publication 4555 (rev. 2009)software is in the applicable yellow tab section of publication 4012....

For Use in Preparing Tax Year 2009 Returns

• Volunteer Income Tax Assistance (VITA)

• Tax Counseling for the Elderly (TCE)

Visit www.irs.gov

for the most up-to-date

tax products and

information.

2009 Publication 4555Instructor Guide

Publication 4555 (Rev. 2009) Catalog Number 50820G Department of the Treasury Internal Revenue Service www.irs.govPublication 4555 (Rev. 2009) Catalog Number 50820G Department of the Treasury Internal Revenue Service www.irs.gov

Technical Updates

The mission of the VITA/TCE Program is to provide free basic tax return preparation for eligible taxpayers. Volunteers are the program's most valuable resource. To establish the greatest degree of public trust, Volunteers have a responsibility to provide high quality service and uphold the highest of ethical standards.

As a participant in the VITA/TCE Program, I agree to the following standards of conduct: • I will treat all taxpayers professionally, with courtesy and respect. • I will safeguard the confidentiality of taxpayer information. • I will apply the tax laws equitably and accurately to the best of my ability. • I will only prepare returns for which I am certified. (Basic, Advanced, etc.) • I will exercise reasonable care in the use and protection of equipment and supplies. • I will not solicit business from taxpayers I assist or use the knowledge I have gained about them for any direct or indirect personal benefit for me or any other specific individual. • I will not accept payment from taxpayers for the services I provide. I may receive compensation as an employee of a program sponsor. • I will ensure the returns I prepare, follow the Intake/Interview and Quality Review Processes.

Department of the Treasury – Internal Revenue Service

Volunteer Agreement Standards of Conduct – VITA/TCE Programs

The Tax Software Hints in this product are for sites using TaxWise© software to prepare tax returns. This software is copyrighted and owned by CCH Small Firm Services© (CCH). It is issued to VITA/TCE sites by the IRS. Consult your instructor and/or site coordinator for guidance and access to the software.

Confidentiality Statement

All tax information received from taxpayers in your volunteer capacity is strictly confidential and should not, under any circumstances, be disclosed to unauthorized individuals and should be properly safeguarded.

All persons, scenarios and addresses appearing in this product are fictitious. Any resemblance to persons living or dead is purely coincidental.

Publication 4491-X conveys tax law updates and other revisions to the VITA/TCE training products that occur after the products are published. The publication is normally available for downloading in mid-December via IRS.gov.

Volunteer Tax Alerts are issued during filing season (as needed) and may include additional technical updates. They are accessible via IRS.gov (keyword: Community Network). Also, consult your course instructor and/or site coordinator for guidance.

Product What’s New This Year

Publication 4491, Student Training Guide

or

Publication 4555, Instructor Guide

• Newtaxlawcontentfor2009

• NEW identifiesnewtaxlaws

• Taxsoftwarehintsinthestudentandinstructortrainingguidesprovidebrief,helpfulinformation.SpecificguidanceforenteringdatainthesoftwareisintheapplicableyellowtabsectionofPublication4012.

• IncomefromScheduleK-1s(interest,dividendsandcapitalgains)isanewAdvancedtopicinLesson12.

• Lesson14,SocialSecurityBenefitsisnowaBasiclesson.

• PenaltyforearlywithdrawalofsavingsisnowaBasictopicin Lesson17.

Publication4491-W,ComprehensiveProblems&ExercisesWorkbook

• Problemandpracticeexercisesthatcovernew2009taxlawfromtheAmericanRecoveryandReinvestmentAct(ARRA)andchangestowhat’sinscopethisyear.

• Ifpossible,sitesshouldwaittousethetaxyear2009taxpreparationsoftwarethatwillbeontheSoftwarePracticeLabwhenLink&LearnTaxesisavailableonwww.irs.govinearlyNovember.

Publication4012,VolunteerResourceGuide

• AjobaidforusingForm13614-C,Intake/Interview&QualityReviewSheet

• AdditionalguidanceforenteringdataintheIRS-providedtaxprepara-tionsoftwareisintheyellow(desktop)andblue(on-line)tabs.

Form6744,Test/Retest • ThetestisdesignedforusewiththesoftwarePracticeLabon Link&LearnTaxes.Itisopenbookandcanbetakenandscored onLink&LearnTaxes.

• Priortaxyearformsandsoftwarecannotbeusedtocompletetheworkbookorthetest/retestexercisesduetotheimpactoftheAmericanRecoveryandReinvestmentAct(ARRA)on2009taxpreparation.

Form13222andForm13232,studentandinstruc-torcourseevaluationforms

• Shareyourideasforenhancingthesematerialsbycompletingtheapplicableevaluationform.ReadtheDirector’sletterinthefrontofthebookforadditionalguidance.

SoftwarePracticeLab • ReinforceyourtrainingusingtheIRSorservicee-learningapplicationforvolunteers–Link&LearnTaxes.ThesitealsocontainsanearlyreleaseversionoftheIRS-providedtaxpreparationsoftware.

What’s in my training kit?

ii

Publication 4555 Instructor Guide iii

Introduction

Thisguideandtheproductsinthiskitcontaintheinformationandguidanceyouneedtosatisfyourmutualgoalofprovidingconsistent,yettailoredtraining.Remember,allindi-vidualsincludingIRS-SPECemployeesparticipatingintheVITA/TCEPrograms,whoanswertaxlawquestions,instructtaxlaw,prepareorcorrecttaxreturnsand/orconductqualityreviewsofcompletedtaxreturnsmustbecertified.

Themake-upofVolunteerIncomeTaxAssistance(VITA)andTaxCounselingfortheElderly(TCE)sitesaredifferentfromcitytocity.Becauseofthesedifferences,notallthematerialsinthisguidewillapplytoallsites.Therefore,itisuptoyoutoprovideyourstudentstheguidance,insightsandskillsrequiredtoprovidehighqualitytaxreturnpreparationservices.Inthepagesthatfollow,youwillfind:

• Informationabouttheprocess-basedtrainingapproach

• Answerstofrequentlyaskedinstructorquestions(Topicsinclude:gettingstarted,what’sinthiskit,whichlessonsyoushouldteach,suggestionsformaximizingyourresources,studentengagementandcomprehension,etc.)

• Recommendedpresentationtimesforeachlesson

• Thestudenttext(Publication4491)withinstructornotesinthemargins

What is the training approach?

YoucanteachfiveofthesevenVITA/TCEcoursesusingthisguideandtheotherproductsinyourkit.Eachcourseusestheprocess-basedtraining(PBT)approach.PBTisaperformancebasedtrainingcurricu-lumthatusesaprocessbasedapproachtoteachingthereturnpreparationprocess.Unliketaxlawlecturedriventraining,PBTengagesstudentsinthereturnpreparationprocessandrequiresextensiverole-play-ing,andthecompletionofproblemsandexercisesthatsimulatesituationstheywillencounteratthesite.

Manyvolunteersfindithelpfultotakethecoursesonline,eitherinaclassroomsettingorintheprivacyoftheirhome.Asexplainedonthebackinsidecover,Link&LearnTaxes(L&LT),theIRS’e-learningapplica-tionforVITA/TCEvolunteers,supportsthePBTtrain-ingapproachandincludesalinktothe“ElectronicTaxSoftwarePracticeLabforVITA/TCEVolunteers.”

ThePracticeLab,whichisprogrammedforTaxYear2009,providesvolunteerstheopportunitytogainprac-ticalexperiencewiththeactualsoftwarethatwillbeusedatmostsiteswhenassistingtaxpayers.StudentsmayfindthePracticeLabhelpfulforcompletingtheirpracticeexercises,comprehen-siveproblems,andtest.

DonotusetheElectronicTaxSoftwarePracticeLabtocompleteactualreturns.

TheprovisionsoftheAmericanRecoveryandReinvestmentAct(ARRA)requirenumeroustaxlawchangesfor2009.Ifsitesusethepriortaxyearformsandsoftwaretocompleteproblemsandexercises,theymustalsoapplytheprioryear’staxlawinordertoexcludeanyARRAmaterial.Ifpossible,sitesshouldwaittousethe2009taxpreparationsoftwarethatwillbeonthePracticeLabwhenL&LTisavailableon irs.govinearlyNovember.

Publication 4555 Notes to Instructors

Publication 4555 Instructor Guideiv

What resources are available to me?

Therearenumerousresourcesavailabletoyou,includingyourpartner/sponsor,SiteCoordinator,IRS-SPECTaxConsultant,theCommunityNetworkatwww.irs.gov,andPublication1084,VolunteerSiteCoordinator’sHandbook.

Publication1084containsacompleteoverviewofthevolunteerprograms,trainingdeliveryoptionsincludinginformationaboutorderingproducts,testing,andcertificationguidance.ThepublicationisavailablefromyourIRS-SPECTaxConsultantandcanbedownloadedfromwww.irs.gov.

How do I get started?

Thetrainingisbasedonatieredstrategy;eachtierrepresentsacompletecourseofstudy.There are seven courses of study –Basic,Intermediate,Advanced,Military,International,PuertoRico,andForeignStudents.FiveoftheVITA/TCEcoursesarecoveredinyourkitandthestudents’kit.

ThecoursesforPuerto Rico(taxlawspecifictoresidentsofPuertoRicowhomustfileaU.S.incometaxreturn)and Foreign Students(U.S.taxlawspecifictointernationalstudentsandscholars)areavailableonL&LTonly.

Afterobtainingyourcertificationforthecourse(s)youwillteach,werecommendthefollowingprerequisitesforeachinstructor:

1. Allowtwohoursofpreparationtimeforeveryhourofinstruction.

2. ReviewanddiscussLessons1,2,and3asateam.Theselessonscontaininforma-tionthatwillflowthroughoutthecoursematerials,i.e.,eachinstructorwillcovervari-ousaspectsofVanessaFranklin’staxreturn.

3. EstablishanagendaforteachingthecourseusingExhibits1and2,whichcontainasuggestedsylla-busforpresentingtheinformation.

4. Reviewthetest/retestintroductoryinformationtomakesureyouunderstandthecertificationrequire-mentsandprocedures.

What’s in this kit?

Inadditiontothispublication,whichcontainsthestudentguideinitsentiretywithinstruc-tionalguidanceforeachlessoninthemargins,yourkitincludesthefollowingitems.Thepurpose,changes,andotherimportantinformationabouttheproductsareshownonpageiiofthisguide.

1.Publication 4491-W, Comprehensive Problems and Exercises Workbook

2.Publication 4012, Volunteer Resource Guide

3. Form 6744, Test/Retest

4.Administrative products:Form13232,InstructorCourseEvaluation,andDocument12107,PostagePaidLabelformailingevaluationformstotheIRSfreeofcharge.

Instructorsmustbecertifiedinthecourse(s)theyteach.Certificationisrequiredeachyearbeforeinstructionalservicesareprovided.

StudentswillusePublication4012atthetaxpreparationsite.

IfyourstudentsdonottestandcertifyusingL&LT,youwillalsoneedacopyofthetest/retestanswers(Publication4189)fromyourIRS-SPECTaxConsultant.

Publication 4555 Instructor Guide v

What are other recommended resources?

AsexplainedlaterintheCourseIntroduction,youmayfindthefollowingadditionalresourceshelpful:

1. Publication17,FederalIncomeTaxGuideforIndividuals

2. Statetaxmaterials

3. Form1040Instructionsforpaper/manualreturnpreparationclasses

4. Up-to-datetaxproductsandinformationavailableonwww.irs.gov.

5. Computersand/orInternetaccessforclassesincorporatingthetaxpreparationsoft-wareand/orL&LT–thisrequiresacomputerforeachstudent(ifpossible)and/oracomputerandprojectorfortheinstructors,tablespacefordocuments,flashdrivesorotherstoragemediaforstudentstosavetheirwork,and(ifpossible)oneassistantperfivestudents

6. L&LTtograde/scorethetest/retestand/ortosupple-mentclassroomtraining

7. SoftwarePracticeLabviaL&LTfor24/7accesstotheIRSreturnpreparation software

How do I know what to cover?

Instructionforteachingthecoursesisprovidedinthispublication.ThereferencetabinPublication4012containsaScopeofServicechartthatyouwillfindhelpfulforplanningeachlesson.

Beginninginlesson8,theiconsdescribedbelowindicatetopicsthatarerequiredforeachcourse.

TheBasiccoursecoversincomefromwages,interest,dividends,socialsecurityincome,andthemorefrequentlyusedtaxcreditsforindividualsandcouples.SocialsecurityincomeandpenaltyonearlywithdrawalofsavingsarenewthisyearintheBasiccourse.Allvolunteersarerequiredtotakethiscourse.

TheIntermediate coursecoversalltaxtopicsintheBasiccoursepluseducationcred-its,additionalincometopics(suchasalimonyandScheduleC-EZ),itemizeddeduc-tions,adjustmentstoincome,andsomepensionissuesforindividualsandfamilies.

TheAdvancedcoursecoversalltaxtopicsintheBasicandIntermediatecoursesplusadditionalpensiontopics.Alsocoveredarestockandsaleofhomeissuesforindividu-alsandfamilies.

Whenusingproductsfromothersources,includingwww.irs.gov,makesureyouareawareofanycontentandprocessingchangesbeforesharingthemwithyourstudents.

Publication 4555 Instructor Guidevi

TheMilitarycourseisgenerallytheAdvancedcoursewithspecialemphasisontaxissuesthataffectarmedservicespersonnelandtheirfamilies,suchascombatpay,movingexpenses,etc.ThoseassistingorinstructingtheU.S.ArmedForcesoverseasmustalsotaketheInternationalcourse.

The InternationalcourseisgenerallytheAdvancedcoursewithspecialemphasisoninternationaltaxlawfortheU.S.ArmedForcesoverseasandU.S.residentslivingoutsidetheU.S.,especiallythoseservedbyU.S.embassiesandconsulates.

How can I maximize my resources?

Thefollowingpointsmaybehelpfulindeterminingyourtrainingdeliverymethod,presentationtimes,andcertificationmethod(paperorelectronic):

• What knowledge, skills, and abilities(KSAs)doyourstudentspossess?Forinstance,computerandpeopleskills,taxlawknowledge,interviewingskills,foreignlanguage(s),etc.Whatistheirexpertise/proficiencyineachoftheKSAs?

• Wherewillinstructiontakeplace?Doalargenumberofyourstudentshavecomputeraccess?Areyourstudentsinruralareas?Isitmorebeneficialtosupple-mentclassroomtrainingwithself-studytrainingusingL&LTorPublication4491?CansomeorallthestudentscompletethecourseindependentlyusingPublication4480andL&LTwithadhocface-to-faceorelectronicguidancefromyou?

• Whoistheintendedaudience?Aretheyseniors,retirees,armedforcesperson-nel,low-to-moderatewageearners,students,disabledindividuals,etc.?Areyourstudentsfamiliarwithspecialtaxconcernsofthesetaxpayers?

• Howmuchtimedoyouhaveforclassroominstruc-tionandadministeringandscoringthetest?

Any pointers for keeping the students engaged?

Yes,breathelifeintothecourseyouteachbysharingyourexperiencesandinsights.Itmaytakemoretimebut,byfollowingtheprocessbasedtrainingapproachpresentedinthisguide,yourstudentswillbeengagedandrequirelessassistancewhenpreparingactualreturns.Therole-playsandproblemsandexercisesinPublication4491-Whelpstudents:

• Gainanunderstandingofthetaxpreparationprocessandtheresourcesavailabletothem

• Learntousetheresourcematerialsavailabletothematthesite

Encourage students to use L&LTtoscoretheirtestandobtaintheircertification.

Checkwww.irs.gov(keyword:communitynetwork)fortrain-inginformationandguidancebeginninginNovember.

Publication 4555 Instructor Guide vii

• Completeexercisesandproblemsthatprovidethemanunderstandingoftaxlawandhowtoapplyitinvarioussituations

• Understandtheimportanceoffollowingthereturnpreparationprocessandsafe-guardingtaxpayerinformation

• Completeanaccuratereturn–eachandeverytime

Usingtheintroductoryinformationinthetest/retest,explainthetestingandcertificationprocess.Encouragestudentstobeawareofthetestcontentfortheirlevelofcertification.

How will I know if the students comprehended the information?

PBTisdesignedtoassistyouindeterminingifyourstudentsunderstandhowtoprepareacompleteandaccuratereturn.PBTrequiresextensiveroleplays,classroomdemonstrations,andreturnpreparationpractice.Groupdynamicsaregoodindicators–bodylanguage,listeningskills,etc.Youcanalsoobservethestudents’performanceastheycompletethecomprehensiveproblemfortheircourse.

Remember,youcanreinforceyourclassroomtrainingandprovidefurtherdevelopmentbyencouragingstudentstouseL&LTduringtheirfreetime.Ultimately,eachstudent’sachievementonthetestandtheresultsofqualityreviewsofthereturnstheypreparedwilldetermineiftheyunderstoodtheinformation.

How do I suggest changes to the course materials?

Wewelcomeyourcommentsandsuggestionsforenhancingyourteachingexperience.YourtrainingkitcontainsForm13232forsubmittingyourcomments;studentshaveForm13222intheirtrainingkitforthesamepurpose.

Forwardallcompletedformsusingthepostage-paidbusinessreplylabel(Document12107)inyourkit.Pleasebesuretofollowtheseinstructions:

• Entertheapplicablecity,state,andZIPcode

• Darkenthecirclebubbles;donotplaceanXorcheckmarkinthebubbles

• Donotfold,staple,orphotocopytheforms

• Mailformsinanenvelope9x12inchesorlarger

• Mailthecompletedevaluation(s)attheconclusionofeachcourse

ThesurveyresultsaresharedwithlocalIRS-SPECtaxconsultantsinearlytolateJune.

Donotusethemailinglabelinyourkittomailtaxdocuments;onlymailcourseevaluationsusingthemailinglabel.

Publication 4555 Instructor Guideviii

Exhibit 1: Content and Courses

Lesson1–CourseIntroduction Allcourses

Lesson2–ScreeningandInterviewing Allcourses

Lesson3–FilingBasics Allcourses

Lesson4–FilingStatus Allcourses

Lesson5–PersonalExemptions Allcourses

Lesson6–DependencyExemptions Allcourses

Lesson7–UniqueFilingStatusandExemption Allcourses Situations

Lessons8through16 SeeLesson8forachartof Incometopicsbylesson

Lesson17–AdjustmentstoIncome Allcourses(BasicshouldonlycoverPenaltyforEarlyWithdrawalofSavings)

Lesson18–MilitaryMovingExpenses Military

Lesson19–StandardDeductionandTaxComputation Allcourses

Lesson20–ItemizedDeductions Allcourses(exceptBasic)

Lesson21–MilitaryEmployeeBusinessExpenses Military

Lesson22–BusinessTravelExpenses International

Lesson23–CreditforChildandDependent Allcourses CareExpenses

Lesson24–EducationCredits Allcourses(exceptBasic)

Lesson25–ForeignTaxCredit Allcourses(exceptBasic)

Lesson26–ChildTaxCredit Allcourses

Lesson27–MiscellaneousCredits Allcourses(BasicshouldonlycoverElderlyorDisabledandQualifiedRetirementSavings)

Lesson28–OtherTaxes Allcourses

Lesson29–Payments Allcourses

Lesson30–EarnedIncomeCredit(EIC) Allcourses

Lesson31–Refund/AmountofTaxOwed Allcourses

Lesson32–QualityReviewoftheTaxReturn Allcourses

Lesson33–ConcludingtheInterview Allcourses

Lesson34–MilitaryFinishingandFilingtheReturn Military

Lesson35–AmendedReturns Allcourses

Publication 4555 Instructor Guide ix

Exhibit 2 – Curriculum Recommended Presentation Times

Lesson Content Estimated Minutes*Welcome&Introductions 15

1 Course Introduction 15-302 ScreeningandInterviewing 153 FilingBasics 15-454 FilingStatus 605 PersonalExemptions 306 DependencyExemptions 307 UniqueFilingStatusandExemptionSituations 308 Income-Wages,Interest,Etc. 90-1659 Income-BusinessIncomeorLoss 6010 Income-CapitalGainsorLoss 9011 Income-RetirementIncome 10512 Income-RentalandScheduleK-1s 6013 Income-UnemploymentCompensation 15-3014 Income-SocialSecurityBenefits 3015 Income-OtherIncome 15-3016 MilitaryIncome 6017 AdjustmentstoIncome 15-7518 MilitaryMovingExpenses 45-7519 StandardDeductionandTaxComputation 15-4520 ItemizedDeductions 4521 MilitaryEmployeeBusinessExpenses 3022 BusinessTravelExpenses 3023 CreditforChildandDependentCareExpenses 3024 Education Credits 3025 ForeignTaxCredit 6026 ChildTaxCredit 3027 Miscellaneous Credits 3028 OtherTaxes 1529 Payments 3030 EarnedIncomeCredit(EIC) 60-12031 Refund/AmountofTaxOwed 3032 QualityReviewoftheTaxReturn 6033 ConcludingtheInterview 3034 MilitaryFinishingandFilingtheReturn 6035 AmendedReturns 30

TestingGuidelines(UsingForm6744) 15ReviewTest 240Closing&EvaluationForm13222 15

*Estimatedtimedoesnotincludebreaksorlunch

Publication 4555 Instructor Guidex

Notes

Table of Contents a

Table of Contents

What’s New for 2009 ImportantTaxLawChangesfor2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Lesson 1: Course Introduction Welcome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1Whyisthispublicationsolarge?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-2WhathappensafterIcompletethiscourse?. . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4WhattypesofreturnscanIprepare?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-5WhataremyresponsibilitiesasaVITA/TCEprogramvolunteer? . . . . . . . . . . 1-5Arethereothermaterialsavailabletoassistme? . . . . . . . . . . . . . . . . . . . . . . 1-7Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-8

Lesson 2: Screening and InterviewingIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-1Whatisincludedintheintakeandinterviewprocess?. . . . . . . . . . . . . . . . . . . 2-1WheredoIfindthetoolstoassistmewiththisprocess?. . . . . . . . . . . . . . . . . 2-2HowdoIusethetools?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-2HowdoIwelcomeandscreenthetaxpayer?. . . . . . . . . . . . . . . . . . . . . . . . . . 2-4HowdoIconductaprobinginterview?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-6WhattechniquescanIusetoassistmewiththeinterview?. . . . . . . . . . . . . . . 2-8HowcanIovercomecommunicationbarriers?. . . . . . . . . . . . . . . . . . . . . . . . 2-10Whathappensnext?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2-11Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2-11

Lesson 3: Filing BasicsIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1Whomustfile?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1Whoshouldfile?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4HowdoIverifytaxpayeridentity?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5HowdoIchoosetheappropriatetaxreturnform?. . . . . . . . . . . . . . . . . . . . . . 3-8HowdoIfileareturn?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-10WhatdoItelltaxpayersaboutrecordkeeping?. . . . . . . . . . . . . . . . . . . . . . . . 3-10HowdoIanswertaxpayers’administrativequestions? . . . . . . . . . . . . . . . . . .3-11WhatpotentialpitfallsshouldIkeepinmind?. . . . . . . . . . . . . . . . . . . . . . . . . 3-12Whichformsanddocumentsneedtobefiled?. . . . . . . . . . . . . . . . . . . . . . . . 3-12Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-13Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-13

Lesson 4: Filing StatusIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1Whatarethefivefilingstatuses? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1Whataretherequirementsforeachfilingstatus? . . . . . . . . . . . . . . . . . . . . . . 4-2HowdoIdeterminethecorrectfilingstatus?. . . . . . . . . . . . . . . . . . . . . . . . . . 4-8Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-10Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-10

Table of Contentsb

Lesson 5: Personal Exemptions Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-1Whatareexemptions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-1HowdoIusetheinterviewtechniquestodeterminehowmany personalexemptionsataxpayercanclaim?. . . . . . . . . . . . . . . . . . . . . . . . . . 5-3HowdoIenterthepersonalexemptions?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-3TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . . 5-3NEW Exemptionforindividual(s)displacedbyaMidwesterndisaster. . . . . . 5-4Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-5Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-5

Lesson 6: Dependency ExemptionsIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1Whoaredependents?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1Whomaybeclaimedasadependent?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2HowdoIapplythedependencytests?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-2Whatarethetestsforqualifyingchildren?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-3Canthechildbeaqualifyingchildofmorethanoneperson? . . . . . . . . . . . . . 6-5Whatarethetestsforqualifyingrelatives?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-6Whatarethenewrulesforchildrenofdivorcedornevermarriedparents?. . .6-11HowdoIentertheexemptionsinthetaxsoftware? . . . . . . . . . . . . . . . . . . . 6-12TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 6-12Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-13Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-13

Lesson 7: Unique Filing Status and Exemption Situations Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-1HowdoIapplytaxlawtononresidentaliens?. . . . . . . . . . . . . . . . . . . . . . . . . 7-1Cancitizensorresidentalienswholivewiththeirnonresident alienspouseeverfileasHeadofHousehold?. . . . . . . . . . . . . . . . . . . . . . . . . 7-6PersonalExemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-7HowdoIenterthefilingstatusintothetaxsoftware? . . . . . . . . . . . . . . . . . . . 7-7DependencyExemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-8Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-10

Lesson 8: Income – Wages, Interest, Etc.; Form 1040, Lines 7-11Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1Howaretaxableandnontaxableincomedetermined?. . . . . . . . . . . . . . . . . . . 8-2HowdoIgetstarted?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-3HowdoIreportwages,salaries,tips,etc.? . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-4Whatinterestistaxable?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-8TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 8-10HowdoIhandledividends?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8-11TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 8-13Whatshouldbereportedonline10ofForm1040?. . . . . . . . . . . . . . . . . . . . 8-14Whatisalimony?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-14Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-15Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-15

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Lesson 9: Income – Business; Form 1040, Line 12Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-1WheredoIgetbusinessincomeorlossinformation? . . . . . . . . . . . . . . . . . . . 9-1TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . . 9-3HowdoIcompleteScheduleC-EZ?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-4Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-5Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-5

Lesson 10: Income – Capital Gain or Loss; Form 1040, Line 13Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-1WhatinformationmustIhavetoreportacapitalgainorloss?. . . . . . . . . . . . 10-2Whatisthebasisofstock? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-2HowdoIdeterminetheholdingperiod?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-4WhatinformationdoIneedfromForm1099-B?. . . . . . . . . . . . . . . . . . . . . . . 10-6HowdoIenterdataonScheduleD,PartsIandII?. . . . . . . . . . . . . . . . . . . . 10-8HowdoIreportcapitalgaindistributions? . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-8HowdoIcompletereportingofcapitalgainorloss?. . . . . . . . . . . . . . . . . . . 10-9HowdoIcalculateandreportacarryoverofacapitalloss?. . . . . . . . . . . . 10-10TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 10-10WhomustfileScheduleDforthesaleofahome?. . . . . . . . . . . . . . . . . . . . .10-11Whomustreportthesaleofahome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-12Whatisconsidereda“main”home?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-12Whataretheownershipandusetests?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-12HowdoIfigurethegain(orloss)fromthesaleofahome?. . . . . . . . . . . . . 10-14Howmuchofthegainfromahomesalecanataxpayerexclude? . . . . . . . 10-16WheredoIreportanytaxablegainfromthesaleofahome? . . . . . . . . . . . 10-16TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 10-17WhatistheFive-yearTestPeriodSuspension?. . . . . . . . . . . . . . . . . . . . . . 10-18Howisacancellationofdebtforaprincipalresidencereported onthereturn?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-19Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-33

Lesson 11: Income – Retirement Income; Form 1040, Lines 15-16Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-1Whatisretirementincome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-1WherecanIgetinformationaboutataxpayer’sretirementincome?. . . . . . . .11-1Whatifthetaxableportionisalreadycalculated?. . . . . . . . . . . . . . . . . . . . . . .11-2Whatifthetaxableportionisnotcalculated?. . . . . . . . . . . . . . . . . . . . . . . . . .11-3WhatdoIneedtoknowaboutretirementincomedistributions? . . . . . . . . . . .11-3HowdoIfindthetaxableportionofIRAincome?. . . . . . . . . . . . . . . . . . . . . . .11-4HowareIRAdistributionsreported?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-6HowdoIfindthetaxableportionofpensionsandannuities?. . . . . . . . . . . . . .11-8Whatotherretirementincomeissuesarethere? . . . . . . . . . . . . . . . . . . . . . .11-10HowdoIdeterminewhenanadjustmenttowithholdingshouldbemade? . .11-13Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11-14

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Lesson 12: Income – Rental and Schedule K-1s Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-1NEW ScheduleK-1s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2Whatisrentalincome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-3Whatqualifiesasarentalexpense? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-3HowdoIhandledepreciationofrentalproperty?. . . . . . . . . . . . . . . . . . . . . . 12-7HowdoIfiguretheMACRSdeduction?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-9TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 12-10HowdoIhandlerentalpropertythatthetaxpayeralsouses?. . . . . . . . . . . .12-11HowdoIhandlerentallosses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-14Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-16

Lesson 13: Income – Unemployment Compensation; Form 1040, Line 19Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-1Whatisunemploymentcompensation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-1NEW What’sdifferentfor2009? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-2Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-2Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-2

Lesson 14: Income – Social Security Benefits; Form 1040, Line 20aIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-1Whataresocialsecurityandrailroadretirementbenefits?. . . . . . . . . . . . . . . 14-1Whatarelump-sumbenefitpayments? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-4Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-5

Lesson 15: Income – Other Income; Form 1040, Lines 21-22Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-1HowdoIhandleotherincome? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-1Whatisworldwideincome? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-2HowdoIconvertforeignincometoU.S.dollars?. . . . . . . . . . . . . . . . . . . . . . 15-3Whatistheforeignearnedincomeexclusion?. . . . . . . . . . . . . . . . . . . . . . . . 15-5Whatistheperiodofstayrequirement?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-8Whatisqualifyingincome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-9WhendoIcompleteandfileForm2555orForm2555-EZ?. . . . . . . . . . . . . 15-10TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 15-12Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-13

Lesson 16: Military Income Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-1Whatarethetypesofincome?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-1Whatismilitaryseparationwithdisabilityseverancepay?. . . . . . . . . . . . . . . 16-2Whatisacombatzone?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-3TaxpayerInterviewandTaxLawApplication. . . . . . . . . . . . . . . . . . . . . . . . . 16-6Whatarethelawsregardingcommunityproperty? . . . . . . . . . . . . . . . . . . . . 16-6Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-7

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Lesson 17: Adjustments to IncomeIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-1HowdoIdetermineifthetaxpayerhasadjustmentstoincome?. . . . . . . . . . 17-1HowdoIhandleeducatorexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-2TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 17-4HowdoIhandleself-employmenttax?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-5HowdoIhandlepenaltiesforearlywithdrawal?. . . . . . . . . . . . . . . . . . . . . . . 17-5HowdoIhandlealimonypaid?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-5HowdoIhandleIRAcontributions?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-6HowdoIhandlestudentloaninterest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17-11TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 17-14HowdoIhandletuitionandfees?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-15Ispayforjurydutyanadjustmenttoincome? . . . . . . . . . . . . . . . . . . . . . . . 17-17Whataboutotheradjustmentstoincome?. . . . . . . . . . . . . . . . . . . . . . . . . . 17-17HowdoIdetermineAdjustedGrossIncome?. . . . . . . . . . . . . . . . . . . . . . . . 17-17TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . 17-18Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-19Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-19

Lesson 18: Military Moving ExpensesIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-1Whatisapermanentchangeofstation?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-2Whatexpensesareincludedinthemovingexpenseadjustment?. . . . . . . . . 18-2HowdoIhandlemilitaryreimbursements?. . . . . . . . . . . . . . . . . . . . . . . . . . . 18-3TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 18-4TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 18-6Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-7

Lesson 19: Standard Deduction and Tax ComputationIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-1Whataredeductions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-1Howdoesageorblindnessaffectthestandarddeduction?. . . . . . . . . . . . . . 19-3Whataboutindividualswhocanbeclaimedasdependents? . . . . . . . . . . . . 19-5Whatabouttaxpayerswhopaidrealestatetaxesbutdonotitemize?. . . . . . 19-5Whatifthetaxpayerpurchasedanewmotorvehicle?. . . . . . . . . . . . . . . . . . 19-6HowdoIdeterminewhichdeductionisbestforthetaxpayer?. . . . . . . . . . . . 19-6Howaretaxableincomeandtaxdetermined?. . . . . . . . . . . . . . . . . . . . . . . . 19-7Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-8Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-8

Lesson 20: Itemized DeductionsIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-1Whomustitemize?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-1HowdoIhandlemedicalanddentalexpenses?. . . . . . . . . . . . . . . . . . . . . . 20-2HowdoIhandleinterest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-6HowdoIhandlegiftstocharity?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-8

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Lesson 20: Itemized Deductions (continued)Whatarecasualtyandtheftlosses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20-11Whataremiscellaneousdeductions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-12Practice-VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-13Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-13

Lesson 21: Military Employee Business ExpensesIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-1Whataremilitaryemployeebusinessexpenses?. . . . . . . . . . . . . . . . . . . . . . 21-1Whatarequalifieduniformexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-1Canservicemembersclaimwork-relatededucationalexpenses?. . . . . . . . . 21-3Whataretravelexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-4Whatarelocaltransportationexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-7WhoneedstocompleteForm2106?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-8TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 21-9Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21-11

Lesson 22: Business Travel ExpensesIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-1Whatqualifiesasadeductiblebusinesstravelexpense?. . . . . . . . . . . . . . . . 22-1Whatrecordsmustthetaxpayerhave? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-3Aretherealternativemethodsforfiguringsomeexpenses?. . . . . . . . . . . . . . 22-3HowdoIreportbusinessexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-5Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22-5

Lesson 23: Credit for Child and Dependent Care ExpensesIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-1Whatisthechildanddependentcarecredit?. . . . . . . . . . . . . . . . . . . . . . . . . 23-1HowdoIdetermineifataxpayeriseligible? . . . . . . . . . . . . . . . . . . . . . . . . . 23-2Whatisthequalifyingpersontest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-2Whatistheearnedincometest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-3Whatisthework-relatedexpensetest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-4Whatisthejointreturntest?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-6Whatistheprovideridentificationtest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-7TaxpayerInterviewandTaxLawApplication . . . . . . . . . . . . . . . . . . . . . . . . . 23-7HowdoIdeterminetheamountofthecredit? . . . . . . . . . . . . . . . . . . . . . . . . 23-8HowdoIcompleteForm2441?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-9HowdoIavoidcommonerrors?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-10Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23-10Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23-11

Lesson 24: Education CreditsIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-1Whatareeducationcredits?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-1Whocantakeaneducationcredit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-1Whatisaneligibleinstitution?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-2Whatarequalifyingexpenses?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-2Whatrulesapplytoeachcredit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24-4

Table of Contents g

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

Table of Contents i

HowcanIavoidcommonerrors?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31-11Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31-11Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31-11

Lesson 32: Quality Review of the Tax ReturnIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-1Howisaqualityreviewofareturncompleted? . . . . . . . . . . . . . . . . . . . . . . . 32-1HowdoIconductaqualityreviewofareturn?. . . . . . . . . . . . . . . . . . . . . . . . 32-2Whenshouldthetaxpayersignthereturn? . . . . . . . . . . . . . . . . . . . . . . . . . . 32-2DoIhavetoenterasitenumber?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-2Whatarethefinalstepsinthequalityreviewprocess? . . . . . . . . . . . . . . . . . 32-3Practice-VanessaFranklin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-4Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-4

Lesson 33: Concluding the InterviewIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-1HowdoIpreparethee-filingpacket?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-2Whokeepstherecords?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-2WhatshouldItellthetaxpayeraboutrefundsorbalancesdue?. . . . . . . . . . 33-3Howcanthetaxpayeravoidabalanceduenextyear? . . . . . . . . . . . . . . . . . 33-4Howcantaxpayersadjusttheirwithholding?. . . . . . . . . . . . . . . . . . . . . . . . . 33-4Whenshouldthetaxpayermakeestimatedtaxpayments?. . . . . . . . . . . . . . 33-4Howisestimatedtaxfigured?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-5Howisestimatedtaxpaid?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-5HowdoIclosethecontact?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-6Doesthetaxpayerhavetodoanythingelse?. . . . . . . . . . . . . . . . . . . . . . . . . 33-6Practice–VanessaFranklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-6Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-7

Lesson 34: Military Finishing and Filing the ReturnIntroduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-1Whattypeofidentifyinginformationshouldmembersofthe ArmedForcesenterontheirtaxreturns? . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-1WhereandwhenshouldmembersoftheArmedForcesfiletheirreturns?. . 34-2WhataretheextensionrequirementsfortaxpayerswithintheU.S.? . . . . . . 34-3WhataretheextensionrequirementsfortaxpayersoutsidetheU.S. andPuertoRico? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-5Whatarethetaxoptionsforcombatzoneparticipants?. . . . . . . . . . . . . . . . . 34-6Whatareothertaxoptionsforcombatzoneparticipants?. . . . . . . . . . . . . . . 34-7Whencantaxesbedeferred?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-7Whatarerulesfordeferment? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-8Canotherpartiesassistwithataxreturn?. . . . . . . . . . . . . . . . . . . . . . . . . . . 34-8Whatarethetaxforgivenessprovisionsfordecedents? . . . . . . . . . . . . . . . . 34-8Whataretherulesforfilingareturnfordecedents?. . . . . . . . . . . . . . . . . . . . 34-9Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-10

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Lesson 35: Amended ReturnsIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-1Whenisanamendedreturnrequired?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-2HowdoIstart?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-3WhatisForm1040X?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-3Whatarethetimeframesrelatedtoamendedreturns?. . . . . . . . . . . . . . . . . 35-4Whatifthetaxpayerowesmoneyontheamendedreturn?. . . . . . . . . . . . . . 35-5HowdoIcompletetheamendedreturnusingtaxsoftware?. . . . . . . . . . . . . 35-6HowdoIassembleandsubmitForm1040X? . . . . . . . . . . . . . . . . . . . . . . . . 35-6Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-7

Appendix A: Vanessa Franklin Taxpayer ScenarioLesson3:FilingBasics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1Lesson4:FilingStatus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-6Lesson5:PersonalExemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-8Lesson6:DependencyExemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-9Lesson8:Income–Wages,Interest,Etc.;Form1040,Lines7-11. . . . . . . . A-12Lesson9:Income–Business;Form1040,Line12. . . . . . . . . . . . . . . . . . . . A-14Lesson13:Income–UnemploymentCompensation;Form1040,Line19 . . A-16Lesson17:AdjustmentstoIncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-17Lesson19:StandardDeductionandTaxComputation. . . . . . . . . . . . . . . . . . A-19Lesson20:ItemizedDeductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-21Lesson23:CreditforChildandDependentCare . . . . . . . . . . . . . . . . . . . . . A-25Lesson24:EducationCredits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-27Lesson26:ChildTaxCredit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-28Lesson27:MiscellaneousCredits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-30Lesson28:OtherTaxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32Lesson29:Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-34Lesson30:EarnedIncomeCredit(EIC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-35Lesson31:RefundandAmountofTaxOwed. . . . . . . . . . . . . . . . . . . . . . . . A-37Lesson32:QualityReviewoftheTaxReturn. . . . . . . . . . . . . . . . . . . . . . . . . A-39Lesson33:ConcludingtheInterview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-41

Appendix B: Vanessa’s Tax Documents

What’s New for 2009 1

Important Tax Law Changes for 2009

Economic Recovery Payment

The$250EconomicRecoveryPaymentwaspaidin2009torecipientsofcertainbene-fitsadministeredbytheSocialSecurityAdministration,DepartmentofVeteransAffairs,andtheRailroadRetirementBoard.Eligibleindividualsreceivedthepaymentauto-matically;theydidnothavetoapplyforthepayment.Anyeconomicrecoverypaymentreceivedduring2009isnottaxable,butitdoesreduceanymakingworkpaytaxcredit.

Making Work Pay Tax Credit

Themakingworkpaytaxcreditisarefundabletaxcreditofupto$400forworkingindividuals($800forMarriedFilingjointly).Thiscreditiscalculatedatarateof6.2%ofearnedincome.Itisphasedout(graduallyreduced)fortaxpayerswithamodifiedadjustedgrossincome(AGI)inexcessof$75,000($150,000forMarriedFilingJointly).Tobeeligibleforthecredit,taxpayersmusthaveavalidsocialsecuritynumber(SSN).ForMarriedFilingJointlytaxpayers,atleastonetaxpayermusthaveavalidSSN.

MostFormW-2wageearnershavealreadybenefitedfromthecreditwithalargerpaycheck,asaresultofthechangesmadetothefederalincometaxwithhold-ingtablesinearly2009(toimplementthemakingworkpaytaxcredit).Theamountofthecredit,however,muststillbeclaimedonthetaxpayer’s2009return(filedin2010).Generally,ScheduleM(Form1040Aor1040),MakingWorkPayandGovernmentRetireeCredits,isusedtoclaimthecredit.TaxpayersfilingForm1040EZdonothavetofileScheduleM.TheywillcalculatetheamountofthecreditdirectlyontheForm1040EZ.

Special Credit for Certain Government Retirees

Aone-timerefundablecreditof$250isavailablein2009forcertaingovernmentretir-eeswhoreceiveapensionfromworkandarenotcoveredbysocialsecurity.Thisone-timecreditmustbeclaimedonthe2009incometaxreturnandisareductiontoanymakingworkpaytaxcredit.Individualswhoreceiveaneconomicrecoverypaymentmustreducethegovernmentretireecreditbytheamountofthepayment.ScheduleM(Form1040Aor1040),MakingWorkPayandGovernmentRetireeCredits,isusedtoclaimthecredit.

American Opportunity Tax Credit – Expanded Hope Credit

Fortaxyears2009and2010,theAmericanopportunitytaxcreditmakestemporarychangestotheeducationcreditknownastheHopecredit.ThisnewcreditmodifiestheexistingHopecredit,makingitavailabletoabroaderrangeoftaxpayers,includinghigherincometaxpayersandthosewhoowenotax.Itaddsrequiredcoursematerialstothelistofqualifyingexpensesandallowsthecredittobeclaimedforfouryearsofpost-secondaryeducationinsteadoftwoyears.Themaximumamountofthecreditis

Nonresidentaliensandtaxpayerswhocanbeclaimedasdependentsonsomeoneelse’staxreturnarenoteligi-bleforthecredit.

What’s New for 2009


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

Instructor Notes

Lesson 1: Course Introduction

Welcome

We’regladyoudecidedtotakeadvantageofthischallenging,yetrewardingexperienceasanimportantplayerinthetaxadministrationprocess.Thistrainingmaterialwillintro-duceyoutothemajorcomponentsoftheVolunteerIncomeTaxAssistanceandTaxCounselingfortheElderly(VITA/TCE)returnpreparationprocess.Thecomponentsoftheprocessare:

• ScreeningandinterviewingtaxpayersusingForm13614-C,Intake/Interview&QualityReviewSheetoranapprovedalternativeform

• Understandingandapplyingtaxlaw

• Usingreferences,resources,andtoolsincludingreturnpreparationsoftware

• Conductingqualityreviews

Introduction

Unlikemostclasses,thereisnoneedtomemorizealotofinformation–everythingaboutthiscourseisopenbook.Inordertobeasuccessfultaxpreparer,youneedto:

• Understandandhavecompassionforalltypesofpeople

• Knowwhereandhowtogetthe“rightanswer”

• Understandandapplytaxlaw,and

• Prepareaccuratereturns

Yourabilitytoprepareanaccuratereturnwillbemeasuredintwoways:

1. Thetestingandcertificationprocess–usedinitiallytogaugeyourunderstandingofthereturnprepara-tionprocess

2. Qualityreviewresultsofthereturnsyouprepare–demonstrateyourproficiencyinallaspectsoftheprocess

Objectives

Aftercompletingthiscourse,youwillbeableto:

• Certifyasavolunteertaxreturnpreparerbytakingthetest(s)locatedintheLink&LearnTaxese-learningcourseonwww.irs.gov(oronpaperifthisoptionisnotavail-abletoyou)

• Conducttheinitialinterviewandscreenthetaxpayerusinganapprovedintakeandinterviewsheet

• Determinewhetherthetaxpayerisrequiredtofileataxreturn

• Usereferenceandtechnicalmaterials,suchastheVolunteerResourceGuideandPublication17,toensurethatyouaskthecorrectquestionsduringyourdialogwiththetaxpayer,inordertoprepareacompleteandaccuratetaxreturn

Emphasize their donated time provides a tremendous service to the American public and to the community.

Conduct an icebreaker and introductions at this time.

Stress that accuracy is achieved by obtain-ing information from taxpayers during the screening and inter-view process, and from their supporting docu-mentation. A return is accurate when tax law is applied correctly and the return is free from error.

Point out that quality reviews are discussed in a later lesson. Each VITA/TCE site must have a process for conducting a quality review of each return prepared by volunteer preparers.

Summarize main points in the Introduc-tion.

Thecomponentsforcomplet-inganaccuratereturnarethesamewhetheryoupreparetaxreturnsusingcomputersoftwareorpreparethereturnonpaper.

Review objectives with the class.

Lesson 1: Course Introduction1-2

• Correctlycompletea1040seriesreturn,aswellasaccompanyingtaxforms,usingpapertaxformsorthetaxsoftwareprovidedatyoursite

• Usethequalityreviewprocesstocheckthetaxpay-er’sreturn

• Concludetheinterviewandassemblethereturn

• Preparethereturnforelectronicfilingusingtaxsoft-warelicensedbytheIRSforuseatVITA/TCEsites

Inthislessonyouwilllearnabout:

1. Thecourseofstudyaspresentedinthisbookandtheassociatedworkbook,test,andreferencebooks

2. ImportantinformationabouttheVITA/TCEprogramandtheroleofthevolunteers

3. TheapprovedVITA/TCEprocessforpreparing taxreturns

Attheendofthislessonyouwillbeabletodescribe:

• Themajorfeaturesofthecoursematerials

• ThemajorcomponentsoftheVITA/TCEprocess

• Whatisexpectedofavolunteeraftercompleting thiscourse

• Theresourcesavailabletoassistyou

Yourcourseinstructorwillprovidealltheavailabletech-nicalpublicationsandformsrequiredforthiscourse.

Why is this publication so large?

Therearefivecoursespresentedinthispublication,eachrepresentingalevelofcertification.Thefirstsevenlessonsapplytoalllevelsofcertification.BeginninginLesson8,thelevelofcertificationforthesubjectbeingcoveredwillbeindicatedbythefollowingicons:

Basic coversthecompletionofwageearnertypereturns.

Intermediatecoverscompletionofreturnsforwageearnerswhoreceivepensionincome,andmorecomplexForms1040.ItrequirescompletionoftheBasiccourse.

AdvancedcoversthecompletionofthefullscopeofVITA/TCEreturns.ItrequirescompletionoftheBasicandIntermediatecourses.

MilitarycoversthefullscopeofVITA/TCEreturnspresentedbymembersoftheArmedForces,Reserve,andNationalGuard.ItrequirescompletionoftheBasicandIntermediatecourses.

PriortoassistingtaxpayersattheVITA/TCESite,besuretocompletethe“AreYouReadytoGetStarted?”assessmentinthefrontoftheVolunteerResourceGuide.

What do I need?

□ ApprovedIntakeandInterviewSheet

□ ApprovedQualityReviewSheet

□ VolunteerResourceGuide□ Publication17□ Publication 4491 □ Publication4491-W□ Form6744□ Form13222□ Form13614-C□ Form13615□ 13614-CJobAidOptional:□ Publication3□ Publication596□ Publication972□ Publication4299□ Publication4403□ Publication4575□ Form13645□ InternetAccess(optional

buthighlyrecommended)

Seekfeedbackfromyoursponsorabouttheaccuracyrateofthereturnscompletedatyoursite.

Point out the resources cited under What do I need? and describe the contents of the kit.

It will not always be possible to have all suggested forms and publications available in the classroom or site. These forms and publications can all be viewed or downloaded at www.irs.gov.


Internationalcoversthecompletionofreturnsfornon-MilitarytaxpayerslivingoutsidetheUnitedStateswhoareassistedbyvolunteersworkingatU.S.EmbassiesandConsulatesorotherareas.ItrequirescompletionoftheBasicandIntermediatecourses.

Iconsaredisplayedafterthelessontitle.Ifasectionofalessonisassociatedwith onlyonecertificationlevel,thecorrespondingiconisdisplayedatthebeginningof thatsection. Ifnoiconsaredisplayedinasection,alliconsdisplayedafterthelessontitleapply.

What is the training approach?

Eachcourseusestheprocessbasedtraining(PBT)approach.PBTisastructuredfact-gatheringprocesstohelpyouprepareanaccuratereturn.Tocompletetheprocess,youwilluse:

• TheintakequestionsfromForm13614-C,Intake/Interview&QualityReviewSheetorapprovedalternativeformtoscreenthetaxpayerforeligibility,andpreparethereturn.

• Referencematerials,suchasPublication4012,VolunteerResourceGuide,Publication17,YourFederalIncomeTaxforIndividuals,andtaxsoftwarehelpfeaturesaswellasotherresourcesavailableatyoursite,topreparethereturn.Thesematerialswillprovideyouwithstandardizedquestionstoaskduringyourinterviewwiththetaxpayerinordertohelpyoupreparea100%accuratetaxreturn.

• Anapprovedqualityreviewsheettocheckthequalityofallcompletedreturns.AdheringtoaqualityreviewprocesshelpsensurehighqualityreturnsatallVITA/TCEprogramsites.

Inmostcases,whenyouhavecompletedthereturn,itwillbefiledelectronically.ThereshouldonlyberareinstanceswhenthetaxpayermayneedtomailthetaxreturntotheIRS.

What do I need to get started?

Inadditiontothispublication,yourtrainingkitincludesthefollowingitems:

• Publication4491-W,Workbook–ComprehensiveProblems&PracticeExercises

• Publication4012,VolunteerResourceGuide

• Form6744,Test/Retest

• Drafttaxforms

• Form13222,StudentEvaluationandForm13232,InstructorEvaluation

Thepurpose,changesandotherimportantinformationabouttheproductsinyourkitareshownonpageiiofthisguide.

Duetotheproductionscheduleforthistrainingguide,draftformsmaybeusedinillustra-tions.Thedraftformsshouldneverbeusedforactualtaxpreparation.Finalformsareavail-ableonwww.irs.gov,anewPublication17,aninstructionbooklet(e.g.,Form1040Instructions),orotherpublication.

IRSe-fileisaquickandeasyalternativetotraditionalpaperreturns.MostVITA/TCE volunteersitesarenowsetupforelectronicfilingusingtaxsoftware.

Summarize process based training for the class.

Display the quality review sheet on the third page of Form 13614-C. Explain that the quality review sheet, Form 8158, or an approved alternative contain the same ques-tions but with different headings, and are used to review the return.


What other resources are available to help me learn?Publication4491-W,acompanionbooktothiscourse,providesmanyopportunitiestopracticetaxreturnpreparationusingtheinformationtaughtinthisguide.

DirectionsattheendofmanylessonsidentifyspecificproblemsinPublication4491-Wthatwillallowyoutopracticethelessonmaterial.Althoughitmightnotbepossibletoworkeachexercisesuggestedwiththeknowledgeyouhaveatthatpoint,attheendofthecourse,youwillhavetheopportunitytocompleteallofthecomprehensiveprob-lemsandexercisesinPublication4491-W.

YoumayusethePracticeLabintegratedwiththeonlinecourse,Link&LearnTaxes,tocompleteexercises,practicereturns,andtestscenariosusingtaxsoftware.

What happens after I complete this course?

Youwillbetestedonyourunderstandingoftaxlawandtheguidelinesandtoolsneededtoprepareanaccuratereturn.Afteryouhavebeencertified,youwillbereadytovolunteerataVITA/TCEsite.

How does this certification work?

ToparticipateintheVITA/TCEprogram,youmustpassatleasttheBasiccertifica-tiontest.AfteryourBasiccertification,youcantestforIntermediatecertification.Onceyouhaveachievedbothofthesecertifications,youmaytestforanyoralloftheothercertifications(Advanced,Military,andInternational).YoumaytakeonlineteststhatareavailableintheIRS’LinkandLearnTaxese-learningcourseonwww.irs.gov.Onlinetestingisfastandefficient;youwillknowimmediatelyifyouhavepassedandcanprintoutthecertificationforyourSiteCoordinator.Volunteerswhodonotpassthetestthefirsttimemayreviewthecoursematerialandtryagain.Apapertest(Form6744)mayalsobeavailable.TalkwithyourinstructororSiteCoordinatorformoreinformationontheseoptions.

Allvolunteerswhotrainothersinhowtocompletetaxreturns,preparetaxreturns,transmittaxreturns,orconductqualityreviewsoncompletedreturnsmustcompleteandpasstheVITA/TCEcertificationtestatalevelequivalenttothelevelatwhichtheytrain.

IfavolunteerdoesnotachievetheminimumrequiredscoreontheTestortheRetesttheyareencouragedtoparticipateintheprograminanothercapacitysuchasgreeter,publicity/communication,orresourceacquisition,amongothers.

Whenyoupassthetest,yourSiteCoordinatororinstructormayprovideyouwithaVITA/TCEprogramWalletCard,Form13645.

TheWalletCardwascreatedtoacknowledgetheaccomplishmentofcertifiedvolun-teers,aswellastoassistinternalandexternalstakeholdersinidentifyingcertifiedvolunteers.Thiscredentialprovidesanobjectivemeasurethatyouhavemasteredenoughtaxlawtopreparereturns.Ifprovided,youshouldbringyourWalletCardtothetaxpreparationsiteforidentificationpurposes.

Show Publication 4491-W and how to locate the workbook exercises.

Review testing options with the class.

Display/Circulate Form 13645, Wallet Card (if desired).


What types of returns can I prepare?

Itisimportantthatyouassistonlywithreturns,support-ingschedulesandformsforwhichyouhavebeentrainedandcertified.YoushouldonlypreparereturnsthatfallwithinthescopeoftheVITA/TCEprogram.ThetrainingresourcesandtoolsdiscussedinthisguideonlysupportthecompletionofabasicForm1040andassociatedtaxforms.AcompletelistofwhatiswithinthescopeoftheVITA/TCEprogramcanbefoundintheVolunteerResourceGuide(Tab14).

How does the IRS identify volunteer-prepared returns?

Eachpaperorelectronicallyfiledreturnshouldbeidentifiedwiththeappropriatesiteidentificationnumber(SIDN)toensurethatallvolunteer-preparedreturnsarereadilyidentifiablebytheInternalRevenueService.YourSIDNisan8-digitnumberprecededbythe“letterS”whichmustbeenteredonallreturnsyouprepare(Form1040,Form1040A,andForm1040EZ)–bothpaperandelectronic.YourSiteCoordinatorprovidesthisnumberalongwithothernecessaryguidelinesforcompletingthereturn.

TheSIDNshouldappearinthe“PaidPreparer’sUseOnly”sectionofthereturnandwillbediscussedindetailinLesson32,QualityReviewofTaxReturn.

Am I legally liable for returns I prepare?

Becausetheyacceptpaymentforpreparingataxreturn,paidpreparersarelegallyliableunderfederallawforthereturnstheyprepare.VITA/TCEprogramvolunteersarenotconsideredpaidpreparers.Thismeansyoucannotacceptpaymentofanykindfromthetaxpayerforpreparingafederaltaxreturnorforprovidinganyothertax-relatedassistance.YouarealsoprotectedbythefederalVolunteerProtectionActof1997,aslongasallofthefollowingconditionsaretrue:

• Youareactingwithinthescopeofyourvolunteerresponsibilities.

• Youcompletedtheleveloftrainingandcertificationrequiredforpreparingtaxreturnsatyoursite.

• Theharmwasnotcausedbywillful,criminal,reck-less,grosslynegligent,orconscious,flagrantly indifferentacts.

What are my responsibilities as a VITA/TCE program volunteer?

AsaVITA/TCEprogramvolunteer,youhavearesponsibilitytoprovidequalityserviceandtoupholdtheethicalstandardsoftheprogram.Whenyoubeginasavolunteer,youwillbeaskedtosignForm13615,VolunteerAgreement,StandardsofConduct,whichstatesthatyouwilladheretothesestandards:

• Treatalltaxpayersprofessionally,withcourtesyandrespect.

• Safeguardtheconfidentialityoftaxpayer information.

AccessacopyofthisActontheInternetbytyping“VolunteerProtectionActof1997”intoanysearchengine.

Provide the site SIDN (if available) and sug-gest the students write it in the Volunteer Resource Guide.

Remembertorefertaxpayerswithtaxsituationsoutsideyourscopeoftraining,experienceandcertificationtoyourSiteCoordinatorand/oraprofes-sionaltaxpreparer.

Identitytheftisagrowingproblemandyouneedtodoallyoucantopreventtaxpayerinformationfromendingupinthewronghands.


• Applythetaxlawsequitablyandaccuratelytothebestofyourability.

• Onlypreparereturnswithinthescopeofyourtrainingandexperience.

• Exercisereasonablecareintheuseandprotectionofequipmentandsupplies.

• Donotsolicitbusinessfromtaxpayersyouassistoruseknowledgeyougainedaboutthemforanydirectorindirectpersonalbenefitforyouoranyotherindividualororganization.

• Donotacceptpaymentforservicesprovided.(Note:Youmayreceivecompensationfromyoursitesponsor.)

Ensurethestandardsaddressingreturnpreparationarefollowed.Theseincludebecomingcertified,usingtheintakeandinterviewprocess,usingreferencematerials,usingtheapprovedqualityreviewprocess,completingthestepstoelec-tronicallyfiletaxreturns,andadheringtotheprivacyandconfidentialityguidelines.

How do I maintain the taxpayer’s trust?

Taxpayerswilltrustthatallinformationyoureceivefromthemisprotectedfrom disclosure.Tomaintainthistrust:

• Donotdiscloseanypersonaltaxinformationgainedasaresultofthe serviceprovided.

• Donotopenlydiscusstaxpayersbynameinthepresenceofothervolunteersortaxpayers.Youmaydiscusstaxsituationswithothertaxpayersandvolunteers. Forexample,avolunteermayrefertoasituation(notataxpayer)andaskorgiveadviceabouttheappropriatetaxtreatmentforthatspecificsituation.

• Donotretaintaxpayers’documentsforafollow-upvisit.Ifyoucannotfullycompletethetaxpayer’sreturnatthetimeofservice,returnalldocumentstothetaxpayer.

• Donottaketaxpayers’informationforpreparationofthereturnoutsidethepresenceofthetaxpayer.

• Donotprepareataxreturnwhenyoususpectanindividualisnotprovidingtruthfulinformation.

Someindividualsmayattempttodefraudthegovernmentbyfilingfalsetaxreturns. Ifyouhaveanyquestionatallaboutthevalidityofinformationprovidedbyataxpayer,orareuncomfortablewithataxpayersituation,discussyourconcernwithyourSiteCoordinatororanotherindividualinchargeofthesite.

Therearemanycaseseachyearinwhichacouplefilesajointreturnandthenlater,oneorbothindividualsfileareturnasHeadofHousehold,usingthesamedependentinformation.Sinceonlyoneoriginalreturncanbefiledeachyearusinganygivensocialsecuritynumber,thisscenariocancauseadelayinprocessinganyorallofthereturnsassociatedwiththatsocialsecuritynumber.Creditsand/ordeductionsmaybedisallowed.Ifyouareassist-ingataxpayerwhomyoubelievefitsthisscenario,consultwithyourSiteCoordinator.

YouarethekeytotheintegrityoftheVITA/TCEprogram.

Moreinformationcanbe foundinPublication4299,PrivacyandConfidentiality –APublicTrust.

Donotsolicitoracceptpaymentfromtaxpayersforservicesyouprovide.

Show students the Vol-unteer Resource Guide listing of what is in scope.

Ask students to turn to Form 13615 in their Form 6744. Discuss each item in the agree-ment.

Explain to the students the importance of pro-viding quality service and upholding the ethical standards of the VITA/TCE program.

Emphasize the last two standards: never solicit or accept pay-ment for services. (This includes a donation jar for tips, the purchase of supplies, etc.)


Are there other materials available to assist me?

Whenyouarriveatthetaxpreparationsite,yourSiteCoordinatorwillassistyouwithyourresourceneeds.Yoursitemayevenhaveatechnicalresearchlibraryfromwhichyoucanaccessvariousforms,publications,andworksheets.

Youshouldnotusethistrainingguideatyourtaxpreparationsite.Itisdesignedfortrainingpurposesonly.TaketheVolunteerResourceGuideandPublication17withyouforuseatthesite.YourSiteCoordinatorshouldbeabletoprovideaccesstothe followingkeyresourcesaswell:

• Instructionbooklets,schedules,andworksheetsforForms1040,1040A,and1040EZ

• Taxinformationpublicationsthatarefrequentlyusedatthesites(e.g.,Publication596,EarnedIncomeCredit,Publication972,ChildTaxCredit,Publication3,ArmedForcesTaxGuide,etc.)

• Equipmentandsuppliesalongwithsecurity requirementsanduserestrictions

• VolunteerQualityAlerts

YoumayalsoreinforceyourtaxlawtrainingbyviewingonlinetrainingresourcessuchasLink&LearnTaxesandUnderstandingTaxes–e-learningcoursesonwww.irs.gov.

Thereisalsoatoll-freetaxinformationhotlineavailableforvolunteeruseonly.IfyouhaveataxlawquestionandcannotgettheanswerfromyourSiteCoordinatororyourreferencematerial,youcancall1-800-829-8482(1-800-TAX-VITA).Ifyoucall,besuretoidentifyyourselfasavolunteer.Do not give this phone number to taxpayers.ThevolunteerhotlineisgenerallyavailablefromFebruary1untilthefilingdeadline.ThisnumbercanbefoundonthebackcoveroftheVolunteerResourceGuide.

How do I get started using the tax software?

ManysitesusetheIRSsponsoredtaxpreparationsoftware.Thetaxsoftwareassistsinpreparingreturnsandalsoincludesahelpfeaturetoassistinunderstandingtheappli-cationoftaxlaw.

Ifyouareworkingatasitethatusestaxpreparationsoftware,youwillneedtobecomefamiliarwiththeparticularsoftwarepackagebeingusedatyoursite.IRScontractswithaspecificsoftwarecompanytoprovidesoftwareforuseintheVITA/TCEprogram.

Sincethemajorityofsitesusetaxpreparationsoftware,IRStrainingmaterialsaregearedtotheuseoftaxsoftwareinbothdesktopandonline(internet-based)versions.

Yourinstructorand/orSiteCoordinatorwillprovideyouwiththeinformationandpasswordsrequiredforloggingintotheprogramfortrainingand/ortaxpreparationpurposes.HowtoUsetheGuideintheVolunteerResourceGuidewillprovidemoreinformationformakingacomparisonbetweenthedesktopandonlineversions.

Point out the tax software comparison chart in the blue tab section of the Volunteer Resource Guide.

Provide the login and passwords for the tax software.

Recipientsofgovernmentpropertyandequipmentmustcertifythattheequipmentwillbeusedforvolunteertaxreturnpreparationpurposes.Commercialandcertainpersonalusesofthepropertymayterminatetheagreement.Thisappliestohardwareandsoftware,aswellassupplies.

HandycontactinformationislistednearthebackoftheVolunteerResourceGuide.

Point out students can always access such materials on the IRS website at www.irs.gov.

Point out the contact information on the Volunteer Resource Guide.

Provide instructions for accessing the practice lab.


Where do I find information about the tax software?

TheVolunteerResourceGuideprovidesgeneralinformationandhelpfulhintsforusingthetaxsoftwareundertheyellowtabs.Informationspecifictotheonlineversionislistedunderthebluetabs.InformationaboutcompletingthereturnislistedundertheFinishingtheReturntab.

Summary

WelcometotheVITA/TCEprogram.Remember:

• Makesureyouhavetheresourcesandsupportyouneedtoprovideeach taxpayerwithhighqualityserviceandanaccuratereturn

• Areturnisaccuratewhentaxlawisappliedcorrectlyandeachtaxpayer’s supportingdocumentation(includinganapprovedintakeandinterviewsheet)supportstheentriesonthereturn

• Knowyourrightsandresponsibilitiesandupholdtheintegrityofthe VITA/TCEprogram

• Preparereturns:

- thatarewithinthescopeoftheVITA/TCEprogram

- forwhichyouhavebeencertified

• UseVITA/TCEequipmentandsupplies(includinghardwareandsoftware)fortheirintendedpurposes

• Completethe“AreYouReadytoGetStarted?”assessmentintheVolunteerResourceGuidepriortoassistingtaxpayerstodetermineifyouhaveeverythingyouneedtoprovidetopqualityprofessionalservice

Review the lesson summary.

Show the students the assessment (page 3 – Are you Ready to Get Started?) in the Volun-teer Resource Guide.

If students are using the tax software desk-top version, point out the tool bars and func-tion keys listed under the tax software Quick Reference Guide in the Volunteer Resource Guide.

Point out that the tax software flow chart explains the sequence of using the software.

If students are using the tax software online version, point out the tool bars and short cuts available.

Note: References to function keys in tax software discussions only apply to the desk-top version. There are many similarities between the two prod-ucts, but they do have their differences.

Lesson 2: Screening and Interviewing 2-1

Instructor Notes

Lesson 2: Screening and Interviewing

Introduction

Thislessonassistsyouindevelopinginterviewandscreeningskillsthatwillassuretaxpayersthatyouhavetheirbestinterestatheart.Withtheseskills,youwillbeabletoobtaintheinformationnecessarytoprepareacompleteandaccuratereturn.Youwillbeintroducedtotechniquesthatwillhelpyouconductaprobinginterviewduringthetaxpayer’sinitialscreeningforprogrameligibility.Youwillusetheseskillstoclarifyissuesthatmayariseasyoumovethroughthetaxreturnpreparationprocess.

Aprobinginterviewtodetermineimportantfactsaboutthetaxpayerisrequiredbeforeandduringthepreparationofthetaxreturnaswellasduringthequalityreviewprocess.Youwillusetheoralandwritteninformationgatheredthroughoutthetaxprep-arationprocesstopreparethetaxpayer’sreturnandtofacilitateaqualityreviewofthereturnafteritiscompleted.

Objectives

Attheendofthislesson,usingyourresourcematerials,youwillbeableto:

• Describetheelementsoftheintakeandinterviewprocess

• LocatethetoolsthatwillassistyouinPublication4012,VolunteerResourceGuide

• Probefornecessaryinformation

• Usethevariouscommunicationstechniquesneces-sarytosuccessfullyelicittheinformationneededtoprepareacompleteandaccuratereturnsuchas:

- Buildingrapport

- Askingeffectivequestions

- Usingactivelistening

- Overcomingcommunicationbarriers

What is included in the intake and interview process?

Whentaxpayersarriveatasite,theyshouldbegivenanapprovedintakeandinterviewsheet.Duringtheintakeprocess,youoracertifiedscreenerwillusetheapprovedintakeandinterviewsheettoscreentaxpayersforprogrameligibilityandvalidatetheinforma-tiontheyhaveprovided.Throughoutthescreeningprocess,listenforcluesthatwillassistincompletingthereturn–maritalstatus,numberofchildren,relativeslivingwiththem,childcareexpenses,potentialtoqualifyforcredits,unreportedincome(e.g.,cashtransactions),etc.

Theintakeandinterviewprocessmustincludethefollowing(ataminimum):

• Aninterviewwiththetaxpayerthatincludesexplainingthetaxpreparationprocessandencouragingthemtoaskquestionsthroughouttheinterviewprocess

• Useofanapprovedintakeandinterviewsheet

What do I need?


□ VolunteerResourceGuide□ ApprovedQualityReview

Sheet


Point out the resources cited under What do I need?

Display or refer stu-dents to the approved intake and interview sheet.

Point out that these are minimum expectations.

Lesson 2: Screening and Interviewing2-2

• Confirmationoftheaccuracyofthetaxpayer’sresponsesprovidedonthefrontoftheapprovedintakeandinterviewsheetbyacertifiedreturnpreparer

• Useofprobingquestionstoensurecompleteinformationisgathered

• Reviewofallsupportingdocumentation,Form(s)W-2,1099,etc.

• Requestformissingorincompletedocumentation,ifapplicable

Asyouworkwiththetaxpayer,applytheseinterviewtechniques:

• Buildingrapport

• Askingeffectivequestions

• Usingactivelisteningskills

• Overcomingcommunicationbarriers

Where do I find the tools to assist me with this process?

ThetoolstoassistyouduringthescreeningandinterviewprocessareincludedintheintroductorysectionoftheVolunteerResourceGuide,whichispartofyourtrainingkit.

How do I use the tools?

How do I use the approved intake and interview sheet?

Everyvolunteertaxpreparationsitegatherstaxpayerinformationusinganapprovedintakeandinterviewsheet.Nomatterwhichapprovedintakeandinterviewsheetyouuse,itmustaskforthebasicintakeinforma-tionneededforacompleteandaccuratereturn.

Taxpayerscompletethesectionsoftheapprovedintakeandinterviewsheetlabeled“tobecompletedbythetaxpayer.”Oncethisisdone,volunteersrevieweachentry.Usingthequestioningtechniquescoveredinthislesson,volunteersworkwithtaxpayerstocompletetherestoftheform.

Process

Comparethetaxpayers’personalinformationtothesupportingdocumentstoensurethenames,addresses,andcontactinformationareallcorrect.

Payparticularattentiontomaritalstatusanddependentinformation;usethedecisiontreesintheVolunteerResourceGuide(ortheHelpfeatureinthetaxsoftware)toverifymaritalstatus.

ReviewtheIncomequestions.Taxpayersmayqualifyforadditionalcreditsanddeduc-tionsbasedonlifeevents.Ifthetaxpayerhasanswered“yes”toanyoftheseques-tions,conductfurtherresearchtomakeavaliddeterminationabouteligibilityforcreditsordeductions.Usetheappropriatesourcedocumentslistedonthe13614-CJobAid.Reviewthe“yes”boxestodeterminewhattoenteronthereturn.

Form13614-C,Intake/Interview&QualityReviewSheet,istheIRSversionoftheform.NEW The13614-CJobAid,whichcanbefoundintheVolunteerResourceGuide,isnewin2009,andgivesline-by-lineinstructionsonusingtheform.

Point out that they will practice these in this lesson.


ReviewtheExpensesquestions.Someexpensesareenteredasadjustmentstoincome,someareitemizedonScheduleA,andcertainexpensesimpacttheadditionalstandarddeduction,whichiscoveredintheStandardDeductionandTaxComputationlesson.Ifthetaxpayerhasany“yes”answersfortheexpensesquestions,usetheVolunteerResourceGuide,the13614-CJobAid,ortheHelpfeatureinthesoftwaretodeterminethequalificationfortheseexpenses.

Usingtheinterviewskillsexplainedintheselessons,youwillrevieweachitemontheapprovedintakeandinterviewsheetwiththetaxpayerbeforeyoucompletethetaxreturn.

Ifacorrectiontothetaxpayer’sinformationisrequiredduringtheintakeandinterviewprocess,itshouldbeannotatedontheapprovedintakeandinterviewsheetpriortocompletingthereturn.Thesenotesexpeditethetaxreturnpreparationandthequalityreviewprocess.

How do I use the Volunteer Resource Guide?

TheVolunteerResourceGuidewillhelpyouasyouinterviewthetaxpayer.Itincludesdecisiontrees,interviewtips, andotherinformationtogather,clarify,andverifythetaxpayer’sinformationontheapprovedintakeandinterviewsheet.

TheVolunteerResourceGuideisdividedintofourmajorsections–GeneralInformation,TaxLaw,theTaxSoftwareandtheTaxSoftwareOnline.

• GeneralinformationlocatedinthefrontsectionandthecoversofthebookoffersguidanceandacopyofForm13614-CJobAid.

• Whitetabscontaintaxlawintheformofdecisiontrees,chartsandinterviewtips.

• Yellowtabscontainstep-by-stepproceduresforelectronicreturnpreparationusingthetaxsoftware.

• Bluetabscontaininformationspecifictousersoftheweb-basedoptionforthetaxsoftware.

TaxSoftwareOnlineusersshouldtakeadvantageofboththeyellowandbluetabsasmaterialwhichisuniversalforbothapplicationswillbecontainedintheyellowtabsection.

Tax Software Hint:Partnersmayuseformsprovidedinthesoftwareinlieuofan

approvedintakeandinterviewsheet.

Partnerschoosingthismethodmustprovidepapercopiesofthetaxsoftwareforms,oraccesstotheformsonline,tothereviewerconductingaqualityreturnreview.

InformationfromtheVolunteerResourceGuideisreferredtothroughoutthistraining.YoumustuseitatyourVITA/TCEsite,sorefertoitoftenduringclasstoprepareforyourtaxpayerinterviews.

Tell volunteers not to write on any of the tax-payer’s personal docu-ments or take them out of the taxpayer’s sight.

Explain if the tax soft-ware tabs will or won’t be used during this les-son and why.

Remind students to take their Volunteer Resource Guide to their VITA/TCE site.

Direct students to follow along in their copy of the Volunteer Resource Guide.


How do I welcome and screen the taxpayer?

How should I welcome the taxpayer?

Herearesuggestionsforwelcomingthetaxpayer:

• Greetthetaxpayerandintroduceyourself

• Takeafewmomentsforsmalltalk(weather, traffic,etc.)

• Explainthescreening,taxpreparationandqualityreviewprocesses

• Explainthat,oncethetaxpayerhascompletedtheportionoftheapprovedintakeandinterviewsheetlabeled“TobecompletedbytheTaxpayer,”youwillcompletetherestofittogether,andyouwillassistwiththetaxpayer’sportionifneeded

• Askifthetaxpayerhasanyquestions

HereisanexampleofhowJorge,avolunteerwelcomedBill,ataxpayer:

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… BIll responds…

Hello, I’m Jorge. How are you today?

I’m fine, thanks. Did you have any trouble finding the place?

Yes, especially this time of day. Did the receptionist ask you to complete an intake sheet like this one?

Thank you. I’ll have to see your photo ID and social security card and then I’ll check your income to make sure you qualify for volun-teer assistance. Next, we’ll go over your information together and make sure it’s complete. Then I’ll input the information into the computer to create your tax return. Finally, I’ll go over the return with you, and have our Site Quality Reviewer check it one last time for accuracy. You will then be able to sign and date it. Do you have any questions?

I’m glad you asked that. We normally file your return electronically, so you won’t have to mail your return at all. That way you can get your refund faster. Do you have any other questions before we look at your intake sheet?

Okay, but please feel free to ask questions as we go along. The tax process isn’t always clear to people, so it’s always good to ask, okay?

Hi,I’mBill.I’mfine.Howaboutyou?

Itwasn’ttoobad.Thetrafficwasterriblethough!

Yes,Ihaveithere.

IfIsignanddateit,doIhavetomailitrightaway?

Idon’tthinkso.

Sure,Iappreciatethat,thanks.

If available, play the DVD or VHS based on Publication 4475, Interview Techniques.

Ask two volunteers to role-play the sample interview.

Review student observations on the volunteer’s approach.


How can I screen the taxpayer for eligibility?

Whenthetaxpayerindicatesthattheirportionoftheapprovedintakeandinterviewsheetiscomplete,begintheinterviewtocompletetheformandthenscreenthetaxpayerforeligibilityforthevolunteerprogram.Screeningmethodsdifferbetweenvolunteersites,butherearesuggestionsforthisstep:

• Askthetaxpayerfortheircompletedintakeandinterviewsheet.

• Verifythetaxpayer’sidentitywithapictureIDorotheracceptablemethod.

• Obtainsocialsecuritycards,aformorletterfromtheSocialSecurityAdministrationand/orIndividualTaxpayerIdentificationNumber(ITIN)lettersforeachpersontobelistedonthereturn.Keepthesedocumentsavailableforreferencethroughoutthereturnpreparationprocess.

• Reviewthetaxpayer’sincomeinformation,suchasForm(s)W-2,andForm(s)1099,todetermineiftheyfallwithinthescopeofthevolunteerprogramandyourlevelofcertification.YourSiteCoordinatorand/orinstructorwillletyouknowthetaxreturncriteriaforyourprogram.Iftheydonotfallwithinthescopeoftheprogram:

- Courteouslyexplainthatvolunteerservicesarelimitedtothosewhofallwithinthescopeoftheprogramandwhytheydonotqualify.

- Encouragethetaxpayertousetheinformationtheyrecordedontheintakeandinterviewsheetinworkingwithanothertaxpreparationservice.

- Thankthetaxpayerforcomingandexpressregretthatyoucannotassistthem.

• Ifthetaxpayerqualifiesforvolunteerassistance,begintheinterviewandcompletetherestoftheintakeandinterviewsheetwiththetaxpayer.Ifthetaxpayerqualifiesbutdoesnothaveallthenecessarydocumentation,explainhowtotoacquirethedocumentation.

HereisanexampleofhowavolunteerscreenedtaxpayerRobertCornellfor assistance:

Ask students to look at an approved intake and interview sheet.

Explain what to do if the taxpayer is eligible for the program, but not within the pre-parer’s level of certifi-cation.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… roBert responds…

Mr. Cornell, you might be aware that the volunteer program is limited. We are volunteers and can only do tax returns within the scope of our training. Did anyone let you know that?

Well, we’ll certainly do whatever we can. First, let’s look at your Form W-2, interest statements, and anything else that reports your income. May I look at those?

I’m sorry to tell you, but rental income is outside the scope of the volunteer program. I’m afraid we won’t be able to help you.

I’m afraid so. However, you are welcome to take the intake sheet with you – it may be helpful as you work with another preparer to complete your return. I’m sorry we weren’t able to work together.

Yes, but thank you so much for coming in.

No,notreally.Ihopeyoucanhelpme.

Sure,heretheyare.Ialsoownaduplexandcollectsomerentfromit.

Oh,I’mdisappointed.Areyousure?

Well,metoo,butrulesarerules, Iguess.

Okay,thanksanyway.


Review student observations on the volunteer’s approach.

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.

Divide the class into pairs and ask students to role-play the sample interview.

Discuss the exercise.

Review the Determina-tion of Filing Status Interview Tips in Pub-lication 4012 (Tab B) as an example.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… regIna responds…

Ms. Reinhardt, were you uncertain how to answer any of the questions on the intake sheet?

Okay, as we go over that part. I’ll explain a little more about what they are looking for. You should feel free to ask questions. Fair enough?

I’m going to ask you a few questions that will help us determine the best filing status for you and then we will go over your depen-dent information. First, I see from your intake sheet that you were married as of the last day of the tax year. Is that right? (Step1)

So, he was not living with you?

Okay, do you plan on filing a joint return with your spouse? (Step2)

Yes, of course. Let’s assume for now that you will file separately, and I’ll ask you a few more questions. I see that you have two children. Did they live in your home during the tax year? (Step3)

Yes,actuallyIhadtroublewiththefamilyanddependentsection.

Yes,thanks.

Yes,Iwas,butmyhusbandandIwerelivingapart.

That’sright.Butwewerestilllegallymarried.

Well,I’mnotsure…Idon’treallyliketheideaofit.Iwasthinkingoffilingseparately.CanIdothat?

Yes,theylivedwithme.

The13614-CJobAidwillhelpyouobtainallthenecessaryinformation.


ExErcisEs

Asyoucansee,thevolunteerusedtheinterviewtipsandtheinformationfromtheVolunteerResourceGuideinanaturalandpersonalway.Youwilllearnmoreaboutthisapproachinthislesson’ssectiononinterviewtechniques.

Readtheinterviewswiththeseexercisesandanswerthequestions.Answersarelocatedafterthelessonsummary.

Question 1:Fromthelistbelow,markallthethingsthevolunteerdid.

• Greetedtaxpayer

• Introducedhimselforherself

• Madesmalltalk

• Explainedscreeningandtaxpreparationprocesses

• Askedtaxpayertocompletetheapprovedintakesheettothebestoftheirability

• Asked the taxpayer if they had any questions

Question 2:Fromthelistbelow,selectallthethingsthevolunteerdid.

• Reviewed the approved intake and interview sheet

• Asked if taxpayer was uncertain about any responses

• Reassured taxpayer that they would help them complete the form

• Encouraged questions

Advise students that future lessons will pro-vide guidance for the taxpayer about missing SSNs, W-2, 1099s, etc.

Assign the following exercises.

Review answers with the class when com-plete.

Volunteer did only one thing right: asked if the taxpayer had any questions – but asked rudely.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… roBert responds…

Yes?

Here, fill out this intake form. You may sit over there.

Come back to me. Do you have any other questions?

I’mheretodomytaxes.

WhatdoIdowhenI’mfinished?

No,thanks…Iguess!

The volunteer did all of the recommended things courteously!

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… roBert responds…

Okay, let’s take a look at your intake sheet. Did you have any questions about filling it out?

Okay, don’t worry. Let’s start at the beginning and go step by step. When we get to those questions, I’ll explain what they mean, and we’ll try to answer them together. How does that sound?

Please feel free to ask questions as we go over the intake sheet. Shall we begin?

Yes,Iwasn’tsurewhatthisques-tionmeant,andthisonehere.

Thatwillhelp!

Yes,let’sgetstarted.


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.

Ask the same student pairs to reverse roles for this interview.


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.

Review the lesson summary with the class.


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

Instructor NotesIntroduction

Thislessonwillhelpyoudeterminewhichtaxpayersmustorshouldfileataxreturn.Youwillalsofindinformationonhowtoverifyataxpayer’sidentity,whichformtouse,completingthemaininformationsheetorlabelonthereturn,andhowlongtokeeptaxpayerrecords.

Objectives

Attheendofthislesson,usingyourreference materials,youwillbeableto:

• Determinewhomustfileataxreturn

• Determinewhoshould fileataxreturn

• Verifythetaxpayer’sidentity

• Selectthecorrectformtouse

• Determinehowtofilethereturn

• Telltaxpayershowlongtheyshouldkeepcertainrecordsanddocuments

Who must file?

U.S.citizensorresidentsoftheUnitedStatesmustfileareturnbasedonthreefactors–age,grossincome,filingstatus.Therearespecialrulesfordependents,survivingspouses,U.S.CitizensandresidentslivingoutsidetheU.S.,residentsofPuertoRico,andindividualswithincomefromU.S.possessions.

RemembertousetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglessonwhendeterminingwhomustfile.

What do I need to know?

Todecidewhethersomeonemustfileataxreturn,youneedtoknowtheindividual’s:

• Age

• Grossincome

• Filingstatus

Publication17,Chapter1–FilingInformation,containsadditionalinformationforotherindividualswhomustorshouldfileareturn–dependents,childrenunderage18,self-employed,aliens.

Where do I get information on the taxpayer’s age?

Lookattheapprovedintakeandinterviewsheetforthetaxpayer’sdateofbirth.Confirmthisdateduringtheinterview.Refertothesampleapprovedintakeandinter-viewsheetatthebeginningoftheVolunteerResourceGuide.

Lesson 3: Filing Basics

What do I need?


□ VolunteerResourceGuide□ Publication17□ Optional:Publication552



Direct the students to the appropriate line of the approved intake and interview sheet.

Lesson 3: Filing Basics3-2

Where do I get information on the taxpayer’s gross income?

Anapproximationofgrossincomeisenoughtoseeifataxpayermustfileareturn.Grossincomeisalltheincomethetaxpayerreceivedduringthetaxyearintheformofmoney,goods,property,andservicesthatarenotexemptfromtax.Itincludesbothearnedandunearnedincome.

TheIncomesectionoftheVolunteerResourceGuide(TabD)liststhesourcesofincomethatshouldbeincludedandexcludedindeterminingaperson’sgrossincome.YoucanalsorefertotheIncomelesson.

Toapproximategrossincome:

• Obtainthetotalofwages,tips,andotheremploy-mentcompensationreportedinbox1ofthetaxpay-er’sForm(s)W-2

• Onpage2oftheapprovedintakeandinterviewsheet,reviewtheincomequestionswiththetaxpayertoseeiftherewasanyadditionalincome(frominvestments,retirementplans,socialsecu-rity,unemployment,orotherincomenotreportedonFormW-2orForm1099)anddetermineeachamount.TakealookatPartIVonPage2ofthesampleapprovedintakeandinterviewsheetatthebeginningoftheVolunteerResourceGuide.

Totaltheaboveamountsofincometodeterminethetaxpayer’sapproximategrossincome.

Where do I get information on the taxpayer’s filing status?

Taxpayersmayormaynotknowwhichfilingstatustouse.Forthepurposesof determiningwhetherapersonmustfileareturn,narrowingthechoicesdowntothemost likelyfilingstatus(es)isadequateinmostcases.

example

Basedontheapprovedintakeandinterviewsheetshownbelow,thistaxpayerwillmostlikelyusetheMarriedFilingJointlyfilingstatus.

Donotincludesocialsecuritybenefitswhendeterminingfilingrequirementunlessthetaxpayerismarried,filingaseparatereturn,andlivedwiththeirspouseatanytimeduringthetaxyear.

Remind the students to assemble all of the income reporting documents.

Point out that exclud-able, in this case, means not taxable.

Emphasize the importance of using the approved intake and interview sheet at the beginning of the process.

Review the example shown here.

Usethegrosssaleprice,notthenetprofit,whenestimatinggrossincomeforataxpayerwhosoldstockorotherassets.


ExErcisEs

ChecktheTaxpayerInformationsectionoftheapprovedintakeandinterviewsheetfor:

• Thetaxpayer’smaritalstatus

• Whetherthetaxpayercanbeclaimedasadependentonsomeoneelse’s taxreturn

• Thetaxpayer’spotentialdependents

UsetheVolunteerResourceGuide’sDeterminationofFilingStatusdecisiontreeandtheInterviewTips(TabB)forhelpfulprobingquestions.

Who is legally required to file a federal tax return?Todeterminewhetherataxpayerislegallyrequiredtofileareturn,startwiththeVolunteerResourceGuide(TabA),ChartA–ForMostPeopleWhoMustFile,andChartB–ForChildrenandOtherDependents.TurntherenowandreviewthedollaramountsinbothChartsAandB.

For Special Situations

IftheWhoMustFilechartsshowthatanindividualisnotrequiredtofileareturn,thencontinuetotheChartC–OtherSituationsWhenYouMustFileintheVolunteerResourceGuide(TabA)toseeifanyofthefollowingspecialconditionsrequirethepersontofile.

Someofthemostcommonsituationsyoumayseewhenindividualsarelegallyrequiredtofileareturnare:

• Self-employedwithnetearningsof$400ormore

• Advanced Earned Income Tax Credit payment recipientswhohaveanamountinbox9oftheirFormsW-2

• Taxpayers who owe Special Taxes

RefertotheWhoMustFilesectionoftheVolunteerResourceGuidetoanswerthesequestions.Answersareattheendofthelessonsummary.

Question 1:Bobis27yearsold.Hisgrossincomewas$9,550duringthetaxyear.Basedonlyonthisinformation,isherequiredtofileataxreturn?þ Yes ¨ No

example

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

example

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

Explain that many military couples who are separated by the service assume they must file separately. The decision tree can help correct this mis-conception.

Assign the exercises.

Review the answers with the class when complete.

Point out that the amounts change each year.

Use the examples to illustrate the use of the Volunteer Resource Guide.

Bob’s gross income was over $9,350.


ExErcisEs (continued)

Question 2: JanetandHarryaremarriedandusuallyfilejointly.Duringthetaxyear,sheturned66andheturned64.Theirgrossincomewas$16,200.Basedonlyonthisinformation,aretheyrequiredtofileataxreturn?£ Yes þ No

Question 3: JuanitacanfileasaQualifyingWidowwithDependentChild.Sheis47yearsold.Hergrossincomewas$15,400.Basedonlyonthisinformation,issherequiredtofileataxreturn? þ Yes £No

Who should file?

Evenifanindividualisnotrequiredtofileataxreturn,theyshouldfileareturnto getmoneybackiftheyqualifyincertainsituations.Remembertousetheinterview techniquesandtoolsdiscussedintheScreeningandInterviewinglesson.

Who should file a federal tax return?

Althoughsomeindividualsmaynotberequiredtofile,theyshouldfileareturniftheyareeligibletoclaim:

• Arefundofwithheldtaxes

• TheEarnedIncomeCredit(EIC)

• TheAdditionalChildTaxCredit

• TheHealthCoverageTaxCredit

• TheFirst-TimeHomebuyerCredit

Taxpayerswhoshouldfilemaybeentitledtoataxcreditandfilingareturnistheonlywaytogetit.

TheseitemsarelistedintheVolunteerResourceGuide(TabA)WhoMustFilesection,ChartD–OtherSituations.

Individualswhoarenotrequiredtofileareturnandwhowouldnotbenefitfromfilingareturncanreducethecost,time,andeffortofunnecessaryprocessingbynotfiling areturn.

How do I find out if a taxpayer is eligible to claim a refund?

Todeterminewhetherapersonshouldfileareturninordertoclaimataxrefundorrefundabletaxcredit,checkthetaxpayer’s:

• Form(s)W-2(boxes2and17)andForm(s)1099

• TheFamilyandDependentInformationsectionoftheapprovedintakeand interviewsheet

Thetaxpayermayqualifyforataxrefund,EarnedIncomeTaxCredit,and/orAdditionalChildTaxCreditif:

• Federalorstateincometaxwaswithheldonanyincomeform,and/or

• Thetaxpayerhadearnedincome,and/or

• Thetaxpayerhasaqualifyingchild

Direct students to this section of the Volun-teer Resource Guide.

Their combined gross income was less than $19,800.

Her gross income was over $15,050.


Whenindoubt,itmaybeworthwhiletobeginataxreturnforthetaxpayerandthenfilethereturnonlyifthetaxpayeriseligibleforarefund.

RefertaxpayerswhomayqualifyfortheHealthCoverageTaxCredittoaprofessionaltaxpreparer.

How do I verify taxpayer identity?

Toverifyataxpayer’sidentity,usetheinterviewtech-niquesandtoolsdiscussedintheScreeningandInterviewinglesson.

What documents do I use to verify identity?

Beforeyouenterthetaxpayeridentificationinformationonthetaxreturn,youshouldfirstverifytheidentityofthetaxpayer(s),theaccuracyofeachSSN(orITIN),andthespellingofnamesenteredonthetaxpayer’sapprovedintakeandinterviewsheet.

• Asktoseeasocialsecuritycard,anITINletter,orotherlegaldocumentforeachindividualwhowillbelistedonthereturn

• Asktoseeproofofidentityforthetaxpayer(andthespouseiffilingajointreturn)

• VerifytheSSN(orITIN)andproofofidentityareforthesameperson

• VerifytheSSN(orITIN)andthespellingofeachindividual’snameonthesocialsecuritycardorotheracceptabledocumentsmatchtheinformationyouenteronthetaxreturn

• Verifytheaddressandbirthdateontheapprovedintakeandinterviewsheetmatchestheinformationontheidentificationanddiscussanydiscrepancieswith thetaxpayers

• Makesurethetaxpayerunderstandshowcriticalitistohavethecorrectinformationinordertoreceiveanyage-relatedtaxbenefits

Taxpayerswhocannotsubstantiatetheiridentityshouldseekprofessionaltaxassistance.

What are Taxpayer Identification Numbers?

IRSregulationsrequirethateachpersonlistedonaU.S.federalincometaxreturnhaveavalidTaxpayerIdentificationNumber(TIN).ThetypesofTINsare:

• Socialsecuritynumber(SSN)

• IndividualTaxpayerIdentificationNumber(ITIN)

• AdoptionTaxpayerIdentificationNumber(ATIN)

Who has a social security number?

AnyindividualwhoislegallyeligibleforemploymentintheUnitedStatesmusthaveasocialsecuritynumber(SSN).

Identitydocumentsconsistofadriver’slicense(U.S.),employerID,schoolID,birthcertificate,stateidentifica-tioncard(U.S.),MilitaryID,nationalidentitycard,visa,orpassport.However,anyothervalidformofidentificationthatwouldnormallybeusedtoproveidentityisacceptable.

Point out that time spent verifying these issues can save time for the site coordinator and the taxpayer.

TheEarnedIncomeTaxCreditmayapplywithorwithoutachild.SeetheEarnedIncomeCreditandChildTaxCreditlessonsfordetailsondeter-miningeligibilityforthesetaxcredits.

Remind students that some taxpayer’s needs are beyond the scope of the VITA/TCE pro-gram.

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


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:Itisyourresponsibilityasavolunteertaxpreparertochecktheaccuracyofeverysocialsecuritynumberprovidedtoyoubytaxpayers. þ True ¨ False

How do I enter the identification data?

Forpaperreturns,fillinthename,address,andsocialsecurityinformationinthelabelsectionofthereturn.Ifyouareusingtaxsoftware,turntotheMainInformationSheetsectionintheVolunteerResourceGuide(Tab1).Besuretoreadallthedetailsandhelpfulhintsforenteringthetaxpayer’sidentificationinformation.

Tax Software Hint:TurntotheVolunteerResourceGuide(Tab1)formoreinformationabouttheMainInformationSheet.

How do I choose the appropriate tax return form?AlltaxpayerscanuseForm1040.IndividualsmustmeetcertainrequirementstouseForm1040EZorForm1040A.

Tax Software Hint:Ifyouaree-filingthetaxreturns,theIRSdoesnotcarewhichformisused.Youmaydeterminetheeasiestformforthetaxpayer’sbenefit.ThisinformationisdisplayedatthetopoftheMainInformationSheet.

Form 1040EZ

Ofallthetaxreturnforms,Form1040EZisthesimplest.Theone-pageformisdesignedforindividualswhofileaseitherSingleorMarriedFilingJointlyandwhohavenodependents.Mostindividualswhocanbeclaimedasadependentonanothertaxpayer’sreturnuseForm1040EZ.

Form 1040A

Form1040Aisatwo-pageform.Page1showsthefilingstatus,exemptions,income,andadjustedgrossincome.Page2showsstandarddeduction,exemptionamount,taxableincome,tax,credits,payments,amountowedorrefund,andsignature.

TurntotheWhichFormtoFilechartintheVolunteerResourceGuide(TabA)toseewhichincomeandexpensescanbereportedwithaForm1040A.

Demonstrate how the tax software warns the user if a social security number might be incorrect or invalid.

example

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

Ask a volunteer to read the Trudy example.

Assign the exercise.

Review the answer with the class when complete.

Checking the accuracy of names and social security numbers prevents delays.



Form 1040

Form1040isatwo-pageformthatcontainsalltheentriesonForm1040Aplusentriesformoretypesofincome,itemizeddeductions,andothertaxes.Form1040providesschedulesforreportingthesevarioustypesofincomeanddeductions.

Taxpayerswhosetaxableincomeexceeds$100,000orwhohaveself-employmentincomemustuseform1040.

Which tax form do I select?

Whenfillingoutapapertaxreturn,youcanrefertotheWhichFormtoFiletableintheVolunteerResourceGuide(TabA)asyouinterviewthetaxpayer.

Whenusingtaxsoftware,alwaysselectForm1040fromtheMainInformationSheet.Basedontheinfor-mationyouenterwhencompletingthereturn,theprogramwilltellyouthesimplestformtouse.Allreturnsfiledelectronicallyaretransmittedinthesameformatregardlessoftheformselected.

UsingtheVolunteerResourceGuide,answerthefollowingquestions.

Question 5: LennyandLisaarefilingajointreturnandhavenodependents. Theircombinedincomewas$31,000,whichincluded$35intaxableinterestandtwomonthsofunemploymentincomeforLisa.Theywanttotakethestandarddeduction.WhichisthesimplestformthatLennyand Lisacanusefortheirtaxreturn?

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

example

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

example

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

Ask a volunteer to read the Ramon and Julia example.

Ask a volunteer to read the Cynthia example.



Form 1040EZ

Form 1040

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.

Point out that some of the common elements are: quality review, site ID nos, and signature (man-ual or PIN docs.)

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.Wherecan youfindthatinformation?

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

Foradditionalrecordkeepinginformation,seePublication552,RecordkeepingforIndividuals.

If the internet is avail-able, demonstrate the search feature of the IRS website



Publication 17 - the chap-ter on Filing Information.


What potential pitfalls should I keep in mind?

Remember:

• Alwaystreattheinformationusedtoprepareanindividual’sincometaxreturn asconfidential.

• Canadianshaveanumberthatislikeasocialsecuritynumber,butitisfortheiroldagepension.DonotusethisnumberonaU.S.taxreturn.CanadiansoftenhavebothaU.S.andaCanadiansocialsecuritynumber.

• ManytaxpayerserroneouslyreportamountsfromForm1099-MISC,MiscellaneousIncome,withwagesorotherincome.Incomefrombox7oftheForm1099-MISCgenerallyshouldbereportedonScheduleCorC-EZandonScheduleSE,Self-EmploymentTax.Iftheincomeisreportedincorrectly,theIRSmaylaterissueanoticeofproposedtaxincreasefortheself-employmentincomeandtax.

• Bealerttothefollowingpossibleindicationsoffraudulentactivity:

- AFormW-2thatistyped,handwritten,orhasnoticeablecorrections

- AFormW-2fromacompanythatlooksdifferentfromotherFormsW-2issuedbythesamecompany

- Asuspiciouspersonaccompanyingthetaxpayerandobservedonotheroccasions

- MultiplerefundsdirectedtothesameaddressorP.O.box

- Employmentorearnings,whichareabasisforrefundablecredits,thatarenotwelldocumented

- Similarreturns(e.g.,sameamountofrefund,orsamenumberofdependents,orsamenumberofFormsW-2)

Notifyyoursitecoordinatorifyoususpectanyfraudulentorunusualactivity.

Which forms and documents need to be filed?

Turntothechartthatliststheforms,typesofincome,andthelineitementriesforbothForm1040andthetaxsoftwareintheVolunteerResourceGuide(Tab2).

Tax Software Hint: Oncethemaininformationandincomestatementsareentered,thesoftwareautomaticallymakesavailablemostformsandapplicablesched-ules.Thesecreditformsandscheduleswillbeannotatedwitharedexclamationpoint.Thevolunteermuststillbealerttootherdeductionsandcredits(suchasAmericanOpportunity,Hope,andLifetimeLearningCredits,andretirementsavingscontributioncreditifthereisonlyaRothIRAcontribution).

Point out that volun-teers should notify their site coordinator of any suspicious behavior.


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.


Direct students to Appendix A, page A-1.


ExErcisE answErs

Answer 1: Yes, Bob is required to file a return because his gross income was over $9,350.

Answer 2: No, Janet and Harry are not required to file because their combined gross income was less than $19,800.

Answer 3: Yes, Juanita must file because her gross income was over $15,050.

Answer 4: True. To prevent processing delays, you should check the accuracy of each social security number, as well as the spelling of the name associated with the number.

Answer 5: Lenny and Lisa can use Form 1040EZ to file their tax return.

Answer 6: Ray will need to file Form 1040 both for two reasons: because he had self-employment income and because he is itemizing deductions.

Answer 7: The index in Publication 17 directs us to a paragraph in the chapter on Filing Information.

Notes

Lesson 4: Filing Status 4-1

Instructor Notes

Lesson 4: Filing Status

Introduction

Thislessonwillhelpyoudeterminethemostadvantageous(andallowable)filingstatusforthetaxpayer.Selectingandenteringthecorrectfilingstatusisacriticalcomponentofcompletingthetaxpayer’sreturn.

Reportingofthecorrectfilingstatusishandleddifferently,dependingonwhichtaxformyouuse:

• Form1040orForm1040A:checktheboxfortaxpayer’sfilingstatusintheFilingStatussection.

• Form1040EZ:doesnotrequireanentryforfilingstatus.UseitonlyfortaxpayersfilingasSingleorasMarriedFilingJointlywithnodependents.

Todetermineataxpayer’sfilingstatus,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.SeetheVolunteerResourceGuide(TabB)fortheDeterminationofFilingStatusdecisiontreeandtheinterviewtipsforhelpfulprobingquestions.

Objective

Attheendofthislesson,usingyourresource materials,youwillbeableto:

• Determinethemostadvantageous(andallowable)filingstatusforthetaxpayer

What are the five filing statuses?

Taxpayersmustuseoneoffivefilingstatuses.Filingstatusimpactsthecalculationofincometax,affectstheamountofthestandarddeduction,anddeterminesallowanceorlimitationofcertaincreditsanddeduc-tions.Thefollowinglistputstheminorderfromthemostbeneficialtotheleastbeneficialtothetaxpayer.

• MarriedFilingJointly

• QualifyingWidow(er)withDependentChild

• HeadofHousehold

• Single

• MarriedFilingSeparately

What do I need?


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

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


Review objective with the class.

Refer students to Tab B in the Volunteer Resource Guide.

Ask the students which filing statuses they have used in the past. Would their taxes be higher or lower if they could use one of the other filing statuses?

Lesson 4: Filing Status4-2

Tax Software Hint:FilingstatusisselectedontheMainInformationSheet. GototheVolunteerResourceGuide(Tab1),MainInformationScreen,toreviewthesoftwareentries.

How does marital status affect filing status?

Thefirststepindeterminingthetaxpayer’sfilingstatusistoconfirmtheirmaritalstatuson the last day of the tax year. Avoidusingtheinformationfromtheprioryear,asitmayhavechanged.

Generally,taxpayersareconsideredtobeunmarriedfortheentireyearif,onthelastdayofthetaxyear,theywere:

• Unmarried

• Legallyseparated,underaseparatemaintenancedecree,or

• DivorcedunderafinaldecreeonorbeforeDecember31ofthetaxyear

Taxpayersareconsideredtobemarriedfortheentireyearif:

• Theyweremarriedonthelastdayofthetaxyear,or

• Thespousediedduringtheyearandthesurvivingspousehasnotremarried

What are the requirements for each filing status?

Therearedifferentrequirementsforeachfilingstatus.

Who is considered Single?

TaxpayerscanusetheSinglefilingstatusif,onthelastdayofthetaxyear,theywere:

• Notmarried

• Legallyseparatedordivorced,or

• Widowedbeforethebeginningofthetaxyearanddidnotremarry

Can Single taxpayers qualify for another status?

SomeSingletaxpayersqualifyforHeadofHouseholdorforQualifyingWidow(er)withDependentChildstatus,whichcanmeanalowertax.

What is Married Filing Jointly?

Marriedtaxpayerswhochoosetofileajointreturnwilluseonereturntoreporttheircombinedincomeandtodeductcombinedallowableexpenses.Marriedtaxpay-erscanselectthisstatusevenifoneofthespousesdidnothaveanyincomeoranydeductions.TheMarriedFilingJointlystatuscanbeclaimedbytaxpayerswho,onthelastdayofthetaxyear:

• Weremarriedandlivedtogetherashusbandandwife

• Weremarriedandlivingapart,butwerenotlegallyseparatedordivorced

Avoidselectingafilingstatusthatresultsinahighertaxforthetaxpayer.Forexample,Singletaxpayerswithaquali-fyingpersonmayqualifyforHeadofHousehold,whichoftenresultsinalowertax.Therulesforwhoisaquali-fyingpersonareaddressedintheWhoisHeadofHousehold?topic.Point out for Married

Filing Jointly, one Form 1040EZ, 1040A, or 1040 is filed, which covers both spouses.


• Livedtogetherinacommonlawmarriagethatisrecognizedinthestatewheretheycurrentlyliveorthestatewherethecommonlawmarriagebegan,or

• Didnotremarryaftertheirspousediedduring theyear

What are the responsibilities of each taxpayer on a joint return?

Filingajointreturnforacommonlawmarriageappliestothefederalreturnonly.Volunteersmustcheckstateorlocallawsbeforecompletingastatereturn.Bothtaxpayersmustincludeallworldwideincomeontheirjointreturn.Theyeachmaybeheldresponsibleforallthetaxandforanyinterestorpenaltydue,evenifalltheincomewasearnedbyonlyonespouse.Asubsequentdivorceusuallydoesnotrelieveeitherspouseoftheliabilityassociatedwiththejointreturn.

Insomecases,aspousemayberelievedofjointliability.ThistopicisbeyondthescopeoftheVITA/TCEProgram.Refertaxpayersinthissituationtoaprofessionaltaxpreparer.Formoreinformation,seePublication971,InnocentSpouseRelief.Thispubli-cationcanbedownloadedfromwww.irs.gov.

What is Married Filing Separately?

TheMarriedFilingSeparatelystatusisfortaxpayerswhoqualifyasmarriedunderthedefinitionprovidedabove,andeither:

• Choosetofileseparatereturns,or

• Cannotagreetofileajointreturn

TaxpayerswhofileasMarriedFilingSeparatelyeachreporttheirownincomeanddeductionsonseparatereturns.Theserulesdonotapplyincommunitypropertystates.Moreinformationoncommunitypropertyisdiscussedinothertopicsinthislesson.

Can Married Filing Separately taxpayers qualify for another status?

Somemarriedtaxpayersmayqualifyasunmarried,accordingtotheIRSdefinition,eveniftheyarenotdivorcedorlegallyseparated.SuchtaxpayersmaybeabletousetheHeadofHouseholdfilingstatus.FilingasHeadofHouseholdmayresultinalowertaxthanMarriedFilingSeparately.RefertotheCanmarriedtaxpayerseverfileasHeadofHousehold?topicinthislessontoseeifthe“unmarried”definitionapplies.

Therulesaroundcommonlawmarriagesarecomplexanddifferfromstatetostate.Asavolunteer,itisnotyourresponsibilitytodeterminewhetheracoupleisinvolvedinacommonlawmarriage.Ifataxpayerisnotcertain,referhim/hertoaprofessionaltaxpreparer.

Acitizenorresidentalienmarriedtoanonresidentalienmaybeabletofileajointreturn.MoreinformationcanbefoundintheUniqueFilingStatusandExemptionSituationslesson.

Ask under what cir-cumstance can some-one not be legally married on the last day of the year, but still be considered to be mar-ried for tax purposes?

Answer: If the per-son’s spouse died dur-ing the year and the person did not remarry during that same year.

Explain that if the spouse is temporarily away but is expected to return home, the tax-payer is probably not considered unmarried.


Why are taxes usually higher for Married Filing Separately?

SpecialrulesapplytoMarriedFilingSeparatelytaxpayers,whichgenerallyresultinthetaxpayerpayingahighertax.Forexample,whenfilingseparately:

• Thetaxrateisgenerallyhigherthanonajointreturn.

• Taxpayerscannottakecreditsforchildanddependentcareexpenses,earnedincome,andcertainadoptionandeducationexpenses.

• Somecreditsanddeductionsarereducedatincomelevelsthatarehalfthoseforajointreturnsuchasthechildtaxcredit,retirementsavingscontributioncredit, itemizeddeductions,andthedeductionforpersonalexemptions.

IfonespousefilingMFSisitemizing,theotherspouse,iffilingMFS,mustitemizeor takeastandarddeductionofzero.

ForthecompletelistofspecialrulesseePublication17,FilingStatus.

Are there special rules for taxpayers who live in community property states?

TheincomeoftaxpayerswholivedinArizona,California,Idaho,Louisiana,Nevada,NewMexico,Texas,Washington,orWisconsinduringthetaxyearandwhowishtofileseparatereturnsmaybeconsideredasseparateincomeorcommunityincomefortaxpurposes.Eachstatehasitsowncommunitypropertylaws.SeePublication555,CommunityProperty,formoreinformation.

IfyourlocaltaxassistanceprogramviewscommunitypropertytaxlawsforMarriedFilingSeparatelytaxpayersasbeyondthescopeoftheprogram,refersuchtaxpayerstoaprofessionaltaxpreparer.

ForMarriedFilingSeparatelytaxpayers,youmustentertheotherspouse’snameandsocialsecuritynumberorITINonthetaxreturn.ThisisexplainedintheForm1040Instructionsforline3.

Tax Software Hint: GototheVolunteerResourceGuide(Tab1).FindthesectionoftheMainInformationSheetthataddressesfilingstatus.Noticetheques-tionsaskedoftheMarriedFilingSeparatelytaxpayers.Ifthetaxpayerisinoneofthecommunitypropertystatesmentionedontheform,additionalquestionsmustbeanswered.YoumayhavetocompleteaworksheetentitledAllocationofIncomeforCommunityPropertyIncome.

If filing jointly generally results in the lowest total tax, why would married taxpayers want to file separately?

Marriedtaxpayerssometimeschoosetofileseparatereturnswhenonespousedoesnotwanttoberesponsiblefortheotherspouse’staxobligations;orbecausefilingseparatelymayresultinalowertotaltax.Forexample,ifonespousehashigh medicalormiscellaneousexpenses,orlargecasualtylosses,separatereturns

Refer students to the list in Publication 17.

ThequestionofwhoisitemizingonlycomesintoconsiderationwhenbothtaxpayersarefilingasMarriedFilingSeparately.IfonespousequalifiestofileasHeadofHousehold,thefactthattheotheroneisfilingasMarriedFilingSeparatelyandisitemizingdoesn’tapply.


mayresultinlowertotaltaxesbecausealoweradjustedgrossincomeallowsmoreexpensesorlossestobededucted.

AnothercommonreasontaxpayersfileasMarriedFilingSeparatelyistoavoidanoffsetoftheirrefundagainsttheircurrentspouse’soutstandingpriordebt.Thisincludespastduechildsupport,pastduestudentloans,orataxliabilitythecurrentspouseincurredwhentheywerenotmarriedtoeachother.

Ifataxpayerwantstofileseparately,askforthereasontoelectthisstatus.Ifapotentialoffsetisthereason,educatethetaxpayeraboutthepossibilityofavoidingatleasttheirshareoftherefundoffsetandattachingForm8379,InjuredSpouseAllocation.SeethePublication17Index,keyword:“InjuredSpouse,”foradditionalinformation.TheForm8379instructionsarealsoinformative.Thisformcanbee-filed.

Beawareofcommunitypropertylawrequirements,whichmayaffecttheamountoftaxowedbytaxpayerslivingincommunitypropertystates.

What if a spouse died during the tax year?

Remember,taxpayerswhosespousesdiedduringthetaxyearareconsideredmarriedtothatspousefortheentireyear,providingthesurvivingspousedidnotremarry.ThesurvivingspouseiseligibletofileasMarriedFilingJointlyorMarriedFilingSeparately.

Ifthesurvivingspousehasremarried:

• Heorshemustfileeitherjointlywiththenewspouse(MarriedFilingJointly)or separatelyfromthenewspouse(MarriedFilingSeparately)

• Thedeceasedspouse’sfilingstatusbecomesMarriedFilingSeparately

Determinethemostadvantageousfilingstatusforthetaxpayer.SurvivingspouseswhohaveadependentchildmaybeabletousetheQualifyingWidow(er)withDependentChildstatusinthetwotaxyearsfollowingtheyearofthespouse’sdeath.Thisisdiscussedinasubsequentsection.

Who is Head of Household?

TaxpayersmayqualifyfortheHeadofHouseholdfilingstatus,ifthey:

• Areunmarriedorconsideredunmarriedandarenotaqualifyingwidow(er)withdependentchildonthelastdayofthetaxyear,and

• Paidmorethanhalfthecostofkeepingupahomeduringthetaxyear,and

• Hadaqualifyingpersonlivingintheirhomeformorethanhalftheyear(exceptfortemporaryabsencessuchasschool)

Foramarriedtaxpayertobeconsideredunmarried,thetaxpayermustalsohaveachildwhoisclaimedasadependent.Exception:iftheonlyreasonthetaxpayerisnotclaiminganexemptionforthechildisbecausethenoncustodialparentcanclaimtheexemption,thisrequirementismet.

TaxpayersmayalsochoosetheHeadofHouseholdfilingstatusiftheyarenotmarriedandmaintainahomefortheirparent(s).Thishomemustbetheprincipalplaceofabodefortheparent(s),butitdoesnothavetobethesamehomeasthatofthetaxpayer.Theparent(s)mustqualifyasthetaxpayer’sdependent(s).

Display Form 8379.

Ask students to find this information in Publication 17 by using the index. Recommend they make a note of the page number.

Point out that college students who attend school in another area often qualify as living in the home.

Point out that some aspects of Head of Household filing sta-tus depend on if the qualifying person is the taxpayer’s dependent. Explain that dependent qualifications will be covered in Lesson 6.

Point out that dependent parents are not required to live with the taxpayer.


ExErcisEs

Who is a qualifying person for Head of Household status?

TurntotheVolunteerResourceGuide(TabB),FilingStatus.LookattheDeterminationofFilingStatus–DecisionTree.

Aqualifyingpersonisdefinedas:

• Aqualifyingchild

• Amarriedchildwhocanbeclaimedasadependent

• Adependentparent

• AqualifyingrelativewholivedwiththetaxpayermorethanhalftheyearandisoneoftherelativeslistedintheVolunteerResourceGuideInterviewTipsforDependencyExemptionforQualifyingRelativeunder Step1only.SeeFootnote7.

Foramarriedtaxpayer,thequalifyingpersonforHeadofHouseholdmustbethetaxpayer’sdependentchild.(Exception:thenoncustodialparentrule.)

Answersareafterthelessonsummary.

Question 1:Alexandra’syoungerbrother,Sebastian,isseventeenyearsold.SebastianlivedwithsomefriendsfromJanuary-Februaryof2009.FromMarch-Julyof2009,helivedwithAlexandra.August1,Sebastianmovedbackinwithhisfriends,withwhomhestayedfortherestoftheyear.SinceSebastiandidnothaveajob,Alexandragavehimmoneyeverymonth.AssumingAlexandrahadnootherdependents,canshefileas“HeadofHousehold”for2009?¨ Yes þ No

NoticethattherelativesthatqualifyapersonforHeadofHouseholdmaynotbethesamerelativesthatcouldqualifyataxpayerforadependencyexemption.

WhenyougettoStep7oftheFilingStatusInterviewTipsintheVolunteerResourceGuide,besuretorefertothedefinitionsofaqualifyingpersononthepreviouspageifyouhaveanyquestions.

example

SinceJoan’shusbanddiedfiveyearsago,shehaslivedwithherfriend,MaryAnn.JoanisaU.S.citizen,sheissingleandlivedwithMaryAnnallyear,shehadnoincomeandreceivedallofhersupportfromMaryAnn.MaryAnnisalsoawidow.NoonecanclaimMaryAnnasadependentonhisorherreturn.Joanfallsunderthedefinitionofa“qualifyingrelative”andMaryAnncanclaimJoanasadependentonherreturn.

However,JoanwouldnotqualifyMaryAnnforHeadofHouseholdpurposes,becauseshedoesnotfallunderthe“otherrelative”definitionstatedintheVolunteerResourceGuide(TabB),FilingStatus.

No, because Sebastian only lived with Alexandra for five months, which is less than half the year.

Refer students to the Who is a Qualifying Person Qualifying You To File as Head of Household? table in the Volunteer Resource Guide (Tab B).

Ask a student to read the exercise.

Review student answers with the class when complete.

Ask a volunteer to read the example about Joan and Mary Ann.

Point out that Joan falls under the defi-nition of qualifying relative defined in the Dependency Exemp-tion for Qualifying Relative table in the Volunteer Resource Guide (Tab C).

Refer students to the Filing Status decision tree in the Volunteer Resource Guide (Tab B). Apersonmayqualify

asa“qualifyingrelative”dependent,butnotqualifythetaxpayerforHeadofHouseholdfilingstatus.

ThequalifyingpersonforHeadofHouseholdfilingstatusisalwaysrelatedtothetaxpayer.


ForHeadofHousehold,aqualifyingchilddoesnothavetobeadependentof thetaxpayer.Exception:amarriedtaxpayerconsideredunmarriedforHeadofHouseholdpurposes.

Ifthechildisnotthetaxpayer’sdependent,enterthequalifyingchild’snameonline4ofForm1040AorForm1040.Onlyenteronechild’sname.

Tax Software Hint:TurntotheVolunteerResourceGuide(Tab1).FindtheMainInformationSheetthatshowsthefilingstatussection.Thechild’snameandsocialsecuritynumbermustbeenteredinline4ifthechildisnotincludedintheDependents/Nondependentssection.

What are the advantages of filing as Head of Household?

TheHeadofHouseholdfilingstatusprovidesahigherstandarddeductionand, generally,alowertaxratethanSingleorMarriedFilingSeparately.

Can married taxpayers ever file as Head of Household?

MarriedtaxpayersmaybeconsideredunmarriedandfileasHeadofHouseholdiftheymeetthetestsformarriedpersonslivingapartwithdependentchildren.TaxpayersareconsideredunmarriedandcanfileasHeadofHouseholdifthey:

• Fileareturn,separatefromtheirspouse,forthetaxyear.Ifajointreturnhasbeenfiled,thefilingstatuscannotbechangediftheduedateofthereturnhaspassed.

• Havepaidmorethanhalfthecostofkeepinguptheirhomeforthetaxyear.SeePublication17,FilingStatus:HeadofHouseholdfortheCostofKeepingUpaHomeworksheet.

• Havelivedapartfromtheirspouseduringtheentirelastsixmonthsofthetaxyear.Thespouseisconsideredtohavelivedinthehomeeveniftemporarilyabsentduetospecialcircumstances,suchasmilitaryserviceoreducation.

• Haveprovidedthemainhomeofadependentchild,stepchild,adoptedchild,orfosterchildplacedbyanauthorizedagencyformorethanhalftheyear.Certainexceptionsexist.Tofinddetails,seePublication17,PersonalExemptionsandDependents,ExemptionsforDependents,andChildrenofDivorcedorSeparatedParents.

Taxpayerswhoaredivorcedorlegallyseparatedunderaseparatemaintenanceagree-mentareconsideredsingle.TheycanfileasSingle,ortheymightqualifyforHeadofHousehold.TheywouldhavetomeetthesamerulesasasinglepersonwouldforHeadofHousehold.

AtaxpayerwhoismarriedtoanonresidentalienspousemaybeabletofileasHeadofHouseholdeveniftheyhavelivedtogetherduringtheyear.ReviewtheUniqueFilingStatusandExemptionSituationslessonformoreinformation.

Point out the spouse is considered to have lived in the home even if temporarily absent due to special circumstances, such as military service or education.


Who is a Qualifying Widow(er) with Dependent Child?

Ataxpayer,whosespousediedinoneofthetwotaxyearspriorto2009(either2008or2007)andwhohasoneormoredependentchildren,mayclaimtheQualifyingWidow(er)withDependentChildstatus.Toqualify,thetaxpayermust:

• Beentitledtofileajointreturnfortheyearthespousedied,regardlessofwhetherthetaxpayeractuallyfiledajointreturnthatyear.

• Havehadaspousewhodiedin2007or2008.Thetaxpayermustnothaveremar-riedbeforetheendof2009.

• Haveachild,stepchild,oradoptedchildwhoquali-fiesasthetaxpayer’sdependentfortheyear.

• Havefurnishedoverhalfthecostofkeepingupahomeforhimself/herselfandthequalifyingchildfortheentireyear,exceptfortemporaryabsences.

Intheyearataxpayer’sspousedies,ifthetaxpayerdoesnotremarry,theMarriedFilingJointlyfilingstatuscanbeusedwiththedeceasedspouse.

TaxpayersmaybeabletousetheQualifyingWidow(er)withDependentChildfilingstatusfortwoyearsfollowingtheyearofdeath,providedtheydonotremarry.

ThestandarddeductionandtaxtablesarethesameforQualifyingWidow(er)withDependentChildandMarriedFilingJointlyfilingstatuses.ThesearemorefavorablethanthoseforHeadofHouseholdfilingstatus.

Tax Software Hint: GototheVolunteerResourceGuide(Tab1),MainInformationSheet,whichincludesthefilingstatussection,forthesoftwareentries.

How do I determine the correct filing status?

Todeterminethebestfilingstatus,followtheFilingStatusInterviewTipsandtheDeterminationofFilingStatusflowchartintheVolunteerResourceGuide(TabB).Thenenterthefilingstatusontheapprovedintakeandinterviewsheet.

example

Laura’shusband,Jim,diedinSeptemberofthetaxyear.Shehasnotremarried,andprovidesallthesupportfortheirdependentchildren,ages7and9.LauracanfileasMarriedFilingJointly,claiminganexemptionforherdeceasedhusband.Forthenexttwoyears,shecanusetheQualifyingWidow(er)withDependentChildstatusifshehasnotremarried.

Ask a volunteer to read the example about Laura and Jim.

Ask students if they have any questions about the example.

AfosterchilddoesnotqualifyataxpayerfortheQualifyingWidow(er)withDependentChildfilingstatus.



Checkyourunderstandingofeachfilingstatus.Feelfreetoreviewthelessonif youarenotsureofananswerandusetheVolunteerResourceGuide(TabB). Theanswersareattheendofthelesson.

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

• Single

• Married Filing Jointly

• Married Filing Separately

• HeadofHousehold


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

• Single



• HeadofHousehold


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

• Single



• Head of Household


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

• Single



• Head of Household

• Qualifying Widow(er) with Dependent Child


Instruct students to use both pages in the Filing Status Inter-view Tips, Volunteer Resource Guide (Tab B), to complete the exercises.


Review answers with the class when complete, demonstrating how to use the Filing Status Interview Tips and the Determina-tion of Filing Status Deci-sion Tree.



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

• Single



• HeadofHousehold

• Qualifying Widow(er) with Dependent Child


Let’stakealookathowavolunteerhelpedourtaxpayer,VanessaFranklin. GotoAppendixA-6todeterminethemostappropriatefilingstatusforher.

Summary

Thislessoncoveredthefivefilingstatuses,aslistedonthereturn,theyare:

• Single



• HeadofHousehold


Iftaxpayersqualifyformorethanonefilingstatus,choosetheonethatresultsinalowertax.Forexample,inmostcases,marriedcouplespaylesstaxiftheyfileajointreturn.

Ingeneral,theHeadofHouseholdstatusisforunmarriedtaxpayerswhopaidmorethanhalfthecostofmaintainingahomeforaqualifyingpersonduringthetaxyear.However,somemarriedtaxpayerswholivedapartfromtheirspouseduringthelastsixmonthsoftheyearandprovidedfordependentchildrenmayqualifytofileasHeadofHousehold.

AwidoworwidowerwithoneormoredependentchildrenmaybeabletousetheQualifyingWidow(er)withDependentChildfilingstatus,whichisavailablefortwoyearsfollowingtheyearofthespouse’sdeath.


Ask students how fil-ing status impacts the tax return.

Answer: Filing status can impact the amount of tax, credits, and deductions.

Remind students that it is important to deter-mine the correct filing status so the taxpayers do not pay more tax than is required.

Direct students to Appendix A-6.




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

Instructor NotesIntroduction

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.

Review the objectives with the class.


Lesson 5: Personal Exemptions5-2

When can a taxpayer claim personal exemptions?

Todeterminethepersonalexemptionsthatataxpayercanclaim,usetheinterviewtechniquesandtoolsdiscussedintheInterviewlesson.SeetheVolunteerResourceGuide(TabC)fortheInterviewTipsreferencedinthislesson.Theycanprovidehelpfulprobingquestions.

Toclaimapersonalexemption,thetaxpayermustbeabletoanswer“no”totheintakequestion,“Canyouoryourspousebeclaimedasadependentontheincometaxreturnofanyotherpersonfor2009?”

Thisappliesevenifanotherpersondoesnotactuallyclaimthetaxpayerasa dependent.Ataxpayerwhocouldbeclaimedasadependentmustclaim“0” exemptions.Thismeanstheywon’tbeabletosubtracttheexemptionamountfromtheirgrossincome,andtheymayhavetouseasmallerstandarddeductionamount.(SeethelessonStandardDeductionandTaxComputation).

Ifmarriedtaxpayersfileajointreturn,theycantakeapersonalexemptionforeachspouse.Iftheyfilesepa-ratereturns,theycaneachtakeapersonalexemptionforthemselves.

When can taxpayers claim an exemption for their spouse?

Aspouseisneverconsideredthedependentoftheotherspouse.However,taxpayersmaybeabletotakeanexemptionfortheirspousesimplybecausetheyaremarried.

Toclaimapersonalexemptionforone’sspouse,thetaxpayermustmeetthese conditions:

• MarriedasofDecember31ofthetaxyear,and

• Spousecannotbeclaimedasadependentonanotherperson’staxreturn,and

• Filesajointreturn,orfilesaseparatereturnandthespousehadnoincomeandisnotfilingareturn

What about a deceased spouse?

Ataxpayerwhosespousediedduringthetaxyearcangenerallyclaimthepersonalexemptionforthedeceasedspouseifthetaxpayermeetsalloftheseconditions:

• DidnotremarrybyDecember31ofthetaxyear,and

• Wasnotdivorcedorlegallyseparatedfromtheirspouseonthedateofdeath,and

• Wouldhavebeenabletoclaimtheexemptionundertherulesforajointorseparatereturn.

Acommon-lawmarriageisrecognizedforfederaltaxpurposesifitisrecognizedbythestatewherethetaxpayerscurrentlyliveorinthestatewherethecommon-lawmarriagebegan.Legaladvicemaybenecessarytodetermineifacommon-lawmarriageexists.Note:Filingajointreturnforacommon-lawmarriageappliestothefederalreturnonly.Youmustcheckstateorlocallawbeforecompletingastatereturn.

AlwaysusetheInterviewTipsintheVolunteerResourceGuide(TabC)todeterminethenumberofexemptionseachtaxpayercanclaim.

Taxpayerswhoaredivorcedorlegallyseparatedattheendofthetaxyearcannotclaimtheir(former)spouseasanexemption.

Review the main points to ensure that the students understand.

Ask a volunteer to read the tips.


How do I use the interview techniques to determine how many personal exemptions a taxpayer can claim?

TheInterviewTipsforPersonalExemptionscanhelpdeterminewhetherthetaxpayercanclaimanypersonalexemptions.TakealookattheInterviewTipsintheVolunteerResourceGuide(TabC).Whileyouinterviewthetaxpayer,usethesequestionsasaguidetohelpyougettheinformationyouneedfromthetaxpayer.

How do I enter the personal exemptions?

Personal exemptions are claimed on line 6a and 6b of Form 1040.

Online 6aofthetaxreturn,checktheboxnextto“Yourself”ifthetaxpayermeetstherequirementsforclaimingthemselvesasanexemption.

Online 6b,checktheboxnextto“Spouse”ifthetaxpayermeetstherequirementsforclaimingtheirspouseasanexemption.

WhenfilingapaperreturnforataxpayerwhoisfilingasHeadofHouseholdandclaim-inganexemptionforanonresidentalienspouse,checktheboxonline 6b and enter thespouse’sfirstname,lastname,andSSNorITIN.

Tax Software Hint: Thetaxsoftwarewillauto-filltheentriesforlines6aand6baswellasfor“Numberofboxescheckedon6aand6b.”Thesoftwareautomati-callycheckstheexemptionsboxforthetaxpayer(andfortheirspouseifMarriedFilingJointlystatusisselected).ReviewtheMainInformationscreenintheVolunteerResourceGuide(Tab1).

Taxpayer Interview and Tax Law Application

RayJacksonisawidowerwhosewifediedduringthe2009taxyear.Ray’sapprovedintakeandinterviewsheetshowsthefollowingresponses.

Which personal exemptions can Ray claim?

UsetheInterviewTipsforPersonalExemptionsintheVolunteerResourceGuide (TabC)tohelpyoucompletelines6aand6bonhistaxreturn.Here’showtheconver-sationmightsound:

Direct students to the Interview Tips for Per-sonal Exemptions in the Volunteer Resource Guide (Tab C).

Direct students to Ray Jackson’s intake sheet, shown here.



Tax Software Hint: ReviewtheMainInformationscreenintheVolunteerResourceGuide(Tab1).

BecauseRaycanclaimhimselfandhislatewifeaspersonalexemptions,youwillenterboththeirnamesandSSNsintheMainInformationSheetinthetaxsoftware.Thesoft-wareautomaticallycheckstheboxesonlines6aand6bandenters“2”for“Numberofboxescheckedon6aand6b.”YouwillalsoentertheDateofDeathunderthespouseintheTaxpayerInformationareaoftheMainInformationSheetinthetaxsoftware.

Ifyouarepreparingapaperreturn,write“Deceased”alongwiththedeceasedspouse’snameandDateofDeathacrossthetopofthereturn.OnceyoucompletetheDateofDeathinthesoftware,theprogramwillautomaticallyprintthatnotation.

NEW Exemption for individual(s) displaced by a Midwestern disaster

Thetaxpayermaybeentitledtoanadditionalexemptionifhousingwasprovidedtoapersondisplacedbythestorms,tornadoes,orfloodinginaMidwesterndisasterarea.Thetaxpayercanclaimthisexemptionforuptofourdisplacedindividuals,butnotfortheirspouseordependent.Theexemptionamountis$500perpersonhoused,andthemaximumamountthatmaybeclaimedforalldisplacedindividualsis$2,000($1,000ifMarriedFilingSeparately).

Review this new topic with class.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… ray responds…

The questions I’m about to ask you will help us figure out if you can claim any personal exemptions. First of all, you’ve told me that you were married until your wife died in February. I’m sorry for your loss, sir. Did you remarry sometime during the rest of the tax year?

Are you filing a joint return with your late wife this year?

Can anyone else claim either of you as dependents?

Based on your answers, you can claim an exemption for yourself and for your late wife.

[Ontheapprovedintakeandinterviewsheet,volunteershouldcheck“No”forthequestion,“Canyourparentsorsomeoneelseclaimyouoryourspouseasadependentontheirtaxreturn?”whichRayleftblank.]

No,Ihaven’tremarried.

Yes.

Well,Idon’tthinkso.Welivedoffourownincome.


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

Instructor Notes

Lesson 6: Dependency Exemptions

Introduction

ThisisthesecondandfinallessoncoveringtheExemptionssectionofthetaxreturn.Identifyingandenteringthecorrectnumberofexemptionsisacriticalcomponentofcompletingthetaxpayer’sreturn.Ataxpayercanclaimoneexemptionforeachqualifieddependentontheirreturn,therebyreducingtheirtaxableincome.

Todeterminethedependencyexemptions,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.SeetheVolunteerResourceGuide(TabC)fortheinterviewtipsinthislesson.Theinterviewtipscanprovidehelpfulprob-ingquestions.

Whentheinterviewiscomplete,theresultsaredocumentedontheapprovedintakeandinterviewsheet.Thisinformationwillbethebasisofyourentriesinthetaxsoftware.

Who are dependents?

Dependentsareeitheraqualifyingchildoraqualifyingrelativeofthetaxpayer.AsexplainedinthePersonalExemptionslesson,thetaxpayer’sspousecannotbeclaimedasadependent,butcanbeclaimedasapersonalexemption.Someexamplesofdependentsincludeachild,stepchild,brother,sister,orparent.

Ataxpayercanclaimoneexemptionforeachqualifieddependent,therebyreducingthetaxableincome.

Objectives


• 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.

Direct students to the Volunteer Resource Guide (Tab C).

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.

Ask students to locate the interview tips in the Volunteer Resource Guide (Tab C) for determining the Depen-dency Exemption for Qualifying Child.

example

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

Ask a volunteer to read the Bob example.

Ask what if Bob’s earnings were over half of his total support.

Answer: He would fail the support test.


Residence

Step5oftheinterviewtipsexaminesresidency.Thechildmusthavethesameprincipalresidenceasthetaxpayerformorethanhalftheyear.Thechildisconsideredtohavethesameplaceofresidenceasthetaxpayerevenifthechild(ortheparent)istempo-rarilyabsentduetospecialcircumstancessuchaseducation,illness,vacation,busi-ness,ormilitaryservice.Thetaxpayers’homecanbeanylocationwheretheyregularlylive.Itdoesnotneedtobeatraditionalhome.Forexample,achildwholivedwiththetaxpayerformorethanhalftheyearinoneormorehomelesssheltersmeetstheresi-dencytest.

Special Exceptions for the Residence Test

Taxpayersmayclaimanexemptionforachildwhohasbeenkidnapped,achildwhowasbornaliveatanytimeduringtheyearandthendied,oranyotherdependentthatdiedduringtheyear,aslongasthedependentmeetsotherdependencytests.

Ataxpayermaynotclaimdependencyexemptionsforahousekeeper,otherhouseholdemployee,orforastillbornchild.

RefertothePersonalExemptionsandDependentschapterofPublication17fordetailedinformationregardingtheresidencytest.

Specialrulesthatapplytocustodialandnon-custodialparentswillbediscussedlaterinthislesson.

Additional Rules

Thefirstfivestepscoveredaboveapplyspecificallytoqualifyingchildren.Thenextfiveinterviewtipscoveradditionalrulesforconsideringaqualifyingchildasadependent.Someofthesestepswillalsoapplywhenwetalkaboutqualifyingrelatives.

Citizenship or Residency

Step6issometimesreferredtoasthecitizenorresidenttest.Donotgetitconfusedwithstep5whichreferstowhothechildislivingwith(residencytest).Topassthe citizenorresidenttest,thedependentmustbeeitheraU.S.citizen,U.S.national,orresidentoftheU.S.,CanadaorMexico.Notethat:

• Childrenareusuallycitizensorresidentsofthecountryinwhichtheirparentsarecitizens.So,ifeitherparentisaU.S.citizen,achildborninaforeigncountrycanberecognizedasaU.S.citizenfortaxpurposes.

example

Hugh’sdaughterdiedonJanuary15ofthetaxyear.Ifshemetallthedependencytestsupuntilherdeath,Hughcanclaimanexemptionforheronhisreturn.

Read the Hugh example. Answer any student questions.

Point out the special circumstances for kid-napping or birth and death of a child.

Point out the details listed here and answer any student questions.

example

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

Ask a volunteer to read the Doris example. Answer any student questions.

Ask what if her par-ents used her earnings to defray household expenses.

Answer: She might fail the support test.

Inthecaseofachildwhowasbornanddiedduringtheyear,anSSNisnotrequiredbutthereturncannotbee-filed.Thetaxreturnmustbemailedin.RefertotheFilingInformationchapterofPublication17.


• IfaU.S.taxpayerlegallyadoptsachildwhoisnotaU.S.citizenorresident,this testismetaslongasthechildliveswiththetaxpayerasamemberofthehouseholdallyear.Ifalltheotherdependencytestsaremet,thetaxpayercanclaimthechildasadependent.

• ForeignexchangestudentsgenerallyarenotU.S.residentsanddonotmeetthe citizenorresidenttest,sotheycannotbeclaimedasdependents.

Joint Return

Lookatsteps7and8intheinterviewtipsforqualifyingchildintheVolunteerResourceGuide(TabC).Topassthejointreturntest,thedependentmustnotfileajointreturnfortheyear,unless:

• Thejointreturnisfiledonlytoclaimarefundoftaxeswithheld,and

• Notaxliabilitywouldexistforeitherspouseonseparatereturns

Can the child be a qualifying child of more than one person?

Reviewstep9andtheassociatedfootnotesintheVolunteerResourceGuide.

Ifthechildmeetstheconditionstobethequalifyingchildofmorethanoneperson,onlyonepersoncanclaimthechildasaqualifyingchildforallofthefollowingtaxbenefits(unlessthespecialruleforchildrenofdivorcedorseparatedparentsapplies):

• Dependencyexemption

• Childtaxcredits

• HeadofHouseholdfilingstatus

• Creditforchildanddependentcareexpenses

• Exclusionfordependentcarebenefits

• Earnedincomecredit

example

Joan,whoisaU.S.citizen,adoptedaninfantboyfromCambodiawhohaslivedwithherfortheentiretaxyear.EventhoughJoan’schildisnotyetaU.S.citizenorresident,hemeetsthecitizenorresidenttestbecausehewasamemberofJoan’shouseholdfortheentireyear.

example

Ruthhadnoincome.ShemarriedinNovemberofthetaxyear.Ruth’shusbandhad$16,700incomeandtheyclaimedtwopersonalexemptionsontheirreturn.EventhoughRuth’sfathersupportedherandpaidforthewedding,hecannotclaimherasadependentbecausesheisfilingajointreturnwithherhusband.Whiletheyarefilingareturnjusttoclaimarefundoftaxeswithheld,Ruth’shusbandwouldhavetaxliabilityifhefiledaseparatereturn.

Ask a volunteer to read the Joan example. Answer any student questions.

Ask a volunteer to read the Ruth example.

Point out the footnotes to the interview tips.


Noothertaxpayercantakeanyofthesesixtaxbenefitsunlesstheyhaveanotherquali-fyingchild.Ifanytaxpayercanclaimthechildasaqualifyingchild,thefollowingrulesapply:

• Ifonlyoneofthetaxpayersisthechild’sparent,thechildistreatedasthequalifyingchildoftheparent.

• Iftwoofthepersonsarethechild’sparents,thechildistreatedasthequalifyingchildoftheparentwithwhomthechildlivedforthelongerperiodoftimein2009.Ifthechildlivedwitheachparentforthesameamountoftime,thechildisthequalify-ingchildoftheparentwhohadthehigheradjustedgrossincome(AGI)for2009.

• Ifnoparentcanclaimthechildasaqualifyingchild,thechildistreatedasthequali-fyingchildofthepersonwhohadthehighestAGIfor2009.

• Ifaparentcanclaimthechildasaqualifyingchildbutnoparentdoesso,thechildistreatedasthequalifyingchildofthepersonwhohadthehighestAGIfor2009,butonlyifthatperson’sAGIishigherthanthehighestAGIofeitherofthechild’sparents.

SeetheVolunteerResourceGuide(TabC)andPublication501formoreinformationandexamplesaboutaqualifyingchildofmorethanoneperson.

Ifthequalifyingchildisactuallyclaimedonmorethanonetaxreturninagivenyear,theIRSwillapplytheQualifyingChildofMoreThanOnePersonruleslistedinPublication17,PersonalExemptionsandDependents.

Dependent Taxpayer

Thefinalinterviewquestionforaqualifyingchildisstep10intheVolunteerResourceGuide(TabC).LookatthequestioninPartIonthetaxpayer’sapprovedintakeandinterviewsheetthatasks“Canyourparentsorsomeoneelseclaimyouoryourspouseontheirtaxreturn?”Toclaimadependencyexemption,ataxpayercannotbeadepen-dentonanotherperson’staxreturn.Ifataxpayercanbeclaimedasadependentbyanotherperson,thetaxpayermaynotclaimanyoneelseasadependent,evenifthetaxpayerhasaqualifyingchildorqualifyingrelative.

What are the tests for qualifying relatives?

Dependentswhodonotmeetthetestsforqualifyingchildmightmeettheslightlydiffer-entteststobeaqualifyingrelative.Thetestsare:

• Notaqualifyingchildtest

• Memberofhouseholdorrelationshiptest

• Citizenshiporresidencytest

• Grossincometest

• Supporttest(tobeaqualifyingrelative)

example

LynneandhermotherMargaretshareahomeandbothcontributetothehouse-holdexpenses.Lynne’stwelve-year-olddaughterKarenliveswiththem.AlthoughKarenmeetsalltheconditionstobeaqualifyingchildforbothLynneandhermother,LynneisthetaxpayerwhocanclaimKarenasaqualifyingchild,becausesheisKaren’sparent.

Ask a volunteer to read the Lynne and Marga-ret example. Answer any student questions.

Display or refer to step 10 of the interview tips for determining the Dependency Exemp-tion for Qualifying Child.

Display or refer to the interview tips in the Volunteer Resource Guide (Tab C) for determining the Depen-dency Exemption for Qualifying Relative.


• Jointreturntest

• Dependenttaxpayertext

TurntotheQualifyingRelativeInterviewTipsintheVolunteerResourceGuide(TabC).

Not a Qualifying Child Test

Achildisnotconsideredataxpayer’squalifyingrelativeifthechildisthetaxpayer’squalifyingchildoristhequalifyingchildofanothertaxpayer.

However,thereisanexceptiontothisstatement.Achildmayqualifyasthetaxpayer’sdependentunderthetestsforqualifyingrelative,evenifthatchildisthequalifyingchildofanothertaxpayer.Thisisallowedonlywhentheothertaxpayerisnotrequiredtofileanincometaxreturnand:

• Doesnotfileanincometaxreturn,or

• Onlyfilesareturntogetarefundofincometaxwithheld

Specialrulesthatapplytocustodialandnoncustodialparentsarecoveredlaterinthislesson.

example

Toddhaslivedwithhisgirlfriend,Eva,andhertwochildrenallyearinhishome.Evaisnotrequiredtofilea2009taxreturn,anddoesnotfilea2009taxreturn.Toddhasprovidedmorethanhalfoftheirsupportfortheentireyear.EvaandhertwochildrenareTodd’squalifyingrelativesbecausetheymeetthememberofhouseholdorrelationshiptest,grossincometest,andsupporttest.(EvaandTodd’srelationshipdoesnotviolatelocallaws.)

Ask volunteers to read the following examples.

example

Allthefactsarethesameasinthepreviousexample,exceptthatEvaisrequiredtofileataxreturn.ShestillmeetsalltheteststobeTodd’squalifyingrelativedependent.SinceEvahasafilingrequirementandherchildrenmeettheteststobeEva’squalifyingchilddependents,Toddcannolongerclaimthechildrenasqualifyingrelativedependents.HecanstillclaimEvaasadependent,andEvamaynotclaimherselforanydependentsonherown.

example

Sincelatein2008,Sallyhasbeensupportingherfriend,Ann,andAnn’syoungson,Bobby.AnnandBobbylivedwithSallyallof2009andmeetalltheteststobeSally’squalifyingrelativedependents.Annworkedpart-timeandmade$3,100inwagesduring2009.Annfilesareturnonlytohaveherwithholdingrefunded.Shedoesnotclaimherownexemption.SallycanclaimAnnandBobbyasdependents.

example

Allthefactsarethesameasinthepreviousexample,except,whenAnnfileshertaxreturn,shealsoclaimstheearnedincomecredit.BecauseAnndidnotfileherreturnonlytogetarefundofherwithholding,BobbymustbeconsideredAnn’squalifyingchild.Therefore,SallycannotclaimBobbyasadependent.AnncannotclaimBobbyasadependenteither,sinceAnnisadependentherself.Anncan use Bobbyasaqualifyingchildfortheearnedincomecredit(coveredintheEarnedIncomeCreditlesson).


Member of Household or Relationship Test

Tomeetthistest,thepersonhastohaveaclosefamilialrelationshipwiththetaxpayerorhavelivedwiththetaxpayerfortheentireyear.Itisimportanttonotethatacloserelativeofthetaxpayerdoesnothavetoliveinthesamehouseholdtomeetthistest.

Anunrelatedpersonwholivedwiththetaxpayerfortheentireyearcanalsomeetthememberofhouseholdorrelationshiptest.Step3probestodetermineifthepersonisanindividual(otherthanaspouse)whohadthesameprincipalplaceofabodeasthetaxpayerandwasamemberofthetaxpayer’shouseholdfortheentireyear,regardlessofrelationship.Iftherelationshipviolateslocallaws,thistestisnotmet.Forexample,ifthetaxpayer’sstateprohibitscohabitation,thenthatpersoncannotbeclaimed,evenifallothercriteriaaremet.

Notethat:

• Temporaryabsencesduetoillness,education,business,vacation,militaryservice,andplacementinanursinghomeareacceptable.

• Arelationshipestablishedbymarriage,suchasmother-in-laworsister-in-law,doesnotendwithdivorceordeathofaspouse;theyarequalifyingrelativeseveniftheydonotlivewiththetaxpayer.

• Cousinscanmeettherelationshiptestforqualifyingrelativeonly if theylivewiththetaxpayerfortheentireyear.

• Qualifyingrelativescanbeunrelated,aslongastheylivedwiththetaxpayerallyear.

TheDependencyExemptionInterviewTips,steps2and3,canhelpyoudetermineifapersonpassesthequalifyingrelative,memberofhousehold,orrelationshiptest.

Citizenship or Residency Test

Step4willguideyoutodeterminecitizenshiporresidency.AlsolookatPartII,FamilyandDependentInformationofthetaxpayers’approvedintakeandinterviewsheet,whichasksthetaxpayeraboutcitizenshiporresidency.AdependentmustbeaU.S.citizen,U.S.national,U.S.residentalien,oraresidentofCanadaorMexico.

Thisisageneralrulefordependents.Itappliestobothqualifyingchildandqualifyingrelative.

Gross Income Test

Step5oftheinterviewtipsaddressesthegrossincometest.Thedependent’sgrossincomeforthetaxyearmustbelessthanthepersonalexemptionamount($3,650for2009).Thereisanexceptionifthepersonisdisabledandhasincomefromashel-teredworkshop.GrossincomeisdefinedinPublication17,PersonalExemptionsandDependents.Rememberthistestdoesnotapplytoqualifyingchildren,onlyqualifyingrelatives.

example

SusanandTedaremarriedandfileajointreturn.TheyhavesupportedTed’sparentsforthemajorityofthetaxyear.EventhoughTed’sparentsdonotlivewithTedandSusan,Ted’sparentsmeetthememberofhouseholdorrelationshiptest.

Ask a volunteer to read the Susan and Ted example. Answer any student questions.

Point out the details listed here and answer any student questions.


Support

Step6oftheinterviewtipsasksaboutsupport.Thetaxpayermusthaveprovidedmorethan50%ofthedependent’stotalsupportforthetaxyear.Notethatthissupporttestisdifferentthantheoneforaqualifyingchild.

Whencalculatingtheamountoftotalsupport,taxpayersshouldcomparetheircontribu-tionswiththeentireamountofsupporttheirdependentreceivedfromallsources(suchastaxableincome,tax-exemptincome,andloans).ReviewthelistofvalidsupportexpensesandtheworksheetinthePersonalExemptionsandDependentschapter,Publication17.

SocialSecuritybenefitsreceivedbyachildandusedtowardssupportareconsideredtohavebeenprovidedbythechild.

Ifthetaxpayerprovidesoverhalftheperson’stotalsupport,youcanskipsteps7through10andgodirectlytostep11.Ifthetaxpayerhasnotprovidedoverhalftheperson’ssupport,gotostep7toseeifsome-oneelseisprovidingoverhalfthesupport.

Multiple Support Agreements (Form 2120)

Ifonepersonhasnotprovidedoverhalfthesupport,gotostep8todetermineifmultiplesupportexists.Multiplesupportmeansthattwoormorepeopletogether,whocouldclaimthepersonasadependentexceptforthesupporttest,providemorethanhalfthedependent’ssupport.However,only one taxpayercanclaimtheexemptionforadependentwithmultiplesupport.Inthissituation,theindividualswhoprovidemorethan10%oftheperson’stotalsupport(step9),andwhomeettheothertestsforaqualifyingrelative,canagreethatoneofthemwilltaketheperson’sexemption.

example

Sherrie’sfatherreceived$2,700fromsocialsecurityandinvestments,butheput$300ofitinasavingsaccountandspentonly$2,400forhisownsupport.Sherriespent$2,600ofherincomeforhissupport,soshehasprovidedoverhalfofhissupport.

Publication17containsaworksheetfordeterminingsupport.

example

Steveprovided$4,000towardhismother’ssupportduringtheyear.Hismotherhadearnedincomeof$600,nontaxablesocialsecuritybenefitpaymentsof$4,800,andtax-exemptinterestof$200.Sheusedalloftheseforhersupport.Stevecannotclaimadependencyexemptionforhismotherbecausethe$4,000heprovidedwasnotmorethanhalfofhertotalsupportof$9,600.

Ask a volunteer to read the Steve example. Answer any student questions.

Ask a volunteer to read the Sherrie example.

Ask what if Sherrie’s father had spent all his income on himself?

Answer: He would not pass the support test.

Statebenefitpaymentslikewelfare,TemporaryAssistanceforNeedyFamilies(TANF),foodstamps,Medicaid,orhousingassistanceareconsid-eredsupportprovidedbythestate,notbythetaxpayer.

RefertotheWorksheetforDeterminingSupportintheVolunteerResourceGuideorthePersonalExemptionsandDependentschapterofPublication17.

example

Joeis65yearsoldandliveswithhissonanddaughter-in-law.In2009,Joe’staxablepensionincomewas$4,700.Joe’ssonanddaughter-in-lawcannotclaimadependencyexemptionforJoebecauseJoe’sincomeexceedstheexemptionamountfor2009,whichis$3,650.

Ask a volunteer to read the Joe example.


Step10guidesyouinaskingifthetaxpayerhastheappropriatedocumentation.

• ThetaxpayerwhoisclaimingtheexemptionforthedependentmustattachtotheirtaxreturnForm2120,MultipleSupportDeclarationorsimilarstatement.

• Theothersupportingtaxpayersmustsignthiswrit-tenstatementagreeingnottoclaimtheexemptionforthatyear.Thepersonwhoclaimstheexemptionmustkeepthiswrittenstatementasarecord.

Joint Return

Topassthejointreturntest(steps11and12),thedependentmustnotfileajointreturnfortheyear,unless:

• Thejointreturnisfiledonlytoclaimarefund,and

• Notaxliabilitywouldexistforeitherspouseonseparatereturns

Thisisageneralrulefordependents.Itappliestobothaqualifyingchildandqualifyingrelative.

Dependent Taxpayer

Thefinalinterviewquestionforaqualifyingrelativeisstep13.Lookatthequestiononthetaxpayer’sapprovedintakeandinterviewsheetthatasks“Canyourparentsorsomeoneelseclaimyouoryourspouseontheirtaxreturn?”Toclaimadependencyexemption,ataxpayercannotbeadependentonanotherperson’staxreturn.Ifataxpayercanbeclaimedasadependentbyanotherperson,thetaxpayermaynotclaimanyoneelseasadependent,evenifthetaxpayerhasaqualifyingchildorqualify-ingrelative.

example

Fred’sfather,Charlie,liveswithhimandreceives27%ofhissupportfromsocialsecurity,40%fromFred,24%fromCharlie’sbrother,and9%fromCharlie’sfriend.EitherFredorCharlie’sbrothercantaketheexemptionforCharliebecausetheyeachprovidedmorethan10%ofCharlie’ssupport,andtogethercontributedmorethan50%towardshissupport.Whoeverisnotgoingtotaketheexemptionmustsignastatementagreeingnottotaketheexemption.

example

Dianeandherbrothereachprovided20%oftheirgrandmother’ssupportfortheyear.TwopersonswhoarenotrelatedtoDiane’sgrandmother,andwhodonotlivewithher,providedtheremaining60%ofhersupportequally.Nooneisentitledtothedependencyexemption,sincemorethanhalfofthegrandmother’ssupportisprovidedbypeoplewhocan’tclaimherexemption.

MultipleSupportAgreementsapplyonlytoaqualifyingrela-tive,nottoaqualifyingchild.

Read the Fred and Charlie example. Answer any student questions.

Ask a volunteer to read the Diane example.

Ask what if Diane and her brother each provided half of the support and the two unrelated persons con-tributed nothing.

Answer: Either Diane or her brother could claim the exemption because together they provided 100% of their grandmother’s support. ThetaxpayerswhoprovideMultipleSupportforadependentdecideamongthemselveswho

willtaketheexemptionfortheyear.Volunteertaxpreparersdonotdecide.

Display or refer to the approved intake and interview sheet ques-tion mentioned here.


Special Rule for Children of Divorced, Separated, or Never Married Parents

Specialrulesapplyifthedependentissupportedbyparentswhoaredivorcedor separated;theserulesalsoapplytoparentswhowerenevermarried.Afterfirststart-ingwithTable1,useTable3:ChildrenofDivorcedorSeparatedParentswithintheVolunteerResourceGuide(TabC)todeterminewhichparentisentitledtoclaimthechildasadependent.

Ingeneral,thechildwillbeconsideredadependentofthecustodialparent,assum-ingthechildmeetsalltherulesforaqualifyingchildorqualifyingrelative.However,thecustodialparentcanagreetoallowthenoncustodialparenttotreatthechildasaqualifyingchildorqualifyingrelativeifcertainconditionsaremet.AsignedForm8332orequivalentisrequiredandmustbeattachedtothenoncustodialparent’sreturn,orattachedtoForm8453iffilingelectronically.

What are the new rules for children of divorced or never married parents?

NEW Revocation of Release of Claim to an Exemption

FortaxyearsafterJuly2,2008(the2009calendaryearformosttaxpayers),newrulesallowthecustodialparenttorevokereleaseofclaimtoexemptionpreviouslyfiledonForm8332,Release/RevocationofReleaseofClaimtoExemptionforChildbyCustodialParent,orsimilarform.Thecustodialparentmustprovide,ormakeareason-ableefforttoprovide,thenoncustodialparentwithwrittennoticeoftherevocationinthecalendaryearpriortothetaxyearinwhichtherevocationistotakeeffect.Therefore,ifthecustodialparentprovidesnoticeofrevocationtothenoncustodialparentin2009,theearliesttherevocationcantakeeffectisthe2010taxyear.PartIIIofForm8332canbeusedforthispurpose.Attachacopyoftherevocationtothereturnforeachtaxyearthechildisclaimedasadependentasaresultoftherevocation.

NEW Use of Divorce Decree or Separation Agreement Instead of Form 8332

Ifthedivorcedecreeorseparationagreementwentintoeffectafter1984andbefore2009,thenoncustodialparentcanstillattachcertainpagesfromthedecreeoragree-mentinsteadofForm8332orsimilarform.

Beginningwithdivorcedecreesgrantedin2009,thenoncustodialparentwillnolongerbeabletoattachpagesfromthedecreeoragreement.Form8332mustbefiledifthedecreeoragreementwasmadeafter2008.

Pre-1985decreeofdivorceorseparatemaintenanceorwrittenseparationagreementisstillapplicablefor2009whenthedecreegivestheexemptiontothenoncustodialparentandtheparentpaysatleast$600inchildsupportonly if the child is permanently and totally disabled.

TheSpecialRuleforChildrenofDivorcedorSeparatedParentsisdescribedindetailinthePersonalExemptionsandDependentschapterofPublication17.

ThisruledoesnotapplyforHeadofHouseholdfilingstatus,thecreditforchildanddependentcareexpenses,ortheearnedincomecredit.Forthesebenefits,thechildmustmeettheresidencytest.Thecustodialparentmaystillqualifyforthoseprovisionseventhoughthenoncustodialparentcanclaimthedepen-dencyexemption.

Display or refer to the Children of Divorced, Separated, or Never Married Parents Inter-view Tips in the Vol-unteer Resource Guide (Tab C).


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:

Display or refer to the Dependents/Nonde-pendents section of the tax software Main Information Sheet in the Volunteer Resource Guide (Tab 1).

example

Thetaxpayerhasa1999divorcedecreethatstatestheycanclaimtheirchildasadependent.Sincethedivorcedecreewascreatedpriorto2009,thedivorcedecreecanbeattachedtothetaxreturnandthetaxpayercanclaimthedependent.

example

Thetaxpayerhasa2009divorcedecreethatstatestheycanclaimtheirchildasadependent.Thetaxpayercannotattachacopyofthedivorcedecreetothetaxreturnevenifitstatesthetaxpayercanclaimthechildasadependent.ThetaxpayermustattachasignedForm8832tothetaxreturninordertoclaimthechildasadependent.

Read the examples. Answer any student questions.


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.

Walk through the sequence of steps in the interview tips, if time permits.




Notes

7-1

Instructor Notes

Lesson 7: Military – Unique Filing Status and Exemption Situations

Introduction

Thislessonwillassistyouinaddressingsomefilingstatusissuesyoumayencounterwhenhelpingservicemembersorotherswhosespousesarenonresidentaliens(notU.S.citizensorpermanentresidentaliens).

Thislessonalsocoversexemptionissuesrelatedtotaxpayerswhowanttoclaimanexemptionfor:

• Anonresidentalienspousewhodoesnotqualifytobearesidentalienfortaxpurposes,and/or

• Nonresidentalienstepchildren

Taxsituationsinvolvingnonresidentalienscanbecomplex.IfthetaxpayerhasaJ,Q,F,orMvisa,askthesitecoordinatorifthereisavolunteerwhoistrainedandcertifiedtopreparethesetypesofreturns.

Ifthereisn’tacertifiedvolunteeratthesiteorifyouarefacedwithasituationnotcoveredinthislesson,referthetaxpayertoaprofessionaltaxpreparer.

Objectives


• 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

Review objective with the class.


Lesson 7: Unique Filing Status and Exemption Situations7-2

Keepinmindthatapersonisconsideredmarriednomatterwhereintheworldtheyweremarried.Itdoesnotmatterifonespouseislivinginanothercountry.Thepersonwhoistheresidentalien/citizenstillmustfollowtaxrulesformarriedpersons.

Filingataxreturnasaresidentaliendoesnotaffecttheperson’simmigrationstatus inanyway.

Who is a citizen, resident alien, or nonresident alien?

Let’sbeginbylookingattheapprovedintakeandinterviewsheet.Locatethepartoftheformwheretaxpayersand/ortheirspousesindicatewhetherornottheyareU.S.citizensorresidentaliens.Inanotherpartoftheform,taxpayersindicatecitizenshiporresidencyoffamilymembersanddependents.

Ifthetaxpayerhaschecked“no”forU.S.citizenorresidentalienontheapprovedintakeandinterviewsheet,youmustdetermineifthepersoncanbetreatedasaresidentalienfortaxpurposesbeforecontinuing.Anindividualmustmeetoneofthefollowingteststobeconsideredaresident alien for tax purposes:

• GreenCardtest

• SubstantialPresencetest

What is the Green Card test?

IndividualswhowerelawfulpermanentresidentsoftheU.S.atanytimeduringthetaxyearareresidentaliens.Thesepeopleweregiventheprivilege,accordingtoimmigra-tionlaws,ofresidingpermanentlyintheU.S.Theyreceivealienregistrationcards,commonlyknownasa“greencards,”attestingtothisstatus.Greencardsareapproxi-matelythesizeofdriverlicenses.Theyarenolongergreenincolor,butstillholdthename.MostgreencardholdershavevalidsocialsecuritynumbersandmustfollowthesametaxlawsasU.S.citizens,includingtherequirementtoreportworldwideincomeontheirtaxreturns.

MoreinformationaboutgreencardholdersisavailableinPublication4588,BasicTaxGuideforGreenCardHolders,foundatwww.irs.gov.

What is the Substantial Presence test?

ThistestisbasedonaformulaofdaysandyearsapersonisphysicallypresentintheUnitedStates.Ifindividualsdonothavegreencards,findoutiftheymeettheSubstantialPresencetest,whichallowsthemtobetreatedasresidentaliensfor taxpurposes.

Page9oftheVolunteerResourceGuidereprintsthedecisiontree,NonresidentAlienorResidentAlien?fromPublication519,U.S.TaxGuideforAliens.Itisusedtodeter-mineifanalienisaresidentalienornonresidentalienfortaxpurposes.

UsetheResidentAlienorNonresidentAlien?decisiontreetodetermineanindividual’sresidencystatus.

Ask students to find these parts of the approved intake and interview sheet.

Ask students: When a green card has been issued, what is the resi-dency status?

Answer: Resident alien

Ask students to turn to the Resident Alien or Nonresident Alien? decision tree in the Volunteer Resource Guide, page 9.

Lesson 7: Unique Filing Status and Exemption Situations 7-3

Who is exempt from the Substantial Presence test?

PeoplewhoareintheU.S.onvalidF,J,MorQvisasareusuallyconsideredexemptfromtheSubstantialPresencetest.TaxpayersmustfollowtherulesdescribedinForms1040NRor1040NR-EZinstructions.

Forindividualswithvalidvisas,donotcountthedayspresentintheU.S.forpurposesoftheSubstantialPresencetest.Ingeneral,thesepeoplewillbe considered nonresident aliens for tax purposes.Otherexamplesofexemptindividualsinclude:

• Nonresidentalienswithmedicalconditionsthatpreventthemfromleavingthecountry,and

• CertaincommutersbetweentheU.S.,Canada andMexico

Publication519hasmoredetailedinformationonwhoisanexemptindividual.

What if a nonresident alien meets the Substantial Presence test?

NonresidentalienswhomeettheSubstantialPresencetestaretreatedasresidentaliensfortaxpurposes.

NopaperworkordocumentationisneededtoindicatethatapersonisanonresidentalienfilingasaresidentalienundertheSubstantialPresencetest.

Allpersonslistedonthereturnmusthaveeitheravalidsocialsecuritynumberoranindividualtaxidentificationnumber(ITIN).ITINsarediscussedintheFilingBasicslesson.

AtaxpayerobtainsanITINbyfillingoutFormW-7orFormW-7SP.Attachthisformtothetaxreturn.(Youmaypreparethereturnforthetaxpayer.)FollowtheinstructionsintheVolunteerResourceGuide(Tab1)forpreparingthereturnwithoutavalidSSNorITIN.AreturnwiththeFormW-7applicationcannotbee-filed;itmustbemailed.

AreturnwithanITINcanbee-filed.AreturnmissinganITINcannotbee-filed.

example

PFCGloriaBenton’shusband,Dante,hasneitheragreencardnoravisa.Dantedoesnothaveataxhomeinanothercountry.HewasphysicallypresentintheU.S.for150daysineachoftheyears2007,2008,and2009.IsDantearesidentalienundertheSubstantialPresencetestfor2009?

ThedecisiontreeindicatesthatDantedoesmeettheSubstantialPresencetestandisconsideredaresidentalienfortaxpurposes.

2009:150days2008:1/3of150=50days 2007:1/6of150days=25days

Totaldays=225days

Ifaperson’svisahasexpiredorthepersonisnotcomplyingwiththerequirementsofthevisa,thenthatpersonisnotanexemptindividualandcannotexcludethosedaystheyarephysi-callypresentintheU.S.

AnindividualwithanITINisnotentitledtotheEarnedIncomeCredit.ThiswillbecoveredintheEarnedIncomeCreditlesson.

MostVITAsitesdonotpreparereturnsforindividualswithF,J,M,orQvalidvisas.Askthesitecoordinatorifthereisavolunteerwhoiscertifiedtopreparethesetypesofreturns.Ifnot,referthetaxpayertoaprofessionaltaxpreparer.

Ask a volunteer to read the example about PFC Benton’s husband. Answer any student questions.

Point out the caution.


IRSTaxpayerAssistanceCentersoracceptanceagentscanhelpthetaxpayercompleteFormW-7orFormW-7SP.Mostacceptanceagents,otherthantheIRS,chargeafeeforthisservice.

Formoreinformationaboutacceptanceagents,seePublication4393,WhatisanIRSITINAcceptanceAgent.Youcanfindthispublicationandmoreinformationaboutacceptanceagentsonwww.irs.gov,keyword“acceptanceagent.”

UsetheResidentAlienorNonresidentAlien?decisiontreeintheVolunteerResourceGuide(page9)todetermineifapersonmeetstheSubstantialPresencetest.

What if a nonresident alien does not meet the Green Card or Substantial Presence test?

IfanunmarriednonresidentaliendoesnotmeettheGreenCardorSubstantialPresencetest,referthetaxpayertoavolunteerwhohasbeentrainedandcertifiedtopreparereturnsfornonresidentaliensoraprofessionaltaxpreparertofileForm1040NRorForm1040NR-EZ.

IfthenonresidentalienismarriedandthespousedoesnotqualifytobetreatedasaresidentalienusingtheGreenCardorSubstantialPresencetest,youcanprovideassistance.

Marriedcouplesinthissituationhaveafewoptionswhenitcomestofillingataxreturn.Intheexample,Gabriella(wifeofSgt.PaulKingman)doesnotmeettheGreenCardnorSubstantialPresencetest.Thus,sheisconsideredanonresidentalien.

AsacitizenmarriedtoanonresidentalienspousewhodoesnotmeeteithertheGreenCardorSubstantialPresencetest,Sgt.Kingmanhasfourfilingstatusoptions:

1. HemaychoosetofileasMarriedFilingSeparately

2. ThecouplemaychosetofileasMarriedFilingJointly

3. HemayqualifyforHeadofHouseholdundertheregularrulesforamarriedpersonwhoisconsidered unmarriedforHeadofHouseholdpurposes

4. HemayqualifytofileasHeadofHousehold,evenwhile living with the nonresident alien spouse

example

Sgt.PaulKingmanandhiswife,Gabriella,weremarriedattheendof2009.Gabrielladoesnothaveagreencardnoravalidvisa.Theyhavenochildrenandarenotsupportinganyoneelse.

GabrielalivedintheU.S.for120daysin2009(fromSeptembertoDecember)asanonresidentalien.ShewasalsointheU.S.for120daysineachoftheyears2007and2008.Gabrielladoesnothaveataxhomeinanothercountry.DoesGabriellameettheSubstantialPresencetest?

Followingthedecisiontree,youfindthatGabrielladoesnotmeettheSubstantialPresencetest.Fortaxpurposes,sheisconsideredanonresidentalien.

2009:120days2008:1/3of120days=40days2007:1/6of120days=20days

Totaldays=180

Ask a volunteer to read the example about Sgt. Paul Kingman and his wife. Answer any stu-dent questions.

Refer students back to the Resident Alien or Nonresident Alien? decision tree in the Volunteer Resource Guide.

Ask students to turn to the Filing Status Inter-view Tips in the Vol-unteer Resource Guide (Tab B).


Who can file a joint return?

EventhoughGabrielladoesnotpasstheGreenCardtestortheSubstantialPresencetest,itispossibleforthismarriedcoupletofileajointreturn.Thecouplemayelecttotreatthenonresidentalienspouseasaresidentalienfortaxpurposes.ThisinformationcanbefoundinPublication519,U.S.TaxGuideforAliens.

How does a couple elect to treat the nonresident alien spouse as a U.S. resident for tax purposes?

Ifthenonresidentalienspouseagreestofileajointreturn,worldwideincomemustbereported,andasigneddeclarationisattachedtothejointreturnstating:

• OnespousewasanonresidentalienandtheotherspouseaU.S.citizenorresidentalienonthelastdayofthetaxyear,andbothchoosetobetreatedasU.S.residentsfortheentireyear

• Thename,address,andSSNorITINofeachspouse

How does this election affect filing status in future years?

Theelectioncontinuesinfutureyearsbutthespousescanfileseparatelyafterthefirstyear,iftheychoose.Theelectiontotreatthespouseasaresidentistermi-natedbyrevocation,thedeathofeitherspouse,theirlegalseparation,ortheIRSmayterminateitforfailuretokeepadequaterecords.

Asyoulearnedinapreviouslesson,marriedtaxpayerscanbeconsidered unmarried andclaimHeadofHouseholdstatusiftheyhavenotlivedwiththeirspouseforthelastsixmonthsoftheyear,andiftheymeetafewotherrequirements.

Tax Software Hint:FollowthefilingstatusinterviewtipsintheVolunteerResourceGuide(TabB)toseeifthecitizenspousequalifiestofileasHeadofHousehold.

example

EventhoughGabriella,Sgt.PaulKingman’snonresidentalienwife,doesnotpasstheGreenCardorSubstantialPresencetest,theybothagreetochoosetotreatGabriellaasaresidentalienbyattachingasignedstatementtotheirjointreturn.PaulandGabriellamustreporttheirworldwideincomefortheyearandforalllateryearsunlessthechoiceisendedorsuspended.AlthoughPaulandGabriellamustfileajointreturnfortheyeartheymakethechoice,theymayfileeitherjointorseparatereturnsforlateryears.

Makeanotebystep2ofthePersonalExemptionschartintheVolunteerResourceGuidethat,ifaspouseisanonresi-dentalien,thetaxpayercanstillmakethechoicedeclara-tion.

Display or refer stu-dents to Table 1-1, Ending the Choice, in Publication 54.

Ask a volunteer to read the example about Gabriella.


ExErcisEs

Can citizens or resident aliens who live with their nonresident alien spouse ever file as Head of Household?

ThereisanexceptionthatallowsU.S.citizensandresidentalienspouseswholivewithnonresidentalienstofileasHeadofHousehold.Allofthefollowingrequirementsmustbemet:

• ThetaxpayerisaU.S.citizenorresidentalienfortheentireyearandmeetsallthe“consideredunmarried”rulesforHeadofHouseholdexceptforlivingwiththenonresidentalienspouse

• ThenonresidentalienspousedoesnotmeettheSubstantialPresencetest

• Thenonresidentalienspousedoesnotchoosetofileajointreturn

Question 1: Gloria’shusband,Dante,meetstheSubstantialPresencetest.GloriaisaU.S.citizen.Theydonothaveanychildrenanddonotsupportanyoneelse.DanteisapplyingforanITIN.GloriahasanSSN.Theylivetogether.

WhatfilingstatusoptionsdoesGloriahavefor2009?

Question 2:Sgt.RaulThomasisaU.S.citizenandservingintheU.S.ArmyinJapan.Hiswifeandhischildrenlivewithhimandheisabletoclaimthechildrenasdependents.Raul’swife,acitizenofJapan,choosesnottobetreatedasaresidentalienfortaxpurposes. Shedoesnotwanttofileajointreturnwithhim.

RaulmeetsalloftheotherqualificationsforHeadofHousehold.Eventhoughheismarriedandlivingwith hisspouse,canheclaimHeadofHouseholdstatus? þ Yes ¨ No

Can a taxpayer filing Head of Household who is married to and living with a nonresident alien spouse claim the Earned Income Tax Credit, if they are otherwise eligible?

No.TaxpayerswhoareconsideredunmarriedforHeadofHouseholdpurposes(becausetheyaremarriedtoanonresidentalien)arestillconsideredmarriedforpurposesoftheEarnedIncomeCredit.TaxpayersareonlyentitledtothecreditiftheyfileajointreturnandmeettheEICqualifications.

IntheVolunteerResourceGuide,turntoTabB,FilingStatus.Notatethefactthat,ifaspouseisanonresidentalien,theliving apart rule doesnotapplytothecitizenspouse.YouwillalsofindthisinformationinPublication17,under Head of Household, nonresident alien.

Gloria can file as either Married Filing Jointly or Married Filing Separately.

Yes, he can claim Head of Household status since his spouse is a nonresi-dent alien who won’t file a joint return with him, and he meets the other qualifications for Head of Household.



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.

Ask a volunteer to read the example about Raul.

example

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

Ask a volunteer to read the example about Major Tom Beckley and his wife.

Direct students to the Filing Status section of the Main Information screens shown in the Volunteer Resource Guide (Tab 1).

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


IfthetaxpayerisfilingasHeadofHouseholdandclaimingthenonresidentalienspouse’spersonalexemption,gotothatlineinthefilingstatussectionoftheMainInformationSheet.ChecktheHeadofHouseholdbox.OntheMainInformationSheet,under“exemptions,”checktheboxunder6(c)thatstatesthatyouareusingfilingstatus4andclaiminganexemptionforanonresidentalienspouse.Entertheperson’snameandTINinthespaceprovided.Donotenterthepersonagaininthedependent/nonde-pendentsectionoftheMainInformationSheet.

Dependency Exemptions

Can a taxpayer claim a dependency exemption for a child born overseas, a foreign-born stepchild, and/or an adopted foreign-born child?

Child born overseas to a U.S. citizen

ChildrenbornoverseastoU.S.citizenparentsareconsideredtobeU.S.citizensfortaxpurposes.Achildcanbeclaimedasadependentaslongasalltheotherrulesfor qualifyingchildorqualifyingrelativearemet.

Thebirthofachildabroadshouldbereportedassoonaspossibleforthepurposeofestablishinganofficialrecordofthechild’sclaimtoU.S.citizenshipatbirth.FormFS-240,ConsularReportofBirth,establishesofficialevidencethatthechildisa U.S.citizen.

Can a foreign-born stepchild be claimed as a dependent?

Ifachildisanonresidentalien,beforeaddressingthedependencyexemptionquestion,itisnecessarytoconfirmthechild’sU.S.residencystatusfortaxpurposes.TurntotheResidentAlienorNonresidentAlien?interviewtipsintheVolunteerResourceGuide,(TabC).

example

Sgt.PatriciaSpencer,aU.S.citizen,ismarriedtoGilberto,anonresidentalienfromSpain.Theirdaughter,Eva,wasborninSpain,wheretheylive.

EvaisentitledtoU.S.citizenship.HermothershouldcheckwiththemilitaryofficeforinformationonreportingthebirthofthechildsoEvawillberecognizedasaU.S.citizen.Evawillneedasocialsecuritynumbertobeclaimedasadependentonhermother’staxreturn.

WhileapplyingfortheConsularReportofBirth,parentsshouldalsoapplyforasocialsecu-ritynumberandpassportfortheirchild.Withoutasocialsecuritynumber,theparentswillnotbeabletoclaimthechildasadependentnortakeadvantageofcredits,suchastheEarnedIncomeTaxCreditortheChildTaxCredit,evenifalloftheotherprerequisitesaremet.

Ask a volunteer to read the example about Sgt. Spencer and Gilberto.

example

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

Read the example about Sgt. Summers.



Followtheinterviewtips.ThechildrendonothavegreencardsandwerenotphysicallypresentintheU.S.duringthetaxyear.Theyarenonresidentaliensfortaxpurposes.

NowturntotheinterviewtipsunderDependencyExemptionforQualifyingChildintheVolunteerResourceGuide(TabC).Step6asks,“IsthepersonaU.S.citizen,U.S.national,oraresidentofCanadaorMexico?”Theansweris“no.”Thechildrendonotmeetthecitizenshiptest.Sgt.Summerscannotclaimthechildrenasdependents.

What if Sgt. Summers adopted the stepchildren?

Continuingtheexampleabove,ifSgt.Summersadoptedthestepchildrenandthey lived with him all year,eventhoughtheyarestillnotcitizensoftheU.S.,Sgt.Summerscouldanswer“yes”tothecitizenshiptest.Ifalltheotherrulesweremetforaqualify-ingchildorqualifyingrelative,hecouldclaimtheadoptednonresidentalienchildrenasdependentsonhistaxreturn.Ofcourse,thechildrenwouldhavetoobtainSSNs,ITINs,orATINstobeclaimedonhistaxreturn.

AnAdoptionTaxpayerIdentificationNumber(ATIN)canbeobtainedwhenadomesticadoptionispendingandotherrulesaremet.AnATINcanbeobtainedinthecaseofaforeignadoptionwhenthechildalreadypossessesagreencardoracertificateofcitizenship(aformclaim-ingcitizenshipbecauseachildwasbornoverseastoaU.S.citizen).

SeePublication17undertheCitizenorResidenttestinChapter3formoreinformation,includingwhoisconsideredaU.S.national.

Question 3:Sgt.SummersmovedhisfamilytotheU.S.inJanuary.ThestepchildrenarestillnotU.S.citizensandtheydonothavegreencards.Theymettheotherdepen-dencytests.Ifhecanclaimthem,hewillapplyforITINsforthem.Canheclaimthestepchildrenasdependentsonhistaxreturn?þ Yes ¨ NoQuestion 4: Sgt.JohnRamsey,aU.S.citizenwhohasbeenintheU.S.Armyfor13years,isstationedinGermany.HiswifeisaGermancitizenwhohasneverlivedintheU.S.Theirtwo-year-oldsonwasborninGermany.Sgt.Ramsey’s12-year-oldstepdaughter,aGermancitizenwhomSgt.Ramseyhasnotadopted,alsoliveswiththem.TheRamseysprovidetotalsupportforthetwochildren.HowmanydependencyexemptionscanSgt.Ramseyclaimonajointreturn?

A. One

B.Two

C.Three

D.Zero

Anadoptednonresidentalienchildmustlivewiththetaxpayerallyeartopassthecitizenorresidentalientest.

Yes, the children meet the Substantial Presence test because they were in the United States more than 183 days.

He would answer “yes” to step 6, the citizen/resident test; they must also meet the requirements for quali-fying child/relative and obtain SSNs or ITINs.

He can claim one depen-dency exemption (his son, a U.S. citizen); the step-daughter does not meet the test, and a spouse is never a dependent.




Summary

Beforefilingataxreturn,U.S.citizensmarriedtoaspousewhoisnotaU.S.citizen,national,orresidentalienmustdeterminewhatfilingstatusoptionsareavailableandwhetherthenoncitizenspousewillbetreatedasaresidentalienfortaxpurposesorasanonresidentalien.

ResidentaliensfollowthesametaxlawsasU.S.citizens.Nonresidentaliensfollowanothersetoftaxlaws,mostofwhichareoutsidethescopeoftheVITAprogram.

Todeterminetheresidencystatusofanoncitizen,usetheResidentAlienorNonresidentAlien?decisiontreeintheVolunteerResourceGuide(TabC).

Amarriedcouple,whereacitizenorresidentalienismarriedtoapersonwhodoes notmeettheGreenCardorSubstantialPresencetest,stillhastheoptionofelectingtotreatthenonresidentspouseasaresidentalienandfileasMarriedFilingJointly.

IfthenonresidentalienspousedoesnotmeettheGreenCardorSubstantialPresencetestsanddoesnotchoosetofileajointreturn,undercertaincircumstances,theU.S.citizenorresidentaliencanfileasHeadofHouseholdeventhoughthecouplelivestogether.

AU.S.citizenorresidentalienmayclaimthenonresidentalienspouse’spersonalexemptionaslongasthespouse:

• HadnoU.S.-sourcedincome

• Cannotbeclaimedasadependentonsomeoneelse’sU.S.taxreturn,and

• HasaTIN

AU.S.citizen’schildisusuallyaU.S.citizenbybirth,evenifthechildisbornin anothercountry.

AnonresidentalienstepchildwhodoesnotmeettheGreenCardorSubstantialPresencetestscannotbeclaimedasadependentoftheU.S.citizenorresidentalienbecausethechilddoesnotpassthecitizenshiptest.

AnadoptednonresidentalienchildcanusuallybeclaimedasadependentofaU.S.citizenorresidentalienifthechildliveswiththeU.S.citizentheentireyear.

Review lesson sum-mary with the class.


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

Instructor Notes

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.

Walk through the chart to help students interpret and apply it to their certification needs.


What are types of nontaxable or exempt income?NEW Beginningin2009,eachrecipientofunemploymentcompensationcanexcludefromgrossincomeupto$2,400oftheamountreceivedduringtheyear.

• Nontaxableincome–includessuchthingsasgiftsandinheritances.Excludibleincomeisnotshownonthereturn.

• Exemptincome–includessuchthingsasinterestincomeproducedfromcertaintypesofinvestments.Therearesomeinstanceswhenexemptincomeisshownonthereturn,butnotincludedintheincometaxcomputation,e.g.tax-exemptinterestincome.

What are types of taxable income?

TheIncomesectionofForm1040isusedtoreportearnedandunearnedtaxableincome.ThesumofallearnedandunearnedincomeisreportedonForm1040,line22astotalincome.

• Earnedincome–anyincomereceivedforwork,suchaswages;businessincomereportedonForm1040,ScheduleC,ProfitorLossFromBusiness;Form1040,ScheduleC-EZ,orNetProfitFromBusiness

• Unearnedincome–anyincomeproducedbyinvestments,suchasinterestonsavings,dividendsonstocks,orrentalincome

How do I get started?

Todetermineataxpayer’sincome,discussandreviewtheIncomesectionoftheapprovedintakeandinterviewsheetwiththetaxpayer.UsetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewlessontoprobeforthisinformation.

Incomeisreportedonavarietyofformsdependingonitssource.AskthetaxpayertoshowyouallFormsW-2,Forms1099,andotherstatementsreportingincome.(Note:DonotconfuseForm1099withForm1098.Generally,Form1098reportsexpensesthetaxpayerhaspaid,notincometheyhavereceived.)Youmayalsofinditusefultousepage1ofForm1040asaguidetoaddressincomeitems.

Tax Software Hint:Afteryouhavecollectedalltheincomestatements,reviewIncomeandHow/WheretoEnterIncomeintheVolunteerResourceGuide(Tab2).Thesepageswillshowyouwheretocorrectlyreportincomeitems.

Direct students to the Income section of the Volunteer Resource Guide (Tab D).

Point out that the earned/unearned income concept will be important later in the training, especially when learning about the earned income credit.

Ask students to explain the difference between taxable and nontaxable income. Correct any misunderstanding.


How do I report wages, salaries, tips, etc.?

What is Form W-2?

MostemployersissueastandardizedversionofFormW-2.ReviewFormW-2intheVolunteerResourceGuide(Tab2).

EmployersmustreportwagesandotheremployeecompensationonFormW-2andhaveitavailabletotheemployeebyJanuary31.TheemployerisnotrequiredtomailoutFormsW-2,buttheymustmakethemavail-abletotheemployees.TheemployeemayneedtopickupFormW-2fromtheiremployer.

What if the taxpayer does not receive Form W-2 by January 31?

IfthetaxpayerdoesnotreceiveFormW-2byJanuary31,theyshouldfirstcontacttheemployerandfindoutif,orwhen,FormW-2wasmailedorifthetaxpayercanpickupFormW-2inperson.SomeemployersmakeFormW-2availableonlinetotheiremploy-eesasanoption.

IfFormW-2isstillnotreceivedafterallowingareasonableamountoftimefortheemployertoissueorreissueFormW-2,thenthetaxpayershouldcontacttheIRSforassistanceat1-800-829-1040,butnotbeforeFebruary15.

If,afterrequestingFormW-2fromtheemployer,thetaxpayerdoesnotreceiveitinsufficienttimetofilethereturn,theyshouldfilethetaxreturnwithForm4852,SubstituteforFormW-2,WageandTaxStatementorForm1099-R,DistributionsfromPensions,Annuities,RetirementorProfit-SharingPlans,IRAs,InsuranceContracts,Etc.ThetaxpayershouldkeepacopyofForm4852fortheirrecords.UsuallyForm4852canbeusedwithastatereturnaswell.

IftheearningsreportedonForm4852arenotreflectedontheyearlySocialSecurityStatement,thetaxpayershouldcontacttheSocialSecurityAdministrationatthenumbershownonthestatement.

Tax Software Hint:RefertotheVolunteerResourceGuide(Tab2)forinstruc-tionsonenteringincomeintothesoftware.ItisimportanttoentertheinformationfromFormW-2exactlyasitappears.OnceyouenterallForm(s)W-2intothesoftware,itautomaticallyreportsthetotalonline7ofForm1040.Thetaxsoftwareautomatically

Youalwayswanttostresstothetaxpayerthat,whentheyfinallyreceivetheemployer’sFormW-2,ifthenumbersaredifferentfromthoseontheirForm4852,theyneedtoamendtheirreturnstoreportthecorrectamounts.Direct students to

How/Where to Enter Income in the Volun-teer Resource Guide (Tab 2).

example

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


Refer students to Pub-lication 4491-W for examples of Form W-2. Ifthereisamismatchofthe

ITINontheForm1040andtheSSNonFormW-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.

Direct students to the Volunteer Resource Guide, (Tab 2), How to Enter Unreported Tips.


Allocated Tips

Forsomebusinesses,givingemployeestipsiscustomary.Thesebusinessesincluderestaurants,bars,andsimilarbusinesses.Toensurethateveryonereportstheirfairshareofincomefromtips,someemployershavetipallocationprograms.TheseprogramsareapprovedbytheIRS.Ifanemployeereportstipstotheemployerthatwerelessthanthedesignatedsharebasedontheemployer’sformula,theemployerreportsthedifferenceas“allocatedtips”andincludesitontheemployee’sFormW-2.

Allocatedtipsareshownseparatelyinbox8ofFormW-2.SocialsecurityandMedicaretaxesarenotwithheldonallocatedtips.Allocatedtipsarenotincludedintheamountinbox1ofFormW-2.Explaintothetaxpayerthatunlessthetaxpayerkeptawrittenandreliablerecordoftipsactuallyreceivedatthatjobandcanprovetheallocatedamountisinaccurate,theallocatedtipsmustbeincludedinline7ofForm1040.Ifthetaxpayerdidkeepareliablewrittenrecordoftips,thentheirfiguresareusedinplaceoftheamountinbox8whenincludingtipincomeonline7ofForm1040.

Tax Software Hint: Whenallocatedtipsarereportedinbox8ofFormW-2,thesoftwareautomaticallyaddsthemtoline7ofForm1040andalsocompletesForm4137.Ifthisamountisnotcorrect,basedonthetaxpayer’srecords,anadjustmentwillneedtobemadeonForm4137.

AllocatedtipsarealsosubjecttosocialsecurityandMedicaretaxes.ReporttheallocatedtipamountonForm4137,alongwithanyunreportedtipsto calculatesocialsecurityandMedicaretaxes.

Other W-2 Income

What about income received by household employees?

Theterm,“householdemployee”referstoonewhoworksinsomeone’shomeperform-inghouseholddutiessuchascaringforchildren,cleaning,orcooking.Generally,ifataxpayer,workingasahouseholdemployee,earnedlessthan$1,700ayearwhileworkingintheemployer’shome,theemployerisnotrequiredtoprovidethetaxpayerwithFormW-2andnosocialsecurityorMedicaretaxesareowed.RegardlesswhetherFormW-2isissued,theincomemustbeincludedonForm1040,line7.However,iftheemployerwithheldfederalincometaxesfromthetaxpayer’swages,theemployermustissueFormW-2.

Ifyouarepreparingapaperreturnandthetaxpayer’shouseholdemployerisnotrequiredtoissueFormW-2,enter“HSH”andtheamountonthedottedlinenexttoline7,thenincludetheamountinthetotalonline7.

Are scholarships and fellowships taxable income?

Form W-2 and Form 1098-T

Scholarshipsandfellowshipsmaybefully,partially,ornon-taxable.Taxableamountsinclude:

• Paymentforservices

• Moneyusedforpersonallivingexpenses,suchasroomandboard

Emphasize that the volunteer tax preparers will correctly deter-mine this income only by interviewing the taxpayer and noting it on the intake sheet.

Formoreinformationabouttipincome,seePublication531,ReportingTipIncome.

Forfurtherinformationandadefinitionofwhoisahouseholdemployee,seePublication926,HouseholdEmployersTaxGuide.


IfthetaxpayerreceivedFormW-2forthescholarshiporfellowship,includetheamountonForm1040justasyouwouldforanyotherFormW-2.Thisincomeisincludedinthetotalonline7ofForm1040.

Form1098-Tlistsqualifiedtuitionandrelatedexpensesbilledbytheschool.Verifythattheseamountshavebeenpaid.Italsolistsscholarshipandgrantmoneythestudentreceived.Ifscholarshipsorgrantsexceedthequalifiededucationalcosts,someofthegrantorscholarshipmoneymaybetaxable.

Todetermineifanyscholarshiporgrantreceivedistaxable,ortodetermineifthetaxpayercanclaimaneducationcredit,seePublication970,TaxBenefitsforEducation.Educationcreditswillbediscussedinalaterlesson.

Tax Software Hint: Afteraskingquestionsaboutthescholarship/fellowship

money,recordthetaxableportioninthesoftware.SeetheVolunteerResourceGuide(Tab2)forguidanceonwheretoentertheincome.

Whenpreparingapaperreturn,ifthetaxpayerdidnotreceiveFormW-2fortheschol-arshiporfellowship,reportthetaxableportionofthescholarshiporfellowshiponline7ofForm1040.Write“SCH”andtheamountonthedottedlinenexttoline7ofForm1040andincludetheamountinthetotalforline7.

Are distributions from Educational Savings Accounts, such as a Coverdell ESA and a 529 plan, taxable?

CoverdellESA(section530plan)andQualifiedTuitionProgram(section529plan)areeducationalsavingsaccountsthatincludethefollowingprovisions:

• Moneyiscontributedtoaspecialaccount.

• Thecontributionisneverdeductible.

• Earningsontheafter-taxcontributionsbecometax-deferred.

Whenadistributionismade,noneofthemoneywillbetaxableaslongasitisaqualifieddistribution.Ifitisnotusedforqualifiededucationexpenses,someofthemoneythatwasnevertaxed(theearnings)becomestaxableincomeandmaybesubjecttoanextrapenaltytax.

NEW Effectivefor2009,qualifiededucationexpensesincludebooks,supplies,andequipmentneededforacourseofstudy,whetherornotthematerialsarepurchasedfromtheeducationalinstitutionasaconditionofenrollmentorattendance.

DistributionsfromEducationalSavingsAccountsandQualifiedTuitionPrograms(underSections529and530)arereportedonForm1099-Q.CoverdellESAdistributionscanbeusedtopayforqualifiedelementary,secondary,andpostsecondaryexpenses.QualifiedTuitionProgram(QTP)plandistributionscanonlybeusedtopayqualifiedpostsecondaryexpenses.

Additionalinformationabouteducationalsavingsaccounts,distributions,andqualifiededucationexpensescanbefoundinPublication970,TaxBenefitsforEducation.

Tax Software Hint: Form1099-Qisnotavailableinthesoftwarebecausetheformdoesnotcontainenoughinformationtodeterminehowmuch,ifany,ofthedistri-butionistaxable.

Review these points to check student under-standing.


Askthetaxpayerifallthefundswereusedforqualifiededucationalexpenses.(Qualifiededucationalexpenseshavedifferentrequirementsforeachplan.)Ifyes,noneofthedistributionistaxable.Youdonotreportanythingonthereturn.

Referthetaxpayer/beneficiarytoaprofessionaltaxpreparerif:

• Thefundswerenotusedforqualifiededucationexpensesor

• Thedistributionwasmorethantheamountofthequalifiedexpenses

What interest is taxable?

Commonsourcesoftaxableinterestincomearecheckingandsavingsaccounts,certificatesofdeposit(CDs),savingscertificates,U.S.governmentbonds,interestoninsuranceproceeds,andloansthatthetaxpayermakestoothers.

Where do I get interest income information?

Therearemanysourcesofinformationaboutinterestincome.AskthetaxpayertosupplyallForm(s)1099-INTfrominstitutionsthatpayinterest.

OriginalIssueDiscount(OID),long-termobligationsthatpaynointerestbeforematu-rity,areconsideredtobeissuedatadiscountandarefullytaxable.

IfthetaxpayercashedinSeriesEEorSeriesIbonds,theyshouldhaveaform1099-INTfromthebank.Mosttaxpayersdon’treportsavingsbondinterestasitaccrueseveryyear.Theyreportthetotalinterestwhentheycashthebonds.Ifthetaxpayersaystheyhavebeenreportingtheinterestasitaccrueseachyear,seePublication17underInterestIncomefordirectionstoreportthecurrentyearinterest.

IfaU.S.savingsbondisissuedinthenamesofco-owners,suchasthetaxpayerandchild,orthetaxpayerandspouse,interestonthebondisgenerallytaxabletotheco-ownerwhopurchasedthebond.Todeterminewhoisresponsibleforpayingthetaxontheinterestfromtheredemptionofabond,seePublication17underInterestIncome.

• IfthetaxpayerhasSeriesHHbonds,theyreceiveinteresttwiceayear.Askthetaxpayerforthebankstatementsreportingtheinterestreceived.

• Askifthetaxpayerholdsanyloansorseller-financedmortgages.

InterestonqualifiedU.S.Series EE and Series I savingsbondsthatisusedtopayforhighereducationexpensesmaybeeligibleforexclusionfromincomeusingForm8815,ExclusionofInterestFromSeriesEEandIU.S.SavingsBondsIssuedAfter1989.

Somesavingsandloans,creditunions,andbankscalltheirdistributions“dividends.”ThesedistributionsarereallyinterestandarereportedcorrectlyasinterestonForm1099-INT.

Achoicecanbemadetoreportthetaxablepartofthedistribution(ifany)andclaimtheHopeorLifetimeLearningCreditonthewholedistribu-tion.SeePublication17andPublication970,TaxBenefitsforEducation,formoredetails.

Review the circum-stances that require referring a taxpayer to a professional tax preparer.


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.


Emphasize that the gain/loss from sale of these bonds is taxable.


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.


Direct the class to lis-ten and complete Part IV of the approved intake and interview sheet.

Direct students to How/Where to Enter Income in the Volun-teer Resource Guide (Tab 2).

example

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

Ask a volunteer to read the Mike example.


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.

Ask a volunteer to read the Robert example.

example

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


Review examples of Form 1099-Div in Pub-lication 4491-W. Point out where ordinary, qualified, and capital gain distributions are found.


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.

Only volunteers certi-fying at the intermedi-ate level or above are required to cover this topic. If you are teach-ing a Basic only class, skip to page 8-15 for Vanessa Franklin Prac-tice. Upon completion, proceed to Lesson 13, Unemployment Com-pensation.

Advise the students they will learn about standard and itemized deductions later in this course. example

Bobitemizedhisdeductionsonhis2008federalreturn.Heincludedthetaxeshehadpaidtohisstateduring2008.However,hereceivedarefundin2009ontheoverpaidportionofthosetaxes.Hemustusethestatetaxrefundworksheettoseehowmuchoftherefundtoincludeinhisfederaltaxableincome.


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

Assign the workbook exercise and review as a class when done (optional).

Tax law applicaTion using ThE workbook

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

Forpracticeusingthetaxpreparationsoftware,completethescenariosusingthePracticeLabonL&LT.

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

Instructor Notes

Introduction

Thislessonwillhelpyouassisttaxpayerswhohavebusinessincome,includingself-employmentincome.BusinessincomeorlossisreportedonScheduleC-EZ,NetProfitFromBusiness,orScheduleC,ProfitorLossFromBusiness.ScheduleCisoutofscopeforvolunteerpreparers.Thelessonalsocoversthoseself-employedtaxpay-erswhopayself-employmenttaxandparticipateinthesocialsecurityandMedicareprograms.

Objectives

Attheendofthislesson,usingyourresource materials,youwillbeabletodetermine:

• Howtoreportbusinessincome

• WhocanuseScheduleC-EZ

• HowtocompleteScheduleC-EZ

Where do I get business income or loss information?

Basedonyourinterviewandthecompletionofthetaxpayer’sapprovedintakeandinterviewsheet,youmaydiscoverthatthetaxpayerorspousehadbusinessincome;thisincludesincomeasaself-employedpersonorindependentcontractor.

Eveniftaxpayerssaytheydidnothaveself-employmentincome,besuretoaskagain,rephrasingyourquestionstoprobedeeper.Manytaxpayershavejobsonthesideorhaveasmallhome-basedbusinessanddonotthinkofthemselvesas“self-employed”iftheymakemostoftheirmoneyfromW-2wages.AskforanyForm(s)1099-MISCthatdocumentthisincome.AlsoaskfordocumentationofanybusinessincomethatwasnotreportedonFormW-2orForm1099-MISC(forexample,checkstubsgeneratedbythetaxpayer’sclient).

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

What do I need?


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

Someemployersmisclas-sifyworkersasindependentcontractorsandreporttheirearningsonForm1099-MISC.TaxpayerswhobelievetheyhavebeenmisclassifiedshouldcontacttheIRSandaskforhelp.



Refer students to Publication 4491-W for examples of Form 1099-MISC.

Lesson 9: Income – Business; Form 1040, Line 129-2

How is business income reported?

Businessincomeisreportedoneither:

• ScheduleC-EZ,NetProfitFromBusiness,or

• ScheduleC,ProfitorLossFromBusiness

ThetotalprofitorlossisthentransferredtoForm 1040,line12.

Ifpreparingapaperreturn,completetheitemsonScheduleC-EZ.ThenetprofitwillbereportedonForm1040,line12.ThenetprofitwillalsoneedtobeshownonScheduleSEinordertocalculatetheself-employmenttax.ScheduleSEwillbecoveredinalaterlesson.

Who can use Schedule C-EZ?

ThereareanumberofconditionsthatthetaxpayermustmeetinordertouseScheduleC-EZ.TaxpayerscanuseScheduleC-EZonlyifthey:

• Havelessthan$5,000inbusinessexpenses

• Usethecashmethodofaccounting

• Havenoinventoryatanytimeduringtheyear

• Havepositivenetincome(donothaveanetloss)

• Operateonlyonebusinessasasoleproprietorduringthetaxyear

• Havenoemployeesduringtheyear

• Arenotrequiredtocomputedepreciation(Form4562)

• Donotdeductexpensesforbusinessuseofahome

• Donothaveprioryearunallowedpassiveactivitylossesfromthisbusiness

Inyourprobinginterview,explainthatthereareanumberofconditionsthatthetaxpayermustmeetinordertouseScheduleC-EZ,andthenwalkthrougheachoftheseconditionswiththetaxpayer.Iftaxpayersdonotmeettheseconditions,explainthatvolunteersarenottrainedtohandlethepreparationofScheduleC.Apologizeforbeingunabletocompletethereturn,andexplainthattheyshouldseekhelpfromaprofessionaltaxpreparertocompletetheirreturn.

Definition of TermsBusinessexpenses

Businessexpensesareamountsthatareordinaryandnecessarytocarryonthebusiness.

Cashmethod ofaccounting

Thecashmethodofaccountingreportsallincomewhenreceivedanddeductsallexpenseswhenpaid.

Inventory Inventoryistheitemsthetaxpayerbuysormakesforresale toothers.

Depreciation Thecostofitemsthatareexpectedtolastmorethanayearshouldbespreadoveraperiodofyearsratherthandeductedintheyearofpurchase.Ifthetaxpayerhassuchacost,theyshouldbereferredtoaprofessionaltaxpreparer.

Volunteertaxpreparerswhocompletethislessonmay,atthediscretionofthesite coordinator,assistself-employedindividualswhoqualifytouseScheduleC-EZ.TaxpayerswhomustfileScheduleCshouldseeaprofessionaltaxpreparer.

Emphasize that before starting to prepare the return, the volunteer must determine if the business qualifies to be reported on Sched-ule C-EZ. This means estimating business income and expenses.


ExErcisE


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

Question 1:Basedonthisinformation,doesJasonqualify tofilloutaScheduleC-EZ?þ Yes ¨ No

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… Jason responds…

What kind of business do you have and were you the sole owner?

Do you have a record of your business income and expenses for last year?

Do you use the cash method of accounting?

And what were your expenses?

Do you keep any parts in inventory?

And you say you had a good year? Did you have a net loss? In other words, did you make a profit?

Do you plan on deducting expenses for the business use of your home?

Okay, and how much business income did you have? [Onpage2oftheapprovedintakeandinterviewsheet,indicateJason’sresponsestothesequestions.]

Iinstallairconditionersandyes,Iownthebusinessmyself.Nopartnersoranything.

Yeah,I’vegotaseparatecheckingaccountformybusiness.Ihadaprettydecentfirstyearactually.

Yes.Ihaveaprintoutofmyyear-endsummaryhere.

Well,Idotheinstallationsmyself;Idon’thaveanyemployees,soIspendalotofmoneyongas,toolsthatlastlessthanayearandequipmentrepairs. Myexpensesfortheyearwere$2,212.

No,Ipurchasethepartswholesalewhenanorderisplacedwithme.

That’scorrect.Nolosses.

NoIdon’t.

Myreceiptstotaled$30,762.

Ask two volunteers to role-play the sample interview. Ask the rest of the class to listen and take notes.



Yes. Jason meets all requirements for using Schedule C-EZ.


How do I complete Schedule C-EZ?

Part I: General Information

EnterthetypeofbusinessonlineA.EnterthePrincipalBusinessCodeonlineB.A listingofPrincipalBusinessCodescanbefoundinScheduleCInstructionsandinForm1040Instructions.

Tax Software Hint:TofindPrincipalBusinessCodes,bringuptheHelpscreenwhileintheScheduleC-EZ.AlistisavailableunderBusinessCodes.

Enterthebusinessname,ifthereisone,onlineC.IfthebusinesshasanEmployerIdentificationNumber(EIN),enteritonlineD(mostScheduleC-EZbusinessesdonotneedanEIN,sincetheydonothaveemployees.)IfthebusinesshasanaddressthatisdifferentfromtheoneshownonForm1040,enteritonlineE.

Part II: Figure Net Profit

Entertotalgrossreceiptsonline1.Thisincludesalltheincomepaidtothe business,whetherornotitwasreportedonaForm1099-MISC.IfanyoftheincomewasreportedonFormW-2andthe“Statutoryemployee”boxontheformwaschecked,checktheboxonline1ofScheduleC-EZ.

Ifpreparingapaperreturn,totalallincomefromForm1099-MISCandothertaxpayerrecordsandentertheamountonScheduleC-EZ,line1.

Enteronline2thetotalamountofalldeductiblebusinessexpensesthatthetaxpayeractuallypaidduringtheyear.Onlytheportionofthesecoststhatareattributabletothebusinesscanbedeductedasabusinessexpense.Examplesoftheseexpensesincludeadvertising,carandtruckexpenses,commissionsandfees,insurance, interest,legalandprofessionalservices,officeexpense,rentorleaseexpenses,repairsandmaintenance,toolsthatlastlessthanayear,supplies,taxes,travel,theallowablepercentageofbusinessmealsandentertainment,andutilities.Thebaserateofthefirsttelephonelinetoaresidencecannotbededucted,butadditionalcostsincurredforbusinesspurposescanbeincludedasanexpense.Forearnedincomecreditandself-employmenttaxpurposes,thetaxpayermustincludeallallowabledeductionsincomputingnetearnings.

Ifpreparingapaperreturn,totalallthedeductiblebusinessexpensesincludingautoexpenses,calculatedbyusingthestandardmileagerate.RecordtheamountonScheduleC-EZ,line2.Calculatethenetprofitbysubtractingline2fromline1.ThenetprofitisreportedonForm1040,line12.

Tax Software Hint:RefertotheVolunteerResourceGuide(Tab2)forguid-anceonenteringexpensesontheScheduleC-EZ.Thetaxsoftwarewilltotalalltheexpensesandtransferthetotaltoline2.

Direct students to fol-low along in the Vol-unteer Resource Guide (Tab 2) on the page titled Schedule C-EZ Business Income.

example

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

Ask a volunteer to read the Kiana example.


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

Refer students to Publication 4491-W for an example of Schedule SE.




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

Instructor Notes

Introduction

ThislessonwillhelpyouassisttaxpayerswhomustuseScheduleD,CapitalGainsandLosses,toreportcapitalgainsand/orlossesonthesaleofassets.Inthislessonwewilldiscussthesaleofstock,mutualfunds,andthesaleofapersonalresidence.Ifthetaxpayerhassoldanyotherassetsreferhim/hertoaprofessionaltaxpreparer.Thislessonwillhelpyouidentifytheasset’sholdingperiod,adjustedbasis,netshort-termandlong-termcapitalgainsorlosses,thetaxablegainordeductibleloss,thetaxliabil-ity,andtheamountofanycapitallosscarryover.

Todetermineifthetaxpayermustreportthesaleofinvestmentsorthesaleof ahome,usetheinterviewtechniquesandtoolsdiscussedinthelesson,Screening andInterviewing.Theapprovedintakeandinterviewsheetlistsincomefromthesaleofpropertysuchasstock,bonds,orrealestate.Itisimportanttoensurethatallincomeisaccuratelyreportedonthereturn.Asktaxpayersiftheysoldanystock,securities,otherinvestmentproperty,orahomeduringthetaxyear.

Foradditionalinformationonthetopicsdiscussedinthislesson,seePublication544,SalesandOtherDispositionsofAssets,Publication551,BasisofAssets,Publication523,SellingYourHome,andPublication4681,CanceledDebts,Foreclosures,Repossessions,andAbandonments.

Objectives


• 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).

Ask a volunteer to read the Alice exam-ple. Answer any stu-dent questions.

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.

Ask a volunteer to read the Erma exam-ple. Answer any stu-dent questions.

Ask a volunteer to read the Lenny example. Answer any student questions.


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.

Ask a volunteer to read the Richard example. Answer any student questions.

example

In1998,Mariebought100sharesofAntrimCorporationstockfor$2,000.In1999,sheboughtanother100sharesofAntrimfor$2,300.In2009,shesold100sharesofAntrimfor$3,000,butshedidnotidentifythespecificblockatthetimeofsale.

BecauseMariepurchasedtheearliestblockof100sharesat$2,000,theadjustedbasisofthesharesshesoldwas$2,000.Thesalespriceofthe100sharessoldwas$3,000.Mariehadalong-termcapitalgainof$1,000.

However,ifshehadtoldherbrokertosellthe100sharesboughtin1999,theadjustedbasiswouldhavebeen$2,300,givingMariealong-termcapitalgainof$700.

Ask a volunteer to read the Marie example.


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.”

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.


Review answer with the class when com-plete.



How do I enter data on Schedule D, Parts I and II?

InformationfromForm1099-BisenteredonScheduleD.PartIisforshort-termsalesandPartIIisforlong-termsales.

Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2),CapitalGainorLossTransactionsWorksheet.

Whenpreparingapaperreturn,determinetheholdingperiodforeachblockofstocksold.ThiswillindicatewhetherthesaleshouldbereportedinScheduleDPartI(shortterm)orPartII(longterm).Recordtheinformationoneachsaleincolumnsa-eandcalculatethegainorlossforcolumnf.

How do I report capital gain distributions?

CapitalgainsdistributionsarereportedtothetaxpayeronForm1099-DIV.Iftherearenocapitalgainsfromthesaleofproperty,theForm1099-DIVamountisenteredonLine13ofForm1040.

Ifataxpayerhasbotha1099-DIVandaForm1099-B,thencapitalgainsdistributionsareaddedtoScheduleDinPartII,Line13.

Question 2: WhichofthefollowingtaxpayersisrequiredtofileForm1040andScheduleD?

A. Marriah, who received one Form 1099-B and no Forms 1099-DIV

B.Lorraine,whoreceivedForms1099-DIVforcapitalgain distributionsfromthreedifferentmutualfunds

C.Bothoftheabove

Tax Software Hint:Ifthesourcedocuments(Forms1099-DIVand1099-B)arerecordedproperlyinthetaxpreparationprogram,thenthenumberswillbereportedintheproperplaces.TheamountfromForm1099-DIV,box2a,willbeenteredontheDividendStatementforScheduleB(alongwiththeotherinformation)andwillautomati-callycarryovertothecapitalgaindistributionsline(Line13)inPartIIofScheduleD.

example

EldridgereceivedaForm1099-DIV.Box2ashowshereceivedatotalcapitalgaindistributionof$170.

EldridgealsoreceivedaForm1099-Bthatshowsanetsalespriceof$1,200onthesaleof600sharesofABCGroup,Inc.HeboughtthestockonFebruary19,2004,andsolditonAugust25,2009.HisbasisinABC,includingcommission, is$1,455.

EldridgemustuseScheduleDtoreporthiscapitalgaindistributionbecausehesoldstockthatmustbereportedonScheduleD.

Ask a volunteer to read the Eldridge example. Answer any student questions.

Only Marriah sold stock and received Form 1099-B.





How do I complete reporting of capital gain or loss?

CombiningalltheamountsincolumnfonScheduleD,PartI,resultsinanetshort-termcapitalgainorloss.CombiningalltheamountsincolumnfonScheduleD,PartII,resultsinanetlong-termcapitalgainorloss.

Thecombinationofthenetshort-termandnetlong-termcapitalgainsorlossesimpactsthetaxliability.Ifthereisacombinednetcapitallossinexcessof$3,000(orifMarriedFilingSeparately,inexcessof$1,500),thentheexcessiscarriedtothenexttaxyearandforwarduntilexhausted.Carryoverlossesretaintheiroriginalholdingperiod.

Question 3:Stella’scostbasisfor600sharesofKLMCorporationstockshepurchasedinJune2003andsoldinMarch2009was$2,400.Stellasoldthe600sharesfor$4,400andpaida$100commission.Herbrokerreportedthegrossproceedsof$4,400onForm1099-B.Whatwasthesalespriceforthesharesandtheamountofcapitalgain?

A.$4,400salespriceand$2,000gain

B. $4,400 sales price and $1,900 gain

C.$4,500salespriceand$2,100gain

D.$4,300salespriceand$1,900gain

example

Margoboughtstockfor$1,500,plusa$25commission.18monthslatershesoldallthestockfor$2,000andpaida$25commission.HerForm1099-Bshowsthegrossproceedsof$2,000asthesalesprice.

Basis=($1,500+$25+$25)=$1,550

SalesPrice=$2,000

GainorLoss=SalesPrice–Basis=$2,000-$1,550=$450

Margohadalong-termgainof$450.

The sales price was $4,400, which was $1,900 more than the adjusted basis of $2,500 ($2,400 cost + $100 commission) of the shares.

Ask a volunteer to read the Bill example. Answer any student questions.

Ask a volunteer to read the Margo example. Answer any student questions.



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.

Answer any student questions about the conclusions drawn in the interview.

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.

Ask a volunteer to read the Lucille example. Answer any student questions.

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.Emilyreturned toherhomeonMay31,2008andlivedthereuntilshe soldthehouseonJanuary10,2009.DoesEmilymeet theownershipandusetest?þ Yes □No

Reduced Exclusion

Taxpayerswhoownedandusedahomeforlessthantwoyears(andsodonotmeettheownershipandusetest)maybeabletoclaimareducedexclusionundercertainconditions.Theseincludesellingthehomeduetoachangeinplaceofemployment(beyondacertaindistance),health,orunforeseencircumstances.Ifanyapply,referthetaxpayertoaprofessionaltaxpreparer.Reducedexclusioncomputations/determina-tionsarebeyondthescopeofVITA/TCE.

example

In2001,Helenlivedinarentedapartment.Theapartmentbuildingwaslaterchangedtoacondominium,andsheboughtherapartmentonDecember1,2006.In2007,HelenbecameillandonApril14ofthatyearshemovedintoherdaugh-ter’shome.OnJuly10,2009,whilestilllivinginherdaughter’shome,shesoldherapartment.

Helencanexcludeallthegainonthesaleofherapartmentbecauseshemettheownershipandusetests.Herfive-yearperiodisfromJuly11,2004,toJuly10,2009,thedateshesoldtheapartment.SheownedherapartmentfromDecember1,2006,toJuly10,2009(overtwoyears).ShelivedintheapartmentfromJuly11,2004(thebeginningofthefive-yearperiod),toApril14,2007(overtwoyears).

Ask a volunteer to read the Helen example. Answer any student questions.

Ask what if Helen had to move in with her daughter one year earlier.

Answer: It would make a difference: She would miss the requirement of two years in a five-year period by 3 months.

Emily meets the owner-ship and use test because she owned and lived in the home for at least two years of the five-year period ending on the date of the sale.




Prior Exclusions

Inaddition,duringthetwo-yearperiodendingonthedateofthesale,thetaxpayermustnothaveclaimedanexclusiononagainfromthesaleofanotherhome.

Married Homeowners

Theownershipandusetestsareappliedsomewhatdifferentlytomarriedhomeowners.Marriedhomeownerscanexcludeupto$500,000iftheymeetalloftheseconditions:

• Theyfileajointreturn

• Eitherspousemeetstheownershiptest

• Bothindividualsmeettheusetest

• Neitheroneexcludedgaininthetwoyearsbeforethecurrentsaleofthehome

Ifeitherspousedoesnotsatisfyalltheserequirements,theycannotclaimthemaxi-mumexclusion($500,000).Themosttheycanclaimisthetotalofthemaximumexclu-sionseachwouldqualifyforifnotmarriedandtheamountswerefiguredseparately.Forthispurpose,eachspouseistreatedasowningthepropertyduringtheperiodthateitherspouseownedtheproperty.ThiscalculationisoutsidethescopeofVITA/TCE.

Sale of Main Home by Surviving Spouse

Beginningwithmainhomesalesafter2007,themaximumexclusion($500,000)byanunmarriedsurvivingspouseisallowedifthesaleoccursnolaterthan2yearsafterthedateofthedeceasedspouse’sdeath,andallotherrequirementsaremet.

How do I figure the gain (or loss) from the sale of a home?

Onceyou’vedeterminedthatataxpayeriseligiblefortheexclusion,youcanfigurethegain(orloss)onthesalebasedonthesellingprice,amountrealized,basis,andadjustedbasis.Ifthesellingpriceofthetaxpayer’shomeislessthantheallowableexclusion($250,000ifSingle,$500,000ifMarriedFilingJointly),youdonotneedtocalculatethegainonthesaleofthehome.Noneofthegainwillbetaxable.Lossonthesaleofaresidenceisnotreportedonthereturn.Formoreinfor-mation,seetheSellingYourHomesection inPublication17.

IfthetaxpayerusedthehomeforbusinesspurposesorasrentalpropertyafterMay6,1997,referthetaxpayertoaprofessionaltaxpreparer.Thetaxpayercannotexcludethepartofthegainequaltothedepreciationallowedorallow-ableasadeduction.

Alossonthesaleofapersonalresidenceisnotdeductible.

example

Jennifer,whoissingle,boughtherfirsthomeinAugust2007.InDecember2008,thecompanysheworkedfornotifiedherthatshewouldbetransferredtoanothertownbytheendof2009.ShecontinuedtoliveinthehomeuntilJune2009,whenshesolditatagainandmoved500milestothenewtown.Jenniferownedandlivedinthehomelessthantwoyears,soshedoesnotmeettheownershipandusetests.However,shemayqualifytoexcludeallorpartofthegainbecauseshesoldthehomeduetoachangeinplaceofemployment.Jennifershouldbereferredtoaprofessionaltaxpreparer.

Ask a volunteer to read the Jennifer example. Answer any student questions.


ExErcisEs (continued)Assign the exercise.


Selling Price

Thesellingpriceisthetotalamounttaxpayers(theseller)receivedfortheirmainhome.Itincludesmoney,allnotes,mortgages,orotherdebtstakenoverbythebuyeraspartofthesale,andthefairmarketvalueofanyotherpropertyorservicesthatthesellerreceived.

IfthetaxpayerreceivedForm1099-S,ProceedsfromRealEstateTransactions,useittofigurethesellingprice.Box1showsthedateofsale(closing)andbox2showsthegrossproceedsreceivedfromthesaleofthehome.FortaxpayerswhodidnotreceiveaForm1099-S,usesaledocumentsandotherrecords.

Amount RealizedTheamountrealizedisthesellingpriceminussellingexpenses(commissions,adver-tisingfees,legalfees,andloanchargespaidbytheseller,suchaspoints).AmountrealizedcanbecalculatedusingWorksheet2,Gainor(Loss),Exclusion,andTaxableGainonSaleofHome,inPublication523.(Asimilarworksheetisavailableinthetaxsoftware.)

Amountrealized=Sellingprice-Sellingexpenses

$246,000=$250,000-$4,000

Question 5: Janmeetstheeligibilityrequirementsforclaimingtheexclusiononthegainfromthesaleofhishome.Thesellingpriceofthehomewas$195,000.Thesellingexpenseswere$15,000.Whatistheamount realizedinthissale?$180,000.

Basis

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

Adjusted Basis

Theadjustedbasisisthetaxpayer’sbasisinahomeincreasedordecreasedbycertainamounts.

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

The amount realized on Jan’s sale is $180,000 (selling price minus selling expenses).

Alternativevaluationissuesanddeterminingtheadjustedbasisofpropertyreceivedasagiftcanbeverycomplexandareoutsidethescopeofthistraining.Advisethetaxpayertoseekassistancefromaprofessionaltaxpreparer.


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.

Ask a volunteer to read the Peter example.

Ask what if Peter had not been on qualified extended duty but merely rented out his home while he lived in another city?

Answer: He would not meet the use test in the five-year period.

example

Peterboughtahomein2000andlivedinitfor2½years.Beginningin2003,hewasonqualifiedofficialextendeddutyintheU.S.Army.Hesoldhishomein2009andhada$12,000gain.Peterwouldnormallynotmeettheusetestinthefive-yearperiodbeforethesale(2004–2009).Petercandisregardthosesixyears.Thetestperiodconsistsofthefiveyearsbeforehewentonqualifiedofficialextendedduty.

Thisextensionoftimecanapplytotaxpayerswhohaverecentlyleftthemilitary.

sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… Jeremy responds…

Did you receive Form 1099-S?

Your paperwork shows a selling price of $580,000. Do you have anything that lists the basis in the home, that is, the value of the home at the time you bought it?

Clearly, with a basis of $300,000, your gain from the sale is $280,000 or less. As a married couple who meets the owner-ship and use tests, you can exclude up to $500,000 from the sale, so you don’t have to report the sale on your return. [IndicateJeremy’sresponsestothesequestionsontheapprovedintakeandinterviewsheet.]

No, but I do have my paperwork from the sale. My real estate broker said I wouldn’t need that form because I was within the limits.

Yes, I bought it for $280,000 and put in $20,000 of improvements – mostly new bathrooms.

Answer any student questions about the conclusions drawn in the interview.



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

A.JohnwentonsabbaticalforfouryearsandbackpackedthroughEurope.

B.Johnlivedwithaco-workerforfouryearsandlethisbrotheroccupyhishome.

C. John was deployed to Europe on official extended military duty for five years.

D.Johnmarriedandhisbridehadherownhome.Thecouplechosetoliveinthewife’shomeandrentoutJohn’shome,untilitwassold.

How is a cancellation of debt for a principal residence reported on the return?

Asegmentofthecancellationofdebtissueisinscopeforthevolunteertaxpreparer.Cancellationofvarioustypesofdebtcouldresultinareportableitemonthetaxpayer’sreturn.VITA/TCEvolunteersarelimitedtothetypethatinvolvesthetaxpayer’smain,personalresidence.Allothercancellationofdebtissuesshouldbereferredtoaprofes-sionaltaxpreparer.Thetopicthatfollowswillhelpyourecognizewhenyouwillbeabletohelptaxpayersandwhenyoumustreferthemtoaprofessionaltaxpreparer.

Cancellationofindebtednessissuesfrequentlyinvolveautoloans,creditcarddebt,debtformedicalcare,professionalservices,installmentpurchasesoffurnitureorotherpersonalproperty,mortgages,andhomeequityloans.Generally,ifadebtforwhichataxpayerispersonallyliableiscanceledorforgiven,otherthanasagiftorbequest,thetaxpayermustincludethecanceledamountinincome.Adebtincludesanyindebted-nessforwhichataxpayerisliableorwhichattachestothetaxpayer’sproperty.

UndertheMortgageForgivenessDebtReliefActof2007,taxpayersmayexcludecertaindebtforgivenorcanceledontheirprincipalresidence.Thisexclusionisappli-cabletothedischargeof“qualifiedprincipalresidenceindebtedness.”Ifthecanceleddebtqualifiesforexclusionfromgrossincome,thedebtormayberequiredtoreducetaxattributes(certaincredits,losses,andbasisofassets)bytheamountexcluded.

ThetaxpayermayalsohaveareportabletransactiononScheduleDifthepropertywasforeclosedonorabandoned.Whenthisoccurs,thetaxpayerwillgenerallyreceiveForm1099-A,AcquisitionorAbandonmentofSecuredProperty,fromthelender.Form1099-Awillhaveinformationneededtodeterminethegainorlossduetotheforeclo-sure/abandonment.Ifthedebtiscanceled,thetaxpayermayalsoreceiveForm1099-C,CancellationofDebt.Iftheforeclosureandcancellationofdebtoccurinthesamecalendaryear,thelenderhastheoptionoffilingForm1099-Conlybyreportingaddi-tionalinformationincertainboxesontheForm1099-C.Youwilllearnmoreabouttheseformsandhowtoreporttheinformationonthetaxpayer’sreturnlaterinthislesson.

The only circumstance that will allow the taxpayer to exclude the gain is if he can extend the five-year period due to official extended military duty.



Emphasize only can-cellation of qualified principal residence indebtedness is within scope for the volunteer program.


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?þ Yes □NoIsScheduleDrequired? þ Yes □No





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

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

Question 9:FredwenttohislocalVITAsitetohavehis2009taxreturnprepared.ThevolunteerwentthroughhisrecordsandnoticedhehadForm1099-Creflectingacanceleddebtof$50,000.

UsingPublication4731,ScreeningSheetforCancellationofDebt,forassistingtaxpayerswithForm1099-Casaguide,thevolunteerlearnedFredlosthisjobin2009andcouldnolongermakehismortgagepayments.Thebankforeclosedonhishome.Duetothehousingmarketslump,thevalueofFred’shomehaddeclined.Hismortgagebalancewasmorethanthefairmarketvalueofthehome.ThebanksoldFred’shomeandcanceledtheremainingdebt($50,000)notcoveredbythesalesprice.

Uponfurtherquestioning,thevolunteerlearnedFredhadrefinancedhishome2yearsagoandusedtheequityinthehometopayoffsomecreditcardsandtakeatriptoLasVegas.

ShouldthevolunteerassistFredwiththepreparationofhisreturnattheVITAsite?□ Yes þ No






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

Instructor Notes

Lesson 11: Income – Retirement Income; Form 1040, Lines 15-16

Introduction

Thislessonwillhelpyouidentifyandreportthetaxableportionofretirementincomereceivedbythetaxpayer.Todothis,youmustunderstandthetypesofretirementincomeandtheformsusedtoreportthem.Youshouldalsobeabletorecognizewhentaxpayersshouldadjusttheirwithholdinganddeterminewhichformtouse.

Thislessondoesnotcoversocialsecuritybenefitsortier1railroadretirementbenefits(socialsecurityequivalentbenefits),whicharediscussedintheSocialSecurityBenefitslesson.

Formoreinformationonthetopicsdiscussedinthislesson,seePublication575,PensionandAnnuityIncome;Publication590,IndividualRetirementArrangements(IRAs);Publication721,TaxGuidetoU.S.CivilServiceRetirementBenefits;andPublication939,GeneralRuleforPensionsandAnnuities.

Objectives


• 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.

Emphasize the need to be considerate in prob-ing for information.

Display or refer to the 1099-R Pension and Annuity Income illus-tration in the Volunteer Resource Guide (Tab 2).

Emphasize that the Intermediate level cov-ers Pension income where the taxable amount is predeter-mined; the Advanced level covers computing the taxable amount.


What if the taxable portion is not calculated?

Ifthepayerdidnotincludeanamountinbox2aofForm1099-R,CSA-orCSF-1099-R,oriftaxpayershaveFormRRB1099-R,youwillneedtocomputethetaxableportionofthedistribution.ThefollowingwillhelpyoudeterminetheadditionalinformationthatisneededtocalculatethetaxableportionofdistributionsfromIRAs,pensions,or annuities.

What do I need to know about retirement income distributions?

Retirementplansarefundedbyeitherbefore-taxorafter-taxcontributions.“Before-tax”simplymeansthattheemployeedidnotpaytaxesonthemoneyatthetimeitwascontributed,i.e.,thetaxpayerhasnocostbasisintheplan.“After-tax”meanstheemployeepaidtaxesonthemoneywhenitwascontributed,i.e.,thetaxpayerhas a costbasisintheplan.

Ifthetaxpayermadeallcontributionstoaplanwithbefore-taxdollars,theentiredistributionwillbefullytaxable.Thefundsaretaxedatthetimeofthedistribu-tionbecauseneitherthecontributionsnortheearn-ings/investmentgainswerepreviouslytaxed.Thisiscommonin401(k)andThriftSavingsplans.

Ifthetaxpayermadeallcontributionstoaplanwithafter-taxdollars,thenthedistribu-tionswillbepartiallytaxable.Theportionofthedistributionthatisconsideredareturnoftheafter-taxdollarswillnotbetaxedagain.Itisconsideredareturnofthetaxpayer’scostbasis(anamountforwhichtaxeshavealreadybeenpaid).Theportionofthedistributionthatrepresentstheearnings/investmentgainsistaxablesinceithasnotbeenpreviouslytaxed.Thisiscommoninemployerretirementplans.

Ifthetaxpayerdidnot contrib-utetotheretirementplan,allthedistributionsarefullytaxable.

Employee Contributions

Contributions Taxability of Distributions

Before-Tax After-Tax Fully PartiallyNo n/a n/a Yes —Yes Yes — Yes —Yes — Yes — Yes

Ask a volunteer to read the Mark example.

example

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


How do I find the taxable portion of IRA income?

Individual Retirement Arrangements

IRAdistributionsarereportedonForm1099-Rwithacheckinbox7.Earningsandinvestmentgainsinataxpayer’sIRAgenerallyaccumulatetaxfreeortaxdeferreduntiltheyarewithdrawnasfully-orpartially-taxabledistributions.TherearefourkindsofIRAs,eachwithdifferenttaximplications:

• TraditionalIRA

• RothIRA

• SavingsIncentiveMatchPlansforEmployees(SIMPLE)IRA

• SimplifiedEmployeePension(SEP)IRA

Traditional IRA

DistributionsfromtraditionalIRAsarefullytaxableunlessnondeductiblecontributionshavebeenmade.SeetheAdjustmentslessonforadditionalinformation.Form8606,NondeductibleIRAs,isusedtokeeptrackofnondeductiblecontributions.Taxpayerswhomadenondeductiblecontributionsshouldbereferredtoaprofessionaltaxpreparer.

Roth IRA

DistributionsfromaRothIRAaretaxfreeandmaybeexcludedfromincomeifthefollowingrequirementsaremet:

• Thedistributionismadeafterthe5-yearperiodbeginningwiththefirsttaxableyearforwhichacontributionwasmadetoaRothIRAsetupforthetaxpayer’sbenefit,and

• Thedistributionis:

- Madeonorafterage591/2,or

- Madebecausethetaxpayerwasdisabled,or

- Madetoabeneficiaryortoanestate,or

- Topaycertainqualifiedfirst-timehomebuyeramounts (uptoa$10,000lifetimelimit)

WhenyoulearnaboutIRAaccountsintheAdjustmentstoIncomelesson,besuretonotethedifferencebetween“contri-butions”and“deductions.”Simplyput,contributionsaretheamountsdepositedintoanIRAaccount,anddeductionsaretheportionofthecontribu-tionthatisdeductedonthetaxreturn;thatportionmaybetotalorpartial.

example

Richardcontributed$500ayeartoatraditionalIRA.Eachyear,hedeductedthesecontributionsfromhisincome.ThisyearhereceivedhisfirstdistributionfromthetraditionalIRA.Itisfullytaxable:Richardwillpayincometaxonthedistributionshereceives,whichrepresentthecontributionshemadeanddeducted,aswellastheearningsonthesecontributionsovertheyears.

Ask a volunteer to read the Richard example.

Review the definitions in the tip.

Read the tip to the class.

Taxpayersmaynotalwaysunderstandwhytheymustpaytaxesontheirretirementincome.Whenthisisthecase,takethetimetoclearlyexplainwhatretirementfundsaretaxedandwhy.Itisusuallyagoodideatoquestiontaxpayersaboutthenatureoftheircontributionstoensurethattheywillnotbetaxedtwiceonthesamefunds.


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 þ False

Question 2: MaryopenedaRothIRA3yearsago.In2009,shetookthefullamountofherRothIRAasa distributiontohelpherpurchaseherfirsthome.The entiredistributionisexcludedfromhertaxableincome. □ True þ False

Question 3: AmycontributedtoaRothIRAfor5years.Inyear6(atage60),shetookadistributionfromherIRA.Theentiredistributionisexcludedfromhertaxableincome. þ True □False

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

Review the different ways each type of IRA is handled.

ThenexttwotopicsareoutofscopeforVITA.Thedefinitionsareincludedforyour informationonly.

Nondeductible contribu-tions to traditional IRAs are not taxed when distrib-uted.

She did it before the 5-year period ended.

It was made six years after her first contribution and after age 59½.


How are IRA distributions reported?

Traditional IRA

IfIRA/SEP/SIMPLEischeckedinbox7ofForm 1099-R,askthetaxpayer:

• WasthisadistributionfromatraditionalIRA?

• Werethecontributionsdeductedfromincomeintheyeartheyweremade?

Ifso,theentiredistributionistaxable.ReportitonForm1040A,lines11aand11boronForm1040,lines15aand15b.Ifnot,thedistributionispartiallytaxable.Inthatcase,referthetaxpayertoaprofessionaltaxpreparer.

Roth IRA

DistributionsfromaRothIRAarenottaxableaslongastheymeetallthecriteriadiscussedpreviously.Ifthedistributiondoesnotmeetthecriteria,thenallorpartofthefundswillbetaxable;referthetaxpayertoaprofessionaltaxpreparer.

How are rollovers handled?

Generally,arolloverisatax-freedistributiontothetaxpayerfromoneretirementaccount(traditionalIRAoremployer’spensionplan)thatrollsoverintoasimilarretire-mentaccountwithin60days.

Form1099-Rwillbeissuedtothetaxpayerbythefinancialinstitution.Ifitwasadirectrolloverbytheinstitutiontoanotherinstitution,box7willcontaincodeG.IfthereisnocodeG,thenthetaxpayermusthaveredepositedthefullamountintoanappropriateaccountwithin60days.Ifthiswasnotdone,thedistributionmaybepartiallyorfullytaxable;referthetaxpayertoaprofessionaltaxpreparer.

Tax Software Hint:Additionalinformationmustbeenteredforretirement

accountrollovers.RefertotheVolunteerResourceGuide(Tab2),1099-RExclusionWorksheet.

Ifyouarepreparingapaperreturn,theamountofthedistributionisreportedonForm1040A,line11aoronForm1040,line15a.Toshowthatthisisaqualifiedrolloverandnoneoftheamountistaxable,enterzeroonForm1040A,line11boronForm1040,line15b,andwrite“Rollover”nexttoline11bor15b.

DistributionsfromaSIMPLEIRAandfromaSEPIRAaregenerallyfullytaxableandareoutofscopeforVITA/TCE.

AnearlydistributionfromatraditionalorRothIRAmaybesubjecttoa10%additionaltax.Refertolesson28,OtherTaxes,formoreinformation.

Point out the explana-tions of box 7 codes in the software, or on the back of Form 1099-R.





Excluded from income because it was rolled over into an IRA.

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

Whichofthefollowingstatementsistrue?

A.Theentiredistributionisincludibleasincome

B. The entire distribution is excludible from income

C.Thedistributioniseligiblefortheten-yeartaxoption

D.Thedistributioniseligibletobetaxedataspecialrate

What if the distribution is used for charitable purposes?

Thetaxpayercanhaveaqualifiedcharitabledistribution(QCD)madetoanorganiza-tioneligibletoreceivetax-deductiblecontributions.Ifallrequirementsaremet,thisactionwillexcludeanypartofthedistributionthatwouldnormallybetaxable.Form1099-Rwillbeissuedtothetaxpayer;thereisnodistributioncodeforbox7thatidenti-fiesaQCD.

TherequirementsforaQCDinclude:

• Thetaxpayermustbeatleast70½yearsoldatthetimeofthedistribution.

• OnlydistributionsfromtraditionalIRAsareeligibleforthistreatment.

• Thedistributionmustbemadebythetrusteedirectlytotheeligibleorganization.

• Theamountcannotbemorethan$100,000.(Onajointreturn,thespouseiseligibleforthesameamount.)

• TheamountcannotbeincludedwithothercharitablecontributionsonScheduleA.

Thetaxpayermayhavemarkedtheboxfor“Charitablecontributions”ontheapprovedintakeandinterviewsheet.IfthereisaForm1099-RforatraditionalIRAaccountandthetaxpayer(orspouse)isatleast70½yearsold,askifanyofthefundswereadirecttransfertoacharitableorganization.

Taxpayersshouldhaveawrittenacknowledgmentfromtherecipientstating:

• Theorganization’sname

• Theamount

• Thedate

• Astatementindicatingtherewasnopersonalbenefittothetaxpayer

Thisamountcountstowardtherequiredminimumdistribution.

Ifanypartofthedistributionisareturnofafter-taxcontributions,Form8606,NondeductibleIRAs,mayneedtobecompleted.Form8606requiresbasisinforma-tioninIRAsfromprioryearsandcanbecomplex.IfForm8606isrequired,referthetaxpayertoaprofessionaltaxpreparer.


Tax Software Hint: Youmustindicateinthesoftwareifaqualifiedcharitablecontributionwasmade.RefertotheVolunteerResourceGuide(Tab2),1099-RExclusionWorksheet.

Ifyouarepreparingapaperreturn,enterthetotaldistributiononForm1040,line15a.Write“QCD”nexttotheamountonline15b.ThiswillindicatethatallorpartofthedistributionisnottaxablebecauseitmettherequirementsofaQCD.

How do I find the taxable portion of pensions and annuities?

Fully Taxable Pensions and Annuities

PensionandannuityincomeisreportedonForm1099-R(box7isunchecked),FormCSA1099-R,andFormRRB1099-R.Ingeneral,pensionorannuitypaymentsarefullytaxable,ifthefollowingistrue:

• Taxpayersdidnotpayanypartofthecostoftheirpensionsorannuities

• Employersdidnotwithholdpartofthecostfromthetaxpayers’paywhiletheyworked

• Employerswithheldpartofthecostfromthe taxpayer’sbefore-taxpaywhiletheyworked

Partially Taxable Pensions and Annuities

Therearetwomethodsusedtofigurethetaxableportionofeachpensionorannuitypayment:theGeneralRuleandtheSimplifiedMethod.Unlessanexceptionapplies,retireesmustusetheSimplifiedMethodforannuitypaymentsfromaqualifiedplan. IfataxpayertellsyoutheyhavebeenusingtheGeneralRuletofigurethetaxableportionforpastyears,referthemtoaprofessionaltaxpreparer.

TheSimplifiedMethodisusedtocalculatethetax-freeportionofeachpensionorannu-itypayment.TheSimplifiedMethodWorksheetcalculatesthetaxpayer’scostbasisforeachmonthlypayment.Thenumberofmonthlypaymentsisbasedonthetaxpayer’sage(andthespouse’sageifajoint/survivorannuityisselectedbythetaxpayer)ontheannuitystartdate.

Taxpayer’scostbasis÷Numberofmonthlypayments=MonthlyTax-FreePortion

Tax Software Hint: RefertotheVolunteerResourceGuide(Tab2),1099-RExclusionWorksheet.

Ifpreparingapaperreturn,usetheSimplifiedMethodWorksheetfoundintheForm1040AandForm1040Instructionstocalculatethetaxableportiontobereportedonline12b/16bofthereturn.Donotforgettoincludeanyamountsinbox4ofForm1099-RinthePaymentssectionofthetaxreturn.

Display the Volunteer Resource Guide (Tab 2), 1099-R Exclusion Worksheet illustration of the Simplified Gen-eral Rule.

Emphasize to stu-dents that the ages of both taxpayers must be used with a joint/survivor annuity.

SocialsecuritybenefitsandIRAdistributionsarenotreportedonthepensionlineofthetaxreturn.

example

Sueworkedforasoftwaredevelopmentcompanyfor20years.Sheretiredin2009andbeganreceivingpensionincomethesameyear.Suenevercontributedtothepensionplanwhileshewasworking;heremployermadeallofthecontributions.Herpensionisfullytaxable.

Ask a volunteer to read the Sue example.



TocalculatethetaxableportionofapensionorannuityusingtheSimplifiedGeneralRule,youwillneedcertaininformation:

• Thecostintheplan(box9bofForm1099-R)

• Thetaxpayer’sageonthedatetheannuitybegan(andthespouse’sageifjoint/survivorannuityisselected)

• Totaloftax-freeamountsfrompreviousyears,availablefromthetaxpayer’sprioryearworksheet

IfthetaxpayerhasmorethanoneForm1099-Rthatisnotfullytaxable,calculatethetax-freeportionforeachformseparately.

Question 5:Dottyworkedforthelocaltireplantfor32years.SheretiredinJuneof2009andreceivesamonthlypensionof$1,679.(ShereceivedsixpaymentsforJulythroughDecember2009.)Dottynevercontributedtothepensionplan;heremployermadeallofthecontributions.Howmuchofherpensionistaxable?

A.$12,074

B.$11,074

C. $10,074

D.$1,679

Disability Pension Income

Generally,taxpayerswhoretireondisabilitymustincludealloftheirdisabilitypaymentsinincome.Disabilitypaymentsaretaxedaswagesuntilthetaxpayerreachesthemini-mumretirementage–this age is set by the employer.Afterthetaxpayerreachestheminimumretirementage,disabilitypaymentsaretreatedaspensionincometodeter-minetaxability.

Minimumretirementageisgenerallytheearliestageatwhichtaxpayersmayreceiveapension,whetherornottheyaredisabled.

Employersmayreportdisabilityincomeononeofthefollowingforms:

• FormW-2,ifthetaxpayerhasnotreachedtheminimumretirementagesetbytheemployer

• Form1099-R,ifthetaxpayerhasreachedtheminimumretirementage

example

Melvinretiredfromamanufacturingplantin2009.Whilehewasworkingattheplant,hisemployerwithheldmoneyfromeachpaycheckandsentittotheEngineer’sPensionFund.Melvinwillreceiveamonthlypensionpaymentfortherestofhislife.MelvinwillusetheSimplifiedMethodWorksheettodeterminethetax-freepartofmonthlypayments.

Ask a volunteer to read the Melvin example.

The amount is fully tax-able because she never paid income taxes on employer contributions.



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. Line 7

Retired Public Safety Officers

Eligiblepublicsafetyofficerscanelecttoexcludefromincomedistributionsofupto$3,000madedirectlyfromagovernmentretirementplantotheproviderofaccident,health,orlong-termdisabilityinsurance.SeeInsurancePremiumsforRetiredPublicSafetyOfficersinPublication575formoreinformation.

Tax Software Hint: Ifthetaxpayeriseligiblefortheexclusion,refertotheVolunteerResourceGuide(Tab2),1099-RExclusionWorksheet.

What other retirement income issues are there?

Thereareafewotherissuesrelatedtoreportingretirementincomethatyoumayencounter.SomeofthefollowingdistributionsaresubjecttovariousadditionaltaxesthatarecomputedonForm5329,AdditionalTaxesonQualifiedPlans(IncludingIRAs)andOtherTax-FavoredAccounts.ThecompletionofthisformisnotincludedintheVITA/TCEtraining.RefertaxpayerswhomustcompleteForm5329toaprofessionaltaxpreparer.

Lump-Sum Distributions

Alump-sumdistributionisthedistributionorpaymentwithinonetaxyearofanemploy-ee’sentirebalancefromallqualifiedpension,stockbonus,orprofit-sharingplansthattheemployermaintains.Thedistributiondoesnotincludedeductiblevoluntaryemployeecontributionsandcertainamountsforfeitedorsubjecttoforfeiture.DistributionsfromIRAsortax-shelteredannuitiesdonotqualifyaslump-sumdistributions.

Annie Jo is below minimum retirement age so the income is reported as wages.




Toqualifyasalump-sumdistribution,thepaymentmusthavebeenmade:

• Becausetheplanparticipantdied

• Aftertheparticipantreachedage591/2

• Becausetheparticipant(notincludingaself-employedindividual)separatedfromservicewiththeemployeror

• Aftertheparticipant,ifself-employed,becametotallyandpermanentlydisabled

Lump-sumdistributionsarereportedonForm1099-Rlikeanyotherpensiondistribu-tion.Somelump-sumdistributionsqualifyforspecialtaxtreatments.IfForm1099-R,box7indicatesadistributioncodeofA,itisalump-sumdistributionandqualifiesforspecialtaxtreatments.Taxpayerswiththissituationshouldbereferredtoaprofes-sionaltaxpreparer.

Premature Distributions

Aprematuredistributionisanearlywithdrawalfromaretirementfund,forpurposesotherthanretirement,byataxpayerwhoisunder591/2.Earlydistributionscanbesubjecttoanadditional10%tax.Thetaxappliestothetaxableportionofthedistribu-tionorpayment.

Certainearlydistributionsareexcludedfromtheearlydistributiontax.Ifthedistributioncodeinbox7ofForm1099-Ris2,3,or4,thetaxpayerdoesnothavetopaythe additionaltax.

Ifthedistributioncodeinbox7is1,thetaxpayerwillbesubjecttotheadditional10%tax,unlessanexceptionapplies.Ifpreparingapaperreturn,enter10%ofthetaxableamountintheOtherTaxessectionofForm1040andwrite“No”onthelinetoindi-cateForm5329isnotrequired.However,ifafterreviewingPublication17,IndividualRetirementArrangements(IRAs)orRetirementPlans,PensionsandAnnuities,youdeterminethatthetaxpayermeetsoneoftheexceptionsanddoesnothavetopaytheadditionaltax,referthetaxpayertoaprofessionaltaxpreparer.

Minimum Distributions

Toavoidanadditionaltax,participantsinretirementplansmustbegintakingaRequiredMinimumDistribution(RMD)byapreviouslyspecifieddate.ThatdateisApril1ofthecalendaryearfollowingtheyearinwhichthetaxpayerseitherreachedage70½,orretired,whicheverislater.ForIRAs,itdoesnotmatterifthetaxpayerisemployed.TheserulesdonotapplytoRothIRAs.ThetrusteeofthequalifiedplanwillcontactthetaxpayerattheappropriatetimetobeginRMD.

AfterthestartingyearforRMDs,taxpayersmustreceivetheminimumdistributionforeachyearbyDecember31ofthatyear.(Thestartingyearistheyearinwhichthetaxpayerreaches70½orretires.)Ifnodistributionisreceivedduringthetaxpayer’sstartingyear,therequiredminimumdistributionsfortwoyearsmustbereceivedthefollowingyear,oneofwhichmustbetakenbyApril1.

Thisinformationisprovidedforyourinformationonly,tohelpyouansweranyquestionsataxpayermayaskaboutRMD.RMDdistributionsarereportedonForm1099-Randincludedonthereturnusingtheproce-durespreviouslydiscussed.

Review the criteria for a lump-sum distribution.

Ifthetaxpayerdoesnotreceivetheminimumdistribu-tion,anadditionaltaxmaybeimposed.Thetaxis50%ofthedifferencebetweentheminimumdistributionandtheamountactuallydistributedforthetaxyear.

Ask a volunteer to read the caution.

Check student under-standing of this sec-tion.


NEW Temporary Waiver of Required Minimum Distributions (RMDs) for 2009

For2009,taxpayersarenotrequiredtotakeanRMDfromtheirIRAsordefinedcontri-butionplans.Thiswaiverappliestoplanparticipantsaswellastobeneficiaries.Thewaiveralsoappliestotaxpayerswhoturned701/2in2009anddelayedtheir2009RMDuntilApril1,2010.ThewaiverdoesnotapplytoRMDsfor2008,evenifthetaxpayerturned701/2in2008andchosetotakethe2008RMDbyApril1,2009.

Withdrawal of Excess IRA Contributions

AnexcessIRAcontributionistheamountcontributedtoatraditionalIRAduringtheyearthatismorethanthesmallerof:

• $5,000($6,000ifage50orolder),or

• Thetaxablecompensationfortheyear

Thetaxpayermaynotknowthatacontributionisexcessuntilthetaxreturniscompletedaftertheendoftheyear.Whenthissituationisidentified,theexcessamount,withanyearningsonthatamount,mustbewithdrawnbytheduedateofthereturn(includingextensions).Iftheexcessamountisnotwithdrawnbytheduedateofthereturn,thetaxpayerwillbesubjecttoanadditional6%taxonthisamount.

Thewithdrawnexcesscontributionisnotincludedinthetaxpayer’sgrossincomeifbothofthefollowingconditionsaremet:

• Nodeductionwasallowedfortheexcesscontribution

• Allinterestorotherincomeearnedontheexcesscontributioniswithdrawnbytheduedateofthereturn,includingextensions

example

Ralphretiredin2003.Heturned70½in2008.HemustbegintakingminimumdistributionsfromhisqualifiedplansbyApril1,2009.

example

Myrnawas72whensheretiredin2008.Shemustbegintakingminimumdistribu-tionsfromherqualifiedplansbyApril1,2009.Thewaiverdoesnotapplytoherrequiredminimumdistributionfor2008,eventhoughshehasuntilApril1,2009totakeit.

Ask a volunteer to read the examples.

example

Samretiredin2005.Heturned701/2in2009.ThetemporarywaiverofRMDsfor2009appliestoSam.

example

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





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

Question 7: Taxpayerswhowithdrawexcesscontribu-tionsbytheendofthetaxyeararenotsubjecttoan additional6%taxontheexcesscontribution. þ True □FalseQuestion 8:Helenturned71onMarch17,2009.Sheretiredin2001.Shehasnevertakenanydistribution fromhertraditionalIRAaccounts.Thebanktoldherthatshenowneedstotakeaminimumdistributionof$1,479peryear.Helenisrequiredto:

A.Takeadistributionof$1,479byDecember31,2009

B. Take a distribution of at least $1,479 by April 1, 2009

C.Takeadistributionof$2,958byDecember31,2009

D.Nottakeanydistributionsuntil2010

How do I determine when an adjustment to withholding should be made?

Afterthecompletionofthereturn,ifthetaxpayerowes$1,000ormoreonthetaxreturn,youshoulddiscusstheirwithholdingandestimatedtaxoptionswiththem. ThisiscoveredinmoredetailintheConcludingtheInterviewlesson.

SometimestaxpayersarenotawarethattheycanrequestfederalincometaxtobewithheldfromtheirretirementincomebyfilingFormW-4P,WithholdingCertificateforPensionorAnnuityPayments.Thisformissenttothepayer.Also,FormW-4V,VoluntaryWithholdingRequest,isusedtorequestwithholdingfromsocialsecuritybenefits.ThisformissenttotheSocialSecurityAdministration.

Foradditionalhelp,taxpayerscanrefertoPublication919,HowDoIAdjustMyTaxWithholding?,orvisittheIRSWebsiteatwww.irs.govandusethe“WithholdingCalculator.”Ataxpayerwhochoosesnottohavetaxwithheldmayhavetopayesti-matedtaxeachquarter.Failuretohaveenoughfederalincometaxpaidthroughouttheyearcanresultinalargeamountoftaxbeingowedwhenthereturnisdue.Itcanalsoresultinapenalty.Form1040-ES,EstimatedTaxforIndividuals,isusedtocalculatetheestimatedquarterlypaymentandprovidesvoucherswithwhichtoremitthepayments.

The $1,479 is for tax year 2008, the year Helen reached 70½ years old. Due to the temporary waiver, an RMD is not required for 2009.

They must withdraw excess contributions/earn-ings by the return due date to avoid the tax.

Taxpayerswhoreceiveaverylargerefundmaymakebetteruseoftheirfundsifthewith-holdingislowered.Explainwaystheycanreducetheirwithholding.



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

A. Form W-4P

B.FormW-4V

Summary

Thislessonhelpedyouidentify,calculate,andreportthetaxableportionofretirementincomereceivedbythetaxpayer.Itreviewedthetypesofretirementincomeandtheformsusedtoreportthem.Youlearnedwhentaxpayersofretirementagearerequiredtotakeaminimumdistributionfromaretirementplanandwhentheymayneedtoadjusttheirwithholding.

Youmaynotbeabletocompletetheentireexerciseifsomeofthetechnicalissuesintheexercisearenotcovereduntillaterlessonsintheintermediateandadvancedpartsofthetraining.Intheseinstances,completeasmuchoftheexerciseasyoucan.Comebacklatertofinishtheexerciseafteryoucoverallthetechnicaltopics.





This form is used to request a change in with-holding on a pension.





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

Instructor Notes

Introduction

ThislessonwillhelpyouidentifyandreportcertainincomefromScheduleK-1s;Form1041,Form1065,andForm1120S.Thistopicisin-scopeforthefirsttimethisyearforAdvanced,MilitaryandInternationalcourses.

ThislessonalsocoversrentalincomeandexpensesfortheMilitaryandInternationalcourses.

TodetermineifataxpayerneedstofileScheduleE,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.Theapprovedintakeandinterviewsheetlistsincomefromrentalproperty,butdoesnotlistincomefromScheduleK-1s.Itisimpor-tanttoensurethatallincomeisaccuratelyreportedonthereturn.AsktaxpayersiftheyrentedouttheirhomeorotherpropertyduringthetaxyearoriftheyreceivedaScheduleK-1(Form1041,Form1065,orForm1120S)fromatrust,partnership,orScorporation.

Objectives


• 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 (1/3 or 33%)

D.Noneofit

Generally,mortgageinterestexpenseisfullydeductible.However,refertaxpayerswithrental-relatedinterestexpensesotherthanmortgageinteresttoaprofessionaltaxpreparer.

example

PaulKingmanlivedinhishomethroughSeptember,whenhewasnotifiedhewasbeingtransferredoverseas.HerentedhishomebeginninginOctober.ThetotalamountofKingman’smortgageinterestforthetaxyearwas$2,400andhisprop-ertytaxeswere$600.Reportninemonths(Jan–Sept)ofmortgageinterestandpropertytaxesasitemizeddeductionsonScheduleA,i.e.$1,800and$450,andtheotherthreemonths(Oct-Dec)asexpensesonScheduleE,i.e.$600and$150.

Ask a volunteer to read the Paul example. Answer any student questions.

John lived in the home for 8 of 12 months. He rented the home 4 of 12 months. The amount he can claim on Schedule E is 4/12.




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. Repairs made to the homeowner’s personal resi-dence

Question 3: Whichofthefollowingrentalexpensesmustberecoveredby takingdepreciation?

A.Homeinsurancepremiums

B.Painting

C. Installing a backyard fence

D.Repairingabrokenfurnace

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

Costs and fees must relate to the rental property to be deductible as rental expenses.

Fencing adds to the value of the property so it can-not be deducted as a rental expense; it must be depre-ciated over the useful life of the improvement.



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 þ False

Question 5:Allofthefollowingpropertymaybedepre-ciableEXCEPT___.

A.Furniture

B.Buildings

C. Land

D.Vehicles

Taxpayers should claim the correct amount of depreciation every year.

The value of land is not depreciable; furniture and vehicles are depre-ciable property.



Point out if taxpayers don’t claim the correct amount of deprecia-tion every year, they must still reduce their basis by the amount of depreciation they could have deducted.



Question 6:Whichmethodofdepreciationisusedfor propertyplacedinserviceafter1986?

A.Straightline

B. MACRS

C.ACRS

D.Decliningbalance

What is considered the basis and adjusted basis for depreciation purposes?

Generally,thebasisfordepreciationisthepurchasepriceoftheproperty,includingthecostofimprove-ments,butnotincludingthevalueofthelandonwhichitsits.Whenpropertyisconvertedfrompersonalusetorentaluse,thebasisisthelesseroftheadjustedbasisorfairmarketvalue(FMV)atthetimeofconversion.Thetotaloftheyearlydeductionsfordepreciationcannevertotalmorethanthebasisoftheproperty.

Thebasisofpropertymustbeincreasedordecreasedtoreflectcertainadjustmentsbeforethedepreciationdeductioniscomputed.Tofindtheadjustedbasis,addthepurchasepriceofahometothecostofanyimprovementsminus:

• Anycasualtylossesordepreciationpreviouslydeducted,and

• Landvalue

Thebasisofdepreciablepropertyshouldalsobeadjustedwhenitisacquiredinapurchasewithatrade-in.Again,thevalueofanyassociatedlandmustbeassessedandexcludedfromthebasisoftheproperty.

What are considered recovery periods?

Therecoveryperiodofpropertyisthenumberofyearsoverwhichthetaxpayerrecov-ersitscostorotherbasis.TheMACRSmethodusestheclasslifeofpropertytodeter-minethelengthoftimethepropertywillbedepreciated.

example

CarlosandVanettapurchasedahousein1985for$100,000.Thevalueofthebuildingwas$85,000.Theymadenoimprovements.In2009,theyweretransferredoverseasanddecidedtorentoutthehome,whichwastheirpersonalresidence.Thevalueofthehouseandlandin2009was$125,000.Thebasisfordepreciationis$85,000.

Ask a volunteer to read the Carlos and Vanetta example. Answer any student questions.

Fortaxpayerswhobuilttheirownhomeoracquireditasaninheritanceorgift,thebasismaynotbetheoriginalcost.Formoreinformation,seePublication551,BasisofAssets.

MACRS (modified ACRS) is the method used for property placed in service after 1986.



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).


Wayne’s basis for depreciation is $150,000 ($255,000 minus $155,000 plus $50,000). The basis does not include land-scaping expenses.



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. A washing machine in a rental unit located in the U.S.

C.Improvementstoarentalunitlocatedoutside theU.S.

D.ArentalhomelocatedoutsidetheU.S.


Asyouusetheapprovedintakeandinterviewsheetwithataxpayer,askquestionstodetermineiftheyhaveanyrentalincomeandexpenses.UsetheInterviewTipstohelpobtainadditionalinformation,asshowninthissampleinterview.

The recovery period of an appliance is shorter than that of a home; property inside the U.S. has a shorter recovery period than property outside the U.S.



Direct students to review the differ-ent types of property classes in Publication 527, Recovery Periods Under GDS.

Ask two volunteers to role-play the sample interview. Ask the rest of the class to listen and take notes.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… tony responds…

I see you were stationed overseas last year from March through December. Did you rent out your home during that time?

We only need to deal with last year. Now, during January of last year you were the only one living in the house?

For January, we’ll report a twelfth of your mortgage interest and property taxes as itemized deductions on Schedule A. For February through December, we’ll report your mortgage interest, most property taxes, the cost of maintenance and repairs, and other expenses on Schedule E.

Now, how much did you receive in rent and other payments from February through December?

Yes.FromFebruary1throughtheendoftheyear.Actually,thetenantwasthereforthirteenmonths– hejustmovedout.

Yes,that’sright.Howdoesallthataffectmytaxes?

O.K.

Therewasrentof$1,200eachmonth,andthelastmonth’s cleaningdeposit.


How do I handle rental property that the taxpayer also uses?

Whentherentalpropertyisaportionofthetaxpayer’sresidence,therentalincomeandexpensesmustbeallocatedseparatelyfromthetaxpayer’spersonalexpenses.

How do I differentiate between rental expenses and personal use expenses?

ExpensesthatapplytoonlytherentalpartofapropertyarebusinessexpensesandshouldbereportedinfullonScheduleE.Thecostofinstallingasecondphonelinestrictlyforatenant’suse,forexample,isdeductibleasarentalexpense.However,thetaxpayercannotdeductanypartofthecostofthefirstphoneinapartially-rented property,eveniftenantsuseit.

Expensesthatbenefittheentirepropertymustbedividedbetweenrentaluseandpersonaluse;therentalportionisreportedonScheduleE.Ifdeductionsareitemized,thepersonalportionofhomemortgageinterestandpropertytaxmaybereportedonScheduleA.Thetaxpayercanchooseanyreasonablemethodtoallocatetheexpenses.Themostcommonmethodsarebasedonthenumberofroomsinthe dwellingoronthetotalareaofthedwelling.

OnScheduleE,reportexpensesthatapplyexclusivelytotherentalroomandtheallowedpercentageofexpensesthatbenefittheentirehouse.Forexample,iftherentedportionis10%oftheproperty:

• 100%ofthecosttowallpaperthetenant’sroom

• 10%ofpropertytaxes,utilities,mortgageinterest,anddepreciation

sample IntervIeW (continued). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… tony responds…

I have Form 1098 for your mortgage interest and the invoice for your property taxes. I’ll need the amount of your homeowners insurance for the year. Did you have any other expenses related to renting, such as repairs or improvements?

We’ll report the paint job on Schedule E as an expense. We’ll also work out the depreciation on both the house and the refrigerator.

Yes,justbeforeIleftthecountry,Ispent$1,000havingtheplacepaintedandIinstalledanew refrigerator.

Point out that taxpay-ers who rent out part of a property allocate mortgage interest and property taxes separately on both schedules.

example

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

•100%ofanyexpensesthatrelateonlytotherentalportionofthehouse,suchasrepairsorupgradestotherentedroom

•10%ofanyqualifiedexpensethatbenefitstheentirehouse

Ask a volunteer to read the Gloria example.





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

• 90%ofthemortgageinterest

• 90%ofthepropertytaxes

Question 9:Fortaxpayerswhorentpartofapropertyinwhichtheylive,whichexpensesarereportedonlyonScheduleEandnotonScheduleA?

A.Homeinsuranceandmortgageinterest

B.Propertytaxesandrepairs

C. Utilities and home insurance

D.Depreciationandpropertytaxes

How should taxpayers report rental expenses that exceed their rental income when they live in the home?

Thewaytaxpayersreportrentalexpensesdependsonhowmuchtheyusetheprop-erty.Howtaxpayersreportrentalexpensesthatexceedtheirrentalincomedependsonhowmuchtheyusetheproperty.

Taxpayerswhodonotusetherentalhomeastheirresidenceshould:

• Includetherentasincome,and

• Deductalltherentalexpenses,evenifexpensesexceedincome

Taxpayerswhorentouttheirresidence15daysormoreduringtheyearshould:

• Includetherentasincome,and

• Deducttherentalexpensesuptotherentalincome;expensesthatexceedrentalincomemaynotbedeductible

Taxpayerswhorentouttheirresidencefewerthan15daysduringtheyearmaynot includetherentasincomeordeductrentalexpenses.

Are there any limitations?

Deductibilitylimitationsapplytorentalexpensesforadwellingthetaxpayerusesasahomemorethanthegreaterof:

• 14days,or

• 10%ofthenumberofdaysduringthetaxyearthepropertyisrentedatfairmarketvalue

.

The rental portion of utilities, home insurance, repairs, and depreciation are rental deductions claimed on Schedule E, but the personal portions are not reported on Schedule A.

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



Are there any exceptions?

Taxpayerswhousedadwellingunitastheirmainhomemaynothavetocountallthattimeas“daysofpersonaluse”if,for12ormoreconsecutivemonths,theyrentedortriedtorentthedwellingunitatafairrentalprice.Inthiscase,daysofpersonalusedonotincludethetimethetaxpayerusedthepropertyashisorhermainhomebeforeorafterrentingitorofferingitforrent.

Thisexceptionappliesforthepurposesofdeterminingwhethertolimitthedeductibil-ityofrentalexpenses.Itdoesnotapplywhendividingexpensesbetweenrentalandpersonaluse.

Anydaythetaxpayerspentworkingsubstantiallyfulltimerepairingandmaintainingtherentalpropertyisnotcountedasadayofpersonaluse,evenifthetaxpayer’sfamilymembersusedthepropertyforrecreationpurposesonthesameday.

Question 10:Whichofthefollowingtaxpayerscannotdeductanyoftheir rentalexpenses?

A.Julio,whorentedouthishouseeightmonthslastyear.Afterthetenantsmovedout,helethissisterandbrother-in-lawstayinthehousetwomonthsrent-free.

B.Marcel,whorentedaroomofhiscondoallyearandlivedtherehimself11months.

C.Cherice,whoofferedaroomforrentinherhomeallyear,buthadonlyonerenterwhostayedjustonemonth.

D. Lois, who rented her home 12 days, then allowed her father to live there rent-free the rest of the year while she worked overseas.

Ask a volunteer to read the Latricia example. Answer any student questions.

example

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

•14days,or

•10%ofthe270daysitwasrented(27days)

Direct students to review the Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home in Publication 17, Chapter 9, Rental Income and Expenses.

example

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

Ask a volunteer to read the Trent exam-ple. Answer any stu-dent questions.



Lois rented her home out fewer than 15 days dur-ing the year and used it for personal purposes by allowing her father to live there rent-free.


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. Passive activity law

C.Activeparticipationrule

How are passive rental losses reported?

TaxpayersuseForm8582tofiguretheamountofanypassiveactivitylossallowedforthecurrenttaxyear.Form8582summarizeslossesandincomefromallpassiveactivities.

Generally,taxpayersarenotrequiredtofileForm8582iftheyhave:

• Onlyonepassivelossgeneratedfromarentalactivity,and

• Anadjustedgrossincome(AGI)oflessthan$100,000

Tax Software Hint:ThetaxsoftwarewillautomaticallygenerateandcompleteForm8582ifrequired.IfanyquestionsariseregardingwhethertofileorhowtocompleteForm8582,referthetaxpayertotheIRSoraprofessionaltaxpreparer.

example

SallyJenkins,aU.S.citizen,livesinEuropeandispaid$25,000inwagesbytheU.S.Government,and$100ofinterestincome.SherentedoutherU.S.homeandincurred$1,000inrentallossforthetaxyear.Althoughhersistercollectstherent,Sallymakesallofthedecisionsastowhom,andforwhatamount,thepropertywillberented.WhileSallyisinEurope,shepayshersistertomanagetheproperty.Sally’srentallossof$1,000maybeoffsetagainsthergrossincomeof$25,100becausesheisconsideredtobeanactiveparticipantintherentalactivity.

Ask a volunteer to read the Sally example. Answer any student questions.

Formoreinformation,seePublication925,PassiveActivityandAt-RiskRules.

Passive activity losses can be deducted only from passive activity income. Taxpayers who are not active participants may not deduct rental losses that exceed rental income.





Question 12:WhichtaxpayerismostlikelyrequiredtofileForm8582,PassiveActivityLossLimitations?

A.Chelsea,whoownstworentaldwellingswithnonetlossandhasanAGIof$111,000

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

C. Sean, who owns one rental dwelling with a loss of $800, and has an AGI of $103,000

Summary

Thetaxpayer’sincomeinterest,dividends(ordinaryandqualified),andcapitalgains(netshort-termandnetlong-term)shouldbereportedontheappropriateformsandschedulesaslistedonpage2ofForm1041,ScheduleK-1.

TaxpayersreceiveaScheduleK-1(Form1065orForm1120S)reportingtheincometheyreceivedfrominterest,dividends(ordinaryandqualified),andcapitalgains(netshort-termandnetlong-term)frompartnershipsandcorporations.Page2ofScheduleK-1liststheappropriateformsandscheduleswherethetaxpayer’sincomefromthesesourcesshouldbereported.

RentalincomeanddeductiblerentalexpensesarereportedonPartIofScheduleE,SupplementalIncomeandLoss.U.S.citizensandresidentaliensmustreportrentalincomeforthemonthstheirhomeisrented,regardlessofwhethertherentalpropertyislocatedintheU.S.orinaforeigncountry.

Whenrentingoutpartoftheproperty,certainexpensesmustbedividedbetweenrentaluseandpersonaluse;somearereportedonScheduleAandsomeonScheduleE.

Taxpayerswhodonotuseadwellingunitasahome(forpersonalpurposes)shouldincludealltherentintheirincomeanddeductalltherentalexpenses.Thosewhorentouttheirhomes:

• 15daysormoreduringtheyearmaynotbeabletodeductrentalexpensesthatexceedrentalincome

• Fewerthan15daysduringtheyearshouldnotreportanyoftheincomeordeductanyoftherentalexpenses

Becauserentalactivitiesaregenerallyconsideredpassiveactivities,rentallossesarenotfullydeductible.However,taxpayerswhoactivelyparticipatedintherentingofthepropertymaydeductupto$25,000oftheirrentallosses,upto$12,500formarriedtaxpayersfilingseparatelyandlivingapart.

Thepassiveactivitylawstatesthatpassiveactivitylossescanbedeductedonlyfrompassiveactivityincome.TaxpayerswithrentallossesmayberequiredtofileForm8582,PassiveActivityLossLimitations.

Sean wouldn’t have to file Form 8582 if his AGI was less than $100,000 and he only had one pas-sive rental loss.





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

Instructor Notes

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



Ask the students to determine if unemploy-ment compensation is earned income.

Refer students to the Volunteer Resource Guide (Tab H).

What do I need?


□ 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

Review lesson sum-mary.



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

Instructor Notes

Introduction

Thislessonwillhelpyouassisttaxpayerswhohavesocialsecurityandequivalentrail-roadretirementbenefits.Thesebenefitsmayormaynotbetaxable.

Toproperlyreportincome,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.TheapprovedintakeandinterviewsheetlistsSocialSecurityandRailroadRetirementBenefitsintheIncomesection.

Askthetaxpayeraboutthereceiptofeitherofthesebenefits.TheSocialSecurityAdministrationissuesFormSSA-1099,SocialSecurityBenefitStatement,tosocialsecuritybenefitrecipients.TheRailroadRetirementBoardissuesFormsRRB-1099,PaymentsbytheRailroadRetirementBoard,andRRB-1099-R,AnnuitiesorPensionsbytheRailroadRetirementBoard.

SeePublications575,PensionandAnnuityIncome,and915,SocialSecurityandEquivalentRailroadRetirementBenefits,foradditionalinformationonthetopicsdiscussedinthislesson.

Objectives


• 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%.

Review how each type of retirement benefit is reported.


Ifthetaxpayerfilesajointreturn,combinetheincomeandbenefitsofbothspouseswhencompletingtheworksheet.Evenifonespousereceivednosocialsecuritybenefits,includethatspouse’sotherincomewhencompletingtheworksheet.Ifbothspousesreceivedbenefits,combineboththeirbenefitsandincomewhencompletingtheworksheetforthereturn.

How do I report social security or railroad tier 1 benefits?

Tax Software Hint:Thetaxsoftwarewillperformallthecalculationstodeter-minethetaxableamountbasedonotherinformationonthereturn.Besuretoenterallincome,includingtax-exemptinterest,inorderforthesoftwaretocorrectlycalculatetaxabilityofbenefits.GototheVolunteerResourceGuide(Tab2),RailroadRetirement,CivilService,andSocialSecurityBenefits,forsoftwareentries.

Ifyouarepreparingapaperreturn,firstcompletetheotherincomeandcertainadjust-mentitemsonForm1040,page1.Next,calculatethetaxableamountofsocialsecu-ritybenefitsbyenteringthebox5amountsfromallFormsSSA-1099andRRB-1099intotheSocialSecurityBenefitsWorksheetintheForm1040Instructions.OnForm1040,enterthetotalamountofbenefitsreceivedonline20aandthetaxableportiononline20b.Ifnoneofthebenefitsaretaxable,enter“0”onForm1040,line20b.Ifthetaxpayerisitemizingdeductions,includeMedicarepremiums(PartBandD)fromtheFormsSSA-1099andRRB-1099onScheduleA.Additionally,besuretoreportanyfederalincometaxwithholdingontheappropriatelineofForm1040,page2.

example

WandaandDanarebothretiredandwillfileajointreturn.WandareceivedFormSSA-1099withanamountof$4,300appearinginbox5.Danretiredfromtherail-road,andbox5ofhisFormRRB-1099showsanamountof$6,800.WandaandDanwillusethecombinedbenefitsof$11,100andonlyoneworksheettocalculateifanyoftheirbenefitsaretaxable.

Ask a volunteer to read the Wanda and Dan example.

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

CompletetheSocialSecurityBenefitsWorksheetintheForm1040Instructionstodetermineifanyportionofthebenefitsistaxable.


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.


Review the answer when complete.

Up to 85% of a tax-payer’s benefits can be taxable.



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

A.Averagingthebenefitoverthenumberofyears

B. A special procedure used to figure the taxable portion of the benefits assigned to the earlier years

C.Reportingthewholepaymentin2009

D.Reportinghalfthepaymentin2008andtheotherhalfin2009

Summary

Thislessonexplainedhowtodeterminewhetherincomefromtaxpayers’socialsecuritybenefitsandrailroadretirementbenefitsistaxable.

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

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

Ifyouareunabletocompletetheentireexercise,completeasmuchofitasyoucan.Comebacklatertofinishtheexerciseafteryoucoveredallthetechnicaltopicsinlaterlessons.




Review the answer when complete. Emphasize that B and C are the only options available under the cur-rent tax law. Answers A and D are not allow-able options.





ExErcisE answErs

Answer 1: D. $9,965 or 85% of the net benefits is the maximum amount that could ever be taxable.

Answer 2: B. There are only two options available for figuring the taxable portion of social security benefits paid as lump-sum benefit payments. The first option allows the taxpayer to report the whole payment in the year it was received. The other option is a special procedure that must be used to figure the taxable portion of the benefits assigned to the earlier years. Refer taxpayers who want to use this option to a professional tax preparer or to Publication 915.

Notes

Lesson 15: Income – Other Income; Form 1040, Lines 21-22 15-1

Instructor Notes

Introduction

Thislessonwillhelpyoudetermineotherformsofincomeandhowtoreportothersourcesofincome.PartofthelessonisforallcourselevelsandpartisonlyfortheInternationallevel.

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

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

Objectives


• 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.

Ask a volunteer to read the Alfredo example.


ExErcisEs

Answersarelistedfollowingthelessonsummary.

Question 1:MartaBremer,aU.S.citizen,livesinMussbach,Germany.Her2009incomeincluded$22,000inwagesearnedinGermany.Sheearned$300ininter-estfromherU.S.bank.WhatisMarta’stotalincome?

A. $0

B. $22,300

C. $300

D. $22,000

Question 2:MaryCarleton,aU.S.citizen,livesinBelgium.Her2009incomeincluded$10,000inwagesfromherBelgianemployer,$200ininterestfromherU.S.bank,$8,000inalimonypayments,and$7,000inchildsupportpaymentsfromherex-spouse.WhatisMary’stotalincome?

A. $8,000

B. $10,200

C. $18,200

D. $25,200

How do I convert foreign income to U.S. dollars?

Exchange rates

AllamountsontheU.S.taxreturnmustbestatedinU.S.dollars.ConvertincometaxpayersreceivedinforeigncurrencyintoU.S.dollarsusingtheappropriateexchangerate.U.S.exchangeratesarestatedintwoways:

• UnitsofforeigncurrencytooneU.S.dollar:0.74855Euro=1U.S.dollar

• U.S.dollarstooneunitoftheforeigncurrency:1.33592U.S.dollar=1Euro

ToconvertasumofmoneyintoU.S.dollars,dividetheamountofforeigncurrencybytheexchangeratefortheforeigncurrencytooneU.S.dollar.

example

Ryanreceived3,000Euros(€3000)onadaythattheexchangeratewas0.74855EurostooneU.S.dollar.Basedonthisexchangerate,thevalueofRyan’s€3000is:€3000÷0.74855=$4,007.75

Her gross income includes wages and interest.

Only her child support payments are nontaxable.



Ask a volunteer to read the Ryan example.

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.

Divide 200 Euros by .75514.

Divide 36,000 Euros by .7000 exchange rate.



Ask a volunteer to read the Edward example.


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.

Direct students to the tax software tab men-tioned here.

Point out that vol-unteers should help taxpayers determine if taking the exclusion will benefit them.

Form6251,AlternativeMinimumTax,isoutofscope.Referthetaxpayertoaprofes-sionaltaxpreparerifForm6251isapplicable.



Oncethetaxpayerchoosestoexcludeforeignearnedincome,thatchoiceremainsineffectforthatyearandalllateryearsuntilrevoked.Taxpayersmayrevoketheexclu-sionforanytaxyearbyattachingastatement.Whentheexclusionisrevoked,thetaxpayermaynotclaimtheexclusionagainforthenextfivetaxyearswithouttheapprovaloftheIRS.

What are the eligibility requirements?

Toclaimtheforeignearnedincomeexclusion,taxpayersmust:

• Demonstratethattheirtaxhomeisinaforeigncountry

• Meeteitherthebonafideresidencetestorthe physicalpresencetest

• Haveincomethatqualifiesasforeign earnedincome

Therequirementsareappliedseparatelytoeachindivid-ual.Ifahusbandandwifeareworkingoverseas,eachmustmeetallrequirementstoqualifyfortheexclusion.Iftheydoqualify,eachisentitledtoanexclusionofupto$91,400(onqualifiedincome)for2009.

Question 5:MirandahaslivedinPuertoRicosince2001.Issheeligiblefortheforeignearnedincomeexclusion? ¨ Yes þ No

How do I determine the tax home?

Toclaimtheforeignearnedincomeexclusion,thetaxpayer’staxhomemustbeinaforeigncountry.Thetaxhomeisdefinedasthecountryinwhichthetaxpayerisperma-nentlyorindefinitelyengagedtoworkasanemployeeoraself-employedindividual,regardlessofwherethefamilyhomeismaintained.

Fortaxpayerswhoworkabroadbutdonothavearegularplaceofbusinessbecauseofthenatureofthework,theirtaxhomeistheplacewheretheyregularlylive.ThetaxhomeformembersoftheU.S.ArmedForcesisthepermanentdutystation,eitherland-orship-based.Generally, most U.S. military members and their dependents do not qualify for the foreign earned income exclusion.

example

JohnandMaryarebothinthearmedforcesandhavebeenpermanentlystationedinGermanysinceAugust2004.Theirtaxhomefor2009isGermany.

Theterms“foreign,”“abroad,”and“overseas”donotincludePuertoRico,U.S.VirginIslands,AmericanSamoa,Guam,theCommonwealthoftheNorthernMarianas,WakeIsland,theMidwayIslands,andJohnstonIsland.

Puerto Rico is not a foreign country.



Ask a volunteer to read the John and Mary example.



Question 6:AlanhaslivedandworkedinChinasinceAugust16,2002.For2009,Chinaishistaxhome. þ True ¨ False

What is a regular place of abode?

Forpurposesoftheforeignearnedincomeexclusion,iftaxpayersworkoverseasforanindefiniteperiodoftime,andtheirregularplaceofabodeistheU.S.,thetaxpayerscannotdesignatetheforeigncountryasthetaxhome.

“Regularplaceofabode”isdefinedasone’shome,habitation,domicile,orplaceofdwelling.Itdoesnotnecessarilyincludeone’sprincipalplaceofbusiness.

Ifthetaxpayermaintainsaplaceofbusiness,orisassignedtooverseasemploymentinaforeigncountryforanindefiniteperiod,and does not maintain a regular place of abode in the U.S.,thetaxhomeisoverseasandthetaxpayermaybeeligiblefortheforeignearnedincomeexclusion.

How do I determine whether the U.S. is the taxpayer’s regular place of abode?

AskthreequestionstodeterminewhetheraU.S.homeisthetaxpayer’sregularplaceofabode:

1. DidyouuseyourhomeintheU.S.asaresidencewhileyouworkedatyourjobintheU.S.justbeforegoingabroadtoyournewjob,anddidyoucontinuetomaintainwork(contacts,jobseeking,leaveofabsence,ongoingbusiness,etc.)inthatareaintheU.S.duringthetimeyouworkedabroad?

2. AreyourlivingexpensesduplicatedatyourU.S.andforeignhomesbecauseyourworkrequiresyoutobeawayfromyourU.S.home?

3. DoyouhaveafamilymemberormemberslivingatyourU.S.home,ordidyoufrequentlyuseyourU.S.homeforlodgingduringtheperiodyouworkedabroad?

Iftheanswertotwoofthequestionsis“no,”thetaxpayerisconsideredtobeindefi-nitelyassignedtothenewlocationabroadandiseligiblefortheforeignearnedincomeexclusion.

Iftheanswertoallthreequestionsis“yes,”andthejobdurationisforlessthanoneyearwiththetaxpayerreturningtotheU.S.home,thetaxpayerisconsidered“tempo-rarilyaway”fromhome.Inthiscase,thetaxpayerdoesnotqualifyfortheforeignearnedincomeexclusion,butmayqualifytodeductaway-from-homeexpenses.

Iftheanswertotwoofthethreequestionsis“yes,”withthesameexpectationofjobdurationandreturntotheU.S.home,thelocationofthetaxhomedependsonthefactsandcircumstances.

Generally, the tax home is the country in which taxpayers maintain their place of business.



Point out that detailed information on deter-mining the taxpayer’s abode and tax home is in Publication 54.




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

What is the period of stay requirement?

Theperiodofstayistheamountoftimethetaxpayerstaysintheforeigncountry.Tomeettheperiodofstayrequirement,thetaxpayermustbeeither:

• AU.S.citizenorU.S.residentfromataxtreatycountrywhoisabona fide resident ofaforeigncountry(orcountries)foranuninterruptedperiodthatincludesanentiretaxyear,or

• AU.S.citizenorU.S.residentalienwhoisphysicallypresentinaforeigncountryorcountriesforatleast330fulldaysduringanyperiodof12consecutivemonths

What is the bona fide residence test?

Tomeetthebonafideresidencetest,taxpayersmustshowthattheyhavesetuppermanentquartersinaforeigncountryforanentire,uninterruptedtaxyear.Simplygoingtoanothercountrytoworkforayearormoreisnotenoughtomeetthebonafideresidencetest.Ataxpayermustestablisharesidenceintheforeigncountry.

AbrieftriptotheU.S.willnotpreventthetaxpayerfrombeingabonafideresident,aslongastheintentiontoreturntotheforeigncountryisclear.

Question 8:Zach,aU.S.citizen,hashomesintheU.S.andinSpain,wherehehasworkedforthelasttwoyears.Zach’swife,whoisalsoaU.S.citizen,liveswithhiminSpain.ZachvisitstheU.S.frequently.DoesZachmeetthebonafideresidencetestinSpain? þ Yes ¨ No

example

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

Having established perma-nent residence in Spain with his wife, he meets the test.

Ask a volunteer to read the Charles example.



He is considered to have an abode in the United States.



example

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

Ask a volunteer to read the Henry example.


What is the physical presence test?

Ifthetaxpayerdoesnotmeetthebonafideresidencetestthentheymayqualifyunderthephysicalpresencetestrules.Toqualify,thetaxpayermustbephysicallypresentinaforeigncountry330fulldaysduringaperiodoftwelveconsecutivemonths.

Inorderforadaytocountforthetest,itmustbeafulldayinaforeigncountry.WhenarrivingfromtheU.S.,orreturningtotheU.S.,anydayinwhichpartofthetimeisspentintheU.S.oroverinternationalwatersdoesnotcountasaqualifyingdayinaforeigncountry.

Thetaxpayermaymoveaboutfromoneplacetoanotherinaforeigncountryortoanotherforeigncountrywithoutlosingfulldays.Ifanypartofthetaxpayer’stravelisnotinanyforeigncountryandtakeslessthan24hours,youareconsideredtobeinaforeigncountryduringthatpartoftravel.SeePublication54,PhysicalPresenceTestcolumnforadditionalinformation.

Figuring the 12 Month Period

Any12monthperiodmaybeusedifthe330fulldaysinaforeigncountryfallwithinthatperiod.Ifnecessary,morethanoneperiodmaybeused,includingperiodsthatoverlap.SeePublication54forclarificationonthephysicalpresencerules.

What is qualifying income?

Toqualifyfortheexclusion,incomemustbeearnedincome.

How does earned income qualify for the exclusion?

Toqualifyfortheexclusion,theearnedincomemustbeforservicesperformedinaforeigncountry.AmountspaidbytheUnitedStatesoritsagenciestoitsemployeesdo not qualify fortheexclusion.Thisincludesmilitarypayandpaymentforsuchactivitiesaspostexchanges,commissaries,andofficersclubs.

Earnedincomedoes not include:

• Dividends

• Interest

• Capitalgains

• Alimony

• Socialsecuritybenefits

• Pensions

• Annuities

example

IfataxpayerleftEnglandbyshipat10:00p.m.onJuly6andarrivedinLisbonat6:00a.m.onJuly8,thetaxpayerwouldloseJuly6,7,and8asfulldaysbecausethetriptookmorethan24hours.Inthisexample,ifthetaxpayerremainedinLisbon,thefirstfulldaywouldbeJuly9.

Ask a volunteer to read the taxpayer example.



What are sources of earned income?

Toqualifyfortheexclusion,servicesmustbeperformedinaforeigncountry.Wherethepaymentscomefromorwheretheyaredepositedisnotafactorindeterminingthesourceoftheincome.

Ifataxpayerworkspredominantlyinaforeigncountry,butdoessomeworkintheU.S.,anadjustmentmustbemadetothetotalforeignearnedincome.

Question 9:JuanitalivesinScotland.SheisretiredandherincomeconsistsofU.S.socialsecurity,apension,andseveralstockdividends.Doesshequalifyfortheforeignearnedincomeexclusion?¨ Yes þ No

When do I complete and file Form 2555 or Form 2555-EZ?

Ifthetaxpayerqualifiestoexcludeforeignearnedincome,Form2555orForm2555-EZmustbecompleted.Publication54,TaxGuideforU.S.CitizensandResidentAliensAbroad hasanillustrationofataxreturnwithForm2555completedforthehusbandandForm2555-EZcompletedforthewife.

TobeabletouseForm2555-EZ,thetaxpayermust:

• BeaU.S.citizenorresidentalienwhohaswagesandsalaries,butnot self-employmentincome

• Havetotalforeignearnedincomeof$91,400orless

• Havenobusinessormovingexpensedeductions

TaxpayerswhodonotmeettheserestrictionsshouldfileForm2555toclaim theexclusion.

example

EarlworksandlivesintheBahamas.In2009,heworked50weeksintheBahamas.HeattendedabusinessmeetinginFloridaforoneweek,andwasonvacationforoneweek.One-fiftiethor2%ofhiswagesarenotforeignearnedincome,becauseoftheweekspentworkinginFlorida.

Social security benefits, pension, and dividends are not earned income, so she does not qualify.

Ask a volunteer to read the Earl example.



example

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

Ask a volunteer to read the Margaret example.



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

A.Form2555

B. Form 2555-EZ

How do I complete Form 2555-EZ?

TaxpayerswhoareeligibletofileForm2555-EZshouldcompletePartsI,II,andIVoftheform.CompletePartIIIifthetaxpayerwasintheUnitedStatesoranyofitsposses-sionsduringthetaxyear.

How do I complete Form 2555?

UsethefollowingguidelineswhencompletingForm2555.

• PartIiscompletedbyalltaxpayers

• PartIIiscompletedbytaxpayerswhoqualifyunderthebonafideresidencetest

• PartIIIiscompletedbyalltaxpayerswhoqualifyunderthephysicalpresencetest

• PartIViscompletedbyalltaxpayers–listallforeignearnedincome

• PartViscompletedbyalltaxpayers

• PartVIiscompletedbytaxpayersclaimingthehousingexclusionand/orhousingdeduction

• PartVIIiscompletedbytaxpayersclaimingtheforeignearnedincomeexclusion

• PartVIIIiscompletedbytaxpayerswhohavedeductionsallowedinfiguring adjustmentstogrossincomethatareallocabletotheexcludedincome.Thethreemostcommondeductionsthatmayaffecttheexclusionare:

- One-halfself-employmenttaxplusallexpensesonScheduleC-EZ(self-employ-mentincomemaybeexemptfromincometaxbutnotself-employmenttax)

- Itemizeddeductions

- Movingexpenses


example

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

Becauseherincomeisfromself-employment,shewillneedtocompleteForm2555insteadofForm2555-EZtoexcludetheincome,andmustcompleteScheduleSEtopaysocialsecurityandMedicare.

Her earned income is less than $91,400.

Ask a volunteer to read the Michael and Eva example.



Display the Form 1040 page in the tax soft-ware and demonstrate the link to Form 2555 or Form 2555-EZ.



LookattheapprovedintakeandinterviewsheetfortaxpayersJackandJillHill(seeMilitaryPracticeExercises,Exercise16,inPublication4491-W.)

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… JIll says…

That is possible. First, we will have to determine if you meet the requirements. Were you working as a military or civilian employee of the U.S. Government?

Great, that would qualify, but Jack’s military pay won’t. [VolunteerlinkstoForm2555-EZonthetaxsoftware.] Let’s see. You are a U.S. Citizen. You earned wages in a foreign country and the total was less than $91,400. You have no self-employment income or business/moving expenses and since you lived on base, you won’t have a foreign housing exclusion. OK, we can use Form 2555-EZ.

Now we have to determine if you meet the bona fide resi-dence or physical presence test and if your tax home is in a foreign country.

Don’t worry, I just need to ask you a few questions. How long did you say you were in Germany?

No problem then. You were living in Germany for the entire year so you are considered a bona fide resident in 2009. Since your home and place of employment were both in Germany, you meet the tax home test. Now, what was your address while you were living in Germany?

What did you do for Bavaria Advertising?

Do you have Bavaria Advertising’s address?

Were you present in the U.S. during 2009? I have to enter the dates on this form. [Onpage2or4oftheapprovedintakeandinterviewsheet, indicateJill’sresponsestothesequestions.]

Willwebeabletoexcludeanyofmyincomeonourtaxreturn?IworkedforBavariaAdvertisinginMunichthispastyearandmade$24,000inU.S.dollars.Iheardthatyoudon’thavetopaytaxesonincomeearnedinaforeigncountryandI’veneverdonethisbefore.

No,BavariaAdvertisingisaforeigncompanyownedbyafamilyrightthereinMunich.

Yeah,thatallsoundsright.

Isurehopeyouknowwhatyouaredoing,itsoundscomplicatedtome.

WemovedonbaseinGermanyonMarch3,2008andjustreturnedtothestatesonJanuary10,2010.

1567AlbionStreet,Munich.

Iwasacopywriter.

Isuredo,itisrighthereonthisstatement.

Notin2009.Butwedidcomehomefortheholidaysin2008.

Direct students to find the approved intake and interview sheet in Publication 4491-W.



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

Instructor Notes

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.



Direct students to Publication 3 for this section and the exercises.

Lesson 16: Military Income16-2

ExErcisEs

What income is excludible?

ExcludibleincomedoesnothavetobereportedasincomeonForm1040,Form1040A,orForm1040EZ.Theexclusionapplieswhetherornottheitemisfurnishedinkindorisareimbursementorallowance.

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


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

Question 2: WhichofthefollowingitemsisexcludiblefromU.S.ArmedForcesmembers’income?

A. Studentloanrepayments

B. Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) income

C. Basicpay

D. Hardshipdutypay

What is military separation with disability severance pay?

Disabilityseverancepayhasvaryingeffectsonaservicemember’sincomeandtaxes.

What is severance pay?

U.S.ArmedForcesmemberswhohavebeenseparatedfromtheserviceafteryearsofserviceorformedicalreasonsaregivenseverancepay,whichisgenerallytaxableaswages.IfthememberreceivesdisabilityseverancepayandislaterawardedVeteran’sAffairs(VA)disabilitybenefits,100%ofthedisabilityseverancebenefitmaybeexcludedfromincome.TheVAmakesthedeterminationthatthememberisentitledtomedicaldisabilitybenefits,andthedeterminationprocesscantakeseveralmonths,andsometimesyears.

What is VA disability compensation?

VAdisabilitycompensationisamonetarybenefitpaidtoveteranswhoaredisabledbecauseofinjuryordiseaseincurredoraggravatedduringactivemilitaryservice. Theserviceoftheveteranmusthavebeenterminatedthroughseparationordischargeunderhonorableconditions.Disabilitycompensationvarieswiththedegreeofdisabilityandthenumberofdependents,andispaidmonthly.Thebenefitsarenotsubjecttofederalorstateincometax.

Both allowances are non-taxable income.

Bonuses are reflected on Form W-2.



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. Are not included on the taxpayer’s Form W-2 or 1099-R

D. MaybeginbeforetheVAissuestheletterofdetermination

What is a combat zone?

AcombatzoneisanyareathePresidentoftheUnitedStatesdesignatesbyExecutiveOrderasanareainwhichtheU.S.ArmedForcesareengagingorhaveengagedincombat.AnareabecomesacombatzoneandceasestobeacombatzoneonthedatesthePresidentdesignatesbyExecutiveOrder.Publication3liststhespecificareasanddates.

example

AnitaZapatawasanactivedutyservicememberwhowasseparatedduetoamedicalcondition,andbeganreceivinghermilitarypensioninFebruary2008.Herearethepaymentsshereportedonher2008taxreturn:

Payments Amount

• Disabilityseverancepay $10,000

• Servicepension $33,000

• Activedutypay $5,000

In2009,theVAdeterminedthatshewasretroactivelyentitledtoaVAdisabilitypensionof$837eachmonthfromthedateofherdischarge(February2008).Shecanamendher2008taxreturntoexclude$9,207($837x11months)ofthepensionshereceivedplustheentire$10,000disabilityseverancepayment.

Shemustattachacopyofherletterofdeterminationtotheamendedreturn.Her2009Form1099-RwillnotincludethenontaxableVAdisabilityretirementsreceivedduring2009.

Point out the need to file an amended return under the conditions described here.

Ask a volunteer to read the Anita example.

Answer any student questions.

Disability payments are paid directly from the VA and not listed on Form W-2.




HazardousdutyareasaredeterminedbyCongress.MembersoftheArmedForcesdeployedoverseas,awayfromtheirpermanentdutystation,insupportofoperationsinaqualifiedhazardousdutyarea,orperformingqualifyingserviceoutsidethequalifiedhazardousdutyarea,aretreatedasiftheyareinacombatzoneforfederalincome taxpurposes.

What is the combat zone exclusion?

MembersoftheU.S.ArmedForceswhoserveinacombatzonemayexcludecertainpayfromtheirincome.Theentitlementtothepaymusthavefullyaccruedinamonthduringwhichtheyservedinthecombatzoneorwerehospitalizedduetowounds,disease,orinjuryincurredwhileservinginthecombatzone.Theydonothavetoreceivethepaywhileinacombatzone,inahospital,orinthesameyeartheyservedinacombatzone.

Thefollowingsectionistohelpyouunderstandwhenpayisconsideredexcludableascombatpay.Youwillnotbemakinganydecisionsaboutwhatisexcludable.Theinformationonthemilitarymember’sFormW-2indicatestheamountofcombatpaywithacodeQ.Ifmilitarymembersfeeltheamountisincorrect,referthemtothelocalaccountingandfinanceorpayrollofficeforclarification.DonotchangeanyamountsontheFormW-2wheninputtinginthetaxsoftware.

What qualifies as service in a combat zone?

Serviceinacombatzoneincludesperiodsthatmilitarymembersareabsentfromdutybecauseofillness,wounds,orleave.If,asaresultofservinginacombatzone,militarymembersbecomeprisonersofwaroraremissinginaction,theyareconsideredtobeservinginthecombatzoneaslongastheykeepthatstatusformilitarypaypurposes.

When does service outside a combat zone qualify as service inside a combat zone?

Militaryserviceoutsideacombatzoneisconsideredtobeperformedinacombatzoneiftheservice:

• Isindirectsupportofmilitaryoperationsinthecombatzone,and

• Qualifiesamemberforhostilefire/imminentdangerpayduetodangersorrisksfromthecombatzone

Militarypayreceivedforthisservicewillqualifyforthecombatzoneexclusioniftheotherrequirementsaremet.

What is nonqualifying presence in a combat zone?

Thefollowingmilitaryservicedoesnotqualifyasserviceinacombatzone:

• Presenceinacombatzonewhileonleavefromadutystationlocatedoutsidethecombatzone

• Passageoverorthroughacombatzoneduringatripbetweentwopointsthatareoutsideacombatzone,and

• Presenceinacombatzonesolelyforamember’spersonalconvenience

Emphasize that vol-unteers will not need to determine what income is excludible. Form W-2 information can only be changed by the payroll office, which then must issue a correct Form W-2.

U.S.servicemembersareconsideredtobeservinginacombatzoneiftheyareeitherassignedonofficialtemporarydutytoacombatzoneor theyqualifyforhostilefire/imminentdangerpaywhileinacombatzone.



Question 4: Whichofthefollowingmayqualifyasserviceinacombatzone?

A. Temporary duty in a combat zone

B. Travelingthroughacombatzonebetweentwopointsoutsideofthecombatzone

C. Presenceinacombatzonewhileonleavefromadutystationlocatedoutsidethecombatzone

D. Directsupportofaqualifiedhazardousdutyarea,butnotentitledtohostilefire/imminentdangerpay.

What is the amount of the combat zone exclusion?

• Enlistedmembers,warrantofficers,orcommissionedwarrantofficerswhoserveinacombatzoneduringanypartofamonth(evenifit’sonlyoneday)canexcludeallofthatmonth’smilitarypay,includingawardsandre-enlistmentbonusesforwhichthememberbecomeseligiblewhileinthecombatzone.Militarypayearnedwhilehospitalizedduetowounds,disease,orinjuryincurredinthecombatzonecanalsobeexcluded.

• Commissionedofficers(includinglimiteddutyofficers)mayexcludepayaccordingtotherulesforenlistedmembers.However,theamountoftheexclusionislimitedtothehighestrateofenlistedpayplustheamountofimminentdanger/hostilefirepayreceivedforeachmonthduringanypartofwhichtheyservedinacombatzoneorwerehospitalizedasaresultoftheircombatzoneservice.

Combatpayisnotincludedinbox1wagesontheservicemember’sFormW-2,buttheamountisshowninbox12ofFormW-2,withcodeQ.IfservicemembersbelievethetaxablewagesonFormW-2areincorrect,theyshouldcontactthefinanceofficetorequestacorrectedFormW-2.NontaxablecombatpaysometimesincreasesChildTaxCreditortheEarnedIncomeTaxCredit.Ifusingthetaxsoftware,besuretoenterallfieldsonFormW-2.Iffilingapaperreturn,besuretoconsiderthecombatpayamountwhencalculatingthesecredits.


example

Sgt.BobbyOsagewasnotassignedtoacombatzonebuthediddutythatwasqualifiedforhostilefirepay.Hecanexcludethatincome.

Includes qualifying for hostile fire/imminent danger pay while serving in direct support of a combat zone.

Ask a volunteer to read the Sgt. Osage example.

Ask what if Sgt. Osage did not qualify for hostile fire pay but had to pass through a combat zone on the way to his assignment.

Answer: His pay dur-ing that trip is includ-able.





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.

Point out that responses to these questions would be noted on page two of the approved intake and interview sheet.


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

Instructor Notes

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.

Direct students to Form 1040 – Adjust-ments to Income in tax software, in the Volun-teer Resource Guide (Tab 3).


What other rules apply?

Continuetoprobetolearnifthetaxpayerorspousereceivedreimbursementthatwouldreducetheamountoftheireducatorexpenses.Forexample,ask:

• DidyoureceivereimbursementthatisnotlistedonFormW-2?

• Didyouredeemtax-freeinterestonU.S.SeriesEEandISavingsBonds?

• DidyoureceivenontaxableearningsfromaQualifiedTuitionProgram(QTP)orCoverdellEducationSavingsAccount(ESA)?

Educatorexpensesarereducedbyanyoftheseapplicablereimbursements.

How do I report this?

Educatorexpensesareenteredonline23ofForm1040.Don’tforgettoreducethetotaleducatorexpensesbyanyreimbursements,nontaxablesavingsbondinterest,ornontaxabledistributionsfromanESAorQTP.

Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab3),AdjustmentstoIncome.

example

Debbieisapart-timeartteacheratanelementaryschool.In2009,shespent$185onqualifiedexpensesforherstudents.Becauseshehasonly440hoursofdocumentedemploymentasaneducatorin2009,shecannotdeducthereducatorexpenses.

example

Gloriaisa5thand6thgradeteacherwhoworksfull-timeinayear-roundschool.Shehad1,800hoursofemploymentin2009.Shespent$262onsuppliesforherstudents.Ofthatamount,$212wasforeducationalsoftware.Theother$50wasforpamphletsforaunitsheteachessixthgradersonreproductivehealth.Onlythe$212isaqualifiedexpense.Shecandeduct$212.

example

Evelynmanagedtowork1,000hoursasaneducatorin2009whilecompletinggraduatestudies.Shespent$200tobuyqualifiedschoolsuppliesforherstudents.Shecovered$400ofherowneducationalexpensesfromherCoverdellESA.Shecannottakethedeductionforeducatorexpenses.

Ask a volunteer to read the two examples.

Ask a volunteer to read the Evelyn example.



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.

Ask a volunteer to read the Gloria example.

Remind students that child support pay-ments are not deduct-ible for the taxpayer and are not taxable to the recipient.


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.



Direct students to the Alimony chapter in Publication 17, and Publication 504, Divorced or Separated Individuals.

She can deduct the full amount because it is all required by the divorce instrument.

example

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

Ask a volunteer to read the Anthony example.


example

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

Ask a volunteer to read the Fred example.

AlthoughcontributionstoaRothIRAcan’tbededucted,thetaxpayermaybeeligiblefortheretirementsavingscontributionscredit,discussedinthelessononMiscellaneousCredits.

What are the eligibility requirements for an IRA contribution?

Thetaxpayer,andthetaxpayer’sspouseifapplicable,mustmeettheseeligibilityrequirementsinordertomakeanIRAcontribution:

• TypesofIRAs:VerifythetypesofIRAstowhichthetaxpayerandspousecontrib-uted.OnlycontributionstotraditionalIRAsaredeductible.

• Agelimit:TaxpayerscancontributetoatraditionalIRAonlyiftheyarelessthan70-1/2yearsofageattheendofthetaxyear.Checkthetaxpayer’sbirthdate(andspouse’sifapplicable)indicatedontheapprovedintakeandinterviewsheet.Tomeettheagerequirementfor2009,ataxpayermusthavebeenbornon,orafter,July1,1939.

• Compensation:Individualsmusthavetaxablecompensation(wages,self-employ-mentincome,commissions,taxablealimony,andtaxablescholarshipsorfellowships).

• Timelimits:Contributionsmustbemadebythe duedateforfilingthereturn,notincludingexten-sions.Verifywiththetaxpayerandspousethat theymadethecontribution(s)(orwillmakethem) byApril15,2010.

How much can a taxpayer contribute to an IRA?

ThereisalimittotheamountthatataxpayercancontributetoanIRAeachyear. Thetotalcontribution(combinedcontributionstoallaccounts,includingRothandtradi-tionalIRAs)cannotbemorethanthesmallerof:

• $5,000($6,000forapersonwhoisage50orolderbytheendofthetaxyear)

• Theindividual’staxablecompensation

What is the compensation requirement?

Compensationisgenerallytheincomeataxpayerhasearnedfromworking;italsoincludesalimony,andotherformsofincome.(SeePublication17formoreinformationoncompensation.)TaxpayerscannotmakeIRAcontributionsthataregreaterthantheircompensationfortheyear.

Iftaxpayersfileajointreturn,andonespouse’scompensationislessthantheotherspouse’scompensation,themostthatcanbecontributedforthatspouseisthelesserof:

• $5,000($6,000ifage50orolder),or

Besurethetaxpayerknowsthatifacontributionisreportedonthe2009returnbutisnotmadebythedead-line,thetaxpayermustfileanamendedreturn.



• Thetotalcompensationincludibleinthegrossincomeofbothspousesfortheyear,reducedby:

- TraditionalIRAcontributionsforthespousewiththegreatercompensation

- AnycontributionfortheyeartoaRothIRAforthespousewiththegreatercompensation

Inotherwords,aslongastheyfileajointreturn,marriedtaxpayers’combinedIRAcontributionscannotexceedtheircombinedcompensation,andneitherspousecancontributemorethan$5,000(or$6,000for50andolder)totheirownIRA.

AlthoughapersonmayhaveIRAaccountswithseveraldifferentfinancialinstitutions,thetaxlawtreatsalloftheirtraditionalIRAaccountsasonesingleIRA.

Question 2:Stanis47;hecontributed$1,000toaRothIRA.WhatisthemaximumhecancontributetoatraditionalIRA?

A. $3,000

B. $4,000

C. $1,000

D. $2,000

Question 3: BobandCarolaremarriedandbothare55yearsold.TheybothworkandeachhasatraditionalIRA.In2009,Bobearned$2,000andCarolearned$50,000.Iftheyfileseparatereturns,whatisthemaximumthatBobcancontrib-utetohisIRA?$2,000

Question 4:IfBobandCarol(fromQuestion3)filejointly,whatisthemaximumtheycancontributetoBob’sIRA?$6,000WhatisthemaximumtheycancontributetobothoftheirIRAs?$12,000

Ask a volunteer to read the Gene and Sue example.

Review the example to ensure that all stu-dents understand it.

Ask a volunteer to read the Bill example.

example

GeneandSuearemarriedandarebothover50yearsold.Geneearned$70,000andSueearned$1,500.In2009,Genecontributed$3,500tohistraditionalIRAand$2,000toaRothIRA,makinghistotalcontributions$5,500.TofigurethemaximumcontributiontoSue’sIRA,useatotalcompensationof$66,000(thatis,$71,500-$5,500).IfGeneandSuefilejointly,theycancontributeupto$6,000toSue’sIRAeventhoughherowncompensationwasjust$1,500.

example

Billis29.HehasatraditionalIRAaccountatCityHomeSavingsBank,andanothertraditionalIRAaccountthroughhisstockbroker.HealsoopenedaRothIRAthroughhisstockbroker.Billcancontributetoanyorallofhisaccountsthisyear,butthecombinedcontributionsfor2009cannotexceed$5,000.

$4,000 + $1,000 = $5,000 maximum for 2009.

If Married Filing Sep-arately, he can contrib-ute no more than his $2,000 compensation.

If Married Filing Jointly, they can con-tribute a maximum of $12,000, up to $6,000 each.




Special rules for certain military personnel

CurrentorformermembersoftheArmedForcesmayqualifyforadditionalretirementbenefits.UndertheHeroesEarnedRetirementOpportunities(HERO)Acttaxpayerscancounttax-freecombatpaywhendeterminingwhethertheyqualifytocontributetoeitheraRothortraditionalIRA.Beforethischange,membersoftheArmedForceswhoseearningscameentirelyfromtax-freecombatpayweregenerallybarredfromusingIRAstosaveforretirement.

When can IRA contributions be deducted?

MakesureyouarediscussingatraditionalIRAwiththetaxpayer.DeductionscannotbetakenforcontributionstoothertypesofIRAs.Thetaxpayer’sdeductionforIRAcontributionsmaybe“phasedout”(thatis,reducedoreliminated)dependingontheirincome,filingstatus,andwhetherthetaxpayeriscoveredbyaretirementplanatwork.ThedifferencebetweenthepermittedcontributionsandtheIRAdeduction,ifany,isthetaxpayer’snondeductiblecontribution.Form8606,NondeductibleIRAs,mustbecompletedforanynondeductiblecontributions.

Iftaxpayersdonotreportnondeductiblecontributions,allofthecontributionstoatradi-tionalIRAwillbetreatedashavingbeendeducted.Thismeansalldistributionswillbetaxedwhenwithdrawnunlessthetaxpayercanshow,withsatisfactoryevidence,thatnon-deductiblecontributionsweremade.

Form8606requiresbasisinformationinIRAsfromprioryearsandcanbecomplex. IfForm8606isrequired,referthetaxpayertoaprofessionaltaxpreparer.

How do I determine the deduction amount?

YouwillhelptaxpayersdetermineiftheyqualifytodeductallorpartoftheirtraditionalIRAcontributionsfromtheirincome.ThefactorsthataffectwhethertraditionalIRAcontributionsaredeductibleinclude:

• Whetherthetaxpayer(orspouse,iffilingajointreturn)iscoveredbyaretirementplanatwork.ReviewthetablesintheAdjustmenttaboftheVolunteerResourceGuide(TabE).ThesetablesarealsointheIRAchapterofPublication17.

• Thetaxpayer’sModifiedAdjustedGrossIncome(MAGI)beforetakingthededuction.Ifthetaxpayerorspouseiscoveredbyaretirementplan,thedeductionamountwillbereducedoreliminatediftheMAGIonthetaxreturnisaboveacertainlimit.UsetheIRADeductionWorksheetfromForm1040InstructionstofiguretheirMAGIwith-outthededuction.

How do I complete the IRA Deduction Worksheet?

Ifthetaxpayerandspousemeetthegeneraleligibilityrequirements,continuetheinter-viewbyusingtheIRADeductionWorksheet,foundintheForm1040Instructions,asyourguide.

Retirement coverage at work

Askifthetaxpayerand/orspousewerecoveredbyaretirementplanatworkatanytimeduring2009(worksheetstep1).Ifso,theirdeductionmaybelimited.Employeescoveredbyaretirementplanwillhavebox13onFormW-2checked.

Display or direct students to the Tradi-tional IRA Deduction Phaseout Charts in the Adjustment section (Tab E) of the Volun-teer Resource Guide.

Display or direct stu-dents to find the IRA Deduction Worksheet in the Form 1040 Instructions.


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.

Point out the caution.

Confirm that students understand.

Confirm that all stu-dents are following this process on the IRA Deduction Work-sheet.


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.


Display or direct students to the Effect of MAGI on Student Loan Interest Deduc-tion Chart in the Adjustment section (Tab E) of the Volun-teer Resource Guide.

example

Roberthastakenhisfirstjobaftercompletinglawschool.HisfilingstatusisSingle.Hepaid$3,000ininterestonhisstudentloansin2009.Withalladjustmentstoincome(exceptstudentloaninterestadjustment),hisMAGIis$49,000.Hecandeduct$2,500ofhisstudentloaninterestasanadjustmenttoincome.

example

Veronicaandherhusbandarefilingjointly.TheirMAGIis$120,000.Shecompletedherdoctoraldegreein2008andpaid$2,400instudentloaninterestin2009.DuetotheirhighMAGI,theirdeductionmustbecalculated;itwillbelessthanthefullamountofinterestthatshepaid.

Ask a volunteer to read the Veronica example.

Ask what if their MAGI is $100,000? $150,000?

Answers: Deduc-tion not affected for $100K; eliminated for $150K.



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



His mother is not their dependent.


No double benefit allowed

Taxpayerscannotdeductasinterestonastudentloananyamountthatisanallowabledeductionunderanyotherprovisionofthetaxlaw(forexample,ashomemortgageinterest).

What is an eligible educational institution?

Aneligibleeducationalinstitutionisgenerallyanyaccreditedpublic,nonprofit,orprivatepost-secondaryinstitutioneligibletoparticipateinthestudentaidprogramsadministeredbytheDepartmentofEducation.Itincludesvirtuallyallaccredited,public,nonprofit,andprivatelyownedprofit-makingpost-secondaryinstitutions.Ifthetaxpayersdonotknowifaneducationalinstitutionisaneligibleinstitution,theyshouldcontacttheschool.AsearchabledatabaseofallaccreditedschoolsisavailableontheU.S.DepartmentofEducationwebsiteathttp://ope.ed.gov/accreditation/.

Who is an eligible student?

Aneligiblestudentissomeoneenrolledatleasthalf-timeinaprogramleadingtoadegree,certificate,orotherrecognizededucationalcredential.Thestandardforwhatishalfthenormalfull-timeworkloadisdeterminedbyeacheligibleeducationalinstitution.

Where can I get the information?

Ifthetaxpayerpaid$600ormoreininteresttoasinglelender,thetaxpayershouldreceiveForm1098-E,StudentLoanInterestStatement,oranotherstatementfromthelendershowingtheamountofinterestpaid.Thisinformationwillassistyouincomplet-ingthestudentloaninterestdeduction.

Tofigurethedeductionwhenpreparingapaperreturn,usetheStudentLoanInterestDeductionWorksheetintheForm1040Instructions.Youneeddocumentationofallqualifiedstudentloaninterestpaidduringthetaxyear.

SeePublication970,TaxBenefitsforEducation,formoreinformationontheStudentLoanInterestDeduction.

Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab3),AdjustmentstoIncome.

Ask a volunteer to read the Jeremy example.

example

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


Ask two volunteers to role-play the sample interview while the class listens for key information.


HereishowavolunteerhelpedBrendadetermineifshecantakethedeductionforherstudentloaninterest.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… Brenda responds…

In reviewing your intake and interview sheet, I see you did not indicate if you had any educational expenses. Did you pay any student loan interest this year?

Well, you might be able to take a deduction for that. Since you are filing as Single, and your income before adjustments is not more than $55,000, your income is not more than the limit for your filing status. Can you show me a statement from the lender?

The interest amounts add up to $2,600. Now, if your interest payments qualify for the deduction, the most we can claim is $2,500. Do you have any questions about that?

I just need to ask a few questions to see if you qualify, okay? Earlier we decided that you can’t be claimed as a dependent on someone else’s return, so that’s no problem. Can you tell me what you used the loan to pay for?

Did you receive any educational assistance, like from your employer or the Veteran’s Administration?

How about tax-free withdrawals from a Coverdell educational savings account, another qualified tuition program, or from U.S. savings bonds?

Did you get any other nontaxable payments, not counting gifts, bequests, or inheritances, which were specifically for educational expenses?

It looks like you can claim the maximum deduction of $2,500. [IndicateontheapprovedintakeandinterviewsheetwhetherBrendaiseligibleforthisadjustment.]

Yes,IjustgraduatedayearagoandI’llbepayingthoseloansforawhile.

Ihavetwoloans,herearethe statements.

No,Iunderstand.

Mytuitionandfees,andmybooks.

No.

No,noneofthose.

Heavens,no,IwishIhad!

Review with the class the key points they noticed during the interview.


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.

Display or refer stu-dents to Form 1040 to follow along.

Demonstrate how to use software to com-pare adjustments to credits.



HereishowavolunteerhelpedDanielawiththeadjustmentstoincomecoveredin thislesson.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… danIela responds…

Daniela, we’ve totaled your income, so we can go on to Adjustments to Income. We might find ways to reduce the income that you’re taxed on. Do you have any questions before we go on?

Now, let’s review the expenses listed on your intake and interview sheet and the deductions listed in the Adjustments to Income section of Form 1040. Do you have a Health Savings Account?

Okay. We can skip moving expenses because you haven’t moved for your job. That brings us to self-employment tax. As you can see, tax software has calculated half of your self-employment tax and shows it here as an adjustment to income. The same with the penalty for an early withdrawal, right? Since I put that in when I entered your inter-est income, it already shows up as an adjustment.

Did you pay any alimony?

Now, did you contribute to an IRA?

Good for you. You can contribute up to $5,000 this year – will you be contributing any more before April 15? You can put money in your IRA for 2009 right up until the deadline for filing the return.

Was it a traditional, Roth IRA or a SIMPLE IRA?

There we go; it is what we call a traditional IRA. You certainly are under 70½ years of age. Were you covered by any kind of employer retirement plan at any time during 2009?

Because you weren’t covered by a retirement plan, you will be able to deduct the full $2,000 you contributed. [ThevolunteerreviewsallexpenseslistedontheapprovedintakeandinterviewsheetandmovesdowneachlineoftheAdjustmentssectionofForm1040,asksmorequestions,anddeterminesthatDanieladoesnotqualifyfortheremainingadjustments.]

We’ve entered all the adjustments that apply to you. Here is your total income… here are your total adjustments… and here is what we call your Adjusted Gross Income, that will carry over to the second page of the return where we will determine your deduc-tions and exemption amounts. [Ontheapprovedintakeandinterviewsheet,notethatyouhaveaddressedthisadjustment.]

No,itallmakessense.

No,Idon’t.

Cool!

No,I’veneverevenbeenmarried.

Iputin$2,000rightafterChristmas.

Idon’tthinkso,butthat’sgoodtoknow.

ItwasjustaplainoldIRA.Here’sthestatement.

No,none.

That’sgreat!Thisprogrammakesitreallyeasy!.

Ask two volunteers to role play the sample interview while the class listens for key information.




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

Instructor Notes

Lesson 18: Military Moving Expenses

Introduction

ThislessonwillhelpyoudeterminewhichmembersoftheU.S.ArmedForcesareentitledtoanadjustmenttoincomeformovingexpenses.Todothis,youwillneedtodeterminequalifyingmoves,allowancesandreimbursements,anddeductiblemovingexpenses.

Todetermineifthetaxpayerhasincurredmovingexpenses,usetheinterviewtech-niquesandtoolsdiscussedintheScreeningandInterviewinglesson.Althoughtheapprovedintakeandinterviewsheetmaynotlistmovingexpenses,itisimportanttoaskprobingquestionstoseeifthetaxpayermayhavesomedeductiblemovingexpenses.

Todeductmovingexpensesasanadjustmenttoincome,thetaxpayergenerallymustmeetcertaintimeanddistancetests.However,amemberoftheArmedForcesonactivedutywhomovesbecauseofapermanentchangeofstationdoesnothavetomeetthesetests.

UnreimbursedmovingexpensesaredeductedusingForm3903,MovingExpenses.ArmedForcesmembersreceiveavarietyofmovingreimbursementsandallowancesthatmustbeconsideredwhendeterminingiftheexpensesaredeductible.Thetravelvoucherwillcontainmuchoftheinformationneededtocomputethededuction.

SeePublication521,MovingExpenses,foradditionalinformationonthetopicsdiscussedinthislesson.

Objectives


• 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. A move by a new enlistee from her home to her first post of duty

D.AtemporarymovebyaU.S.Marinetoattendasix-monthtrainingprogram

What expenses are included in the moving expense adjustment?

Qualifyingexpensesaremilitarymovingexpensesthatfallintothefollowingtwo categories.Thecostof:

• Movinghouseholdgoodsandpersonaleffects

• Reasonabletravelandlodgingexpenses

Toqualifyas“reasonable,”theroutetakenmustbetheshortest,mostdirectroute available,fromtheformerhometothenewhome.Additionalexpensesforstopoversorsidetripsarenotdeductibleasmovingexpenses.

Qualifyingexpensesthatexceedgovernmentallowancesandreimbursementsaredeductible.

UsePublication521asaresourceforadditionalinformation.Thispublicationhasdetailedinformationondeductibleandnondeductiblemovingexpenses.ItalsocontainsaspecialsectiononmembersoftheArmedForces.

This is defined as a PCS.




How do I handle military reimbursements?

Youneedtodeterminewhetheranymovingallowancesorreimbursementsprovided bythegovernmentshouldbeincludedinaserviceperson’sincome,andhowto accuratelyreportthedeductiononForm1040.

What is a DITY move?

Typically,ArmedForcesmembersmovetheirownhouseholditems,inapersonalorrentedvehicle.ThisiscalledaDoItYourself(DITY)move;themostcommonformofmilitarymove.TheArmedForcesprovidesanincentivepaymentequalto95%oftheestimatedcosttothegovernmentforDITYmoves.Whenthemoveiscompleted,theArmedForcesmemberprovidesreceiptsandpaperworktosubstantiateauthorizedexpenses.Thenetfinancialprofitistaxable,andisreportedonaseparateFormW-2.

How do I report a DITY move?

DITYpaymentsareenteredasincomeonline7ofForm1040.

ArmedForcesmembersmaynottakeamovingexpensedeductionbasedontheexpensesapprovedbythefinanceofficewhensettlingtheDITYmove,astheyhavealreadybeenusedtoreducetaxableincome.

What forms of reimbursement are not included as income?

Certainformsofreimbursementprovidedbythegovernmentarenot to be included as incomeontheArmedForcesmember’staxreturn.

• MovingorstorageservicesfurnishedtotheArmedForcesmember

• Nontaxableallowancessuchas:

- Dislocationallowance

- Temporarylodgingallowance

- Mileageallowanceinlieuoftransportation

- Perdiemallowance

example

CaptainJonesreceivesordersforaPCS.Hechoosestopackanddrivehis householdgoodstothenewdutystationinhisownvehicle.TheAirForce estimatesthatthemovewouldhavecostthegovernment$2,500.CaptainJones’actualexpensesforthemovewere$1,750.Hereceivesapaymentfor$2,375(95%ofthegovernment’sestimate)butBox1onFormW-2willshowonly$625($2,375minus$1,750)fortheDITYmove.CaptainJonescannotdeductanyofhisexpenses,sincehe’salreadybeenreimbursed.

Ask a volunteer to read the Captain Jones example.



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:

Only the $1,000 DITY payment is taxable as gross income.



Display or direct stu-dents to Form 3903.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… mrs. FannIn responds…

You said you just moved here during June of this year. Was this a PCS move?

If your expenses were more than the Armed Forces reimbursed you for, you may be able to use the difference to reduce your gross income. We’ll complete Form 3903 to see how it comes out. Did you bring your travel voucher with you?

Did you drive directly here, or did you take any side trips?

The IRS will let you take a standard 24 cents a mile, or we can use actual expenses, if you kept track. The stan-dard rate would be $240.

Yes,myhusbandwastransferredhereshortlybeforehedeployed.Ihavefamilycloseby,soI’dratherstayherewhilehe’soverseas.

It’srighthere.Wedroveourowncar1,000milestogethere,andpaid$120forgas.Wepaid$300formotelsand$165formealsontheway.Themilitarymovedourhouseholdgoods,andwedidn’thaveanyoverweight.

Wecamerightheresowecouldsettleinbeforehedeployed.

Ionlykeptthegasreceipts,sothestandardwouldprobablybebest.



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)canPettyOfficerWhartonclaimhismovingexpensesonForm3903?

A.2009only

B.2010only

C. Either 2009 or 2010


GregwasrelocatedtoanotherAirForcebase.Here’showavolunteercouldhelpGregdetermineifhehadanydeductiblemovingexpenses:

He can claim the expenses in the year he paid the expenses or the year he was reimbursed.




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

Instructor Notes

Lesson 19: Standard Deduction and Tax Computation

Introduction

Thisisthefirstofninelessons(lessons19through27)coveringtheTaxandCreditssectionofthetaxpayer’sreturn.AftercompletingthislessononstandarddeductionsandLesson20,ItemizedDeductions,youwillbeabletosubtracttheappropriatedeductionfromthetaxpayer’sadjustedgrossincometofiguretheirtaxableincome.

Mosttaxpayerscanfindtheirstandarddeductionbylookingattheamountslistedunder“Allothers”totheleftofForm1040,line40a.SometaxpayersmayneedtousethestandarddeductionworksheetintheForm1040InstructionsandothersmayberequiredtouseScheduleLtofiguretheirstandarddeduction.

ObjectivesAttheendofthislesson,usingyourresource materials,youwillbeableto:

• Determinethestandarddeductionamountfor mosttaxpayers

• Determinethestandarddeductionamountfortaxpayersclaimedasdependents

• IdentifywhenScheduleLorthestandarddeduc-tionworksheetisrequiredtocomputethestandarddeduction

• Identifyhowtaxableincomeandincometaxarecomputedandreported

What are deductions?

Deductionsaresubtractionsfromataxpayer’sadjustedgrossincome(AGI).Theyreducetheamountofincomethatistaxed.Mosttaxpayershaveachoiceoftakingastandarddeductionoritemizingtheirdeductions.Whentaxpayershaveachoice,theyshouldusethetypeofdeductionthatresultsinthelowertax.Usetheinterviewtech-niquesandtoolsdiscussedinearlierlessonstoassistyouindeterminingifthestan-darddeductionwillresultinthelargestpossibledeductionforthetaxpayer.

What is a standard deduction?Astandarddeductionformosttaxpayersisapredefineddollaramountbasedonthetaxpayer’sfilingstatus.Anincreasedstandarddeductionisavailabletotaxpayerswhoare65orolder,blind,paidrealestatetaxes,orpurchasedanewmotorvehicleduringpartof2009.Therearelimitationsonthestandarddeductionfortaxpayerswhocanbeclaimedasadependentonsomeoneelse’sreturn.TheVolunteerResourceGuide (TabF)includesreferencesforcalculatingthestandarddeduction.

Display or refer to the Standard Deduction for Most People Chart in the Volunteer Resource Guide (Tab F).



What do I need?


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

Lesson 19: Standard Deduction and Tax Computation19-2

Assign the exercises. Have students use the Standard Deduction for Most People chart to complete them.

Point out the footnote below the chart.


Ask a volunteer to read the Chase example.

ExErcisEs

UsetheStandardDeductionforMostPeoplechartintheVolunteerResourceGuide(TabF)tocompletethefollowingexercises.Answersareattheendofthelessonsummary.

Question 1: Michaelissingle,22,cannotbeclaimedbyanothertaxpayer,andhasnoitemizeddeductions.Whatishisstandarddeductionforthetaxyear?

A. $5,700

B.$7,850

C.$3,000

Question 2: Nicoleis35,hastwochildrenandqualifiesfortheHeadofHouseholdfilingstatus.Shewillnotitemizeanydeductionsthistaxyear.Whatisherstandarddeductionforthetaxyear?

A.$5,700

B. $8,350

C.$11,150

What is an itemized deduction?

Itemizeddeductionsallowtaxpayerstoreducetheirtaxableincomebasedonspecificpersonalexpenses.Ifthetotalitemizeddeductionsaregreaterthanthestandarddeduc-tion,itwillresultinalowertaxableincomeandlowertax.Ingeneral,taxpayersbenefitfromitemizingdeductionsiftheyhavemortgageinterest,verylargeunreimbursedmedi-calordentalexpenseswhencomparedtotheirincome,orotherlargeexpensessuchascharitablecontributions.Itemizeddeductionswillbecoveredinthenextchapter.

Who cannot take the standard deduction?

Sometaxpayerscannottakethestandarddeductionandmustitemize.Duringtheinter-view,findoutifthetaxpayeris:

• FilingasMarriedFilingSeparatelyandthespouseitemizes

• Anonresidentordual-statusalienduringtheyear(andnotmarriedtoaU.S.citizen orresidentattheendoftheyear)

Ifeithersituationapplies,thetaxpayermustitemizepersonaldeductions.

Tax Software Hint:Taxsoftwarewillautomaticallycalculatethestandarddeduc-tionbasedontheinformationcollectedontheMainInformationSheet.Ifthetaxpayercannottakethestandarddeduction,thetaxsoftwarewillpromptthepreparertoitemizedeductions.

example

ChaseisMarriedFilingSeparately.Herspouse,Grant,willbeitemizinghis deductions.Chasecannotusethestandarddeduction;shewillhavetoitemize herdeductions.

State that itemized deductions will be covered in the next chapter.


IftaxpayerscannottakethestandarddeductionbecausetheyarefilingMarriedFilingSeparatelyandthespouseitemizesorisanonresidentordualstatusalien,theboxonline39bonpage2ofForm1040mustbechecked.

How does age or blindness affect the standard deduction?

Thestandarddeductionishigherifthetaxpayerand/orspouseis65orolder.Itisalsohigherifoneorbothareblind.Thisinformationisreportedinthecheckboxeslocatedonpage2ofForm1040.Themorecheckboxesmarked,thehigherthestandarddeduction.Besuretoverifythetaxpayer’sand/orspouse’sageandlevelofblindnessasdescribedbelow.

Tax Software Hint: TaxsoftwarewillautomaticallychecktheseboxesbasedonentriesontheMainInformationSheet.Forsoftwareentries,gototheVolunteerResourceGuide(Tab1),MainInformationScreen.

Who qualifies as 65 or older?

Taxpayersareentitledtoahigherstandarddeductioniftheyare65orolderattheendoftheyear.Theyarealsoconsideredtobe65onthedaybeforetheir65thbirthday. Inotherwords,apersonbornonJanuary1ofanycalendaryearisconsideredtobe65onDecember31ofthepreviouscalendaryear.Therefore,taxpayersareentitledtoahigherstandarddeductionfor2009iftheywerebornbeforeJanuary2,1945.

Thestandarddeductionforadecedentisthesameasifthetaxpayerhadlivedtheentireyear,withoneexception:ifthetaxpayerdiedbeforetheir65thbirthday,thehigherstandarddeductionforbeing65doesnotapplytothedecedent.

Who qualifies as blind?

Ataxpayermustbetotallyorpartiallyblindonthelastdayoftheyeartoqualifyasblind.Taxpayersareentitledtoahigherstandarddeductioniftheyareconsideredtotallyorpartiallyblindandtheydonotitemizetheirdeductions.Ataxpayerwhoclaimstobepartiallyblindmusthaveacertifiedstatementfromaneyedoctororregisteredoptometristthatstateseitheroftheseconditions:

• Thetaxpayercannotseebetterthan20/200inthebettereyewithglassesorcontactlenses,or

• Thefieldofvisionisnotmorethan20degrees

Refer students to Form 1040, line 39a.

Read the example of Sherman.

Ask a volunteer to read the Armando example.

If a taxpayer dies at any time during the year, the taxpayer is entitled to a full stan-dard deduction and personal exemptions. In Armando’s case, he is entitled to a year’s standard deduction and personal exemp-tion – as if he had lived through December 31.

example

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

example

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

Display or refer to the Standard Deduction Chart for People Born Before January 2, 1945 or Who Are Blind in the Volunteer Resource Guide (Tab F).

Point out how to compute the standard deduction by using the chart.

Ifvisioncanbecorrectedbeyondthoselimitsonlybycontactlensesandthetaxpayercanonlywearthelensesbrieflybecauseofpain,infection,orulcers,thetaxpayercantakethehigherstandarddeductionforblind-ness.



Iftheeyeconditionwillneverimprovebeyondtheselimits,thestatementshouldincludethatfact.Taxpayersshouldkeepthestatementintheirrecords.

What if only one spouse is over 65 or blind?

Taxpayerscantakethehigherstandarddeductionifonespouseis65orolder,orisblind,andif:

• Thetaxpayerfilesajointreturn,or

• Thetaxpayerfilesaseparatereturnandcanclaimanexemptionforthespousebecausethespousehadnogrossincomeandanexemptionforthespousecouldnotbeclaimedbyanothertaxpayer

What is the standard deduction based on age or blindness?

Standarddeductionamountsfortaxpayerswhoare65orolder,and/orareblind,increasesby$1,100or$1,400ifsingleorheadofhouseholdforeachboxcheckedforageorblindness.ItcanalsobecomputedusingtheStandardDeductionChartforPeopleBornBeforeJanuary2,1945orWhoAreBlindintheVolunteerResourceGuide(TabF).

UsetheStandardDeductionChartforPeopleBornBeforeJanuary2,1945orWhoAreBlindintheVolunteerResourceGuide(TabF)tocompletethefollowingexercises.Answersareatthe endofthelessonsummary.

Question 3: RoderickwasbornDecember30,1945. Doeshequalifyasbeing65orolder?¨ Yes þ No

Question 4: BrianneandherhusbandClarkarebothovertheageof65andarelegallyblind.Theywillfileajointreturnandwillnotitemizetheirdeductions.Whatistheirstandarddeduction?

A.$11,500

B.$13,600

C. $15,800

example

Robertis78.Helosthiswife10yearsago,soheisfilingasSingle.Heisnotblindandhecannotbeclaimedasadependentonsomeoneelse’sreturn.Hisstandarddeductionis$7,100.

example

RudyandIvyareboth76.Ivyisblind.TheyarefilingasMarriedFilingJointly.Neithercanbeclaimedasadependentonsomeoneelse’sreturn.Theirstandarddeductionis$14,700.


Ask what if Ivy’s fil-ing status was Married Filing Separately.

Answer: Her standard deduction would be $7,900.

Ask students to break into groups and com-plete exercises 3-6.

Point out the footnote below the chart used in the exercises.

Ask groups to share their answers with the class when finished.

Roderick is only 64. To qualify for the higher standard deduction, his birthday must be before January 2, 1945.

Calculation: $11,400 + (4 x $1,100) = $15,800

Theseamountsdonotapplyifthetaxpayer(orspouseifMarriedFilingJointly)canbeclaimedasadependentonsomeoneelse’sreturn.



Question 5: LeticiadiedMay1,2009.Her65thbirthdaywasonApril3,2009.Doesshequalifyasage65? þ Yes ¨ No

Question 6: Jasonwasbornin1967.Heissingleandlegallyblind.Whatishisstandarddeduction?

A. $7,100

B.$5,700

C.$3,650

What about individuals who can be claimed as dependents?

Thestandarddeductionisgenerallylowerforanindividualwhocanbeclaimedasadependentonanotherperson’staxreturn.Thedeductionisgenerallylimitedtothegreaterof:

• $950,or

• Theindividual’searnedincomefortheyear,plus$300(butnotmorethantheregu-larstandarddeductionamount)

Tax Software Hint: Taxsoftwarewillautomaticallycalculateadependent’sstan-

darddeduction,aslongastheboxindicatingthatthetaxpayercanbeclaimedasadependentonanotherperson’staxreturnhasbeencheckedontheMainInformationSheet.Forsoftwareentries,gototheVolunteerResourceGuide(Tab1),MainInformationScreen.

What about taxpayers who paid real estate taxes but do not itemize?

Forthe2009taxyear,taxpayerswhofileusingthestandarddeductionwillbeentitledtoanadditionalstandarddeductionforpayingcertainstateandlocalrealestateprop-ertytaxesthatwouldnormallybedeductibleonScheduleA,line6,ifthetaxpayerwasitemizingdeductions.Singletaxpayerswillbeentitledtoamaximumof$500andjointtaxpayerswillbeentitledtoamaximumof$1,000.

Duringyourinterview,reviewwiththetaxpayerandverifytheiranswerstotheques-tionsregardinghomemortgageinterestandrealestatetaxesinPartVoftheapprovedinterviewandintakesheet.

Leticia was 65 when she died in 2009. She qualifies for the higher standard deduction given to those 65 or older.

Display the approved intake and interview sheet.

Point out the check box for a dependent being claimed by another taxpayer.

example

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

Ask a volunteer to read the Janet example.


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.

Emphasize that these amounts play an impor-tant role in determin-ing the taxpayer’s tax liability and diligent care should be taken to ensure that they be figured correctly.

Refer students to the Volunteer Resource Guide (Tab 4) to view how to link to the Schedule A Worksheet.

example

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

Read Ada’s example.

Ask what if Ada’s fil-ing status was Head of Household.

Answer: Her tax-able income would be $2,000 if she used the filing status of Head of Household.

CasualtyandtheftlossesareoutsidethescopeoftheVITA/TCEprogramandarementionedhereforawarenessonly.Taxpayerswiththeseissuesshouldbereferredtoaprofessionaltaxpreparer.

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


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.


State that itemized deductions is an inter-mediate topic, and that volunteers must certify at that level to complete returns for taxpayers that itemize. These taxpayers must be referred to a prop-erly certified volunteer.



example

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

Read the example of Mr. and Mrs. Brown.

Ask what if the Browns’ taxable income was $29,000.

Answer: Their tax would be $3,519.

Ifthetaxpayerreceivedaqualifieddividendorcapitalgainsdistributionandyouarepreparingapaperreturn,youshouldfigurethetaxpayer’stotaltaxusingtheworksheetinForm1040Instructions.

Ask students to locate the tax tables in Publi-cation 17.





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

Instructor Notes

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”).

Ask students to review the table of deduct-ible and nondeductible expenses shown in the Medical and Dental Expenses chapter of Publication 17.

Read the Stewart and Carmen example.

Review the tip.

Review the tips for medical and dental expenses.

CasualtyandtheftlossesareoutsidethescopeoftheVITA/TCEprogram.Refertaxpayerswiththeselossestoaprofes-sionaltaxpreparer.


ExErcisEs

What types of expenses are covered?

UnreimbursedmedicalanddentalexpensesandeligibleLong-TermCarepremiumspaidduringthetaxyeararedeductible.Besuretheexpenseswerenotpaidwithpre-taxdollarsorreimbursedbyaninsurancecompany.

Answersareattheendofthelessonsummary.

Question 1: BillandKathyFerrisfileajointreturn.Theypaidthemedicalanddentalbillslistedbelow.ThetotalofBillandKathy’squalifiedmedicalexpensesis $3,250.

How do I handle taxes that may be deductible?Taxpayerscandeductcertaintaxesiftheyitemizetheirdeductions.Tobedeductible,thetaxmusthavebeenimposedonthetaxpayerandpaidbythetaxpayerduringthecurrenttaxyear.Taxesthataredeductibleincludethefollowing:

• Stateandlocaltaxes:Taxpayerscannotdeductbothstateandlocalincometaxesandgeneralsalestaxesinthesameyear.Theymustelecttodeductoneortheother.

- Stateandlocalincometaxesincludewithheldtaxes,estimatedtaxpayments,orothertaxpaymentssuchasaprioryearrefundofastateorlocalincometaxthatthetaxpayerchosetohavecreditedtotheirestimatedstateorlocalincometaxes.

- Generalsalestaxescanbedeterminedbyusingthetaxpayer’sactualexpensesorthestateandlocalsalestaxtableslocatedintheForm1040,ScheduleAInstructions.

Ifyouandataxpayerdisagreeastowhetheraparticularexpenseisdeductible,thenpolitelyreferthetaxpayertothesitecoordinator.Thetaxpayermaybecorrect,butyoushouldnotdeductanexpenseunlessyouaresureitisdeductible.

Medical Expenses Amount DeductibleUnreimburseddoctors’bills $500 $500Unreimbursedorthodontistbillforbraces $1,200 $1,200Hospitalinsurancepremiums $300 $300Lifeinsurancepremiums $500Unreimbursedprescriptionmedicines $100 $100Vitamins $70Hospitalbill(beforeinsurancecompany’sreimbursementof$1,000)

$2,000 $1,000

Smoking-cessationprogram $150 $150Total $4,820 $3,250



The total of qualified medical and dental expenses is $3,250, which does not include life insurance premiums, vitamins, or reimbursed hospital expenses.

Ask students to turn to the Taxes chapter of Publication 17 and review the table, Which Taxes Can You Deduct?

Point out the col-umn on what can be deducted.


• Realestatetaxes

- State,local,orforeignrealestatetaxesthatarebasedontheassessedvalueofthetaxpayer’srealproperty,suchasthetaxpayer’shouseorland,aredeductible.

- RealestatetaxesaregenerallyreportedonForm1098,MortgageInterestStatement,orasimilarstatementfromthemortgageholder.Ifthetaxesarenotpaidthroughthemortgagecompany,thetaxpayershouldhavearecordofwhattheyhavepaidduringtheyear.

- Somerealestatetaxesarenotdeductible,includingtaxesforlocalbenefits,item-izedchargesforservices,transfertaxes,rentincreasesduetohigherrealestatetaxes,andhomeownersassociationfees.

• NEW Motorvehicletaxes:ARRAprovidesadeductionforstateandlocalsalesandexcisetaxespaidonthepurchaseofnewcars,lighttrucks,motorhomes,andmotorcycles.Italsoprovidesforthedeductionofothertaxesandfeesinstateswithnosalestax.Formoreinformation,refertoLesson19,StandardDeductionandTaxComputation.

- TaxpayerswhopurchasedanewqualifiedpassengervehicleafterFebruary16,2009andbeforeJanuary1,2010qualifyforthenewmotorvehicletaxesdeduction.

- Taxpayerswholiveinstatesthatdonothavestatesalestaxesarestillentitledtodeductotherfeesortaxesimposedbythestateorlocalgovernment.Thefeesortaxesthatqualifyareforthepurchaseofanewmotorvehicleandarebasedonthevehicle’ssalespriceorasaper-unitfee.

- Thedeductionislimitedtothetaxespaidonaqualifiednewcar,lighttruck,motorhome,ormotorcyclewithapurchasepriceofupto$49,500.

- Theamountofthedeductionisphasedoutfortaxpayerswhosemodifiedadjustedgrossincomeisbetween$125,000and$135,000forsingletaxpayers,andbetween$250,000and$260,000formarriedtaxpayersfilingjointly.

• ForeignincometaxescanbedeductedonincomethatisnotexemptfromU.S.taxundertheforeignearnedincomeexclusionortheforeignhousingexclusion.

• Othertaxes:Anyotherqualifieddeductibletaxesthatarenotincludedabove.

• Personalpropertytaxesaredeductibleiftheyarestateorlocaltaxesthatare:

- Chargedonpersonalproperty

- Basedonlyonthevalueofthepersonalproperty,and

- Chargedonayearlybasis,evenifcollectedmoreorlessthanonceayear

Which expenses are not deductible?

Notalltaxesaredeductibleandsomeitemsaren’tactuallyclassifiedastaxes.SeetheTaxeschapterinPublication17.

example

SupposeWaynebringsinrecordsshowingthefollowingtaxpayments:stateincometax,$2,000;realestatetaxes,$900;salestaxonanewcar,$1,600;home-owners’associationfee,$250.Wayne’stotaltaxdeductionis$4,500($2,000+900+1,600=$4,500).The$250homeowners’associationfeeisnotdeductible.

Ask a volunteer to read the Wayne example.

Ask students to review the Publication 17 chapter on Taxes for expenses that are not deductible.



How do I deduct the taxes?

State and local income taxes

IfthetaxpayercandeductstateandlocalincometaxesonScheduleA,includetaxwithheld,estimatedtaxpaymentsmadeingoodfaithtoastateorlocalgovernment,andtaxpaymentsforanearlieryearpaidduringthecurrenttaxyear.Donot includepenaltiesorinterest.

Real estate taxes

RealestatetaxesarereportedonForm1040,ScheduleA.

NEW Motor Vehicle Taxes

SalesandexcisetaxeswillbecalculatedonScheduleA,NewMotorVehicleTaxDeductionWorksheet.Theamountfromline11oftheworksheetiscarriedoverandreportedonline7ofScheduleA.

Other taxes

Othertaxes,includingpersonalpropertytaxes,arereportedonline8ofScheduleA.

Foreign Income Taxes

Generally,incometaxesthatwerepaidtoaforeigncountrycanbetakenasanitemizeddeductiononline8ofScheduleA,orasacreditagainstU.S.incometaxonForm1040.Moreinformationwillbeprovidedonthiscreditinsubsequentlessons.Youshouldcompareclaimingtheforeigntaxespaidasanonrefundablecredittotakingitasanitemizeddeductionandusewhicheverresultsinthelowesttax.

Question 2:WhichofthefollowingtaxesaredeductibleonScheduleA?

A. Federalincometax

B. State, local, and foreign income tax and real estate tax

C. Taxonalcoholandtobacco

D. Foreignsalestax

Question 3: Forataxtobedeductible,ataxmustbe____.(Selectallthatapply.)

A. Imposedduringthetaxyear

B. Imposed on the taxpayer

C. Paid during the tax year

D. Paid by the taxpayer

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

Ifbox5aofScheduleAischecked,completeline7toincludeanydeductiblenewmotorvehicletaxes.Ifbox5bischecked,includethenewmotorvehicletaxesonthatline.Donotcompleteline7andcheckbox5b.

StateandlocaltaxwithheldissometimesshownonFormW-2ineitherbox17or19.




How do I handle interest?

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

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

Ask students to review the amount deductible in the Interest Expense chapter in Publication 17.

Usingtheflowchart–IsMyHomeMortgageInterestFullyDeductible?–inPublication17willhelpyoudetermineiftheinterestshouldbeincludedonScheduleA.

Membersoftheclergyandmilitarycandeductqualifiedmortgageinteresteveniftheyreceiveanontaxablehousingallowance.

example

From1991through1998,AlfredoandCindyKendallobtainedhomeequityloanstotaling$91,000.AlfredoandCindyusedtheloanstopayoffgamblingdebts,overduecreditpayments,andsomenondeductiblemedicalexpenses.

ThecurrentbalanceofAlfredoandCindy’shomeequityloanis$72,000.Thefairmarketvalueoftheirhomeis$230,000,andtheycarry$30,000ofoutstandingacquisitiondebt(theamountusedtobuy,build,orimprovetheirhome).

IfAlfredoandCindyfileajointreturn,theycandeducttheinterestontheirloansbecause:

•Thetotaloftheseloansthroughout2009($72,000)doesnotexceed$100,000,and

•Thetotalamountofthehomeequity($72,000)isnotmorethanthehome’sfairmarketvalueminusanyoutstandingacquisitiondebt($230,000-$30,000=$200,000)

Ask a volunteer to read the Alfredo and Cindy example.



What about points?

Pointsarethechargespaidbyaborrowerand/orsellertoalendertosecurealoan.Theyarealsocalled:

• Loanoriginationfees(includingVAandFHAfees)

• Maximumloancharges

• Premiumcharges

• Loandiscountpoints

• Prepaidinterest

Onlypointspaidasaformofinterest(fortheuseofmoney)canbedeductedonScheduleA.Thisinterest,evenifitqualifiesforhomemortgageinterest,mustgener-allybespreadoverthelifeofthemortgage.However,iftheloanisusedtobuyorbuildataxpayer’smainhome,thetaxpayermaybeabletodeducttheentireamountintheyearpaid.SeetheInterestExpensechapterofPublication17formoreinformation.

Pointspaidtorefinanceamortgagearegenerallynotdeductibleinfulltheyearthetaxpayerpaidthem,unlessthepointsarepaidinconnectionwiththeimprovementofamainhomeandcertainconditionsaremet.

When are points fully deductible?

Bewareofcertainchargesthatsomelenderscallpoints.Pointspaidforspecificservices,suchasappraisalfees,preparationfees,VAfundingfees,ornotaryfeesarenot interest and are notdeductible.

What about qualified mortgage insurance premiums?

QualifiedmortgageinsuranceisprovidedbytheDepartmentofVeteransAffairs,theFederalHousingAdministration,theRuralHousingService,andprivatemortgageinsurance(PMI)companies.Taxpayerscantreatqualifiedmortgageinsurancepremi-umspaidoraccruedduringthetaxyearashomemortgageinterest.Theinsurancecoveragemustrelatetohomeacquisitiondebt,theinsurancecontractmusthavebeenissuedafter2006,andthetaxpayermusthavepaidthepremiumsbefore2010forcoverageineffectduring2009.PMIisdeductibleonline13ofScheduleA.

What qualifications are required to deduct PMI?

• PaidoraccruedJanuary1,2009toDecember31,2009

• Borrowersobtainedmortgagetobuy,build,orimprovetheirhome

• IfAGIismorethan$100,000($50,000ifMarriedFilingSeparately),theamountofmortgageinsur-ancepremiumsthatwouldotherwisebedeductibleisreducedoreliminated

AtaxpayermaybeabletodeductinterestonamainhomeANDasecondhome.Ahomecanbeahouse,cooperativeapartment,condominium,mobilehome,housetrailer,orhouseboatthathassleeping,cookingandtoiletfacilities.

UsetheflowchartintheInterestExpensechapterofPublication17tohelpyoudetermineifthepointsarefullydeductible.

Direct students to the flow chart in the Inter-est Expense chapter of Publication 17.

ReviewtheInterestExpensechapterofPublication17forspecialrulesandlimitationsfordeductingmortgageinsur-ancepremiumsashomemortgageinterest.



Ask students to go to the Contributions chapter in Publication 17 and review the first column in Table 24-1.



Refinance points and personal interest are not deductible.

What types of interest are not deductible?

Interestthatcannotbedeductedincludes:

• Interestoncarloanswherethecarisusedfornonbusinesspurposes

• Otherpersonalloans

• Creditinvestigationfees

• Loanfeesforservicesneededtogetaloan

• Interestonadebtthetaxpayerisnotlegallyobligatedtopay

• Financechargesfornonbusinesscreditcardpurchases

Question 4: JoeandAngelafileajointreturn.Duringtheyear,theymadetheinterestpaymentslistedbelow.ThetotalofJoeandAngela’sfullydeductibleinterestforthetaxyearis$ 2,180 .

Interest Payments Amount DeductibleQualifiedinterestontheirhomemortgage,reportedonForm1098

$2,180 $2,180

Credit card interest $400Pointspaidtorefinancetheirmortgageforabetterinterestrate(noneofthepointsqualifyasinterest)

$1,500

Interest on a car loan $2,000Total $4,880 $2,180

How do I handle gifts to charity?

Acharitablecontributionisadonationorgifttoaqualifiedorganization.Taxpayersmustitemizetheirdeductionstodeductacharitablecontribution.Taxpayerscandeductcontributionstothefollowingtypesofqualifying organizations:

• Organizationsthatoperateexclusivelyforreligious,charitable,educational,scien-tific,orliterarypurposes

• Organizationsthatworktopreventcrueltytochildrenoranimals

• Organizationsthatfosternationalorinternationalamateursportscompetitioniftheydonotprovideathleticfacilitiesorequipment

• Warveterans’organizations

• Certainnonprofitcemeterycompaniesorcorpora-tions

• TheUnitedStates,oranystate,theDistrictofColumbia,aU.S.possession(includingPuertoRico),apoliticalsubdivisionofastateorU.S.possession,oranIndiantribalgovernmentoranyofitssubdivisionsthatperformsubstantialgovern-mentfunctions

To be deductible, contributions mustbemadetoaqualifyingorganization,notanindividual.

Turntothetable–ExamplesofCharitableContributions–AQuickCheck–inthechapterContributionsinPublication17.


Deductibleitemsinclude:

• Monetarydonations

• Dues,fees,andassessmentspaidtoqualifiedorganizationsabovethevalueofbenefitsreceived

• Fairmarketvalueofusedclothingandfurnitureingoodcondition

• Costandupkeepofuniformsthathavenogeneralusebutmustbewornwhileperformingservicesdonatedtoacharitableorganization

• Unreimbursedtransportationexpensesthatrelatedirectlytotheservicesthetaxpayerprovidedfortheorganization

• Partofacontributionabovethefairmarketvalueforitemsreceivedsuchasmerchandiseandticketstocharityballsorsportingevents

• Transportationexpenses,includingbusfare,parkingfees,tolls,andeitherthecostofgasandoilorastandardmileagedeductionof14centspermile

Which gifts to charity are not deductible?

Organizationsthatdonotqualifyfordeductiblecontributionsinclude:

• Businessorganizations,suchastheChamberofCommerce

• Civicleaguesandassociations

• Politicalorganizationsandcandidates

• Socialclubs

• Foreignorganizations

• Homeowners’associations

• Communistorganizations

Amountsthatmaynotbedeductedinclude:

• Costofraffle,bingo,orlotterytickets

• Tuition

• Valueofaperson’stimeorservice

• BlooddonatedtoabloodbankorRedCross

• Cardepreciation,insurance,generalrepairs,ormaintenance

• Directcontributionstoanindividual

• Sicknessorburialexpensesformembersofafraternalsociety

• Partofacontributionthatbenefitsthetaxpayer,suchasthefairmarketvalueofamealeatenatacharitydinner

Review gifts to charity that are deductible.

Ask students to give examples.

Review gifts to charity that are not deductible.

Ask students to give examples.


What limits apply to charitable deductions?

Taxpayerswhosetotalcontributionsaremorethan20%oftheirAGImaybeabletodeductonlyapercentageoftheircontributions,andmustcarryovertheremaindertoalatertaxyear.Thepercentagevariesdependingonthetypeofgiftandthetypeofchar-itableorganization.MoreinformationontheselimitationsisavailableinPublication17.Individualsaffectedbylimitsoncharitabledeductionsshouldbereferredtoaprofes-sionaltaxpreparer.

What records should the taxpayer keep for charitable contributions?

Taxpayers must keep records toprovetheamountofthecashandnoncashcontri-butionstheymakeduringtheyear.Cash,check,andnoncashcontributionsshouldbereportedonScheduleA,line16andline17respectively.Foreachcontribution,telltaxpayersthattheycannotdeductacashcontribution,regardlessoftheamount,unlessoneofthefollowingrecordsofthecontributioniskept:

• Abankrecord,suchasacanceledcheck,abankcopyofacanceledcheck,orabankstatementcontainingthenameofthecharity,thedate,andtheamount

• Awrittencommunicationfromthecharity,whichmustincludethenameofthecharity,dateofthecontribution,andamountofthecontribution

Out-of-Pocket Expenses

Forunreimbursedexpensesrelatedtodonatedservices,thetaxpayermusthave:

• Adequaterecordsoftheexpenses

• Organization’swrittenacknowledgementanddescriptionofthetaxpayer’sservices

Onlyout-of-pocketexpensesthataredirectlyrelatedtothedonatedservicescanbededucted.Thevalueoftimeorservicesdonatedcannotbededucted.

What records should the taxpayer keep for noncash contributions?

example

Susanrana10KorganizedbytheChamberofCommercetobenefitaqualifiedcharitableorganization.Shepaidtheraceorganizersa$30entryfeeandreceiveda“free”t-shirtandpancakebreakfastaftertherace.

Susandidnotmakeacontributiontothequalifyingorganization.ShepaidtheChamberofCommerce,whichallottedfundstothebenefitingorganization.Therefore,noneofSusan’sentryfeeistaxdeductible.Iftheracehadbeenorga-nizedbythequalifyingorganizationitself,partofherentryfeemayhavebeendeductible.

Ask a volunteer to read the Susan example.

EffectiveforcontributionsmadeafterAugust17,2006,deductionsaredisallowedforthecharitablecontributionofclothingandhouseholditemsiftheitemsarenotingoodusedconditionorbetter.

Review the tips.

Remind students to ask about noncash con-tributions.



Noncash Contribution Deductions Less Than $250

Foreachsinglecontributionoflessthan$250,tellthetaxpayertokeep:

• Receiptorotherwrittencommunicationfromtheorganizationorthetaxpayer’sownreliablewrittenrecordsforeachitem,showing:

- Nameandaddressoforganization

- Dateandlocationofthecontribution

- Reasonablydetaileddescriptionofthedonatedproperty

- Fairmarketvalueofthedonatedproperty

Noncash Contribution Deductions of At Least $250 but Not More Than $500

Foreachsinglecontributionofatleast$250andnotmorethan$500,thetaxpayermusthaveallthedocumentationdescribedfornoncashcontributionslessthan$250.Inaddition,theorganization’swrittenacknowledgementmuststatewhetherthetaxpayerreceivedanygoodsorservicesinreturnandadescriptionandgoodfaithestimateofanysuchitems.

Noncash Contribution Deductions of More Than $500

Taxpayersmustreportnoncashcontributionsof$500ormoreonForm8283andthetaxpayershouldbereferredtoaprofessionaltaxpreparer.

Question 5: Juliamadethefollowingcontributionslastyear:

• $600toSt.Martin’sChurch(thechurchgaveheraletterverifyingtheamount)

• $32toGirlScouts(notforcookies!)

• $40toafamilywhosehouseburned

• $50forlotteryticketsatafundraiser

• $100forplayingbingoatherchurch

TheamountthatJuliacanclaimasdeductiblemonetary contributionsis$ 632 .

What are casualty and theft losses?

Thedeductionforcasualtyandtheftlossesiscomplex,withmanyrulesandexcep-tions,soyoushouldreferthetaxpayertoaprofessionaltaxpreparer.

Ifthetaxpayerisreducingthefairmarketvaluebyapprecia-tion,ordonatingcapitalgainproperty,referthetaxpayertoaprofessionaltaxpreparer.



Bingo, lottery tickets, and donations to indi-viduals in need are not deductible.


What are miscellaneous deductions?

What types of miscellaneous expenses are deductible?

Miscellaneousitemizeddeductionsareexpensesataxpayerpaysinorderto:

• Produceorcollectincome

• Manage,conserve,ormaintainpropertyheldforproducingincome

• Determine,contest,pay,orclaimarefundofanytax

Forsomemiscellaneousdeductions,onlytheportionthatexceeds2%ofthetaxpayer’sAGIcanbededucted.OthermiscellaneousdeductionsaredeductibleregardlessofAGI.

Which deductions are subject to the 2% limit?

Deductionssubjecttothe2%limitarereportedonlines21through27ofScheduleA.Examplesinclude:

• NEW Creditordebitcardconveniencefeesincurredwhenpayingincometax,chargedbythecardprocessor

• Unionduesandfees

• Professionalsocietydues

• Uniformsnotadaptabletogeneraluse(SeetheMiscellaneousDeductionschapterinPublication17foradiscussion)

• Smalltoolsandsuppliesusedforbusiness

• Professionalbooks,magazines,andjournals

• Employment-relatededucationalexpenses(ReviewDoesYourWork-RelatedEducationQualify?intheTaxBenefitsforWork-RelatedEducationchapterinPublication17)

• Expensesoflookingforanewjobinyourpresentoccupation

• Investmentcounselfees

• Investmentexpenses

• Safedepositboxrentalforinvestmentdocuments

• Taxcounselandassistance

• FeespaidtoanIRAcustodian

Tax Software Hint: Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),ScheduleA-ItemizedDeductions.

Which deductions are exempt from the 2% limit?

Deductionsthatarenotsubjecttothe2%limitarereportedonline28ofScheduleA.Examplesinclude:

• Gamblinglossestotheextentofgamblingwinnings(taxpayermusthavekeptarecordoftheirlosses)

• Work-relatedexpensesforindividualswithadisabil-itythatenablethemtowork,suchasattendantcareservicesattheirworkplace

Review the list of deductions.


Gamblinglossesinexcessofwinningsarenotdeductible.Thefullamountofwinningsmustbereportedasincomeandthelosses(uptotheamountofwinnings)canbeclaimedasanitemizeddeduc-tion.



What types of miscellaneous expenses are not deductible?

Thetypesofmiscellaneousexpensesthatarenotdeductibleinclude:

• Politicalcontributions

• Thecostofentertainingfriends

• Lostormisplacedcashorproperty

• Travelasaformofeducation

Question 6:Philiphadtheexpensesshownbelow.WhatisthetotalofPhilip’squalifiedmiscellaneousitemizedexpenses?$ 695 .

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

$70 $70

Lossonsaleofpersonalhome $1,800Investmentjournalsandnewsletters $250 $250Investmentexpenses $200 $200Attorneyfeesforpreparationofawill $100Total $2,895 $695


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.



Refer students to the Publication 17 chapter on Miscellaneous Deductions for addi-tional non-deductible expenses.




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

Instructor Notes

Introduction

Thislessonwillhelpyoudetermineandclaim qualifiedemployeebusinessexpensesformembersoftheArmedForces,suchasuniforms,educationandtravelthatarerelatedtoworkingasamemberoftheArmedForces.Theseexpenses,withoneexception,maybereportedonForm2106orForm2106-EZandwillbedeductedonScheduleAasaMiscellaneousItemizedDeductionsubjecttothe2%limitorincertaincasesasanadjustmenttoincome.

Objectives

Attheendofthislesson,usingyourresourcetools,youwillbeableto:

• Determineifthetaxpayerhasmilitarybusinessexpensesthatcanbededucted

• Identifywhichformtousetoreportmilitarybusinessexpenses

What are military employee business expenses?

Militaryemployeebusinessexpensesareneces-sarybusiness-relatedexpensesincurredbyactivemembersoftheU.S.ArmedForces.TheU.S.ArmedForcesincludescommissionedofficers,warrantofficers,andenlistedpersonnelinallregularandreserveunitsunderthecontroloftheSecretariesoftheDefense,Army,Navy,AirForce,andCoastGuard.ItdoesnotincludemembersoftheMerchantMarinesortheAmericanRedCross.

What are qualified uniform expenses?

Qualifieduniformexpensesarethecostandupkeepofuniformsandcertainarticlesthatare:

• Specificallyrequiredasaconditionofemployment,and

• Notadaptabletogeneraluseasregularclothing

Forexample,althoughmembersoftheArmedForcesarerequiredtowearuniformswhentheyareonduty,theyaregenerallyallowedtoweartheiruniformsinplaceofregularcivilianclothingwhentheyareoffduty.Therefore,inthiscase,membersofthemilitarycannotclaimadeductionfortheuniformcostandupkeep.

Lesson 21: Military Employee Business Expenses

Althoughtheapprovedintakeandinterviewsheetdoesnotlistmilitaryemployeebusinessexpenses,itisimportanttoensurethatservicememberstakeadvantageofdeductionstowhichtheyareentitled.Asktaxpayersiftheyhadanyunreimbursedmilitary work-relatedexpenses.



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(withoutshoulderboardsorgoldstripe onpants),includingcape;off-dutywearallowed

B.ThecostofafullArmygreenuniform(withoutbraid)thatcanbewornanytime

C. The cost of battle dress uniforms and utility uniforms that can be worn only while on duty or while traveling to and from duty

D.Noneoftheabove

Question 2:Whichofthefollowingexpensescanbededucted?

A. Cost of epaulets

B.Costandupkeepofareservist’suniformthatcanbewornoffduty(nouniformallowancereceived)

C.Alloftheabove

Question 3:Lt.ClayisonactivedutyfortheU.S.Navy.HespecializesintheinstallationandmaintenanceofsonardetectionsystemsonNavyships.Asavolunteer,healsodrawsillustrationsandcartoonsforhisbase’sinternalnewsletter.Hereceivesnocompensationforhisillustrations.IsthemembershipfeehepaystotheProfessionalIllustrators’Societyadeductibleexpense?¨ Yes þ No

example

Lt.Allen,anelectricalengineeratMaxwellAirForceBase,candeductprofessionalduespaidtotheAmericanSocietyofElectricalEngineers.

Thesamerulesapplyforactivedutypersonnelandreservists.

Q1 & 2: Items replacing regular clothing and insig-nia of rank and epaulets are tax deductible.

Illustrations are not part of official duties and can’t be deducted as an employee business expense.

Read the Lt. Allen example.





Can service members claim work-related educational expenses?

Servicememberscanclaimeducationalexpensesasanemployeebusinessexpenseiftheeducation:

• Isrequiredbytheiremployer,thelaw,orregulationstokeeptheircurrentsalary,status,orjobiftheserequirementsserveabusinesspurposeoftheemployer;or

• Maintainsorimprovestheskillsrequiredintheirpresentwork

Theseexpensesaredeductiblewhetherornottheeducationmayleadtoadegree.

However,servicememberscannotclaimanemployeebusinessexpensefor educationthatis:

• Neededtomeettheminimumeducationalrequirementsfortheirtradeor business, or

• Partofaprogramofstudythatwillqualifythemforanewtradeorbusiness

Question 4: TrueorFalse?Foreducationalexpensestobeclaimedasanemployeebusinessexpensededuction,theeducationmusthelptheservicememberqualifyforadegree.

¨ True þ False

Question 5:Whichofthefollowingcanbeclassifiedasawork-relatededucationexpense?

A.Costofalaptopanddesklampforstudying

B. Expenses incurred by a flight operations officer to take an advanced piloting course

C.Costofcivilianclothestoweartoacoursetakenoffbase

D.ExpensesincurredbyaNavydisbursingclerktolearntelevisionrepair

What about travel and transportation expenses incurred for educational expenses?

Servicememberswhohavequalifieddeductibleeducationalexpensesmaydeductthecostoftravelandtransportationforthateducation.Thisincludesthecostofgoingfromworktoschool,ortravelexpensesiftheservicemembertravelsovernightmainlytoobtainwork-relatededucation.Servicememberscannotdeducttheround-tripcost

Thissectionrelatesonlytoexpensesthatmaybededuct-ibleonScheduleAsubjecttothe2%AGIlimitation.Servicememberscandeterminewhethertheexpensesalsoqualifyasaneducationcredit,thenclaimthemwheretheyaremostbeneficial.

example

Sgt.Ventura,anArmypilot,incurrededucationalexpensestoobtainanaccountingdegree.HecannotdeducthisaccountingdegreeexpensesonScheduleAbecausethedegreewillqualifyhimforanewtradeorbusiness.

Q4 & Q5: Educa-tional expenses may be claimed as item-ized deductions if it improves the skills used in the service member’s current job.

Point out that qualified educational expenses can be deducted as an educational credit or as a certain miscella-neous itemized deduc-tion. Students should calculate the various ways and claim these expenses where they are most beneficial.

Ask a volunteer to read the Sgt. Ventura example.

Ask what if Sgt. Ven-tura took an advanced aviation course.

Answer: He could deduct the expenses because he met the minimum job qualifica-tions and the course improved his skills in his current position.





ofgoingfromhometoschoolunlesstheyareregularlyemployedandgotoschoolonatemporarybasis(notreasonablyexpectedtolastmorethanoneyear)forwork-relatededucation.

Question 6: MajorManchesterisstationedinManila.Onweekends,shedrivestoTaaltotakelessonsintraditionalPhilippinedance.CanMajorManchesterdeductthesetravelexpenses?¨ Yes þ No

What are travel expenses?

Travelexpensesareunreimbursedwork-relatedexpensesincurredwhileservicemembersaretravelingawayfromhome.Theymustbeordinaryandnecessaryexpensessuchasairfare,carrental,taxifare,lodging,andmeals.Expensesforpersonaltravel,leave,orlibertycannotbededucted.

When are travel expenses deductible?

Fortravelexpensestobedeductible:

• Theremustbeawork-relatedpurposeforthetravel

• Theymustbedeemedasthe“ordinaryand necessary”costsoftravelingawayfromhome

• Theexpensesmustbegreaterthanthetotalofanyadvances,allowances,orreimbursementsservicemembersreceived

What is meant by “away from home”?

“Awayfromhome”hasaslightlydifferentmeaningformilitarythanforciviliantaxpay-ers.Forservicemembers,“home”isthedutystationtowhichtheyarepermanentlyassigned,whichcanbeashiporabase.Itincludestheentirecityorgeneralareawherethepostofdutyislocated.

Servicepersonnelareconsideredtobeawayfromhomeiftheyareawayfromtheirpermanentdutystationsforaperiodsubstantiallylongerthanan ordinaryday’swork.Servicemembersmaydeductbusiness-relatedtravelexpensesincurredwhile travelingawayfromhome.

The cost of traveling to Taal cannot be deducted on weekends because the travel is not work-related.

SeePublication970foraddi-tionalinformationregardingEducationalExpenses.

IfArmedForcesmembersdonotclaimreimbursementforexpensestheyareentitledto,nodeductionforthoseexpensesmaybeclaimed.

ForNavypersonnelassignedtopermanentdutyaboardashipthathasregulareatingandlivingfacilities,theshipisconsideredtobe“home”fortravelexpensepurposes.

Servicememberscannotdeductthecostoftravelthatisitselfaformofeducation,evenifitisdirectlyrelatedtotheirduties.



Refer tax preparers to Publication 3 for a listing of deductible “away from home” travel expenses.



Examplesofwork-relatedtravelexpensesformembersoftheArmedForcesinclude:

• Expensesincurredwhileontemporaryduty(TDY)ortemporaryadditionalduty(TAD)if“awayfromhome”(ship,base,orstation)

• Expensesofareservistawayfromhomeovernighttoattenddrills

• Mealsandlodgingofareservisttemporarilycalledtoactiveduty

• Travelexpenses,includingmealsandlodging,incurredinconnectionwith deductibleeducationalactivities

• Travelexpensesincurredwhencarryingonofficialbusinesswhileon“nocost”(tothegovernment)orders

Question 7:Whichofthefollowingindividualsisentitledtodeducttravelexpenses?

A.Sgt.Bullock,whocommutesfromhishometohispermanentpostofdutyinthesamecity

B.Capt.Hinds,whotakesataxitoworkfromhishometohispermanent postofduty

C. Major Forrest, a reservist who is called to temporary duty and must attend an overnight meeting away from home

D.PFCJenkins,whoisassignedtopermanentdutyaboardashipthatprovidesmealsandlodging

What are temporary active duty reservists’ expenses?

Militaryreserviststemporarilycalledtoactivedutywhomustremainawayfromhome toperformtheirdutiesmayclaimunreimbursedtravelexpensessuchasmealsandlodging.Thisapplies:

• Aslongasthedutyoccurredundercompetentorders,and

• Whetherornotthereservistwascompensated

Toclaimunreimbursedtravelexpenses,reservistsmust:

• Bestationedawayfromthegeneralareaoftheirjoborbusiness,and

• Returntotheirregularjobsoncereleased

ExpensesaredeductibleonlyifthereservistspayformealsandlodgingattheirofficialmilitarypostandonlytotheextenttheexpensesexceedBasicAllowanceforHousing(BAH)andBasicAllowanceforSubsistence(BAS).

Costs of traveling overnight to attend a reservists’ meeting can be deducted.




What is the 100-mile rule for reservists?

Militaryreservistswhomusttravelmorethan100milesawayfromhomeandstayovernighttoattendadrillorreservemeetingmaybeabletodeducttheirtravelexpensesasanadjustmenttoincomeratherthanasamiscellaneousitemizeddeduction.Theamountofexpensesthatcanbedeductedislimitedtothe:

• Federalrateforperdiem(forlodging,meals,andincidentalexpenses)

• Standardmileagerate(forcarexpenses)plusanyparkingfees,ferryfees,and/ortolls

For2009,thestandardmileagerateformilesdrivenforbusinesspurposesis55centspermile.Anyexpenseinexcessoftheseratesandexpensesthatdonotqualifyfortheadjustmenttogrossincomedeductioncanbeclaimedonlyasamiscellaneousitemizeddeductionsubjecttothe2%limit.

Tax Software Hint:Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),ScheduleA-ItemizedDeductions(continued).

What is the deduction for meals?U.S.servicepersonnelcandeductthecostofmealsandbusiness-relatedentertain-mentincurredduringbusinesstravelawayfromtheirpermanentdutystation.

Mealsandentertainmentexpensesarefiguredseparatelyfromotherbusinesstravelexpenses.Theyaremultipliedbyapercentage:50%formosttaxpayersand80%forthosesubjecttoDepartmentofTransportationhoursofservice.

Taxpayersmayreporttheactualamountsformeals,entertainment,andincidentalexpensesortheymayuseastandardamounttoclaimmealsandincidentalexpenses.Ineithercase,theservicemembermustproviderecordstoprovethetime,place,andbusinesspurposeofthetravel.

MilitaryReservistsincludemembersoftheU.S.ArmedForces(Army,Navy,MarineCorps,AirForce,CoastGuardReserve),theU.S.ArmyNationalGuard;theU.S.AirNationalGuard;ortheReserveCorpsoftheU.S.PublicHealthService.

Forinformationonusingthestandardmealallowanceinsteadofactualexpenses,seePublication463,Travel,Entertainment,Gift,andCarExpenses.

example

MaryisintheArmyReserve.Shelivesinatownthatis120milesfromBaseA,whereshenormallyreportsforReservedrillsormeetings.During2009,sheocca-sionallytraveledtoBaseB,whichwasonly40milesfromherhome.

MarymayclaimthetravelexpensessheincurredgoingtoBaseAasanadjustmenttoincome.Mary’sremainingexpensesfortraveltoBaseBmayqualifyasanitem-izeddeductiononScheduleA.Thisdeductionwillbesubjecttothe2%AGIlimitation.

Ask a volunteer to read the Mary example.

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



Forservicepersonnelwhoarefullyreimbursedbythegovernmentformealsunderanaccountableplanthatexcludesreimbursementfromgrossincome,thereisnoamounttodeductand,therefore,noamountsubjecttothe50%limit.

What are local transportation expenses?

Localtransportationexpensesaretypicallydefinedastheordinaryandnecessarycostsincurredingettingfromoneplacetoanothertoperformwork-relatedduties whilenottravelingawayfromhome.Thiscanincludetravelingfromonejobto another.However,theexpensesofgettingtoandfromthetaxpayer’sregularplaceofworkarenotdeductible.

Allowablelocaltransportationexpensesinclude:

• Thecostofdrivingandmaintainingone’sownvehicle

• Travelbyrentalcars,bus,rail,ortaxi

Are car expenses deductible?

Servicepersonnelwhousetheirownvehiclestotravelforworkareentitledtodeductactualexpensesorthestandardmileageratetofigurethedeductiblecostsofoperatingtheirvehiclesforbusinesspurposes.

Actualexpensesincludethecostofgas,oil,repairs,insurance,anddepreciationonthevehicle.Ifataxpayerchoosestouseactualexpensesinsteadofthestandardmileagerate,referthemtoaprofessionaltaxpreparer.

Question 8:Whichofthefollowingcostsareconsideredtobealocal transportationexpense?

A.Dailymealstakenduringaweek-longtrainingsessionwhileonduty

B.Gasolineusedtodrivetoandfromone’sregularplaceofwork

C. Taxi fare to travel while on duty to a local work-related convention

D.Elaboratelunchtotreattop-rankingmilitaryofficial visitingbase

Are expenses related to temporary work locations deductible?

Expensesincurredwhilecommutingtoworkarenotdeductible.However,servicememberswhoareassignedtotemporaryassignmentsinthesametradeorbusinessastheirregularplaceofbusinesscandeducttheexpensesofthedailyroundtripbetweentheirhomeandthetemporarylocation,ifnotreimbursedbytheiremployer.

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

Taxi fare is an allowable transportation expense when used to travel on work-related business.




Servicememberscandeductordinaryandnecessarycostsoftravelingtotemporaryworkassignments:

• Travelingfromoneworkplacetoanotherwithinthecityorgeneralareathatistheirtaxhome

• Visitingclientsorcustomers

• Goingtoabusinessmeetingawayfromtheirregularworkplace

Expensesincurredwhiletravelingawayfromhomeovernightaredeductibleastravelexpenses,notlocaltransportationexpenses.

Who needs to complete Form 2106?

Iftheservicememberhasjob-relatedtravel,meals,orlocaltransportationexpenses,orotherexpensesthataregreaterthanreimbursements,Form2106mustbeusedtocalculatetheitemizeddeduction.

Form2106isnotrequiredifthetaxpayerisclaim-ingonlyjob-relatedexpensesforuniforms,profes-sionalduesoreducation,andnoreimbursementwasreceived.

TodeterminewhetherservicemembersneedtocompleteForm2106,considerthefollowingfactors:

• Didtheservicememberhavework-relatedtravel,meals,orlocaltransportationexpenses?

• Didtheservicememberreceiveanallowanceorreimbursementfromthemilitary?

• Didtheamountoftravelexpensesexceedtheamountofthereimbursementorallowance?

ForservicememberswhoarenotrequiredtofileForm2106,entermiscellaneousdeductionssubjectto2%ofAGIdirectlyonScheduleA,line21.

Tax Software Hint: Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),ScheduleA-ItemizedDeductions(continued).

example

Sgt.PurdueattendedameetingofanArmedForcesreserveunit.ThemeetingisconsideredtobeasecondplaceofbusinessbecauseitisheldononeofSgt.Purdue’sregularworkdays.Hecandeducttheexpenseoftravelingfromhishomeandregularworklocationtothemeetinglocation.

2106-EZcanonlybeusedbyemployeeswhoreceivednoreimbursementfromtheiremployerandwhousethestandardmileagerate.Inmostcases,militarymemberswithwork-relatedtravelexpenseswillhavereceivedreimburse-mentandwillneedtouseForm2106.

Ask a volunteer to read the Sgt. Purdue example.

Read the Capt. Glen-dale example.

Ask what if he did not return the extra $75.

Answer: If the $75 was not included on his Form W-2, he would have to include it on line 7 of Form 1040.

example

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



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

Instructor Notes

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



Review list of deductible 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.

Ask a volunteer to read the Jocelyn Lane example.


Are reimbursements reported?Taxpayersmustreportbothbusinesstravelexpensesaswellasanyemployer-providedreimbursement.Insomecases,thisresultsinanetexpenseofzero.Inothercases,excessreimbursementsmaybetaxableincome.Whentaxpayerscombinepersonalandbusinesstravel,theymuststrictlyseparatetheexpenses.

What records must the taxpayer have?

Taxpayersmustkeeprecordsinordertodeducttravelexpenses,whichincludemeals(unlessusingthestan-dardmealallowance),entertainment,gifts,oruseofanautomobileorotherlistedproperty.Therecordsmustdocumentthetime,place,businesspurpose,business relationship(forentertainmentandgifts),andamountsofeachexpense.Generally,taxpayersmusthavereceiptsforalllodgingexpenses,regardlessoftheamount,andforanyotherexpensesof$75ormore.

Are there alternative methods for figuring some expenses?

Therearealternativewaysofreportingsomeexpenses,suchas:

• Vehicleexpensescanbereportedbyusingtheactualexpensemethodorthestan-dardmileagerate

• Mealsandincidentalexpensescanbereportedbyusingtheactualamountsorastandardamountcanbeusedtoreporttheseexpenses

What are vehicle expenses?

Vehicleexpensesareexpensesincurredwhentaxpayersusetheirvehiclesforbusi-nesspurposes.Ifataxpayerhasqualifiedvehicleexpenses,figurethoseinPartIIofForm2106.

Oneofthetwofollowingmethodscanbeusedtofigureataxpayer’sdeductibleexpenses.

• Theactualexpensemethodfiguresthedeductionbasedonavarietyoffactorsincludinggasoline,oil,repairs,insurance,andrentals.Itmayeveninvolvedepreciationorthevalueofavehicleprovidedbythetaxpayer’semployer.

example

BobSmithtraveledtoaconferenceinCleveland,OhiothatlastedfromWednesdaythroughFriday.Hisemployerreimbursedhimforhistransportationtoandfromtheconference,hisrentalcarexpenses,andhismeals.HepostponedhistravelhomeuntilSundayafternoonsohecouldvisitaluxuryspainCoshocton,Ohio.Hemayreporttheexpensesfortheconferenceandthereimbursement,buthecannotclaimanycostsrelatedtovisitingthespa.

Ask a volunteer to read the Bob Smith example.

Thislessondiscussesonlythestandardmileagerate.Ifthetaxpayerwishestousetheactualmethod,referthemtoaprofessionaltaxpreparer.

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


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. Taxpayers may report the actual amounts for meals and entertainment and for incidental expenses or use the standard method.

D.Alloftheabove.

Question 2:TrueorFalse:Taxpayerswhocanusethestandardmethodforcalculatingbusinessmileageneednotproducerecordsprovingthetime,place,andbusinesspurposeofthetravel.¨ True þ False

SeetheinstructionsforForm2106todetermineifataxpayerissubjecttoDOThoursofservice.

SeePublication463fordetailsonhowtofiguredeductionsusingthestandardmealallow-ance,includingspecialrulesforpartialdaysortravelandfortransportationworkers.



All business expenses must be supported by records.

Refer students to Form 2106, General Informa-tion section.


How do I report business expenses?

BusinessexpensesarereportedonForm2106,EmployeeBusinessExpenses,orForm2106-EZ,UnreimbursedEmployeeBusinessExpenses.TheresultfromForm2106or2106-EZisreportedasamiscellaneousitem-izeddeductiononScheduleAofForm1040.

Tax Software Hint: Forsoftwareentries,gototheVolunteerResourceGuide(Tab4),ScheduleA-ItemizedDeductions(continued).

Summary

Whenyouhelptaxpayerscalculatebusiness-relatedtravelexpenses,youmustiden-tifydeductibleexpenses.Theseareaffectedbythetaxpayer’s“taxhome”andotherfactors.Also,ataxpayercannotdeductexpensesforafamilymemberwhoaccompa-niesthemforpleasureonabusinesstrip.

NotalltaxpayersmustfileForm2106;somemayfileForm2106-EZandothersdonotneedtofileeitherform.Besurethetaxpayerhasproperrecordsforexpenses,andcorrectlyreportsanyreimbursementamounts.

Refer students to Form 2106-EZ to determine who can use that form, and the Who Should File Form 2106 flow-chart, in Form 2106 Instructions.

ThefinaldeductionamountonForm2106maybereducedwhenyouapplythe2%AGIlimitonScheduleA.

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



ExErcisE answErs

Answer 1: C. Taxpayers may report the actual amounts for meals/entertainment and for incidental expenses or use the standard method for one or the other.

Answer 2: False. All business expenses must be supported by records.

Notes

Lesson 23: Credit for Child and Dependent Care 23-1

Instructor Notes

Lesson 23: Credit for Child and Dependent Care Expenses

What do I need?


□ 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!



Explain what is meant by “nonrefundable” credit.

Lesson 23: Credit for Child and Dependent Care23-2

How do I determine if a taxpayer is eligible?

Theinformationgatheredfromanapprovedintakeandinterviewsheet,alongwiththedecisiontreeintheVolunteerResourceGuide(TabG)willhelpyoudeterminethetaxpayer’seligibility.Besuretoaskwhetherthetaxpayerhaspaidforanytypeofdependentcare,forexample,foraspouseorotherdependent.

TheVolunteerResourceGuidedecisiontreecoversthefiveeligibilityteststhetaxpayermustmeettoqualifyforthecredit:

• Qualifyingpersontest

• Earnedincometest

• Work-relatedexpensetest

• Jointreturntest

• Provideridentificationtest

UsethedecisiontreequestionsintheVolunteerResourceGuide(TabG)asaguideforyourinterviewwiththetaxpayer.Keepinmindthatthetaxpayermustpassallfiveoftheteststoqualifyforthecredit.

What is the qualifying person test?

Thetaxpayer’schildanddependentcareexpensesmustbeforthecareofoneormorequalifyingpeople.RefertotheVolunteerResourceGuide(TabG),ChildandDependentCareCreditExpenses,todeterminewhoisaqualifyingperson.Anyofthefollowingarequalifyingpersons:

• Aqualifyingchildwhoisthetaxpayer’sdependentandunderage13whenthecarewasprovided.Onlythecustodialparentcantakethechildanddependentcarecredit.Ifthechildisnotbeingclaimedasadependentbythetaxpayerbecausethenoncustodialparentistakingtheexemptionunderthespecialrulesforchildrenofdivorcedandseparatedparents,onlythecustodialparentmaytreatthechildasaqualifyingpersonforthiscredit.

• Someonewhowasphysicallyormentallyunabletocareforhim-orherselfandforwhomthetaxpayercouldclaimadependencyexemption,exceptif:

- thepersonhad$3,650ormoreofgrossincome

- thepersonfiledajointreturn

- thetaxpayerorspouse,ifMarriedFilingJointly,couldbeclaimedasadependentonsomeoneelse’s2009return.

• Spouseswhowerephysicallyormentallyunabletocareforthemselvesandlivedwiththetaxpayermorethanhalftheyear.

example

Jimpaidsomeonetocareforhiswife,Janet,sohecanwork.Janetisphysicallyunabletocareforherself.Jimalsopaidtohavesomeonepreparemealsfortheir12-year-olddaughter,Jill.BothJanetandJillarequalifyingpersonsforthecredit.

SeetherulesforQualifyingChildandthespecialrulesforchildrenofdivorcedand separatedparentsinPublication17,PersonalExemptionsandDependents.

Display or refer stu-dents to the Child and Dependent Care Expenses – Decision Tree in the Volunteer Resource Guide (Tab G).

Review the eligibility tests with the students.

Emphasize to students that only the parent with whom the child lives can take this credit.

Ask a volunteer to read the Jim example.


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.


Point out the definition of a student.


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.

Ask a volunteer to read the Krista example.

Ask a volunteer to read the Roger example.


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.

Display or refer stu-dents to the questions on the decision tree in the Volunteer Resource Guide (Tab G).


Ask if Married Filing Separately can claim this credit.

Answer: No


ExErcisEs

What is the provider identification test?

Theprovideridentificationtestrequiresthattaxpayersprovidethename,addressandtaxpayeridentificationnumber(TIN)ofthepersonororganizationwhoprovidedthecarefortheirchildordependent.

Ifthecareproviderisanindividual,theTINisthesameastheprovider’ssocialsecu-ritynumber.Iftheproviderisanorganization,thenitistheemployeridentificationnumber(EIN).Certaintax-exemptorganizationsarenotrequiredtohaveanEIN.SeePublication17formoredetails.

Taxpayerswhocannotprovidealloftheprovider’sinformationorwhohaveincorrectinformationmaystillbeabletotakethecreditiftheycanshowthattheyusedduediligenceintryingtoobtainthecorrectinformation.RefertothesectionsentitledDueDiligenceandProviderRefusalinPublication17formoreinformation.Returnsthatdonotincludetheproviderinformationcannotbefiledelectronically.

UsethedecisiontreeintheVolunteerResourceGuide(TabG)toanswerthefollowingquestions.Theanswersappearattheendofthelesson.

Question 1:Audreyisastay-at-homemom.Herhusbandworksandhad earnedincomeforthetaxyear.Theyhaveayoungsonwithautismwhomustbesupervisedatalltimes.Audreyvolunteersatalocalautisminformationhotline12hoursaweek.Sheandherhusbandpayacaregivertostaywiththeirsonduringthosehours.

Dotheyqualifyforthechildanddependentcarecredit?□ Yes þ No

Question 2: Whydon’tAudreyandherhusbandqualifyforthecredit? (Selectallanswersthatapply.)

• The caregiver expense is not work-related

• Theirsonisnotaqualifyingperson

• Thecaregiver’sdutiesdonotqualifyaswork-related

• They do not pass the earned income test


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

ApplythequestionsfromthecreditforchildanddependentcareexpensesdecisiontreeintheVolunteerResourceGuide(TabG)tofindoutwhetherBillcantakethecredit,asshowninthesampleinterviewtofollow.

The care does not allow them to work or look for work; also, only the hus-band had earned income.





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.

Ask a volunteer to read the Paula example.

Refer students to the Volunteer Resource Guide (Tab 2), Form W-2 Instructions, to see box 10.

Remind students to apply the limits.


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).

Ask a volunteer to read the Mary example.


ExErcisE answErs

Review the lesson summary with the stu-dents.

Summary

Thecreditforchildanddependentcareexpensesisanonrefundablecreditthatallowstaxpayerstoreducetheirtaxliabilityforaportionoftheexpenses.

Themaximumexpenseamountsare$3,000foronequalifyingpersonand$6,000fortwoormorequalifyingpersons.

Themaximumcreditrateis35%ofthetaxpayer’sexpenses.Ataxpayermustsatisfythefiveeligibilityteststoqualifyforthecredit.Thetestsarethe:

• Qualifyingpersontest

• Earnedincometest

• Work-relatedexpensetest

• Jointreturntest

• Provideridentificationtest

ThecreditiscalculatedonForm2441ofbothForms1040and1040A.

Answer 1: No, they do not qualify.

Answer 2: The correct answer is “the caregiver expense is not work-related” and “they do not pass the earned income test.” Audrey is not using the caregiver’s services to look for work or to perform work. In addition, both spouses must have earned income during the year to qualify. Only the husband had earned income for the tax year.






Notes

Lesson 24: Education Credits 24-1

Instructor Notes

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.

Ask a volunteer to read the Erma example.

Discuss expenses paid by a third party with the students.

Direct students to the Volunteer Resource Guide (Tab G), Educa-tion Credits Tips.

Advise students that books are now quali-fied expenses for the American opportunity credit.

Define the term required for the students.


Which expenses do not qualify?

Donotincludeexpensessuchas:

• Roomandboard,insurance,medicalexpenses(includingstudenthealthfees),transportationcosts,orothersimilarpersonal,living,orfamilyexpenses

• Anycourseofinstructionorothereducationinvolvingsports,games,orhobbies,unlessthecourseispartofthestudent’sdegreeprogramor(forthelifetimelearningcredit)helpsthestudenttoacquireorimprovejobskills

Are any amounts excluded from qualified expenses?

Certaintax-freefundsusedtopaytuitioncannotbeusedtofigurethecredit.Onceyouhaveidentifiedeachpersonclaimingacredit,andtheirqualifiedexpenses,askifthestudentreceivedanyoftheseuntaxededucationalbenefitsduringtheyear:

• Pellgrants

• Employer-providededucationalassistance

• Veterans’educationalassistance

• Tax-freeportionsofscholarshipsandfellowships

• Anyothernontaxablepaymentsreceivedaseducationalassistance(otherthangiftsorinheritances)

• Refundsoftheyear’squalifiedexpensespaidonbehalfofastudent(forexample,thestudentdroppedaclassandreceivedarefundoftuition)

Subtractthetax-freeeducationalassistance,refunds,andbenefitsfromthestudent’squalifiedexpenses.Thesetax-freebenefitsarelistedintheEducationCreditsInterviewTipsintheVolunteerResourceGuide(TabG).

MoststudentswillreceiveForm1098-Tfromtheeducationalinstitution.Theformshouldshowtheamountsthestudentpaidfortuitionandrelatedexpenses,theamountsofscholarshipsandgrantsreceived,andwhetherthestudentwasatleastahalf-timestudentoragraduatestudent.Verifywiththetaxpayerthattheamountinbox1or2ofForm1098-Tisactuallytheamountpaidinthecurrenttaxyearforqualifiedexpenses.

example

WhenJaniceenrolledforherfreshmanyearofcollege,shehadtopayasepa-ratestudentactivityfeeinadditiontohertuition.Thisactivityfeeisrequiredofallstudents,andisusedsolelytofundon-campusorganizationsandactivitiesrunbystudents,suchasthestudentnewspaperandthestudentgovernment.Noportionofthefeecoverspersonalexpenses.Althoughlabeledasastudentactivityfee,thefeeisrequiredforJanice’scollegeenrollmentandattendance;therefore,itisaqualifiedexpense.

Ask a volunteer to read the Janice example.

Ask a volunteer to read the Jackie example.

example

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

Direct students to the Education Credits Tips in the Volunteer Resource Guide (Tab G).


What about payments for the next academic year?

Thetaxpayerscanclaimpaymentsprepaidfortheacademicperiodthatbeginsinthefirstthreemonthsofthecalendaryear.RefertotheVolunteerResourceGuide(TabG),EducationCredits.

What rules apply to each credit?

How do the credits compare?NEW Fortaxyears2009and2010,thereareseveralnewdifferencesbetweenthetwocredits.TheAmericanopportunitycredit(Hopeexpanded):

• Ispermittedforthefirstfouryearsofpost-secondaryeducation.

• Hasbeenexpandedsothatqualifiedtuitionandrelatedexpensesnowincludesexpensesforcoursematerials—books,supplies,andequipmentneededforacourseofstudy,whetherornotthematerialsarepurchasedfromtheeducationalinstitutionasaconditionofenrollmentorattendance.

• Generally,40%ofthecreditisnowarefundablecredit,whichmeanstaxpayerscanreceiveupto$1,000eveniftheyowenotaxes.

example

JoanSmithreceivedForm1098-T,shownabove,fromthecollegesheattends. Itshowshertuitionwas$9,500andthatshereceiveda$1,500scholarship.Shehadnootherscholarshipsornontaxablepayments.Hermaximumqualifyingexpensesfortheeducationcreditwouldbe$8,000($9,500-$1,500).

example

Thomaspays$1,500inDecember2009forqualifiedtuitionforthewintersemesterthatbeginsinJanuary2010.Hecanusethe$1,500paidinDecember2009tocomputehiscreditfor2009.Hecannotcountitagainin2010.

Ask a volunteer to read the Joan example.

Ask a volunteer to read the Thomas example.


Lifetimelearningcredit:

• Thereisnolimitonthenumberofyearsforwhichthetaxpayercanclaimthecreditbasedonthesamestudent’sexpenses.

• Course-relatedbooks,supplies,fees,andequipmentareincludedinqualifiededucationexpensesonlyifthefeesandexpensesmustbepaidtotheinstitutionasaconditionofenrollmentorattendance.

• Noportionofthecreditisrefundable.

American Opportunity Tax Credit — Hope Expanded

TaxpayerscantaketheAmericanopportunitycreditforastudentiftheycananswerallofthesequestionsasindicatedbelow:

• Asofthebeginningofthetaxyear,wasthestudentstillinthefirstfouryearsofpost-secondarystudy?Yes

• Wasthestudentenrolledin2009inaprogramthatleadstoadegree,certificate,orothercredential?Yes

• Wasthestudenttakingatleastone-halfthenormalfull-timeworkloadforthecourseofstudy,foratleastoneacademicperiodbeginningin2009?Yes

• Hasthestudentbeenconvictedofafelonyforpossessingordistributingacontrolled substance?No

TheAmericanopportunitycreditcanbeupto$2,500pereligiblestudent,dependingontheamountofeligibleexpensesandtheamountoftaxonthereturn.Thecreditis100%ofthefirst$2,000and25%ofthesecond$2,000ofeligibleexpensesperstudent,uptotheamountoftax.FortypercentoftheAmericanopportunitycreditisnowarefundablecredit,whichmeansthetaxpayercanreceiveupto$1,000evenifnotaxesareowed.TheAmericanopportunitycreditisavailableforthefirstfouryearsofcollegepereligiblestudent(generally,fresh-manthroughsenioryearsofcollege).

Lifetime Learning Credit

Thelifetimelearningcreditcanbetakenifthetaxpayerandtheexpensesmeettherequirementsdescribedunder“Whatbasicrequirementsmustthetaxpayermeet?”RefertotheVolunteerResourceGuide(TabG),EducationCreditsTips,forthebasic

Ifthestudentdoesn’tmeetalloftheconditionsfortheAmericanopportunitycredit,thetaxpayermaybeabletotakethelifetimelearningcreditforpartorallofthestudent’squalifiedexpenses.

Forstudentsattendinganeligible educational insti-tutionintheMidwesternDisasterAreas,thecreditsareexpanded.PartIIofForm8863isnowrenamedHopecredit.SeePublication970foradditionalinformation.

Refer students to the Comparison Chart in the Education Tips of the Volunteer Resource Guide (Tab G).

example

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

Ask a volunteer to read the Toby example.

Discuss the fact that these are now qualified expenses because of recent tax law changes.


ExErcisEs

requirements.Thestudentneednotbeenrolledhalf-timeorinadegreeprogram,andafelonydrugconvictiondoesnotdisqualifythestudent.

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

UsetheEducationCreditsTipsintheVolunteerResourceGuide(TabG)andtheComparisonTableinPublication17toanswerthefollowingquestions.Answersareattheendofthelessonsummary.

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

Question 2:Janiceworksfulltimeandtakesonecourseamonthatnightschool.Someofthecoursesarenotforcredit,buttheyaremeanttoadvancehercareer.Whichcreditisappropriateforher?□Americanopportunityþ Lifetime

Question 3:Clarkisanolderstudentwhohasgonebacktocollegehalftimeafterserving18monthsinprisonforfelonydrugpossession.Whichcreditisappropriateforhim?□Americanopportunityþ Lifetime

Can a taxpayer take multiple credits?

Taxpayerscannottakemultiplecreditsonthesamestudent’sexpenses.Forexample:

• DonotfiguretheeducationcreditsbasedonexpensesthathavealreadybeentakenonScheduleA,ScheduleC-EZ,ortuitionandfeesdeduction.

• DonottakebothanAmericanopportunitycreditandalifetimelearningcreditforthesamestudentinthesameyear.

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


Herearethegeneralstepsinfiguringtheamountofeducationcredits:

1. Reviewthelistofqualifyingstudentsandexpenses,anddecideiftheAmericanopportunitycreditorlifetimelearningcreditismoresuitable.(Seetherequirementdiscussedearlier.)



example

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

Ask a volunteer to read the Jill example.


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.

Review the separate parts of Form 8863.

Review the caution about education credits claimed in prior years.

Direct students to the Volunteer Resource Guide (Tab 5), Form 8863, Education Credits.


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!

Demonstrate how to use the software to quickly compare edu-cation benefits.


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


Direct students to Appendix A, page 27.






Notes

Lesson 25 : Foreign Tax Credit 25-1

Instructor Notes

Introduction

ThislessonwillshowyouhowtohelpU.S.citizensandresidentaliensfileaclaimfortheforeigntaxcredit.Thiscreditappliestothosewhohavepaidoraccruedforeigntaxestoaforeigncountryonforeign-sourcedincomeandwhoaresubjecttoU.S.taxonthesameincome.

Tohelpthesetaxpayers,youmustdeterminewhichtaxesandtypesofforeignincomeareeligiblefortheforeigntaxcreditandaccuratelycomputethecreditusingForm1116.

IftheforeigntaxpaidisreportedonaForm1099-INToraForm1099-DIV,theentireForm1116maynotneedtobecompleted.

IftheforeigntaxpaidisaresultoflivingandworkingoutsidetheU.S.,thenallthequestionsonForm1116needtobeaddressed.Inthissituation,U.S.ArmedForcesmembersmayneedtoprovideadditionaldocumentstothemilitarylegalassistanceofficerorseekassistancefromaprofessionaltaxpreparer.

Toidentifyqualifyingforeignincomeandtaxes,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.Useanapprovedintakeandinterviewsheettoasktaxpayersquestionsrelatedtocreditsthatmaybereportable.Althoughtheforeigntaxcreditisnotspecificallylistedontheapprovedintakeandinter-viewsheet,asktaxpayersiftheypaidanytaxtoaforeigncountry.

Objectives


• 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.þ True ¨ FalseQuestion 2: Clydecomestoyoursiteseekinghelpwithhisforeigntaxcredit.HeissingleandhisForms1099-DIVshowatotalof$423offoreigntaxpaid.CanClydemaketheelec-tion?¨ Yes þ No

Question 3: JudyandMarkaremarriedandwillfileajointreturn.TheirForms1099-DIVshowaforeigntaxpaidof$590.Cantheymaketheelection?þ Yes ¨ No

TheremainingsectionsofthislessonaredirectedatvolunteersseekinganInternationalcertification.AllothersmayproceedtoLesson26,ChildTaxCredit.

What is the foreign tax credit (FTC)?

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



Clyde’s foreign taxes exceed $300.

Their combined foreign taxes are less than $600.

Ask a volunteer to read the example about Ryan.

Ask what if Ryan had paid a total of $532 in foreign taxes.

Answer: He would have to complete Form 1116.

example

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


Theforeigntaxcredit(FTC)wascreatedtohelptaxpayersavoidthisdoubletaxation.Taxpayerswhopaidincome,warprofits,orexcessprofitstaxestoanyforeigncountryorU.S.possessionmaybeabletotakeacreditagainsttheirU.S.taxesfortaxespaidtoothercountries.Likeothernonrefundablecredits,theFTCallowstaxpayerstotakeadollar-for-dollarreductionintheamountofU.S.taxowed.However,therearecasesinwhichnotalltaxespaidtoaforeigngovernmentonforeign-sourcedincomecanbeusedinthecomputationoftheforeigntaxcredit.

Inmostcases,itistothetaxpayer’sadvantagetotaketheforeigntaxcredit.Ingeneral,ifthecreditischosen,youmusttakethecreditforallqualifiedforeigntaxes.However,ifthetaxpayerpaidforeigntaxesthatdonotqualifyforthecredit,theymaybeabletotaketheitemizeddeductiononthenon-qualifyingitemsas“OtherTaxes”onScheduleA.Inthissituation,referthetaxpayertoaprofessionaltaxpreparer.Formoreinformation,seePublication514,ForeignTaxCreditforIndividuals.

Forapaperreturn,entertheforeigntaxpaiddirectlyonline47ofForm1040,keepinginmindthe$300/$600limitations.

What qualifies taxpayers for the credit?

Toqualifyforthecredit,thefollowingrequirementsmustbemet.Ataxpayermust:

• Haveincomefromaforeigncountry

• Havepaidtaxesonthatincometothesameforeigncountry

• Nothaveclaimedtheforeignearnedincomeexclusiononthesameincome(seetheforeignearnedincomeexclusionsectionofLesson15,Income–OtherIncome)

Inaddition,theforeigntaxmust:

• Bepaidtoaforeigncountryonincomederivedfromthatcountry

• BesimilartotheU.S.incometax

• Providenoeconomicbenefittothetaxpayerpayingthetax

Foradditionalinformation,seetheinstructionsforForm1116andrefertoPublication514.

Theforeignearnedincomeexclusionisdifferentfromtheforeigntaxcreditandtaxpayerscanchoosetheapproachthatresultsinthelowesttaxpaidoverall.

•Theexclusionrulesallowaportionoftheforeignearnedincometobeexcludedfromtaxableincomesoitisnottaxed

•ThecreditrulesaddtheforeignincometothetaxableincomeandthenreducestheU.S.taxduebysomeportionoftaxespaidtotheforeigngovernment(s)

•Youshouldtrybothmethodstoseewhichresultsinthelowesttax

Point out an example of an “economic ben-efit” such as health services paid for by the foreign tax.

AcreditforforeigntaxescanbeclaimedonlyforforeigntaximposedbyaforeigncountryorU.S.possession.


Foreigntaxesthatqualifyfortheforeigntaxcreditgenerallyincludetaxeson:

• Wages

• Dividends

• Interest

• Royalties

• Annuities

Foreigntaxesforwhichanindividualmaynottakeacreditincludetaxes:

• Onexcludedincome

• Onforeignoil-relatedincome

• Onforeignmineralincome

• Onforeignoilandgasextractionincome

• Forwhichthetaxpayercantakeonlyanitemizeddeduction

• Frominternationalboycottoperations,and

• OfU.S.personscontrollingforeigncorporationsandpartnerships

example

EvaisaU.S.citizenwholivesinHongKong.EvaownsherhomeinHongKongandpaid$2,000inrealestatetaxesand$1,000inpersonalpropertytaxes.Shealsopaid$300inincometaxestothegovernmentofHongKong.Shecannotclaimaforeigntaxcreditforeithertherealestatetaxesorthepersonalpropertytaxesbecausetheyarenotincometaxes.Evacancomputeaforeigntaxcreditonthe$300inincometaxespaidtoHongKong.

Note:EvacandeducttherealestatetaxesthatshepaidasanitemizeddeductiononherU.S.taxreturn.Shecanitemizetheforeignpersonalpropertytaxonlyifitisbasedonthevalueofthepersonalproperty.

Read the example about Eva.

Ask what if Eva paid $200 in taxes on income she earned in Hong Kong.

Answer: She could apply for the credit without filing Form 1116, as long as all the foreign-source income is from Forms 1099-DIV or 1099-INT.

example

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

Ask a volunteer to read the Kendall example.

Ask what if they had no interest income from the French bank.

Answer: They would not be able to claim the credit for taxes paid on the U.S. interest. Only foreign-source income qualifies for the credit.

SeePublication514,ForeignTaxCreditforIndividuals,formoredetailedinformation.



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

A.WagesfromherjobintheU.S.

B.InterestincomefromaU.S.bank

C. Interest income from a Japanese bank

D.DividendincomefromaU.S.corporation

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

What is “economic benefit”?

Asmentionedearlier,theforeigntaxpaidcannotprovideaspecificeconomicbenefitforthetaxpayerandbeincludedintheforeigntaxcreditcomputation.Thismeansthatthetaxcannotbeapaymentthatresultsinanindividualreceiving:

• Goods

• Services

• Feesorotherpayments

• Therighttouse,acquireorextractresources,patentsorotherpropertythattheforeigncountryownsorcontrols

• Dischargesofcontractualobligations



An inheritance does not qualify as income under U.S. tax law.

AccordingtoPublication514,ForeignTaxCreditforIndividuals,ataxpayerisconsideredtoreceiveaspecificeconomicbenefitifheorsheconductsabusinesstransactionwithapersonwhoreceivesaneconomicbenefitfromaforeigncountry,andunderthetermsandcondi-tionsofthetransaction,thetaxpayerdirectlyorindirectlyreceivessomepartofthebenefit.

example

LawrenceisabusinessownerwholivesinChina,whichhasatwo-tierincometaxsystem:

•Everyoneistaxedaccordingtotheirincome

•Businessownerspayadditionaltaxontheirprofits

Thesecondtierentitlesbusinessownerstocertainreducedfeesandotherbene-fits,suchasabilitytorentspaceinagovernmentbuilding.BecauseofthespecificeconomicbenefitsLawrencereceives,hecannotusethesecond-tiertaxpaymentstocomputeaforeigntaxcreditonhisU.S.taxreturn.However,thefirst-tierincometaxesaresimilartoU.S.incometaxesandcanbeusedtofigurehisforeigntaxcredit.

Ask a volunteer to read the example about Lawrence.

Ask students if they have any questions about the example and “economic benefits.”



Country Restrictions

Taxespaidtooraccruedbycertaincountriesdonotqualifyfortheforeigntaxcredit.Thesearecountries:

• ThathavebeendesignatedbytheSecretaryofStateasrepeatedlyprovidingsupportforactsofinternationalterrorism,

• WithwhichtheU.S.hasseveredordoesnotconductdiplomaticrelations,or

• WhosegovernmenttheU.S.doesnotrecognize,unlessthatgovernmentiseligibletopurchasedefensearticlesorservicesundertheArmsExportControlAct

IncometaxespaidtogovernmentstheU.S.doesnotrecognizearenoteligiblefortheforeigntaxcredit.Atthetimeofthiswriting,thefollowingcountriesarenotrecognized:

• Cuba

• Iran

• NorthKorea

• Sudan

• Syria

Question 6: AdelelivedandworkedinIranuntilAugust2009,whenshewastrans-ferredtoItaly.Shepaidtaxestoeachcountryontheincomeearnedinthatcountry.CanAdeletakeaforeigntaxcreditonherU.S.taxreturnforthetaxespaidonincomesheearnedinIran? □ Yes þ No

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

Q Dividendtaxes

NQ Foreignoil-relatedincometax

Q Interestincometax

NQ Realestatetaxes

Q Incometaxonwagesfromaforeigncountry

NQ TaxespaidonincomeearnedinSyria

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

Ask students to break into groups and com-plete the exercises.


Income from Iran does not qualify for the credit.


What categories of income qualify for the credit?

AtthetopofForm1116,PartI,taxpayersareaskedtoindicatethetypeofforeignincometheyreceived.Twooftheseincomecategoriesfallwithinthescopeofthevolunteerprogram:

• Passivecategoryincome

• Generalcategoryincome

Passive Category Income

Passivecategoryincomeincludespassiveincomeandspecifiedpassivecategoryincome,assumingtheincomeisfromanothercountryandthetaxpayerhaspaidtaxesonit.

Passiveincomegenerallyincludesthefollowing:

• Dividends

• Interest

• Royalties

• Rents

• Annuities

• Netgainfromthesaleofpropertythatproducessuchincome,ornon-income-producing investmentproperty

Forexample,ataxpayerwholivesinaforeigncountryandpaystaxesoninterestincomecouldclaimtheforeigntaxcreditandcheckboxa,“Passivecategoryincome,”onForm1116.

Foradditionalinformationonpassiveincomeandspecifiedpassivecategoryincome,seePublication514,ForeignTaxCreditforIndividuals.

General Category Income

Generalcategoryincomeconsistsofwagesearnedinaforeigncountrythatanindivid-ualdoesnotexclude,orexcludesonlypartof,undertheforeignearnedincomeexclu-sion.Additionally,foreignincomethatdoesnotcomeunderanyoftheothercategoriesonForm1116cantypicallybeincludedasgeneralcategoryincome.

AseparateForm1116must becompletedforeachtype ofincome;eachForm1116canincludeincomeearnedinasmanyasthreeforeigncountries.

Point out the tip on types of income.

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

example

RobertpaidtaxestoSpainanddidnotelecttoclaimtheforeignearnedincomeexclusion.HecanclaimaforeigntaxcreditforthetaxespaidtoSpainonhisearn-ingsfromSpain.

Ask a volunteer to read the example about Robert.

Ask what if Robert did claim the foreign earned income exclu-sion.

Answer: He could not claim the foreign tax credit on that income.



High-taxed Income

SomepassivecategoryincomecanbeincludedingeneralcategoryincomeifitistaxedbyaforeigngovernmentataratehigherthanthehighestU.S.incometaxrate.In2009,thehighestU.S.incometaxratewas35%incometax.Therefore,ifataxpayerpaysmorethan35%incometaxontheforeign-sourcedpassiveincomeforwhichheorsheclaimedthecredit,thecreditiscomputedundergeneralcategoryincome.

Question 8:ReginalivesinSingaporeandisaU.S.citizen.ShehasbothdividendincomeandinterestincomefromcountriesoutsidetheUnitedStates.Herforeignbankwithholds15%ofherinterestincomeforincometaxes.Shealsopaysforeignincometaxesonherdividendincome,atarateof40%.ForthepurposesofForm1116,howshouldthefollowingtypesofincomebeclassified?

InterestIncome: A DividendIncome: B

A.Passivecategoryincome

B.Generalcategoryincome

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

A. Passive category income

B.Generalcategoryincome


Thereareseveralfactorstoconsiderwhendeterminingifataxpaidtoaforeigngovernmentiseligiblefortheforeigntaxcredit.Youwillneedtoaskthetaxpayerques-tionstodetermine:

• Wastheincomeforeign-sourced?

• Whattypeoftaxwaspaidtotheforeigngovernment?

• Willthetaxpayerreceivesomekindofspecificeconomicbenefitfromthepaymentofthistax?

Here’showavolunteerhelpedBonniedetermineifshequalifiedfortheforeigntaxcredit:



40% is more than 35% so the dividend income goes on Form 1116 as “general category income.”

17% is less than 35% so his interest income is treated as “passive category income.”


example

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

Ask a volunteer to read the example about Brenda.


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.


Advise students to enter the date as the last date of the year (e.g., 12/31/2009) if the taxes were withheld throughout the year.


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

Instructor Notes

Lesson 26: Child Tax Credit

Introduction

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

ThechildtaxcreditisenteredintheNonrefundableCreditssectionofthetaxreturn;theadditionalchildtaxcreditisenteredinthePaymentssection.Form1040EZfilerscannottakethecredit.

Anapprovedintakeandinterviewsheetandtheinter-viewtipsintheVolunteerResourceGuide(TabG), arecriticaltoolsneededtodetermineeligibilityfor thecredit.

Objectives


• 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!



Direct students to the Child Tax Credit Inter-view Tips in the Vol-unteer Resource Guide (Tab G).

Lesson 26: Child Tax Credit26-2

Does the child have to be the taxpayer’s dependent?

NEW Tobeaqualifyingchildforthechildtaxcreditfor2009,thechildmustbeclaimedasthetaxpayer’sdependent.

Are there special rules for children of divorced, separated, or never married parents?

Therearespecialrulesforchildrenofdivorcedorseparatedparents,aswellasforchil-drenofparentswhohavenevermarried.Inmostcasesthecustodialparent(theparenthavingcustodyofthechildforthegreaterpartoftheyear)mayclaimthedependencyexemptionforthequalifyingchild.Custody,forthispurpose,meansthechildlivesintheparent’smainhome.Thenoncustodialparent,however,maybeentitledtoclaimthedependencyexemptionforachildandthusthechildtaxcreditandadditionalchildtaxcredit.ReviewtheChildTaxCreditInterviewTipsintheVolunteerResourceGuide(TabG)foradditionalinformation.

Remember,acustodialparent’sreleaseofthedepen-dencyexemptionwillalsoreleasethechildtaxcreditandtheadditionalchildtaxcredit,ifeitherapplies,tothenoncustodialparent.NoncustodialparentsmustattachForm8332orasimilarstatementtotheirreturneachyeartheexemptionisclaimed.

What is the amount of the credit?

Themaximumamounttaxpayerscanclaimforthechildtaxcreditis$1,000foreachqualifyingchild.TheamountactuallyclaimedonForm1040dependsonthetaxpayer’staxliability,modifiedadjustedgrossincome(MAGI)andfilingstatus.Theamountofthecreditmaybereducedifthetaxpayer’s:

• Taxliabilitylessthemajorityofthenonrefundablecreditsislessthanthemaximumchildtaxcredit,or

example

MaryandRalphgotadivorcein2002.Theyhaveonechildtogether,Amy,wholiveswithMary.AllareUScitizensandhaveSSNs.MaryandRalphprovidemorethanhalfofAmy’ssupport.Mary’sAGIis$31,000andRalph’sAGIis$39,000.Amyis12.Thedivorcedecreedoesnotstatewhocanclaimthechild.

Ralph,thenoncustodialparent,canclaimthedependencyexemptionandchildtaxcreditifMarysignsForm8332.Marycanstillclaimtheearnedincomecredit,HeadofHousehold,andchildanddependentcarecreditforAmyassumingshequalifiesforthem.

example

Ed’sson,Jeff,turned17onDecember30,2009andhasavalidSSN.Heisaciti-zenoftheUnitedStates.AccordingtotheChildTaxCreditInterviewTips,heisnotaqualifyingchildforthechildtaxcreditbecausehewasnotundertheageof17attheendof2009.

Read the Ed and Jeff example.

Ask a volunteer to read the Mary and Ralph example.

NEW Taxpayerswithdivorcedecreesordivorceagree-mentsexecutedafter2008mustuseForm8332orsimilarstatement;theycannotsimplysubstitutepagesfromthedivorcedecree.


ExErcisEs

• MAGIisabovethelimitforthetaxpayer’sfilingstatus;reviewPublication17,ChildTaxCreditchapterforthelimitsonthecredit

Reviewsteps6and7intheVolunteerResourceGuide(TabG)todeterminewhichworksheetmustbeusedtofigurethecredit.Ifthetaxpayeranswersyestosteps6and7,thentheworksheetinPublication972mustbeusedtofigurethecredit.

Tax Software Hint: Toreviewinformationrelatedtothesoftware,gotothe

VolunteerResourceGuide(Tab1),MainInformationScreen.

What is MAGI?

Typically,thetaxpayer’sMAGI(ModifiedAdjustedGrossIncome)isthesameastheirAGIfromline37ofForm1040,orline21ofForm1040A.Formoreinfor-mationonMAGIasitappliestothechildtaxcredit,refertoPublication17.

UsetheChildTaxCreditinterviewtipsfromtheVolunteerResourceGuide(TabG)tocompletetheexercises.Answersareattheendofthelessonsummary.

Question 1: PaulandMariearemarriedwithtwodependentchildren.TheywillfileajointForm1040fortheyear.Thechildrenarequalifyingchildrenforpurposesofthechildtaxcredit.PaulandMarie’sMAGIis$112,000andtheirtaxliabilityis$6,200.Basedonthisinformation,PaulandMarie:

A. Are not eligible for the maximum credit and can use the Child Tax Credit Worksheet in the Form 1040 Instructions to figure their child tax credit

B. WillhavetousePublication972tofiguretheir childtaxcredit

C. Areeligibletoclaimafullchildtaxcredit

D. Arenoteligibletoclaimanyamountforthechildtaxcredit

example

StanfilesasHeadofHouseholdandhasthreechildrenwhoqualifyforpurposesofthechildtaxcredit.Stan’sMAGIis$54,000andhistaxliabilityis$4,680.Staniseligibletotakethefull$1,000perchild($3,000)becausehisMAGIislessthan$75,000andhistaxliabilityisgreaterthan$3,000.

example

MayandBobfileasMarriedFilingJointlyandhavetwochildrenwhoqualifyforthechildtaxcredit.TheirMAGIis$86,000andtheirtaxliabilityis$954.EventhoughtheirAGIislessthanthethresholdlimitof$110,000,theycanonlyclaim$954,reducingtheirtaxtozero.Astheycouldn’tclaimthemaximumchildtaxcredit,MayandBobmayalsobeeligiblefortheadditionalchildtaxcredit.


Remind students that using incorrect work-sheets will reduce the taxpayers refund.

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

Taxpayers with AGI above the MAGI phaseout can calculate the credit using the CTC Worksheet in the Form 1040 Instruc-tions rather than Publica-tion 972, if preparing a paper return.





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

A. Fiona,whoisMarriedFilingSeparatelywithaMAGIof$60,000

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

C. Nick, who is Single with a MAGI of $70,000 and a tax liability of $5,000

D. Julie,whoisMarriedFilingJointlywithaMAGIof$116,000

How do I determine taxpayer eligibility for the credit?

Todeterminewhetherachildmeetsthecriteriaofqualifyingchildforthechildtaxcreditoradditionalchildtaxcredit,usetheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.BeginbyreviewingtheFamilyandDependentInformationsectionofthetaxpayer’sapprovedintakeandinterviewsheet.Verifythatthechild:

• Isunder17onDecember31ofthetaxyear

• Livedwiththetaxpayerformorethan6monthsoftheyear(rememberthespecialrulesfordivorced,separated,ornevermarriedparents)

• Didnotprovideoverhalfofhisorherownsupport

• Meetstherelationshipcriteria

• IsaU.S.citizen,U.S.National,orresidentoftheUnitedStates

IftheFamilyandDependentInformationsectionisincomplete,orthetaxpayerisunsureofhowtorespond,youmaywanttousetheChildTaxCreditInterviewTips intheVolunteerResourceGuide(TabG).Itprovideshelpfulprobingquestionstoaskthetaxpayer.

Tax Software Hint: TheentriesforeachqualifyingchildontheMainInformationSheetwillhelpthesoftwaredetermineifthechildiseligibleforthechildtaxcredit.Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab1),MainInformationScreen.

Review the rules for eligibility.

Jack meets the require-ments in interview steps 1-4.

Nick’s MAGI is not affected by the $75,000 limit; his tax liability is more than $1,000 per child.


How do I calculate the child tax credit?

Tocalculatethecredit,youmustfirstdeterminewhichworksheettouse.ReviewtheChildTaxCreditinterviewtipsintheVolunteerResourceGuide(TabG)todeterminewhichworksheetthetaxpayermustuse.

Tax Software Hint: Ifyouareusingtaxsoftware,thesystemwillautomaticallycalculatethecredit,providedyouhavecorrectlycompletedthe:

• DependentsectionoftheMainInformationSheet

• Taxpayer’sreturnthroughtheretirementsavingscontributioncreditline

• PartIofForm5695,andScheduleR

Ifyouhaveaquestionabouttheamountthatappearsasthechildtaxcredit,thetaxpayer’scompletedChildTaxCreditWorksheetmayhelpyouunderstandthedeter-mination.

What is the additional child tax credit?

What is the amount of the credit?

Thiscreditisforcertainindividualswhogetlessthanthefullamountofthechildtaxcredit.Theadditionalchildtaxcreditmaygivetaxpayersarefundeveniftheydonotoweanytax.

NEW Likethechildtaxcredit,theadditionalchildtaxcreditallowseligibletaxpayerstoclaimupto$1,000foreachqualifyingchildaftersubtractingtheallowableamountofchildtaxcredit.Thecreditisgenerallybasedonthelesserof:

• 15%ofthetaxpayer’staxableearnedincomethatisover$3,000,or

• Theamountofunusedchildtaxcredit(causedwhentaxliabilityislessthan allowedcredit)

Who can take the additional child tax credit?

Taxpayerswhodon’tgetthefull$1,000ofthechildtaxcreditmayqualifyfortheadditionalchildtaxcredit.ReviewtheAdditionalChildTaxCreditTipintheVolunteerResourceGuide(TabG)toseetherequirementstoclaimthecredit.

example

RememberMayandBobwhohavetwoqualifyingchildren,aMAGIof$86,000,andataxliabilityof$954?Becausetheirtaxliabilityislessthanthefullamountofthecredit(intheircase$2,000)theymaybeabletotaketheadditionalchildtaxcreditofupto$1,046($2,000-$954).

Review the require-ments again with the students.

Read the May and Bob example.



Thereisanothermethodtocomputetheadditionalchildtaxcreditfortaxpayerswiththreeormorequalifyingchildren.Thesetaxpayersmaybenefitifthey:

• HadsocialsecurityorMedicaretaxeswithheldfromtheirpay

• Wereself-employedandpaidself-employmenttax

• Paidtaxontipsnotreportedtotheiremployer

• Didnotreceivethemaximumavailablechildtaxcredit

Theamountofthetaxpayer’searnedincomecreditisnotafactorinthiscalculationonForm8812.

How do I calculate the additional child tax credit?

Form8812,AdditionalChildTaxCredit,isusedtocalculatetheadditionalchildtaxcredit.ThecreditwillappearontheadditionalchildtaxcreditlineofthePaymentsectionofForm1040.

Tax Software Hint:Ifyouareusingthetaxsoftware,thesystemwillautomati-callycalculatethecreditandplacethatentryontheappropriatelineofthepaymentsection.

Question 4:JoseandYolandaAlamedaareMarriedFilingJointlyandhavefivedependentchildrenundertheageof17.JoseandYolandabothhavevalidSSNs.TheirchildrenhaveIndividualTaxpayerIdentificationNumbers(ITINs).Thechildrenarequalifyingchildrenforpurposesofthechildtaxcredit,butnottheearnedincomecredit.JoseandYolanda’sAGIis$8,850andtheirtaxliabilityis$0.TheirsocialsecurityandMedicaretaxesare$677.Theirearnedincomecreditamountis$457.Aretheyeligibletotaketheaddi-tionalchildtaxcredit?þ Yes □No

How do I avoid common errors?

Whenconsideringthechildtaxcredit,itiscriticaltoensurethatthetaxpayerhasbeeninterviewedthoroughlytocorrectlyidentifyeligiblechildren.Ifpreparingapaperreturn,besuretousetheworksheetstofigurethecredit,anddetermineiftheadditionalchildtaxcreditshouldbeincluded.

Tax Software Hint: OncetheCTCblockontheMainInformationSheetischecked,thesoftwarewillcomputetheamountofthecreditautomatically.


Takealookathowavolunteerhelpedourtaxpayer,VanessaFranklin.GotoAppendixA-28andreviewthesampleinterviewswithVanessarelatedtolesson26.

Their tax liability (0) was less than their allowable child tax credit ($5,000). They may qualify for the additional child tax credit.



Remind students to use the correct worksheet.



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

Instructor Notes

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.

Direct students to this page in the Volunteer Resource Guide.

Point out the types of plans that qualify as listed in Publication 17.


Tax Software Hint:IfthetaxpayercontributedtoaRothoratraditionalIRA,whetheritisdeductibleornot,linktotheIRAdeductionworksheetandentertheinfor-mation.ReviewtheVolunteerResourceGuide(Tab3),Form1040-AdjustmentstoIncome,forthesoftwareentries.

What may reduce an eligible contribution for purposes of the credit?

Eligiblecontributionsarereducedbythefollowingdistributionsreceivedduringthe testingperiod:

• Anydistributionthatisincludedinthetaxpayer’sgrossincomefromaqualifiedretirementplanorfromaneligibledeferredcompensationplan

• AnydistributionfromaRothIRAthatisnotaqualifiedrollovercontribution

Thetestingperiodincludes:

• Thetaxyear,and

• Thetwoprecedingtaxyears,and

• Theperiodbetweentheendofthetaxyearandtheduedateofthereturn,includingextensions

Married Filing Jointly

Formarriedtaxpayersfilingajointreturn,bothspousesmaybeeligibleforacreditonamaxi-mumannualcontributionamountof$2,000each.Ifeitherspousehasadistributionduringthetestingperiod,bothspousesmustreducetheireligiblecontributionbythatamount.

How do I determine the amount of the credit? Form8880isusedtofiguretheamountofthecredit.

Tax Software Hint:IfthetaxpayermeetstheageandincomerequirementsandacontributionwasindicatedonFormW-2ortheIRAworksheet,Form8880willdisplayintheformstree,highlightedinred.Youwillneedtoaddressafewfieldsbeforethe

example

JoseandLucyaremarriedandwillfileajointreturn.Theircombinedadjustedgrossincomewas$39,000.Theyeachcontributed$3,000toa401(k)plan.Theydidnotreceiveanydistributionsduringthethree-yearperiodandcannotclaimanyothercredits.JoseandLucyareeacheligibleforacreditbasedonthemaximumeligibleannualcontributionamountof$2,000each.

Ask a student to read the Jose and Lucy example.

Youmustquestionthetaxpayertodetermineiftherehavebeenanydistributionsinthetestingperiod.

example

JoeandMaryaremarriedandfiledjointreturnsfor2007and2008,andplantodosoin2009.Joereceivedataxabledistributionfromaqualifiedplanin2007andataxabledistributionfromaneligibledeferredcompensationplanin2008.MaryreceiveddistributionsfromaRothIRAin2008.

BothJoeandMarymadeeligiblecontributionstoanIRAin2009andotherwisequalifyfortheretirementsavingscredit.Theymustreducetheamountoftheirqual-ifyingcontributionsin2009bythetotalofthedistributionstheyreceivedin2007and2008.ThiscalculationiscompletedonForm8880.

Ask a student to read the Joe and Mary example.

Ask what if only Joe had taken a distribution.

Answer: Both Joe and Mary would have to reduce their eligible contributions by the amount of Joe’s distribution.


ExErcisEs

Ed, Bert, and Carl do not qualify because their AGIs are over the limit for their filing statuses.



Ask two volunteers to read the Ryan inter-view.

Display Form 8880.

Direct students to the page in the Volunteer Resource Guide noted in the Tax Software Hint.

RefertoForm8880intheVolunteerResourceGuide(Tab5),RetirementSavingsContributionsCredit.

returniscompleted.ReviewtheVolunteerResourceGuide(Tab5),RetirementSavingsContributionsCredit,forthesoftwareentries.

Thecreditcanbeaslowas10%orashighas50%ofamaximumannualcontributionof$2,000perpersondependingonfilingstatusandadjustedgrossincome.

Question 1: Whichofthefollowingtaxpayers,whocontributedtotheiremployers’401(k)plans,ispossiblyeligiblefortheretirementsavingscredit?

A.Ed,whoissingleandhasanadjustedgrossincomeof$35,200

B. Sybil, who is married, files jointly, and has an adjusted gross income of $49,500

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

D.Carl,whoisaqualifyingwidowerwithadependent child,andhasamodifiedAGIof$29,000


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.


Display or refer to the Volunteer Resource Guide (Tab G). Point out the income limits on the page titled, Credit for the Elderly or the Disabled.

Thetotalamountofthecreditthatcanbeclaimedin2009and2010islimitedto$1,500.ThecreditisclaimedonPartIofForm5695.

Ifthetaxpayeriseligibleforthecreditfortheelderlyorthedisabled,computethatcreditfirst.

What is the residential energy efficient property credit?

Taxpayersmayqualifyforanenergycreditforquali-fiedsolarelectricpropertycosts,qualifiedsolarwaterheatingpropertycosts,qualifiedsmallwindenergypropertycosts,andqualifiedgeothermalheatpumppropertycosts.ThiscreditisclaimedonPartIIofForm5695.ThisinformationisoutofscopefortheVITA/TCEprogramandisincludedforyourawarenessonly.Refertaxpayerswiththeseexpensestoaprofessionaltaxpreparer.

How do I handle the Credit for the Elderly or the Disabled?

ThecreditfortheelderlyorthedisablediscalculatedonScheduleRandreportedintheTaxandCreditssectionofForm1040.ThiscreditcanalsobeclaimedonForm1040A.

Who qualifies for the credit for the elderly or the disabled?

Individualswhoqualifyfortheelderlyorthedisabledcreditare:

• Age65orolder,or

• Underage65,retiredonpermanentandtotaldisability,receivingtaxabledisabilityincome,andhavenotreachedthemandatoryretirementagetheircompanyhasset

Besidesbeingaqualifiedindividual,theirtotalincomemustbewithincertainlimits.TheincomelimitscanbefoundintheVolunteerResourceGuide(TabG),CreditfortheElderlyortheDisabled,FigureBIncomeLimits.

Mandatory retirement ageistheagesetbyataxpayer’semployeratwhichthetaxpayerwouldhavebeenrequiredtoretire,hadthetaxpayernotbecomedisabled.

Generally,disabilityincomecomesfromanemployer’sdisabilityinsurance,healthplan,orpensionplan.Thepaymentsreplacewagesforthetimethetaxpayermissedworkbecauseofthedisability.Theplanmustprovidefordisabilityretirementforthepaymentstobeconsidereddisabilityincome.

Ataxpayerwithapermanentandtotaldisabilityisunabletoengagein“substantial,gain-fulactivity,”orinotherwords,paidemployment.Taxpayerswhocandosuchworkarenotconsidereddisabled.Workinginashelteredworkshopsetting,however,isnotconsideredsubstantial,gainfulactivity.

IRSprovidesguidanceforpropertythatqualifiesfortheenergycredits.Homeownersgenerallycanrelyonmanu-facturers’certifications. Refertowww.irs.govorwww.energystar.govformoreinfor-mation.





Ask a volunteer to read John’s example.

Ask what if John’s nontaxable social security benefits were $4800 and he had other nontaxable pension income of $300.

Answer: He would still not be eligible.

Explain that few tax-payers qualify for the credit.

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


ScheduleRisusedtocalculatethecredit,andhasthreeparts:

• PartI,FilingStatusandAge

• PartII,StatementofPermanentandTotalDisability,ensuresthattaxpayerswhoareunder65haveobtainedacompletedphysician’sstate-mentthatprovestheyarepermanentlyandtotallydisabled

• PartIII,FigureYourCredit

Ifthetaxpayeris65orover,orunder65andretiredonpermanentandtotaldisability,completeScheduleRtodeterminetheamountofthecredit,ifany.

Tax Software Hint: TaxsoftwarewillcompletemostofScheduleRbasedonthedatafromtheMainInformationSheetandincomeamountsenteredonthereturn.ItwilldeterminewhetherthetaxpayeriseligibleforthecreditandtransferthecreditamounttotheappropriatelineonForm1040.GototheVolunteerResourceGuide(Tab5),NonrefundableCreditsforsoftwareentries.

Question 2:Whichoneofthefollowingitemswouldautomaticallydisqualifysomeonewhoisunder65yearsoldfromclaimingthecreditfortheelderlyorthedisabled?

A.Participatinginshelteredemployment

B.Receivingtaxabledisabilitybenefitsduringtheyear

C.Failingtoattachaphysician’sstatementtothetaxreturn

D. Earning at least minimum wage by performing productive work

Sincetaxsoftwareautomati-callycalculatesthecreditfortheelderlyorthedisabled,itiscriticalthatallsocialsecurityandrailroadretirementbenefitstreatedassocialsecuritybeenteredontheworksheetforline20aofForm1040.Amountsmustbeenteredevenifnosocialsecurityistaxable.

example

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

Someone under 65 and not yet retired on perma-nent and total disability is ineligible for the credit.



Determining Albert’s Eligibility

Albertcomesintothetaxcenter.HehasalmostcompletedhisForm1040Abutwantstoknowifhecanclaimthecreditfortheelderlyorthedisabled.Followalongintheconversation.

RefertotheVolunteerResourceGuide(TabG),CreditfortheElderlyortheDisabled.FigureBshowsthatAlbert’sAGI($15,430)isunderthelimitforasinglefiler($17,500),andhisincomefromnontaxablesocialsecurityorpensionbenefits($4,430)isalsowithinthelimitforasinglefiler($5,000).

What about the Alternative Motor Vehicle Credit?

Form8910,AlternativeMotorVehicleCredit,isusedtoclaimacreditforalternativemotorvehiclesthatmeetcertainrequirements.Thistopicisoutofscopeforthevolun-teerprogramandisincludedforawarenessonly.Refertaxpayerswhochoosetoclaimthiscredittoaprofessionaltaxpreparer.

What is the Mortgage Interest Credit?

Taxpayerswhoholdqualifiedmortgagecreditcertificates(MCCs)underaqualifiedstateorlocalgovernmentprogrammayclaimanonrefundablecreditformortgageinterestpaid.Thetaxpayermusthaveadocumenttitled,“MortgageCreditCertificate,(MCC).”Theamountofthecreditislistedonthecertificate.

ThistopicisintroducedintheVITA/TCEtrainingforinformationalpurposesonly.Refertaxpayerswhochoosetoclaimthiscredittoaprofessionaltaxpreparer.

Emphasize that Sched-ule R must be com-pleted to determine if the taxpayer can claim the credit.

Display the table for the Credit for the Elderly or the Disabled.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… alBert responds…

Are you either a U.S. citizen or a resident alien?

Are you over 65?

Are you retired on permanent and total disability?

Sounds like you may qualify. What is your adjusted gross income?

How much did you receive in social security?

Did you receive any other pension benefits that might not be taxable?

And your filing status is Single, so it looks like you might be able to claim the credit. If you would like for me to do your return, I will go back through it step-by-step to make sure.

Yes,I’maU.S.citizen.

No,I’monly54,notevenoldenoughforretirement.ButIhadtostopworkinglastyearbecauseofmydisability.

Yes.Infact,IstartedreceivingdisabilityretirementbenefitslastAugust.

$15,430.

Igot$4,430insocialsecuritybenefits.

No,Ijustgetmydisabilitychecksandsocialsecurity.

Point out that claiming the Alternative Motor Vehicle Credit requires a professional tax pre-parer.

Point out that claiming the Mortgage Interest Credit requires a pro-fessional tax preparer.

Ask two students to role-play the sample interview.


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

Instructor Notes

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.



Refer to the Other Taxes section of Form 1040.

Emphasize the caution.Ifyouarenotcertifiedto

prepareareturnincludingadditionaltaxesonIRAsandotherqualifiedretire-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.

Confirm that volun-teers understand who must pay self-employ-ment tax.

Display or refer to Schedule SE.

Demonstrate how to figure the tax using tax software or the sched-ules.


What about taxes on unreported tip income?

Alltipincomeissubjecttofederalincometax.However,tipsoflessthan$20permonththatarenotreportedtotheemployerarenotsubjecttosocialsecurityandMedicaretaxes.

Individualswhoreceive$20ormorepermonthintipsfromanyonejobmustreporttheirtipincometotheiremployer.TheemployerreportsthesetipsaspartofthewagesonFormW-2,box1.TheemployerwithholdssocialsecurityandMedicaretaxesandfederalincometaxonthatincome.

What about allocated tips?

Anemployermay“allocate”tipstoanemployeeiftheemployeeworkedinarestau-rant,cocktaillounge,orsimilarbusinessandreportedtipsthatwerelessthantheemployee’sshareof8%offoodanddrinksales.Iftheemployerallocatestipstoemployees,theamountisreportedonFormW-2,box8.ThisamountistobeincludedonForm1040.SocialsecurityandMedicaretaxesarenotwithheldonallocatedtips.TheemployeepaysthesocialsecurityandMedicaretaxesbycompletingForm4137,SocialSecurityandMedicareTaxonUnreportedTipIncome.

Iftheemployeecanshow,usingPublication1244,Employee’sDailyRecordofTipsandReporttoEmployer,orsomesimilardailytiprecord,thattheactualtipsreceivedaredifferentfromtheallocatedamount,thentheactualamountisreportedonForm1040.TheactualtipsreceivedarealsoreportedonForm4137tocalculatesocial securityandMedicaretaxes.

What about tips that the employee did not report to the employer?

Iftheemployeereceived$20ormoreinunreportedcashandchargetipsinanymonthfromanyjob,theemployeemustreportthatincomeonForm1040andpaythesocialsecurityandMedicaretaxesonthatincome.But,iftheemployeereceivedlessthan$20intipsinanymonthfromanyjob,theyarenotrequiredtoreportthemtotheemployer.However,theseamountsdoneedtobeincludedonForm1040.TheywillnotbesubjecttosocialsecurityorMedicaretaxes.

Ifataxpayerisfilingapaperreturnandonlyhasunreportedtipsoflessthan$20permonth,Form4137isnotrequiredsincesocialsecurityandMedicaretaxisnotappli-cable.

Tax Software Hint: AlltipsarereportedonForm4137becausethesoftwarecalculatessocialsecurityandMedicaretaxesonlyontheapplicabletips.ThesoftwarewillthenaddunreportedtipstoLine7onForm1040.

Display or refer to Form 4137. Direct stu-dents to review box 8 on Form W-2.


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

On all but the tips in May because they amounted to less than $20.

Direct students to the How to Enter Unre-ported Tips page in the Volunteer Resource Guide (Tab 2).

Display or refer to Form 4137 and assist volunteers in complet-ing the form.

Assign the exercises and review with the class.

The difference between tips received and tips reported to her employer.

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

example

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

Ask a volunteer to read the Carla example.

Emphasize that both cash and charge tips are taxable and aren’t treated differently for tax purposes.

Ask what if Carla worked only 2 months as a waitress and received $15 per month in tips.

Answer: She must report the tip income on her return, but pays no social security or Medicare tax on them.


What about taxes on IRAs and other qualified retirement plans?

Contributions to and Distributions from IRAs and Qualified Plans

TraditionalIRAsandother“qualifiedplans”allowindividualstodeferpayingtaxesonmoneytheycontributeandontheearningsuntilthefundsaredistributed.

Iftherulesforcontributionsanddistributionsarenotfollowed,additionalpenaltytaxesmaybedue.Forexample,thetaxpayermustpayincometaxdueplusanadditionaltaxifanyofthefollowingapply:

• Adistributionistakenbeforetheindividualreachestheageof59½andisnotrolledoverintoanotherqualifiedplanorIRAandnootherexceptionapplies

• Minimumdistributionsarenotwithdrawnwhenrequired

• Excesscontributionsarenotremovedbytheduedateofthereturnincludingextensions

TheadditionaltaxforeachsituationisoutlinedonForm5329,AdditionalTaxesonQualifiedPlans(IncludingIRAs)andOtherTax-FavoredAccounts.Whilecomple-tionofForm5329isoutofscopefortheVITA/TCEprogram,volunteersshouldbeawareoftheexceptionstotheadditionaltaxforprematuredistributions.Taxpayersfrequentlyuseaprematuredistributionforhouseholdexpensesorbillsthatarenotonthelistofexceptions.Inthiscase,youcanassistthembecausethisdoesnotrequirecompletionofForm5329.TaxpayerswhomayqualifyforanexceptionmustcompleteForm5329andshouldbereferredtoaprofessionaltaxpreparer.

Refertotheapprovedintakeandinterviewsheet,PartIV–Income,forthequestionregardingpensionorIRAdistributions.Iftheansweris“yes,”askthetaxpayerforanyForm1099-Rthatreportsthesepayments.

Review the penalty conditions to make sure students under-stand them.

Frequently,taxpayerswhoreceiveForm1099-Rwithcode1inbox7aresubjecttothe10%additionaltaxforprematuredistributionbecausethemoneywasspentforitemsthatdonotmeetanyoftheexceptions.

RefertothePublication17chaptersRetirementPlans,Pensions,andAnnuitiesorIndividualRetirementArrangementsforthelistofexceptionstotheadditionaltaxonqualifiedretirementplans.

example

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

Review the example with the class.

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


IRAdistributions,pensions,andannuitiesarecoveredintheRetirementIncomelesson.IfyouarenotcertifiedabovetheBasicLevel,refertaxpayerswiththeseissuestoamoreexperiencedvolunteerortoaprofessionaltaxpreparer.

What are Advance Earned Income Credit Payments?

Whenataxpayerqualifiesfortheearnedincomecredit(EIC),theamountofthecreditisreportedinthePaymentssectionofForm1040.TheEICisarefundabletaxcredit.Itreducesthetaxpayer’stotaltaxpaymentandcouldresultinataxrefundforthetaxpayer.TheEICwillbediscussedinLesson30.

TaxpayerscanchoosetogetpaymentsofEICinadvance,aspartoftheirpaychecks,insteadofwaitingtogetitallatoncewhentheyfiletheirtaxreturn.Toreceiveadvanceearnedincomecredit(AEIC)payments,thetaxpayermusthave,orexpecttohave,aqualifyingchildandsubmitFormW-5,EarnedIncomeCreditAdvancePaymentCertificate,totheiremployer.Theemployerwillincludeaportionoftheearnedincomecreditintheemployee’sregularpay.Farmworkersareexcluded.TheamountofadvanceEICisreportedontheemployee’sFormW-2,box9.IfadvanceEICisreceived,thetaxpayerisrequiredtofileataxreturn,evenifthetaxpayer’sgrossincomeisbelowtheamountrequiredtofile.

How does AEIC affect tax?

AEICisEICthatwaspaidtothetaxpayerduringthetaxyear.TheAEICamountmustbereportedonForm1040intheOtherTaxessection.Onthesamereturn,theEICamountmustbereportedinthePaymentssection.

TheAEICisaddedtothetotaltaxandEICissubtractedfromthetotaltax.Reportingthenumbersinthiswayensuresthatthetaxpayerreceivesalltheearnedincomecredittowhichtheyareentitled.Ifthisisthecaseforataxpayeryouarehelping,besuretoexplainthisandansweranyquestions.ThisusuallyresultsinthetaxpayersreceivinganadditionalamountofEICwhenthetaxreturnisfiled.However,taxpayersmayowetaxiftheirincomechangedduringtheyear.

example

Claireliveswithher2year-oldandknowsthatshequalifiesforEICin2009.ShecompletesFormW-5toreceiveaportionofthecreditaspartofherpaycheckduring2009,ratherthanwaitingtoreceivethefullamountafterfilingher2009return.

Review the meaning of refundable credit with the class.

Ask a volunteer to read the Claire example.

Ask what if Claire had only $5,000 in income; would she need to file a tax return.

Answer: Yes, because she received the AEIC.

example

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

Ask a volunteer to read the Claire example.



Tax Software Hint: BesurethatFormW-2isenteredinitsentirety.Informationfrombox9willautomaticallydisplayontheapplicablelineonForm1040.TheAEICboxischeckedtoreflectthatthisentryisforadvanceearnedincomecredit.GototheVolunteerResourceGuide(Tab2),FormW-2Instructions,forsoftwareentries.

Question 3: Gloriahadadvanceearnedincomecredit(AEIC)paidtoherduringtheyear.Theamountinbox9ofherFormW-2was$700.

GloriaqualifiedforanEICamountof$1,025.Herincometaxwas$200andherwithholdingwas$1,000.Therewerenootherpayments,creditsorothertaxes.Whatisthefinalamountonhertaxreturn?Choosethebestanswerbelow.

A.Gloriaowestaxof$1,125

B.Gloriahasanoverpaymentof$2,025

C. Gloria has an overpayment of $1,125

D.Gloriahasanoverpaymentof$1,825

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

A. Income

B. Other Taxes

C. Payments

D. AdjustmentstoIncome

What about repayment of the first-time homebuyer credit?

Thefirst-timehomebuyercreditiscoveredinLesson29,Payments.However,certainsituationsmayrequirethecredittoberepaidandreportedintheOtherTaxessectionofForm1040.

Ifthetaxpayerreceivedthefirst-timehomebuyercreditforahomepurchasedin2009anditceasestobethetaxpayer’smainhomewithinthe36-monthperiodbeginningonthepurchasedate,thetaxpayergenerallymustrepaythecredit.

Ifthetaxpayerreceivedthefirst-timehomebuyercreditforahomepurchasedin2008,thetaxpayergenerallymustrepaythecreditovera15-yearperiodin15equalinstall-ments.Therepaymentperiodbeginsin2010andthetaxpayermustincludethefirstinstallmentasadditionaltaxonthe2010taxreturn.However,ifthehomeceasestobethetaxpayer’smainhomebeforethe15-yearperiodisup,thetaxpayermustrepayallremainingannualinstallments.

Review the Tax Soft-ware Hint.

($1,025+$1000)-($200+$700)=$1,125

Assign the exercises and review the answers with the class.


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.



Display or refer to the Other Taxes section of Form 1040 so students understand how other taxes affect total tax computation.


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

Instructor Notes

Introduction

ThislessonisoneofseverallessonsthatcoverthePaymentssectionofthereturn.Thispartofthereturnincludesadditionalchildtaxcredit,therefundableeducationcredit,payments,andearnedincomecredit.Afterfinishingtheselessons,youwillbeabletocompletethePaymentssectionofthetaxpayer’sreturn.Thislessoncoverscertainrefundablecreditsandpaymentsmadebythetaxpayer.Theseinclude:

• FederalincometaxwithheldfromFormsW-2andForms1099

• Estimatedtaxpaymentsforthecurrenttaxyearandamountsappliedfromtheprioryear’staxreturn

• NEW Makingworkpayandgovernmentretireecredits

• NEW First-timehomebuyercredit

• Amountspaidwitharequestforextensiontofile

• Excesssocialsecurityandtier1RRTAtaxwithheld

Additionalchildtaxcreditandtherefundableeducationcredithavealreadybeencovered.Earnedincomecreditwillbecoveredinthenextlesson.

ObjectivesAttheendofthislesson,usingyourresourcematerials,youwillbeableto:

• Identifythefollowingtypesofpaymentsandcreditsthatareapplicableformostlow-andmoderate-incometaxpayers:

- FederalincometaxwithheldfromFormsW-2,WageandTaxStatement

- FederalincometaxwithheldfromForms1099

- Estimatedtaxpaymentsandamountsappliedfromtheprioryear’sreturn

- Makingworkpayandgovernmentretireecredits

- Firsttimehomebuyercredit

- Amountpaidwitharequestforanextensiontofile

- Excesssocialsecurityandtier1RRTAtaxwithheld

• Reportthesepaymentsandcreditscorrectlyonthetaxpayer’sreturn

Lesson 29: Payments

Review the objectives with the class.

Identify the new tax law provisions in this lesson: making work pay and government retiree credits and the first-time homebuyer credit (amended).

Lesson 29: Payments29-2

Theinformationyouobtainfromanapprovedintakeandinterviewsheetwillhelpyoudeterminethepaymentsandcreditsthatshouldbereportedonthetaxpayer’sreturn.

RefertotheOtherTaxesandPaymentssectionoftheVolunteerResourceGuide(Tab6)toidentifyandreviewthePaymentssectionofthereturn.

How do I report federal income tax withheld?

TheFederalincometaxsystemisa“payasyougo”system.Thatmeanstaxispaidasincomeisearnedorreceivedduringtheyearandisreferredtoaswithhold-ingcredit.

Incometaxisgenerallywithheldfromthefollowingtypesofincome:

• Salariesandwages

• Tips

• Taxablefringebenefits

• Sickpay

• Pensionsandannuities

• 401(k)andIRAdistributions

• Gamblingwinnings

• Unemploymentcompensation

• Certainfederalpaymentssuchassocialsecuritybenefits

Ifthetaxpayerhasincometaxwithheldduringthecurrenttaxyear,theywillreceiveoneofthefollowingformsshowingtheamountwithheld:

• FormW-2,WageandTaxStatement

• FormW-2G,CertainGamblingWinnings

• OneofseveraldifferenttypesofForms1099

ThetotalfederalincometaxwithheldisreflectedinthePaymentssectionofForm1040,page2onthelineforfederalincometaxwithheld.

Forahouseholdemployee,anemployershouldwithholdfederalincometaxonlyifthehouseholdemployeeaskstheemployertowithholditandtheemployeragrees.

Thewithholdingfromallincomedocumentsisincludedonthereturn,butnotallincomestatementsarerequiredtobeattached.Refertopage1ofForm1040forthefollowingguidance:“AttachForm(s)W-2here.AlsoattachFormsW-2Gand1099-Riftaxwaswithheld.”

NEW Makingworkpayandgovernmentretireecreditsarenew.Themakingworkpaycreditappliestotaxyears2009and2010.Thegovernmentretireecreditisaone-timecreditfor2009.Reviewtherulesforthesenewcreditstoensureyouprepareanaccuratereturn.

What do I need?


□ 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).

Ask a volunteer to read the Freda example.

Refer students to the Payments section of Form 1040 to illustrate the Freda example.

Estimatedtaxincludesthetaxpayer’sincometaxandself-employmenttax.Self-employmenttaxisthesocialsecurityandMedicaretaxesowedbyself-employed workers.

SuggestthetaxpayerobtainForm1040-ESfordetailsaboutestimatedtaxes.Formscanbeobtainedbydownload-ingfromwww.irs.govorcallingtoll-free,1-800-829-3676.

Ifataxpayerpaidsubstantiallymoreorlessthanrequiredinestimatedtax,encouragethemtorecalculateit.TheycanadjusttheirestimatedtaxpaymentsbyfollowingtheinstructionsandworksheetonForm1040-ES..

SeeLessons31and33 formoreinformationonesti-matedtaxes.


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!

Ask two volunteers to role-play the Ernie sample interview.

Remind students not to confuse the making work pay credit with the recovery rebate that was on the 2008 return.


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.

Direct students to Schedule M in the Volunteer Resource Guide, page 10, under the ARRA section - making work pay credit.


Thecreditisreducedoreliminatedforhigher-incometaxpayers.Itisphasedoutbasedonmodifiedadjustedgrossincome(MAGI).ForMarriedFilingJointlytaxpayers,thephase-outbeginsat$150,000.Forothertaxpayers,thephase-outrangestartsat$75,000.ThismeansthatthefullcreditisavailableformarriedcouplesfilingajointreturnwithaMAGIof$150,000orlessandforothertaxpayerswithaMAGIof$75,000orless.

Form5405,First-TimeHomebuyerCreditandRepaymentoftheCredit,isusedtoclaimthecredit.

Which home purchases qualify for the first-time homebuyer credit?

Tobeconsideredafirst-timehomebuyer,thetaxpayercannothaveownedahomeinthelast3years,and,oncetheybuythehome,theymustliveinitfor3yearstoavoidrepaymentofthecredit.

Also,forhomesboughtin2009,taxpayerscanmakeanelectiontoclaimthecreditontheiroriginaloramended2008taxreturnortheir2009taxreturn.

OnlythepurchaseofamainhomelocatedintheUnitedStatesqualifiesandonlyforalimitedtime.Amainhomeiswherethetaxpayerlivesmostofthetime.Itcanbeahouse,houseboat,housetrailer,cooperativeapartment,condominium,orothertypeofresidence.Vacationhomesandrentalpropertyarenoteligible.AtaxpayermustbuythehomeduringtheperiodafterDecember31,2008andbeforeDecember1,2009.Forahomethatataxpayerconstructs,thepurchasedateisthefirstdatethetaxpayeroccu-piesthehome.

Who is not eligible for the credit?

Ifanyofthefollowingdescribethetaxpayer,thecreditcannotbetaken,evenifthetaxpayerbuysamainhome:

• Taxpayer’sincomeexceedsthephase-outrange.ThismeansMarriedFilingJointlytaxpayerswithMAGIof$170,000andaboveandothertaxpayerswithMAGIof$95,000andabove.

• Taxpayerbuysthehomefromacloserelative,includingthetaxpayer’sspouse,parent,grandparent,childorgrandchild.

• Taxpayerbuysthehomefromarelatedentity,includingacorporationorpartnershipinwhichthetaxpayerdirectlyorindirectlyownsmorethana50%interest.

• Taxpayersellsthehome,oritceasestobethetaxpayer’smainhome,beforetheendof2009.

• Taxpayerisanonresidentalien.

• ThehomepurchasedislocatedoutsidetheUnitedStates.

• Taxpayeracquiredthehomebygiftorinheritance.

• Taxpayerownedanothermainhomeatanytimeduringthethreeyearspriortothedateofpurchase.

Reviewtheapprovedintakeandinterviewsheettodeter-mineifthetaxpayer(andspouse,ifmarried)qualifiesforthiscredit.

Direct students to review the term “refundable credit” and explain how it affects a taxpayer’s tax return.

Display or refer stu-dents to Form 5405.

Taxpayers(includingspouseifmarried)whoownedaprin-cipalresidenceatanytimeduringthethreeyearspriortothedateofpurchase,arenoteligibleforthecredit.


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.

Ask a student to read the Bernice example.

example

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

Refer students to the Filing for an Extension Using the Tax Software section in the Volunteer Resource Guide (Tab 6). Walk through the steps for filing an extension in tax software.

Inform students that the payments listed are not the typical types of payments for people who qualify for assis-tance in the VITA/TCE program, thus they are beyond the scope of volunteer training.



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

Summary

ThePaymentssectionofthetaxreturniscriticaltoanaccuratereturn.Itlistsallthetaxpaymentsthetaxpayermadeduringtheyear,andthetaxpayer’srefundablecredits.Youmustbeabletoidentifythetypesofpaymentsandcreditsthatapplytoindividualswhoqualifyforvolunteerreturnpreparationassistance.

Notes




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


Direct students to Appendix A- 35.

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

Instructor Notes

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



Direct students to the sample Form W-2 in the Volunteer Resource Guide (Tab 2).

Lesson 30: Earned Income Credit (EIC)30-2

How does a taxpayer qualify for the EIC?

TherearegeneralsetsofrulesforclaimingtheEarnedIncomeCredit:

• Rulesforeveryone

• Rulesfortaxpayerswithaqualifyingchild

• Rulesfortaxpayerswhodonothaveaqualifyingchild

What rules apply to everyone?ThetaxpayermustmeetalltherulestoqualifyfortheEarnedIncomeCredit.TurntothecharttitledSummaryofEICEligibilityRequirementsintheVolunteerResourceGuide(TabH).ReviewPartA,RulesforEveryone,andPartD,EarnedIncomeandAGILimitations.

What is “earned” income for EIC purposes?

Earnedincomeiswages,salaries,tips,andothertaxableemployeepay.TurntotheEarnedIncomeTableintheVolunteerResourceGuide(TabH)forexamplesofearnedincome.

Onetypeofpaymentconsideredearnedincomeis“taxablelong-termdisabilitybenefitsreceivedpriortominimumretirementage.”Disabledtaxpayerscansometimesreceiveadisabilitypensionfromthecompanyeventhoughtheyareyoungerthanthemini-mumretirementage.Minimumretirementageisgenerallytheageatwhichtaxpayerscanfirstreceiveapensionorannuityfromtheircompanyiftheyarenotdisabled.

TaxpayersusuallyreceiveForm1099-Rreportingthepension.

TurntotheVolunteerResourceGuide(Tab2),1099-RPensionandAnnuityIncome.FindthepageshowingapictureofForm1099-R.Adistributioncodeof“3”inbox7indi-catesthisisadisabilitypension.

Askifthetaxpayerisstillundertheplan’sminimumretirementage.Iftheyare,reportthisincomeonline7ofForm1040orForm1040A.Iftheyareatorabovethecompa-ny’sminimumretirementage,reportthisasyouwouldaregularpension.Sometimesthecompanyneverchangesthecode3inbox7toindicatethatthisisnowregularpensionincome.

IndividualTaxpayerIdentificationNumbers(ITINs)andAdoptionTaxpayerIdentificationNumbers(ATINs)cannotbeusedwhenclaimingtheEIC.Ifacoupleisfilingajointreturn,bothspousesandallqualifyingchildrenmusthavevalidsocialsecuritynumbers.However,ifavalidnumberisobtainedlaterandthetaxpayermeetsallthequalifications,anamendedreturnmaybefiledclaimingtheEIC.

ThereisalimittotheamountofinvestmentincomeapersoncanreceiveandstillqualifyfortheEIC.For2009,theamountis$3,100.Investmentincomeincludessuchitemsastaxableinterestanddividends,tax-exemptinterest,capitalgainnetincome,andincomefromresidentialrentalproperty.

BothearnedincomeandadjustedgrossincomemustbebelowthelimitsinorderforthetaxpayertoqualifyfortheEIC.Theseamountsareadjustedforinflationeveryyear.

Direct students to the Summary of EIC Eli-gibility Requirements chart in the Volunteer Resource Guide (Tab H).

Review the rules with the students.

Direct students to Form 1099-R in the Volunteer Resource Guide (Tab 2).


Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab2),1099-RPensionandAnnuityIncome.

What about combat pay?

Combatpayisnevertaxabletothesoldier.MembersoftheU.S.ArmedForceswhoservedinacombatzonemayelecttoincludetheirnontaxablecombatpayintheirearnedincomeforthepurposesofcomputingthiscreditonly.Doingthismayincreaseordecreasethetaxpayer’sEIC.FiguretheEICamountwithandwithoutthepaybeforemakingtheelection.Iftheelectionismade,allofthenontaxablecombatpaymustbeincluded.Ifbothspousesfilingajointreturnhavecombatpay,theycanindividuallychoosetomaketheelectiononthetaxreturn.

Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab6),ScheduleEIC-Worksheet.

What about self-employment income?Netearningsfromself-employmentareconsideredearnedincome.Formosttaxpayerswithinthescopeofthevolunteerprogram,“netearnings”forEICpurposeswillbetheamountreportedonline12ofForm1040,minusthedeductionforone-halfofself-employmenttaxthatisreportedintheAdjustedGrossIncomesectionofthetaxreturn.

Reminder: Non-wageincomereceivedfordoingwork(suchasforsidejobsorcontractlabor)isself-employmentincome,evenfortaxpayerswhodonotthinkofthemselvesas“self-employed.”Allself-employmentincomeshouldbereportedonScheduleC-EZ,NetProfitfromBusiness.SincetheVITAprogramonlyinstructspreparersonhowtofileScheduleC-EZ,taxpayerswithalossorotherreasontofileScheduleCwillneedtoseektheassistanceofaprofessionaltaxpreparer.

What about household employee income?

DomesticemployeessuchasmaidsareonlyissuedFormW-2iftheirearningsaremorethan$1,700.Theincomeshouldbeaddedtoline7onForm1040andForm1040Aandline1ofForm1040EZ.IfthereisnoFormW-2,youshouldwriteHSHnexttotheamountonthecorrespondingline.ThisincomeshouldalsobeincludedinthecomputationoftheEIC.

VITAvolunteerspreparingpaperreturnsshouldbesuretousetheEICworksheets(inForm1040Instructions)andcomparewhichmethodwouldprovidethetaxpayerwiththemostbeneficialcredit.

example

Jeff’sself-employmentincomereportedonForm1040,line12is$2,000.Thedeductionforone-halfofhisself-employmenttax,whichisrecordedintheadjust-mentssectionofForm1040,is$141.

HisincomeforEICpurposesis$2,000-$141=$1,859.

VolunteersmustremembertoincludeallallowableexpenseswhencompletingScheduleC-EZ.

Nontaxablecombatpayisshowninbox12ofFormW-2,designatedwithcodeQ.

Ask a volunteer to read the Jeff example.


ExErcisEs

Earned income not qualifying for the EIC

OneincomeitemthatisreportedonFormW-2,butdoesnotqualifyasearnedincomeforEICpurposes,isincomereceivedforworkwhileaninmateinapenalinstitu-tion(includingworkperformedwhileinaworkreleaseprogramorwhileinahalfwayhouse).Whenpreparingapaperreturn,refertotheVolunteerResourceGuide(TabH)tofindthislistedintheEarnedIncomeTable.MakeanoteintheVolunteerResourceGuidethatthisparticularincomeissubtracted fromotherearnedincomeontheEICworksheetinthesectiontitledEarnedIncome.EntertheinitialsPRI andtheamountonthedottedlinenexttoForm1040line7.

Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab6),ScheduleEICWorksheet.

UsetheSummaryofEICEligibilityRequirementsChartintheVolunteerResourceGuide(TabH)toanswerthefollowingquestions.Answersfollowthelessonsummary.

Question 1:AtaxpayerisfilingasMarriedFilingSeparately.CanthistaxpayerqualifyfortheEIC?□ Yes þ No

Question 2: Ataxpayerhasinterestincomeof$3,200.Hisearnedincomeisonly$7,000.Heissingle,hasavalidsocialsecuritynumberandisnotthequalifyingchildofanyoneelse.DoeshequalifyfortheEIC?□ Yes þ No

What are the rules for taxpayers with qualifying children?

ThetaxpayermustfileForm1040orForm1040AtoclaimtheEICwithaQualifyingChild.ThetaxpayerhasaqualifyingchildforEICpurposesifthechildmeetsall thetestsoutlinedintheVolunteerResourceGuide(TabH).AshortversionoftherulesisshowninPartB,RulesIfYouHaveaQualifyingChild.AdetailedversionisonthenextpageoftheVolunteerResourceGuide.

UsingtheInterviewTips(EICwithaQualifyingChild)fromtheVolunteerResourceGuide(TabH),basedonwhatwehavelearnedsofaraboutRobynandherfamily:

Step1isYES

Step2isYES

Step3isYES

Step4isNO

Step5isYES

example

Robynis25yearsold.Sheandher2-year-oldson,Aiden,livedwithRobyn’smotherallyear.Aidenhasavalidsocialsecuritynumber.

Married Filing Sepa-rately does not qualify for the EIC.

His investment income exceeds $3,100 for 2009.



Review these rules with the students.

Remind students of the new tax law change allowing earned income credit for three or more qualifying children.

Read the Robyn example.

Direct students to the EIC with a Qualifying Child Interview Tips in the Volunteer Resource Guide (Tab H).


Forstep6,checktoseeifAidencanbeanyoneelse’squalifyingchild,forEICpurposes.

WhoelselivedinthehousethatisrelatedtoAiden?Robyn’smotheralsoliveswiththem.GothroughthestepstoseeifAidencanbeaqualifyingchildforRobyn’smother.

What are the rules for a qualifying child of more than one person?NEW Onlyonetaxpayercanclaimachildthatmeetstheconditionstobeaqualifyingchildofmorethanoneperson.ReviewtheQualifyingChildofMorethanOnePersonrulesintheVolunteerResourceGuide(TabH).

Tax Software Hint: Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tab1),MainInformationSheet.

What are the rules for taxpayers without qualifying children?

TaxpayerscanfileForm1040EZ,Form1040A,orForm1040toclaimtheEICwithoutaqualifyingchild.ReviewtherulesintheVolunteerResourceGuide(TabH),underPartC,RulesIfYouDoNotHaveaQualifyingChild.

Direct students to Qualifying Child of More than One Per-son in the Volunteer Resource Guide (Tab H).

Ask the students if they understand the new rule regarding a qualifying child.

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

Listthechildrenfromyoungesttooldestinthesoftware.

Foracouplefilingajointreturn,onlyonetaxpayerhastomeettheagerequirement.

Reviewthequestionontheapprovedintakeandinter-viewsheet:Canyourparentsorsomeoneelseclaimyouoryourspouseontheirtaxreturn?Didthetaxpayercheckyesorno?

Clarify the age require-ment for joint filers.

Read the Tom and Martha example.

example

TomandMarthaareamarriedcouple.Tomis66andMarthais58yearsold.Ifallotherrulesaremet,theywouldqualifyfortheEIC.

Ifthechildmeetsthecondi-tionstobethequalifyingchildofmorethanoneperson,onlyonepersoncanclaimthechildasaqualifyingchild.



UsingtheinterviewtipsintheVolunteerResourceGuide,determineifeachofthesetaxpayershasaqualifyingchildorcanclaimtheEIC.Eachchildhasavalidsocialsecuritynumber.

Question 3: Maureen’s20-year-olddaughter,Angie,livedwithherforeightmonthsoftheyear.Angieisnotmarried andisafull-timecollegestudent.IsAngieaqualifyingchildfortheEIC?þ Yes □NoQuestion 4: StartinginFebruaryofthetaxyear,SamhascaredforLisa,the10-year-olddaughterofhisstepson. DoesLisameettheEICrequirementsforaqualifyingchild?þ Yes □NoQuestion 5: ThreechildrenlivewithMira,whocaresforthemasherown:Twila,the3-year-olddaughterofMira’scousin;Chez,Mira’snewlyadopted2-year-oldsonfromEurope,whohaslivedwithMirasinceNovemberofthetaxyear;andDwight,Mira’s20-year-oldson,whoattendscommunitycollegeparttime.Whichofthemarequalifyingchildren?□Twila□Chez□Dwightþ None

Question 6: Amarriedcoupleisfilingjointly.Theyareraisingtheir10-year-oldgranddaughterbecausetheirdaughterisservingalongprisonterm.Theyarealsocaringforanunrelated8-year-oldboywhowasplacedwiththemasafosterchildbytheStateDepartmentforFamilyandDependentChildren.TheyhavewagesandanAGIof$41,463.Assumingtheymeetallothertests,cantheyclaimtheEIC?þ Yes □NoQuestion 7:Imaginethatthemarriedcoupleinthepreviousquestionwasinadifferentsituation:Whatiftheywereonlycaringfortheirgranddaughter?WouldtheybeabletoclaimtheEIC?□ Yes þ No

Question 8:Margie’sdaughter,Aimee,turned23earlyinthetaxyearwhileattendingcollegefulltime.MargieisfilingasHeadofHousehold.MargiehasanAGIof$29,231.Assumingthatsheandherdaughterpassallothertests,canMargieclaimtheEIC?þ Yes □NoQuestion 9:RobandLauraaredivorced.Lauraisthecusto-dialparentforDawn,wholivedwithherallyear.LaurasignedForm8332,allowingRobtoclaimthedependencyexemp-tionforDawnuntilsheturns18.CanRobclaimDawnfortheEIC?□ Yes þ No

Twila fails the relation-ship test; Chez fails the residency test; Dwight fails the age test.

Both children meet the relationship, age, and residency tests.

With just one qualify-ing child, their income would be more than $40,463; they could not claim the EIC.

She meets all the eli-gibility tests to be a qualifying child.

She is a descendent of Sam’s stepson and meets the other eligibil-ity requirements.



Dawn fails the resi-dency test; she is the qualifying child of Laura. Form 8332 has no relevance to EIC.

Margie meets the gen-eral eligibility require-ments and Aimee meets the Qualifying Child rules.


Theapprovedintakeandinterviewsheetasksavolun-teerifthetaxpayerwaspreviouslydisallowedtheEIC.Thevolunteerwouldanswerthequestionbasedontheirexplanationofthequestionduringtheir conversation.

How do I answer the question, “Based on the inter-view, is the taxpayer qualified for the EIC?”

YouanswerthisquestionafteryouhavecollectedallthefactsusingtheinterviewtipsintheVolunteerResourceGuide(TabH).

Optional Class Exercise

MarkandEvelynBellaremarriedandfileajointreturn.Theyhavean8-year-oldchild,JenniferBell,wholivedwiththemtheentireyearandwhomtheyclaimasadependent.TheBellshaveadjustedgrossincomeof$21,250,whichconsistsofwagesof$21,211andinterestincomeof$39.

Youhavealreadyverifiedtheiridentitiesandsocialsecurityinformation.MarkandEvelynarebothage32andnooneispermanentlyandtotallydisabled.

DoMarkandEvelynqualifyfortheEIC?þ Yes □No

How is the correct Earned Income Credit amount calculated?

ThecreditisdeterminedusingworksheetsandtheEarnedIncomeCredittables.

YouwillalreadyhavedeterminedifyourtaxpayerqualifiesfortheEICfromtheinforma-tionyougatheredtoanswerquestionsontheapprovedintakeandinterviewsheet.

TheEICworksheetscanbefoundinForm1040,1040Aor1040EZInstructions.Everytaxpreparerortheirsiteshouldhaveatleastonesetofinstructionbooklets.

Combat Pay Election

Ifataxpayerhascombatpaylistedinbox12ofFormW-2markedwithcodeQ,andyouarepreparingapaperreturn,youmayneedtopreparetwoEICworksheetstodetermineifthecombatpayshouldorshouldnotbeaddedtoyourtaxpayer’sincome.

Ifthiselectionischosen,writethecombatpayamountbytheEIClineofthepaymentsectionofthetaxreturn.YoucanseethisentryintheVolunteerResourceGuide(Tab6),Form1040–OtherTaxesandPayments.

Where are the EIC tables and how do I use them?

TheEICtablesarelocatedintheappendixofPublication4491-W.AdditionaltablesareinPublication596,Form1040andForm1040A.TheForm1040EZInstructionsonlycontaininformationfortaxpayerswithnochildren.

Let’slookatthosetablesnow.TurntothefirstpageoftheEICtables.

SpecialrulesapplyifthetaxpayerwaspreviouslydeniedEIC.SeetheVolunteerResourceGuide(TabH),DisallowanceoftheEarnedIncomeCredit.

They meet the general requirements and their daughter meets all the qualifying child tests.

Ask students to find the EIC tables in Publica-tion 596 or in the Form 1040 Instructions.

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


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.

Walk through the Class Exercise or assign it and review it with the class when complete.

Display or direct students to the EIC checkbox on the Main Information Sheet in the Volunteer Resource Guide (Tab 1).




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

Instructor Notes

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



Display or refer to this section of Form 1040 so the tax preparers can see how the overpay-ment is shown and the options for the over-payment.

What do I need?


□ VolunteerResourceGuide□ Publication17□ Publication4491-W□ Form1040□ Form8888□ Form9465□ FormW-4□ FormW-4POptional: □ Publication 594□ Publication 4541□ Publication4542□ Form2210andInstructions

Lesson 31: Refund and Amount of Tax Owed31-2

What are the options for an overpayment?

Taxpayerscanchooseto:

• Applyanyportionoftheiroverpaymenttothefollowingtaxyear

• Receivetheirrefundusingdirectdeposit

• Receivetheirrefundasacheck

How do I apply part of the overpayment to the following year?

Fortaxpayerswhowanttoapplyaportionoftheoverpaymenttonextyear’staxes,entertheamounttobeappliedtothefollowingyearontheapplicableline.Byenteringanamountonthisline,thetaxpayeriselectingtoapplyalloraportionofthecurrentyear’soverpaymenttonextyear’sestimatedtax.

Tax Software Hint: Thesoftwareshowstheremainingamounttoberefundedtothetaxpayerontheamounttoberefundedline.

How do I indicate that the entire refund should be sent to the taxpayer?

Fortaxpayerswhowanttheentirerefundsenttothem,leavethelineforamountappliedtoestimatedtaxblankorenter“0.”

Tax Software Hint: Thetaxsoftwareshowstheentirerefundamountontheamounttoberefundedline

Refundchecksareusuallymailedwithin6to8weeksafterthereturnisfiled.However,insteadofgettingapapercheck,taxpayersmaychoosetohavetheirrefunddepositeddirectlyintotheiraccountatabank,creditunion,orotherfinancialinstitution.Inaddi-tion,taxpayerscanrequestthattheirrefundbedepositeddirectlyintoaTreasuryDirectonlineaccounttobuyU.S.Treasurymarketablesecuritiesandsavingsbonds.Detailscanbefoundatwww.treasurydirect.gov.

NEW Forthe2010filingseason,taxpayerscanusetheir2009taxrefundtobuyU.S.savingsbonds,evenwithoutabankaccountoranexistingaccountwithTreasury.Checkwww.irs.govforthelatestinformationandalistofquestionsandanswers.

Encouragetaxpayerstousedirectdeposit,whichismuchfaster,safer,andmoreeffi-cient.Withane-filedreturn,adirectdepositisusuallyreceivedwithin10to14days.

How do I enter the information for direct deposit?

Tax Software Hint: Makesurethetaxpayershowsyouproofofthisbankinfor-mation.Bankdepositslipsarenotareliablesourceforroutingandaccountnumbersfordirectdeposit.Forsoftwareentries,gototheVolunteerResourceGuide(Tab1)MainInformationScreenonDirectDeposit.

GototheVolunteerResourceGuide(Tab13),PointersforDirectDepositofRefunds,whichincludesadiagramshowingwheretofindtheroutingtransitnumber(RTN)anddepositoraccountnumber(DAN)informationonacheck.

Directdepositofataxpayer’srefundistobemadetoanaccount(oraccounts)onlyinthetaxpayer’sname.Advisetaxpayerstheirrefundsmayonlybedepositeddirectlyintotheirownaccounts.

Ask students to find Direct Deposit of Refunds in the Volun-teer Resource Guide (Tab 13), Finishing the Return. Review the main points.


Tax Software Hint:GototheVolunteerResourceGuide(Tab1),MainInformationScreen,forsoftwareentriesrelatedtodirectdeposit.Fordirectdepositintooneaccount,thesoftwaremakessuretheinformationwasenteredproperly.Iftheinformationdoesnotmatch,theprogramwillgiveyouawarningduringdiagnosticsinthecompletionphaseofthereturn.

Can the refund be deposited into more than one account?

Taxpayerscanchoosetodividetheirdirectdepositrefundamonguptothreeaccounts.Forexample,apersonexpectingarefundof$500couldchoosetodeposit$200intoacheckingaccount,$200intoasavingsaccount,and$100intoanIRAaccount.

Tax Software Hint:UseForm8888,DirectDepositofRefundtoMoreThanOneAccount,tolisttheRTNandaccountnumberforeachdeposit.Form8888isnotrequirediftherefundistobedepositedintoasingleaccount.GototheVolunteerResourceGuide(Tab6),SplitRefundOptionpageforthesoftwareentries.

What if the taxpayer makes a mistake on the return that increases the amount of the refund?

TheIRSrecommendsusingelectronicfilingtoavoidmatherrorsandothercommonproblemsthatcanrequireadjustmentstoareturnafteritisfiled.Ifanadjustmentresultsinalargerrefundthanexpected,theIRSaddsthedifferencetothelastaccountdesignatedfordirectdeposit.

What if the taxpayer makes a mistake on the return that decreases the amount of the refund?

Ifanadjustmentresultsinasmallerthanexpectedrefund,theIRSusesabottom-upruleanddeductsthedifferencefromthedirectdepositamountdesignatedforthelastaccountshownonForm8888.Ifthedifferenceexceedstheamountdesignatedforthelastaccount,theIRSdeductstheremainderfromtheamountdesignatedtothenextaccount,untiltheamountdueispaid.

Iftheroutingandaccountnumbersarenotvalid,therefundwillbedelayed4-6weeks.Ifthedirectdepositisrejected,apapercheckwillautomaticallybemailedtotheaddressonthereturn.

Ask a student to read the Tax Software Hint.

Whenanadjustmentismadetoataxrefund,theIRSsendsaletterexplaininganyerrorsthatresultedintheadjust-ment,aswellasanychangesmadetotherefundamountandtheamountofeachdirectdeposit.

Ask a volunteer to read the Joan example.

Review the tip for adjustments to split refund requests. Remind volunteers that the IRS issues a notice to the taxpayer explain-ing the adjustment.

example

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

Requested Actual DirectDeposits DirectDeposits

Account1 $100 $100

Account2 $100 $50

Account3 $100 $0


Review the caution.

TheIRSwillapplythissamebottom-upruletoadjustdirectdepositsforrefundoffsetsforunpaid federal taxesoriftheearned income credit (EIC) portion of the taxpayer’s refundiswithheldpendingfurtherreview.AftertheEICreview,ifarefundisallowed,itwillbedirect-depositedintheaccountlistedfirstonForm8888.

What happens if the taxpayer owes other debts like student loans or child support?

Iftherefundisdecreasedduetoanoffsettopaystateincometax,childsupport,orcertainfederalnontaxdebts,suchasstudentloans,thenthedecreasewillbetakenfirstfromtheaccountthatappearsfirstonthepaymentfilereceivedfromtheIRS.TheIRSpaymentfileordersaccountsfromthelowesttothehighestroutingnumber.Ifthedebtexceedsthepaymentdesignatedfortheaccountthatappearsfirstonthepaymentfile,FinancialManagementService(FMS)willreducethepaymentdesignatedfortheaccountthatappearsnext.

What should I watch out for?

Double-checktheRTNofthefinancialinstitutionbeforethereturnistransmittedif:

• Youareunfamiliarwiththefinancialinstitution.

• TheRTNisforacreditunionthatispayablethroughanotherfinancialinstitution.ThetaxpayershouldcontacttheircreditunionforthecorrectRTN.

• Ifmorethanoneaccountisselectedfordirectdeposit,besurethattheamountsonForm8888equaltherefundamountonForm1040.

example

Billasksthathisrefundof$780bedepositedintothreedifferentaccounts:$300intoAccount1,$300intoAccount2and$180intoAccount3.However,Billowesfederaltaxesof$290onanearliertaxyear,andafterthisisoffsetonly$490remainstobedirectdeposited.Account3willreceive$0,Account2willreceive$190andAccount1willreceive$300.

example

Melanieisduearefundof$1,000.$700oftherefundisanEarnedIncomeCredit.Sheasksthatherrefundbesplitintothreedifferentaccounts:$500intoAccount1,$300intoAccount2,and$200intoAccount3.Melanie’sEICamountof$700washeldpendingareview.$300wenttoAccount1and$0wenttoAccounts2and3.Later,whentheIRSallowedherEICrefundamount,itwasdepositedintoAccount1.


Point out how each example illustrates the bottom-up rule.

Review the rules for refund adjustments and Form 8888.

Publications4541and4542provideinformationonsplitrefunds,andareavailableelectronicallyonwww.irs.gov.

Financialinstitutionsgener-allydisallowajointrefundtobedepositedintoanindi-vidualaccount.TheIRSisnotresponsibleifafinancialinsti-tutionrefusesadirectdeposit.


ExErcisEs




Question 1: Althoughdirectdepositsavespostage,itisnofasterthanreceivingarefundthroughthemail.¨ True þ False

Question 2: Whenenteringanaccountnumberfordirectdeposit,makesuretoincludeallspacesandhyphens.¨ True þ False

How do I know if an amount is owed?

Tax Software Hint: Thesoftwareautomaticallycalculatestheamountthatisowedwhenthepaymenttotalislessthantheamountoftax.RefertotheVolunteerResourceGuide(Tab6),Form1040,page2,OtherTaxesandPayments.ReviewthelineforAmountYouOwe.

ExplaintotaxpayersthatthetaxreturnwillbefilednowandthattheyshouldsubmittheirpaymentoftaxesduenolaterthanApril15.

What forms of payment are acceptable?

Thepaymentoptionsare:

• CheckormoneyordersubmittedwithForm1040-V,PaymentVoucher

• Electronicfundswithdrawal

• Creditcard

• ElectronicFederalTaxPaymentSystem(EFTPS)

Tax Software Hint: GototheVolunteerResourceGuide(Tab13),FinishingtheReturn,toreviewtheinformationonbalanceduereturns.Besuretoreadthisreferenceandrefertoitwhenpreparingareturnthathasanamountowed.IfusingElectronicFundsWithdrawal,locatedatthebottomofpage2ofForm1040,indicatethatthetaxpayerwantstopayallorpartoftheirtaxeselectronically.RefertoVolunteerResourceGuide(Tab6)forelectronicfundswithdrawalsoftwareentries.

Direct deposit is faster.

Enter the number from left to right; leave out all spaces and special characters.

Display or refer to this section of Form 1040.

Ask students to find Balance Due Returns in the Volunteer Resource Guide (Tab 13), Finish-ing the Return.

Point out that credit card payments are made to a private ser-vice provider, and a convenience fee will be charged.

ThepaperForm1040-Vincludes instructions and a tableofIRSServiceCenteraddresses.

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

Explaintotaxpayerswhohaveanamountowedthatthereturnmustbefiledbytheduedateevenifthefullamountcannotbepaid.Aseparatepenaltyforfilingareturnaftertheduedatemaybeapplied.

Emphasize the main points, Tips, and Cau-tions in this section. Volunteers must under-stand the payment options available to taxpayers on returns with an amount owed.

Taxpayersshouldnotmailcashwiththeirreturns.



What if the taxpayer cannot pay?

Taxpayerswhocannotpaythefullamountowed,shownontheapplicablelineintheAmountYouOwesectionofForm1040,mayrequestthefollowing:

• Payinfullwithin60or120dayswithnofee;interestandpenaltieschargedonpaymentsafterApril15

• MakemonthlyinstallmentpaymentsbyfilingForm9465,InstallmentAgreementRequest

How do I handle Form 9465, Installment Agreement Request?

Thefollowingoutlineskeyinformationrelatedtoaninstallmentagreement.

• Ifthereturnisbeingfiledelectronically,Form9465canalsobeincludedinthee-filedreturn.

• Whenfilingapaperreturn,Form9465shouldbecompletedandattachedtothefrontofthereturnbeforemailing.

• Iftherequestisgranted,thetaxpayermustalsopayafeeof$105or$52,ifpaymentsaremadebyelectronicfundswithdrawal.Ifthetaxpayer’sincomeisbelowcertainlimits,theymayqualifyforareducedfeeof$43.Taxpayerscanalsorequestareduceduserfeeof$43bycompletingForm13844,ApplicationforReducedUserFeeforInstallmentAgreement.TaxpayerscanobtainForm13844atwww.irs.govorbycallingtheIRSformsnumberat1-800-829-3676.

• IftheIRSapprovestheagreement,anoticeisissuedthatprovidesdetailsoftheagreementandrequeststheuserfeeatthattime.

• InsteadofcompletingForm9465,thetaxpayercanfileanOnlinePaymentAgreement(OPA)attheIRSwebpage.Formoreinformation,gotowww.irs.govandsearchfortheterm“OPA”or,onthe“Ineedto…”list,click“SetUpaPaymentPlan.”

Tax Software Hint: Ifthetaxpayerchoosestoapplyforaninstallmentagree-mentusingForm9465,theformcanbee-filed.RefertotheVolunteerResourceGuide(Tab6),Form1040,page2andrefertothelineAmountYouOweandsoftwareentriesforForm9465.

Question 3: Forwhichofthefollowingwillthetaxpayerbechargedaconveniencefee?

A. Directdepositofarefund

B. Electronicfundswithdrawalofataxpayment

C. Using a credit card to make a tax payment

D. Usingapersonalchecktomakeataxpayment


Review answer with the class when com-plete. The automated system

tells users the fee they will be charged, which covers the costs of credit card processing.

Display or refer to Form 9465. The form and the instructions provide specific details on the process of requesting an install-ment agreement.

Emphasize to volun-teers that they can pro-vide a valuable service to the taxpayer if they are thoroughly familiar with the form and pro-cedures.

Point out that, even if taxpayers are granted an installment agree-ment, interest and penalties continue to accrue until the balance is paid.

Ifpayingthetaxwouldcausethetaxpayeranunduehard-ship,thetaxpayercanaskforanextensionoftimetopaybyfilingForm1127byApril15.Formoreinformation,seeForm1127.




Seymour’spaperForm1040showshistotaltaxis$450.Histaxpaymentscometojust$200.Therefore,Seymourowes$250.

How is the estimated tax penalty calculated?

TheestimatedtaxpenaltyiscalculatedonForm2210,UnderpaymentofEstimatedTaxbyIndividuals,Estates,andTrusts,andreportedontheapplicablelineintheAmountYouOwesectionofForm1040.WhilecompletionofForm2210isoutofthescopeoftheVITA/TCEprogram,itisimportantforvolunteerstohaveanawarenessoftheesti-matedtaxpenaltyprovisions.

What is the Estimated Tax Penalty?

Inmostcases,taxpayersmustmakeestimatedtaxpaymentsiftheyexpecttooweatleast$1,000intax(aftersubtractingwithholdingandcredits)andtheirwithholdingandcreditstobelessthanthesmallerof:

• 90%ofthetaxshownonthecurrenttaxreturn,or

• 100%ofthetaxshownontheprioryear’staxreturn(110%forcertainhigherincometaxpayers;seeForm1040-ES)

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… seymour responds…

The amount of tax you owe for 2009 is $250. You can either mail in a check or money order with the payment voucher, use elec-tronic funds withdrawal, or call in a credit card payment. You’ll have to pay an additional convenience fee for using a credit card.

No, we can designate the date that the debit will occur, any time up to April 15. I would just need to see proof of account to verify your bank account information so I can include the routing and account numbers in your electronic return.

Right. And it saves you the trouble of mailing in the voucher with your payment.

You can do that too. Here’s Form 1040-V, which has been completed for you. Make your check or money order payable to “United States Treasury.” If it’s not already printed on the check, make sure it shows your name, address and daytime phone number. Also, print your social security number and “2009 Form 1040” on the front of your check. Then mail the payment with the voucher. I’ll get the mailing address for you.

Just make sure it gets postmarked no later than April 15. I can e-file your tax return right now, but it’s up to you to make sure you send in your payment on time.

Hmm.Howdoeselectronicfundswithdrawalwork?Doesitcomeoutofmyaccountrightaway?

Andthere’snocharge?

Soundsgoodtome.ButIdon’thavemycheckingaccountinforma-tionwithme.MaybeIshouldjustmailinmypayment.

Thatdoesn’tseemtoohard.

Refer to or display this section of Form 1040.



Anestimatedtaxpenaltymayapplyifthetaxpayerdoesnotmakeestimatedtaxpaymentsasrequired.

NEW For2009,qualifiedindividualswithsmallbusinessesmaybeeligibletomakesmallerestimatedtaxpayments.SeeForm2210,UnderpaymentofEstimatedTaxbyIndividuals,Estates,andTrusts,formoreinformation.

Therearespecialsituationswhenataxpayerwillnothavetopayapenalty.SeeForm2210andInstructionsorPublication17formoreinformation.

Do I have to calculate the estimated tax penalty?

BecauseForm2210iscomplicated,leavetheestimatedtaxpenaltylineblankonForm1040.ThiswillnotpreventtheIRSfromcalculatingthepenaltyifitisdue.Letthetaxpayerknowthatapenaltymaybeowed,andifso,theIRSwillsendanotice.Ifnecessary,thetaxpayercancompletetheForm2210thatwillbeincludedwiththenotice.

Tax Software Hint:For2009,Form2210willbedefaultedinthesoftwareand$0willbereflectedonline9.Thiswillpreventvolunteerpreparersfromcalculatingtheestimatedtaxpenalty.VolunteerpreparersneedtoinformtaxpayerswithabalanceduewhoaremeetingtheestimatedpenaltyrequirementsthattheymayreceiveanoticefromtheIRS.

Question 4: Dion’stotaltaxliabilityis$1,044.Afterwithhold-ing,sheowes$640.ThismeansDionmighthavetopayapenaltyforunderpaymentofestimatedtax. □ True þ False

How can taxpayers make sure the correct amount of tax is withheld?

FormW-4,Employee’sWithholdingAllowanceCertificate,includesthefollowingtypesofinformationtheemployerusestofigurethetaxpayer’scorrectwithholding:

• Maritalstatus(marriedtaxpayersmayrequesttheemployertowithholdatthehighersinglerate)

• Withholdingallowancesthetaxpayerclaims

• Anyadditionalamounttobewithheld

• Qualificationofexemptstatus

example

Mark’stotaltaxis$1,657for2009.Hiswithholdingis$417.Heowes$1,240.His2008taxwas$2,000.Markwillprobablybechargedanestimatedtaxpenaltybecausetheamountheowesisover$1,000andhiswithholdingandcreditsarelessthan90%ofhis2009taxor100%ofhis2008tax.


Ask what if Mark’s previous year’s tax was $300.

Answer: The penalty may be waived since his withholding was more than was due the year before.

Review the Tax Soft-ware Hint.

The tax Dion owes is less than $1,000, so she does not have to pay a penalty.




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

Instructor Notes

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.

Remind the students that both spouses must sign and date a Married Filling Jointly return.

Direct students to the signature procedures in the Volunteer Resource Guide (Tab 13).


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. Both spouses

C. Thespousewiththehighestincome

Question 2: WhatistheformnumberoftheIRSquality reviewsheetusedbymostvolunteersforqualityreview?

What are the final steps in the quality review process?

Oncethetaxreturnhasgonethroughtheestablishedsitequalityreviewprocess,assemblethereturnandensurethatallnecessarydocumentationiscomplete.

IfthetaxpayerhaschosennottouseaSelf-SelectPIN,printtwocopiesofForm8879,andobtainthetaxpay-er’ssignatures.Ifthereturnisajointreturn,makesurebothsignaturesareincludedontheform,otherwisethereturnwillnotbeelectronicallytransmitted.ReviewtheVolunteerResourceGuide(Tab13),CheckYourWork-TheQualityReview,forthefinalstepsintheprocess.

Provide the SIDN (if available) and suggest that students write it in the Volunteer Resource Guide.

Both spouses must sign a joint return, even if only one spouse had income.

Form 8158, Quality Review Sheet, which is contained in Form 13614-C.



Point out “Distributing Copies of Returns” in the Volunteer Resource Guide (Tab 13).

FormembersoftheArmedForceswhoaresigningjointreturns,refertoPublication3.Electronictransmissionisnotalwayspossible.



Question 3: Sandra,whois17,iseligibletouseaSelf-SelectPINtosignherreturnusingtaxsoft-ware.Shedidnotfileataxreturnforthepreviousyear.Canshestillfileanelectronictaxreturnforthe2009taxyear?þ Yes □NoQuestion 4: Whatarethethreemethodsof qualityreview?


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.



She must enter 0 for her prior year AGI then use the Self-Select PIN or use the Practitioner PIN and sign Form 8879 to file electronically.

Designated quality reviewer (the preferred method), peer review, and self-review.




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

Instructor Notes

Lesson 33: Concluding the Interview

Introduction

Inthislesson,youwillreceiveinsightsandinformationforconcludingyourinterviewwiththetaxpayer.

UsingtheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson,suchasactivelisteningandbuildingrapport,sharethefollowingwiththetaxpayers:

• Whichrecords/documentationtheyshouldkeepandwhy

• Whatdocumentationaboutthemismaintainedatthesite–why,howlong,etc.

• Whattheyneedtoknowanddoiftheyoverpaidtheirtaxes(i.e.,refundduedates,increasingthenumberofexemptionsonFormW-4toavoidoverpayments,etc.)

• Whattheyneedtoknowanddoiftheyoweadditionaltaxes(i.e.,paymentduedatesandestimatedtaxpayments,reducingthenumberofexemptionsonFormW-4toavoidadditionalpayments,etc.)

Theseareimportanttaskstoaccomplishafterthetaxreturniscompleted,qualitychecked,andreadytobefiled.Thewaythatyouconcludetheinterviewcanimpacttaxpayers’attitudestowardthetaxpayingexperienceandtheirsatisfactionwiththevolunteertaxreturnassistanceprogram.Itcanalsomakenextyear’staxpreparationeasierfortaxpayersandthevolunteerwhoassiststhem.

Objectives


• 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.

Direct students to the Finishing the Return tab in the Volunteer Resource Guide (Tab 13) and review the steps for completing a return using the tax software.

Emphasize that every taxpayer must receive a complete copy of their return before leaving.

Emphasize that it will be important for taxpayers to bring this year’s return to next year’s appointment.


What tax return data will the site keep?

Ifapaperreturnisfiled,thevolunteersitewillnotkeepcopiesoftaxpayers’returnsoranyothertaxpayer-relateddocumentation.Taxpayersshouldkeepcopiesoftheirrecords.

Fore-filereturns,thesitewillkeepthefollowingdataconfidentialandinasecureloca-tionuntilDecember31ofthecurrentyear,exceptasnoted:

• Amasterbackupdiskcontainingallelectronicallytransmittedreturns

• OnesignedForm8879(whichwillbeheldfor3years)foreachreturntransmitted(unlessSelf-SelectPINprocedureswerefollowed)

• OnecopyofForm(s)W-2and/orForm(s)1099showingfederaltaxwithheld

• AcopyoftheIRSAcknowledgementReportfortransmittedfederalreturns

• AcopyoftheDeclarationControlReport(DCR)fortransmittedreturnsmaybekept

What should I tell the taxpayer about refunds or balances due?

Fortaxpayerswhoareduearefund:

• Reviewthe2010IRSE-fileRefundCycleChartintheVolunteerResourceGuide(Tab14)andprovidetheexpecteddatetheymayreceiveit.(Thecyclechartwillprovideyouwithdatesfordirectdepositandpaperchecks.)

• Makesurethetaxpayerrealizesthatthisisnotaguaranteeddate,sincedelayscanoccur.

FortaxpayerswhoowemoneytotheIRS(alsoknownashavingabalancedue):

• ElectronicFundsWithdrawalcanbesetuptohavepaymentselectronicallywith-drawnfromanaccount.Thismaybesetupusingtaxsoftwareande-filedwiththereturn;seetheVolunteerResourceGuide(Tab6).

• RemindtaxpayerstosendForm1040-Vtotheappropriateaddressiftheywishtomailapayment;fore-filereturns,Form1040-V,PaymentVoucher,willbegeneratedbythee-filesoftwarewhenthetaxreturnresultsinabalancedue.

• RemindtaxpayersthatpaymentmustbemadebyApril15,2010toavoidpenaltiesandinterest.

• Iftaxpayersrequestaninstallmentagreement,remindthemtosubmitForm9465,InstallmentAgreementRequest,assoonaspossible.

• Iftaxpayerscanpayaportionoftheamountowedbytheduedate,theywon’tbecharged interestandpenaltiesonthatportion.

Ifyoursitedoesnothavestor-agecapabilityorwillnotbeopenafterApril15th,makestoragearrangementswithyourlocalIRSSPECcontact.

Ask students to name the data that the site will keep without look-ing at their study guide.

Advise the students to tell the taxpayers not to spend the refund until they actually get it.

Review Tab 13, Bal-ance Due Returns, with the students.

MakethetaxpayerawarethattheIRSchargesafeeforsettingupaninstallmentagreement.


How can the taxpayer avoid a balance due next year?

Thereareseveralwaystopaytaxesduringtheyearinordertoavoidhavingabalanceduewhenthereturnisfiled.Dependingonthetaxpayer’ssituation,herearesomesuggestions:

• Taxpayerswhoseincomeismostlyfromwagesorpensionscanadjusttheir withholding.

• Taxpayerswhoseincomeismostlyfromself-employmentorinvestmentscanmakeorincreasetheirestimatedpayments.

• Acombinationofincreasedwithholdingandestimatedtaxpaymentsmayworkbestforsometaxpayers.

How can taxpayers adjust their withholding?

TaxpayersreceivingwageincomecanadjusttheirwithholdingbyprovidingtheiremployerwithanewFormW-4,Employee’sWithholdingAllowanceCertificate. BydecreasingthenumberofallowancesclaimedonFormW-4,theamountwithheldfromeachpaycheckwillincrease.

TohelptaxpayersadjusttheirwithholdingusingFormW-4,theIRSWebsiteprovidesahelpfulwithholdingcalculatoratwww.irs.gov–keyword:calculator.Moreinforma-tioncanbefoundintheFormW-4Instructions,Publication17,TaxWithholdingandEstimatedTaxes,orinPublication919,HowDoIAdjustMyTaxWithholding?

TaxpayerscanalsouseFormW-4torequestanadditionaldollaramountbewithheld.FormW-4canalsobeusedtodecreasetheamountoftaxwithheld.Thismaybeusefulfortaxpayerswhoreceivedlargerefundsduetoexcessivewithholding.

Withholdingfrompensionincomeisvoluntary,notautomatic,asitisforwages.Asaresult,manyretireesdonothavetaxwithheldfromtheirretirementpaymentsandareunpleasantlysurprisedbyabalancedueattheendoftheyear.TaxpayerscanrequestwithholdingfrompensionandannuitypaymentsbysubmittingFormW-4P,WithholdingCertificateforPensionandAnnuityPaymentstothepayer.

Withholdingcanberequestedfromcertaingovernmentpayments,suchassocialsecu-rityandunemploymentcompensation,bysubmittingFormW-4V,VoluntaryWithholdingRequesttothepayingagency.

When should the taxpayer make estimated tax payments?

Estimatedtaxistheamountataxpayerexpectstooweforthetaxyearafterdeduct-inganytaxcreditsorfederalwithholding.Taxpayerswithsignificantincomethatisnotsubjecttowithholding(suchasinterest,dividends,capitalgainsorself-employmentincome)willoftenfindtheyneedtomakeestimatedtaxpayments.

ThedecisiontreeinPublication17,YourFederalIncomeTaxforIndividuals,TaxWithholdingandEstimatedTaxescanhelpdetermineifthetaxpayershouldmakeesti-matedtaxpayments.SeeLesson29,Payments,formoreinformation.

Display (if possible) the online withholding calculator and walk through an example.


How is estimated tax figured?

UseForm1040-ES,EstimatedTaxforIndividualstocomputetheamountofesti-matedtaxthatshouldbepaidovertheyear.Thisformincludesworksheetstohelpthetaxpayerestimatetheirincomeandtaxliabilityfortheyear.Thecurrentyear’staxreturncanbeusedasastartingpoint,butanyanticipatedchangesshouldalsobetakenintoaccount.Taxpayersmayalsohavetoadjusttheirpaymentsduringthetaxyearifachangeinincomeorthetaxlawwillaffecttheirtaxliability.

Estimatedtaxpaymentsareduefourtimesayear.IfanyduedatefallsonaSaturday,Sunday,orlegalholiday,thepaymentisduethenextbusinessday.Eachduedatecoversaspecifictimeperiod:

For the period… Due date:January1throughMarch31 April15April1throughMay31 June 15June1throughAugust31 September15September1throughDecember31 January15nextyear

Mostofthetaxpayersyouwillassistwillpaytheirestimatedtaxinfourequalinstall-ments.However,ataxpayercanchoosetomakepaymentsforeachperiodbasedontheactualamountofincomereceivedduringthatperiod.Iftaxpayersdonotpayenougheachpaymentperiod,theymaybechargedapenaltyeveniftheyareduetoreceivearefundwhenthetaxreturnisfiled.Generally,thesimplestandsafestproce-dureistomakesurethateachpaymentisatleastone-fourthoftheprioryear’stotaltax,lesstaxwithheldduringtheperiod.Formoreinformationaboutestimatedtaxpayments,refertoPublication17,TaxWithholdingandEstimatedTaxes,orPublication505,TaxWithholdingandEstimatedTax.

How is estimated tax paid?

EstimatedtaxpaymentscanbesentelectronicallytotheIRSbydirectdebitpaymentfromthetaxpayer’scheckingorsavingsaccount,bycreditcard,orbycheckormoneyorderwithForm1040-ES,paymentvoucher.Eachvoucherisnumberedandinscribedwithitsduedate.Remindtaxpayerstobesuretousethecorrectvoucherforeachpayment.Advisetaxpayerstowritetheirsocialsecuritynumberand“2009Form1040-ES”onthecheckormoneyorderpayabletothe“UnitedStatesTreasury.”

Formoreinformation,seetheForm1040-ESinstructions.

example

Mariaisretired,andheronlyincomeisfromapensionandsomeinvestments.Shehadnowithholdingandisnoteligibleforanytaxcredits.Hertaxlastyear,whileshewasstillworkingfulltime,was$2,760.Whenyoucompleteherreturnthisyear,hertaxtotals$1,300.Mariashouldmakeestimatedpayments,sincehertaxafterwithholdingandcreditswillbemorethan$1,000,andherwithholdingislessthan$1,170(90%ofthisyear’stax).IfMariadoesn’twanttomakeestimatedpayments,shecouldsubmitFormW-4Ptorequestwithholdingfromherpensioninstead.

Ask a volunteer to read the Maria example.

Ask what if next year Maria expects to owe far less than $1,000 after tax withheld and credits.

Answer: She does not need to make estimated tax payments unless she wants to.

Point out that all pay-ments sent to the IRS should be made pay-able to United States Treasury, never to IRS.


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.

Emphasize the impor-tance of having good contact information to resolve problems if there are issues with the e-filing process.



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

Instructor Notes

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.



Review the tip with the class.

Lesson 34: Military Finishing and Filing the Return34-2

ExErcisEs


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

A. To the IRS service center for Florida

B.TotheIRSservicecenterforPuertoRico

C.Eitheroftheabove

Where and when should members of the Armed Forces file their returns?

Where should the taxpayer file the return?

MembersoftheArmedForcesshouldsendtheirpaper-filedfederalreturnstotheservicecenterforwheretheycurrentlylive.

IfthemilitarymemberisstationedoverseasandhasanAPOorFPOaddress,filethepapertaxreturnwiththeIRSServiceCenterinAustin,Texas,73301-0215,USA.

When should the taxpayer file the return?

Mostindividualtaxreturnscoveracalendaryear,JanuarythroughDecember.

Calendar-yeartaxpayerswholiveintheUnitedStatesorPuertoRicoshouldfiletheirindividualtaxreturnsbyApril 15ofthefollowingyear.

Taxpayerswhohaveabalanceduecanpayby check,moneyorder,electronicfundswithdrawal,orcreditcard.

What can members of the Armed Forces do if they are unable to pay the tax due?

TaxpayerswhocannotpaythetaxduewiththeirtaxreturnshouldattachForm9465,InstallmentAgreementRequest.

IfApril15fallsonaweekendorholiday,thentheduedateisthenextbusinessday.

ManymilitaryfacilitieshaveaVolunteerIncomeTaxAssistancecenterthatwille-filetaxreturns.

He must submit the form to the service center for his previous address.






TheIRSwilltrytoarrangeaninstallmentpaymentagreementthatreflectsthetaxpay-er’sabilitytopaythetaxowed.However,taxpayersshouldpayasmuchaspossiblewiththeirreturntoreducetheamountofinterestandpenaltiesthatwillbeaddedtotheunpaidbalance.

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

Question 2:TaxpayerswhoattachForm9465,totheirtaxreturnwillavoidinterestchargesonanytaxbalancetheycannotpaybytheduedate.□ True þ False

What are the extension requirements for taxpayers within the U. S.?

DeadlineextensionsareavailabletomembersoftheArmedForceswhoservedinacombatzone.Taxpayerscanreceiveextensionsoftimetofiletheirreturns.DifferentrulesapplytotaxpayerswholiveintheU.S.andthosewholiveoutsidetheU.S.

TheIRSwillchargeinterestontaxesnotpaidby theduedate,evenifanextensionoftimetofileisgranted.Theonlyexceptioniswhenthecombat zoneextensionapplies.

How does a taxpayer get an automatic extension?

TaxpayerslivingintheUnitedStatescanreceiveanautomaticsix-monthextensionoftimetofiletheirfederaltaxreturns.

Togettheautomaticextension,taxpayersmustfileForm4868,ApplicationforAutomaticExtensionofTimeToFileU.S.IndividualIncomeTaxReturn,bytheduedatefortheirtaxreturn(usuallyApril15).Calendar-yeartaxpayerswhotaketheextensionwillhaveuntilOctober15tofiletheirtaxreturn.

SeePublication3,ArmedForcesTaxGuide,forexten-sionsofdeadlinesanddefer-ralsoftaxesduethatmayapplytomembersoftheArmedForces.

The IRS-arranged pay-ment plan will include interest payments.






Taxpayerscannotusetheautomaticsix-monthextensionifthey:

• ChoosetohavetheIRSfiguretheirtax,or

• Areunderacourtordertofiletheirreturnsbytheregularduedate

Will the taxpayer owe interest and/or penalties?

AlthoughtaxpayersarenotrequiredtopaytheirtaxduewhensubmittingForm4868,theywilloweinterestonanytaxnotpaidbytheoriginalduedate.Interestwillbechargedfromtheduedatetothedateofpayment.

Inaddition,taxpayersmaybechargedalate-paymentpenaltyiftheamountoftaxpaidbeforetheduedate(fromwithheldtaxesorestimatedtaxpayments)islessthan90%oftheactualtaxowed.

IfForm4868isfiledlate,therequestforanextensionwillbedenied,andtheIRSwillinformthetaxpayerthattherequestwasdenied.

Question 3:Whichofthefollowingcalendar-yeartaxpayerscanreceivean automaticsix-monthextension?

A.Avery,whofiledForm4868inFebruaryandchosetohavetheIRSfigure histaxes

B. Benton, who filed Form 4868 on April 15 and did not include any tax payments

C.Calvin,whofiledForm4868onApril20andincludedataxpaymentthatwasover90%ofwhatheowed

D.Noneoftheabove

How does the taxpayer file the return?

Whenthetaxreturnisactuallyfiled,anypaymentthatwassubmittedwithForm4868shouldbeaddedtothetotalonthetotalpaymentslineofForm1040AorForm1040EZ.

Formoredetailsonpenalties,refertofilinginformationinPublication17.

Benton filed Form 4868 by the return’s due date.




Totheleftoftheline,enter“Form4868”andshowtheamountpaidinordertoreceivecreditforthepayment.

EntertheamountontheAmountpaidwithrequestforextensiontofileline,iffilingForm1040.

What are the extension requirements for taxpayers outside the U.S. and Puerto Rico?

ExtensionrequirementsfortaxpayerswholiveintheUnitedStatesdifferfromthosewholiveoutsidetheU.S.

Who qualifies for an Automatic Two-Month Extension?

U.S.citizensandresidentaliensareallowedanautomatictwo-monthextensiontofiletheirreturniftheyare:

• LivingoutsidetheU.S.andPuertoRicoontheduedateofthereturn,andtheirmainplaceofbusinessorassignedpostofdutyisoutsidetheU.S.andPuertoRico

• MembersoftheArmedForcesandondutyoutsideoftheU.S.andPuertoRicoontheduedateofthetaxreturn

Althoughcalendar-yeartaxpayersinthissituationdon’thavetofileorpayuntilJune15,theywilloweinterestchargedfromtheApril15duedatetothedatethetaxispaid.Inthisinstance,Form4868isnotrequired.

What must taxpayers attach to their return?

Taxpayersusingtheautomatictwo-monthextensionmustattachastatementtotheirreturnstatingthattheymeettherequirements.

What is the extension rule for married taxpayers?

Formarriedtaxpayerswhofilejointly,onlyonespouseneedstomeettherequirementstotakeadvantageoftheautomaticextensiontoJune15.

Formarriedtaxpayerswhofileseparately,onlythespousewhomeetstherequirementsqualifiesfortheautomaticextension.Ifbothspousesmeettherequirements,eachmaytakeadvantageoftheextension.

How can a taxpayer request an additional extension?

TaxpayerswholiveoutsidetheU.S.andPuertoRicoandwhosemainplaceofbusi-nessorassignedtourofdutyisoutsidetheU.S.andPuertoRicocanalsorequestanadditionalextensionbyfilingForm4868bytheautomaticextensiondateofJune15andcheckingtheboxonline8.

TheduedatewillthenbeextendedtoOctober 15.

TravelingoutsidetheUnitedStatesandPuertoRicoontheduedatedoesnotqualifythetaxpayerforanautomatictwo-monthextension.

Point out line 8 on Form 4868.



Question 4: Whichofthefollowingcalendar-yeartaxpayershasuntilJune15tofileataxreturn?(Selectallthatapply.)

A. Weston, who files a joint return with his wife, Sheila. She was stationed in the Philippines from January through May, and they paid their taxes by credit card on April 2.

B.Lilly,wholivesinMexicofromJanuarythroughAprilwork-ingforacompany,returningtohermainbusinessinTexasonMay1.

C.Dwayne,whowasstationedinSouthKoreafrom July1,2009throughJanuary31,2010.

D.Noneoftheabove

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

A. April 15

B.June15

D.June16

What are the tax options for combat zone participants?

FormembersoftheArmedForcesservinginacombatzoneorqualifiedhazardousdutyarea,thedeadlineforfilingtaxreturns,payingtaxes,filingclaimsforrefunds,andtakingotheractionswiththeIRSisautomaticallyextended.

ThedeadlinefortakingactionwiththeIRSisextended180daysafterthelaterof:

• Thelastdayinacombatzone/qualifiedhazardousdutyarea

• Thelastdayofanycontinuoushospitalizationforinjuryfromserviceinacombatzoneorqualifiedhazardousdutyarea

Inadditiontothe180-dayextension,thedeadlineisalsoextendedbythenumberofdaysthatwerelefttotaketheactionwiththeIRSwhenthetaxpayerenteredacombatzone(orbeganperformingqualifyingserviceoutsidethecombatzone).Ifataxpayerenteredthecombatzoneorqualifiedhazardousdutyareabeforetheperiodoftimetotakeactionbegan,thedeadlineisextendedbytheentireperiodofthetimetotakeaction.

Generally,spousesofindividualswhoservedinacombatzoneareentitledtothesamedeadlineextension.Therearetwoexceptions:

• Anytaxyearbeginningmorethantwoyearsafterthedatetheareaceasestobeacombatzone

• AnyperiodthequalifyingindividualishospitalizedintheU.S.forinjuriesincurredinacombatzone

Intheseinstances,theextensiondoesnotapplytoaspouse.

Weston and Sheila file jointly so only one must meet the require-ment.

Puerto Rico is not a foreign country.

Lilly’s main business location is in Texas and not Mexico.

Dwayne does not qual-ify for the automatic two-month extension because he was back in the U.S. on the due date.



Review these rules with students to ensure they understand their application.



Publication3willprovideadditionalinformationforcombatzoneextensionofdeadlines.

Question 6: IfamemberoftheArmedForcesservedinacombatzonefromDecember30,2007throughMay31,2009andwasnotinjured,thedeadlineforfilinga2007taxreturnwouldbeextendedbyhowmanydays?

What are other tax options for combat zone participants?

Othersituationsthatcountastimeservedinacombatzoneorqualifiedhazardousdutyareaare:

• Missingstatussuchasmissinginactionorprisonerofwartimecountsastimeserved

• SupportpersonnelincludingRedCross,accreditedcorrespondents,andcivilianpersonnelactingunderthedirectionoftheArmedForces

• HospitalizationoutsidetheU.S.anduptofiveyearsofhospitalizationintheU.S. asaresultofaninjury

When can taxes be deferred?

ReservistscalledtoactivedutyorregularArmedForcesmembersnotinacombatzonemaystillqualifytodeferthepaymentofbacktaxesby:

• Servingtheirinitialperiodofservice(theperiodofactivedutyfollowingrecalltoactivedutyfromaninactivereserveornationalguardunitorforregularmilitary,theperiodfollowinginductionorfirstenlistment),or

• Showingthattheabilitytopaybacktaxeshasbeenmateriallyimpairedbecauseincomehasdroppedasaresultofgoingintomilitaryservice

example

CaptainKristinaJonesenteredacombatzoneonDecember1,2007.SheremainedtherethroughMarch31,2009,whenshedepartedfortheU.S.Shewasnotinjuredanddidnotreturntothecombatzone.Herdeadlinesforfiling2007,2008,and2009returnsare:

•2007taxreturndeadlineisJanuary10,2010.Thisdeadlineisextendedby285days(180plus105)aftertheCaptain’slastdayinthecombatzone.The105additionaldaysarethenumberofdaysinthe3½monthfilingperiodthatwereleftwhensheenteredthecombatzone(January1–April15,2008).

•2008taxreturndeadlineisJanuary10,2010;thedeadlineisextendedby285days(180plus105).

•2009taxreturndeadlineisnotextendedbecausethe180-dayextensionperiodafterMarch31,2009,endsonSeptember27,2009(whichisbeforethestartofthenextfilingperiod,January1–April15,2010).

For 2007, (180 days + 105)



Point out the tip about obtaining Publication 3.

Ask a volunteer to read the Captain Jones example.

RequestPublication3ifyoupreparereturnsatamilitarysite.Therearemanyspecialprovi-sionsthatapplytoservicepersonnelandthispublicationisavaluablereference.

Review the rules for combat zone partici-pants and reservists to ensure students under-stand their application.


What are rules for deferment?

ArmedForcesmemberswhohaveacurrentpaymentagreementorreceiveanotice requestingpaymentmustmakeawrittenrequestfordefermenttotheIRS.TheIRSwillrevieweachrequestandadvisethetaxpayerinwritingofitsdecision.

Can other parties assist with a tax return?

Ifataxpayerwantsathird-partydesigneetodiscussataxreturnwiththeIRS,the“Yes”boxinthethirdpartydesigneeareaofthereturnmustbechecked.Also,thetaxpayermustprovidethedesignee’sname,phonenumber,andanyfivenumbersthedesigneechoosesasapersonalidentificationnumber.Volunteersmaynotbenamedasa“ThirdPartyDesignee.”

ApowerofattorneyForm2848mayalsobeusedtograntauthoritytoanindividualtorepresentthetaxpayerbeforetheIRSandtoreceivetaxinformation.Acopymustbeattachedtothereturn.

Usecautionwhenallowingarepresentativetosignforsomeone.SeeSignaturesintheFilingInformationchapterinPublication17formoreinformation.

Ifitisnotpossibletoobtainasignatureforajointreturnfromaspouseservinginthecombatzone,asignedauthorizationtoactonthetaxpayer’sbehalfcanbeaccepted.TheIRSalsoacceptsawrittenstatementexplainingthatthespouseisservinginthecombatzone.Thestatementmustbesignedbythespousewhoisnotservinginthecombatzoneandattachedtothereturn.

What are the tax forgiveness provisions for decedents?

Specialtax-forgivenessprovisionsapplytoindividualswhodie:

• Whileservinginacombatzoneorfromwoundsincurredwhileservinginacombatzone,or

• FromwoundsorinjuriesincurredinaterroristormilitaryactionwhileworkingfortheU.S.govern-ment

Thecombatzonetaxforgivenessprovisionappliesfortheyearofdeathandanyprioryearendingonorafterthefirstdaythattheindividualservedinacombatzone.Anyforgiventaxliabilitythathasalreadybeenpaid,willberefunded.

Thetaxforgivenessprovisionalsoappliestothosetaxpayersservingoutsidethecombatzoneiftheservice:

• Wasindirectsupportofmilitaryoperationsinthezone,and

• Qualifiedthememberforspecialmilitarypayfordutysubjecttohostilefire,imminentdanger,and/orterroristactions

Display or direct stu-dents to the third-party designee section of Form 1040.

Emphasize the importance of using caution when allowing a representative to sign for someone.

Onlythedecedent’spartofthejointincometaxliabilityiseligiblefortherefundortaxforgiveness.



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

A.2007through2008

B.2007through2009

C. 2006 through 2009

What are the rules for filing a return for decedents?

Thepersonalrepresentativemustfilethefinalincometaxreturnfortheyearofdeathandanyreturnsnotfiledforprecedingyears.Asurvivingspousemayhavetofilethereturnsforthedecedent.

Tomakeaclaim,thedecedent’srepresentativemustfile:

• Form1040EZ,Form1040A,orForm1040foreachyearanincometaxreturnhasnotyetbeenfiled

• Form1040Xforeachyearanincometaxreturnhasalreadybeenfiled

Ifanindividualdiedafterthetaxyear,butbeforethereturnforthatyearwasfiled,thereturnforthetaxyearisnotthefinalreturn;itisaregularreturn.Thereturnfortheyearthetaxpayerdiedwillbethefinaltaxreturn.

Thefinaltaxreturnisdueatthesametimethedecedent’sreturnwouldhavebeenduehadthedeathnotoccurred.

Tax Software Hint:Forsoftwareentriesrelatedtofilingadecedent’sreturn,gototheVolunteerResourceGuide(Tab1),MainInformationSheetpages(first2pages).

Forinformationonsigningajointreturnifonespousehasdiedorcannotsignthereturn,seePublication17Index,keyword:Signatures.



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

Instructor Notes

Lesson 35: Amended Returns

Introduction

Thislessonwillhelpyoudeterminehowtoamenda2009returnthatwasoriginallypreparedatthesameVITA/TCEsite.Toamendafederalincometaxreturn,usethelatestrevisionofForm1040X.

Theseareseveralreasonstaxpayersmayneedtoamendareturn,forexample:

• AdditionalFormsW-2,WageandTaxStatement,orForms1099-INT,InterestIncome,arereceivedafterataxpayerhasfiledareturnatyourVITA/TCEsite.

• Taxpayersrealize,afterclaimingapersonalexemption,thattheycanbeclaimedasadependentonanotherperson’staxreturn.

Ifataxpayerrequestsyourhelpinfilinganamendedreturn,firstreviewtheoriginalreturntocorrespondwiththescopeofVITA/TCEregardingamendments.Examinethereturncarefully,lookingforobviouserrors.Thenaskthetaxpayertoidentifyandexplaintheerrors.Trytodetermineiftheoriginalreturnis,infact,inerror.

Askprobingquestions,usingtheinterviewtechniquesandtoolsdiscussedintheScreeningandInterviewinglesson.

Tax Software Hint:Youcanprepareanamendedreturnusingtaxsoftware.However,anamendedreturncannotbefiledelectronically;itmustbemailedtotheIRS.

Objectives


• 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.

Point out that math errors are more fre-quent with paper returns than e-file returns.

Ask a volunteer to read the Bernard example.

Review the tips.


How do I start?

Tofileanamendedreturn,youneedacopyoftheoriginalreturnandtheinformationthatneedstobechanged.

• Beginbyresearchingandverifyingthatthechangerequestedbythetaxpayeriscorrect.Reviewtheapprovedintakeandinterviewsheetwiththetaxpayerand usetheVolunteerResourceGuideandPublication17tomakesurethatwhatthetaxpayerwantstochangeiscorrect.

• GetallthefactsbeforepreparingForm1040X.AsktaxpayersiftheyhavereceivedanycorrespondencefromtheIRSmakingchangestotheoriginalreturn,orifthetaxpayerhasamendedthereturnforanotherissue.Youwillneedthisinformationtoproperlyamendthereturn.Forexample,theparentsofacollegestudentcorrectlyclaimedtheirchildasadependent.However,theirchildalsofiledareturnandincor-rectlyclaimedthepersonalexemption.Thechild’sreturnwasprocessedfirst.Inthissituation,theIRSwouldadjusttheparents’returnbyremovingtheexemptionforthechild.Youwillneedthisinformationtocorrectlyamendtheparents’andchild’sreturns.

Let’slookattheformatofaForm1040X,AmendedU.S.IndividualIncomeTaxReturn.

What is Form 1040X?

Form1040Xisnotyearspecific.Youmustspecifytheyearforwhichtheamendedreturnisbeingprepared.WhenpreparingapaperForm1040X,besureyouareusingthelatestversionoftheform.Therevisiondateisintheupperleftcorner.Whenthistrainingmate-rialwasprinted,thelatestrevisiondateofForm1040XwasNovember2009.

Thisformhasbeencompletelyredesigned.Onemajordifferenceisthatthethreecolumnshavebeenreplacedwithjustonecolumn.Theamountenteredisthe“correctamount.”

Form1040X,LineA,AmendedReturnFilingStatus(onpage1),isusedtochangethefilingstatusonthetaxpayer’soriginalreturn.

Ifthetaxpayerisaddingnewformsorchangingexistingforms,thoseformsmustbeattachedtoForm1040X.

Display or direct stu-dents to the top portion of Form 1040X. Reit-erate that this is a new form, updated within the past year.

Point out the column on Form 1040X.

Review the Form 1040X Instructions for all line items.

Optional activity: If a flipchart or white board is available, illus-trate the one-column approach with possible numbers, showing how you come up with the figures.

ThestartingpointinthecolumnisthecorrectedamountswiththeupdatesifanotheramendedreturnwaspreviouslyfiledoriftheIRSchangedsomethingontheoriginalreturn.


LineBasksthetaxpayertoselectthecalendaryears2009,2008,2007,or2006;towriteinthecalendaryear(ifitisbefore2006);ortowriteinthefiscalyear(monthandyearended).

ThetaxpayersservedbytheVITA/TCEprogramarecalendar-yeartaxpayers.Thatis,theyreportincomereceivedfromJanuary1throughDecember31.Theyclaimallow-abledeductionspaidfromJanuary1throughDecember31.Ifyouarepreparingapaperreturn,selecttheappropriatecalendaryear.Ifyouareusingtaxsoftwareandtheorigi-nalreturnisonthecomputer,theprogramwillentertheyearautomatically.

Form1040X,LineC,ExplanationofChanges,(onpage1)isusedtoexplainspecificchangesbeingmadeonthereturnandthereasonsforeachchange.Explanationsshouldbeeasilyunderstoodandclearlypointoutthatthetaxpayerqualifiesforthechange.Forexample,“taxpayerreceivedanotherW-2aftertheyfiledtheoriginalreturn,”or“taxpayerqualifiestoclaimchildcareexpensesof$600fortheir10yearolddepen-dentchild,Form2441attached,”or“taxpayermeetsthequalificationstofileasHeadofHouseholdinsteadofMarriedFilingSeparately.”

Lines23-31,Exemptions,areusedonlyifthetaxpayerisincreasingordecreasingthe:

• Numberofexemptionsclaimedonline6dofthereturnbeingamending,or

• ExemptionamountofhousingindividualsdisplacedbyHurricaneKatrinaoraMidwesternDisasterArea.

What are the time frames related to amended returns?

What is the time limit on refunds?

Thereisastatuteoflimitationsonrefundsbeingclaimedonamendedreturns.Ingeneral,ifarefundisexpectedonanamendedreturn,taxpayersmustfilethereturnwithinthreeyearsfromtheduedateoftheoriginalreturn,orwithintwoyearsafterthedatetheypaidthetax,whicheverislater.

Returnsfiledbeforetheduedate(withoutregardtoextensions)areconsideredfiledontheduedate.

Timeperiodsforclaimingarefundaresuspendedforaperiodwhenataxpayeris“financiallydisabled.”Itis,however,veryrarethatataxpayerqualifiesforthatstatus.YoucanreadthedefinitionoffinancialdisabilityinPublication17intheFilingInformationchapter.

example

Robert’s2006taxreturnwasdueApril16,2007.HefileditonMarch20,2007.Heamendsthe2006return,expectingthecorrectiontoresultinarefund.IfhegetsitpostmarkedonorbeforeApril15,2010,itwillbewithinthethree-yearlimitandthereturnwillbeaccepted.Butiftheamended2006returnispostmarkedafterApril15,2010,itwillfalloutsidethethree-yearperiodandhewillnotreceivetherefund.

Display or direct stu-dents to the sections of Form 1040X.



Thereareafewexceptionstothethree-yearlimitrule.Forexample,ataxpayermaybeabletoclaimalossonadebtorsecuritiesthatbecameworthlessinaprioryear,aninjuredspouseclaimmaybefiledforuptosevenprioryears,andcertainmilitaryissuesmaygobeyondthethree-yearlimit.Ifyouthinkthetaxpayermayqualifyforanexcep-tiontothethree-yeartimelimitrule,referthetaxpayertoaprofessionaltaxpreparer.

What if taxpayers are due a refund on their amended return?

Iftheamendedreturnindicatesthatthetaxpayerisduearefund,besuretoadvisethetaxpayerthat:

• Thetaxpayermustwaituntiltheoriginalreturnisprocessed(upto8weeksafterfilingtheoriginalreturn).

• Thetaxpayercancashtheoriginalrefundcheck,ifany,whilewaitingforanyaddi-tionalrefund.

• Interestwillbepaidforarefundonanamendedreturnfromtheduedateoftheoriginalreturnorthedatetheoriginalreturnwasfiled,whicheverislater,tothedatetheamendedreturnisfiled.(Thisinterestwillbetaxableonthetaxreturnfortheyearinwhichitisreceived.)

• Generally,ittakes8-12weekstoprocessanamendedtaxreturn.

What if the taxpayer owes money on the amended return?

Iftheamendedreturnindicatesthatthetaxpayerowesmoney,fileForm1040XandinstructthetaxpayertopayanytaxduebytheAprilduedatetoavoidanyinterestandpenalties.

EvenifthetaxpayerisfilingForm1040XandcannotpaythebalanceinfullbytheAprilduedate,besuretohavethemfilethereturnanyway.TheIRSwillcalculateinterestonthebalancedueandsendthetaxpayerabill.Interestiscalculatedbasedontheamountoftaxowed.Interestratescanchangeevery3months.Theinterestiscalculatedforeachdaythebalancedueisnotpaidinfull.Encouragethetaxpayertopayasmuchaspossibletoreduceinterestandpenalties.RefertoForm1040XInstructionsformoreinformationonpaymentoptions.

Point out these excep-tions in Publication 17 for awareness only.

ShowthetaxpayertheForm1040XInstructionsforhowtoincludeallthecorrectinforma-tiononthecheckormoneyorder.

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


ExErcisEs


Question 1:Johne-filedhis2007Form1040onMarch29,2008.Thenextyear,whilepreparinghis2008return,Johndiscoveredanerrorinhis2007returnwhichresultedinahigherrefund.Johnmailedanamended2007returnonApril19,2009.Isthistoolatetoqualifyfortherefund? □ Yes þ No

Question 2:OnMay6,2011,Brendadiscoversanerroronhertimelyfiled2007taxreturn.Correctionofthiserrorwouldresultinarefund.ShemailsanamendedreturnonMay6,2011.IsthistoolateforBrendatoclaimarefund? þ Yes □No

How do I complete the amended return using tax software?

ThescopeofpreparingamendedreturnsintheVITA/TCEprogramislimited.Generallyyouwillprepareamendedreturnsinsituationswheretheoriginalreturnwaspreparedatthatsamevolunteersite,usingtaxsoftware.

Tax Software Hint:Forsoftwareentries,gotoAmendedReturnsintheVolunteerResourceGuide(Tab14)toreviewthestep-by-stepproceduresforpreparingForm1040X.

Remembertofollowtheinterviewprocessandusetheresearchtoolstoprepareanaccuratereturn.

How do I assemble and submit Form 1040X?

What should be attached?

Remember,Form1040Xcanbepreparedusingtaxsoftwarebutcannotbee-filed.Oncetheamendedreturniscomplete,followthesestepstoassemblethereturnformailingandforthetaxpayer’srecords:

1. Fromthetaxsoftware,printtwocopiesofthefederalamendedreturnand,ifthereisastatereturn,twocopiesofthatform:oneforthetaxpayer’srecordsandonetomailin.

2. Havethetaxpayer(andspouseifMarriedFilingJointly)signanddatethebottomofthesecondpageofForm1040X.Checkthestatereturnforwheretosignandwheretomailthestatereturn.

3. AttachalladditionalorcorrectedForm(s)W-2orForm(s)1099thatthetaxpayerreceivedafterfilingtheiroriginalreturn.BesureyouhaveincludedanyadditionalFederalincometaxwithheld.

4. Attachanyadditionalformsorschedulesneededtoexplainthechanges.DocumenttheexplanationsforamendingthereturninSectionCofForm1040X.

TheRefundorAmountYouOwesectiononForm1040Xmustbefilledoutcarefully.Lookatline17,“Overpayment,ifany,shownonoriginalreturn.”Theorigi-nalrefundisenteredhere.However,iftheIRSadjustedtherefund,enterthatamountinsteadoftheoriginalamount.

Direct students to the Volunteer Resource Guide.

Review the tip with the class.


Review answers with the class when com-pleted.

He mailed within the three-year period allowed for refunds.

Must be postmarked three years from the due date of the return.


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

Instructor Notes

Appendix A: Vanessa Franklin Taxpayer Scenario

Inthisappendix,youwillpracticetaxreturnpreparationbyassistingourtaxpayer,VanessaFranklin.YouwillreviewVanessa’sdocuments,interviewhertoclarifyissues,andthencompletehertaxreturn,usingtheprocessestaughtineachofthefollowinglessons.YoucanreviewVanessa’scompletedtaxreturninAppendixB.

Let’sgetstarted!Vanessacomestoyoursiteandrequestsassistancewithherreturn.Shehasmanyofthedocumentslistedatthetopofpage1oftheintakeandinterviewsheetandshehascompletedthefirsttwopages.

UsingthejobaidintheVolunteerResourceGuide,yourtaxlawknowledge,andyourscreeningandinterviewskills,you’rereadytoassistMrs.Franklin.

Lesson 3: Filing Basics

Must Vanessa file a return?

Todetermineifataxpayerhasafilingrequirement,youneedtheirage,possiblefilingstatus(es),andgrossincome.

Vanessa’s Age and Marital Status

StartbyreviewingPartsIandIIofherapprovedintakeandinterviewsheet.

3

Ask students Vanessa’s age and marital status. She is 37 and legally married.


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


Explain why the last six months is relevant.

A-3Appendix A: Vanessa Scenario, Lesson

What are Vanessa’s most likely filing statuses?

VanessamayqualifyforMarriedFilingSeparately,HeadofHousehold,orMarriedFilingJointly.

Vanessa’s Gross Income

Thenextstepistomakesurehergrossincomeforthetaxyearismorethanthegrossincomelimit.ReviewtheVolunteerResourceGuide(TabA),WhoMustFile?

Remember,atthispoint,we’redeterminingifVanessahasafilingrequirementsowewilldoageneralreviewofherincomedocumentation.

Vanessa’s Form W-2

BrieflyreviewVanessa’sFormW-2andPartIVofherapprovedintakeandinterviewsheettodetermineherincomeforthetaxyear.Vanessa’sW-2indicatesshehaswagesof$31,000.

3

Point out to students that Vanessa does not want to file jointly with her spouse.

Point out Vanessa’s wages on her Form W-2.


Onherapprovedintakeandinterviewsheet,Vanessaalsoindicatedthatshehadself-employmentincome.Younextconfirmandclarifythisandanyotherincomesources.RefertotheIncomesectionoftheVolunteerResourceGuide(TabD)forotherincomesourcesyoushouldconsider.

Sample interview probing for other income

MakenotesonVanessa’sapprovedintakeandinterviewsheettocapturewhatshehastoldyou;forexample,indicatethatthe“Yes”onthequestionaboutunemploymentcompensationactuallyreferstoherestrangedhusband.

Chart A – For Most People Who File

ConsultChartA–2009FilingRequirementChartForMostPeopleWhoFileintheVolunteerResourceGuide(TabA).FindVanessa’slikelyfilingstatus(es),age,andincomeonthechart.

WehavenowdeterminedVanessa’sage,herpossiblefilingstatuses,andhavereviewedherpreliminaryincomeinformation.Becausesheisunder65yearsoldandhergrossincomeonherFormW-2exceedstheincomelimitslistedforeachofherpossiblefilingstatuses,weknowthatVanessahasafilingrequirement.

SinceVanessaisrequiredtofileareturn,thetaxsoftware’sMainInformationSheetorthe“Label”sectionofthereturnmustbecompletedwithname,address,andsocialsecuritynumber.IfVanessaisfilingbyherself,onlyherinformationwillbeincluded.

Tax Software Hint: Sinceitisnecessarytousetheprimarytaxpayer’ssocialsecuritynumbertostartanewreturninthetaxsoftware,youshouldnotbeginthisprocessuntilyoufinishtheinitialinterview.

Point out that Vanessa’s $33,400 exceeds the gross income amounts for the filing statuses she may use.

Direct students to the Volunteer Resource Guide (Tab D), Income.


Direct students to the table in the Volunteer Resource Guide (Tab A).


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


Restate the impor-tance of confirming the taxpayer’s identity and verifying that the SSN names and numbers match.

Verify Vanessa’s Identity

BeforecompletingthetaxsoftwareMainInformationSheetortheLabelsectionofVanessa’staxreturn,makesureyouverifyheridentity.Vanessapresentsyouwithherdriver’slicenseandthesocialsecuritycardsforalltheindividualslistedonherintakesheet.

Using the Tax Software in Training

RefertoPublication4491-W,Introduction:UseofSoftwareinTraining,forsocialsecu-rityformatrequirementsandotherrequirementsforusingthePracticeLabduringthetraining.

Sample interview to verify identity

Youhavenowcompletedthesefilingbasics:

• Determiningifthereisafilingrequirement

• Verifyingtheidentityofthetaxpayerandconfirminghersocialsecuritynumber

Returntolesson3.

3


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.


Explain why Vanessa’s entries must match the information on the cards.


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

Direct students to the Interview Tips for Filing Status (Tab B).


Ask students to explain why she qualifies for the three filing statuses.


Vanessa’s filing status is Head of Household

VanessaqualifiesasHeadofHouseholdbecausesheislegallymarried,butlivedapartfromherhusbandduringthelastsixmonthsofthetaxyear.Sheis“consideredunmar-riedforheadofhouseholdpurposes”andatleastoneofherchildrenmustbeherdependenttousethisfilingstatus.

Tax Software Hint: NowthatyouhavedeterminedVanessa’sfilingstatus,youcan“StartaNewReturn”inthetaxsoftware.RefertotheVolunteerResourceGuide,Tab1,fordetailedinstructionsaboutthisprocess.

CompletealltherequiredinformationuptotheDependents/Nondependentssection.ConfirmeachentrywithVanessaandmakeanycorrectionsonVanessa’sapprovedintakeandinterviewsheet.

IntheFilingStatussection,checktheboxforHeadofHousehold.Leavetheremainingblocksinthisareablankuntilyouhavediscussedthestatusofherchildren.

ReturntoLesson4.

4

Ask what facts qualify Vanessa to file Head of Household? (See Interview Tips.)


Lesson 5: Personal Exemptions

What personal exemptions can Vanessa claim?

Let’sdetermineifVanessacanclaimanypersonalexemptions.Remember,sheismarriedbutlivesapartfromherhusband.Personalexemptionsareallowedforthetaxpayerandfortheirspouseiftheymeetcertainrequirements.

FirstreviewPartI,YourPersonalInformation,onherapprovedintakeandinterviewsheettoseeifVanessaorherhusbandcanbeclaimedasadependentonsomeoneelse’staxreturn.

Next,askquestionstodetermineifVanessacanclaimanexemptionforherspouse.Todothis,usetheInterviewTipsforPersonalExemptionsintheVolunteerResourceGuide(TabC).

Sample interview clarifying personal exemptions

BecauseVanessacannotclaimherhusbandasanexemption,youwillleavehimoffherreturn,leavingtheboxonForm1040,line 6bunchecked.

Tax Software Hint:Basedonthefilingstatus,HeadofHousehold,thesoftwareautomaticallyenters“1”for“Numberofboxescheckedon6aand6b.”

ReturntoLesson5.

5

Ask if either Vanessa or her husband can be claimed as a dependent.


Let’s see if you can claim an exemption for your spouse. I’m going to ask you a few more questions. First of all, we already know that you were married during part of the tax year. So, does that include December 31st?

You have already indicated that you do not plan to file with your husband.

Did he have income of his own last year?

Well, there’s our answer. Because you’re not filing a joint return, and because he had income, you cannot claim an exemption for your husband.

Yes,that’sright.Eventhoughwedon’tlivetogetheranymore,we’restillmarried.

Right.

Yes,hewasemployedasacookformostofthetaxyear,andcollectedsomeunemploymentcompensation.

Direct students to the Interview Tips for Personal Exemptions.



Lesson 6: Dependency Exemptions

Which dependency exemptions can Vanessa claim?

Let’sdeterminewhichdependencyexemptionsVanessacanclaim.Dependentscanbethetaxpayer’schildrenorrelatives.BeginbyreviewingPartII,FamilyandDependentInformation,item2,onVanessa’sapprovedintakeandinterviewsheet.Shelistedfourpotentialdependents.

Youseethatherchildrenareunder10yearsofageandhermotheris73yearsold. AllfourlivedwithVanessafor12monthsduringthetaxyearandareU.S.citizens. (Ababybornanytimeduringtheyearisconsideredtohavelivedwiththetaxpayerfortheentiretaxyear.)

Are Vanessa’s children her dependents?

TodetermineifherchildrenBella,Zoe,andZacharyqualifyasdependentsonVanessa’staxreturn,usetheInterviewTipsforDependencyExemptionforQualifyingChildintheVolunteerResourceGuide(TabC).

BasedonVanessa’sanswerstotheinterviewtips,youconcludethatallthreechildrenqualifyasherdepen-dents.However,becausesheandherhusbandareseparated,youneedtogathermoreinformation.

Sample interview clarifying dependency exemptions

Thespecialrulesofdivorced,separated,ornevermarriedparentsmayapplyinthissituation.TheyarelistedinPublication17,inthePersonalExemptionsandDependentschapter.

6

Direct students to the Interview Tips for Dependency Exemption for Qualifying Child (Tab C).

Review steps in the interview tips that may apply to Vanessa’s chil-dren.

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… vanessa responds…

It looks like you should be able to claim your children as depen-dents. Is there a court document or an agreement that you have signed to allow their father to claim them?

You’vegottobekidding.Hebetternottrytoclaimthem.

Whenusingtheinterviewtips,youmayfindithelpfultosubstitutethechild’snamefortheword“person.”Askinter-viewquestionsindividuallyforeachchild;asyougainexperi-encewiththesequestions,youwilllearntoobtainthisinformationforeachchildatthesametime.


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

Direct students to the Interview Tips for Children of Divorced or Separated Parents. (Tab C).


Ask students if Vanessa covered more than half her mother’s expenses.

Direct students to the Interview Tips for Dependency Exemption for Qualifying Relative in the Volunteer Resource Guide (Tab C).

Review steps 1, 3, 4, and 5 as applied to Vanessa’s mother.


ForCertifiedVolunteerPreparerCompletionandReminder,onherapprovedintakeandinterviewsheet.

Volunteer Preparer Determinations

Now,youcancompletethedependentquestionsinSectionB.Checkofftheapplicableyes/noresponsesandmakeannotationsasneeded.

Thechildrenarethegrandmother’squalifyingchildren,butthegrandmotherdoesnotpasstheQualifyingChildofMoreThanOnePersonrulebecauseheradjustedgrossincome(AGI)islessthanVanessa’s.

Basedontheinterview,Vanessacanclaimdependencyexemptionsforherthreechildren,butnotforhermother.Vanessa’schildrenarethequalify-ingchildrenofbothVanessaandhermother,Annabelle.Vanessaisentitledtoclaimthechildren,becausesheistheirparent.AnnabellecouldonlyclaimthemifVanessachosenottoclaimthem,andifAnnabelle’sAGIwashigherthanbothparents.

Vanessa’shusbandcannotclaimthechildrenonhisreturnbecausethechil-drendon’tmeettheresidencyrequire-ment,andhedoesnotmeettheteststoclaimthemasdependentsundereitherthequalifyingchildorqualifyingrelativerules.Healsodoesn’thaveadivorcedecreeorwrittenagreementineffectthatwouldallowhimtoclaimthechildren.

AcopyofthecompletedSectionBofVanessa’sapprovedintakeandinterviewsheetisinAppendixB.Ifyouhaveanyincorrectentries,usethejobaidtodetermineyourmistakesoraskyourinstructorforassistance.

Preparing Vanessa’s Return

Atthispoint,youcancompletetheFilingStatusandExemptionssectionsofVanessa’staxreturnorentertheinformationintheMainInformationSheetinthetaxsoftware.Youwillneedvalidsocialsecuritynumbersforeveryonelistedonherreturn.

Tax Software Hint:ThesoftwarewillcalculateVanessa’sexemptiondeduction.ThecompletedExemptionssectionofVanessa’sForm1040isinAppendixB.

Returntolesson6.

Ask students how they would answer ques-tions 1-5 in Section B.

6


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.

Ask two volunteers to role-play the interview.


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

Direct students to the Volunteer Resource Guide (Tab D).


Ask students what key facts determine that Vanessa can use Schedule C-EZ.


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

Direct students to the Volunteer Resource Guide (Tab D).



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


Direct students to Vanessa’s approved intake and interview sheet.

Direct students to the Volunteer Resource Guide (Tab E).

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .volunteer says… vanessa responds…

I see from box 12 of your W-2 that you put $1,000 into your 401k account. Did you make any contributions to an IRA or any other retirement account?

Okay. When did you make the contribution and what type of IRA was it, traditional or Roth?

Great. It looks like your income is within the limits, so you can deduct the entire IRA contribution.

Did you ever make IRA contributions that you didn’t deduct?

Okay. Now, until April 15, you can still make deductible contributions up to a total of $5,000 and deduct them for this tax year. Are you planning on contributing any more to your IRA account?

Sounds like you’ve thought about it and have a plan.

Yes,Iput$600intomyIRA.

It’satraditionalIRA.IdiditlastMay,Ithink.Yes,here’sthestatement.IalwaystrytoputpartofmytaxrefundintomyIRA.

Thanks!

No,Ijusthavethisoneaccount,andI’vealwaystakenthededuction.

I’llsavepartofmyrefundagain,butIwanttoputthattowardnextyear’sdeduction.

Yes,Ihave.

17


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

Direct students to the Volunteer Resource Guide (Tab F).



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.

Point out the tax soft-ware hint.

Ask students to review Lesson 20 if you are not teaching the lesson as part of the course.

19


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

Direct students to the Interview Tips for Itemized Deductions (Tab F).



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!

Direct students to the Volunteer Resource Guide (Tab G), Can You Claim the Credit for Child and Depen-dent Care Expenses? decision tree.



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

Ask students to complete Parts I and II of Form 2441 using the tax software or Form 2441.

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


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.

Direct students to the Volunteer Resource Guide (Tab G), Education Credits.



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!

Direct students to the Tips for the Child Tax Credit (Tab G).



Sample interview explaining Vanessa’s partial child tax credit

ThepaperversionofVanessa’sForm1040,ChildTaxCreditWorksheetisverysimilartowhatyouseeinthetaxsoftware.Itmayhelpyouunderstandhowthesoftwarecalcu-latesthechildtaxcredit.SeethecompletedworksheetinAppendixB.

Explanation of Additional Child Tax Credit

Makeanoteonpage4ofVanessa’sapprovedintakeandinterviewsheetthatshedoesnotqualifyforthefullnonrefundablechildtaxcreditbecausethecreditwasmorethanhertaxliability.Next,determineifsheiseligiblefortheadditionalchildtaxcredit.

TheAdditionalChildTaxCreditcriteriaareshownasaTipintheCreditssectionoftheVolunteerResourceGuide(TabG).

BecauseVanessadidnotusetheentireamountofthechildtaxcredittooffsethertax,andherearnedincomewasmorethan$3,000,sheiseligibletoclaimtheadditionalchildtaxcredit.

Tax Software Hint:Toreviewinformationrelatedtothesoftware,gototheVolunteerResourceGuide(Tabs5and6).

Vanessa’sadditionalchildtaxcreditis$2,793Toreviewinformationrelatedtothesoft-ware,gototheVolunteerResourceGuide(Tabs5and6).asindicatedonForm1040.

ReturntoLesson26.

26

sample IntervIeW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . volunteer says… vanessa responds…

Let’s see if you are able to take the full credit. Your modified adjusted gross income of $32,630 qualifies. It is less than the $75,000 limit.

Let’s take a look at your tax. I see your tax on line 46 is $843. After applicable credits, you are still left with a tax amount that is less than the full $3,000 credit for three children.

Well, this credit is limited to the amount of your tax. But you may be eligible for the additional child tax credit. For now, let’s take a look at your Child Tax Credit Worksheet in the tax software and I can show you how this works.

Great!

Whatdoesthatmean?

Direct students to Vanessa’s Form 1040, Child Tax Credit Worksheet.


Direct students to the Tip for the Additional Child Tax Credit (Tab G).


Lesson 27: Miscellaneous Credits

Does Vanessa qualify for the credit for qualified retirement savings contributions?

Vanessamaybeabletoreducehertaxliabilityifsheisabletotakethiscredit.InPartV,Expenses,ofherapprovedintakeandinterviewsheet,Vanessaanswered“yes”tothequestionaboutcontributionstoanIRAorotherretirementaccount.BasedonherFormW-2,weknowVanessacontributed$1,000intoher401Kplanatwork.Inapreviousinterview,shestatedthatshealsoput$600intoherIRA.Besuretorecordthisinfor-mationonherapprovedintakeandinterviewsheet,asshownhere.

Vanessa’sretirementsavingsmayqualifyherforthecreditforretirementsavingscontributions.GototheVolunteerResourceGuide(TabG)andreviewtheRetirementSavingsContributionsCredit-DecisionTree.YoudecidetoaskVanessaadditionalprobingquestionstodetermineifsheiseligible.

Sample interview clarifying the retirement savings contribution

27

Direct students to the the Retirement Savings Contributions Credit Decision Tree in the Volunteer Resource Guide (Tab G).

Ask for two volunteers to role-play the sample interview.


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

Point out that the self employment tax is reported in the Other Taxes section of Form 1040 (page 2).


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.

Display the Payments section in the tax soft-ware.




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.

Direct students to the Interview Tips for EIC.


Direct students to the EIC General Eligibility Interview Tips in the Volunteer Resource Guide (Tab H).


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.

Optional: Assign optional exercise or walk through it with students.


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.

Direct students to Appendix B and review Vanessa’s Form 1040, direct deposit items, and Form 8888.

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

Direct students to the Check Your Work page in the Volunteer Resource Guide (Tab 13).

Direct students to the Finishing the Return section of the Volunteer Resource Guide (Tab 13).



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.

Direct students to the “Frequent Taxpayer Inquiries” on the inside back cover of the Volunteer Resource Guide.


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. . . . . . . . . . . . . . . . . . . . . . 18-1Miscellaneous Credits. . . . . . . . . . . . . . . . . . . . . . . . . 27-1Mortgage interest.....12-3,19-2,20-1,20-6,20-14,17-8Mortgage interest credit. . . . . . . . . . . . . . . . . . . . . . . . 27-8Mortgageinsurancepremiums. . . . . . . . . . . . . . . . . . 20-7Motorvehicletaxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 20-4Movingexpenses........................15-11,18-1Multiplesupportagreement. . . . . . . . . . . . . . . . . . . . . . 6-9Mutualfunds. . . . . . . . . . . . . . . . . . . . . . . 8-12,10-2,10-5

N-O-PNewmotorvehiclepurchase. . . . . . . . . . . . . . . . . . . . 19-6NonbusinessEnergyPropertyCredit . . . . . . . . . . . . . 27-5Noncustodialparent...................4-5,6-11,26-2Nonrefundablecredits(defined) . . . . . . . . . . . . .23-1,27-1Nonresidentaliens. . . . . . . . . . . . . . . . . . . . . . . . .7-1,20-1Nontaxableincome. . . . . . . . . . . . . . . 8-2,Publication525Originalissuediscount(OID).................8-8,17-5OtherTaxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28-1Overpayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-1Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2Passiveincome. . . . . . . . . . . . . . . . . . . . . . . . .12-14,25-7Payments...................................29-1Paymentoptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-5Penaltyforearlywithdrawal................ 11-11,17-2Pensionincome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-1Permanentlyandtotallydisabled(defined). . . . . . . . . 27-6PersonalExemptions...........................5-1Points,mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-7PracticeLab..................................1-4PrincipalBusinessCode. . . . . . . . . . . . . . . . . . . . . . . . 9-4Prior-yearreturns.............................3-10Proofofidentity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-5Provideridentification,childcare. . . . . . . . . . . . . . . . . 23-7Publication4012,VolunteerResourceGuide. . . . . . . . 1-3

QQualifieddividends . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-11QualifiedDividends/CapitalGainsTaxWorksheet . . . 8-13Qualifiededucationexpenses. . . . . . . . . . 8-7,17-16,24-1Qualifyingperson(ChildandDependentCareCredit). 23-2Qualifyingchild(ChildTaxCredit). . . . . . . . . . . . . . . . 26-1Qualifyingchild(dependencyexemption). . . . . . . . . . . 6-2Qualifyingchild(EIC). . . . . . . . . . . . . . . . . . . . . . . . . . 30-4Qualifyingrelative. . . . . . . . . . . . . . . . . . . . . . 4-6,6-1,6-6QualifyingWidow(er)filingstatus . . . . . . . . . . . . . .4-1,4-8QualityReview...............................32-1QualityReviewJobAid. . . . . . . . . . . . . . . . . . . . .2-2,32-2QualityReviewSheet(Form13614-C). . . . . . . . .2-2,32-1

RRailroadretirement . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-1Realestatetaxes. . . . . . . . . . . . . . . . . . . . . . . . .19-5,20-4Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . .3-10,3-13Refund/AmountofTaxOwed. . . . . . . . . . . . . . . . . . . . 31-1Refundinformation . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-1Refundablecredits(defined). . . . . . . . . . . . . . . . . . . . 29-1Refunds/overpayments. . . . . . . . . . . . . . . . . . . . . . . . 31-1RentalIncomeandExpenses. . . . . . . . . . . . . . . . . . . 12-1Rentalproperties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-1Reservistsexpenses. . . . . . . . . . . . . . . . . . . . . . . . . . 21-5

IndexI-4

Residencystatus. . . . . . . . . . . . . . . . . . . . . . . . . . .7-2,7-8ResidentialEnergyCredits . . . . . . . . . . . . . . . . . . . . . 27-9ResidentialEnergyEfficientPropertyCredit. . . . . . . . 27-9RetirementIncome . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-1Retirementplandistributions. . . . . . . . . . . . . . . . . . . . 11-1Retirementsavingscontributioncredit. . . . . . . . . . . . 27-1Rollover. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-6RothIRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-4

SS-corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-2Saleofhome. . . . . . . . . . . . . . . . . . . . . . . . . . .10-1,10-11Saleofinvestmentproperty. . . . . . . . . . . . . . . . . . . . . 10-1Saleofstock. . . . . . . . . . . . . . . . . . . . .10-1,Form1099-BSalestaxes. . . . . . . . . . . . . . . . . . . . . . . . 8-14,19-6,20-3Savingsaccounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-7Savingsbond. . . . . . . . . . . . . . . . . . . . . . . . . . . . .8-8,17-3ScheduleK-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-1Scholarships. . . . . . . . . . . . . . . . . . . . . . . 8-6,17-12,24-4ScreeningandInterviewing. . . . . . . . . . . . . . . . . . . . . . 2-1Self-employed,abroad . . . . . . . . . . . . . . . . . . . . . . . . 15-7Self-employmentincome. . . . . . . . . . . . . . . . . . . . . . . . 9-1Self-employmenttax. . . . . . . . . . . . . . 9-1,9-5,17-5,28-1Self-selectPIN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32-3SIDN(SiteIdentificationNumber). . . . . . . . . . . . . . . . . 1-5Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 32-2,34-8,34-9Singlefilingstatus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-2SiteIdentificationNumber. . . . . . . . . . . . . . . . . . .1-5,32-2Socialsecuritybenefits. . . . . . . . . . . . . . . . . . . . . . . . 14-1Socialsecuritytaxes. . . . . . . . . . . . . . . . . . . . . . . . . . 14-1Socialsecuritynumber(SSN). . . . . . . . . . . . . . . . . . . . 3-5Softwarepracticelab. . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4Sourcesofsupport . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-5Splitrefunds.............................31-4,31-8StandardDeductionandTaxComputation. . . . . . . . . 19-1Standarddeductioncharts......................19-4Standardmileagerate(business). . . . . . . . . . . . . . . . . 9-4Standardmileagerate(charitable) . . . . . . . . . . . . . . . 20-9Standardmileagerate(medicalandmove).........18-3Standardsofconduct...........................1-5Stateandlocalincometaxes................19-6,20-3Stateandlocalrealestatetaxes. . . . . . . . . . . . . . . . . 19-5Stateandlocalrefunds. . . . . . . . . . . . . . . . . . . . . . . . 8-14Student(defined). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-3Student loan interest deduction. . . . . . . . . . . . . . . . . 17-11Substantialpresencetest . . . . . . . . . . . . . . . . . . . . . . . 7-2Supplementalsecurityincome(SSI). . . . . . . . .14-1,31-10Supporttest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6-3,6-9

TTax-exemptinterest. . . . . . . . . . . . . . . . . . . . . . . . .8-3,8-9Taxforgiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34-8Taxhome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15-6,22-2Taxpayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29-1Taxtables . . . . . . . . . . . . . . . . . . . . . . Publication4491-WTaxableincome. . . . . . . . . . . . . . . . . . . . . . . . . . .8-2,19-7Taxableinterest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-8Taxablepensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-1Taxableretirementincome . . . . . . . . . . . . . . . . . . . . . 11-1Taxationofdistribution. . . . . . . . . . . . . . . . . . . . . . . . . 11-1TaxpayerAdvocate . . . . . . . . . . . . . . . . . . . . . www.irs.govTemporaryabsences. . . . . . . . . . . . . . . . . . . . . .6-8,10-13Temporaryworklocation. . . . . . . . . . . . . . . . . . . . . . . 21-7Testingandcertification. . . . . . . . . . . . . . . . . . . . . .1-1,1-4Theftlosses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-11Third-partydesignee. . . . . . . . . . . . . . . . . . . . . . . . . 31-10Tie-breakerrule. . . . . . . . . . . . . . . . . . . . . . . . . .6-13,30-5TINs(TaxpayerIdentificationNumbers) . . . . . . . . .3-5,3-7Tipincome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8-5,28-3Travelexpenses . . . . . . . . . . . . . . . . . . . . . . . . .21-4,22-1TreasuryDirect. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31-2Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12-2,31-17Tuitionandfeesdeduction . . . . . . . . . . . . . . . .17-15,24-8Tuitionstatement(Form1098-T). . . . . . . . . . . .17-16,24-2

U-V-WUnemploymentcompensation. . . . . . . . . . . . . . . . . . . 13-1Uniforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21-1Validtaxpayeridentification. . . . . . . . . . . . . . . . . . . . . . 3-5Vehicleexpenses.....................9-5,12-5,22-3Vehiclepurchasededuction.................19-6,20-4VITA/TCEsitelocation. . . . . . . . . . . . . . . . . . . . . . . . . . 1-3Volunteerassessment. . . . . . . . . . . . . . . . . . . . . . . . . . 1-8Volunteerhotline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-7VolunteerIncomeTaxAssistance(VITA). . . . . . . . . . . . 1-1VolunteerProtectionAct . . . . . . . . . . . . . . . . . . . . . . . . 1-5VolunteerQualityAlerts. . . . . . . . . . . . . . . . . . . . . . . . . 1-7VolunteerResourceGuide (Publication4012) . . . . . . . . . . . . . . . . . . . . . . 1-3,2-1,2-3Wagesandsalaries. . . . . . . . . . . . . . . . . . . . . . . .8-4,25-7Walletcard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-4Whichformtofile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-8Whomustfile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-1Whoshouldfile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4Withholdingallowances. . . . . . . . . . . . . . . 29-2,31-8,33-4Worldwideincome. . . . . . . . . . . . . . . . . . . . 7-1,15-2,25-2

Electronic Software Practice Labn Experience using return preparation

software available from the IRS

n Prepare the exercises and problems online

n Prepare tax returns based on the test scenarios online

Online Testingn Stand alone online test and

certification

n Bookmark feature means you don’t have to complete test in one session

– if interrupted, you can return to same place and complete it

n Online tests can be taken two times – each test will be different

n Volunteer Agreement with certification results

Different Coursesn Basic

n Intermediate

n Advanced

n Military

n International

n Puerto Rico

n Foreign Students

Immediate Feedbackn Interactive topic activities that allow

you to complete Worksheets, Forms, and Returns

n Immediate feedback – Tells you why you were correct or why your answer was incorrect

Information Onn Latest tax law

n Interview tips

n Preparing accurate returns using: – Intake & Interview Sheet – Volunteer Resource Guide – Quality Review

Easy to Usen Lessons divided into short topics

n Case scenarios

n Interviews with audio dialog

n Cues to tell you where you are in the course

n Easy to read

n Graphics to reinforce key information

n Links to: – Publications and Forms – Tax & EITC tables – Glossary

What Does Link & Learn Taxes Offer?

Hot topics for volunteers and partnersSite Coordinator’s CornerVolunteer Tax AlertsVolunteer Training ResourcesEITC Information for Partnerse-file Materials and Outreach Products

The Volunteer Resource Center (Keyword: Community Network)

Tax Information for Individuals Keyword: Individuals)

1040 Central (What’s new this filing season)Where’s My RefundEITC Assistant - Available in English and SpanishThe American Recovery and Reinvestment Act of 2009:

Information CenterTax Trails for Answers to common tax questionsAlternative Minimum Tax (AMT) Assistant

www.irs.gov

Your online resource for volunteer and taxpayerassistance

Your direct link to tax information

24/7 www.irs.gov

(

and much more!