintaining

• Whichtaxrecordstomaintain

• When(approximately)toexpecttherefund

• Howtoavoidhavingabalancedueinthefuture





Notes

Lesson 34: Military Finishing and Filing the Return 34-1

Introduction

ThislessonwillhelpyouaddressspecialfilingconcernsofUnitedStatesservicemembers.Todothisyouneedtodeterminewhereandwhentofileafederaltaxreturn,whoqualifiesforadeadlineextension,andwhoqualifiesforspecialtaxbenefits.

Objectives


• 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?


□ VolunteerResourceGuide□ Publication3□ Publication17□ Publication525□ Publication4491-W□ Form1040□ Form4868□ Form8822

Ifthepostalservicedoesnotdelivertothetaxpayer’sstreetaddressandthetaxpayerhasapostofficebox,enterthepostofficeboxnumberonthelineforthepresenthomeaddress.

Lesson 34: Military Finishing and Filing the Return34-2

ExErcisEs


Question 1:Tony,whoisduearefund,filedhistaxreturnfromhishomeaddressinFloridaonMarch12.OnMarch30hewastransferredtoPuertoRico.WhereshouldTonysubmithisForm8822,ChangeofAddress?

A.TotheIRSservicecenterforFlorida

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.



TheIRSwilltrytoarrangeaninstallmentpaymentagreementthatreflectsthetaxpay-er’sabilitytopaythetaxowed.However,taxpayersshouldpayasmuchaspossiblewiththeirreturntoreducetheamountofinterestandpenaltiesthatwillbeaddedtotheunpaidbalance.

TaxpayerscannowcompleteanOnlinePaymentAgreement(OPA)applicationvia theInternetatwww.irs.gov.Thisapplicationwillallowthetaxpayeroranauthorizedrepresentative(PowerofAttorney)toself-qualify,applyforaninstallment/paymentagreement,andreceiveimmediatenotificationofapproval.

Question 2:TaxpayerswhoattachForm9465,totheirtaxreturnwillavoidinterestchargesonanytaxbalancetheycannotpaybytheduedate.□ True □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.



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,whofiledForm4868onApril15anddidnotincludeanytaxpayments

C.Calvin,whofiledForm4868onApril20andincludedataxpaymentthatwasover90%ofwhatheowed

D.Noneoftheabove

How does the taxpayer file the return?

Whenthetaxreturnisactuallyfiled,anypaymentthatwassubmittedwithForm4868shouldbeaddedtothetotalonthetotalpaymentslineofForm1040AorForm1040EZ.

Formoredetailsonpenalties,refertofilinginformationinPublication17.


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.



Question 4: Whichofthefollowingcalendar-yeartaxpayershasuntilJune15tofileataxreturn?(Selectallthatapply.)

A.Weston,whofilesajointreturnwithhiswife,Sheila.ShewasstationedinthePhilippinesfromJanuarythroughMay,andtheypaidtheirtaxesbycreditcardonApril2.

B.Lilly,wholivesinMexicofromJanuarythroughAprilworkingforacompany,returningtohermainbusinessinTexasonMay1.

C.Dwayne,whowasstationedinSouthKoreafromJuly1,2009throughJanuary31,2010.

D.Noneoftheabove

Question 5:Pvt.Franklin,aU.S.citizen,isacalendar-yeartaxpayer.WhatwouldtheduedatebeforhimtofileareturnifhisassignedtourisinPuertoRico?

A.April15

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.



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).

RequestPublication3ifyoupreparereturnsatamilitarysite.Therearemanyspecialprovi-sionsthatapplytoservicepersonnelandthispublicationisavaluablereference.


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

Onlythedecedent’spartofthejointincometaxliabilityiseligiblefortherefundortaxforgiveness.



Question 7: Mr.Morris,acivilianemployeeoftheUnitedStates,diedin2009asaresultofinjurieshesufferedduringaterroristattackin2007.WhatyearsareMr.Morris’incomeliabilitiesforgiven?

A.2007through2008

B.2007through2009

C.2006through2009

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.

example

BobdiedinFebruary2009.His2008taxreturn–dueonApril15,2009–isnotthefinaltaxreturn.Thefinaltaxreturnwouldbethe2009Form1040,dueApril15,2010.


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.





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


Notes

Lesson 35: Amended Returns 35-1

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


• Identifywhenitisappropriatetoprepareanamendedreturn,Form1040X,AmendedU.S.IndividualIncomeTaxReturn

• DeterminethetimelimitsforfilingForm1040X

• IdentifyhowtoassembleandsubmitForm1040X

What do I need?


□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form1040X□ Form1040XInstructionsOptional: □ Form1040Instructions□ Form8379

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.


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.

ThestartingpointinthecolumnisthecorrectedamountswiththeupdatesifanotheramendedreturnwaspreviouslyfiledoriftheIRSchangedsomethingontheoriginalreturn.


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.


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.

ShowthetaxpayertheForm1040XInstructionsforhowtoincludeallthecorrectinforma-tiononthecheckormoneyorder.

GuidanceissuedonForm1040XdatedJuly2009statedthatthecurrentprocessingtimeforamendedreturnsis12-16weeks.Sincethismaychange,checkwithyourinstructor or Site Coordinator forthelatestinformation.


ExErcisEs


Question 1:Johne-filedhis2007Form1040onMarch29,2008.Thenextyear,whilepreparinghis2008return,Johndiscoveredanerrorinhis2007returnwhichresultedinahigherrefund.Johnmailedanamended2007returnonApril19,2009.Isthistoolatetoqualifyfortherefund?□ Yes □NoQuestion 2:OnMay6,2011,Brendadiscoversanerroronhertimelyfiled2007taxreturn.Correctionofthiserrorwouldresultinarefund.ShemailsanamendedreturnonMay6,2011.IsthistoolateforBrendatoclaimarefund? □ 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.


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.





Notes

Appendix A: Vanessa Scenario, Lesson A-1

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


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

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


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.


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


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


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.


Lesson 4: Filing Status

Which filing status should Vanessa use?

TaxpayerVanessaFranklincomestoyoursiteandrequestsassistancewithherreturn.PartsIandIIofherapprovedintakeandinterviewsheetindicatethatsheismarriedbutlivesapartfromherhusband.Shehasfourpotentialdependents,herthreechildrenandhermother.Basedonthisinformation,herpossiblefilingstatusesare:



• HeadofHousehold

VanessadoesnotwanttousetheMarriedFilingJointlystatus,butifshechoosestofileMarriedFilingSeparately,itmayresultinahighertax.

TodetermineifVanessaqualifiesforHeadofHousehold,whichmayresultinalowertaxthanMarriedFilingSeparately,youdecidetoasksomequestionsbasedontheFilingStatusInterviewTipsintheVolunteerResourceGuide(TabB).

Sample interview clarifying filing status


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


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


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


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.


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

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.


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


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


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.

6


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


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.


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?


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


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!


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


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!


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.


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


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.)


Becausetheapprovedintakeandinterviewsheetdoesnotlistallthepossibleopportu-nitiesforadjustmentstoherincome,youmayfindithelpfultoaskVanessaabouteachentryintheAdjustedGrossIncomesectionofForm1040.Ataminimum,youmustvali-datetheresponsesshegaveonherapprovedintakeandinterviewsheet.

Duringtheinterview,Vanessaindicatesthatsheneitherpaidnorreceivedalimony. YouaskherprobingquestionsaboutpossibleIRAcontributions.

Sample interview about IRA contributions

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


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.


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


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


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!


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.

19


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


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


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


Did you pay any interest?

I’m sorry, but it isn’t.

Justtheinterestonmycreditcardandmycarpayments.Isthatdeductible?


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.


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


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


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!


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.


ReturntoLesson23.

23

Vanessa’semployerdidnotprovideanydependentcarebenefitsforherchild.Therefore,youdonothavetocompletePartIIIofForm2441forVanessa.Vanessabroughtthedaycareprovider’sinfor-mation.


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.


ReturntoLesson24.

24


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.


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


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!


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?


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


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.


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


Lesson 28: Other Taxes

Does Vanessa have any additional taxes?

Vanessaanswered“yes”toself-employmentincomeearlierintheinterviewprocess.Let’sdetermineifshehasanyadditionaltaxes.Asyourecall,Vanessahasherowncosmeticsbusiness.

Sample interview clarifying additional taxes


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.

YoumayfindithelpfultoreviewinformationinPublication17,HowtoFigureYourTax,whencompletingtheOtherTaxessectionofthereturnespeciallyifyou’renotusingtaxsoftware.

28


Vanessa’scompletedScheduleSEinAppendixBshowsthatshemustpay$339inself-employmenttaxonherincomefromhercosmeticsbusiness.ThisamountisenteredintheOtherTaxessectionofherForm1040,andthedeductionforone-halfofself-employmenttaxisenteredintheAdjustmentssectiononpage1ofForm1040.

Tax Software Hint: ThesoftwarecompletesScheduleSEautomaticallyand

calculatesanyothertaxes.

ReturntoLesson28.

28


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!


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


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.


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


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.


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


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.


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


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


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.

31


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


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.


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.


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


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.


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.

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


RoutingNumber AccountNumber CheckNumber (donotinclude)

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. . . . . . . . . . . . . . . . . . . . . . 18-1MiscellaneousCredits. . . . . . . . . . . . . . . . . . . . . . . . . 27-1Mortgageinterest.....12-3,19-2,20-1,20-6,20-14,17-8Mortgageinterestcredit. . . . . . . . . . . . . . . . . . . . . . . . 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

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